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					Taiwan’s High-tech Industry at the Turn
            of the Century

                   Chi Schive
                     President
      Taiwan Academy of Banking and Finance
                      Advisor
   Council for Economic Planning and Development


          Industrial Restructuring in Asia
              Thammasat University
               September 18, 2000
                                                   1
          High-tech Development in Taiwan

                           Outline
I. Introduction
II. Status of Taiwan’s high-tech industry
III. Development of high-tech industry in Taiwan - the case of
     semiconductor industry
IV. Policy for developing high-tech development industry in
     Taiwan
V. The foundation of the high-tech economy
VI. Global logistics in Taiwan’s high-tech industries



                                                                 2
                      Industrial Structure
                                                                               %

Industries              1986            1991           1997             2000


Basic                    35.6           35.0           36.7             35.0


Tech-intensive           24.0           31.3           39.3             40.0


Traditional              40.4           33.7           24.0             25.0

Source: Ministry of Economic Affairs, Promotion Plan for Asia-Pacific
        Manufacturing Center, July 1998.
                                                                                   3
                    World’s No. 1 Producers in Taiwan
                                                            World’s No. 1, 1999
          World’s No.1, 1983
                                                                 Market share by quantity (%)
         Shoe                            Scanner                                      91
         Electric fan                    CD-ROM                                       77
         Bicycle                         PC case                                      75
         Umbrella                        Power supplies                               70
         Sewing machine                  Keyboard                                     68
         Tennis racket                   Foundry wafer                                67
         Bicycle tire                    Mother board                                 64
         Thermos bottle                  Monitor                                      58
         Monosodium glutamate            Modem                                        57
         Bicycle break                   Notebook computer                            49
         Camphor                         ABS resin                                    25
         Bicycle chains                  Hand tools                                   16
                                         Nuts and bolts                               16
Key bd




         Sources: Cosmos Magazine, Oct., 1984; Ministry of Economic Affairs, ITIS project.      4
              20
                   30
                          40
                               50
                                       60
    19
         83




                                           %
    19
         85




                   26.0
    19
         87
    19
         89
    19
         90
    19
         91
    19
         92
    19
         93
    19
         94
    19
         95
    19
         96
    19
         97
    19
         98
    19
         99
                                               High-Tech Share of Taiwan’s Exports



                                    52.1




5
Policies Relevant to High-Tech Industry in Taiwan

Preparation (1960-80) - Technology development
• Development of core-satellite industrial grouping
• Establishment of Industrial Technology Research Institute
  (ITRI ,1973), Institute for Information Industry (1979),
  Development Center for Biotechnology (1984)
Seedling (1981-90)
• Establishment of Hsinchu Science Park (1981)
• Encouraging venture capital business and providing tax
  incentives to high-tech firms (1984)
• Foreign exchange and financial liberalization
• Environmental protection
                                                              6
Policies Relevant to High-Tech Industry in Taiwan

Expansion (1991- )
• Promoting “ten emerging” industries - Statute for
  Industrial Upgrading (1991) providing tax holidays or tax
  credits
• Subsidy (1991) to product development up to 50% of R&D
  spending
• Subsidy (1997)to technology development
• Promoting NII (national information infrastructure) (1996)
• Setting up venture business incubator in universities and
  research institutions (1998)
• Granting property right of government-funded research
  output (1999) to research organizations
                                                               7
         Then Rise of IT Industries in Taiwan
• As the market for black and white televisions shrank, Taiwan’s
  prosperous television industry switched to produce monitors,
  which was a readily available alternative.
• Local firms entered the industry in five ways
   – People with first-hand experience, such as university
     professors and former game television manufacturers who
     lost business after the government closed television game
     playhouses
   – Former marketers for foreign multinationals
   – Local companies organized by large multinationals
   – Start-ups with government contribution of funds and
     technology
   – Local firms seeking to expand product lines
                                                                   8
Then Rise of Semiconductor Industries in Taiwan

• Subsidiary established by General Instrument (1966), Texas
  Instrument, RCA, and Philips (1969-71)
   – helped develop skilled labor and technicians and managers
   – introduced packaging and resting technology, and quality
      control system
• Laboratories established within educational and research
  institutions
• Electronics Research and Service Organization (ERSO)
  established 1974 developed a technology with good market
  potential and competitive cost
• United Microelectronics Corporation (UMC) was jointly
  formed by the government, public bank and private
  enterprises.
                                                                 9
The Foundation of the High-tech Economy


