These Taiwan manufacturers, such as Wistron, a contract producer of desktop and laptop computers, and Asustek Computer, a major supplier of printed-circuit boards, handle the business of companies including HP, IBM, Microsoft and Sony.
Taiwan's labor costs are higher than those in nearby countries, and contract manufacturers such as Singapore-based Flextronics and Canada-based Celestica are edging into the market, putting Taiwanese manufacturers at risk. Meanwhile, the world's high-tech markets are in the grip of a wrenching slowdown.
The first response of Taiwan's original-design manufacturers was to migrate their more labor-intensive production capacity to China. Our research with several of Taiwan's leading high-tech players indicates that their next move should be to cut their operating costs. The move to China has already proven to be beneficial--the original-design manufacturers quickly reduced their total manufacturing costs roughly 10 percent to 30 percent, depending on the type of business. Relocation not only helped lower their labor costs in general but also provided them with access to China's large pool of engineering talent and with proximity to a big and rapidly growing domestic market.
Nonetheless, Taiwan's original-design manufacturers have yet to regain a comfortable and sustainable competitive position. Global contract manufacturers also have moved their operations to China, and some are ratcheting up the pressure by introducing their own design services, one of the main sources of competitive differentiation for Taiwan's high-tech players.
Meanwhile, mainland Chinese producers are rapidly acquiring competitive manufacturing skills in such commodity products as computer mice, keyboards and power supplies--markets dominated by Taiwan.
What should Taiwan's high-tech companies do next to remain competitive? Materials, which form as much as 80 percent to 90 percent of their total costs, are competitively priced, courtesy of the purchasing clout of customers such as HP and IBM. But global contract manufacturers enjoy even larger scale benefits, and therefore bigger savings in purchasing costs, than do Taiwan's original-design manufacturers.
Taiwanese electronics manufacturers do, however, control their own operations, which aren't as efficient as those of their European, Japanese and U.S. competitors. One leading high-tech manufacturer in Taiwan, for example, has an overall equipment-effectiveness level of only 84 percent, far behind the world-class benchmark of 95 percent; in other words, the company's equipment, on average, remains idle up to 16 percent of the time because of production bottlenecks.
For a typical PC, the $20 to $55 spent on manufacturing overhead may seem small compared with $500 for materials, but reducing it may be the only way for Taiwanese original-design manufacturers to sustain their competitiveness.
Taiwan's labor costs are higher than those in nearby countries.
Many of the world's best manufacturers have taken that route, but most of Taiwan's high-tech original-design manufacturers, accustomed to years of fast growth and large profit margins, have felt no need to undergo the comprehensive changes in organization that a lean-manufacturing program requires.
But as growth slows and margins shrink, the need for such programs becomes more and more pressing. Our experience with several Taiwanese high-tech manufacturers shows that lean techniques can pay off--and in a big way.
In just nine months, one leading electronics manufacturer raised its productivity by 52 percent and cut its throughput time and inventory level by 78 percent and 81 percent, respectively. As a result, the company reduced its manufacturing-overhead costs by almost 65 percent, to $19 a unit, from $53. Some original-design manufacturers have boosted their net income by more than 80 percent after implementing lean-manufacturing programs over a similar period.
Lean techniques can pay off--and in a big way.
Despite these difficulties, lean manufacturing in China offers substantial benefits to original-design manufacturers. Few may feel that they are in immediate danger, but several depend on only two customers for up to 60 percent of their revenue. If Taiwanese electronics manufacturers can't match their overseas competitors' operational productivity, their share of the world's markets for high-tech products may shrink surprisingly quickly.
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