Computex, the world's third-largest IT industry trade show, kicks off today at the Taipei World Trade Center amid an atmosphere of gloom. The importance of Taiwan's economy to the OEM production of IT products has meant that the slowdown in demand for such products, especially in the US but also elsewhere, has hit Taiwan especially hard and unusually fast. Given that the IT sector accounts for some 50 percent of the capitalization of the Taiwan stock market, poor profit forecasts from blue chips such as TSMC and UMC have left the TAIEX short-winded at the 5,000 level. In many countries a depressed stock market would be of little concern to the man on the street. But in Taiwan, where one adult in three owns and trades shares -- the so-called "army of ants" -- the miserable performance of the TAIEX has led to deep cuts in discretionary consumer spending, which in turn has led to an almost unprecedented fall in growth. In this way the fortunes of the IT sector -- which is not in itself a big employer in Taiwan, relying as it does for most of its shop-floor manpower on overseas contract workers -- have affected almost everybody, no matter how low-tech their job might seem.
With pundits suggesting that there is a global hangover after the binge on IT spending of the 1990s that might well take two to three years to wear off, there is a reason to be gloomy. But some pessimism about Taiwan's IT industry is almost certainly unfounded. Prominent among this is the idea that Taiwan's IT industry is going to be hollowed out as companies move increasing amounts of production to China. Of course, as product lines mature and margins become thinner, shifting production across the Taiwan Strait makes sense; inevitably China will become a bigger supplier of lower-end commoditized products than Taiwan. But that does not mean the sky is falling.
Recently the media have produced a plethora of stories suggesting that Taiwan's chip manufacturing industry is about to "boldly march west." Construction costs in Shanghai are 35 percent cheaper than in Taiwan, bulk gas costs are 30 percent cheaper and water is 60 percent cheaper, we were told at a recent seminar. How can the bottom-line watcher resist this?
We are indebted to TSMC's Morris Chang (張忠謀) for the answer. The vast majority of semiconductor manufacturing equipment comes from the US. And the US Department of Defense has strict guidelines about what might or might not be sold to China. Chang notes that the smallest die size available to manufacturers in China is 0.25 microns, whereas 0.18-micron technology is common in Taiwan and 0.12-micron technology is rapidly coming on line. With production in China hobbled in this way, Taiwan has no need to feel that it is soon to be shoved aside from the cutting edge of the industry by its burly rival. The industry model that appeared in the 1990s -- where the more mature a product became, the further west across the Pacific from Silicon Valley its manufacturing base moved -- will remain for some time to come.
That doesn't mean Taiwan IT sector is without threats. One in particular is its own prosperity. Taiwan's universities do not, unfortunately, emphasize cutting edge research, which is why so many of their alumni used to go to the US to further their studies. The enormous money to be made by getting a job at home on graduation however -- remember the annual bonuses of four years' pay -- has stopped this upgrading of local skills, much to the industry's detriment. That this affluence has been temporarily curtailed by the global slowdown might therefore be a benefit in disguise for Taiwan. After the fatcat 1990s it's time to recover a measure of leanness, meanness and hunger.
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