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The Taiwan Touch


International -- Asian Cover Story

THE TAIWAN TOUCH

As neighboring economies falter, this humming entrepreneurial dynamo is the envy of Asia

Jau Huang wanted his wife to quit her job. Not to stay home, mind you. Last year Huang, a computer scientist, begged his spouse, Alice Chang, to chuck her marketing job at a successful Taiwan software company and join his startup, Cyberlink. Chang had stock options and prestige at her old job; Huang was offering a 50% pay cut and a high chance of failure. Huang's final request: that Alice pool her savings with his to come up with $300,000 in seed capital for his new company, which would market video software.

In Japan, husband-and-wife teams in high tech are almost nonexistent. In Korea, the chaebol crowd out small companies. In much of Asia, entrepreneurs lack the training to start high-tech ventures. But Huang and Chang live in Taiwan, where, every day, holders of advanced degrees take the plunge and launch computer-products startups. Alice Chang took the plunge, too. She and her husband have now sold 10 million copies of their software titles, mostly bundled with hardware made by Taiwan-based companies such as Acer Computer, Mitac International, Asustek Computer, and Winbond Electronics. They expect $5 million in revenues this year and double that in 1999. By the way, they think Cyberlink could be the next Oracle Corp.

O.K., they probably won't get that far. But in Taiwan's high-tech industry, folks think big--and then go for it. The result is an economy that's a standout in Asia's depressed markets, with the Taiwanese showing a flair for creating jobs and wealth for the island. "There are so many successful models in Taiwan," says Chang. "If we do things right, maybe we can become one of them."NO SAFETY NET. Maybe the rest of Asia should also look to Taiwan for successful models. Policymakers in Japan, South Korea, China, and elsewhere now realize that they have built economies that are too reliant on big companies and created an atmosphere that discourages start-ups. Taiwan, in contrast, encourages the founding of new enterprises, which are launched in record numbers--and fail in record numbers, too, since the government does not prop up companies. Says Hong Seok Il, economist at the Korea Institute for Industrial Economics and Trade: "What we have to learn from the Taiwanese is the simple principle of holding businessmen responsible for their own projects."

The result is an entrepreneurial culture that resembles Silicon Valley's. Last year, Taiwanese entrepreneurs launched 1,373 electronics companies--and 1,147 went out of business. Despite the high failure rate, electronics companies contributed 10.4% percent to Taiwan's gross domestic product in 1997. That's up from 8.9% in 1996. Their combined revenues: some $78 billion annually. Earnings in Taiwan's electronics sector jumped 60% in the first quarter, says ING Barings. Analysts figure these companies cannot keep up that pace, but they still expect healthy results for the year.

Of Taiwan's 14,000 electronics companies, a handful have become major players. First came Acer Inc., Taiwan's biggest and best-known computer company, followed by United Microelectronics Corp. and Taiwan Semiconductor Manufacturing Co. These success stories have inspired thousands of engineers to strike out on their own. Budding entrepreneurs rely on networks of contacts that stretch from local engineering schools--such as National Taiwan University and National Chiao Tung University--to such Silicon Valley stars as Hewlett-Packard Co. and Intel Corp. that employ many Taiwanese and do business with Taiwan companies.

Taiwanese can also tap into capital accumulated by their parents, who have profited from the runup in the island's property values. In Chinese culture, parents feel almost obligated to help out their children to start businesses, since this is an appropriate way to pass on an inheritance. Savings clubs, informal groups of friends who pool their money, also chip into ventures. And many U.S.-based Taiwanese engineers in midcareer quit their jobs at companies such as HP and IBM to cash in their options and return home to run their own companies. Throw a rock on a street in Taipei, goes a joke, and you'll hit a CEO.MILLIONAIRE EMPLOYEES. Later, the promise of big gains from an eventual stock market listing attracts larger investors and venture-capital funds to the most promising businesses. "Anything you can list can make money," says Taiwanese venture capitalist Hsu Tai-lin, chairman of Hambrecht and Quist Asia Pacific. The 68 electronics stocks listed on the Taipei exchange have a combined market capitalization of $91 billion, about 30% of the entire market. While the overall Taipei market has only risen 3% this year, the electronics stocks are up 23%. Like their Silicon Valley counterparts, companies lure the best engineers with stock options, making millionaires out of hundreds of employees.

