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The island s electronics firms are in need of an upgrade
Mar 26th 2016 | TAIPEI
THE takeover bid by Hon Hai of Taiwan for Sharp, a chronically loss-making
Japanese electronics firm, is being watched closely as a test of Japan s
openness to foreign investment. But it is also being scrutinised back in
Taiwan. The deal may yet falter: as The Economist went to press, Hon Hai was
reportedly seeking to knock around $900m off its earlier offer of $5.4 billion
including assumed debt. But if it does go ahead, and Terry Gou, Hon Hai s boss,
succeeds in absorbing Sharp s brand and technology, he will be able to offer
his big customers, such as Apple, a broader array of parts, and may even
transform his firm into a seller of innovative consumer goods. The deal could
serve as a model for other Taiwanese electronics firms which want to go global,
says the island s economics minister, John Deng.
Electronics firms together contribute 40% of Taiwanese exports, and 15% of its
GDP. For more than two decades they have achieved great success assembling
computers and other gadgets for Western companies. At first their factories
were all in Taiwan, but as China opened up, they shifted some to the mainland.
The combination of Taiwanese production expertise and the mainland s cheap
labour was hard to beat.
Now, however, this cross-strait partnership is giving way to competition.
Taiwanese firms fear that rising mainland counterparts, which they call the
red supply chain , are catching up. Taiwan s semiconductor firms, such as TSMC,
are so far going strong. But its main makers of big display screens, Innolux
(which Hon Hai controls) and AU Optronics, are under threat from the mainland s
BOE and China Star Optoelectronics. Whereas Taiwan s total exports fell by 12%
year on year in February, display screens and other optical instruments
plunged by 34%.
Of all the countries dependent on purchases by China, Taiwan has most to lose
as the mainland s electronics industry becomes more self-sufficient, says
Angela Hsieh, an economist at Barclays, a bank. South Korea also depends on
China, but its firms sell a wider variety of goods there, such as cars and
cosmetics.
Becoming more innovative is easier for some than others. Hon Hai, which has its
eye on Sharp s research into advanced OLED display screens, is big enough to
absorb the struggling Japanese firm, and to keep throwing money at developing
its technology. Likewise, South Korean firms such as Samsung Electronics, which
belong to giant conglomerates, can afford the R&D and marketing budgets needed
to remain globally competitive. But many of Taiwan s electronics firms are,
thus far at least, small, anonymous links in other companies supply chains.
Starting to sell gadgets under their own brands might offer these firms far
higher profit margins, allowing them to pull themselves up by their bootstraps.
But past experience shows that it is hard to do this without going into
competition with the more famous customers that they rely on. Some Taiwanese
firms, including HTC and Asus, have produced branded products such as phones
and notebook computers only to be deserted by the customers to whom they sell
components.
Raymond Hsu, an analyst with Taiwan Ratings, an affiliate of Standard and Poor
s, thinks Hon Hai would only try to make money from Sharp s brand if it could
attach it to products that wouldn t upset its existing customers. The Taiwanese
firm may be more interested, in the short term, in being able to offer
brand-owners like Apple a wider range of components, and thus to increase its
bargaining-power with them. Mr Hsu says Apple would prefer not to buy OLED
displays from Samsung, which is a rival producer of smartphones.
Taiwan s president-elect, Tsai Ing-wen, has promised to reshape its economy by
shifting from an efficiency-driven model to an innovation-driven one. Ms Tsai
also wants to reduce reliance on China and promote greater technology ties with
America and Japan. The question is how. Taiwanese firms have already been
encouraged by the outgoing government to flirt with the likes of cloud
computing, the internet of things , 3D printing, biotechnology and renewable
energy. Some are showing potential, but there will be no quick fixes.
Meanwhile, prospering rivals on the mainland enjoy the benefits of a vast home
market, and a government with lots more money to throw around.