Machine Tools Go High-Tech--Precision Machinery Industry Eyes NT$1 Trillion Revenues

The Central Taiwan Science Park (CTSP), located on the outskirts of Taichung City, is sparking a revival in central Taiwan's economy. Unlike similar parks in Hsinchu and southern Taiwan, the CTSP includes many companies from a sector normally considered more traditional than high-tech--precision machinery. Rows of imposing new factory fronts now line the CTSP's Keya Road, burnishing this industry's formerly "dirty" image. In fact, one third of the companies in CTSP are machinery manufacturers and the industry is, along with optoelectronics, one of the park's two main foci. Similarly, when the Precision Machinery Research and Development Park, located nearby in municipal Taichung, began looking for tenants for its 90-some sites in 2005, more than 200 companies made offers for what was then nothing but bare ground.

How has an industry once viewed as low-tech joined semiconductor and optoelectronics makers in the top tier of Taiwanese industries? As Taiwanese machinery manufacturers transition into precision machinery and high-value-added products, what are their strengths and what hurdles are they facing? How will Taiwan stay ahead of the newly industrialized countries?

A glance at a map of central Taiwan reveals that Taichung City is surrounded by industrial parks, including the Taichung Industrial Park, the Central Taiwan Science Park, the Precision Machinery Research and Development Park, the Tali Industrial Park, the Nankang Industrial Park, and the coastal Chuanhsing Industrial Park. The area's rice fields and alleyways are also dotted with more than ten thousand machinery plants, both large and small, all of which help make Central Taiwan the heart of Taiwan's machinery industry.

The larger of these 10,000-plus enterprises manufacture machine tools, woodworking machinery, and shoemaking equipment. They have spawned a diverse array of smaller companies that play a supporting role, supplying parts and assemblies, performing machining operations, and making tools, jigs and fixtures. Everything the bigger plants need can be sourced from suppliers within 30 kilometers. Planning to manufacture a lathe? Every one of the more than 2,000 parts you'll need is available in central Taiwan.

"The clustering of the up-, mid-, and downstream R&D, manufacturing and assembly makes Taiwan's machinery industry unlike any other in the world," says Wang Wuu-shyong, president of the Precision Machinery Research and Development Center (PMC). He says that in the world's advanced nations, the machinery industry is very capital intensive. For example, a company establishing a machinery plant in the US would usually aim to do all of its manufacturing in-house. Because that requires buying the equipment to make everything from screws to motors, this hypothetical plant needs a great deal of capital to get itself up and running. Taiwan's machinery makers are, in contrast, generally SMEs located in complex clusters that collectively cover every aspect of the business. This provides the individual companies with a number of competitive advantages, including great flexibility, a deep understanding of their specific technologies, low cost structures, and high margins.

Printing money

The machinery business has been called "the mother of industry." With the arrival of the industrial era, demand for basic necessities, communications and healthcare skyrocketed. The growing diversity of the products manufactured enabled machine-tool makers to do very well for themselves. "It was as if those of us in machine tools had a license to print money," says Wang Wuu-shyong. "We were also helping our friends in manufacturing print money." Wang says that in those early years the industry primarily built shoemaking, woodworking, yarn spinning, and injection-molding equipment. But the industry has evolved over the last 20 years to meet the changing needs of Taiwan's economy, upgrading its facilities and moving into the production of high-end machine tools and LCD panel-making equipment.

Take Tera Autotech Corporation, for example, which built its business manufacturing cigarette lighters in the 1980s. In its early days, it also made equipment for manufacturing pesticides, mosquito coils, and egg washers. Later, it became a supplier to Hitachi and moved into the precision machinery sector when it began producing machines used in the manufacture of electron guns. The company then sensed an opportunity in LCD panels. It began developing related devices and has since grown to be Taiwan's biggest manufacturer of the materials handling systems used in the production of large LCDs. During the company's more than 20 years in business, it has serviced clients in more than 60 industries, evolving in step with Taiwan's economy.

The small-and-thin trend in consumer electronics and optical products has required ever more precise manufacturing equipment. According to Chan Ping-chih, president of the PMC, a 100-millimeter die had tolerance of 0.1 millimeters 20 years ago. That tolerance dropped to 0.01 millimeters ten years ago, and these days stands at just 0.001 millimeters, or one micron, for 3C products. The standards are even higher for optical lenses.