                     ICT




           Capital           Labor
       Venture Capital     R&D People


           Institutional Setting

                                          10
           Merits of Taiwan’s Financial Market

                                                          Indirect Finance
              Finance
                                                                Venture Capital


                   Indirect Finance         Direct Finance
               (US$ billion) Share (%) (US$ billion) Share (%)
  1992            1,771          93.4       125         6.6
  1993            1,551          96.7        53         3.4
  1994            1,445          80.8       344         19.2
  1995            1,145          87.6       162         12.4
  1996              960          72.6       362         27.4
  1997            1,188          53.8     1,019         46.2
Note: Indirect finance refers to change in lending and investment by financial institutions; direct
      finance refers to change issuance of stocks, notes, and bonds.
                                                                                                      11
Source: Central Bank of China.
Industrial Structure of Selected Stock Markets

                     Taiwan     Hong Kong Singapore          Thailand
                     (1996)       (1995)   (1995)             (1995)
Industry              50.4           7.8          67.3         19.4
                                               (including
                                                services)
      Electronics     14.2            -             -           1.6
Financial
services              36.0          24.3          16.8         40.4
Real estate &
  construction         5.3          30.5          12.7          8.6
Other industries       8.3          37.4          3.3          31.6
Sources: Stock exchanges of Taiwan, Hong Kong, Singapore, and Thailand.


                                                                          12
  What Financial System did For Taiwan’s
              ICT Industry?
Continuous, steady financial liberalization in appropriate
  sequence since the late 1970s
 Floating exchange rate regime was implemented in 1979.
 Limits on interest rate change were abolished in 1989.
 The ban on establishing new banks was lifted in 1990.
 Stock and money markets have been steadily expanding and
  improving.
 Capital market was opened to foreigners in three phases since
  1983.
 WTO-GATS commitments.
                                                                  13
 What Financial System did for Taiwan’s
             ICT Industry?
As a result
 Taiwan posted the least spreads between lending
  and deposit rates on the list of the IMD global
  competitiveness list. Capital adequacy ratio is far
  above the required 8% by BIS.
 Investment efficiency and quality rose due to
  increasing competition of the financial market.



                                                        14
          Increasing Number of Banks in the 1990s

60
                                                                               52
50                                                       47


40
                   New
30                 Banks                                         Reorganized
         24                              Reorganized
                                         form                    form trusts
20                  16
                           Reorganized
                           from trusts   cooperatives
10
                                                                      5
                                             5
                                 2
 0
     before 1992                                        Jan-98                 2000

 Source: McKinsey&Company.

                                                                                      15
            Growth in the Stock and OTC Markets
                         Listed companies      OTC (over-the-counter)
                                                    companies
                Number Capital (NT$billion) Number Capital (NT$billion)
       1986      130          242.9            -                -
       1987      141          291.8            -                -
       1988      163          352.5            -                -
       1989      181          439.2            1              0.2
       1990      199          533.3            4              1.5
       1991      221          643.1            9              3.8
       1992      256          761.1           11              4.5
       1993      285          908.4           11              4.0
       1994      313        1,099.8           14              9.8
       1995      347        1,346.7           41           173.0
       1996      382        1,661.3           79           264.1
       1997      404        2,106.3          114           314.9
1994




       Source: Securities, Exchange, and Futures Commission, Ministry of Finance, June 1998.   16
  Increasing Openness of Taiwan’s Financial Sector

                    Banks                        Securities         Life insurance
           Number        Foreign banks’      Number       Foreign  Number     Foreign
                         share of assets                  share of            share of
                                                           stock               market
       Local Foreign     Share Growth Local       Foreign market Local Foreign (%)
                          (%)   (%)                         (%)
1990     16     35(43)   5.78     11.4      na        na      na    8     8     1.4
1991     17     36(47)   5.23      8.2     351        2       0.6   8    10     2.3
1992     32     36(50)   5.27     20.6     294        2       1.1   8    13     3.1
1993     33     37(53)   5.42     21.5     272        1       1.8   14   14     4.0
1994     34     37(57)   5.30     13.5     262        1       2.2   15   14     4.9
1995     34     38(58)   5.53     13.2     249        7       3.9   16   14     6.0
1996     34     41(65)   5.53     10.0     229        13      3.7   16   15     6.8
1997     39     45(69)   6.65     31.7     221        15      2.8   16   15     7.7
                                                                                         17
Source: Central Bank of China, Ministry of Finance.
                 Knowledge

