How can Taiwanese companies fight back against the monopoly of electronic components and the one-sided dominance of the mainland?

In 2015, the structure of the global electronic parts supply chain has undergone a major change. In terms of output value and regional share (Figure 1), the United States is far ahead in the connector market, South Korea is the leader in the field of solar cell modules, Japan leads the market in passive components and LED technology , and Taiwan has strong technical strength in the field of printed circuit boards, with a global share of up to 35%. Not only printed circuit boards, Taiwan is also among the top three suppliers in the world in the four major components of passive components, connectors, solar cell modules and LEDs , maintaining strong competitiveness in the field of electronic parts.

The four-power structure of the United States, South Korea, Japan and Taiwan has begun to loosen

In recent years, mainland enterprises have actively launched offensives and have been catching up in the fields of solar cell modules and LEDs . In 2014, the global shares of these two fields reached 12.4% and 16.0% respectively, approaching the leading countries of Japan, South Korea and Taiwan.

In the future, with the continued support of policies and markets, mainland enterprises are expected to further expand their influence in the fields of solar cell modules and LEDs, and are expected to strengthen their offensive in weak areas such as printed circuit boards, passive components, and connectors. In the next few years, the old industry structure in which the four major powers (the United States, South Korea, Japan, and Taiwan) hold a high share of electronic components may change.

Figure 1: The four-power electronic component market in the United States, South Korea, Japan and Taiwan is beginning to loosen

Source: Industrial Technology Research Institute, Industrial Economics Center (April 2016)

Red supply chain integrates the strategy of Taiwanese enterprises

In the past one or two years, mainland enterprises have continuously implemented equity participation and merger strategies in Taiwan enterprises in the three major components of connectors, passive components, and printed circuit boards. In the connector field, Luxshare-ICT, a wire manufacturer that has recently emerged in the mainland, has implemented an equity participation strategy. By strengthening RF connector technology and experience and improving production efficiency, it has acquired 31% of the shares of Speed ​​Tech, a representative RF connector manufacturer in Taiwan (Figure 2).

Although Taiwan is worried that accepting the mainland's equity participation will intensify the merger of Taiwanese companies by mainland enterprises, the results show that this is just a groundless worry. After accepting the equity participation, Xuande can invest more operating resources in the technical development of products such as USB3.1 and USB Type-C connectors. With the help of capital cooperation, the company has obtained orders from Luxshare Precision's customers, such as Xiaomi, Lenovo, Coolpad, TCL, OPPO and other mainland mobile phone brands, creating conditions for entering the downstream market.

Under the premise of adhering to intellectual property rights and business rights, Taiwanese manufacturers have established complementary cooperative relationships with Chinese companies through reasonable resource sharing, thus exerting synergy effects. In 2015, despite the global economic downturn, Luxshare Precision and Xuande achieved sales growth, proving the effectiveness of cooperation.

From a strategic perspective, the cooperation between mainland and Taiwanese manufacturers in the connector field can be regarded as the integration of upstream and downstream products. With the help of the cooperation relationship, enterprises on both sides of the strait conduct comprehensive design of connectors and wires, which are their respective strengths, to create an overall product solution, thereby highlighting the comprehensive competitiveness of product technology.

In the field of passive components and printed circuit boards, Chinese companies have also adopted the same strategy. Fenghua High-Tech, a mainland thick film chip resistor manufacturer, acquired 35-40% of the shares of Guangjie Technology, a Taiwanese thin film chip resistor manufacturer. Founder Technology Group, which owns HDI (High Density Interconnect) circuit board manufacturers, also plans to conduct capital cooperation with Taiwanese rigid flexible circuit board manufacturers. From these trends, it can also be seen that Chinese companies must not only integrate upstream and downstream products, but also start from the two directions of "integration of high-end products and low-end products" and "re-strengthening of horizontal product portfolios" to comprehensively improve the competitiveness of the industry.

