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Taiwan's tech industry feels pinched

Although Taiwanese officials remain optimistic about the island's future as a high-tech hub, the country's technology-driven economy clearly is hitting a bump in the road.

TAIPEI, Taiwan--Although Taiwanese officials remain optimistic about the island's future as a high-tech hub, the country's technology-driven economy clearly has hit a bump in the road.

Taiwan's tech industry is being pinched on two sides. First, a downturn in computer spending worldwide is hurting Taiwan's tech companies, which make the components that go inside the bulk of the world's computers. Second, more and more of the manufacturing of those goods is being moved across the Taiwan Strait into mainland China.

Although Taiwan-based companies make 90 percent of the world's scanners and the bulk of monitors, keyboards, modems and mice, much of the manufacturing work has already moved outside the country. Restrictions keep most production of notebook computers and semiconductors on the island, but most other manufacturing is moving to China, where labor and land are cheap.

Even notebook production, a crown jewel of Taiwan's manufacturing output, appears headed for the mainland.

At this week's Computex, the world's third-largest computer show and the showcase of Taiwan's high-tech industry, the island's boosters are trying to put a good face on the slowdown.

"In the face of economic sluggishness, Taiwan's manufacturers are faring well," said Chih-Peng Huang, president of Taiwan's External Trade Development Council, known as CETRA. "When we see layoffs and cutbacks around the world, I'm sure a lot of manufacturers will rely on Taiwanese" companies to manufacture their goods.

And while it is not clear if there is more or less business being done at this year's Computex, Huang points out that the number of companies exhibiting increased 4 percent, to 1,071.

But expectations of a slowdown are all around.

Jobless rate to rise
Unemployment still hovers at just below 4 percent, but officials say it may head up as the economy worsens and the slow summer season approaches.

"I think it will rise because there is a structural change," said Victor Tsan, managing director of the Market Intelligence Center at Taiwan's Institute for Information Industry.

An article in Taiwanese newspaper China Post notes that the value of Taiwanese stocks is at a 10-year low, as measured by the ratio of companies' stock prices to earnings. The average company now trades at 16 times earnings, down from prices of more than 60 times earnings in the early 1990s.

By contrast, shares of companies based on the mainland are now in the 60s, more than 10 times the amount those companies were valued just two years ago.

According to Tsan's estimate, the mainland has already surpassed Taiwan to become the third leading manufacturer of technology hardware. China produced $25.5 billion worth of computer goods last year, up 38 percent, Tsan said. By contrast, Taiwan produced $21 billion worth, up just 10 percent.

However, the economic relationship between Taiwan and China--like the political one--is complex. China itself is a growing market for Taiwan's tech goods and has somewhat helped offset lower computer spending from North America, which last year consumed nearly 39 percent of the computer goods produced here.

First International Computer, a leading Taiwanese motherboard maker, said China represents an increasing source of sales--as well as labor. Gene Sheu, president of FIC's networking and information group, said the mainland now makes up about 5 percent of its business but could account for 10 percent by next year.

"The Chinese market is growing very fast," Sheu said.

Leaning on each other
Likewise, Taiwan's presence is felt quite heavily on the mainland. Yuanqing Yang, CEO of Chinese computer maker Legend Holdings, said Monday his company still gets all of its laptops, 80 percent of its handhelds, and 40 percent of its motherboards from Taiwan.

And, for its part, Legend is not looking to take over anyone's turf. Yang said the company is focused entirely on its own market for the next several years. It is not looking to serve as a manufacturer for other brands or to offer its products overseas.

Meanwhile, analysts are still projecting growth for Taiwan's computer-making industry--but at a significantly lower rate than in years past.

This year, Tsan estimates that Taiwan's hardware industry will grow 15 percent, producing just north of $54 billion worth of goods. However, his organization projects growth in 2002 will be only 9 percent and will slow to 7 percent in 2003.

Investment in China by Taiwanese companies makes sense, trade officials say, so long as it is done intelligently. Although such investments remove capital from the island's economy now, Huang said, they could pay off down the road.

"In the long run, if we invest correctly--which means that the Taiwan IT industry will benefit--theoretically the capital will return to Taiwan," Huang said. "I think most of our companies are very rational...If companies are looking for cheap labor and cheap land, it is justifiable to move production to the mainland."

Huang said Taiwan must look to become a design center and hang on to the parts of its manufacturing base with the highest value.

At the same time, Tsan said, Taiwanese companies must expand their efforts in other markets such as software development, telecommunications gear and optical components.

Even with such moves, he does not believe Taiwan will be able to repeat the rapid rate of growth from recent years.

"I'm afraid the growth won't be as high," he said.