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Copying others has made Taiwan rich – Now it wants to establish its
own identity by increasing its investment in R&D, establishing a world-class
scientific base by luring back its famous researchers and making products
of better quality in biotechnology and computing

TAIWAN is an awkward place to classify. Politically, it is one of the
loneliest countries in the world, with only a handful of fiercely anti-Communist
states, such as El Salvador and South Korea, recognising its government’s
claim to represent China. Commercially, the island is friends with almost
everybody. It is the world’s 13th largest trading nation, with exports and
imports worth well over $100 billion and larger reserves of foreign currency
than any other except Japan. Taiwanese companies build a quarter of the
world’s personal computers; electronics, electrical appliances and machinery
are Taiwan’s biggest export, well ahead of the second most important, textiles.
The people who work for the computer companies are among the wealthiest
in Asia. That’s not bad for a country which most of the world pretends does
not exist.

Taiwan is now turning its energies in a new direction, to science and
technology. The government’s motives are not the search for pure knowledge
so much as the realisation that unless the island moves into new industries,
its economic miracle is doomed.

The Taiwanese got rich by making goods cheaper than anyone else and
selling them overseas. The secret is hard work and an anarchic entrepreneurial
culture that paid low wages and, frequently, scant regard to the island’s
environment and other people’s intellectual property. This energy is still
obvious: when lorries get stuck in Taipei’s frequent traffic jams, their
drivers leap onto the back to put the finishing touches to the goods they
are delivering.

Today, the image of ‘Made in Taiwan’ is changing quickly. Neighbouring
countries in East Asia, notably China and Malaysia, have swept away the
island’s advantages in cost. China’s emergence as an industrial trading
nation will take the process further. The value of Taiwan’s currency rose
by 40 per cent against the US dollar during 1986 and 1987, which has made
Taiwanese industry less competitive internationally. Taiwan’s average wage,
which the government says is Pounds sterling 1.30 an hour, is already higher
than South Korea’s (Pounds sterling 1.00) and Hong Kong’s (Pounds sterling
1.23). It is in a different league to wages in Malaysia (Pounds sterling
2.95 a day) or China (Pounds sterling 1.00 a day). Labour shortages have
helped to increase earnings, says the government.

Wage rises and currency appreciation last year doubled the average cost
of making one of Taiwan’s traditional exports, shoes. The government in
Taipei is trying to push industry into new products, adding value rather
than slashing costs, because the industries of mainland China will undercut
on cost for the foreseeable future. Taiwan aims to become the Silicon Valley
of the Western Pacific. But first, it must develop a world-class scientific
establishment on an island of 20 million people.

Today, Taiwan spends just over 1 per cent of its gross national product
on civilian R&D. This is well behind the 2.8 per cent that Japan, Asia’s
only country with an unquestionable claim to ‘developed’ status, invests.
Unlike Japan, whose industry pays for four-fifths of the national research
effort, more than half of Taiwan’s research spending comes from the government.
Most of Taiwan’s 80 000 companies are tiny. They spend on average less than
1 per cent of their turnover on R&D, although some electronics firms
invest between 4 per cent and 5 per cent. The government’s target is to
persuade industry to invest an average of 3 per cent of turnover by 2000,
which will mean encouraging the vast majority of electronics firms, for
instance, to invest more than they do.

The National Science Council, which decides science policy and runs
government-funded research, has an uphill struggle guiding industry in this
direction. The council’s chairman, Han-Min Hsia, is one of the few makers
of science policy in the world who can say that getting more money from
the government is not his main problem. His budget this year is 26 per cent
more than last year’s, 3.9 billion Taiwan dollars (Pounds sterling 86.5
million). The council has set priorities in 12 fields, including energy,
production automation, information sciences, materials sciences, electro
optics, biotechnology, food sciences and controlling hepatitis.

