Probing the Underbelly of Taiwan’s Economic Transformation Plan

Probing the Underbelly of Taiwan’s Economic Transformation Plan
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David Green takes a deep dive into what the 'Asia Silicon Valley' plan really means for Taiwan.

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The Asia Silicon Valley six-month report card is in, and my assessment is that the initiative is doing its level best to drag Taiwan kicking and screaming into a chimeric new dawn.

I say chimeric because the Asia Silicon Valley Development Agency’s (ASVDA) agenda is not confined to galvanizing a startup ecosystem around a notional valley in Taoyuan, though this idea blindsided much of the media when it was announced last year. There is indeed a plan to create “a startup cluster” for emerging technologies in the municipality by 2023, but the ASVDA’s remit is far wider. It should not be judged on its success in turning Taoyuan into Cupertino, though of course this would be nice.

Instead, its task is far more challenging – tantamount to instituting a sea change in the island-nation’s economic model. Ferocious competition from rivals such as China and South Korea is eroding Taiwanese SMEs’ already wafer-thin margins, and the Democratic Progressive Party (DPP) government believes the outlook is bleak without fundamental change. Implementing that change is the ASVDA’s primary task. Backed by copious funding and a talented and experienced c-suite, the agency is spearheading a transition away from the original equipment manufacturing (OEM) blueprint that has sustained the island-nation for decades.

“Our energy and resources are limited, and our economy lacks momentum, with the old model of OEM manufacturing facing a bottleneck. This country urgently needs a new model for economic development,” Taiwan President Tsai Ing-wen (蔡英文) said last year in her inaugural address. “We will promote a "New Southbound Policy" to elevate the scope and diversity of our external economy, and to bid farewell to our past over-reliance on a single market,” she added, bringing into focus the administration’s desire to reduce trade dependence on China.

Taiwan’s ICT industry accounted for about a sixth of the island’s GDP in 2015, according the island's national statistics bureau. The vast majority of that value is tied up in exports, of which China and Hong Kong remain by far the largest buyers. In May, 40 percent of Taiwan’s exports headed across the Strait, netting US$9.94 billion, according to the Ministry of Finance. The Association of Southeast Asian Nations (ASEAN) took 18.9 percent, up 7 percent from the same period last year. Despite the trend of growth in trade with ASEAN, rebalancing away from China remains a daunting task.

An Internet of Taiwanese Things?

According to the ASVSA, the twin engines that will power this transition are the internet of things (IOT), and an island-wide culture of startup-style innovation. IOT is a tantalizing yet tough-to-monetize proposition. Management consultancy McKinsey & Co. estimates the industry will have an economic impact worth US$3.5 trillion to US$11 trillion by 2025. The massive differential reflects the uncertainty of achieving these forecasts, and by extension, the ASVDA’s chances of success.

Taiwan’s government aims to raise the island’s share of the global IOT market to 5 percent from the 3.8 percent, or US$3.7 billion, that the Taiwan Institute of Economic Research (TIER) estimates it accounted for in 2015. Global vendors could be earning more than US$470 billion from selling IOT hardware and solutions in 2020, according to market intelligence firm Bain & Co., making Taiwan’s take-home target a mean US$23.5 billion per year.

Those are eye-watering numbers. Yet Charles Reed Anderson, former Asia-Pacific IOT analyst for IDC and founder of an eponymous Singapore-based IOT consultancy, believes they underestimate the size of the opportunity.

“On the demand side, those forecasts understate the value of Asia,” Anderson said. “China, just because of the sheer number of cities that have five-million-plus people and which are investing in infrastructure, will drive the market. Tokyo will invest heavily for the Olympics. Korea’s always been at the forefront. In New Zealand, there’s a lot of smart agriculture. In Australia, it’s mining, healthcare, and government.”