Figure 2: The strategies of Taiwanese enterprises in integrating the red supply chain are becoming more flexible

Source: Taiwan Industrial Technology Research Institute IEK (April 2016)

To resist the pressure of rising Chinese enterprises, international giants are accelerating mergers and acquisitions

Chinese companies have been actively investing in Taiwanese companies. This trend has not only put invisible pressure on major international manufacturers, but also had a significant impact on the mergers and acquisitions of leading companies in the United States, Japan and South Korea.

Take connectors as an example. The world's top four TE Connectivity, Amphenol, Molex and Delphi have recently acquired 3 to 5 connector manufacturers on average each year to expand their influence, hoping to build a barrier of scale benefits. The most noteworthy thing is that FCI, one of the acquisition targets, was once a representative leading manufacturer in France.

FCI ranked sixth in global market share in 2011. However, due to the missed opportunity to implement acquisitions, the company fell out of the top ten in 2012 and has never recovered since then. Its product variety and competitiveness have also declined. Recently, the company transferred its automotive connector division and Singapore business division to Delphi and Amphenol respectively.

Overall, after the merger of the world's top four companies, the combined market share of these four companies is expected to exceed 50% in 2016. If these companies build more difficult barriers in the use of connector products, it will undoubtedly be a huge threat to small and medium-sized manufacturers.

The reason why large connector manufacturers are keen on mergers is, first, to expand the scope of product applications and build scale benefits and competitive barriers in operations. Second, to expand production capacity. Let's take passive components as an example. Japan's Murata Manufacturing and South Korea's Samsung Electro-Mechanics have invested heavily in building MCLL factories and production lines. This is very similar to the practice of memory manufacturers in the past by expanding production capacity to cause price destruction and force competitors to withdraw from the market. The share of these two large manufacturers alone is close to 50%, which will inevitably lead to increased market monopoly pressure and increase the difficulty of survival for small and medium-sized enterprises.

Further in-depth observations reveal that Japanese and Korean manufacturers are not blindly expanding their production scale to reduce costs. Take Japanese printed circuit board manufacturers as an example. Japanese manufacturers have recently failed to expand their market as expected due to high product costs. In the global market share, Japanese companies account for 25% and Taiwanese companies account for 35%. Japanese companies are definitely not the first. However, it must be noted that Japanese companies can best play their advantages outside the production line. In order to implement cost management and maintain competitiveness, these companies have closed some of their domestic production lines with higher costs and accelerated the relocation of factories to emerging markets. This approach is more stable and can be said to be the safest. From this, we can see the willingness of large companies to implement a stable strategy.

Figure 3: International giants are accelerating mergers to resist the pressure of rising Chinese companies

Source: Taiwan Industrial Technology Research Institute IEK (April 2016)

New demands driven by new products

The mergers and acquisitions of the major companies mentioned above indicate that this industry has entered a mature stage to a certain extent. In 2015, the growth of the global electronic components industry was only the same as the previous year (the total output value decreased slightly by 0.03%). Looking back, from 2011 to 2014, the annual growth rate of Taiwan's electronic components fell below 3% in the output value growth rate (calculated on an annual basis) except for 2014, when it achieved an excellent result of 8.7%. This is because the sluggish macro-economy has affected consumers' purchasing power, and the 3C (computers, home appliances, and communication equipment) market has entered a downturn.

Looking back at 2015, the 3C industry spent almost the entire first half of the year dealing with inventory. Fortunately, Intel's new processor (Skylake) and Apple's "iPhone 6s/iPhone 6s Plus" were launched from July to September, and with the support of good sales, they offset the deterioration of the economic situation in the first half of the year to a certain extent. However, looking at the entire industry, only the iPhone supply chain achieved stable growth, and it is an indisputable fact that the sales growth rate of 3C products has declined.

