If You Don't Get in the Game, You Can't Win:An Interview with Acer's K.Y. Lee

Q: ACMM has four major production bases worldwide. Leaving aside the one in Taiwan, could you describe for us the status of the other three?

A: Our Malaysian operation goes back the furthest in time, 11 years, and currently employs more than 2000 people. The Mexico plant was opened in response to the signing of the North American Free Trade Agreement. But you know how ruthless the market can be. We wanted to move production closer to the market, but costs are higher there, and buyers preferred lower costs. So our Mexico operation has never grown very much, and only has 100 or so people.

The Suzhou investment is very different. At first we went there in search of a lower-cost production base for export orders exclusively, to share the load with the Malaysia plant. But as the mainland economy has developed, the Suzhou operation has evolved into a base for supplying products to the PRC domestic market. What makes the China subsidiary special is the fact that it now fulfills a dual mission: production and sales.

Q: What percentage of the corporation's total revenues come from Suzhou?

A: Not that much. Last year the figure was less than 10%. This year we expect it to reach about 15%. That refers to things made by the Suzhou factory and sold through there.

Of course, the Suzhou plant alone cannot satisfy market demand in the PRC. Some products are not made in Suzhou, and others cannot be moved over there because of political restrictions. Like LCD monitors, for instance. We make semi-finished products in Taiwan and send them to Suzhou for final assembly. Acer is very concerned with image, and we will not move some product lines, like mobile phones, to the PRC until we reach an understanding with the relevant authorities in Taiwan.

Of course the mainland percentage will rise. Next year the PRC will surpass Europe as the largest market for Acer brand products, and will become our largest production base.

Q: Do you consider the mainland to be your home market?

A: For a global company, everywhere is the home market. But after all we share a common language and culture with the mainland, and have a better understanding of the market. Compared to outside multinationals, we have a considerable advantage. But there are a lot of tough companies in the mainland itself, like Leader Computers. These are our main competitors.

For example, Acer is the number one brand for CD-ROM in the PRC. But recently a new competitor called Great White Shark has been buying products from Taiwan OEM suppliers and selling them under its own label, hoping to duplicate the success of Leader. A lot of Taiwan companies are perfectly happy to take the OEM money and run, because it is too daunting to build up your own brand name. But it's a market economy after all, so there will always be competitors and price wars. The situation is different for each of our six different product lines. Sometimes the main competitors are multinationals, sometimes mainland companies.

Q: As the mainland market grows, will the Taiwan market be marginalized? For example, some products may no longer even have versions made especially for the Taiwan market.

A: That's true, but not with our products. Although the 20-million-person market in Taiwan is not all that important, it is after all "the hometown of the big boss"! More importantly, our R&D people are there. They depend on the Taiwan market for first-hand information. So this small but elite market provides very important feedback to our R&D teams, and cannot be overlooked.

It is unfortunate that Taiwan's market is not bigger, so that we could take machines made specially for Taiwan and turn around and quickly make them ready to sell globally. This is the biggest problem. Why are computers the way they are today? Because they were designed by Americans for other Americans to use. They set all the specifications. Over the last 50 years, we in Taiwan have not had the kind of space that would allow stretching out like that.

So as the mainland grows, I can only say that if Taiwan firms do not put mainland resources to good use, exploit the power of the mainland market, and seize the various opportunities offered in the course of economic development there, then they are fools.

Q: As the mainland becomes the leading production base for ACMM, will it cut into investment that would have gone to Taiwan?

A: Not at all. We have been in Malaysia for 11 years and the mainland for five, but our Taiwan operations are still expanding. We are now building our third factory in Kueishan. But Taiwan has to continually change and come up with new products, leaving mature products to the other factories. Old things cannot be kept in Taiwan. This is a kind of positive stimulus, pushing R&D in Taiwan to move faster to produce newer and better products.

Q: Yet the mainland is not a secondary market anymore. Mainland consumers demand top-of-the-line stuff.