Anderson views IOT as having reached a tipping point because vendors all around the ecosystem, from sensors and device manufacturers to security providers, analytics companies and systems integrators, have all made an IOT play. This summer’s Computex was notable for the preponderance of seminars and solutions devoted to IOT from companies such as ARM, IBM, Microsoft and Qualcomm. Many market players have been incentivized by the rollout of various low-power wide area networks (LPWANs), which make it possible to connect large numbers of devices over city-district-sized areas at low cost. But for Taiwan, the pertinent question is: where in this evolving ecosystem are its companies going to make US$23.5 billion?

The answer, according to ASVDA Chief Technology Officer T.C. Wu, is on the edge. Not in the sense of the tiny margins on which many of its OEMs operate, but the technologies that act as a gateway between IOT devices and the cloud. “You need some kind of edge to manage devices and control security to become a gateway piping to the cloud,” he told me at Computex. “You have to start implementing AI and security at the edge otherwise it will be very hard to manage, as legacy devices won’t conform to new protocols.”

Edge technologies will make sense of the reams of data collected by the more than 20 billion connected devices Gartner expects to be in use by 2020, before passing on that intelligence to the cloud. Even with 5G connectivity, which is expensive, there simply isn’t enough bandwidth to send all the data the world’s connected devices will be transmitting to the cloud without filtering on the edge. And as Wu says, the edge will keep networks secure, capable of receiving new protocols as technology advances in the same way your phone’s operating system is periodically updated.

“Taiwan is not developed in this space yet, but there is a lot of opportunity to develop these niche platforms,” Wu added. “Amazon Web Services, Apple or Microsoft in the big cloud – all those guys have to pass down to another level. The top level is cooperating on sharing data but the lower level is more about controlling things. Taiwan’s opportunity is in this grounding level: providing services to improve productivity and value, and engaging with domain knowhow to provide realtime decisions.”
I asked for an example of a company already engaged on the edge, and the response was typical for the upfront honesty I experienced in all my encounters with the ASVDA: they do not yet exist. This is an emerging space that Taiwan has the potential to enter, but no blueprint to do so. Of course, Taiwan is strong as a vendor of hardware, sensors and semiconductor technology, driven by market leaders such as Advantech and TSMC. Yet it is widely accepted that the vast majority of the value created by IOT will be in services and solutions, and these require partnerships of a type Taiwanese companies are traditionally unaccustomed to.

IOT ecosystems and the paradox of demand

Philippe Tzou has firsthand experience of how difficult it is to engineer these partnerships, it being the task he faces as principal ecosystem manager for UnaBiz, the operator of LPWAN provider SigFox’s network in Singapore and Taiwan. SigFox is a French company that is currently engaged in a battle for attention and understanding with other providers of LPWAN connectivity, notably LoRa, a standard backed by California-based chipmaker Semtech. In theory, Taiwan is an ideal ecosystem partner for UnaBiz because of its potential to manufacture devices for the 60 countries SigFox is deploying its network, not to mention its suitability as a market to test and demo solutions that can then go global. But Tzou is frustrated at the lack of vision he has encountered thus far.

“The Taiwanese ICT supply chain is extremely demand driven,” he said. “An OEM/ODM like Foxconn or Lite-On, those big guys, they won’t put money into R&D for a trendy connectivity IOT network [like SigFox] before they get orders. The whole developing IOT idea is good, and the government is carrying it out and announcing big money in support, but we’re still viewed as a foreign company not necessarily here to help the Taiwanese economy. I’m finding innovative thinking very lacking compared to other countries.”

Perhaps Taiwanese OEMs can be forgiven for failing to take up the opportunity to be first-movers in what remains a highly uncertain industry. But somebody has to, otherwise Taiwan will fail to capitalize on the IOT opportunity it is targeting.

Ray Tai is Business Unit Head at Might Electronics, one of Taiwan’s more flexible electronics manufacturing services OEMs. Might deals extensively with overseas startups and is set up to deal in high mix low volume orders, in contrast to high-volume peers who rely on bulk orders from a handful of major clients, Foxconn and Apple being the most well documented. “To make a successful IOT ecosystem you need at least three things: the right idea, business plan and investment, the production capability, and then the ability to market and sell it,” Tai said. “You need to understand your market. Unfortunately, Taiwan does not understand marketing. We intend to do more business overseas because their ideas are better than local companies and they totally understand their customers and sales channels.”

