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Taiwan-Regional Manufacturing Headquarters by 2020 (2011-03-22 IEK產業情報網 )

The inking of the Economic Cooperation Framework Agreement (ECFA) between Taiwan and mainland China on June 29, 2010 has caught enormous attention from domestic and foreign investors, as the trade pact will not only spur Taiwan's competitiveness in China, but also boost Taiwan's pivotal position in the world's value chains. Many foreign companies with a long-term interest in the growing China market are trying to figure out how to make the best investment in Taiwan as evidenced by the recent BERI report that ranks Taiwan as the fourth best investment location in the world.
Since the last decade, mainland China has emerged as the world's largest manufacturing center and second largest consumption market. This trend is not going to change any time soon. However, China will face many major challenges in its future growth path, including growing disparities between the rich and the poor, rising wages, intensified competition for skilled workers, and continuous currency appreciation.
Examining the world's history of industrial transformation, the baton passing of manufacturing centers has repeated its cycle from Europe to the United States in the early 1900s, then to the rise and fall of Japan from the 1960s through the 1980s, then to the export-oriented economic boom of Taiwan from 1970 through the 1990s, and lately to the rise of the manufacturing base in China since the early 1990s.
It is a common practice that a company's regional manufacturing headquarters tends be located in the same country as its main production activities. A typical regional manufacturing headquarters is responsible for formulating manufacturing strategy and managing satellite operations in a geographical region to support its business strategy. It is also accountable for the R&D of advanced production systems and processes in a chosen pilot site, before rolling out to other production sites. In this case, it seems like mainland China might be a natural choice for regional manufacturing headquarters for the next 10-20 years.
However, contrary to conventional wisdom, Taiwan has a great potential to establish itself as the regional manufacturing headquarters for high-tech and traditional industries by 2020. According to IEKs long-standing studies of Taiwan's industry, there are three strong reasons to believe that Taiwan can fulfill such role with competitive qualifications not easily copied or out-dueled by China or other countries: Diversified culture, integrated manufacturing capabilities, and supportive environment.

Diversified culture

Taiwan is one of the few Asian countries with a highly diversified culture, which can be a key asset to help manage international operations.
Historically, Taiwan has close ties with China, with the two sides sharing similar culture in language, food, family values, business practices, etc. Despite their past political conflicts, future trends will drive them towards closer cooperation. Taiwan's cumulative investment in China has topped US$200 billion; around one million Taiwanese people now live in China; and Taiwanese-owned businesses are employing more than 14 million workers in China, mostly in the manufacturing sector.
Similarly, many Taiwanese people have linkages with Southeast Asia through cross-cultural marriages or common cultural connections from Chinese immigrants. In addition to its Chinese roots, Taiwan's multicultural composition also derives from its past legacy with a variety of countries like Portugal, the Netherlands, Japan, and the United States. Such a diversified cultural legacy has made Taiwanese people more accepting of foreign culture, which in turn makes them more suitable for international management when compared to many other Asians. Therefore, historically Taiwanese people have developed a nimble entrepreneurial spirit manifested in their extensive global business connections beyond ethnic Chinese populations.

Integrated manufacturing capabilities

Taiwan's industries have developed integrated capabilities in low-cost and flexible manufacturing management from years of OEM/ODM experience with multinational brand companies.
Many manufacturing companies operate on razor-thin margins whereby sustainable profitability often comes from business scale and nickel-and-dime operations management. They have institutionalized a wealth of capabilities in their business DNA of being lean, flexible, and responsive, while meeting continuous cost-down targets by worldwide customers who are ever increasing their demands. Past experiences learned from their Japan and U.S. partners over the years also helped Taiwanese companies fine tune their production management skills.
In addition, Taiwan companies are able to integrate their strengths in ICT applications with China's skillful, large labor resources to lower production costs while maintaining world-class quality. Overall, Taiwanese manufacturing operations based in Taiwan or China are still ahead in the cost learning curve when compared to their China counterparts, who are already focusing on brand marketing and outsourcing manufacturing without getting entrenched in manufacturing operations.

Supportive environment

Taiwan provides a supportive environment for domestic and foreign companies who set up their regional manufacturing headquarters on the island.
Enterprises in Taiwan enjoy low-cost of capital as Taiwan's corporate income tax has been slashed to 17%, comparable to the 17% in Singapore and 16.5% in Hong Kong, but far lower than South Korea's 22%, China's 25%, and Japan's 30%. Taiwan also has a number of industrial parks and technology incubation centers that help germinate entrepreneurial start-ups with innovative products and services. In addition, Taiwan has either competitive or better support infrastructure in its judicial system, stock exchange, intellectual property protection, and education when compared to China and many other Asian countries. The island is well connected by a variety of transportation networks enabling business and recreational activities to be accessed within one day's traveling.
Some examples of industries in Taiwan with leading companies already having established core competencies as regional manufacturing headquarters include semiconductors (TSMC), bicycles (Giant), computers (Acer), and EMS (Hon Hai).
However, Taiwan still has room for improvement to solidify its role as a regional manufacturing headquarters against other countries by 2020. But it needs to act fast with collective effort from government and industry, as its competitors are not sitting still.
First, Taiwanese companies must collectively improve their value add, manifested in an improved gross margin, by continuous innovation in their business model or value proposition. For example, how to integrate manufacturing activities with value-add services like channel and logistics management will be of high interest to existing customers. Another value-add example is about providing customized and differentiated total solutions through innovative products and services, as HTC has done in mobile phones.
Second, Taiwanese companies must begin to capture their operations management experiences and gradually transcend their core competencies from efficiency and cost base to a knowledge-based platform. Over the years Taiwanese companies have gained a great deal of knowhow in manufacturing operations. Therefore Taiwan needs to use its ICT strengths to combine manufacturing technologies with IT systems to enable more efficient and smarter manufacturing operations such as the unmanned factories that Hon Hai has developed in EMS manufacturing.
Lastly, Taiwan still needs to open its doors wider to attract foreign students and talents, particularly to those from Asian countries including China. Taiwan has established quality education systems and an integrated network of research and science parks. Despite concerns about the impact on local job opportunities, successful examples from the United States and Singapore have shown that proper leverage of foreign talent with diversified capabilities can fill gaps in the domestic resource pool while injecting an entrepreneurial spirit that ultimately creates more businesses and jobs at home.
In summary, multinational brand companies have more complementary experiences in innovation, marketing, and integrated services than those of Taiwanese companies. By setting up a regional manufacturing headquarters in Taiwan and forging early partnerships with Taiwanese OEM/ODM companies, they can make good use of Taiwan's profound capabilities in managing satellite operations. They will also be well suited to use Taiwan as a test site for their products and services before gaining easier access to China and the other Asian markets.
It is also wise for foreign investors to hedge their risks in China and take advantage of Taiwan's closer ties with China and the rest of the Asia during the coming decade of the post-ECFA era. Some examples of industries with good potential to establish regional manufacturing headquarters in Taiwan by 2020, especially if the above-mentioned improvements are put in place, include textiles, precision machine tools, auto and consumer electronics products.

This article was originally published in AmCham's Taiwan Business Topics, 2011 Feb. Issue.All Rights Reserved.
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