Taiwan rubs hands in PC glee for 2000

Analysis While last year was a marvellous one for Taiwan's high-tech companies, this year may be even better. The September 21st earthquake halted production for days, costing billions, but it also underlined Taiwan’s importance as a key link in the global electronics supply chain. Multinationals like Hewlett Packard used the hiccough in supplies from Taiwan as an explanation – some say an excuse - for poor sales in the fourth quarter. Recovery from the Asian economic crisis produced dramatic year-on-year growth figures. Monthly sales at Taiwan Semiconductor Manufacturing Co., the country's largest chip maker, literally doubled from November 98 to November 99. Next year both Taiwan and China – the island's key manufacturing partner and largest potential market – will join the WTO, providing new opportunities for local manufacturers. The red tape which hinders Taiwan’s mainland manufacturing operations may finally be cut. While the island's high-tech manufacturers will be focusing their attention on cross-straits relations in 2000, they also need to keep an eye on global PC markets. Price falls slow this year Falling prices have driven growing PC sales in the past two years. In 2000, they will fall more slowly – it is becoming harder to squeeze dramatic cost savings out of the format. As one of the world's largest producers of PCs and components, Taiwan's economy is intimately linked to trends like these. "Traditional PC market growth will be very flat for the next few years," predicts Henry King of International Data Corporation (IDC) in Taipei. One view of the future has the reins of PC growth being taken up by simpler and cheaper 'information appliances'. For some, the information appliance is the 'PC killer', a new product that will don the PC crown, and go on to become as ubiquitous as the telephone or television. For those who see the converging fields of communications and computing meeting at a point, the PC killer will be the offspring of the PC and the mobile phone. But this is not the first time the PC's demise has been predicted. In fact, the PC killer is beginning to look like the tediously persistent villain from a series of low budget horror flicks. Every few years, the concept returns from the dead with a howl. Each time, the PC evolves a little to meet the new challenge, and the beast is dispatched with a stake through its heart. This script has been played out three or four times in the past decade. The Web Misappliance of Science? Once again, last autumn, manufacturers in Taiwan and abroad were touting a variety of information appliances in the form of palm-sized PCs, 'web pads', TV set-top boxes, and so on. No matter what the format, every product has at least two of these three key features: communications, preferably wireless, are built-in; cost is low; and the device is designed for a single application, usually Internet access. Will 2000 be the year that the PC killer finally deals a fatal blow to the desktop PC? Almost certainly not, but the growing necessity of Internet access and the easier availability of high-bandwidth communications are together providing an environment increasingly suitable to the information appliance. The PC, however, is a moving target, constantly evolving. Intel is reducing the cost and complexity of the machine by stripping out dead wood, or legacy hardware. Taiwanese manufacturers are enthusiastic about this process: much of the electronics in a modern PC, especially in its interfaces to the outside world, are unnecessary, merely providing compatibility with older hardware. The release of Microsoft's Windows 2000, expected in mid-February, will support Intel's initiatives, hastening the evolution of the PC. It will also generate a mini sales boom for Taiwan's companies, as PCs and peripherals are upgraded to match the new operating system. Meanwhile, the outside of the machine is changing too. Inspired by the success of Apple's colorful i-Mac, and encouraged by Intel, local manufacturers are testing a variety of new formats. Some of them are very different from the traditional staid and sturdy beige box – "really cool", in the words of one insider who has seen prototypes. Manufacturers need to take steps like this to differentiate their products because, as an Acer executive says, "anyone can make a PC." The market is indeed a free-for-all, and as a result, profit margins have fallen. "There are no entry barriers to PC production," agrees Henry King of IDC. Taiwan notebook production limited by LCDs Notebook computers are a different story, as newcomers like Chuntex found out to their cost last year. But if a manufacturer can learn to assemble the intricate jigsaw puzzle that is a modern notebook PC, then profits are high. Taiwan is now the world's number one notebook maker, with almost 50 per cent of the market. This is at least in terms of units shipped - around nine million in 1999. Next year, an appreciating yen will help increase notebook sales to Japan, and IDC predicts Taiwan’s production will grow 37 per cent. The island's Achilles heel continues to be the LCD screen, which represents more than 30 percent of the cost of the average notebook PC. If these were not so hard to find, then Taiwan might have made another million notebooks, and would have paid far less for the screens in them. The response of local manufacturers has been simple: if you can't buy it, make it yourself. Taiwanese LCD screens will be rolling off production lines at six new factories by early next year. By next Christmas, these will ensure a ready supply of screens for Taiwan’s notebook makers. Better news still, competition means the screens will be cheap - so cheap, unfortunately, that the LCD factories may barely make a profit. Falling profit margins are a way of life for Taiwan's high-tech manufacturers. As the margins slide, manufacturers consolidate production and then move it overseas where labor is cheaper. Some are looking at ways to step out of this cycle into knowledge-based service industries, such as software and the Internet. Acer, for example, is investing tens of millions of dollars in both these sectors, as are local venture capitalists. This is fortunate, because, in Taiwan, raising money on the public stock markets impossible for companies whose main assets are ideas, and whose history is measured in months. The government is muddling its way towards easing listing barriers for Internet-related stocks. The official moves may be late, but they are making a few of Taiwan's first generation of Internet companies put their travel plans on hold and consider raising capital at home. Some should have listed on local exchanges by the second half of next year. And hopefully Taiwan will enjoy some of the benefits of the Internet bonanza before – if pessimists are to be believed - the bubble bursts. ®