East Meets West

May 20, 2002

California's technology industry may have its best ally in the offshore high tech hub of Taiwan. Meanwhile neighboring China, despite its political demons, is catching up. And the face of manufacturing is changing forever.

With the democratization of Taiwan, and with the mutually beneficial business relationships it has formed with the U.S., there can be little doubt that U.S.-Taiwan relations today are relatively harmonious and robust. In the second half of the 20th century, Taiwan witnessed miraculous economic growth. Much of this is due to its rcommerce with the United States, particularly the consumer electronics, PC, and IT industries, which are largely based in California. Fifty years ago, Taiwan's external trade totaled a modest $300 million. Now it has exceeded $300 billion at the beginning of the 21st century, positioning Taiwan as the world's 17th largest economy (which is quite remarkable considering its population) and the third largest exporter of information technology products.

In the fields of science and technology alone, Taiwan and the United States currently have over 124 formal agreements. Much of the private trade and investment between the two countries is borne out of the high-tech sectors. Excluding strategic and personal investments, it is conservatively estimated that Taiwan invests well over $200 million into just Silicon Valley each year, and that number is growing. The activity in Southern California, though not as well tracked as in the North, is becoming quite considerable. According to the LAEDC's 2001 International Trade Report, Taiwan is Los Angeles' fourth largest trading partner, importing $11.48 billion worth of merchandise and exporting $6.35 billion. The largest portion of this trading activity is in the semiconductor industry (and other PC-related products), which now makes up almost half of Taiwan's total exports. Taiwan's economic ascent can be attributed to a multitude of reasons, foremost among them being Taiwan's cost advantage over other countries, particularly the U.S. Manufacturing costs are lower, and there is a not-inconsiderable supply of skilled labor in engineering and technology coupled with a lower cost of living. (India is its top competitor for low-cost high-tech manufacturing, although its import/export infrastructure and financial network is far more robust than India’s.Although the majority of the activity is import as opposed to export (the U.S. runs a deficit of $2.76 billion with Taiwan) that is not necessarily an indicator that one economy is getting the shorter end of the stick. For instance computer manufacturers will still benefit from substantially less overhead through the cheaper manufacturing rates that Taiwan makes available, and that economic boost isn't tracked in the import-export figures. "I think Taiwan is emerging as a powerhouse as a semiconductor producer, and doing a good job at it," says Peter Pao of Raytheon. "But from a positive point of view, in the U.S., many of the semiconductor houses are design shops, and there seems to be a natural marriage between the design shops in California and the foundries in Taiwan. I believe that it's more positive than negative."

Tony Hung, a VC with Dynafund, feels that the hard-hit telecommunications equipment providers in the U.S. may see an upswing because of the demand in Taiwan and China for telecom sophistication. That industry has endured a drop in capital expenditure because of the shortage of demand in the U.S., yet China and Taiwan have a large telecom network demand that still exceeds what's currently available.

"Even though demand in the U.S. has been weak, demand in China remains pretty strong," Hung says. "Unlike the U.S., where there's a legacy of wiring already put into the ground for a phone infrastructure and a network infrastructure, China really is a green field. They don't have the legacy issues in terms of exciting technologies that have been put in place so they can look at these next generation equipment providers and pick and choose what is the best network infrastructure they want to put together. So for the equipment providers in the U.S., that's been a great source of demand when there really isn't any domestically."

China Cost Advantage: A Cause For Catchup?

Historically, Taiwan has much more active in terms of manufacturing, exporting and economic vitality than its neighboring China, yet China is starting to pick up, despite its more complex government environment. This new growth is largely being created for the same reason that put Taiwan in such an strong position for growth in the first place--lower cost of living and subsequent ability to lower labor and manufacturing overhead. China currently enjoys a cost advantage that is even greater than Taiwan's. What happened in Taiwan could happen all over again in China, yet perhaps even on a larger scale because China has a large indigenous market to support its own economy. This has created a new and very complex threat to the stable economy that Taiwan has enjoyed, and will force tumultous change within its business infrastructure.

"More and more of the computer systems, particularly notebooks, are manufactured in OEM companies coming out of China now," says C.K. Cheng of Harbinger Ventures, which has half of its fund in Taiwan based businesses. "Also, quite a few students come to the U.S. from China for a few years to study, and upon graduating, go back home and start their own companies. Or they may also find a company in the States, but then when they want to sell their products in Asia, they use connections in China connections to help them sell the product.”

For all of the talk of displacement of manufacturing in the U.S. and the move offshore of a vital piece of our economy, two things become clear: one, that the U.S. economy is becoming ever-more integrated into a global marketplace of manufacturers, producers and distributors, and that sophistication in manufacturing is growing, especially in China. The kind of hand-wringing witnessed by the self-styled foes of globalization fails to provide a better alternative either for the people of China or to the relentless campaign to control costs and extend competitive advantage, which is the hallmark of any business. Secondly, it is clear that in the past ten years, U.S. manufacturing in general is moving “up market”, so to speak, involved in high-value parts of the manufacturing landscape such as technology development, design and distribution. That seems almost inevitable. Progress should be measured globally by the developing world’s growing competencies in the things that were once our exclusive domain, and those skills should now be leveraged by us in a more strategic way. It is a painful transition, but one that the U.S. – and in particular, Southern California – has shown it is more than capable of handling. The region is the gateway and the happy hunting ground of many of the brave new world’s brightest (and most connected) people, from China, Taiwan and India. Their quest for commercial success should find important contributors to that success here in Southern California.

by Wendy Hall, Staff Writer, Larta
and Rohit Shukla, President and CEO, Larta