Sending IOT services south

This lack of overseas experience is a critical stumbling block to both the ASVDA’s efforts to nurture IOT industry, and the DPP government’s New Southbound Policy, under which Taiwan is fostering business links with the 18 countries of Southeast Asia, South Asia and Australasia. The two initiatives go hand-in-hand, according to ASVDA executives.

“We are in talks with Thailand – they are very interested in knowing more about our tech in IOT and our solutions to help with Thailand 4.0 – their drive to promote Industry 4.0,” said ASVDA Chief Investment Officer David Weng. “Their ministers invited Taiwan to have international cooperation - along with 10 other countries. Thailand wants to be the Industry 4.0 hub for SE Asia. We want to promote our IOT solutions, especially in smart cities or machinery. The ASVDA aims to help the marketplace.”

Taking Taiwanese companies out under the Southbound Policy and exporting IOT solutions will involve providing on-the-ground expertise, a service Taiwanese firms are generally not familiar with providing.

“Taiwanese companies, ECS for example, are often strong in-country but not regionally or globally,” said Anderson. “They need to expand their reach through partnerships with operational technology vendors, or at least partner more with global system integrators. That’s where the real money comes in. You have to find out what solution an industry or a specific enterprise wants to buy, and then partner with the people who own the decision maker. It’s a very complex sales process, and it’s not just going to be Taiwan vendors involved.”

“Building overall control systems is something we don’t have much experience of – even for High Speed Rail,” agreed ASVDA CTO Wu. “Exporting infrastructure is not our strength. We need to not only provide the system solution, but also have the advantage of the infrastructure build portion.”

In order to rectify these issues, the ASVDA in spring presided over the creation of the Major League IOT – a group of 24 companies that will act as national champions providing smart city solutions capable of competing on the international stage. The group counts Stan Shih, founder and president of Acer, as its honorary chairman, and includes companies such as Lite-On, KPMG Taiwan, Asia Pacific Telecom, successful startup iStaging Design and smart manufacturing pioneer Nexcom.

These were whittled down from some 52 initial submissions based on the viability of their business case, according to Jia-Ru Li, who as CEO of San Jose-based telecoms equipment supplier LILEE Systems is acting as an ASVDA advisor. Li said that the agency and a supporting working group sifted submissions based on their Intellectual Property Intelligence Quotient (IPIQ) and suitability for Asian internationalization. “As an agency, the purpose is to provide a platform to accept IPIQ proposals, as well as criteria and processes that select the project that makes most sense for the global economy.” Projects suitable for Asia are given precedence. “The U.S. has a limited number of megacities – LA, Chicago, New York, that’s pretty much about it – so you have to come with generic use cases that fit 80-90 percent of Asian cities.” The ASVDA has already deployed its annual budget of about NT$12-billion (US$400 million) backing smart-city and other IOT projects commissioned by various government ministries, and the agency is keeping tabs on their performance, according to CIO Weng.

Confucian headwinds

The national champion idea appears evenhanded, but begs the question: what happens to the SMEs that are left behind? Those who have spent time working with Taiwanese companies will recognize the herculean nature of the task they face in bringing themselves closer to market, especially one as amorphous as IOT. Much of the challenge in this respect stems from their Confucian corporate structures.

“There are a couple of reasons Taiwan’s brand recognition is not strong internationally: one is that old guy – Confucius,” said Elisa Chiu, a Taiwanese former hedge fund manager who now runs Anchor Taiwan, a program offering international entrepreneurs the opportunity to work remotely in Taipei. “We are humble and not so good at promoting ourselves. That’s crucial. Another is that people in business here have an unspoken pressure or rule about emphasizing their Taiwanese roots, especially if they are trying to do business with China.”

