The National Science and Technology Conference in Taiwan concluded its three-day event the week before Christmas. As a key national strategic meeting, this quadrennial conference sets the collective agenda for the president, with comprehensive discussions among high-profile representatives from government, academia, think tanks, and industry.
During the conference, a CEO from the flat panel display industry expressed his concerns by saying, “We are now the world’s No. 2, yet we still struggle with operational deficits. How can we continue to survive in the face of global competition?”
The flat panel display industry is not exclusive to Taiwan. Other sectors, such as machine tools and screws, face similar challenges. In light of the influx of cheap goods from competitors, how should Taiwan’s manufacturing industries adapt to the global overproduction phenomenon following the pandemic? Additionally, how can business continuity planning (BCP) professionals assist their manufacturing clients in addressing these challenges?
The OEM Business Model
With the Taiwanese government facilitating industrial investments in China the past 30 years, it is time to reevaluate the offshoring production model.
In addition to semiconductor chips and bubble tea, Taiwan is renowned for its high-quality information and communication technology (ICT) products, high-tech industry, and global manufacturing capabilities. As computers gained popularity in the 1980s, especially in the U.S., international clients began offshoring hardware and software modules to contract manufacturers, initiating the original equipment manufacturer (OEM) business model. Over the last 40 to 50 years, Taiwan’s high-tech industries, including electronics and semiconductors, have capitalized on these opportunities, gaining a strategic position in global supply chains. As the OEM model matured, fierce competition resulted in variations such as original design manufacturer (ODM) and electronic manufacturing services (EMS).
Despite their success, OEMs continue to have low profit margins. McKinsey’s 2017 report stated in the early 2000s, OEMs enjoyed 5-7% profit margins as a result of the PC and smartphone booms. However, as the consumer electronics market matured post-2012, these margins dropped to around 3%.
Observing Taiwan’s OEM model, Stan Shih, the founder of Acer, introduced the concept of the “smiling curve.” It demonstrates how manufacturing occupies the lowest value position, where branding, research and developing (R&D) occupy the highest. Shih’s concept encourages manufacturers to focus on higher-value segments, although transitioning from OEM to branding poses significant challenges. To maintain profitability, Taiwan’s OEMs have relied on offshoring manufacturing sites, particularly from Taiwan to China, as part of their cost-reduction strategy.
Shifting Supply Chain Paradigm
The geopolitical shifts in 2018 prompted Taiwan’s offshoring sites in China to relocate to other countries, particularly Southeast Asia. However, the global pandemic reshaped the smiling curve from a happy face to a sad one, especially from the standpoint of offshoring clients. Disrupted global supply chains left these clients with a lack of imported parts and products. Notably, Taiwan’s manufacturing industry stood out for its ability to accommodate the unexpected demands of its clients.
During COVID-19, cyberattacks disrupted global supply chains, especially those involving ICT platforms, systems, equipment, and products. To optimize production, Taiwan’s OEMs became offshoring hubs for global clients, managing multiple production layers with diverse suppliers. However, according to the client’s concerns, these multilayered supply chains introduced “shadow” supply chains with invisible cyber threats. Cybersecurity certifications, standards, and frameworks have become essential requirements in international contracts to ensure supply chain resilience.
To counteract the disadvantages of offshoring production capacity, the government has proposed de-risk policies, such as “China plus one” or “Taiwan plus one,” to drive a new resilient supply chain paradigm. However, overproduction in some sectors has resulted in a flood of cheap goods entering countries tariff-free, destabilizing local industries. In response, other policies, such as increasing tariffs, are expected to revitalize the local manufacturing industry. All of these factors influence Taiwan’s manufacturing sector within the dynamics of global supply chains.
Forward Thinking in Supply Chain Risks
In global risk management, the trend is to combine agility with resilience to address cybersecurity and safety concerns.
During her opening speech at the 2023 ISC2 Security Congress, Clar Rosso, ex-CEO of ISC2, said, “It’s about recognizing your expertise to build resilience and agile security strategies that not only protect our data and critical assets but also empower innovation, drive our global digital economy, and defend our nations.”
In terms of operational risks, agile business continuity (ABC) has emerged as a key theme for global BCP practices.
In the post-COVID economy, agility and resilience go hand in hand with business transformation. Chenbro Micom, a Taiwanese PC chassis manufacturer, exemplifies this transformation. During the conference, the chairman shared their story of resilience. As its offshoring clients adopted the “China plus one” policy, Chenbro expanded its production capacity in Taiwan. During the pandemic, the company established a new headquarters and an ecological factory for high-end products. Chenbro demonstrated how lean production practices can help small and medium-sized enterprises adapt to resilient supply chains with agile practices.
The smiling curve illustrates that offshoring clients capture the most R&D and branding profits, whereas Taiwan’s OEMs have razor-thin margins. The post-COVID economy intensifies global price competition. On the one hand, overproduction forces mass-produced consumer electronics into extreme micro-profits. On the other hand, de-risk policies drive OEMs to establish new production sites in different countries.
To redefine the smiling curve, agility in R&D and resilience in supply chain management provide innovative business and technological practices to help OEMs smile again amid a volatile, uncertain, complex, and ambiguous (VUCA) global environment.
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ABOUT THE AUTHOR
Ming-Chang “Bright” Wu
Ming-Chang “Bright” Wu is the 2024 Top Agile CEO Award Winner and the 2023 ISC2 Mid-Career Professional Award (APAC). With his focus on business continuity and cyber risks, Wu recently has applied agility methodology to cyber incident response. He is a speaker, mentor and facilitator for the BCP workshop at APEC Taipei from 2014 to 2017 and for the workshop at APEC Korea in 2021. Starting from 2018, Wu has been a contributor to Bloomberg Businessweek Chinese, EETimes, Harvard Business Review Complex Chinese Edition, ISSA Journal, and SEMI Standards Watch. His resilience book was selected as the “2020 Book of the Month” recommended by the National Academy of Civil Service in Taiwan. He can be reached on LinkedIn at https://lnkd.in/r2acpg.
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