Why Taiwan Matters

The May 16, 2005 edition of BusinessWeek has an article entitled Why Taiwan Matters, which discusses global IT dependence on Taiwanese technology companies.

It does a good job of illustrating three major points: the extent to which US and other Western economies depend on Taiwanese technology companies, the disastrous economic consequences of armed conflict between Taiwan and China, and the advantage that Taiwan's tech industry (currently) holds over up-and-coming rivals in other countries.

Some key observations in the article:

- Taken together, the revenues of Taiwan's 25 key tech companies should hit $122 billion this year.

- Regarding armed conflict: "It would be the equivalent of a nuclear bomb going off," says a top executive at a U.S. high-tech giant. Couldn't U.S. industry develop sources of IT supply that don't involve the Taiwanese? "That's like asking, 'What's the second source for Mideast oil?' says this exec. "You might find it, but it's going to cost you." Insiders estimate that it would take a year and a half to even begin to replace the vast web of design shops and mainland factories the Taiwanese have built.

- China may threaten Taiwan as No. 1 IT supplier. But for now it's Taiwanese engineers who provide ever-more-ingenious solutions to manufacturing and design conundrums. "In Taiwan, people say the U.S. understanding of outsourcing is backward," says Victor Zue, co-director of the Computer Science & Artificial Intelligence Laboratory at MIT. "It feels more like the Taiwanese are outsourcing marketing and branding to the rest of the world."

- The Taiwanese also play a vital role for rivals on the mainland. Liu Chuanzhi, chairman of Beijing computer company Lenovo Group Ltd. (LNVNG), which just completed its purchase of IBM's PC division, says Lenovo sources components from Taiwanese companies. According to THT Research, Lenovo even buys notebooks from Quanta, Compal, and MiTAC. Liu says that's not the case.

- Most important of all, the Taiwanese are the real developers of China's semiconductor industry. Chinese companies such as SMIC (SMI) depend on squads of Taiwanese executives for knowhow.

- In effect, Taiwan is hoping to control design and innovation while giving over much of its manufacturing to China.

It will be interesting to see if Taiwan's tech industry can maintain its edge over the next few years.