HTC – Bye, Bye Taiwan Miracle?

1

Even today, Taiwan is a political mystery to me – and I believe same goes for the rest of the world. Its founding as a state-like formation with its own constitution begins somewhere between 1912 and 1952. In fact, it fulfills all requirements to be a state according to the Convention of Montevideo, but is not accepted as such. To date, it still proclaims to be the one true Republic of China, whereas it is only recognized by 21 minor UN member states. It is also not clear who the beholder of administrative authority over Taiwan is. 2

Even though it barely is recognized by any country in the world, Taiwan still remains strong trading relationships to major economic powers, such as the US or the European Union – and whereas the per capita income of a Taiwanese in the 1960s were only 200$US, it is now the 28th wealthiest and 19th largest trading economy in the world. Last year, the Taiwanese foreign exchange reserve grew to a record-high of 412 $US b., which makes Taiwan also the 6th largest holder of Forex Reserves. As many global companies have emerged within the tough political environment of Taiwan,I have picked out one in order to take a closer look at economic issues on a microeconomic-level.3 – HTC. The company started in 1997 as OEM producer of electronics and introduced its own brand in 2006. It was once the leading Smartphone supplier in the US, but it lost almost half of its 10.2% market share in 2012 and is now at 5.7%. 4

As I looked at both, HTC and Taiwan, I started to wonder how much these two entities really have in common and where a company like HTC starts to fit in the bigger picture of global politics.

One Step Closer to China

The Taiwan Miracle describes the rapid rise of Taiwan from an agricultural economy into an industrialized society. But the 20th century is over, and just as Japanese firms have nowadays outsourced the vast majority of their electronics production, it is also that Taiwanese companies, like Hon Hai Precision, switched their production fully over to China. The service industry accounted to 70% of the Taiwanese economy in 2008 and yet companies like HTC are still reluctant to outsource their production to lower-cost countries.

Expanding investment in China allows Taiwanese industry to develop their scale easily,…

Hu Sheng-Cheng, former chairman of the government’s Council for Economic Planning and Development (CEPD)

From a historical point of view, China and Taiwan had a truly horrible relationship for many decades, but especially the latter is now trying to reach a closer trade relationship. Just at the beginning of this year, both governmental parties had their first official encounter since 65 years of mutual neglection. Additionally, the economic activities between both countries have nearly doubled since the presidency of Ma Ying-jeou in 2008 and cross-strait 5 economic policies have been loosened in favor of mutual cooperation. Now, 40% of Taiwan’s exports and 80% of its foreign investments go to China.  6 Also about a third of HTC’s sales in the last quarter of 2013 accounted to the Chinese market. Critics believe that Taiwan itself is becoming over-depending on China as they are increasing their business relationship.

Taiwan is still considered as one of the Asian Tiger states, but now it seems like they are merely accommodating their despised brother, the Peoples Republic of China (PRC). HTC faces, just as Taiwan the danger of a takeover by upcoming and financially liquid Chinese companies such as Huawei, ZTE and Lenovo.

The Core Solution – Taiwan is, like Japan, heavily reliant on resource imports. The industry is almost solely exporting High-tech (35%) 7 and capital intensive products such as office telecommunications equipment, machinery, transport equipment and chemicals. The GDP per capita has risen up to as much as 39,400$US – terribly high labor costs to produce something like smartphones in the current market environment.

HTC Stock Development. When comparing the stock chart of HTC and the industrial production of Taiwan, there is an implied correlation of its rise and decline states to be noted. 8                

The above chart also shows that Taiwan’s industrial production currently suffers, just in contrast to their fellow Tiger State Malaysia 9

The Do’s

Shift towards upstream business activities10

Taiwan is explicitly well ranked for their R&D capacities, whereas China is ranked very low. Also, HTC is one of the best-in-class technology developers as their products regularly account for 20% of the best smartphones globally. In fact, they spend a lot of revenue for R&D – 5.74% in 2012. This is where Taiwan’s strength lies, they should focus on development activities.

On the contrary, HTC has huge problems with its supply chain and the cost control as they are producing at their own facilities in Taiwan. HTC is frequently facing drastic production layoffs because the phones are not selling as intended. In the future, HTC might give the production responsibility to Foxconn / FIH Mobile Ltd., or Winstron Corp. This would mean that they outsource their production activities to another Taiwanese company to produce on the Chinese mainland. The same production/design separation is successfully used by Apple to increase their profits. 11

When it comes to marketing, Taiwan has to improve a lot! HTC especially struggles with its image – to ensure that their products are selling as intended in the future, they must put more emphasis on the brand image. HTC has just pumped up their marketing budget with 1$US b to launch a campaign with Robert Downey Jr.

http://www.youtube.com/watch?v=OVE1OcfB1E4

What Taiwanese companies need is a stronger brand image, especially to defend their share on the Chinese market. Strong brands make it more difficult to be copied and increase sales. Thus, Taiwan might become less trade dependent and more competitive.

Annual variation of the Taiwanese GDP in 12

The above chart vividly shows, that the Taiwanese GDP growth suffered from a strong decline slope. This has various reasons, but for most this happened because the European debt crisis lead to a declined demand in western countries and thus to lesser demand for Taiwanese products. In that context, a closer trade relationship to China makes sense, but in the end it will be Taiwan that is dependent on China and not the other way around. The Taiwanese government should seek Free Trade Agreements (FTA) with ASEAN and Western countries. Another key aspect is the shift of Taiwan’s industry from high-technology and consumer goods production to capital goods and the service sector – it indicates the serious shift of this country towards an economically developed society. A company like HTC cannot ignore that, it has to adapt to the new situation and must shift their production capacities over to lower wage countries. Taiwan features a flourishing democracy, it is one of the least corrupt states in the world – its economy is actually expected to grow 5.7% in 2014. 13 I say they should forget about the one-China policy and finally become independent. This entails that they stop labeling their country Republic of China (ROP), call the spade a spade and officially name it Taiwan. But in the end, this tiny country should be really careful to keep its independence – some hegemonic country might just trade them in for a rigorous debt cut.

  1. http://www.knowblogs.net/wordpress/wp-content/uploads/2013/09/rdj-htc-finish.jpg.
  2. http://www.taiwanadvice.com/legal_auth.htm.
  3. http://focustaiwan.tw/news/aeco/201310040038.aspx.
  4. http://media.corporate-ir.net/media_files/IROL/14/148697/2012%20HTC_English%28high%20resolution%29.pdf9.
  5. The term ‘cross-straits relations’ refers to the intersecting political, military, economic, cultural and social relationships between Taiwan and mainland China..
  6. http://www.nytimes.com/2014/02/12/world/asia/china-and-taiwan-hold-first-official-talks-since-civil-war.html?_r=0.
  7. https://www.gov.uk/government/priority/increasing-business-with-taiwan.
  8. Source: Yahoo! Finance.
  9. http://www.tradingeconomics.com/taiwan/industrial-production.
  10. http://www.global-production.com/scoreboard/countries/taiwan.htm + http://www.global-production.com/scoreboard/countries/china.htm.
  11. http://allthingsd.com/20131023/htc-seeks-to-outsource-smartphone-production/.
  12. http://www.focus-economics.com/en/economy/charts/Taiwan/GDP.
  13. http://focustaiwan.tw/news/aeco/201309230023.aspx.

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