Does Generic Base Technology Matter?

1. Does Generic Base Technology Matter? Xin-Wu Lin TIER Aug. 4th 2006

2. Contents • Review Taiwan’s successfully industrial upgrading model – the Second-Mover Model • The bottleneck faced recently • Examine the bottleneck from product life cycle and innovation capability aspects • Successful examples • Policy implication

3. Technological regimes/ Products Second mover First mover Second mover First mover Time The Second-Mover industrial development model Second-Mover’s characteristics: • Enter market when tech/products mature, which implies risk averseness. • Imitate, copy, incremental improvement, learning by doing. • Inherit first-mover’s accumulated capabilities, but usually exclude core technologies and competencies at initial stage. • Utilizing accumulated organization capabilities in order to upgrade and up-scale (OEM→ODMOBM, SME→Large Enterprise) • Extract economic rent from scale efficiency, i.e. mass production to lower costs. • Advantage lies in technology know-how, manufacturing and project execution capabilities. Source: Amsden and Chu (2003)

4. Major strategic policies for supporting the model • Selection of opportunities: emerging industries, key technologies • Encouraging investment: The Statute for Industrial Upgrading • Clusters: science parks • Technology sources: from other countries, TDP • Mode of NIS players: Higher Education RD Institutes Industries Foreign Sectors

5. The path of TDP TDP in RD Institutes Advanced techs., key Techs. and components, testing and certification measures Technologies and prototypes Techs. licensing Start-up, HR transfer Industries Markets

6. The strategies in industries under the second mover mindset The industry strategies in the past • Fast catching-up with new technologies－ • Purchase new technologies from advanced countries. • Disassemble and learn fast. • Concentrate on production automation, modularization, job division and process management. • Take orders from international buyers and subcontract to domestic industries. • Expanding new market－ • Main export markets were U.S. and Japan in early period. • Started to diverse and to develop new export markets in later period when products from low factor cost countries penetrated U.S. and Japan markets. • Off-shoring production base－ • Relocate production bases in order to lower production costs • Relocate to countries such as China, South East Asian countries, Central and South American countries and East European countries.

7. Performance in ICT sector

8. Performance in patents

9. The world has changed • Major trends: Globalization, convergence and popularization in ICTs • The benefits from the Second-Mover Model is decreasing • Lower cost: room to further cost down is very narrow. • New market areas or sectors: highly competitive in almost every area and sector. • Catch up with new technologies: there are many quick followers  lower profit margin, shorter earning period.

10. Manufacturing Industry ICT Industry Source:1. OECD, STAN Database, August 2005. 2. DGBAS, National Income in Taiwan Area of Republic of China 1981-2004. 3.MOEA, Industrial Survey & Statistics Yearbook, 1990-2004. 4.TIER (2005). Source:1. OECD, STAN Database, August 2005. 2. DGBAS, National Income in Taiwan Area of Republic of China 1981-2004. 3.MOEA, Industrial Survey & Statistics Yearbook, 1990-2004. 4.TIER (2005). The trend of value-added ratio

11. Some new strategies have been raised • Smiling curve: extending the two extremes; bigger smile • Branding • Participation in forming standards • Creative design • Integrating existing technologies • Follow market needs, and try to create new needs • New business models • Most strategies are akin to first-mover model; they are not the strategies that Taiwanese industries currently familiar with

12. Efficiency Driven Industrial Value Chain Industrial Value Chain Focusing Policy Focusing Policy Marketing/Services Trading Market Openness Market Efficiency Capital Resource Labor Resource Tech acquisition easiness Maintain Efficiency Clustering Knowledge and value innovation IPR friendly environment Technology Independence Manufacturing Manufacturing Design/Development Product Development Technology R&D Market research/ Forecasting Technology R&D Under efficiency driven stage competitiveness can be enhanced by the means of technology acquisition and boosting production efficiency Under innovation driven stage Utilize both demand and supply side economics to shape innovative friendly environment for an unique value innovation The Transformation Model Innovation Driven Value Creating Business Models/ Branding

13. Necessary conditions for applying the First-Mover Model Technological capabilities, spirit of experiment (practice, trial & error) and information on user’s needs are necessary conditions for being in the First-Mover industrial development model Source: Tidd, Bessant and Pavitt (2005)

14. Story of the Giant Bicycles Design Innovation  Brand Value Price Design Innovation Support bike-racing teams World-wide Awards 100% OEM USA market Low price (USD 50) Avg. price rising (USD50100) “Giant” brand Winner Tour de France (2002, 2004, 2005) Avg. price rising (USD 100250) 1972 1985 1998 2002 2006 Industry clustering Cost down Material Innovation Key components Process Innovation Taiwan factory moved out Low price – China High price - Taiwan Production Efficiency Tech driven

15. Story of the tsmc Tech Master & Leading Tech Transfer & Developing Patent Number R&D mastering; No Tech. transfer Tech catch up with IDM’s Patent rapidly increasing Mid R&D (70M USD/Y; 120 person) High investment Process innovation 8” wafer foundry High R&D (450M USD/Y; 850 person) Tech synchronize to IDMs Tech capabilities surpass rivals for at least 1 year Philips authorized Defect decreased 6” wafer foundry 1987 1990 1997 2000 2006 Revenue IDM’s certification Low business revenue Design house increasing Business extending Public traded New rivals join Market rapidly growing 12” wafer foundry Market share increasing Rivals’ competitiveness decreasing

16. All Type Patent ~TOP 20 Utility Patent ~TOP 20 Taiwan’s Innovation Excellent 2005 Winner: Taiwan Semiconductor Manufactures Co.

17. Level of capabilities – micro foundation • Basic principles for individual level capabilities: • Professional and occupational skills disciplinary or inter-disciplinary knowledge at following level: awareness, comprehension, application, analysis, evaluation, synthesis being innovative • Ability to handle crisis and risks, patient and practice • Firm level capabilities: • Based on the individual level and • Convert and integrate individual level capabilities to firm’s assets • Linkage: skills needed to transmit information, skills, technologies to and receive/absorb from surrounding business entities and technology institutes.

18. Source of capabilities – industry and macro view • Macro level capabilities are accumulated through interplays of different capabilities, including physical investment, human capital and technology effort. Incentives, Institutions Industries Higher Education Value and $ Public Research Institutes • Have to encourage knowledge flow and then to accumulate capabilities. • Have to approach customers’ needs and then to generate value.

19. Policy implication – an institutional view Users information, Feedback Revision, Upgrading, New products Opinions from users (trade partners) Heavy users,market surveys Manufacturing + suppliers of components Design+structure+materials+processes+.. Technology Practitioners Public Research Institutes TDP Researchers Practical issues Possible approaches Public Research Institutes Knowledge Management Researchers Higher Education Professors (Solid theoretical analyzing capabilities )

20. Conclusion If Taiwan wish to learn the First-Mover strategy somehow, accumulating the base technology capabilities is necessary • Micro level -- refocus on ‘practicing’ in education system • Industrial level -- Formulating a KM (connecting R-U-I to market) and encouraging users information and knowledge flow. Higher Education Industries Markets RD Institutes