In the future, for the existing 3C industry, components are expected to become the driving force of growth. The development of smartphones towards 4G has doubled the number of inductors equipped, and the development of mobile phones and wearable terminals towards thinness and lightness has increased the demand for flexible circuit boards, probes, and micro board-to-board connectors. The increasing popularity of smartphones equipped with dual cameras has expanded the use of optical lenses. New technologies and new standards such as fingerprint recognition sensors and USB3.1 Type C connectors have created new demands related to component technology.

IEK Viewpoint

Strategy 1: Strengthen cooperation with mainland enterprises, rather than confrontation

As the market enters a period of slow growth and the industry accelerates restructuring, Taiwan's electronic component manufacturers are forced to rethink their strategies to overcome difficulties. A feasible breakthrough is to face the rise of mainland companies and establish a positive cooperative relationship with them instead of confronting them.

As a short-term strategy, the two sides can establish an equal cooperative relationship. On the premise of upholding intellectual property rights and business rights, through capital cooperation, joint ventures and comprehensive product design, to develop technology and productivity, distribution channels, and downstream brand export locations, to build a complementary cooperative relationship.

In the long run, when leading manufacturers in mainland China gain strong power, the conditions for complementary cooperation may be biased towards one side or disappear. Therefore, Taiwan's industry needs to look to the future and formulate a medium- and long-term strategy.

For example, the mainland is now promoting the policy of "promoting entrepreneurship and innovation", and many small and medium-sized manufacturers with niche technologies have emerged. Although these emerging enterprises have independent technologies, they lack funds and cannot continue to carry out research. Taiwanese companies can find such small and medium-sized manufacturers with excellent technical strength in the mainland, and help them cultivate core technologies through equity participation when they are unable to expand their business scale independently, and provide moderate assistance in production, production scale, and funds, and ultimately achieve resource sharing to a certain extent. That is, through long-term investment, absorb the knowledge and experience of niche technologies owned by emerging small and medium-sized enterprises in the mainland, and achieve common development by providing assistance in business resources.

Although most of these small and medium-sized companies in the mainland only have a single technology, some of them have technologies related to the Internet of Things (IoT) market, such as railways, factory automation, automobiles, and Internet data centers. If Taiwan's component manufacturers share business resources with these companies through medium- and long-term assistance, they can not only accumulate niche component technologies, but also share the huge domestic demand market of IoT and infrastructure construction in the mainland with Chinese manufacturers in the future.

From the perspective of market sales, if Taiwanese companies join hands with Chinese companies, when product technology is established and the market is formed, Taiwanese companies will be able to share the local IoT and infrastructure construction domestic demand market with Chinese companies. They can also play to Taiwan's strengths in developing overseas markets, using the niche technologies accumulated in previous collaborations with Chinese companies as weapons to enter overseas emerging markets and win business opportunities in infrastructure construction in the "Belt and Road" economic circle proposed by China.

Strategy 2: Make integrated components, new standard units, and creative applications the engines of new development

For Taiwanese manufacturers, product technology is another feasible strategic entry point. That is, in the process of forming the product form and specification parameters of the components, they will target key technologies and actively launch products.

For example, in line with the new trend of IoT, future components may need to support sensors that can sense objects at any time. New demands may also arise in the form of wireless sensor modules that integrate sensing, computing, transmission, and power management units. In addition, as smartphones and wearable terminals become thinner, products with more active and passive components embedded in printed circuit boards are expected to continue to emerge.

New technologies such as Apple's fingerprint sensor and skin conductivity sensor have been launched on the market, and new standards such as USB3.1 and USB Type C connectors are tapping into new market demand. These are important forces that lead the component industry and promote product structure and technological innovation. Taiwanese manufacturers must pay attention to these dynamics, judge the future situation more carefully, pay attention to the technological changes of related components and products, and get closer to the perspective of application needs. In addition, they must closely follow the development plans of large international manufacturers and international standardization organizations, adopt product strategies that match their own competitive conditions, firmly grasp the direction of development, and create new development opportunities for the electronic component market.

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