Taiwan’s struggle to become an innovation leader

Taiwan became a manufacturing powerhouse and the centre of the world’s laptop production. But it’s a difficult place to launch successful start-ups. Can it rise to the challenge?

It has a population that is half that of Spain’s crammed into a land mass one-fiftieth the size of Mexico. Yet Taiwan still manages to make nine out of 10 of the world’s laptop computers. So surely its economic prospects must be rosy?

In fact, profits are down in the island’s tech sector, competition is growing and consumers increasingly want devices that are being made elsewhere. It is facing an urgent need to reinvent itself. But with a tradition of making things to order for foreign companies and a hierarchical corporate culture, a new generation of start-up innovators is facing an uphill battle.

“It’s very much to do with innovation,” says Huang Deray, former director of Hsinchu Science Park, home to 400 hi-tech companies and a world leader in semiconductor manufacturing. “To keep doing well, you must think of what’s the next product you should make to help you earn money three to four years from now, even if you have a product that’s selling well right now.”

Taiwan first transformed itself from a labour-intensive economy to a hi-tech powerhouse during the 1980s. You may not have heard of the companies Quanta Computer, Compal Electronics, Pegatron, Wistron and Inventec, but together they make more than 90% of the laptops sold worldwide, including those sold by top brands such as Apple and Dell.

Yet making devices at low cost for others has become less profitable than it was, and neighbouring manufacturing centres such as China and Vietnam are increasingly competitive. Profit margins for the above five companies have halved compared to a decade ago. Revenues for Taiwan’s hi-tech sector more broadly are largely flat, compared to double-digit growth a decade ago, according to Helen Chiang, a Taipei-based market researcher at tech consultancy IDC. “It’s a real crisis situation,” she says.

PC shipments worldwide fell from 363 million in 2011 to 352 million last year, with further declines in the first half of this year. Taiwanese PC makers have shifted their attentions to tablets; however, they do not enjoy the same dominance of this market as they do for laptops.

Small market

Meanwhile smart phone sales are growing rapidly. HTC, Taiwan’s only manufacturer and its best-known brand, was once the number two vendor in the US. It is now struggling with dwindling market share and lacklustre sales. Its handsets do not have the features to compete with the likes of Apple and Samsung in advanced economies. Neither are they cheap enough to compete with increasingly popular low-cost Chinese brands, such as Huawei and Xiaomi.

There is a growing realisation in Taiwan that the future success of its technology export-dependent economy will depend on its ability to innovate. Pointing to a number of significant obstacles, some industry insiders are pessimistic about its prospects.

With a population of a little over 23 million, the island has a relatively small domestic market, and its companies tend to be small and medium in size, rather than the government-backed giants of some of its neighbours. Even if products sell well domestically, companies may not make money if they do not do well overseas. This can lead to an unwillingness to take risks.

As a result Taiwan puts less into on R&D and marketing than some of its rivals. Its spending on R&D has risen steadily over the last decade to $26bn (£16.3n) in 2011, but that’s only about half that of South Korea, which is also focused on exporting tech products. On top of this, Taiwan’s traditional focus on designing and manufacturing hardware means it lacks expertise in software development, which generates a growing proportion of tech industry revenues.

Some say a much bigger problem is that Taiwan lacks a culture of catering to consumers, because of its long history of making products that are marketed under the brand names of companies based elsewhere. As a result its businesses are not used to gauging consumers’ tastes or testing products on them.

“They’re doing a lot of innovations, but they doing it for themselves, not customers,” says Jamie Lin, founder of appWorks, an incubator for start-ups in Taipei. “They start with the technology and package it in a way that the market might like it. It’s different from Silicon Valley, where they are putting more emphasis on starting from the market backwards.”

Cultural constraints

But perhaps the problem has even deeper roots. The culture of most companies, and many would say society as a whole, seem to work against innovation. Many parents put pressure on their children to seek stability after education, rather than exploring and pursuing their interests. The government’s largely hands-off approach means many companies are family-owned. They can often be hierarchical and led by older generations with a tendency to favour long hours over creativity.

“The management culture has been the same since the 1980s,” says Chiang. “It has depended largely on the mentality of the person at the top. And the top managers in the hi-tech sector have been mainly the same group of people.”

The cultural constraints make it all the harder for those who want to do things differently to break out of the mould. One man who has succeeded in doing so is George Chao. Until 2009 he was earning around double the average wage of a tech engineer at a company that designs integrated circuits. But the long hours – 14 a day nearly every day – was hurting his health and family life, so he quit.

“It’s impossible to be innovative in that atmosphere,” he says. “To be creative, people have to be relaxed. When you’re tired, you can only carry out the instructions from the top.”

Turning 40 spurred Chao to move on to “do something that he could call his own.” Being the one in his family who had to clean the many windows in their four-storey home inspired him to design a window cleaning robot called the Hobot. He has sold 20,000 of the devices in various countries, and now earns more than he did in his old job, while working fewer hours.

While the societal and corporate pressures do act against innovation, it’s not a straightforward picture. Last year Taiwan’s companies and individuals obtained 11,628 patents from the US Patent and Trade Office, compared to 14,196 for South Korea, despite Taiwan’s much smaller population.

Chao says there is creativity but often of a limited type. “Taiwan should do more innovation,” he says. “Right now, it’s mainly doing research and development, for instance finding ways to make integrated circuits based on specifications created by overseas companies. They’re not really inventing something new.”

Others complain that Taiwan does not make things easy for start-ups. The government taxes them on paper value of their company. This means investments from venture capitalists are taxed even if companies have yet to make a profit. Red tape and protectionism also make it difficult for tech companies to hire foreign talent, which they need to tap markets in the US, China and or Southeast Asia.

Breaking out

In its favour, the island has a population that is keen to buy the latest products, making it a good testing ground of consumer acceptance of new gadgets such as netbooks and phablets. E-commerce, mobile internet, such as apps and games, and internet advertising are all growing rapidly.

Yet it may be that the decline of Taiwan’s traditional hi-tech companies contains within it the seeds of a solution, with a growing number of people breaking out to set up their own companies. Mr Lin’s tech incubator appWorks provides office space for around 40 start-ups. He says the number of start-ups in Taiwan has at least doubled in the past three years to several thousand.

One of those based at appWorks is Chocolabs, which has developed an app that helps people search for and watch television programmes shows and music videos on their smart phones. It has accumulated more than two million downloads.

Another is software start-up GoodLife. Its portal collects information on daily discounts from local restaurants, convenience stores and other businesses. Founded in 2010, it’s now one of the top 130 websites in Taiwan and its fan page has more than 500,000 members. “It’s hard to run a software start-up in Taiwan,” says co-founder Brenda Chen. “It’s hard to make money. Why do it? It’s like a dream. I felt no one was doing this, but there was a need. I really liked to compare prices, to see where I can get things cheaper. I used to go on Google, search on companies’ websites, and spend a lot of time doing that. Now, I can easily find discounts and coupons.”

It’s this kind of energy that leads people like Mr Lin to believe Taiwan can make the transition to an innovation-based economy. “We have a lot going for us,” he says. He and others say the island’s strong tech manufacturing background, large talent pool, and increasingly confident and energetic start-up sector will help it to overcome the challenges and obstacles before it.

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