Asia Tomorrow

Will China brands short circuit Taiwan’s tech industry?

A worker carries computer mice at the Logitech International SA factory in Suzhou, China.
Nelson Ching | Bloomberg | Getty Images

A swift rise in competition from China threatens an important pillar of Taiwan's economy, according to Barclays: the tech hardware industry.

Taiwan is home to global brands including smartphone manufacturer HTC, PC maker Acer and dozens of Apple component makers and has long been a world leader in tech hardware manufacturing.

However, Taiwan's tech companies face increasingly tough competition from brands like Lenovo, Huawei and ZTE in China due to their home market advantage and abroad due to innovative marketing strategies and improving retail distribution channels. Success in China, the world's largest tech product market, is crucial.

"[Mainland] companies are taking market share in China away from the Taiwan companies, and some of these China companies have even been qualified as suppliers to major customers such as Apple," Barclays' analysts led by Kirk Yang wrote in a report published on Wednesday.

"Besides their home-field advantage, the Chinese brands are now making high-quality, not just low-priced, products. China's government has supported the domestic brands given that it has banned non-Chinese products in such areas as servers and telecom equipment," Yang said.

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Furthermore, Taiwanese tech firms no longer enjoy a low-cost manufacturing base in China given rising wages and yuan appreciation.

Tech supply chain moving to China?

Chinese component makers are fast-movers, said Yang. They arehighly adaptive to market changes and new business opportunities, and are gaining share in traditional fiefdoms of Taiwan suppliers, especially batteries, casing, camera lens, handset antennas and LEDs.

"We believe that the rise of China's supply chain could be a disruptive force to some second-tier companies in Taiwan's supply chain, which lack any differentiating technology, scale or close relationships with China's domestic brands," he said.

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The number of Chinese component makers on Apple's 2013 direct supplier list rose to 12 from 7 in 2011. The total unit value of the components they supplied rose to $21.3 from $14.5, accounting for 11 percent of the iPhone bill of materials versus 7 percent in 2011, according to Barclays' estimates.

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"Chinese component makers are taking market share from their Taiwan counterparts not only based on price but also on service intensity and aggressive investment in R&D and capital expenditure, while China's government is also helping by offering subsidies and tax incentives," Yang added.

Turning the industry around

The future of Taiwan's tech hardware industry hinges on consolidation and government intervention, Barclays said.

"In the absence of innovative measures - like the Hsinchu Science Park project in 1980, or industry consolidation to stop price wars and improve economies of scale - it is hard for us to be long-term positive on Taiwan's tech hardware industry," the bank said.

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Nicknamed Taiwan's "Silicon Valley", the Hsinchu Science Park was the first government planned industrial park focused on IT created to mitigate a brain drain from the exodus of graduates from local universities.