1. 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

2. 7-2 1. 1.Strengths of Taiwan’s Manufacturing Industry 1) 1)Double capabilities of cost reduction and flexible production. 2) 2)These capabilities have been achieved by vertical disintegration and mass production, with the latter being supported by low labor costs.

3. 7-3 2. 2.Why were these capabilities lost? 1) 1)Taiwan was no longer a low-wage country. 2) 2)China provided a better environment for mass production.

4. 7-4 3. 3.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?)

5. 7-5 Example: Notebook PC   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. Fabricated materials (Japan) Glass substrate & Film production (Japan & US) LCD panels (Taiwan) Notebook PC (China)

6. 7-6 4. 4.The ways to maintain materials, components and parts industry in Taiwan: 1) 1)Possessing and maintaining tacit know- how in materials and processing technologies 2) 2)Transforming cost-based manufacturing to service-added manufacturing

7. 7-7 5. 5.Service-added manufacturing 1) 1)Cost-based manufacturing:   Production to order in such a way that cost is minimized, quality warranted, and time to market the shortest. 2) 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.

8. 7-8 6. 6.B2B manufacturer   Possible services to be added: 1) 1)Product development service (ODM) 2) 2)Global logistics (inventory cost reduction) 3) 3)IP service 4) 4)Product design assistance 5) 5)Creation of customer-specific product functions 6) 6)Innovation-enabled components 7) 7)Modularization (disintegrated product design and manufacturing) 8) 8)Multi-function integrated services

9. 7-9 7. 7.B2C manufacturer   Be able to directly service the consumers rather than servicing them indirectly through the buyers – establishing a consumer brand.

10. 7-10 8. 8.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)

11. 7-11 9. 9.Key assets to be built 1) 1)Relational assets – B2B & B2C brands and trust 2) 2)Processing know-how, materials, and proprietary equipment

12. 7-12 10. 10.Build a user-driven production chain 1) 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.

13. 7-13 10. 10.Build a user-driven production chain 2) 2)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.

14. 7-14 10. 10.Build a user-driven production chain 3) 3)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.

15. 7-15 10. 10.Build a user-driven production chain 4) 4)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.

16. 7-16 10. 10.Build a user-driven production chain 5) 5)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.

17. 7-17 10. 10.Build a user-driven production chain 6) 6)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.

18. 7-18 10. 10.Build a user-driven production chain 7) 7)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.

19. 7-19 10. 10.Build a user-driven production chain 8) 8)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).

20. 7-20 10. 10.Build a user-driven production chain 9) 9)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.

21. 7-21 10. 10.Build a user-driven production chain 10) 10)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.

22. 7-22 11. 11.Strategies supporting a user- driven production chain 1) 1)Tax incentive:   Encourage innovation, not production or capital investment; promote value rather than volume. 2) 2)Benchmark for a good company:   Most efficient company → Number one → Only one 3) 3)Aim of R&D policy:   To enable low-cost production → To enable unique services

23. 7-23 11. 11.Strategies supporting a user- driven production chain 4) 4)The R&D team:   Mostly engineers → A mix of engineers, scientists, and artists 5) 5)The R&D theme:   Top down approach → Bottoms up approach (The users dictate the R&D theme)

24. 7-24 11. 11.Strategies supporting a user- driven production chain 6) 6)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). 7) 7)Research collaboration between colleges and enterprises:   Encourage R&D collaboration between colleges and local enterprises to support a locally centered industry cluster.

25. 7-25 11. 11.Strategies supporting a user- driven production chain 8) 8)The R&D stage: 9) 9)R&D location:   Relocate part of product development to China and focus on technology research in Taiwan. Basic R&DTechnology developmentProduct development Basic R&DTechnology developmentProduct development

26. 7-26 12. 12.The role of China B2BB2C Other manufacturers Taiwanese manufacturers in China Taiwanese manufacturers in China & others Taiwanese manufacturers in Taiwan OEM / ODM brand marketers Chinese consumers World consumers Materials & Equipments