Another trend is towards faster machines. To give parts and products finer, sleeker surfaces, cutting, machining, and forming devices must spin faster. The high-speed spindle on a new machine tool, for example, may spin at as much as 20,000 revolutions per minute, and new linear motors can achieve velocities of three meters per second, or three to six times the velocity of typical leadscrew motors currently on the market.

The Taichung area has long been the heartland of Taiwan's machine tools industry. Now that the Central Taiwan Science Park has been established here, people are thinking about how to build on the integration of high-tech and traditional industries to make the Mt. Tatu Corridor an R&D hub.

The mother of high-tech

The growing precision of machines has been a response both to market demands and to government prodding. Ten years ago, the Ministry of Economic Affairs (MOEA) set out to develop Taiwan into an Asia-Pacific regional center for precision machinery R&D, manufacturing and operations. In 2005, it designated the sector as Taiwan's third "star" industry; that is, an industry whose annual production value it hoped to double to NT$1 trillion by 2010.

"The government's recent efforts have focused on three key areas," says Wang. The first has been emerging sectors, including the domestic flat-panel display and IC-equipment manufacturing sectors. The second has been high-end machinery and critical machine parts. The third has been intelligent robots.

While Taiwan has the world's fifth-largest semiconductor industry, that industry's focus is on foundry work; that is, building chips to a designer's specifications. In their efforts to achieve the highest levels of quality and efficiency, Taiwan Semiconductor and United Microelectronics often simply replicate foreign production lines and equipment, effectively locking out local machine tools makers.

Huang Chia-hung, head of planning for the Committee for Precision Machinery Industry Development at the MOEA, explains that chip foundries are tightly focused on improvements in production yields and efficiency, and they upgrade their machinery very frequently. In 2003, the bulk of their production involved 0.13-micron (130-nanometer) processes. Today, it's 90 nanometers. Their manufacturing must also take place in the highly controlled environment of a cleanroom to minimize flaws in the chips.

Huang says that Taiwanese-made silicon wafer production equipment currently lags too far behind to keep up with their clients' advances in process technology. In addition, the thinking in the foundry industry is that there's no room in the middle of the market--those who are going to offer wafer-making services have to shoot for the high end. Given these conditions, the government's development strategy is both pragmatic and conservative: it plans to encourage foreign firms to invest in Taiwanese facilities supplying wafer-manufacturing equipment, then have local firms provide the foreign ventures with parts. The government also has plans for chip testing and packaging equipment, which don't require as high a degree of precision. These goals call for it to encourage the production of three or four items which it believes Taiwanese firms can manufacture competitively.

Taiwan is better situated to greatly expand its involvement in equipment for the LCD panel sector, which has fewer constraints on its development than that for the chip-equipment sector. Taiwan's flat-panel industry, which accounted for over 40% the global market in 2006, has already pulled even with that of South Korea in terms of both volume and production value, and is proving to be fertile soil for the local precision machinery industry.

As with chipmaking, the equipment used in panel manufacture accounts for 70% of the investment in a facility. The equipment for a single facility can cost more than NT$100 billion. In the past, manufacturers seeking to improve their yields purchased their equipment almost exclusively from Japan and the US, meaning that much of the money they made was transferred to those countries in the form of equipment purchases. With flat-panel display prices falling, the ability to source panel-making equipment locally would provide local panel makers with two competitive advantages--lower facility construction costs and more timely maintenance.

Leon Lee, president of Tera Autotech, says that the crucial thing is "not to let your competitors get you by the throat." He explains that the South Korean government has long actively assisted its domestic industry. Samsung, a giant in the flat-panel display industry, sources its equipment from Korean precision machinery manufacturers, who then subcontract it out to Japanese firms. This kind of active support has allowed Korea to increase its local content rate from 50% to 80%. His concern is that if Taiwan doesn't catch up fast, Taiwanese flat-panel makers will soon be forced to source their production equipment from Taiwan's largest competitor. It's not hard to predict the outcome of a war in which one side has to buy its guns from its enemy.

Before branching out into precision machinery, Tera Autotech made cigarette lighters and egg washers. These days, it produces equipment used in the manufacture of LCD panels.

Bringing it back home

Pressure from external forces, government assistance, and hard work on the part of domestic industry have led to rapid increases in Taiwan's local sourcing of TFT-LCD equipment. In fact, the percentage of locally sourced manufacturing equipment has risen from 8% in 2004 to 32% in 2006, and the percentage of locally sourced parts has soared from 5% to 50%.