In 1986, the government contributed 51.4 per cent of Taiwan’s spending
on non-military R&D. Hsia wants to reduce that contribution to 40 per
cent by 1995, not by cutting spending, but by persuading industry to make
a bigger effort. If this works, Taiwan will have doubled the percentage
of its GNP that goes to civilian R&D to 2 per cent, the average for
the industrialised world today. One strategy is to emulate Japan’s high-profile
research programmes to make companies sit up and take notice of new fields.
Hsia hopes to win back from the US one of Taiwan’s best-known emigrant scientists
to launch a world-class centre of research on superconductors. The target
is Maw-Kuen Wu, of Columbia University. Wu won fame in 1987 for his part
in the discovery, at the University of Houston, of materials that lose all
resistance to electricity at temperatures of liquid nitrogen. (Researchers
had not been able to produce superconductivity at such high temperatures
before and Wu’s discovery offered the prospect of superconducting materials
becoming economically viable.) The superconductivity programme will run
for between two and five years, with a budget of around Pounds sterling
6 million a year. Hsia said that the programme’s aim is to give Taiwanese
companies access to patents, for instance in the form of licensing agreements,
in high-temperature superconductivity as it moves from the laboratory to
practical use. ‘Japan already has 2000 patents in superconductivity. I would
expect to have 50 in five years,’ Hsia says.

The showcase of Taiwan’s efforts to reshape its industry is Hsinchu,
80 kilometres south of Taipei. Just off the main west coast highway, the
‘science-based industry park’ houses around 100 companies, employing 16
000 people of whom 40 per cent are university graduates. The park is spacious,
modern, and rather antiseptic compared with most industrial areas in Taiwan.
Its focus, predictably, is on microelectronics. ‘We intend to be the integrated
circuit centre of the Pacific rim,’ says Cho Li, the park’s director-general.
The island should concentrate on quality rather than quantity, he adds:
‘If we produce the same products as our competitors, we are done for.’

Li hopes that the science park will eventually encompass the whole of
the surrounding area, which has two universities as well as the country’s
leading research laboratory and a population of 1.2 million people. The
area is also the site for a synchrotron radiation source, currently under
construction. The facility, another of the National Science Council’s projects,
will be the island’s first synchrotron.

The park owns all its land and merely leases plots to tenants, setting
strict conditions by Taiwan’s laissez-faire standards. ‘We refuse quite
a few,’ Li says. ‘Companies cannot produce air pollution, water pollution
or noise. If they come here, they have got to add value to the park.’ The
model is Japan’s Technopolis strategy, which seeks to create new economic
centres based around high-technology industries. The difference is that
the Technopolises of Japan are still under construction: Hsinchu is up and
running.

Hsinchu’s star performer is Acer, formerly known as Multitech, Taiwan’s
largest maker of personal computers. Acer’s annual turnover of Pounds sterling
224 million is unusually large by Taiwanese standards, although still small
compared with Apple of the US, to say nothing of IBM or the Japanese electronics
giants with their multibillion pound revenues. Acer invests 5 per cent of
its revenue on research.

By March 1990 Acer’s factory at Hsinchu will be turning out one million
personal computers a year. Between 45 and 50 per cent of each computer’s
content, by value, comes from local sources. The company still has to import
the most expensive and intricate parts, microprocessors from the US and
floppy-disc drives from Japan. Three per cent of Acer’s staff (average age
24) have a background in engineering. Like other manufacturing companies
in Taiwan, Acer is beginning to feel the effect of the island’s shortage
of labour. ‘Recruitment is becoming more and more difficult,’ Patrick Lin,
senior vice president, says. To cope, Acer is installing computerintegrated
manufacturing equipment, such as a machine to insert the keys in keyboards.
However, a glance around the plant shows that it is nowhere near as automated
as those of its Japanese competitors. The factory at Hsinchu has only two
auto-insertion lines, one for integrated circuits, the other for capacitors
and resistors.

