LAPTOP PCS - MADE IN TAIWAN NO LONGER

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004719

SIPDIS

DEPT FOR EAP/TC
DEPT PASS AIT/W

E.O. 12958: DECL: 11/22/2015
TAGS: ECON EINV CH TW
SUBJECT: LAPTOP PCS - MADE IN TAIWAN NO LONGER

REF: A. 04 TAIPEI 3464

B. TAIPEI 343

C. TAIPEI 2743

D. TAIPEI 2869

E. TAIPEI 4624

Classified By: AIT Deputy Director David J. Keegan, Reason 1.4 d

Summary
--------------


1. (SBU) Taiwan firms had a 72.4 percent share of global
laptop manufacturing in 2004, but more than 90 percent of
their laptop output was assembled in the PRC. The rapid
transfer of laptop PC assembly from Taiwan to the Mainland
has been driven by the movement of component suppliers and
customers to the PRC, as well as by cheaper labor and land
costs. These same forces are increasing pressure on
Taiwan's most advanced industries, semiconductors and TFT-
LCD panel manufacturers, to move production to the PRC as
well. While manufacturing has moved to the Mainland,
Taiwan firms have generally maintained research and
development, finance and management operations in Taiwan.
Some Taiwan IT firms have also sought to develop their own
brand name as fierce price competition has driven down
manufacturing profits. Taiwan can emerge as a stronger,
more mature economy after the large-scale transfer of
manufacturing operations to the PRC, but many of the
regulations governing Taiwan's economic relations with the
PRC have reduced its opportunity to fully utilize its
strengths. End summary.


Still a Powerhouse
--------------


2. (U) Taiwan dominates global laptop PC manufacturing and
remains a global IT manufacturing power. Taiwan firms had
a 72.4 percent share of global laptop manufacturing in

2004. According to Taiwan's Market Intelligence Center, a
industry research firm, Taiwan firms also had market shares
that topped 50 percent for seven other categories of
components and peripherals, such as motherboards (78.3
percent),LCD monitors (67.6 percent),cable modems (66.3
percent),and WLAN equipment (83.0 percent).

Manufacturing Moving West...
--------------


3. (C) However, Taiwan firms continue to move IT
manufacturing operations from Taiwan to the PRC. In 2005,
about 80 percent of IT hardware produced by Taiwan firms
will be made in the PRC according to Sean Kao, a consultant
at MIC. He predicts that this ratio will not increase much
more because most of the Taiwan factories that can benefit
from transferring to the Mainland have already moved. Kao
estimates that Taiwan firms currently account for 70 to 90
percent of the PRC's IT hardware output.

For Laptops...
--------------


4. (C) Taiwan media reported in September that when First
International Computer Co shut down its last factory in
Taiwan, no laptop PC assembly lines were left on the
island. The report was exaggerated. ASUSTeK Computer Inc.
President of the Sales and Marketing Group Jonathan Tsang
told AIT that his firm still maintains about half of its
laptop production in Taiwan. The firm expects to produce a
total of 4 million laptops this year. Chen Li-hen, a
laptop PC industry analyst at MIC, told AIT that Wistron,
another major Taiwan producer of laptops also maintains
significant production in Taiwan. Nevertheless, the speed
and scale of the transfer of Taiwan's laptop assembly
industry to the PRC has been astonishing. According to
MIC, Taiwan manufacturers currently produce more than 90
percent of their laptop PCs in the PRC. Tsang also noted
that ASUSTeK will move its remaining laptop production to
the PRC next year when its new factory near Shanghai opens.
The near total evacuation of Taiwan's laptop PC
manufacturing industry is even more remarkable considering
that until January 2002 Taiwan prohibited any laptop
manufacturing investment in the PRC. (Note: The extent to
which this prohibition was circumvented is difficult to
assess. Luis Huang of Taiwan's Investment Commission (IC)
told AIT/T that before the prohibition was lifted, IC
investigated several cases of minor infractions and imposed
small fines on some firms. End note.)
And Other IT Hardware
--------------


5. (SBU) Other categories of IT hardware have also seen
rapid migration to the PRC. For example, according to
information from MIC, 85 percent of motherboards produced
by Taiwan firms in 2004 were made in the PRC, up from 60
percent in 2002 and 40 percent in 2000. Taiwan firms'
production of LCD monitors in the PRC was also about 85
percent in 2004 up from 65 percent in 2002 and less than 5
percent in 2000. (Note: Investment in manufacturing
facilities for TFT-LCD panels is still prohibited, but
firms are allowed to assemble monitors and other consumer
products. End note.) For cable modems, 72 percent of
Taiwan firms' output was made in the Mainland in 2004.
Approximately 60 percent of WLAN equipment made by Taiwan
firms was produced in the PRC.

