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TAIWAN NOTEBOOK COMPUTER INDUSTRY: A FIGHT FOR
SURVIVAL
Jonas Yua, c, Hui-Ming Weeb* and Ping-Hui Hsub
a
Industrial Management Department National Central University, Chungli, Taiwan 320
Industrial Engineering Department Chung Yuan Christian University, Chungli, Taiwan 320
b
c
Information Management Department Takming College, Taipei, Taiwan 114
* Tel: +886-3-2654409 E-mail address: [email protected] (H.M.Wee)
ABSTRACT
Being the leader in notebook computer (NB) industry for a decade, Taiwan is now facing the
problem of losing her competitive ground. Finding a way to recuperate her lost ground becomes an
vital issue for herself. According to China Times [Nov 28, 2002], Taiwan’s NB production ranks
number one in the world and accounts for about 60% of NB production worldwide. This is very
impressive for an island with limited natural resources and being left out of the United Nation for
decades. About 98% of her trading partners are from countries without any diplomatic relationship.
Under the recent downturn of world economy, Taiwan is facing a lot of impact from globalization and
internationalization. In order to handle challenges from global competitors, the Council for Economic
Planning and Development of Taiwan is actively promoting “Global Logistic Developing Plan” which
has evolved into “Challenge 2008 – National Development Critical Plan”. These efforts aim at helping
Taiwanese enterprises to develop an integrated worldview plan for diversification, build R&D centers
of high technology and to develop strategic role in the global economy. In this modern era,
“know-how” is a critical issue in electronic industry. Knowing how to invent or introduce the new
products to consumers play a detrimental role for the survival of an enterprise. For the NB industry,
the process of raw material procurement to sale of final products can be extremely complicated and
might involve different levels of job assignment in different parts of the world.
KEY WORDS: Notebook Computers, New Product Introduction, Value Chain, Cost Optimization
System
1. Introduction
At the present time, Taiwan is the leading manufacturing center of notebook computers (NB) in
the world. The major markets for Taiwan-made NBs are in North America, Asia-Pacific and Western
Europe. Marketing Intelligence Center (MIC) (1999) reported that since 1999, over 44% of
Taiwan-made products were sold in North America and with the share of 53%. In the Asia-Pacific,
Taiwan manufacturer has a smaller market share holding of 39% of which 50% belongs to Japan.
About 25% of NBs were sold to Western Europe, which held 57% of the market share. Major
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companies such as Siemens ship their products directly from OEM manufacturers located in Taiwan.
This may explain the high market share in Western Europe. This account to why some of the Taiwan
NB manufacturing is located in US and Europe. Consequently, the NB manufacturers have changed
their collaboration style from OEM and ODM into an integrated global supply chain model.
Many discussions have been made on how this small island with a population of 21 millions can
reach such an achievement. This can be explained from two prospects (1) well manufacturing
infrastructure and (2) well global supply chain. The NB related products are characterized as intensive
technique/capital, short life cycle and fluctuating in market demand. The customers’ demand on
computer system nowadays tends to be more diversified than before, so that the manufacturers have to
deal with cost increase due to customization. NB industry needs to deal with resource decrease,
production life cycle shrinkage, and globalization. The strength of Taiwan NB manufacturing is
mainly attributed to its agile manufacturing, global sourcing practice and the effective management of
global supply chain. The NB manufacturers in Taiwan also need to face the supply issue for most of
the patents and the key parts are supplied from USA, Japan and Korea. More than half of the key parts,
e.g., CPU, LCD, DRAM etc., have to be imported from overseas, therefore, any decision made by
related firm may influence the whole supply chain. The Taiwan NB manufacturers are not able to
manage the whole logistics by themselves. They need to collaborate with all the players in the whole
supply chains. Questions of vital importance to the manufacturers are how to produce under limited
lead-time with the lowest imported price? Should products be assembled in Taiwan or at oversea
locations near the markets? And, how to deliver the final product to customers quickly?