Gallant Precision Machining (GPM), which made its name with its R&D, is typical of the companies riding this wave. When the global optoelectronics industry first began to take off in 1998, GPM was already supplying the likes of Taiwan's AU Optronics, Chi Mei Optoelectronics, and Chunghwa Picture Tubes. In the years since, it has grown into the world's largest supplier of packing and unpacking equipment to the TFT-LCD industry, and in recent years has become Taiwan's largest local supplier of TFT-LCD manufacturing, inspection and test equipment.

Explaining the requirement for automated packing and unpacking equipment, GPM Taichung branch president Tsai Ching-hua explains: "Large glass substrates--a key material in flat-panel-display manufacture--are vulnerable to impacts and to dust contamination. They have to be properly packed for delivery to the panel factory and then unpacked once they arrive."

But while GPM has been very successful with such equipment, that's not the company's primary objective. In recent years it has also moved into high-value-added manufacturing process equipment, which it has succeeded in selling to major flat-panel makers such as AU and Chi Mei.

GPM employs some 600 people in the R&D department for which it is known. In recent years the company has devoted large sums to development in various challenging fields such as vacuum technologies, wet-process cleaning technologies, and factory-wide computer communication and control systems. Its products are now performing well in all three stages of panel manufacture. These products include a polarizer-laminator with a visual alignment system that increases its precision, a washer used prior to the deposition and coating processes, and automated core systems for preliminary cell production.

Materials handling equipment may not be integral to the panel manufacturing process, but its "dust-free" standards are stringent nonetheless. The photo shows an eighth-generation substrate storage system developed by Tera Autotech that meets the Class 10 cleanroom standard of fewer than ten particles of 0.5-micron or greater diameter per cubic meter of air.

Big and light

Tera Autotech, which built its business on automation, has also targeted supporting aspects of the production process--materials handling and storage equipment.

Materials handling equipment is involved in moving items between the 20-some production processes, everything from production of the glass substrate to rubbing, printing, cell assembly, and crystal injection.

"We've built conveyer belts up to a kilometer in length that meet Class 10 cleanroom standards," says Tera Autotech's Leon Lee. Class 10 standards represent an incredibly uncontaminated environment, with no more than ten particles of 0.5 micron or greater diameter per cubic meter of air. Lee explains that the design of and materials used in the conveyor belts are very important because the motion of the belt systems themselves can stir up dust.

"Storage equipment," meanwhile, refers to temporary storage facilities for LCDs at intermediate stages of production. Tera Autotech has developed storage systems for factories producing the larger eighth-generation glass substrates. These enormous 15-meter-tall, 1,000-square-meter units are filled with cassette holders housing the substrates, but weigh less than 20 metric tons--about 26% less than Japanese-made storage systems. Li Yi-lung says that airflow is the key to storage systems because you have to keep out dust particles. He explains that the technology isn't difficult--you can use computer analysis to test the quality--but local panel manufacturers have placed few orders because they worry that buying from a newcomer might be risky.

"Local manufacturers don't yet trust local products," says Li, putting his finger on the frustrations and challenges local high-tech production equipment suppliers face.

A bright future in parts

The flat-panel-equipment business has some notable downsides: While companies may spend three years filling a single order, they may also go three years without a single order. Companies must also custom build each order they receive. It's a different matter entirely with the precision machine tools used to manufacture machine parts. Such machine tools can be produced in volume and product lines enjoy long life cycles. The government is therefore promoting this sector of the precision machinery industry most heavily.

Precision machine-tool manufacturing is the machinery industry's leading sector, and one of the few sectors in any Taiwanese industry to successfully market its own branded products internationally. In fact, the local sector ranked sixth in the world in terms of production value (NT$126 billion) and fourth in terms of exports in 2006.

Taiwanese machine-tool makers originally used a moderate pricing strategy to gain a footing in the international market. Their tools were less reliable, precise and efficient than those of the leading German and Japanese brands, and local toolmakers also had to import key parts.

Under its Technology Development Program, the Ministry of Economic Affairs a decade ago began asking the Industrial Technology Research Institute (ITRI), the PMC, and other institutions to work on development of critical components and single machines. In recent years, they have begun technology transfers to industry. Cooperation with industry has also led to the development of high-speed, high-precision linear-motor machine tools and key components, such as high-speed spindles.

Combined machine tools constitute another high-value-added trend. These devices combine the lathing, milling and boring processes used in the manufacture of components into a single machine.

