US embassy cable - 05TAIPEI4719

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004719 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PASS AIT/W 
 
E.O. 12958: DECL: 11/22/2015 
TAGS: ECON, EINV, CH, TW, Cross Strait Economics, Finance 
SUBJECT: LAPTOP PCS - MADE IN TAIWAN NO LONGER 
 
REF: A. 04 TAIPEI 3464 
     B. TAIPEI 343 
     C. TAIPEI 2743 
     D. TAIPEI 2869 
     E. TAIPEI 4624 
 
Classified By: AIT Deputy Director David J. Keegan, Reason 1.4 d 
 
Summary 
------- 
 
1. (SBU) Taiwan firms had a 72.4 percent share of global 
laptop manufacturing in 2004, but more than 90 percent of 
their laptop output was assembled in the PRC.  The rapid 
transfer of laptop PC assembly from Taiwan to the Mainland 
has been driven by the movement of component suppliers and 
customers to the PRC, as well as by cheaper labor and land 
costs.  These same forces are increasing pressure on 
Taiwan's most advanced industries, semiconductors and TFT- 
LCD panel manufacturers, to move production to the PRC as 
well.  While manufacturing has moved to the Mainland, 
Taiwan firms have generally maintained research and 
development, finance and management operations in Taiwan. 
Some Taiwan IT firms have also sought to develop their own 
brand name as fierce price competition has driven down 
manufacturing profits.  Taiwan can emerge as a stronger, 
more mature economy after the large-scale transfer of 
manufacturing operations to the PRC, but many of the 
regulations governing Taiwan's economic relations with the 
PRC have reduced its opportunity to fully utilize its 
strengths.  End summary. 
 
 
Still a Powerhouse 
------------------ 
 
2. (U) Taiwan dominates global laptop PC manufacturing and 
remains a global IT manufacturing power.  Taiwan firms had 
a 72.4 percent share of global laptop manufacturing in 
2004.  According to Taiwan's Market Intelligence Center, a 
industry research firm, Taiwan firms also had market shares 
that topped 50 percent for seven other categories of 
components and peripherals, such as motherboards (78.3 
percent), LCD monitors (67.6 percent), cable modems (66.3 
percent), and WLAN equipment (83.0 percent). 
 
Manufacturing Moving West... 
---------------------------- 
 
3. (C) However, Taiwan firms continue to move IT 
manufacturing operations from Taiwan to the PRC.  In 2005, 
about 80 percent of IT hardware produced by Taiwan firms 
will be made in the PRC according to Sean Kao, a consultant 
at MIC.  He predicts that this ratio will not increase much 
more because most of the Taiwan factories that can benefit 
from transferring to the Mainland have already moved.  Kao 
estimates that Taiwan firms currently account for 70 to 90 
percent of the PRC's IT hardware output. 
 
For Laptops... 
-------------- 
 
4. (C) Taiwan media reported in September that when First 
International Computer Co shut down its last factory in 
Taiwan, no laptop PC assembly lines were left on the 
island.  The report was exaggerated.  ASUSTeK Computer Inc. 
President of the Sales and Marketing Group Jonathan Tsang 
told AIT that his firm still maintains about half of its 
laptop production in Taiwan.  The firm expects to produce a 
total of 4 million laptops this year.  Chen Li-hen, a 
laptop PC industry analyst at MIC, told AIT that Wistron, 
another major Taiwan producer of laptops also maintains 
significant production in Taiwan.  Nevertheless, the speed 
and scale of the transfer of Taiwan's laptop assembly 
industry to the PRC has been astonishing.  According to 
MIC, Taiwan manufacturers currently produce more than 90 
percent of their laptop PCs in the PRC.  Tsang also noted 
that ASUSTeK will move its remaining laptop production to 
the PRC next year when its new factory near Shanghai opens. 
The near total evacuation of Taiwan's laptop PC 
manufacturing industry is even more remarkable considering 
that until January 2002 Taiwan prohibited any laptop 
manufacturing investment in the PRC.  (Note: The extent to 
which this prohibition was circumvented is difficult to 
assess.  Luis Huang of Taiwan's Investment Commission (IC) 
told AIT/T that before the prohibition was lifted, IC 
investigated several cases of minor infractions and imposed 
small fines on some firms.  End note.) 
And Other IT Hardware 
--------------------- 
 
5. (SBU) Other categories of IT hardware have also seen 
rapid migration to the PRC.  For example, according to 
information from MIC, 85 percent of motherboards produced 
by Taiwan firms in 2004 were made in the PRC, up from 60 
percent in 2002 and 40 percent in 2000.  Taiwan firms' 
production of LCD monitors in the PRC was also about 85 
percent in 2004 up from 65 percent in 2002 and less than 5 
percent in 2000.  (Note: Investment in manufacturing 
facilities for TFT-LCD panels is still prohibited, but 
firms are allowed to assemble monitors and other consumer 
products.  End note.)  For cable modems, 72 percent of 
Taiwan firms' output was made in the Mainland in 2004. 
Approximately 60 percent of WLAN equipment made by Taiwan 
firms was produced in the PRC. 
 