In order to provide the quick-response distribution, Compaq proposed the optimized distribution
model (ODM) in1997. BTO was the first phase to ODM scheme. BTO concept produces NBs
according to the orders from the users instead of customary demand forecast (i.e. build to forecast,
BTF). It was expected to solve the high inventory existed among firms and distribution channels by
decreasing the deviation between the forecast and the actual demand. Recently, the high inventory
existed in distribution channel had hampered the profit of computer makers. The higher market share
of direct sale manufacturers as Dell, Gateway have proved “direct-sale” to be a better business model
since the e-commerce age. The competitive cost structure from the direct-sale strategy has made
Compaq reconsider their strategy in keeping the traditional production-distribution model. Despite
using the traditional production-distribution model, the NB manufacturers in Taiwan are still thriving.
This is due to their flexibility in their manufacturing and logistic management.
In order to maintain the competitiveness, Taiwan has joined the World Trade Organization (WTO)
since January 01, 2002. It is expected that a drastic change in the economy and trading issues under
the free trade agreement will influence the NB market. How to improve the competitiveness of our
industry is a critical concern. The situation is complicated by the rapid introduction of new product
brands, and the short NB product life. The exploding growth of new techniques, application of new
ideas, and the internationalization of the industry all contribute to the escalation of competition in
global economy. Having an innovative value chain can improve the constitutes to the competitiveness
of the NB industry. The research on cost optimization of NB computer “new production introduction”
(NPI) value chain will be the key research issue for the enterprise in Taiwan. Value chain, composed of
multiple general activities of the industry that create valuable products that can fulfill the customers’
satisfaction. These activities will generate value-added products or customer service that will result in
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the competition advantages.
2. Literature Review
2.1. Strategy analysis
Well-trained workers and efficient administration are two components for efficient management.
A strategy requires an innovative way to present products to the customers, so that they can conceive
an added value of the products. There are several approaches to convey the message to the customers
that include a combination of service or maintenance. Porter (1980) mentioned three types of strategy
analysis including cost leadership strategy, differentiation strategy, and focus strategy. Egelhoff (1993)
adopted Porter’s concept and modified it into four different strategies: vertically integrated global
strategy, global horizontally integrated strategy, export manufacturing strategy, and multinational
manufacturing strategy.
2.2. Research in new product development
The market environment, customer’s preference, and the social value system are constantly
changing. The speed of changing today becomes even faster and unpredictable. Due to the short
product life cycle and the influence of customers’ preference, industry needs to be proactive in
adjusting its resources to accommodate the changes. We can view R&D as a combination of serial
information management activities that turns opportunities and demands from the market into effective
production. The determination of a new product is a challenge to managing level since it usually
requires a period of observation before realizing the possible outcome. There is no general rule to
predict the profitability of a new product.
2.3. Related researches on value chain management
Porter (1985) believed that competitive advantages could not be explained by “viewing the
industry as a whole body” so he created the idea of “value chain” as a tool to analyze the advantage
and strategy for competition. He suggested that competitive advantages should build on all kinds of
activities of the industry including product design, production, marketing, transportation, and support
system. Competitive advantages originate from creating value for the customers that are higher than
the production cost. Under this theory the “value” stands for the price that customers are willing to pay.
Superior value comes from lower price for the same service from the competitors. The amount of
value must be calculated from the revenue that reflects the price of the product and the total sale. The
composite value is constructed upon various “value activities” and “margin”. The so-called value
chain is a series of “value-creating activities” of the enterprise that creates valuable products or
services for the customers, including both upstream provider and downstream purchasers.
Shank and Govindarajan (1993) postulated the steps to create the value chain including identify
the stage of value chain, confirm the strategic options, refer cost and income into different stage of the
value chain, estimate the investment, and correct calculation. Taninecz (2000) mentioned that once the
proposal of the value chain been adopted by the management level, then it is important to make sure
both the upstream and downstream partners will play their appropriate role. Through this process the
industry can identify which partners have no intention to cooperate versus the ones that should be
sacrificed and which partners are non-replaceable versus the indispensable ones.
