Taiwan’s electronics industry has been a pillar of its prosperity for
the past four decades, turning the island into a key supplier for the
likes of Apple, IBM and Dell, and spawning billionaires such as Hon
Hai’s Terry Gou and Quanta’s Barry Lam.
Yet rising competition from China is increasingly challenging
Taiwan. Just how badly? To learn more, I exchanged with Matt Cleary,
head of research at Trenchant Tech Research in Taipei. Excerpts follow.
Q. The fortunes of Taiwan’s richest tech entrepreneurs are lower on
the new Forbes Taiwan Rich List in part of because of relatively
short-term worries about orders from Apple. (Click here
for link to main list.) Longer term, how seriously is Taiwan’s
electronics industry being challenged by mainland China companies in
global markets?
A. Taiwan’s electronics industry is arguably facing its greatest
challenge ever, as both the central government in Beijing and the
regional and city governments throughout China are redoubling efforts to
bolster domestic, state-invested competitors. Under these subsidy
regimes, system makers which can reach a targeted percentage of
component value from approved vendors are granted what, by the standards
of prevailing profit margins are massive rebate subsidies. Whereas mere
import substitution had once been a sufficient goal of state
policy, now the Chinese government is trying to foster domestic
champions.
Q. Which segments of the industry are most threatened for Taiwan and why?
A. Clearly the smartphone and tablet food chain companies are the
most vulnerable, followed by the PC component group. Conversely,
networking and automotive component makers are far less vulnerable.
Moreover, there are certain products such as high-end camera lenses and
4K LCD TV panels where the inherent engineering challenges will buffer
the leading manufacturers, such as Largan Precision and AUOptronics,
respectively. TSMC should also be largely insulated, as advanced wafer
foundry too is an area with steep technological barriers to entry.
As for why the smartphone and tablet food chain, I would say that the
reasons are mainly threefold. First, these are areas where the Chinese
government has most focused it subsidies, as these are large and still
growing segments. So it makes sense to concentrate efforts here.
Secondly, most of the components going into mid-range and low-end
smartphones and tablets are less technically advanced, and thus within
the reach of aspiring new Chinese competitors. Finally, these are
consumer products where there is both more willingness to buy
lesser-known brands, and less overall end-market scrutiny of the
components within. The situation is very much the opposite in both
networking and automotive electronics.
Q. Do you expect China’s capabilities to continue to improve and and why?
A. I expect that we will continue to see Chinese would-be national
champions narrow the technological gap, although this will happen at
varying degrees. These barriers to entry will likely prove most durable
in foundry wafer production. But these technology deficits should also
prove relatively persistent in advanced displays and optics, as
resolution migrations continue. While IC packaging and testing has thus
far suffered little impact from the so-called “red supply chain,” we are
concerned that the advantage of the Taiwanese incumbents ASE and
Siliconware Precision will prove less durable over the 2-3 year view.
Global chip makers are eager to avoid being singled out, as Qualcomm was
in recent year. One way that they’ll seek to do this is to engage in
hand-holding of Chinese manufacturers, helping these newer entrants up
the quality curve.
Q. How does the ASE-SPIL deal fit into this picture? Originally,
SPIL was looking to team up with a mainland investor that was also
looking to invest in other Taiwan tech companies (Tsinghua Unisplendor).
A. We are pretty skeptical that the ASE-Siliconware Precision tie-up
will yield a great deal of benefits without any integration of the two
companies. Simply putting these two competitors under the same umbrella
company is likely to yield meager benefits in such areas as procurement
of supplies. Moreover, combining the industry’s largest and
third-largest players is likely to increase their customers’ interest in
fostering Chinese suppliers which can meet their technological
requirements. Even if the new umbrella firm were to invite Chinese
investment, it is very unlikely to be of the scale necessary for the
firm’s products to be considered domestic Chinese content.
Q. What are the risks for the likes of Hon Hai and Quanta?
A. The risk is that the Chinese government continues to throw state
funds at the tech sector in a desperate effort to foster world-class
players. They’ve already seen, for instance in foundry chip production,
that a decade and a half of lavish subsidies have not enabled SMIC to
either appreciable close the technology gap nor win leading-edge orders
from global chip makers without the sort of behind-the-scenes
arm-twisting that Qualcomm has suffered. This sort of industrial
coercion can only get China’s national champions so far, as the SMIC
case clearly demonstrates. The risk to Taiwanese component vendors is
that not all segments of the electronics industry place such a high
premium on cutting-edge technologies as do high-end logic chips.
Companies like Hon Hai may have some ability to defend themselves
through their global network of clients, manufacturing capabilities, and
distribution. But even Hon Hai is not immune to these pressures.
Companies like Delta and Quanta however have a few relatively more
sheltered, more technologically-intensive product areas where they can
easily hold off the new entrants from China. In the case of Quanta,
servers and other data center hardware will play that role. For Delta,
automotive electronics should offer them a means to win business that
the global car makers are unlikely to entrust to Chinese firms. Even HTC
is likely to find refuge in its Vive line of VR hardware, given the
company’s early-mover status and the fact that they’ve aligned
themselves with a very capable software partner in the form of Steam.
HTC’s management have clearly learned from their smartphone struggles
the importance of establishing a viable platform. And we believe that
they’re well positioned to do so in VR in a defensible manner.
Q. You mentioned AUO. What’s ahead for Innolux?
A. I’m personally quite optimistic about both Innolux and AUO. While
both of the Korean display giants (Samsung and LG Display) have tried to
avoid rising Chinese completion by shifting to organic light-emitting
diode (OLED) displays, both have struggle to really make this pay off.
In the meantime, both AUO and Innolux have worked to leverage their
expertise in LCDs. And this ha worked out well for them, especially as
the migration to 4K (UHD) TVs has happened more quickly than expect.
While the Chinese display makers have used lavish government subsidies
to build new capacity, they’ve found that quadrupling pixel density a
massive engineering challenge. Their resulting low yields have muted the
resulting supply impact. At the same time, TV makers are telling us
that Samsung is unable to fill orders for a number of TV panel sizes, as
they are also suffering product migration hiccups, as they try to move
to thinner motherglass and incorporate other new technologies.
Consequently, we’ve seen prices for some panels bounce by as much as 15%
from their lows, with further gains likely.
For Innolux, the big question is of course what Hon Hai boss Terry
Gou plans to do with the newly-acquired Sharp assets. While many in the
industry expect that he will ultimately find a way to leverage Sharp
technologies within Innolux, he has yet to show his hand. Innolux has
already completed an important transition, migrating a great deal of the
labor-intensive, ‘back-end’ module assembly back to Taiwan – a move
that will both yield logistical efficiencies, and enable the company to
avoid rising Chinese wages by applying greater use of automation back
home in Taiwan. These changes leave Innolux in a strong position.
http://www.forbes.com/sites/russellflannery/2016/07/06/taiwan-tech-industry-faces-greatest-challenge-as-rival-china-backs-natl-champions/#79801d653f19
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