Hank H.C. Lu recalls how he sweated over preparing a sales pitch to Taiwan's Institute for Information Industry. As director of business development at Hewlett-Packard Taiwan Ltd., Lu wanted the institute to enter a $6 million software joint venture with Hewlett-Packard Co. But he worried about a barrage of questions from the institute's notoriously crusty president, retired general Kuo Yun. Yet just five minutes into Lu's presentation, the general barked: "Stop, I'll do it."
Thus was born Open Systems Software Inc., which today is using sophisti- cated programming tools supplied by Hewlett-Packard to mass-produce soft- ware. General Kuo quickly saw the pro- posed partnership as an easy way to acquire new technology that will vastly improve Taiwan's ability to supply software to Chinese-speaking Asia. HP, meanwhile, has a new customer and will share 40% of the venture's profits.
Whether he knew it or not, General Kuo was jumping aboard a bandwagon that's rumbling across Asia. With accelerating speed, Westerners and Japanese are "going local" with their high-tech businesses. Rather than merely setting up assembly plants, they are forging strategic alliances with Asian partners, working much more closely with local suppliers to improve their capabilities, and sharing more sophisticated work, including product design, directly with their local employees.
`WIDER AMBITIONS.' The result is a giant transfer of technology, with U.S. companies leading the charge. Asians are getting technology that would have taken billions of dollars and an entire generation to develop on their own. "We can work with partners to get access to all the technology," gloats Tsu-mu Lin, director of research and development at Taiwan's First International Computer Inc. Through relationships with Intel, Texas Instruments, Microsoft, and Motorola, First International has become the world's largest producer of motherboards, the guts of personal computers.
Are foreign multinationals creating a Frankenstein that will rise up tomorrow and eat their lunch? Probably not. None is giving up its crown jewels. But there are risks for U.S. companies as they build up the technical skills of their Asian partners. Although the Japanese have a wider presence, they are more conservative about transferring technology and often insist on filling sensitive technical positions with Japanese.
In contrast, American companies have plugged Asian design and engineering facilities into their global strategies. For instance, Intel Corp. has Malaysian engineers designing state-of-the art microcontrollers and chip packages in Penang. Such work makes Americans more competitive now but could eventually help turn the Asians into world-class players. "I know a lot of American companies that are reassessing the strengths of their Asian partners," says consultant Jordan D. Lewis, author of Partnerships for Profit. "They're much stronger than they were 10 years ago. They have wider ambitions."
Still, the big guys have little choice but to play the game. With Asian factories supplying a growing share of end products for cars, TVs, and disk drives to the world, multinationals must supply their Asian allies with the advanced design tools, process technology, and quality-control knowhow needed for world-class products. At the same time, big chipmakers must expand their design capability in Asia to make sure their chips wind up in finished products--ranging from toys to computers--made by locals.
COMFORTABLE. These dynamics, plus shrinking product cycles, stiffer price competition, and soaring R&D costs, make partnerships and burden-sharing vital to survival. Team-ups with manufacturers in Taiwan and Hong Kong let U.S. companies such as Motorola Inc. move products from design to manufacture much more quickly. Cooperating on research projects with Singapore's government institutes gives Europeans access to money and talent. By designing TVs in Malaysia for global markets, Japanese companies can free engineers back home for more sophisticated work. "To stay competitive, you have to keep transferring technology," says Dennis S. Tachiki, senior researcher at Sakura Institute of Research in Tokyo.
Although they are often less ambitious in scope, U.S. and European linkups in Asia are more creative and less tense than those with Japanese partners. One successful alliance is Taiwan Semiconductor Mfg. Co., a five-year-old chipmaking venture owned jointly by Philips and the Taiwanese government. It has become a model for chip foundries in both Singapore and Korea. The partners have created the first purely contract-based semiconductor plant in the world, which makes chips to the specification of hundreds of small chip-design companies in America, Asia, and Europe. "U.S. companies feel comfortable with us because we don't compete with them," says TSMC President Donald W. Brooks.