What Acer loses in the economy of long production runs it gains in flexibility.
The assembly line can change from one model to another and back again two
or three times every day, producing more than 200 different models in a
month, Lin says. Most of the assembly work is done by hand, mainly by young
women sitting in pairs at slow-moving assembly lines. The workers, who have
all completed secondary school, earn an average of 12 000 Taiwanese dollars
(Pounds sterling 235) a month, for working weeks of 44 hours over five days.
Around 70 per cent of the employees own stock in the company.

‘We can no longer use the low price to compete,’ Lin says. ‘The computer
industry is not like textiles or sport shoes. Quality is more important
than the price.’ The firm is proud of the internationally renowned manufacturers
that put their own badges on Acer’s computers. The names on the boxes stacked
up in the despatch warehouse include Fujitsu, Siemens and Unisys. Only around
60 per cent of Acer’s goods are sold under the company’s own name.

Acer has teamed up with Texas Instruments, the American electronics
giant, to protect Taiwan’s Achilles heel: the fact that it does not produce
memory chips. Taiwanese companies import almost all their DRAM chips, the
bread-and-butter chips of computer memory, from Japan. The new plant, which
will open in 1991, will give Acer a local source, as well as transferring
the expertise needed to mass produce chips.

The obvious route for Taiwan to follow is that of its northern neighbour,
and colonist for half a century, Japan. But Japan built up its industrial
muscle through the leadership of a handful of huge industrial groups, which
could afford to take a long-term view as they invested their money to break
into new markets, guiding their subcontractors behind them. Taiwan’s industrial
culture is quite different. Frederick Chien, chairman of the Council for
Economic Planning and Development, one of the government’s main policy-setting
bodies, says: ‘The proportion of small companies is the big difference between
my country and Japan. At times, we feel very much tempted to encourage mergers.
But when we tried, we had no success.’ A Taiwanese, Chien says, would much
rather be the boss of a small company than an employee in a large one.

Only a handful of Taiwanese companies, such as Formosa Plastics, a chemical-processing
firm with a turnover of around Pounds sterling 3 billion a year, are of
a size to be reckoned with internationally. The island’s only engineering
and electronics combine that approaches a Japanese scale is Tatung, which
had a turnover last year of less than Pounds sterling 1.2 billion. Tatung
is the only Taiwanese company to manufacture on a large scale in Europe,
at its television factory in Telford, England. But even this company is
only a fraction of the size of its global competitors, Hitachi and Toshiba.

Tatung invests 4 per cent of its revenue on R&D, and has plans to
spread its computer business from personal machines into work stations.
One of the models of W. S. Lin, the president of Tatung, is Japan’s electronics
giant NEC, with its famous slogan, ‘computers and commmunications’. ‘This
will also be our focus,’ Lin said. But NEC, as the world’s largest semiconductor
company, can afford to invest millions of its dollars in long-term research.
Tatung is wary of even entering the memory-chip business, the booms and
busts of which have driven away all but the most robust companies. Instead
Tatung’s researchers are developing semi-custom chips, which are designed
to do specific jobs as opposed to general purpose microprocessors. Most
of the rest of Taiwan’s 4000 electronics companies, employing an average
of fewer than 100 people each, do not even have as many resources as Tatung.

Countering this weakness is the aim of an organisation at the heart
of the ‘Hsinchu Effect,’ the Industrial Technology Research Institute (ITRI).
Founded in 1973, the institute is by far Taiwan’s largest research organisation.
It has around 5000 staff doing contract research, investigating new technologies
for which industry is reluctant to foot the bill, and dreaming of the day
when they can set up in business on their own. Many former researchers now
run companies, for example, silicon foundries; and Hsinchu science park
is full of ex-ITRI employees.

