POSTCARD from TAIWAN
There’s good news and bad news on my latest trip to Taiwan. The bad news is that I cannot talk about what was probably the most interesting factory visit and management meeting as they had me sign a very strict three-page long Non Disclosure Agreement forbidding me to even mention that I had talked to them, let alone that I share with you what we actually talked about and what I saw. The good news is that I met plenty of other companies and there are many other experiences to share with you. What follows is in no way intended to be a complete overview of Taiwan and its economy or to give buy & sell recommendations, but rather to give you some insights on what I learnt on this latest trip to Taiwan.
Taiwan lies off the southeastern coast of mainland China and has a population of roughly 23 million. It also lies on the western edge of the so-called Pacific “Rim of Fire” and continuous tectonic movements have created majestic peaks, rolling hills and plains, basins, coastlines and other natural landscapes. On my most recent trip to Singapore, I noticed there were many billboards across the city state promoting the natural beauty of Taiwan.
I usually don’t write that much about a country’s history, but I feel that in the case of Taiwan I have to make an exception as it will help to explain a lot of what is going on today, especially in its relationship with China. Taiwan was colonized in the 17th century by the Dutch in the south and by the Spanish in the north. The Dutch later drove the Spanish of the island, but were defeated in 1662 by the Han Chinese which formed the Kingdom of Tungning. The Qing dynasty annexed Taiwan in 1683, but re-designated the island as Taiwan Province in 1885 with Taipei as its capital and began modernizing the island by building its first railroad and postal service. The Japanese victory over the Qing in the Sino-Japanese War saw Taiwan’s sovereignty transferred to the Empire of Japan in 1895. The Japanese played an instrumental role in modernizing the island, building up its transportation networks, while introducing sanitisation and formal education. (Even in today’s daily life, the Japanese influences set the island apart from many other Asian countries.) With the end of WW2, the Japanese were forced to leave Taiwan and in October 1945 the US ferried ROC troops onto the island. Tensions between the Taiwanese and mainlanders escalated and on 28 February 1947 the shooting of a civilian sparked island-wide unrest which was suppressed with military force and between 18.000 to 30.000 Taiwanese were killed. This is known in Taiwan as the 228 Incident – see picture below.
Meanwhile, the civil war in China had escalated from 1946 and by 1949 the Chinese communists had defeated the Nationalist army and the People’s Republic of China was founded on October 1st. Chian Kai-shek was forced to flee to Taiwan, where he established the KMT (Kuomintang) government and imposed martial law. In 1971, the UN officially expelled the ROC and recognized the PRC instead. Taiwan lost all memberships to UN bodies. In 1986, the Democratic Progressive Party (DPP) was formed and inaugurated as the first opposition party in Taiwan. In 1987 Chiang Ching-kuo (Chiang Kai-shek’s son) lifted martial law in Taiwan. In 1996 (only then!) Taiwan held its first popular vote, marking its successful transition to democracy. President Lee won the election. In 2000, Chen Shui-bian of the DPP was elected as the first non-KMT President of Taiwan. He was also re-elected in 2004 and during his tenure, relationships with the PRC deteriorated significantly! In 2008, the presidency went back to the KMT with the election of Ma Ying-jeou, who campaigned on a platform to improve relationships with mainland China. President Ma was re-elected as President of Taiwan in 2012. Taiwan’s relationship with China has therefore stabilized a lot, especially as it has realized the significant benefits to be had from an enduring peace with China.
For all practical purposes, Taiwan and China are inextricably linked and the links are only getting stronger. In 2009, the Taiwanese government announced that commercial, industrial and employee housing in Taiwan were then opened to Chinese investment, as were 101 other sectors. The two countries have also agreed to increase the number of direct flights between them, which is precisely the kind of trade diplomacy that will save the region from conflict. Taiwan is likely to earn a huge peace dividend and will be a disproportionate gainer from a lasting peace with China going forward.
Taipei is the capital city of Taiwan and I think many people would be surprised on their first visit. It’s not exactly the kind of capital city you might expect. There are not that many skyscrapers to begin with (with the exception of Taipei 101, which is Taiwan’s landmark skyscraper and was the world’s tallest building from 2004 until the Burj Khalifa opened in Dubai in 2010 – see picture below) and the city centre is dominated by scooters instead of cars.
Also, the international airport seems relatively small when you compare it to most other Asian capital cities’ airports and the railway from the airport to the city centre is still under construction – see picture below. Interestingly, most of the restaurants I went to, were bustling with activity. You could not get into Din Tai Fung (to sample some authentic dim sum) or Danny & Company (known as the “Godfather of Steak” by the locals) without a reservation and I noticed waiting lines outside of some other places as well.