Thanks to Taiwan's growing importance in the PC business and its low manufacturing costs, companies such as Intel, LSI Logic, and Philips have flocked to Taiwan for long-term relationships. Many more alliances are being forged. A significant one is Motorola's recent linkup with Cal-Comp Electronics Inc. to develop and manufacture so-called pocket secretaries--handheld computers no bigger than a calculator. Motorola thinks the more affordable design of its Hong Kong-designed PocSec, to be unveiled in January, can beat the competition. Smitten with this success, Motorola says alliances with nimble Chinese entrepreneurs are the way to churn out new products at a quicker rate than they can elsewhere.
Singapore is quickly becoming a thriving R&D center. One showcase is the collaboration between British drug giant Glaxo Inc. and the local Institute of Molecular & Cell Biology. They are teaming up on a $30 million research project to study the causes of brain disease. Glaxo was drawn to the institute largely because of a team assembled by its director, Y.H. Tan. Born in Singapore, Tan has a PhD from the University of Manitoba and started a lab at the National Institutes of Health and an interferon research facility at the Sloan-Kettering Institute for Cancer Research in New York. The hope is that this research will lead to development of drugs that attack cancer and brain diseases associated with aging, such as Alzheimer's.
Singapore's future isn't limited to pharmaceuticals. In another promising development, Apple Computer Inc. recently opened the Apple ISS Research Center in Singapore with the government-funded Institute of Systems Science as its partner. Over the next five years, the center will spend $10 million to develop voice- and handwriting-recognition software for computer and multimedia products in Asian languages.
DESIGNER GLUT. At the other end of Asia, many Korean companies are reaping rewards from partnerships with Japanese and U.S. companies. Daewoo Heavy Industries Ltd. has parlayed technology transfer schemes to become a supplier of wing ribs for the Boeing 747-400 and wings for Lockheed's P3-C. In mid-November, Honda Motor Co. and Daewoo Motor Co. agreed to collaborate on auto production in Korea.
Malaysia is just behind the Four Tigers in developing its technical strengths. One thing it has going for it is low costs. The personnel director of one major U.S. company notes cheerily that he can hire three Malaysian engineers for the price of one American. That doesn't necessarily mean stinting on quality, though. TI, which 20 years ago built a major plant for chip assembly and testing on the outskirts of Kuala Lumpur, now looks to that operation for leadership in those technologies. Only three of the 2,800 employees are non-Malaysian. "TI design people come here from Dallas for expertise," says Country Manager Jerry W. Lee. "We're a key player on a worldwide team."
The Japanese are also helping gear up Malaysia's human capital. At its sprawling, three-year-old plant in the Shah Alam industrial estate on the western outskirts of Kuala Lumpur, Matsushita churns out 1 million TV sets a year for the world market. Already, teams of Japanese and Malaysian engineers at its R&D center are designing 90% of the sets' chassis. Next year, it will rise to 100%. "Engineers are scarce in the U.S., Europe, and Japan" says Managing Director Hiroyuki Shirafuji.
`LIKE ROBIN HOOD.' Although relatively backward, China is managing to garner its share of technology alliances. Hewlett-Packard, in its first experiment with product design in the country, has dispatched a dozen local engineers to the U.S. for training. Soon, they'll be assigned the task of designing "integrators" that give printed readouts of lab tests. HP is starting with this product because it is highly price-sensitive and soaks up a lot of engineering hours. HP simply couldn't afford to have it designed in the U.S.
For the region, the payoff from all this multinational activity has already been enormous. The Asians are gaining access to levels of software, design, and manufacturing technology that once was way out of reach. And the upgrading of its human capital could pay rewards for decades to come. On the Malaysian island of Penang, for example, 40 local and multinational companies sponsor a skills-training center that's teaching locals everything from drafting and basic electronics to computer-aided design and robotics. Says Center Executive Director Boonler Somchit: "What we're doing is like Robin Hood--taking from the big boys and giving to the little guys."
But the toughest question remains: At what point do the little guys grow up? One answer is that, inevitably, Asian technological strength is going to mature. That will keep the pressure on Asia's partners to keep a step ahead. As long as American and other multinationals retain their advantage at the highest end of the technology ladder, they will be able to tap Asian partnerships without one day being swept away.