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FPDs and the China myth
By Matthew Smith
TAIPEI - It's a popular
message, and one being told again and again with
increasing abandon and diminishing levels of critical
thought. China, the globe's largest manufacturing
dynamo, is fast sucking the rest of the world's
industries dry, leaving former East Asian tiger
economies especially exposed to "hollowing out" of their
industries.
The more it is said, the truer it
seems to be. But a growing body of evidence points to a
more realistic conclusion: China's cost competitiveness
makes it the natural choice for many labor-intensive
manufacturers, but the nation is far from ready to take
over all of the value-added, capital-intensive
industries that are creating the most value now.
Western consumers have long become used to the
"made in China" label on cheap manufactured (and often
shoddy) products. But last year, China became the
world's third-largest maker of information-technology
(IT) products, after the United States and Japan.
Nowhere is concern regarding the economic challenge
China presents more apparent than in Taiwan, which is
heavily dependent on high-tech manufactured exports for
economic growth - and which is now in fourth place on
the IT manufacturing list, behind China.
However, the situation is far more complex than
at first meets the eye - global manufacturing is hardly
a zero-sum game. China's apparent emergence as a
high-tech powerhouse belies its true role - that of an
assembler of higher value-added components that are
produced elsewhere. China's low production costs make it
an attractive place to put things together, but it lacks
the necessary infrastructure to support upstream
component suppliers and technologically advanced
processing. This is why China's IT imports remain higher
than its total IT exports, a fact rarely heard amid the
hype about China's emergence as a high-tech colossus. As
Goldman Sachs' Greater China analysis team pointed out
in a report published on October 3, "China is not yet an
original value-added producer but rather a processor."
The flat panel display (FPD) industry provides
an almost perfect example of the actual manufacturing
dynamic in East Asia. With potential applications for
almost every consumer IT product, color FPDs - mainly
the thin film transistor, liquid crystal display type
(TFT-LCDs) - are already a standard feature of flat
personal-computer (PC) monitors and notebook computers.
Worldwide production is forecast to reach US$36.2
billion this year, with Taiwan and South Korea taking
the lion's share of the market and Japan an increasingly
distant third.
Color FPDs are expected to become
standard features of digital still cameras, personal
digital assistants, and mobile phones over the next few
years, and makers anticipate massive demand from the
global flat-TV market. Although there is considerable
difference in opinion on when that demand will appear,
it seems almost certain that bulky CRT (cathode-ray
tube) TVs will disappear from store shelves within a few
years. For Taiwan, the economic implications - and the
challenges posed by South Korea's huge and
well-capitalized manufacturers - are enormous.
The success of Taiwan's FPD industry is
certainly not written in stone. It is young, fragmented,
undercapitalized, and facing massive pressure from
Korean makers. But analysts and industry executives
agree that unlike low- and middle-end semiconductor
manufacturing, it does not face any real challenge from
China. "This may be the one major industry in Taiwan
that is China-proof," says a foreign observer who
closely follows Taiwan's economic and technological
developments.
Industry insiders likewise say
that China is years behind in terms of technical
development, logistical support, and ability to weather
the business cycle in such a capital-intensive industry
as FPD manufacturing. Building a state-of-the-art "fifth
generation" fabrication plant in Taiwan costs about
NT$40 billion to NT$50 billion (US$1.1 billion to US$1.4
billion). And while the mainland's integrated-circuit
(IC) manufacturing capability has come a long way,
TFT-LCD production entails complex upstream supplier
relationships that China's logistical infrastructure
cannot yet support.
Of course, this does not
mean that China is not part of the flat-panel picture.
TFT-LCD panel manufacturing involves three stages - the
array phase, in which circuits are etched on to the
glass; the cell phase, which involves applying the
liquid crystals into the panel; and the final assembly
phase. Currently, Taiwanese and South Korean makers
alike are moving their assembly operations to China in a
bid to increase their cost competitiveness. But only a
few Japanese makers, including Sharp and Epson, have set
up array-phase operations there, and only one company -
NEC - has announced plans to build a complete
fifth-generation plant in China.
Taiwanese are
certainly watching to see whether or not the Japanese
are successful on the mainland, but for now they seem to
prefer this side of the Strait. "Because of the
intensive requirements of technology support,
engineering manpower, and infrastructure, it's better to
do it here," says K Y Lee, chairman of AU Optronics, the
world's third-largest TFT-LCD panel maker. "For example,
our equipment suppliers are all here in Taiwan. Whenever
any machine goes down, we can call them to replace the
failed module very quickly. It's a big advantage for
Taiwan."
Of course, the fact that the government
restricts major investment projects in China is another
incentive for keeping the higher-value-added activities
on this side of the Strait. While there are no specific
prohibitions against moving first- and second-stage
production to China, "everybody knows they won't let us
do it", says one industry executive.
Yet FPD
makers seem genuinely unconcerned about China. Whether
or not the Japanese operations in China can compete "is
a really big question mark", notes Jeff Hsu, vice
president of Chi Mei Optoelectronics. Unlike other
Taiwanese FPD makers, Chi Mei does not even plan to set
up assembly operations in China.
Taiwanese are
putting their money where their mouths are, assuming
they can raise any money in the current economic
downturn - another big question mark for the smaller
makers especially. Four of the island's five large-FPD
makers plan to set up several fifth generation fabs on
this side of the Strait over the next two years. In the
meantime, moving their labor-intensive assembly
operations to the mainland increases their cost
competitiveness while giving them closer proximity to
their downstream customers - flat-monitor makers, for
example - who are increasingly moving their own assembly
facilities to China as well.
In theory, this
should result in a major boost to Taiwan's cross-Strait
IT exports, with the highest-value-added phases of the
manufacturing process - the array and cell processes -
remaining in Taiwan. Far from posing a threat, China's
low labor costs will serve to complement the FPD
industry's higher-end processing, which will continue to
create value and drive economic growth in Taiwan. The
industrial chain that is growing up around the Taiwanese
TFT-LCD industry will make it difficult for China to
hollow out this manufacturing sector for a long time.
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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