A: Very true. They want to "jump to the front of the queue." Also, because of the size of the mainland market, demand volume quickly reaches an adequate level. So the old saying that "high-grade products are kept in Taiwan, low-grade ones go to the mainland" is right out the window. But we still have a lot of OEM orders for Europe and the US that are shipped directly out from Taiwan.

The most important thing is that production capabilities in the mainland are after all a considerable distance behind Taiwan. We still have to do high-grade products in Taiwan first, and the mainland can only take the baton when the machinery and production process is mature. That keeps the risk low. Of course, a corporation must always seek the most rational distribution of its resources. But Acer is not like those companies that don't have factories in Taiwan, that haven't even kept core operations here, but are only listed on the Taiwan stock market.

Nonetheless, Taiwanese have to think carefully about a key question: In the process of globalization of production, what is Taiwan's unique significance, and where is its unique value-added? For example, engineers in the mainland get paid a third of what they do in Taiwan, but do the job just as well. What are Taiwanese going to do about this? Many people have never even thought about this issue, which I feel is very serious.

To put it crudely, early on Taiwan was able to grab a lot of work from the US and Japan by sheer tenacity and hard work. But now the mainland can grab it from us. This is inevitable in the process of globalization of production. So what we have to reassess is, where is our competitiveness?

"Be born amid tribulations, die amidst tranquility and happiness," sure, but no government policies can stop economic logic. You have to rely on improving yourself from the inside out. So we are constantly pushing R&D to come up with products of even more added value. In terms of R&D creativity, there is still a wide gap between Taiwan and the mainland, so there's no need to worry too much right now. But for many jobs which are already fixed, lower and mid-level jobs, mainland engineers can already take over. This is what Taiwan has to worry about.

Q: If Taiwan companies invest in the mainland, won't they be making competitors for themselves?

A: You shouldn't fear competition. Mainland firms still have very weak manufacturing capability, so our suppliers are mostly Taiwanese-run companies. This chain of mutual support among Taiwan firms should remain intact for quite a while.

The key is going to be capital formation. Most suppliers are small enterprises. The founders put up their own capital, rather than raising capital through public channels. So it will be another five or ten years until people in the mainland can accumulate enough capital to get their own small enterprises going.

Q: Now the wafer industry wants to invest in the mainland. It seems as if Taiwan has no successor industry waiting in the wings. How will we maintain competitive-ness?

A: Things aren't that bad. I'm not worried about that. Just think about it. Taiwan has been working at semiconductors for 20 years. The PRC is starting to make them now, but to get to the level of Taiwan you're talking at least ten years. Ten years gives Taiwan a lot of room to develop. Are our entrepreneurs so dumb that they can't find anything new?

As for what the next wave might be, I don't believe you need to think necessarily in terms of new industries. So long as Taiwan companies have a leading role in industries that are new to the mainland, then we win. Think for example about President and their Kang Shifu instant noodles. It was a good thing that they decided to violate government regulations in those days and invest in the mainland to make instant noodles. If you let the mainland develop this industry themselves, what kind of opportunity would there be for President now? President has a 50% share of the PRC market for instant noodles, and what's wrong with that? So Taiwan doesn't necessarily need new industries; it would be enough if existing industries in Taiwan could get a stable foothold in the mainland.

Q: Yet there are those who say Taiwan business people who invest in the mainland are "betraying Taiwan."

A: This is not about betrayal. This is about facing the pressures of global competition. Enterprises cannot put these off till tomorrow. Yes, of course "Taiwan first." But Taiwan's most salient feature is that its economy is outward-oriented. It conforms to the needs of big multinationals, and is linked to the global economy. "Taiwan first" requires that Taiwan complete the lifting of barriers to openness as soon as possible. If Taiwan is not open, how can it be first?

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The mainland market, which shares language and culture with Taiwan, is seen as an ideal battleground for Taiwan firms aiming to establish their own brand names. Acer is one of those firms. (photo by Jimmy Lin)

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From Malaysia to Suzhou, Acer Communications and Multimedia President K.Y. Lee always keeps the big picture in mind in order to keep his company at the forefront of the industry. (photo by Pu Hua-chih)