A destabilising influence on the global technology industry, Taiwan remorselessly cuts costs and reduces product cycle times to satiate the world’s demand for ever more, ever changing electronics. Indeed, much capital has been destroyed by the continuous waves of seismic technological change emanating from this island nation.
That being said, Taiwan has enabled our consumer electronics dream to become a reality. We expect our electronic devices to become cheaper every year, and Taiwan’s process engineers make this possible, giving physical form to designs from the world’s best R&D departments.
Indeed, in the microprocessor industry, TSMC (Taiwan Semiconductor Manufacturing Company) is now behind only Intel and Samsung in scale. The role of fabricating semiconductors is now split between these latter two remaining independent giants and the rest, which share their resources as a partner with TSMC or GlobalFoundries. What’s more, the surrounding ecosystem of component suppliers, materials suppliers, logistics, assembly and research is well established and thriving.
Changing the face of computing
In the consumer computing world, a revolution has already burst through the status quo of twenty years. Smartphones and tablets have overtaken PCs as the main consumer computing device. Where Windows and Intel (‘Wintel’) used to dominate, Android and Apple now hold sway. Touch devices will have a growing effect as a post-Wintel workforce bring their social digital habits into working practices.
Contract manufacturers, then, having dropped allegiance to Intel, have instead become reliant on either Apple or Android. And as the world becomes saturated with smartphones, the limited number of shapes and sizes of models from a multitude of suppliers indicates that the market has already ‘commoditised’ (i.e. devices have broadly become simple commodities in the eyes of consumers). Margins are likely to trend down, as growth stalls and competition for market share intensifies.
Hyperscaling the tech industry
In business computing, a similar changing of the guard may be afoot. A few of the largest internet firms are rewriting the rules of IT procurement, with the term ‘hyperscale’ being used more and more to describe the likes of Google, Facebook, Amazon and Baidu. These companies are big enough to engineer their own standards and order their own data centre equipment direct from manufacturers, cutting out the traditional middle-man ‘box shifters’ such as HP and Dell.
Hyperscale players buy cheaper kit than most businesses can get, and then rent it out as low-price public cloud computing. Getting more efficiency through sharing infrastructure like this is now possible thanks to virtualisation of computing tasks (allowing one physical computer to emulate the operations of many as ‘virtual machines’).
Further, the benefits of this look set to accrue to the hyperscale providers and businesses, and away from the traditional vendors.
For the Asian tech industry players like Taiwan, then, keeping a fair stake in the value chain is tough, especially with little pricing power and differentiation. Scale is therefore key, and flexibility is necessary for survival. Indeed, this is a story of survival of the most adaptable.
In this fast paced sector, with participants in a constant struggle for the top positions, it can seem hard to find strong candidates for a long-term investment horizon. However, the changes being wrought with the help of the industry drive value creation for those who can harness efficiency and progress.
Iain McNaught is a global equity analyst at Sarasin & Partners