The culture of taking instruction rather than initiative extends from the office or factory floor to the way companies here do business, and is a major stumbling block in the path of the ASVDA’s second objective: fostering a healthy startup ecosystem. The ASV moniker denotes a desire to learn from the locus of the world’s most innovative companies and their cultures, and the ASVDA in January established an office in Sunnyvale, California to further this aim. CIO Weng, himself an angel investor with 20 years experience in Silicon Valley, travels there each month in a bid to drum up interest in Taiwan as a go-to destination for talent, business and capital. According to Chiu, there remains a disappointing lack of awareness about Taiwan in and around San Francisco, despite the city being home to a significant Taiwanese population. “Some people might have heard of Foxconn, HTC or Giant, but not make the association that they are Taiwanese,” she said.

In a bid to accelerate cross-border pollination of talent and ideas, the agency is sponsoring 50 Taiwanese PhDs to continue their work in Silicon Valley. The hope is that they will act as a dragnet for talent and ideas that will eventually return to Taiwan, though the mechanism through which this will occur is less clear.

Otherwise, Weng has some powerful tools at his disposal, most notably a sizable budget with which to incentivize foreign partners to do business in Taiwan. Later this year, the agency will open private fundraising for a new NT$10-billion (US$330 million) National Investment Corporation fund, which will seek to pair private and public financing on a 60-40 basis, respectively, for projects devoted to IOT and other emerging technologies.

But it will take more than cash to tempt the very best away from Silicon Valley to Taiwan, according to Chiu. “There is huge competition in Silicon Valley for the best startups. I saw some really aggressive approaches – France is super strong, Korea, Germany, Switzerland, China, Hong Kong – pretty much everybody else. Frankly, you don’t really see many events being hosted by Taiwanese government or corporates. Being there for outreach I felt like I had to piggyback other people’s events.”

Chiu suggests other countries are operating like startups in their outreach, working side by side with their most innovative companies. “With France, the government and the private initiative sit in the same office and the vibe they present is welcoming and innovative. There are open breakfast sessions open to anyone. In Taiwan, if we can’t get young talent to join the government, then they should look into how to partner with talented people to see how to make things work.”

It is tempting to suggest that the ASVDA suffers from the same hierarchical impediments that hinder innovation and initiative in many of Taiwan’s companies, but this would be unfair. There is merit, though, in the idea that it could do more to integrate with the innovative startups that it is championing.

Nothing ventured, nothing gained

The ASVDA is well aware of the literally breathtaking scope of the challenges it has been commissioned to meet. CEO Ming-Hsin Kung, who is also Deputy Minister of the National Development Council, has stated that 80 percent of IOT business opportunities will stem from so-called application services, which Taiwanese hardware OEMs are unfamiliar with providing, and which require significantly more investment in marketing, branding and R&D to realize. He has identified the isolation many Taiwanese SMEs have from international standards organizations, and thus their inability to capitalize on early market opportunities. And he has lamented the lack of synergy between businesses working in different sectors of the economy.

The ASVDA is the primary catalyst of the changes required to surmount these obstacles. Its work deserves close attention, both from those within Taiwan, and the international, southbound partners with which it is leading engagement. If it does struggle to meet its aims, it will not be for a lack of dynamism. Having spoken to a handful of ASVDA executives, they are remarkable for their energy and unity of purpose. They have rapidly established a platform to promote IOT and Taiwan’s companies, but have done so without compromising on fairness or prudence. While there is plenty of money available, it is not being dished out willy-nilly. Indeed, some industry stakeholders lament the fact that money has been too slow to materialize. But there are justifiable reasons for taking such care. Witness the hundreds of billions of dollars behind the mainland’s Manufacturing 2025 plan, which the European Chamber in Beijing summed up in a report as “Putting Industrial Policy Ahead of Market Forces.” Taiwan must champion the values that distinguish it from its regional competitors in order to succeed, and a respect for the market is paramount among them.

It remains to be seen how this gambit plays out, and a healthy skepticism will well serve those with Taiwan’s best interest at heart. The ASVDA operates under the slogan “Dare to Try and Dare to Fail.”

I prefer “Nothing Ventured, Nothing Gained.”

Editor: Edward White

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