Click Focuses on Taiwan

The BBC technology program Click this week focused on the Taiwan computer industry. The writeup on the BBC pages says:

Spencer Kelly visits Taiwan to see how the country's manufacturers are thriving in the global consumer electronics market.

Sitting just off China's east coast, Taiwan has long been overshadowed by its big brother in the manufacturing game.

While China is on its way to becoming the planet's biggest economy, Taiwan is considered the technological workshop of South East Asia.

Already 90% of the world's laptops are produced in Taiwan, along with vast quantities of electronics from motherboards to mobile phones.

But Taiwanese companies have started to realise the favourable commercial conditions offered by its neighbour.

Some have moved their manufacturing to China, where enormous quantities of goods can be produced at bargain basement prices.

"Thirty to forty years ago Taiwan was manufacturing for USA and Japanese companies," said Jonathan Tsang, the chairman of Asus. "But now because the living standard is already high, the manufacturing cannot compete with China, so the manufacturing has been moved to China."

I did find the highlighted phrase above amusing. Taiwan has not STARTED to realize, they realized this many many many years ago. They are among the biggest investors in China and have been heavily involved in manufacturing in China for a long time. There are laws which prohibit the migration of certain technologies to China but, for the most part, a lot of the manufacturing is carried out by Taiwanese companies in China. Perhaps it is even more truthful to argue that the conditions in China are becoming more and more unfavourable with increased taxes and increased minimum wages.

OK enough about that. To be honest I was thrilled to see the program come to Taiwan and highlight the tremendous potential and innovation here. Taiwan definitely deserves the exposure and I feel Taiwan will continue to hold its on in the tech industry for some time to come.

You can watch the program online by clicking here.

BBC: Taiwan takes on tech innovation

Chip Manufacturing Orders Down

CNET reports that orders for the equipment is used to manufacture chips has decreased. According to CNET, the orders for equipment reflects the situation for the entire computer value chain. Apparently orders are at the lowest for some time. CNET argues the industry is being plagued by both the financial crisis and the difficulties in the memory industry. CNET writes:

The chip equipment business is "on hold," said an analyst at a major industry association, and that bodes ill for the electronics industry in 2009.

Chip equipment makers signal how the electronics industry will fare in the future. They take orders from chipmakers which, in turn, take orders from electronic gadget makers.

Lara Chamness, a senior market analyst in industry research and statistics at Semiconductor Equipment and Materials International, talked about prospects for the industry in an interview. SEMI is an industry watchdog that covers the manufacturing supply chains for the microelectronic, display, and photovoltaic industries.

"We were hoping that 2009 would be the comeback year for semiconductor equipment. Now our outlook is much more cloudy," Chamness said.

On October 16, SEMI issued a report saying that the book-to-bill ratio for North American semiconductor equipment manufacturers slipped to 0.76 in September, the lowest ratio since November 2001. A lower ratio indicates lower orders.

While Chamness said the economic crisis is affecting everyone, the chip equipment industry is facing a double whammy of downturn and glut. Above and beyond the financial crisis, the overcapacity in memory has been affecting the bottom line of just about every major chipmaker, including Intel, SanDisk, Samsung, Taiwan Semiconductor Manufacturing Co., and Micron Technology.

"Things have been really difficult for the memory guys in the last few years...They're focusing on cleaning up their own operations and not expanding," Chamness said.

Then there is the worldwide financial problem on top of this. "Capital markets are freezing. So that's directly impacting capital equipment. It's indicative of what's happening in the worldwide economy," she said. "The addition of fab capacity is on hold right now. People are being very conservative with their money."

She cited TSMC, the largest contract chipmaker in the world, as an example of a company where factory utilization rates are low. "TSMC has announced a pretty significant drop-off as far as utilization goes."

This is inline with the expectation that companies will hold on to their cash (see Pundits urge companies to tighten belts, hold cash). The reason is clear. Anticipated weak demand in the near term future is forcing companies to cut back on capacity expansion directly and reduce their capital expenditures to ensure they are able to survive the storm. Companies will also be reluctant to raise debt right now as the mistrust in the credit markets has made the issuance of debt very expensive. Furthermore, borrowing money from the bank creates additional leverage with no certain mechanism to guarantee payments in the short term.

CNET: Chip gear industry's funk is a red flag

Taiwan Computer Industry Challenging Silicon Valley

OK. Don't get too excited yet. I don't think Taiwan is going to take over from silicon valley anytime soon but they are certainly starting to make strong challenges in certain technology sectors. Mercury News writes:

TAIPEI, Taiwan — First came the slim fashion models, hugging the slim new laptops.

