Taiwan looks to flex some R&D muscle

Taiwanese hardware makers must take a greater role in setting standards and developing new technologies if they hope to stave off competition from developing countries, according to Pat Gelsinger, Intel Corp.’s senior vice president and chief technology officer.

“You need to become a powerful participant in the establishment of those worldwide standards,” Gelsinger said, speaking on Friday to Taiwanese executives at a meeting sponsored by the Monte Jade Science and Technology Association in Taipei.

Taiwanese companies are the manufacturing backbone of the IT industry, producing a diverse range of products under contract, including semiconductors, notebooks, personal digital assistants (PDAs) and servers. These companies play an increasingly important role in the hardware industry, having evolved from low-cost manufacturers to take on a greater role in the development and design of new products.

This growing emphasis on R&D comes in the face of competition from countries with lower labour costs that want to attract investments from hardware manufacturers. The greatest competitive threat to Taiwan has so far come from China, where Taiwanese companies have moved much of their manufacturing operations. But there are other competitors out there as well.

“Things are becoming very competitive. Russia, China, India and Brazil want to become what you already are,” Gelsinger told executives here.

Taiwanese companies need to put a greater emphasis on R&D to keep these competitors at bay, he said.

That’s not a traditional strength of Taiwanese companies. Hardware makers here rose to prominence in the IT industry by developing the contract manufacturing business model, which allows vendors like Hewlett-Packard Co. (HP) to outsource much of their manufacturing so they can focus on the development of cutting-edge technologies and marketing hardware to end users.

Even China’s Legend Holdings Ltd., Asia largest PC vendor and an oft-cited example of the rising importance of China’s IT industry, relies on Taiwanese hardware makers to produce some of its products, said Angela Lee, a spokeswoman for the company in Hong Kong.

“Very few science and technology breakthroughs were made in Taiwan,” said Liu Yung-sheng, vice president and general director of the Opto-Electronics and Systems Laboratories at Taiwan’s government-backed Industrial Technology and Research Institute. “Most of the breakthroughs were transferred or transplanted.”

That is starting to change. Taiwanese companies now play a greater role in R&D than ever before and they are pushing for more.

“With the convergence of computing, communications and consumer electronics there will be greater potential for the whole Taiwanese industry to show that we can have more innovation, we can upgrade ourselves,” said Johnny Shih, chairman and CEO of Asustek Computer Inc., one of the world’s largest motherboard makers and a leading hardware manufacturer.

“We should be more aggressive in joining industry standards groups and try to become involved in more original platform definition, have more contributions,” Shih said. “We need to have more original innovation to increase our value.”

In addition to computing hardware, there are several other areas where Taiwanese companies have succeeded in carving out a more prominent role in the IT industry through their R&D efforts.

Chip makers Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and United Microelectronics Corp. (UMC) are on the cutting edge of semiconductor manufacturing. They have helped lead the shift to production using larger silicon wafers and more advanced manufacturing processes, which allow faster and more powerful chips to be produced more cheaply, helping to lower costs for users.

Taiwan is also one of the largest centres of IC (integrated circuit) design, led by companies like Via Technologies Inc., which has helped to push advances in PC chipset technology, and Realtek Semiconductor Corp., one of the world’s largest providers of networking ICs.

These are areas where China and other countries may be hard pressed to compete in the coming years. China has a growing semiconductor manufacturing industry but the country’s largest contract chip maker, Semiconductor Manufacturing International Corp. (SMIC), lags far behind TSMC and UMC in terms of capacity and cannot match their leading-edge processes.

R&D is more than just a way for Taiwanese companies to fend off competition from developing countries and emerging markets. They are also using R&D to raise their competitiveness in other areas, such as thin film transistor liquid crystal display (TFT-LCD) manufacturing, where Taiwanese companies have not played a dominant role.

“Taiwanese (TFT-LCD) suppliers have made great strides in a short time,” said Ross Young, president of market analyst DisplaySearch Inc. “They have successfully reduced the technology and quality gap that’s typically found in late entrants.”

Having trailed South Korea and Japan in TFT-LCD manufacturing capacity for years, Taiwan will surpass South Korea to become the world’s largest manufacturer of TFT-LCD panels during the first quarter of next year, Young said. Taiwan surpassed Japan’s TFT-LCD manufacturing capacity earlier this year, he said.

The success that Taiwanese companies have had improving their R&D capabilities has not gone unnoticed. Multinational companies, including Intel, Sony Corp. and Microsoft Corp., among others, have invested NT$12 billion (US$352 million) to establish Taiwanese R&D centres since 2002, according to the Ministry of Economic Affairs (MOEA).

Some of these R&D centres are being moved to Taiwan from other countries, a sign of the island nation’s growing importance as an R&D centre.

Dell Inc. earlier this year moved its R&D team for notebooks, PDAs and servers to Taiwan from its headquarters in Round Rock, Texas, MOEA said. In addition, HP last year moved some product design work previously done in China and Singapore to Taiwan, where the company has established a product development centre.

While Taiwan has made a good start to increasing its importance as an R&D hub, there’s still a long way to go.

“It’s incredible what Taiwan has done, but it’s critical as a set of companies and as a nation you step up to the next level of innovation and worldwide leadership,” Gelsinger said.