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News feature: Made in Taiwan

Cheaper China threatens Taiwanese economy

'Made in Taiwan' is a familiar label to British consumers, especially when it comes to electronics and computers. In fact, it's almost impossible these days to buy a computer in Britain where a significant part of it wasn't made in Taiwan.

But Taiwan's position as a floating factory for the west's computer industry is under threat from mainland China - the People's Republic - as investment chases China's lower cost base. You could be forgiven for speculating, as the New York Times did recently, that Taiwan is doomed to become the computerland of yesteryear.

For more than 20 years Taiwan has been the place where western computer companies did their tedious manufacturing - keyboards, mice, monitors, joysticks, power supplies.

This is because Taiwan had the ideal combination of low land prices, low wages, a technologically savvy workforce and a staunchly capitalist system, making it easy to set up a factory.

Consequently, Taiwan's computer industry avoided the meltdown that clobbered the other Asian tigers in 1997. According to figures from Taiwan's Institute for Information Industry, Taiwan made over $56bn worth of computer products in the year 2000, which was 21 percent up on 1999.

But the success of Taiwanese companies has brought penalties. Office space in the capital Taipei is now nearly as expensive as in any western city. Wages for a graduate engineer in the Taiwanese computer industry have risen to the equivalent of £13,000 a year.

Okay, so that's only half what he'd expect to be paid in Britain, but it's enough to drive western firms to set up factories in mainland China, where labour and land is even cheaper, and where there are generous regional tax breaks to tempt western investment and no sign of communist rhetoric to put it off.

This aggressive policy has paid off for the People's Republic. Last year it made $25.5bn worth of computer hardware, compared to Taiwan's $23bn, the first time mainland China has outstripped its island neighbour.

And hardware manufacturing in mainland China is growing at nearly four times the rate as in Taiwan.

Taiwanese companies find themselves in the midst of what Zen philosophers would call 'interesting times'. Ignore mainland China or try to compete with it head-on and they run the risk of seeing investment drain to the PRC's lower cost base. But if they move all their manufacturing to the People's Republic - known in Taiwan as 'China fever' - they will loose out at home.

So is this the end of 'Made in Taiwan'?

Not if Taiwan's trade bodies have anything to do with it. They are encouraging Taiwanese companies to invest in China, but only for low-end manufacturing, keeping the high-end stuff on the island. That way they reap the benefits of China's low-cost manufacturing and access to its potentially huge consumer market, but keep the profits in Taiwan.

For example, Taiwan has already managed to shed its reputation for making only boring low-quality stuff. Most of the world's motherboards - that's the big circuit board on which reside the processor, memory and the other vital components - are made in Taiwan. The majority of the world's notebooks are made by a few Taiwanese companies that sell them to the big brandnames who do little more than stick a namebadge on the case.

And Taiwanese production of software - a much higher value proposition than keyboards and monitors - is currently worth $400m and is growing at 25-30 percent.

"For high-end products and design, we will keep production here in Taiwan, but for the low end we will need to go to the PRC," said Mr Chih-Peng Huang, president of the China External Trade Development Council at the Computex tradeshow in Taipei last week. "We understand the world better than the PRC, so we can capitalise on their cheaper labour."

Thus Taiwan is making the transition from a place where things are simply made to a place where complex things are assembled; a place where things are designed, and where manufacturing is planned and directed.

In the words of Mr Victor Tsan director of market research in Taiwan's Institute for Information Industry, Taiwan is "climbing up the value chain", or we might say, becoming a middleman. They will get the Chinese to make their odds and sods cheaply, assemble them back in Taiwan, and then sell them back to the growing number of Chinese consumers.

Clever huh?

When mainland China has learned the same trick, you wonder whether anyone will actually make anything.


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