Cluster Development: Banding Together to Go for the Gold

Several thousand buyers from around the world shuttle back and forth across the brand new Kao­hsiung Exhibition Center in the surprisingly summery April weather. Here for the Taiwan International Fastener Show, they are hoping to uncover new trends and business opportunities among the screws, bolts, nuts and other fasteners on display.

Clusters create close cooperative–competitive relationships, encouraging firms to innovate and grow. The photo shows the Innolux panel factory in the Southern Taiwan Science Park.

People may wonder why the Kaohsiung Exhibition Center, which cost NT$3 billion to build and is Taiwan’s only harbor-side international convention center, chose to launch itself with an event as mundane as a fasteners expo.

The fact is that Taiwan has a reputation as one of the world’s top producers of threaded fasteners. We exported 1.46 million tons of screws, bolts, nuts and other fasteners worth US$3.84 billion in 2013, making us the world’s second-largest exporter of these products. Given that our five largest markets are the US, Germany, Japan, the Netherlands, and the UK, it is clear that high-quality made-in-Taiwan fasteners are highly regarded in the world’s developed industrialized nations.

Southern Taiwan’s Greater Kao­hsiung region is home to the world’s largest fastener cluster, centered on the Gang­shan and Lu­zhu districts, and only 30 minutes’ drive across in any direction. Some 60 years old, the cluster includes nearly 800 manufacturers.

Joe Chen, chairman of the Taiwan Industrial Fasteners Institute, says that there are huge numbers of screw and fastener products. Each manufacturer has its own niche, and no one firm makes everything. The advantage of having a development cluster is that it enables international buyers to visit dozens of companies and purchase everything they need on a single three-to-five-day trip to Kao­hsiung.

That fact added greater significance to the Kao­hsiung Exhibition Center’s choice of the local fasteners industry for its inaugural expo. After all, it meant that international visitors would also be able to visit local manufacturers, making their participation in the show all the more fruitful.

Industrial clusters foster the development of tight geographic and interpersonal relationships, while also making companies more adaptable.

Why do industries cluster? American management expert Michael E. Porter defines a “development cluster­” as a group of mutually interconnected enterprises and service providers, as well as institutions in related fields, such as universities and industrial associations, all located in the same geographic neighborhood.

Members of the cluster are likely to be competitors, and are often part of the same supply chain. They both cooperate and compete with one another, forming closely connected networks. Moreover, their frequent interactions spur rapid exchanges of information, which fosters technological development and product innovation.

Taiwan’s clusters have developed in a wide variety of fields and earned global recognition for their competitiveness. In addition to the fasteners cluster in the Kao­hsiung area, we also have digital content, ceramics, printing, and plastic materials clusters in Tai­pei; electronics, automotive, and glass clusters in Hsin­chu; bicycle, precision machinery, musical instruments, food packaging, exercise equipment, and assistive devices clusters in Tai­chung; hosiery, bicycle, automotive parts, and green energy clusters in Chang­hua; towel and pickled vegetable clusters in Yun­lin; food products, textiles and sweaters, glasses, and electrical wiring and cable clusters in Tai­nan; and yacht building, shipbuilding, and chemical feedstock clusters in Kao­hsiung.

Trade is the lifeblood of Taiwan’s economy. Large harbors make it easy for our companies to import and export goods and materials.

Most firms in these clusters are small and medium-sized enterprises (SMEs). Dr. ­Chang ­Chien-yi, director of Research Division II at the Taiwan Institute of Economic Research, says that SMEs are the lifeblood of Taiwanese industry, but notes that their relative lack of resources and economies of scale make it hard for them to compete with larger corporations. They therefore rely on clustering, which allows them to form close, mutually supportive supply chains, to address their individual competitive shortcomings.

As a result, most of Taiwan’s clusters have either formed naturally, or as a result of a leading firm pushing for the integration of its supply chain. The government has been involved in the creation of only a few, such as the Hsin­chu, Tai­chung, and Tai­nan technology parks, which were established specifically to meet the developmental needs of high-tech and electronics firms.

Taiwan’s industrial clusters have retained their leading global position for so long primarily as a result of their geographic advantages and the character of their business owners.

Taiwan’s compactness has given rise to highly concentrated clusters. These often enable “one-stop shopping” within an area just a few kilometers across, which is very convenient for foreign buyers.

In addition, the owners of Taiwan’s SMEs are renowned for their agility, practicality, flexibility, and never-say-die attitude. They adapt very rapidly to changing circumstances and excel at uncovering new opportunities within their supply chains.

“The close interpersonal relationships between the owners of the businesses that make up Taiwan’s industrial clusters are rare in the global business world,” explains ­Chang. “By simply phoning another firm in their cluster, they can reach a verbal agreement on the delivery of an item they need. They don’t need to write up contracts to acquire all of the miscellaneous items necessary to fulfill an order. These interpersonal relationships provide them with the kind of flexibility that other countries just can’t replicate.”

Taiwan produces a myriad of threaded fasteners that can meet virtually any buyer’s needs.

The best firms within clusters often grow into Mittelstand companies, that is, medium-sized enterprises that dominate their market niches.

Chang says that these Mittelstand firms are able to hold on to their commanding global market shares over the long term not just because they devote tremendous effort to product development, brand marketing, and management of their international operations, but also because the reliable support their supply chains provide enables them to reach for the stars.

As the leading firms in their clusters, Mittelstand companies are usually happy to take the lead in steering them. Giant and Merida, for example, urged fellow cluster members to join them in establishing Taiwan’s A-Team, a group dedicated to implementing stringent quality control on bicycles, reducing manufacturing and delivery times, and transforming Taiwan into a global R&D and manufacturing hub for high-end bicycles. And Eric Chuo, chairman of the Taiwan Machine Tool & Accessory Builders’ Association and of HIWIN, often leads groups of industry peers on trips to Europe and Japan in search of business opportunities. Such efforts have made Chuo integral to the Taiwan precision machinery industry’s international presence.

Symbiotic industrial clusters provide Taiwan’s SMEs and Mittelstand companies with the rich soil they need to grow. Banding together has enabled cluster members to push economies of scale to their limits and to create powerful competitive advantages for themselves.

The Taichung City Precision Machinery Technological Park is among Taiwan’s most important industrial clusters.