Repositioning Taiwan’s Industry:

A Service-Added Manufacturing Industry

產業重定位：服務加值型製造業

Tain-Jy Chen
National Taiwan University
August 3, 2006
 1. Strengths of Taiwan’s
Manufacturing Industry
1) Double capabilities of cost reduction and
flexible production.
2) These capabilities have been achieved
by vertical disintegration and mass
production, with the latter being
supported by low labor costs.

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 1. Why were these
capabilities lost?
1) Taiwan was no longer a low-wage
country.
2) China provided a better environment for
mass production.

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 1. What was left in Taiwan?
 The middle-stream of the manufacturing
industry was left with both up- and down-
streams outside of Taiwan. (Two-ends
out?)

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 Example: Notebook PC
Fabricated materials (Japan)

Glass substrate & Film production (Japan &

US)
LCD panels (Taiwan)

Notebook PC (China)
 The concentration of notebook PC production in
Eastern China increased the pressure for LCD
panels to relocate to China, starting from the
late-stage assembly (LCM).R&D also moves. 7-5
7-5
 1. The ways to maintain
materials, components and
parts industry in Taiwan:
1) Possessing and maintaining tacit know-
how in materials and processing
technologies
2) Transforming cost-based manufacturing
to service-added manufacturing

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 1. Service-added
manufacturing
1) Cost-based manufacturing:
 Production to order in such a way that cost
is minimized, quality warranted, and time to
market the shortest.
2) Service-added manufacturing:
 Adding a service component to conventional
concept of manufacturing so as to enhance
the value of the manufactured goods,
making the manufacturer indispensable.

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 1. B2B manufacturer
 Possible services to be added:
2) Product development service (ODM)
3) Global logistics (inventory cost reduction)
4) IP service
5) Product design assistance
6) Creation of customer-specific product functions
7) Innovation-enabled components
8) Modularization (disintegrated product design
and manufacturing)
9) Multi-function integrated services 7-8
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 1. B2C manufacturer
 Be able to directly service the consumers
rather than servicing them indirectly
through the buyers – establishing a
consumer brand.

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1. How will the new business
model differ from the
past?
 Past:
 Taking the order from the buyers without
knowing the consumers
 Future:
 Addressing the needs of consumers and
producers (called users hereafter)

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 1. Key assets to be built
1) Relational assets – B2B & B2C brands
and trust
2) Processing know-how, materials, and
proprietary equipment

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 1. Build a user-driven
production chain
1) R&D:
Invest in technologies that provide new
services to users, or solve their existing
problems.
 Past pattern:
 R&D to catch up with leading technologies.
 Result:
 Never possess key technologies.

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 1. Build a user-driven
production chain
1) Production:
Engage in first-batch production to test the
water of the market.
 Past pattern:
 Will not enter the market until mass
production is possible.
 Result:
 The cost falls sharply when Taiwanese
manufacturers embarks on mass
production. 7-13
7-13
 1. Build a user-driven
production chain
1) Machinery and Equipment:
Engage in the design and manufacturing of own
machinery and equipment to protect proprietary
processing technologies.
 Past pattern:
 Purchase machinery and equipment from Japan,
Germany and USA whereupon to pursue high yield
rates.
 Result:
 Market entry is possible whenever machinery and
equipment is available, resulting in rapid increases
in the volume of production, pushing down the
prices fast, and unable to prevent cost competition. 7-14
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 1. Build a user-driven
production chain
1) Materials:
Develop new materials to enable new
functions and services.
 Past pattern:
 Purchase materials from foreign providers.
 Result:
 Shift the rent to material providers when the
volume of production increases; always
attempt to cut costs in the processing and
assembly stages rather than materials. 7-15
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 1. Build a user-driven
production chain
1) Inter-discipline integration:
Integrate technologies from different fields to create
new functions and services (knowledge
combination).
 Past pattern:
 Most companies are thinly specialized in their
knowledge base.
 Result:
 Production chain and job division, so is the location
of production, are dictated by international buyers
who perform the role of knowledge combination.
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 1. Build a user-driven
production chain
1) Technology depth:
Encourage technology accumulation within the
company.
 Past pattern:
 Shallow technology capability of individual
companies with high turnover rates of technological
personnel.
 Result:
 Quick dispersion of technology throughout the
industry, leading to fast increases in production
volume, but unable to maintain the technological
edge. 7-17
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 1. Build a user-driven
production chain
1) Cross-country resources integration:
Build a capability to integrate technology
resources across countries.
 Past pattern:
 Licensing technologies from foreign
countries to complement with a small
assortment of indigenous technologies.
 Result:
 Both the production and market ranges are
limited by the technology licensor, forbidding
cross-country integration. 7-18
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 1. Build a user-driven
production chain
1) Reaching out to consumers:
Invest in consumer research to build a
capacity for genuine product innovation.
 Past pattern:
 Never understood the consumer needs.
 Result:
 ODM-type innovation only (serving the
buyers, not the users).

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 1. Build a user-driven
production chain
1) Responding to mega-trends of the global
market:
Develop products and technologies in response to
mega trends of the global market, such as energy
saving, aging and environmental conservation.
 Past pattern:
 Only responding to buyer demands and regulations
in the advanced markets.
 Result:
 Defensive technological development strategies.

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 1. Build a user-driven
production chain
1) Exploiting the idiosyncrasy of the local
markets:
Develop products and technologies that address the
special needs of the local markets.
 Past pattern:
 Product and technology development were always
outward looking.
 Result:
 Unable to develop a local-based competitive edge
in the world market.

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1. Strategies supporting a user-
driven production chain
1) Tax incentive:
 Encourage innovation, not production or
capital investment; promote value rather
than volume.
2) Benchmark for a good company:
 Most efficient company
→ Number one
→ Only one
3) Aim of R&D policy:
 To enable low-cost production
→ To enable unique services 7-22
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1. Strategies supporting a user-
driven production chain
1) The R&D team:
 Mostly engineers
→ A mix of engineers, scientists, and artists
2) The R&D theme:
 Top down approach
→ Bottoms up approach
(The users dictate the R&D theme)

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1. Strategies supporting a user-
driven production chain
1) The R&D personnel:
 Encourage long-term development of R&D
personnel; avoid short-term exploitation of
R&D resources (such as R&D military
service).
2) Research collaboration between colleges
and enterprises:
 Encourage R&D collaboration between
colleges and local enterprises to support a
locally centered industry cluster.
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1. Strategies supporting a user-
driven production chain
1) The R&D stage:
Basic R&D Technology development Product development

Basic R&D Technology development Product development

5) R&D location:
 Relocate part of product development to
China and focus on technology research in
Taiwan.

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 1. The role of China
B2B B2C

Materials & Equipments

Taiwanese Taiwanese
Other Taiwanese
manufacturers manufacturers
manufacturers manufacturers
in China in
in Taiwan
China & others

OEM / ODM World consumers

brand marketers
Chinese consumers

World consumers 7-26

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