Then a tuxedo-clad Jerry Shen, chief executive of Asus, stepped onto the stage earlier this month to introduce his company's new S101 mini-laptop to a horde of reporters. He stood in front of a sign that likened the new product, which is now going on sale in the United States, to "fashion on the go."

And just Wednesday, another low-profile Taiwanese tech company took center stage: Little-known HTC introduced the much-hyped first cell phone based on Google software.

These moves signal a dramatic shift in the island's high-tech focus as it seeks to step out of its behind-the-scenes role as a manufacturer and into the spotlight as a direct challenger to Silicon Valley's dominance in the consumer product market.

It wasn't long ago that the closest a Taiwan technology company came to buzz-making was through assembling products for the likes of Apple and Hewlett-Packard.

"A company going bankrupt in Silicon Valley had a better image than a successful company in Taiwan,'' said Stan Shih, founder of Acer who now heads iD SoftCapital, an investment management and consulting company. "Brand Taiwan" includes computer makers Asus and Acer, the world's No. 3 PC vendor, as well as HTC, a manufacturer of mobile phones. They are among a host of Taiwanese tech companies — along with Chinese computer maker Lenovo — trying to move out of the shadows of Western super brands.

It is funny that a bankrupt company would have a better reputation than a successful Taiwanese company. However, as the article states, Taiwanese companies are starting to stand on their own two feet and starting to grow in market around the world. Tech companies in the US and elsewhere need to be especially cautious. If Taiwanese companies actually manage to get their branding right they will be very tough competitors. However, it is a big if.

I recently spoke with the marketing manager of a big computer company in Taiwan. The manager has a masters degree from an overseas university and is fluent in English. When I asked how the company manages the brand portfolio she didn't understand what I meant by brand portfolio. When I asked how they brand products I was told they thought of creative names. Unlike Acer, Asus, VIA and a few others, most tech companies fail to see the importance of employing professional brand managers. It is all lumped under the product manager who inevitably focuses on a number of products from different product lines.

From my experience many companies in Taiwan view brand managers as unnecessary luxuries. They would rather do the best they can with what they have got. It is sad really as many of these companies could be great if they could brand their products properly. I am sure in time they will learn but for now they will have to continue up the learning curve.

Mercury News: Taiwan PC makers ready to challenge Silicon Valley in the tech marketplace

Notebooks Continue to Grow in EMEA

Research group IDC says the notebook industry in EMEA has continued to show strong growth despite the current economic crisis. According to IDC:

Driven by continued buoyancy in the notebook market and the additional momentum created by the new "Mini Notebook" segment, PC shipments recorded a robust 27% increase in EMEA (Europe, Middle East and Africa) in the third quarter of 2008 (3Q08) compared with the same quarter last year, according to preliminary data released by IDC EMEA.

Despite gloomy economic confidence in several European countries, notebooks continued to drive overall market growth at over 52% year on year as consumer demand showed no sign of slowing down in Western Europe and continued to grow in CEE and MEA, while the market also benefited from sustained demand in the business space.

A large portion of this growth has been driven by the introduction of mini PCs into the market a year ago. ASUS first released the Eee PC but was quickly followed into the sector by other players such as ACER. According to IDC, ACER is now the no. 1 supplier of notebooks in the EMEA region. IDC says:

Acer made an explosive entry in the mini notebook market, which, combined with continued growth of its mainstream notebooks as well as desktops, propelled the Taiwanese vendor to the number 1 position in the overall EMEA PC market ranking for the first time. Acer deployed a massive push of its Aspire One across both the retail and telco channels, which contributed to soaring volumes, further strengthening its position in the notebook market. The vendor also continued to gain share in the desktop space, benefiting from the exit of local players from the Western European desktop market.

Asus in the meantime maintained their no. 4 postion in the EMEA region. IDC notes:

Asus stepped further up to fourth place shipping over 2 million units this quarter, leveraging from the unabated success of the Eee PC product range. Boasting the largest mini notebook portfolio with varied spec options, the vendor maintained strong push into the retail channel, whilst sealing a multitude of deals with telco operators across EMEA. The elevated exposure and brand recognition gained through the Eee PC also contributed to strong growth of its mainstream notebook portfolio.

Although this is optimisitic news in declining times, one should remember the average selling price of the mini PCs is much lower than a notebook computer and therefore although per unit sales have grown rapidly, the overall revenue streams would not have grown as quickly.