                 Innovations        Capital Market
                                        Banks

V.C.   SMEs            ?          Large
                                  firms


              Commercialization
                                     TSMC,       Winbond,
                                     and Micronix were
                                     established with v.c.

                                                             18
An Alternative to
                         Tax incentives (no more today)
Industrial Policy



      Innovators         Venture                Investors
                        Capitalists

        Good projects                 Banks
                                      Insurance companies
High-tech industries                  Institutional investors



                                                                19
Sectoral Distribution of Venture Investment

     Semiconductor                                                   37%
     Communications                                                  15%
     Information                                                     15%
     Opto-electronics                                                10%
     Software                                                         9%
     Biotechnology                                                    3%
     Other high-tech                                                  7%
     Non high-tech                                                    4%
 Source:Taipei Venture Capital Association, Venture Capital Report, No. 19, 1998.
                                                                                    20
              Performance of V.C. Firms
                  Earnings Per Share
NT$
 7.0
 6.0                                                 6.33
 5.0
 4.0
 3.0                                    Top 10
                                                        1.81
 2.0
 1.0     0.12                                    Average
 0.0
-1.0
-2.0
       1984     1986   1988   1990   1992   1994     1996


                                                               21
           Growth of VC Firms in Taiwan


                    1984       1986        1988       1990        1992
No. of firms         1          1            3          7           2
NT$ billion           0.2        0.8          1.5         3.6       1.2
                                                               Up to June
                    1994       1996        1998       1999
                                                                 2000
No. of firms         1          14           38           46     161
NT$ billion          1.1         6.8         30.3         30.4   110.4

Source: Taipei Venture Capital Association (June 2000).


                                                                            22
 What Fiscal Sector did for Taiwan’s ICT
               Industry?

• Income taxes were moderate.
• Fiscal surplus as a percent of GNP was 6.6% in
  average during 1974-81.




                                                   23
                         R&D Indicators
                                                                                %


                                          1986 1991 1997 2000

Ratio of technicians and
  specialists to total work                 5.0         -      11.9      15.0
  force

Ratio of R&D spending to
                                            0.6       1.0       1.9       2.0
  total sales
Source: National Science Council, Indicators of Science and Technology, 1999.
                                                                                    24
                            R&D Spending
                        as a percent of GDP
 2
                                                                            2.0
                                                                     1.9
                                   1.8           1.8   1.8    1.8
                                          1.8
                            1.7
                      1.7
1.5

               1.4

        1.2

 1
       1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

      Source: National Science Council, Indicators of Science and Technology, 1999.
                                                                                      25
        Researchers per 10,000 Population

45
                                                                          38.0
                                                                  35.3
35                                                         33.4
                                                   31.2
                                            27.5
                                    26.2
25            22.6   22.5    23.3
      19.8


15
      1989   1990    1991   1992    1993   1994    1995   1996    1997   1998
     Source: National Science Council, Indicators of Science and Technology, 1999.
                                                                                     26
       No. of Patents Granted in the U.S.
            Rank
   5000     7        7         7        7        7        5        4     4526
   4000                                                  3805


   3000                                        2597
                                      2419
                    1814     2087
   2000    1510


   1000

      0
          1993     1994     1995     1996      1997     1998     1999
Source: U.S. Patent and Trademark Office, U.S. Department of Commerce.

                                                                                27
     Employment by Level of Education

                                                                          %
        Total Junior high             Senior high Polytechnic &
                & below               & vocational     above
1964    100.0     90.2                     6.8          3.0
1980    100.0     70.1                    19.5          10.4
1988    100.0     57.4                    27.9          14.7
1998    100.0     40.5                    34.6          24.9

Source: Directorate-General of Budget, Accounting & Statistics, Monthly Bulletin
        of Manpower Statistics, 1999.


