Wednesday, July 18, 2007

The Tale of Two Silent Economies

Coincident to my last post, there is a story in today's NYT about Taiwan being the Silent Hands Behind the iPhone.

It's stunning that Americans are mostly silent, in this case satisfied with ourselves sans any competitiveness policy, other than promoting free-trade (important, but not sufficient in of itself) and outsourcing to the bottom of the value chain, neglecting the bread-and-butter policy work that is the formulation of a top-level national policy to consistently engender next-generation R&D sectors and the basis for the next round of new markets and technologies (and better jobs).

There's no good reason why we shouldn't be accruing the high-end value of this economic supply chain. Consider what happens when Apple eventually outsources the iPhone + iPod's design overseas - perhaps Cupertino can continue to be the bastion of avant garde sales and marketing.

...Taiwan’s evolution from computer-making giant to telecommunications Goliath has gone largely unnoticed in the United States because companies here make most of their money as made-to-order manufacturers, not sellers of their own brand products.

But Taiwan’s industrial makeover has helped its companies remain competitive in a world increasingly dominated by low-cost Chinese assemblers and by Japanese and South Korean companies with strong footholds in high-end components like flash memory chips. The strategy of repackaging — finding new uses for computer components — has paid dividends.

Companies on the island have captured 87 percent of the global market for wireless modems, 84 percent of the D.S.L. modem market and 70 percent of the market for personal digital assistants. In the competitive cellphone business, Taiwan companies made 12.4 percent of the world’s handsets last year, up from 9.8 percent in 2005, according to the Institute for Information Industry, a government-affiliated research center. That share is expected to grow as brand-name companies like Sony Ericsson outsource more of their production to companies here. In all, Taiwan companies produced $31.5 billion in communications equipment and services last year, more than 50 percent above the total the year before, according to the institute, which expects production to reach a value of $46 billion by 2010.

Less than a quarter of that was manufactured on Taiwan, with the bulk made on the Chinese mainland. “It’s been a fairly natural progression because handsets are really a mini-version of the PC, and Taiwanese are adept at adjusting,” said Gary Chia, president of the Yuanta Research Center.

The transformation did not happen by accident. As in much of Asia, the government played an active role in steering businesses into new markets by showering them with tax incentives, cheap property to build factories and research money. Companies on Taiwan have also been able to shift gears smoothly because the concentration of component producers on the island has made it easier to gather the technology and engineers to design and assemble new products....

...The iPhone is a great example of where Taiwan is still strong: reliable sourcing, leading technology and complex integration,” said Allen J. Delattre, chief of the electronics and high-technology practice at the consulting firm Accenture. “Does the average person who buys an iPhone know it’s from Taiwan? Maybe. Do they care? Probably not. But if you look at the companies in Taiwan, they are behind the scenes, and that’s a good place to be because that’s where the value is.”

...The key for Taiwan companies, Mr. Delattre and other analysts said, is to invest in next-generation products early. For example, companies here are fast becoming important players in the development of WiMax wireless and fiber optic broadband equipment. They are again getting a healthy push from the government, which is spending more than $200 million over five years to help create the world’s largest high-speed WiMax network. By next year, with 2,000 base stations spread across the island, companies will be able to start testing new applications, like the sending of video from ambulances on their way to hospitals. “We are trying to make the infrastructure more complete,” said Tsung-Tsong Wu, deputy minister of the National Science Council, which has a $1 billion annual budget. “If the highways are built, companies can go as fast as they like.”