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2.4. Related researches on activity based cost system
Since Cooper and Kaplan (1988) postulated the “Activity-Based Cost (ABC) system”, it had
become the mainstream of the managerial accounting. This theory focuses on the whole profit earning
process of the enterprise, and analyzes all the involved production or supporting activities together
with cost driver, accumulated cost from operation activities, and the distributing cost into each cost
target based on the cost driver.
The ABC system is a method that uses individual operation as the basic target to improve the cost
system. The most important function of this system is to help the management level to understand the
cost source. Through the process of operation and value analysis, we can foresee which operation adds
value. The aim is to improve the cost structure and facilitate the enterprise to reach the goal of better
planning and management.
Strategy
New product
Value chain
fixed
development
management
Cost
optimization
Activity
based cost
system
analysis
development
Development
3. The overview of investment
in China from the Taiwan businessmen
With the rapid growth in information technology in Asian-Pacific Area and the lower cost of
production in China as compare to Taiwan, how to move the production line to China becomes the
vital issue of the next development stage of Taiwan NB industry. Information and communication
technology (ICT) is identified as strategic industries by Taiwan government. The manufacturing
capability as well as cost and quality advantages enable Taiwan to be one the most competitive
strategic NB computer suppliers.
The Euro-American market is nearly saturated whereas the Asian-Pacific market is just taking off.
Taiwan NB industries need to face the trend of worldwide big companies moving their market share to
the newly developed market in China. Owing to the cheaper cost of manufacturing in China is than
Taiwan, a lot of Taiwan NB companies shifted their plants to China. According to the statistics from
MIC, 42% of the Taiwan NB was built in China in the first half of 2000 as compared with 28% in
1999. The I/O card companies, with 80% of the market share, played a vital and indispensable role in
the economy of Taiwan. Since all the NB appliances and accessories need to be hooked up to the I/O
card, Taiwan’s superior ability in design and production of I/O cards is significant. As the NB is soon
becomes a mature product, the drop in retail price is unavoidable. Since NB companies in Taiwan rely
mainly on the authorized production, under the pressure of retail price decrease, companies are forced
to move their operations to China as a way to survive.
4. Future prospect
The NB manufacturing companies are challenged by uncertain demand, mass product
customization, shorter product life cycles, global competition and quick response to market. China has
great market potential, and will continue to grow in the foreseeable future. To survive in the
ever-changing market competition, NB manufacturing companies need to handle two main issues that
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are technique and price. The NB market will continue to grow. Taiwan needs to upgrade her industry
in R&D and hub center.
5. Conclusion
In Taiwan, the success of NB industry is attributed to three key elements that are agile
manufacturing, global sourcing practice, and global supply chain management. These three elements
are linked by information integration, collaboration, and strategic partnership to form a virtual
enterprise to deliver customer values. The relationship is described in the NB Virtual Enterprise
business model in figure 1.
atio
bor
Co
lla
Agile
Manufacturing
Customer
Values
ip
rs h
tne
Par
n
Global Supply
Chain
Management
Information Integration
Global
Sourcing
Practice
Figure 1. NB Virtual Enterprise business model
According to the characteristics of the NB enterprise, we have to pay special attention to the cost
factors in the inventory system and the “collaboration” issue in each step to avoid the drawbacks in the
individual management. With its superiority in production, Taiwan becomes the model for other
countries.
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References
Cooper, R., & R. S. Kaplan, (1988). Measure Costs Right: Make the Right Decision. Harvard Business
Review, Sep/Oct. 96-103.
Egelhoff, W.G. (1993). Implications of global manufacturing for strategy and organization design.
Advances in applied business strategy, 1(Suppl), JAI Press.
Market Intelligence Center (MIC). (1999). Marketing analysis of Taiwan notebook computer industry.
Electronic Components Magazine, 157, 116-122.
Porter, M.E. (1980). Competitive Strategy: techniques for analyzing industries and competitors. Free
Press.
Porter, M.E. (1985). Competitive Advantage. Free Press.
Shank, J.K, & Govindarajan V. (1993). Strategic Cost Management. Free Press.
Taninecz, G. (2000). Value Chain Fulfillment. Industry Week, 49-54.