                                                                                   28
Higher Education Graduates by Discipline

                                                             %
                         Science          Humanities & Social
           Total
                         &Tech                Sciences
1977        100.0         45.5                  54.5
1988        100.0         54.0                  46.0
1998        100.0         55.5                  44.5
Source: Ministry of Education, Education Indicators, 1999.




                                                                 29
Behind the Emergence of Global Logistics

• Production fragmentation - Classic trade theory
   To push cost down, vertically integrated production
     processes are taking place across country borders
     around the world.
• New phenomenon
   Shortening product cycle is generating inventory pressure.
• New phenomenon
   Technology change improves the cost of information
     transmission and goods transportation.

                                                                30
             Changes in Local Operations


Before the mid-                                Marketing and
1980s               R&D        Manufacturing
                                                Distribution
                                     OEM

In the late 1980s                              Marketing and
                    R     D          Mfg
and early 1990s                                 Distribution
                                  ODM


After the mid-      R     D          Mfg       Logistics   M
1990s
                                      ODL/GL

                        : Local operations
                                                               31
   Taiwan’s International Division of Labor

                                        I:   Investment
                Japan                   M:   Materials/Intermediates
     SQ                                 Q:   Finished product/commodity
          I&M                           S:   Strategic alliance
                   I&M
Taiwan           Q               U.S.
                     Q
                 S

         I&M             Q
                                                Before the mid-1980s
    M                        Q                  Late 1980s and early 1990s
                ASEAN                           After the mid-1990s
                China

                                                                             32
Procurement Order Sharing by Taiwan
              Firms
                                                         %
                                          Domestic    Foreign
                                 % of Mfg
                                          production production
Manufacturing                      100.00     89.35     10.65
 Information electronics            35.71     82.03     17.97
   Electronics, electrical          34.90     82.06     17.94
    machinery
    Precision instruments              0.81         80.92          19.08
 Metal machinery                      23.91         97.62           2.38
 Chemicals                            23.35         89.05          10.95
 Consumer products                    17.04         93.50           6.50
Source: Ministry of Economic Affairs, Statistics Department, Survey on
        Manufacturing Activities,July 1999.
                                                                           33
        Production Sharing of Taiwan’s
             Information Industry
                                                                          %
                 1995         1996         1997        1998        1999*
Total           100.0       100.0        100.0        100.0       100.0
Taiwan           72.0         67.9         62.6        57.0         52.7
China            14.0         16.8         22.8        29.0         33.2
Thailand           5.0         5.5          5.9          5.4         5.3
Malaysia           7.2         7.4          5.6          4.5         4.0
Other              1.8         2.4          3.1          4.1         4.8
* Estimates.
Source: Market Intelligence Center, Institute for Information Industry.
                                                                              34
                Taiwan as a Global Logistics Center
                                                                    1. DELL sends a request to Taiwan upon
                       China                    U.S.                    a Singaporean client order
                                                                    2. The U.S. firm sends CPU to Taiwan
                                                 2 CPU      DELL    3. China sends cases and power supplies
                      7               4                                 to Taiwan
                                                        9
                                                              Order 4. China sends semi-assembled parts to
                                           3
                                                             1
                                                                        Taiwan
                                                                    5. Malaysia sends PCB to Taiwan
Singapore                        6
                                                                   6. Taiwan sends DRAM mainboard and
                                                Taiwan       DRAM
                                                                       semi-asembled parts to Singapore
 8     PC                                                    main-
                                          5                  board 7.China send monitors to Singapore

                                          PCB                       8. Singapore assembles and sends the
                                                                        finished PC to the client
                                 Malaysia
                                                                    9. DELL sends the payment to Taiwan


     Source: Prepared by CEPD.                         Steps 1 to 8 take 2 to 5 days to complete
                                                                                                           35
            Building Global Logistics Capabilities

                                                GLC


                                                                                        Financial
     Telecom
                                                                                     International funding
Fast data transmission                                                                   and payment
  and management         Manufacturing                           Sea/Air
                         Main supplier on the
                         global market - tech              Customs clearance
                          and mfg capability                and fast delivery




                                      Macroeconomic
                          Free flows of 4 I’s (industries, investment, individual,
                                                information)
                                                                                                         36

				
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