Multiple Forces Driving Migration
--------------


6. (C) The rapid transfer of laptop PCs was driven by
multiple factors. Jason Lin, Deputy Spokesman for Quanta,
the world's largest laptop manufacturer emphasized the need
to follow suppliers. Andrew Chen, Vice President for PC
Sales at Compal (the world's second largest laptop
manufacturer),told AIT that many of his firm's customers
have also moved operations to the PRC, increasing the need
to move assembly lines there. MIC's Kao noted the
importance of lower labor and land costs in the PRC, which
is especially important as margins for contract laptop PC
producers have been reduced to very low levels. Quanta and
Compal both expect to have gross margins of 6 percent for

2005.

Creeping Further Up the Chain
--------------


7. (C) These same forces are building pressure for Taiwan's
most advanced industries to move production to the PRC as
well. Taiwan still prohibits any investment in the
manufacturing of TFT-LCD panels. It has strong
restrictions on semiconductor manufacturing as well. To
date, Taiwan has approved only one semiconductor
manufacturer, Taiwan Semiconductor Manufacturing Company,
to build a factory, which can only produce semiconductor
chips with technology that is three generations behind the
most advanced available (ref B). Taiwan regulations also
prevent semiconductor packaging and testing firms from
investing in the Mainland (ref C). Taiwan firms continue
to push the government to liberalize these categories of
investment, arguing that they need to be in the PRC to be
close to their customers. Some argue that unless they can
gain a stronger foothold in the PRC soon, it will be
difficult to compete against rapidly growing PRC firms.
Mainland Affairs Council officials have told AIT that
Taiwan may liberalize investment in some of these
categories after Taiwan's December 3 local elections.

What's Left for Taiwan?
--------------


8. (C) The challenge for Taiwan's leaders in the face of
the rapid migration of manufacturing is to ensure that the
information technology industry continues to bring economic
benefits to Taiwan. One segment of the IT hardware
manufacturing process where Taiwan can still compete with
the PRC is research and development. Compal's Chen pointed
out that his firm maintains all of its research and
development activities in Taiwan and has no plans to move
them to the PRC. Many firms want to keep these activities
in Taiwan because they can better protect their
intellectual property here. Taiwan also has a highly
skilled workforce. However, many firms complain of
shortages of workers in high technology industries and have
urged the Taiwan government to loosen restrictions on
bringing employees from elsewhere, including the PRC (ref
D).


9. (C) Most Taiwan IT manufacturers have also kept their
corporate headquarters in Taiwan. However, Taiwan firms
have increasingly sought financing in the PRC, Hong Kong,
or elsewhere for their Mainland operations, sometimes to
avoid Taiwan restrictions on cross-Strait investment.
MIC's Kao also commented that more Taiwan IT firms will
move their corporate headquarters to the PRC as Mainland
operations become more central to their overall business
strategy.


10. (C) Some observers argue that as manufacturing
operations move to the Mainland, Taiwan IT firms need to
enhance the sales of products that carry their own brand
names. In the past, Taiwan IT firms have concentrated on
manufacturing products under contract from foreign name
brand firms. However, fierce price competition has forced
down margins for contract manufacturing of many IT goods,
and some companies have turned to marketing their own
brands to increase profits. Acer has been the most
successful firm in this area, becoming the world's number
five PC brand by market share in 2004. ASUSTeK's Tsang
told us that about half of his company's laptop PC
production is sold under the Asus brand name and that
percentage is expected to grow. The firm plans to separate
contract manufacturing and brand name operations into two
firms sometime in the next three years, following a similar
model to Acer's restructuring in 2000.

Comment - Holding Back Taiwan Not the PRC
--------------


11. (C) Taiwan firms can increase their profits by moving
manufacturing to the Mainland, but at the same time Taiwan
can benefit from this transfer by evolving from an economy
specializing in low-cost manufacturing to a service-based
economy building on strengths in finance, research and
development, and marketing. Unfortunately, many of the
regulations governing Taiwan's economic relations with the
PRC have reduced its ability to fully utilize these
strengths. Limits on total investment encourage firms to
seek financing locally in the Mainland or elsewhere (ref
E). Cross-Strait financial restrictions further impede
Taiwan's development as a regional financial center.
Restrictions on the ability of Taiwan firms to employ PRC
workers in Taiwan make the island less attractive for
research and development activities. The lack of direct
air links discourages Taiwan firms from managing PRC
operations from Taiwan. As long as political
considerations override economic priorities, Taiwan's
cross-Strait regulations will hinder Taiwan's ability to
face the challenge of China's economic growth and become a
stronger, more mature economy.
Paal