IDC: Major Push of "Mini Notebooks" Boosts Consumer Demand and Drive A Strong Back-to-School Quarter in EMEA, Says IDC

AUO’s Q3 Profit Drops

AU Optronics (AUO) Q3 profit has dropped to the lowest in six quarters further reflecting the declining economic situation. AUO are not sure how long it will take for the industry to recover and are taking steps to ensure they can survive the current storm. According to the Taipei Times:

AU Optronics Corp (AUO, 友達光電), the world’s third-largest maker of flat panels, posted the weakest quarterly net profit in six quarters as corporations and consumers tightened spending on PCs and slim-screen TVs.

Net income plunged 96 percent to NT$860 million (US$25.83 million) in the July-September quarter, from NT$22.57 billion a year earlier. It was the lowest level since the second quarter of last year, during which the company made NT$5.92 billion, AUO said in a statement.

“We are not sure how long it will take for the industry to pick up from the U-shape trough. But, we are taking actions against this downturn,” vice chairman Chen Hsuen-bin (陳炫彬) told investors.

AUO plans to cut its capital spending for this year and next year by a combined 20 percent to less than NT$200 billion by pushing back the start of mass production of a new advanced line by one year to 2010, joining bigger rival LG Display Co Ltd’s step of slowing capacity expansion.

Cutting back on CAPEX and downsizing the workforce is probably all they can do right now. It is good to hear they have chosen the former option. Companies should also right now be looking to aggressively control their costs and improve their efficiencies accross the board. To gain advantages in any other area is going to be difficult.

The reduction in profits also reflects a reduction in the average selling price and the intensification of competition. According to the Taipei Times:

In the third quarter, the average selling price for liquid-crystal-display (LCD) panels dropped 21 percent from last year to an average US$137 per unit, which drove gross margins down from 23 percent a year ago to 8 percent, as the weakening global economy reduced consumer consumption.

AUO is one company big enough and smart enough to weather the current downturn. It all depends on how long the downturn lasts.

Taipei Times: AUO’s Q3 profit drops to six-quarter low

Taiwan Weathering the Storm

So the financial crisis is getting deeper. Trying to ignore it doesn't help. It seems there is not much anyone can do. Paulson in the states is trying to figure out a new rescue package but the markets must self correct before there is any hope of recovery. How much worse will it get? Nobody knows. Are we at the bottom yet? Nobody knows (but I suspect not). Taiwan hasn't escaped the storm however.

First up the Taipei Times reports the unemployment rate on the island hit a four year high. They said: "Global financial turmoil took the blame yesterday for pushing the nation’s unemployment rate up to 4.27 percent last month, a figure expected to continue climbing as the crisis unfolds." The Times continues writing: "The unemployment rate hit a four-year high of 4.27 percent last month, up 0.13 percentage points from a month earlier, defying a seasonal drop in unemployment normally seen at the end of summer, a report by the Directorate General of Budget, Accounting and Statistics (DGBAS) showed yesterday."

The Taipei Times also reports Nanya posted their sixth straight quarterly loss. The times says: "Nanya Technology Corp (南亞科技), the nation’s second-largest supplier of computer memory chips, yesterday posted its sixth consecutive quarterly loss, which it attributed to the collapse of chip prices over an unresolved glut and sagging demand." The Times continues saying: "In the quarter ending Sept. 30, net losses widened to NT$8.77 billion (US$265 million), compared with NT$1.66 billion a year earlier and NT$7.36 billion in losses in the second quarter."

Reuters reports Nanya's main Taiwanese competitor, PowerChip, also has had a rough time. According to Reuters: "Shares of Powerchip Semiconductor Corp Taiwan's top DRAM chip maker, fell more than 3 percent to a one-month low on Wednesday, a day after the company posted a record quarterly loss that was worse than forecast. At about noon, Powerchip shares had slid 3.4 percent to T$4.61, underperforming the main TAIEX's 1.4 percent fall."

Circuits Assembly (CA) writes the globabl financial meltdown is having an impact on EMS/ODM companies. According to CA:

There’s no question the broader economic situation is being felt at the EMS/ODM level. ODM shipments are dropping tremendously this year. The No. 1 company, Compal Communications, a supplier to Motorola, Nokia and LG, has seen shipments drop 33.3% from last year. No. 2 Quanta dropped 7.5%, while Qisda is down a whopping 50%. TPV dipped 14.3%, and Asus is down 6.1%.