THE TECH ISLAND
Taiwan is often called ‘The Tech Island’ and our factory visits and company meetings focused primarily on some specific subsectors and the different parts of the technology value chain. Taiwan’s evolution as a hardware manufacturer began in the 1980s, when it acted as an outsourcer for American and Japanese technology companies. Taiwanese companies, backed by the government, focused on semiconductor technologies. Companies such as UMC and Taiwan Semiconductor Manufacturing Company (TSMC), which began with technology transfer to set up chip foundries, have now grown into technology leaders and created entire industry and subindustry clusters including chip-design houses, a whole bunch of semiconductor device manufacturers and device assemblers. Intense competition within the Taiwanese semiconductor and hardware clusters and very strong links between companies and technical universities have resulted in an entire innovation-support infrastructure which includes funding for start-ups. Today, Taiwanese companies are leading the global drive in optoelectronics. Touch-screen technologies, the kind that made the iPhone all the rage, owe their success in part to the development efforts and innovation of several Taiwanese companies!
One of the things I appreciated a lot from a fund manager’s perspective, is that corporate governance is relatively speaking a lot better than in most more basic Emerging Markets. You could even say Taiwan’s corporate governance is on average reasonably high. Another big positive were the solid balance sheets. Many companies showed very low levels of debt and in some cases even had net cash positions on their balance sheet.
One of the companies we met with, is a well-known producer of pneumatic equipment, used in the automotive, electronics, environmental protection, medical equipment, food & packaging industries to name just a few. As rising labour wages are a structural concern for many companies operating factories in China, this company’s pneumatic equipment products are a good example of the growing factory automation trend helping to mitigate such labour costs.
We also had the opportunity to visit Acer’s e-Enabling Data Center in Taoyuan. When most consumers think of Acer, they think of one of the world’s leading PC brands (although the Acer Group is a family of 4 brands: Acer, Gateway, Packard Bell and eMachines). Their multi-brand strategy allows each brand to offer a unique set of characteristics targeting different customer needs in the global PC market. Acer ranks n° 4 for total PC and n° 2 for notebooks shipments. But, as the tour of their Data Center showed, Acer is more than just a hardware company. They have the single largest data center in the Asia-Pacific region with a total floor area of 54.000 m², built to withstand earthquakes up to 7 on the Richter scale. New developments in cloud computing will make this part of the business even more interesting and may become more important for the company as a whole.
We also met with a handful of other interesting Taiwanese companies and had the opportunity to witness live demonstrations of some of these companies’ products. I will obviously not discuss all of these in detail, but will discuss just one more. No visit to Taiwan’s technology clusters could probably be envisaged without a meeting with TSMC. They are the world’s largest dedicated independent semiconductor foundry and are principally engaged in the research, development, production and distribution of integrated circuit (IC) related products. Its products and services are applied in the production of PC’s and peripheral products, information related products, wire and wireless communication systems, automobile and industrial equipment, as well as consumer electronic products, such as digital disk players, digital TV’s, game consoles, digital cameras and many more. Apple, HTC, Qualcomm, Nvidia,… are all reliant on TSMC’s latest 28nm leading edge semiconductor process technology which enables high performance mobile applications.
To sum up, this trip to Taiwan was definitely a very interesting one as it provided a closer look behind the curtains of some of the leading technology companies in the world. The acquired insights will surely help us to select tomorrow’s winners in some very specific subsectors of the technology value chain.
I thought it would be appropriate to finish this piece by referring to Thomas L. Friedman who has often stated that Taiwan is his favorite country in the world. His argument goes as follows: “Taiwan is a barren rock in a typhoon-laden sea with no natural resources to live off (it even has to import sand and gravel from China for construction), yet it has the fourth-largest financial reserves in the world. Because rather than digging in the ground and mining whatever comes up, Taiwan has mined its 23 million people, their talent, energy and intelligence – men and women. Taiwan has no oil, no iron ore, no diamonds, no gold, just a few small deposits of coal and natural gas and because of that they developed the habits and culture of honing their people’s skills, which turns out to be the most valuable and only truly renewable resource in the world today. Or as my Indian-American friend K.R. Sridhar, the founder of the Silicon Valley fuel-cell company Bloom Energy, likes to say ‘When you don’t have resources, you become resourceful’. Knowledge and skills have become the global currency of 21st century economies, but there is no central bank that prints this currency. Everyone has to decide on their own how much money they will print. Sure, it’s great to have oil, gas and diamonds; they can buy jobs. But they’ll weaken your society in the long run unless they’re used to build schools and a culture of lifelong learning. The thing that will keep you moving forward, is always what you bring to the table yourself.”
Sources: Macquarie, Aaron Chaze, Acer, CLSA, The New York Times, TSMC