The venture-capital industry, which barely existed in Taiwan before 1987, now boasts 97 companies and about $1 billion in investments. Venture capitalists expect 30% annual returns, minimum. Now, VC firms compete not only with each other but also with cash-rich textile and chemical companies, and even wealthy individuals, to find the next big hit. Yulon Motor Co. and Wan Hai, a shipping company, have both set up high-tech funds.

Wen C. Ko, chairman of WK Technology Fund Inc., a venture-capital firm with about $200 million invested, says that competition for good deals is fiercer here than in Silicon Valley. To win the right to back Test Research Inc., a circuit-board testing company, Ko fought off rival suitors in a nine-month courtship. His managers learned everything about the business to convince the chairman that they would provide contacts and wise counsel as well as funds. Before they even had a deal, WK executives introduced Test Research execs to potential customers. They even spent time persuading the chairman's wife. "She has an input in the decision, too," says Ko. Finally, he signed a contract to offer $4.5 million in equity financing. Ko thinks he can earn 10 times that in five years.QUICK CASH. An unofficial stock market supplements the efforts of the venture capitalists. About 400 equities trade on this unregulated exchange, which is run by small brokerages linked in a local area network. It is highly liquid, since investors are eager to buy early into the next Acer or Asustek. "Individual investors can cash out anytime, so there's a willingness to put money in," says Ko. The informal market helps startups compete with larger rivals for engineers, since potential hires can see how well their new company's shares are trading.

It's all heady stuff for startups. "You can feel the fever," says entrepreneur William Yueh, 52, who returned from the U.S. to start his own company. "Everybody talks about startups and IPOs," says Alice Chang. "I don't know if you would call them greedy or just aggressive, but our engineers are willing to work until 11 or 12 at night to make a successful offering happen."

The government's role has been key. From its earliest days, Taiwan eschewed Japanese-style big-company industrial policy in order to avoid creating competing power centers in industry. In the 1970s, Taiwan officials formed a science advisory council composed of leading overseas Taiwanese scientists, who were known as the "monks." The monks told the government to build the infrastructure for high tech but not get into the business of picking winners.

So government has encouraged the high-tech industry with hefty tax incentives as well as the Hsinchu Science-based Industrial Park and subsidized research. The semigovernmental Industrial Technology Research Institute (ITRI), which has a budget of $454 million, contributes research and development expertise to the private sector, including information technology. ITRI's biggest success is the launch of spin-offs such as TSMC, UMC, Winbond, and Vanguard, the companies that started the island's booming semiconductor industry. ITRI scientists also frequently leave to launch ventures in such fields as opto-electronics and telecommunications.

Taiwan's educational system is a key element of the island's entrepreneurial environment. Competitive engineering programs at NTU, National Chiao Tung University, and National Tsinghua University turn out electrical engineers in droves. Most EEs don't start companies right off, but many go entrepreneurial after a few years' work experience. "The smartest students go into engineering. It's the most popular one," says Steve Hsieh, vice-chairman of the National Science Council, which coordinates science and technology policy.KEEP TRYING. Taiwan also benefits from cultural factors. Taiwanese often boast that they would rather run their own show than work for someone else. They cite a Chinese saying: "It's better to be the head of a chicken than the tail of an ox." In contrast to the lifetime-employment cultures of Korea and Japan, job-hopping is common. And there's no loss of face in starting a company and failing.

