Much of Taiwan's tech success has historically centred on the personal computer, but the PC is now a boring, slow-growing product, supplanted by a variety of digital gadgets.
These gadgets are less standardised than the PC, and each product has a lower sales volume than the uniform and ubiquitous PC. This may spell trouble for Taiwan's tech companies.
But it shouldn't. That's because Taiwan has reinvented itself. Some earlier skills have survived (for example, in semiconductors), while the island has made good progress in entering others (liquid crystal displays, consumer electronics).
The jury is still out on how Taiwan companies will do in specific niches like handsets and digital still cameras, but remember that Taiwan's success is defined in terms of market dominance. Success, Taiwan-style, is having more than a third of a market, and it's not uncommon for Taiwanese manufacturers to have as much as three quarters.
This transition, still under way, has been happening against a backdrop of great political uncertainty. No one quite knows what Taiwan's political future will look like, given the confused state of relations with China.
But the tech sector has been able to tap China's low-cost manufacturing and, increasingly, to sell to its consumers. Today, the mainland is a sine qua non part of Taiwan's technology industry: Taiwan is where orders are taken and where most products are designed.
China is where they are made. The mainland may turn out to be the large domestic market that Taiwan, with 22 million people, never had -- the market that could propel the emergence of a Taiwanese Samsung (Korea is lucky it has a sizeable home market). Over time, China may replace the US as the primary end market for Taiwanese technology products.
The lack of a domestic market long relegated Taiwanese tech companies to being suppliers and assemblers, rather than product leaders.
End-users were elsewhere, far away, and Taiwanese companies did not feel qualified to respond to their needs and, in the process, able to develop their own brands.
Better let customers like Hewlett-Packard design the products, Taiwanese companies in effect said; we'll focus instead on bringing prices down while delivering good quality.
If we break the technology value chain into "upstream," where products are designed, and "downstream," where they are sold, Taiwan companies have been sitting somewhere in the middle: mostly as contract manufacturers to US "original equipment manufacturers."
Taiwan's focus has been on process, rather than product, innovation -- simplifying and optimising manufacturing. Often this has meant simply reducing the number of constituent parts in a product.
An ecosystem of suppliers arose to support Taiwan's contract manufacturers: these companies designed and made semiconductors, passive components, printed circuit boards, motherboards, peripherals, and so on.
Most are located in Hsinchu, outside Taipei -- a rare example of a government initiative that was taken over by the private sector and paid off. Another new technology cluster is emerging in Tainan, in the south of the island.
But the contract model is risky: it's easy to get squeezed between powerful downstream customers like HP, who themselves pay high fees to distribution outlets like Wal-Mart, and upstream component suppliers, who are similarly powerful and where capital intensity generates a volatile cycle (think DRAM).
Faced with such a squeeze, scale is the only salvation, but consolidation is tough in an industry dominated by strong-willed corporate leaders.
There has been no Sanmina-SCI-like union in Taiwan. As a result of a go-it-alone mentality, most Taiwanese companies providing "electronic manufacturing services" lack the scale of a Flextronics or Solectron, the sector giants. They also lack the well-balanced product portfolios of overseas rivals; instead, PCs and notebooks still dominate.
Three things happened as the PC box gave way to a more complex landscape that allowed Taiwan to retain, and grow, its competitive advantage:
First, Taiwan moved from being a passive OEM supplier to being an "original design manufacturer" partner. Taiwan companies like Quanta, a notebook leader, not only manufacture; but, working with their customers, they also take the initiative on new models.
Second, Taiwanese contract manufacturers and their component suppliers began moving to China. Taiwan's ecosystem of suppliers was recreated in China. Hundreds of thousands of Taiwanese -- mostly factory managers and their families -- relocated to the mainland.
Taiwanese companies that went to China early are now reaping the benefits. Hon Hai, one of the island's largest companies, owes its pre-eminent status partly to a bold and farsighted decision to move production to China years ago.
Hon Hai's handset division, Foxconn, is now listing in Hong Kong, raising $430 million. Gradually, R&D functions and more capital-intensive manufacturing (in semiconductors and LCDs) are also moving to the mainland.
Finally, Taiwanese companies are growing bolder and developing their own brands. In notebooks, handsets, digital cameras, BenQ, Asus, and Compal are worth watching. In LCD TVs, Sampo and Teco are not content to play second fiddle any more.
They see the emergence of a new product category as an opportunity to build brands. As they build their own brands, most Taiwanese companies don't give up contract work; they continue to do it, sometimes under different legal entities. Wistron, for example, is Acer's contract business.
Taiwan's advantages boil down to three Cs: cluster, China, and capital. "Cluster" refers to having upstream and downstream suppliers working closely together, in Taiwan as well as in China.
China is Taiwan's second advantage. It's close by, the language is the same, and Taiwanese are the most culturally-attuned outsiders to do business in China.
The Chinese government is proactive in supporting high-tech industries, and keen to attract Taiwan enterprises. The first non-mainland company to list domestically in China was a Taiwanese-backed refrigerator company, a year or so ago.
Finally, capital -- Taiwan's only indigenous strength of the three. The island's incredibly vibrant stock market has been supportive of technology.
Behind it are millions of retail investors who invest with abandon, and, increasingly, foreign institutional investors, who account for about a quarter of the market.
Technology is the jewel in the crown. While valuations are currently more modest, historically they have been comparable with Nasdaq levels.
Perhaps there is another "C", important when talking about Taiwan's technology industry: "consumer". Consumer electronics seems to be where the future lies.
By definition, consumer products enjoy large volumes, which favour the Taiwanese. Consumer is a heterogeneous category to speak of, but one example may suffice: your Apple iPod was in all likelihood made by Inventec in Sanchung near Taipei.
Another way to look at Taiwan's tech industry is to say that it has several strengths: semiconductors, where Taiwanese foundries dominate the global market; consumer electronics, especially notebooks; and LCDs -- a relatively new development, as in the case of semiconductors, not unrelated to the strength of the capital markets.
Taiwan's LCD cluster is typical of those in other product areas: downstream sit flat-panel display makers like AU Optronics, Chi Mei, Quanta, Chunghwa, and HannStar.
Mid-stream are makers of parts like backlight modules (Radiant, Coretronic, Forhouse, Helix, K-Bridge), colour filters (Sintek, AMTC, Cando), and polarisers (Optimax). Upstream, houses like Novatek and Himax design driver integrated circuits.
The genius of Taiwan's industrial sector is reinvention. This has been happening for decades, with new products driving each successive incarnation.
Once in a while, naysayers cry "secular change!" or "structural shift!," but so far they've been proven wrong. It would be unwise to assume this time is different.