The institute started looking at semiconductors and integrated circuits
in 1976, at a time when Taiwan’s main exports were textiles and toys. ‘We
decided that the emphasis should be on design work rather than memory chips,’
says Chintay Shih, the institute’s executive vice president, ‘so we adopted
the ASIC (application-specific integrated circuit) concept to encourage
design work.’ The institute’s latest programme is optoelectronics. It grew
out of an unsuccessful attempt to market a magnetic disc drive, a 10-megabyte
hard disc, which was rapidly overtaken by competitors. ‘It missed the market.
We then decided to do more in optical devices rather than chase the hard
disc market,’ Shih says. Another team at ITRI is pushing Taiwan’s computer
makers towards more sophisticated products by developing a minicomputer
based on RISC (Reduced Instruction Set Computing) chips. The government
is also encouraging software companies through research centres such as
ITRI.

To become a world player, however, Taiwan will have to overcome its
dismal international reputation for safeguarding the copyright of software.
Shih says: ‘We suffered from that in 1982 to 1983 because the industry was
not familiar with software and intellectual property. But the whole industry
has evolved. Since then the government has put some effort to apply the
law and now the industry is trying to understand. It is now safe to say
that we have a good industry in this respect.’

It is true that the most blatant signs of piracy have disappeared. In
the area of hardware pirating, Apple Computer, with the backing of Taiwanese
law, is claiming victory in its long legal battle against the Taiwanese
producers of computers with names such as Orange and Pineapple. The copying
of software, however, is more difficult to stamp out. The Business Software
Association, a trade organisation formed by six software companies in the
US, earlier this year said that illegal copying in Taiwan costs its members
more than Pounds sterling 100 million a year. Sales of operating systems
do not match the number of personal computers that Taiwan produces, suggesting
that many Taiwanese PCs are sold with illegally copied software.

Taiwan is not putting all its eggs in electronics. The president of
the Development Center for Biotechnology in Taipei, Weichen Tien, has firm
ideas about which way the island’s industry must go. ‘Biotech is an important
tool for basic research, it also has great potential in medicine and agriculture.’
The island has the dubious distinction of being the world’s largest exporter
of monosodium glutamate, the fermented food additive, and one of the DCB’s
tasks is to adapt Taiwan’s biotechnology expertise to more valuable products.
Research on pharmaceuticals, Tien says, is very weak. Again, the problem
is the dearth of large companies. Rationalisation has whittled down the
industry from 700 to 200 firms, but most are still very small. So far, the
Development Centre is not involved directly in developing new drugs: ‘that’s
too expensive’ says Tien. Instead, the focus is on developing diagnostic
materials, perhaps based on Chinese herbs. ‘There must be some goodies in
there,’ Tien says. The centre plans to start a systematic scientific survey
of Chinese herbs.

The centre’s department heads and directors represent Taiwan’s scientific
strength, the people who graduated from Taiwanese universities then went
to the US for further degrees and experience in American companies. Although
one quarter of Taiwanese between the ages of 18 and 21 attend colleges,
most people seeking higher degrees travel to the US to study. Every year
5000 Taiwanese people go abroad to take higher degrees. Although fewer than
one third return at the end of their studies, the rest are not regarded
in Taiwan as lost for good. Organisations such as the Society of Chinese
Biochemists in America, with more than 1000 members from mainland China,
Malaysia and Singapore, as well as Taiwan, help expatriates to keep in touch
with each other. Daniel Yuan, president of National Chiao Tung University,
one of Taiwan’s leading engineering faculties, said of the emigrants: ‘We
don’t see them as a waste, they are like a bank, a resource for us to draw
on in the future.’ The DCB lured its department heads from companies such
as Corning and Kodak. ‘I have a sales pitch,’ Tien says: ‘I tell them: ‘I
never promise you a rose garden, but I can promise you a garden.’ In the
US, they might be working in a big company. Here they have space, they can
develop.’ This approach seems to be working.

By 1996, Taiwan’s average income per head will be more than Pounds sterling
7500, compared with today’s Pounds sterling 3500. The island is now approaching
the crucial point at which a developing country becomes a developed one.
All Asia is watching closely to see if the Taiwanese experiment succeeds.
The older industrialised countries have scarcely begun to consider the implications
of Taiwan being as successful in computing and biotechnology as it was making
T-shirts and toys.