CA continues:

The big question now is, Of the EMS companies and ODMs, who’s going to survive? And are there any likely bankruptcies? According to a new report by iSuppli, most firms are okay. However, without naming names, Pick suggested some firms could be in trouble during a recession. The iSuppli report, “Recession Hits EMS/ODMs,” is due out Nov. 7.

Digitimes reports leading IC Testing and LCD vendors have also seen a significant decline in their profits. According to Digitimes:

Two leading Taiwan IC testing and LCD equipment suppliers Mirle Automation and Test Research (TRI) have seen a decline in profits for the first three quarters of 2008 due to weak market conditions, according to the companies.

Mirle said that its pre-tax profits dropped 46% on year to NT$43 million (US$1.31 million) in September 2008 although its sales for the month were up 4% from a year earlier to NT$3.4 billion.

For the first nine months of the year, pre-tax profits totaled NT$440 million, down 24% from a year earlier, Mirle noted. FPD (flat-panel display) and materials handling equipment accounted for 55% of Mirle's total revenues.

There are many other doom and gloom stories out there. There is not much left companies can do until demand for computer products picks up again. Computer products in most households are luxury items and people will cut such items out of their budgets first. If the economy continues to slide there will be a lot of strife in the future and all these companies can really do is to continue working towards their strengths, staying as financially strong as possible (easier said than done), and getting ready for when the economy recovers. Until then, life is going to get increasingly uncomfortable for all those in the tech industry.

Taipei Times: Jobless rate hits four-year high
Taipei Times: Nanya posts sixth consecutive loss
Reuters: Powerchip shares hit 1-month low after record loss
Circuits Assembly: Recession Spells End of Foxconn Effect, Analyst Says
Digitimes: IC testing and LCD equipment vendors report declined profits for Jan-Sep period

Financial Crisis Affecting Electronics Industry

We have noted before on this blog that the electronics industry will not be immune to the downturn in the US Economy and that the financial impact will have some effect on the consumer electronics industry. Business Week recently wrote about the predicted downturn. According to Business Week:

Spending on electronics and appliances fell 13.8% in September, compared with 5.5% in August, according to MasterCard Advisors' SpendingPulse service, which provides data on MasterCard (MA) transactions. Electronics retailer Best Buy (BBY) may have had a 9% to 10% sales decline in the second half of September, according to Bernstein Research analyst Craig Moffett, citing company filings. The financial crisis that's crimping interbank lending and dragging down stocks accelerated in the second half of last month.

Sales of big-ticket items such as flat-screen TVs may be in for the biggest drubbing, analysts say. Rather than pony up for a new high-definition TV set, many consumers with analog TVs may simply opt for sub-$100 digital TV converter boxes as they gear up for the February 2009 deadline for the digital-TV transition. "HDTV sales may be the next shoe to drop," Moffett wrote in a recent report. That bodes ill for manufacturers like Sony (SNE), Samsung, and LG. Fewer TV purchases could in turn have an impact on satellite-TV providers DirecTV (DTV) and DISH Network (DISH), whose sales of service packages are closely linked to new TV purchases, Moffett reckons.

Makers of high-end laptops also have cause for concern, says Roger Kay, founder of consultancy Endpoint Technologies Associates. Apple said on Oct. 14 that it's shaving $100 off the price of its entry-level MacBook (BusinessWeek.com, 10/15/08). Other manufacturers may follow suit or roll out more ultramobile PCs, smaller, less powerful laptops that can cost $50 to $200 less than laptops, Kay says. So far, that category of machines "has not cannibalized our notebook sales," says Mark Hill, general manager for U.S. sales. Nor has Acer detected a slowdown in demand, he says.

Declines in the consumer electronics industry will definitely impact the entire electronics value chain. Right from the raw material suppliers, through to the PCB manufacturers, chipset manufacturers, silicon foundries, computer manufacturers etc. This value chain is predominant in Taiwan and therefore the negative effect of a worsening global economy may be magnified in Taiwan.

The technology industry in Taiwan is the predominant industry and tech companies make up a large portion of the TAIEX. Also, a lot of Taiwanese people have a lot of their wealth invested in the markets. Any decline in the market will significantly impact their desire to spend.

No doubt there will be interesting times ahead for many companies here in Formosa. Some industries will at a guess consolidate and over the short term there maybe cutbacks and layoffs but, when the economy improves, those companies left standing will have a lot of opportunities.

Business Week: Rough Times Ahead for the Electronics Industry