Multiple Forces Driving Migration 
--------------------------------- 
 
6. (C) The rapid transfer of laptop PCs was driven by 
multiple factors.  Jason Lin, Deputy Spokesman for Quanta, 
the world's largest laptop manufacturer emphasized the need 
to follow suppliers.  Andrew Chen, Vice President for PC 
Sales at Compal (the world's second largest laptop 
manufacturer), told AIT that many of his firm's customers 
have also moved operations to the PRC, increasing the need 
to move assembly lines there.  MIC's Kao noted the 
importance of lower labor and land costs in the PRC, which 
is especially important as margins for contract laptop PC 
producers have been reduced to very low levels.  Quanta and 
Compal both expect to have gross margins of 6 percent for 
2005. 
 
Creeping Further Up the Chain 
----------------------------- 
 
7. (C) These same forces are building pressure for Taiwan's 
most advanced industries to move production to the PRC as 
well.  Taiwan still prohibits any investment in the 
manufacturing of TFT-LCD panels.  It has strong 
restrictions on semiconductor manufacturing as well.  To 
date, Taiwan has approved only one semiconductor 
manufacturer, Taiwan Semiconductor Manufacturing Company, 
to build a factory, which can only produce semiconductor 
chips with technology that is three generations behind the 
most advanced available (ref B).  Taiwan regulations also 
prevent semiconductor packaging and testing firms from 
investing in the Mainland (ref C).  Taiwan firms continue 
to push the government to liberalize these categories of 
investment, arguing that they need to be in the PRC to be 
close to their customers.  Some argue that unless they can 
gain a stronger foothold in the PRC soon, it will be 
difficult to compete against rapidly growing PRC firms. 
Mainland Affairs Council officials have told AIT that 
Taiwan may liberalize investment in some of these 
categories after Taiwan's December 3 local elections. 
 
What's Left for Taiwan? 
----------------------- 
 
8. (C) The challenge for Taiwan's leaders in the face of 
the rapid migration of manufacturing is to ensure that the 
information technology industry continues to bring economic 
benefits to Taiwan.  One segment of the IT hardware 
manufacturing process where Taiwan can still compete with 
the PRC is research and development.  Compal's Chen pointed 
out that his firm maintains all of its research and 
development activities in Taiwan and has no plans to move 
them to the PRC.  Many firms want to keep these activities 
in Taiwan because they can better protect their 
intellectual property here.  Taiwan also has a highly 
skilled workforce.  However, many firms complain of 
shortages of workers in high technology industries and have 
urged the Taiwan government to loosen restrictions on 
bringing employees from elsewhere, including the PRC (ref 
D). 
 
9. (C) Most Taiwan IT manufacturers have also kept their 
corporate headquarters in Taiwan.  However, Taiwan firms 
have increasingly sought financing in the PRC, Hong Kong, 
or elsewhere for their Mainland operations, sometimes to 
avoid Taiwan restrictions on cross-Strait investment. 
MIC's Kao also commented that more Taiwan IT firms will 
move their corporate headquarters to the PRC as Mainland 
operations become more central to their overall business 
strategy. 
 
10. (C) Some observers argue that as manufacturing 
operations move to the Mainland, Taiwan IT firms need to 
enhance the sales of products that carry their own brand 
names.  In the past, Taiwan IT firms have concentrated on 
manufacturing products under contract from foreign name 
brand firms.  However, fierce price competition has forced 
down margins for contract manufacturing of many IT goods, 
and some companies have turned to marketing their own 
brands to increase profits.  Acer has been the most 
successful firm in this area, becoming the world's number 
five PC brand by market share in 2004.  ASUSTeK's Tsang 
told us that about half of his company's laptop PC 
production is sold under the Asus brand name and that 
percentage is expected to grow.  The firm plans to separate 
contract manufacturing and brand name operations into two 
firms sometime in the next three years, following a similar 
model to Acer's restructuring in 2000. 
 
Comment - Holding Back Taiwan Not the PRC 
----------------------------------------- 
 
11. (C) Taiwan firms can increase their profits by moving 
manufacturing to the Mainland, but at the same time Taiwan 
can benefit from this transfer by evolving from an economy 
specializing in low-cost manufacturing to a service-based 
economy building on strengths in finance, research and 
development, and marketing.  Unfortunately, many of the 
regulations governing Taiwan's economic relations with the 
PRC have reduced its ability to fully utilize these 
strengths.  Limits on total investment encourage firms to 
seek financing locally in the Mainland or elsewhere (ref 
E).  Cross-Strait financial restrictions further impede 
Taiwan's development as a regional financial center. 
Restrictions on the ability of Taiwan firms to employ PRC 
workers in Taiwan make the island less attractive for 
research and development activities.  The lack of direct 
air links discourages Taiwan firms from managing PRC 
operations from Taiwan.  As long as political 
considerations override economic priorities, Taiwan's 
cross-Strait regulations will hinder Taiwan's ability to 
face the challenge of China's economic growth and become a 
stronger, more mature economy. 
Paal