Taiwan Firms Use R&D Information
To Make a Big Technological Leap
By HENNY SENDER Staff Reporter of THE WALL STREET
JOURNAL
TAIPEI, Taiwan -- A year ago, Global Lighting
Co. was just another Taiwan maker of plastic molding.
Today, Global is better known for its pioneering
technology in back-lit displays for cellular phones and notebook
computers, and boasts a client list that includes Motorola Inc.,
Philips Electronics NV, Hewlett-Packard Corp. and Samsung Electronics
Ltd.
Global made the technological leap by doing what
more and more Taiwan manufacturers are doing: buying research
and development know-how from Western or Japanese companies instead
of innovating on their own. In Global's case, that meant acquiring
the research arm of U.S. lighting technology company Lumitex Inc.
18 months ago.
"We're helping to take Taiwanese companies'
manufacturing expertise up the food chain," says Chang Sun, a
managing director of E.M. Warburg Pincus & Co., which took a small
stake in Global and is helping the company reorganize its upgraded
operations. "We're helping to create world-class companies."
Such deals are increasingly common as Taiwan
manufacturers abandon their former strategy of low value-added
contract production. The trend began before Taiwan's stock market
meltdown earlier this year and continues despite a drop of about
48% in Taiwan's weighted price index since March 31.
"Taiwanese tech companies have to step up or
out," says Jerry Harn, head of corporate banking for Citigroup
Inc.'s Citibank unit in Taipei. "They have no choice. And their
success or failure is critical ... to the Taiwanese economy. If
they do succeed, they will become true multinationals."
Taiwan's effort to become a global innovator
as well as a hardware supplier is fortuitous. Many Taiwan companies
are already specialized manufacturers at a time when the global
electronics industry is moving toward increased specialization.
International technology heavyweights are shedding operations
in order to concentrate on a few core businesses or because they
plan to abandon manufacturing altogether. "The trend world-wide
is for companies to spin off everything that isn't core," says
Mr. Harn.
In May, for example, Yageo Corp. acquired the
world-wide passive components division of Philips Electronics
for 650 million euros (US$575.5 million) in the largest foreign
acquisition ever made by a Taiwan concern. "Their noncore is our
core," says Rex Yang, an executive vice president of Yageo. Passive
components are electronics parts such as inductors and resistors,
common in an array of consumer-electronics products.
Advanced Semiconductor Engineering Inc., another
Taiwan company, had the same thing in mind when it acquired the
Korean silicon packaging business of Motorola, together with a
promise from Motorola to continue to do business with the new
owner. Since the Korean operation wasn't as profitable as others
for Motorola, the U.S. company aims to increase its return on
capital by selling it. At the same time, ASE can improve the efficiency
of the packaging business because its operating costs are lower
than Motorola's. Moreover, with ASE in control, the Korean plant
can operate at higher capacity because it can sell to non-Motorola
customers. Through the acquisition, analysts say, ASE has lined
up guaranteed orders, better technology and greater economies
of scale all in one transaction.
Such foreign acquisitions should give Taiwan's
electronics industry a sharper edge against international competition.
If managed successfully, these acquisitions could enable the island
to close the technology gap and take market share from other countries
just as the threat of slower global economic growth means dwindling
orders for weaker producers.
With its acquisition of Philips' passive components
operations, for instance, Yageo became the third-largest maker
of resistors world-wide after two Japanese companies, Murata Manufacturing
Co. and TDK Corp. But Yageo now has the technology to compete
and it can challenge the Japanese in terms of production using
the Philips know-how it purchased.
"Taiwan has become a priority stop for every
multinational that sells a division," says Andrew Kuo, head of
Chase Manhattan Bank's Taiwan operations. "And such cases will
increase."
That is especially true for Japanese tech companies,
which have a vast marketing reach and impressive research, but
little capital to underwrite those endeavors. "Japanese companies
have technology, but they no longer have money to invest because
their performance hasn't been so good," says Toshiaki Nonaka of
Nomura Research Institute in Taipei. "They need a partner."
Taiwan companies could be the perfect complement.
"Taiwanese companies don't spend on basic research. They do no
marketing and they use share bonuses to lower their personnel
costs," says Yasuo Nakane, senior analyst at Daiwa Institute of
Research Ltd. in Taipei. "At the same time, they have lower taxes
and the profit margins to upgrade."
That makes Japanese companies the natural targets
for wealthier Taiwan concerns. "Often you can get these assets
for 50 cents on the dollar," says Wen Ko, chairman of WK Technology
Fund in Taipei, who is teaming up with some of WK's local investment
partners to acquire divisions of smaller Japanese companies.
To date, the most striking Taiwan purchase of
Japanese technology assets is United Microelectronic Corp.'s acquisition
of Nippon Steel Corp.'s loss-making Nippon Foundry unit about
18 months ago. "Within a year, (Nippon Foundry) went from negative
48% margins to positive 46% margins," says Chitong Liu, executive
director and head of Asian technology research for UBS Warburg
Securities Ltd.'s Taipei branch. "Nippon Foundry was an [old]
plant. They upgraded the technology and introduced better processes."
Now UMC is using its Japan production base to
get a larger share of chip orders from Japanese customers. This
quarter, Sony Corp. became one of UMC's top-ten clients and Sharp
Corp. announced that it will invest $64 million in UMC's Japanese
unit to ensure a stable supply of eight-inch wafers, which are
used in personal computers and cell-phone handsets.
UMC's successful record could assuage concerns
among some investors that Taiwan companies could have difficulty
managing their sophisticated purchases. But electronics industry
analysts wonder whether UMC -- one of Taiwan's best-managed concerns
-- is an exception. They ask whether asmaller, family-run company
can execute an acquisition strategy as well as UMC has, especially
when many Taiwan companies are managed in an autocratic, top-down
fashion.
Still, most industry analysts and investment
bankers believe Taiwan manufacturers have no choice but to move
to the technological frontier, even if it means competing with
global giants. If they remain solely suppliers of cheap components,
the companies may be increasingly squeezed by even lower cost
competitors, the analysts say.