Take Jessy Chen. The NTU-trained engineer quit chip giant UMC 12 years ago with six other engineers to form Realtech Semiconductor Corp., a chip- design company. "I thought if I didn't succeed, I'd have another opportunity later," Chen says. The group worked at first in a small apartment and had to buy time on another company's computer-aided-design machine. After two hardscrabble years, Chen's business of selling chips that play melodies in toys and greeting cards took off. The company now has $54 million in annual sales, and Realtech had its initial public offering last year, turning Chen's original $21,000 investment into $12.5 million.

Little wonder so many entrepreneurs and investors want to play the game. William Yueh, an aerospace engineer with a PhD in mathematics from Columbia University, returned to Taiwan after a 15-year career at Northrop and General Dynamics Corp. His company, Asia IC Mic-Process Inc., builds ultraprecise polishing machines for making silicon wafers. Through his Taiwan college connections, Yueh found a machinery company, Asia Metal Industries Inc., to put up the $5 million he needed. "I couldn't have found the same money in the U.S.," Yueh says. Certainly, he couldn't have found it any faster. Yueh and AMI Vice-Chairman Roderick Wong cut a deal a month after first meeting.

The island's innovators also show a pragmatic willingness to shop abroad for technology. Jamie Bai, for example, is combining American technology with local knowhow. A former employee of IBM in Taiwan, Bai had founded a company called Tripod, which makes such electronic point-of-sale devices as credit- card readers. Bai sold Tripod to local computer-hardware maker Lite-On Technology Corp. The sale made Bai a rich man, but he saw a bigger future in systems that send data over wireless networks. His new bosses weren't interested, so he quit to form a new company. Bai learned, through connections, that IBM had developed a handheld two-way wireless device that it did not intend to market. So Bai bought the technology, teamed up with a local software whiz, devised a networking system to send and receive data, and founded Pacific Star Technologies. The IBM device is just the platform Bai wanted for his system, which he plans to start selling this summer. "We would have to spend years developing one," he says. Bai Pacific Star plans to go public in 2000.

Not all Taiwan startups have such a promising beginning. Michael Job started Rightech Corp. four years ago to manufacture flat-screen monitors and market them one niche at a time. In a cramped, chaotic office piled high with printed circuit boards, electronic testing equipment, and cardboard shipping boxes, Job, 33, now says that with larger companies jumping in, his days as a monitor supplier are numbered. But flexibility is what Taiwan business is all about, so Job is turning into a niche supplier of controllers and software for the monitors. "We can keep going without any problem," he says. "But it will be difficult for us to grow big."

Taiwan's policymakers applaud this kind of pluck and drive. But they also worry about what could derail the boom in startups. One factor: research and development, where Taiwan still trails the U.S. "We have to develop more indigenous technology content if we want to stay competitive," says Steve Hsieh.

Others worry about the growing scarcity of talent. Kenneth Tai, chairman of Taipei venture-capital firm InveStar Capital, notes that while Taiwan makes good use of talented overseas Chinese, Silicon Valley lures the best minds from all over the world. "The challenge now is how many brains can we bring in," Tai says. One solution would be to attract engineers from the Chinese mainland. "If we could recruit from even 10% of their best engineers, that would be an incredible resource," says an official. However, immigration laws remain quite restrictive.

A major problem would occur if the stock market crashed and wiped out the chance to get rich that fuels so many startups and venture-capital firms. The overall stock market's growth is slowing, and some analysts wonder if electronics stocks will cool off too. Price-earnings ratios for Taiwan's high-tech stocks are at 22 or so. That's moderate by the standards of U.S. tech stocks, but investors may have to rein in their exuberance: Taiwan depends on U.S. orders for its prosperity, and these will slow as America's PC industry matures. But perhaps Taiwan's entrepreneurs should not pull too far back. Taiwan needs people who dream big dreams--and work ceaselessly to make them come true.By Jonathan Moore in Taipei, with Pete Engardio in San Mateo and Moon Ihlwan in SeoulReturn to top


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