Taiwan's Climb Up the Tech Ladder

It's becoming a center for R&D as well as manufacturing

Taiwan, a manufacturing mecca of the computer industry, is renowned for its countless PC factories and billion-dollar semiconductor plants. Anybody looking for a glimpse of the island's IT future, though, might want to skip the glitzy high-tech science parks and instead visit a modest office in Taipei's financial district. It's here that Intel Corp. in August opened a research facility for wireless-networking products. The first of its kind in Asia, the Intel Innovation Center will employ some 60 engineers working with counterparts from Intel's local partners -- at a cost two-thirds lower than what Intel would have to shell out in Silicon Valley. The pace is faster, too: "They can turn products around in a very short time," marvels Long-song Lin, director of the center. "Taiwan has a very good foundation."

That's just the kind of endorsement the Taiwan government wants to hear. Taiwan's companies today make two-thirds of the world's notebook PCs, and many components for desktop PCs come from the island, too. That's not as big a boon for Taipei as it might sound, though, since most of the machines and parts are made by Taiwanese companies in China, not in Taiwan itself. Furthermore, Taiwan's tech companies are being squeezed as their computer-maker customers demand price cuts. "If we don't promote Taiwan, [multinationals] might look at mainland China," says Jung-Chiou Hwang, director general of the Industrial Technology Dept. at the Economic Affairs Ministry.

So President Chen Shui-bian -- who faces a tough reelection battle in March -- is backing a plan to keep Taiwan relevant in a changing world. He wants to make the island a home for local and foreign engineers and designers working on more innovative products than those manufactured in China. The government is offering incentives such as tax breaks and direct subsidies for foreign companies that set up research centers. It's even allowing engineers to escape the military draft by doing research & development work in lieu of their mandatory service. "The government strategy is to make Taiwan the R&D center for Greater China," says Jih-Chyang Yang, executive vice-president of the Industrial Technology Research Institute, a government-backed lab in Hsinchu. Taiwan remains attractive, he says, because while most of its companies' electronics come from the mainland, "the decision-making is Made in Taiwan."

PLENTY OF COMPANY. Intel isn't the only global giant that has decided Taiwan is the right place to do tech research. Sony, Dell, and IBM have opened R&D centers in the past year. And networking equipment maker 3Com Corp. in September announced that it, too, plans to build a lab in Taiwan to develop some of its lower-end switches. "There's a lot of good development work going on in Taiwan," says Mark Slaven, 3Com's chief financial officer. "We feel proximity [to Taiwanese subcontractors] can lead to more innovation."

Some of those facilities are already bearing fruit. A year ago, Hewlett-Packard Co. opened a product-development operation in Taipei where 70 engineers work closely with designers from the Taiwanese suppliers that make the bulk of HP's notebook PCs. The center, HP's first such operation outside Silicon Valley, makes teamwork much easier, since the HP employees are no longer an ocean away. The collaboration means that HP is now able to introduce as many as 14 new laptop models a year, up from just 10 before the switch, says Tom Mitchell, the Taipei-based HP vice-president who oversees the center. And HP is getting those new computers to customers much faster. Doing the work in Taiwan has helped achieve a 60% gain in efficiency -- at half the cost, Mitchell says.

Too much talk about cost savings, though, could create big problems for Chen's plan. Labor groups in the U.S., Britain, and elsewhere are growing concerned about the loss of jobs to low-cost countries. So executives have to decide whether the savings are worth the headaches at home. Indeed, some companies seem wary about publicizing their R&D efforts in Taiwan. Dell Inc., for instance, is tight-lipped about its Taipei operation. Replying via e-mail to questions about staffing and operations, Singapore-based spokeswoman Judy Low wrote: "We don't discuss head-count details." The Taiwanese Ministry of Economic Affairs says the work Dell is doing in Taiwan was previously handled within the U.S.

Another hurdle: Taiwan faces nearly as much competition for R&D as it does for manufacturing. Just days before Intel CEO Craig R. Barrett inaugurated the Taipei facility, he stopped in South Korea to announce plans for another center there. And hardly a month goes by without one more multinational setting up R&D operations in China. In mid-September, for instance, Nortel Networks Ltd. unveiled a plan to build a research lab in Beijing to focus on third-generation cellular gear. Already, Taiwan companies are moving some of their own chip design and customer support to the mainland. With costs so much lower there, the pressure to shift more jobs will increase. That could make it easier for multinationals to bypass the island and do their R&D in China -- especially if Taiwan doesn't do more to train new workers. Government officials in Taiwan say the island needs at least 10,000 more engineers. That looming shortage could easily result in higher costs as more multinationals compete to hire local talent. Even if Chen's plan is a roaring success, it won't do much for those who have lost their jobs to factories in China.

The government's hope is that the giants' presence will spur local companies to start developing their own products rather than simply making gear for foreign companies. That's starting to happen, albeit slowly. For instance, Quanta Computer Inc.'s suburban Taipei headquarters sits across the street from a huge construction site that will, by the end of next year, become a 2 million-square-foot building where 7,000 new engineers will develop more advanced notebook PCs, servers, and LCD televisions for the company. Consumer electronics maker BenQ Corp. and digital-camera producer Altek Corp. are also beefing up their R&D resources. In cameras, "you have to develop everything," says Alex Hsia, Altek's president and CEO.

For now, Taiwan seems to be successfully climbing the global-electronics ladder. "R&D in Taiwan can get you closer to the design phase," says Rosemary W. Ho, managing director of HP's Taiwan operations. "You don't see that kind of innovation in China yet." So for a few more years, at least, the island has a fighting chance of staying ahead of its giant neighbor across the Taiwan Strait.

By Bruce Einhorn in Taipei, with Peter Burrows in San Mateo, Calif.

— With assistance by Peter Burrows

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