Chen Chun, a project manager in the MOEA's precision machinery development group, says that the transfer of unfinished parts or goods between different machines leads to downtime, as well as time spent loading and unloading materials. Collectively, this accounts for 40-60% of the production cycle. Combined machine tools, known as machining centers, can lower manpower and time requirements, and utilize less floorspace than multiple single-function machines. This enables them to greatly enhance efficiency, a crucial factor in this era of low profit margins. Taiwan, which is a leader in the development of the integrated software crucial to the functioning of machining centers, certainly benefits from their growing use.

Localization, internationalization

The gains in Taiwan's production of key components are crucial for the development of its precision machine tools industry.

Wang Wuu-shyong says that the key machine-tool components currently produced in Taiwan include bearings, spindles, linear guides, and ballscrews. These have already entered the Japanese and German supply chains, and sales have been growing at an average of 28% per annum for the last three years. But the production of the advanced servomotors and control devices that comprise a machine tool's brains await breakthroughs that will allow Taiwanese firms to escape foreign firms' stranglehold on the technology. Local firms also need to grow large enough to achieve the economies of scale that will allow them to price their products more competitively.

Taiwanese component makers tend to be small, and their growth is typically dependent upon the machine-tool makers they supply. The government is therefore urging them to partner up with large machine-tool manufacturers in the US and Europe. Such an approach would eliminate the risk of having of all their eggs in the Chinese basket, improve their R&D, and make them more competitive in international markets.

Take Hiwin, which built its business manufacturing ballscrews and linear guides, for example. When the company bought the 40-year-old German ballscrew maker Holzer in 1993, it gave itself a technological leg up, pulling itself much closer to the Japanese. In so doing, it broke free of its role supporting machine-tool plants and established itself as an independent business. The company has continued to advance its technology with the result that its parts are now employed in high-precision medical equipment and semiconductor manufacturing equipment.

The public-private-sector cooperation of recent years increased the production value of Taiwan's precision machinery industry to NT$800 billion in 2006. Machines for traditional manufacturers, including woodworking and textiles, accounted for about 50% of this amount; machine tools and parts each accounted for another 16%; semiconductor and LCD panel manufacturing equipment combined for 7% of the total; and the robotics sector accounted for the remaining 3%.

Ten NT$10 billion enterprises

High-tech and services are expected to be at the forefront of Taiwanese industry in the years ahead, and precision machinery is the foundation upon which the high-tech industry is built. Precision machinery is trending towards high-value-added high-speed, high-precision, and combined-function devices that are enabling the rapid upgrade of other industries. This, in turn, is benefiting optoelectronics, semiconductor, automobile, and consumer electronics producers.

"You need good tools to do good work. The only way we're going to meet Taiwanese industries' need to upgrade themselves further is by producing ever-better precision machine tools," says PMC president Chan Ping-chih. He cites the Taiwanese automotive industry's lack of a highly efficient engine as a case in point: it takes very precise integrated machine tools (e.g. horizontal machining centers) to produce fuel-efficient, low-emission engines.

"Taiwan's greatest advantage is its manpower," says Chan, who attributes the recent phenomenal growth of the island's machinery industry to the quality of its workforce. When Japan and Korea import Western technology, their engineers often have trouble with linguistic and cultural differences. Chan claims Taiwan's workers are the hardest working and best educated in Asia. He also argues that the island's machinery industry benefits from the unique way in which its businesses are clustered, something other newly industrialized countries will have difficulty replicating within the next five to ten years.

However, given the trend towards global competition, Taiwan's industry is facing a serious challenge. Currently, the output of the majority of Taiwan's 200-300 machine tools firms is less than NT$1 billion per annum. They don't have the resources to establish overseas offices and must leave their post-sales customer service to agents. This, in turn, makes it difficult for them to provide good maintenance service. The government is therefore encouraging them to grow larger and extend their customer service abroad. To that end, it is nurturing ten large firms, including Yeong Chin Machinery, Tongtai Machine and Tool, and Victor Taichung Machinery Works, with the objective of growing their revenues to the NT$10 billion level.

Another key is attracting top research personnel. Chan admits that while the Taiwanese machinery industry has been adept at copying others, it hasn't yet become adept at developing its own breakthroughs. Even though the industry is far cleaner than it once was and its production involves none of the metal shavings and ear-piercing noise of the old days, tech workers still prefer the stock bonuses of the semiconductor and electronics firms. If the industry is to advance further into optoelectronics, biotechnology, energy and environmental devices, and micro- and nano-applications, it must attract more top-tier multidisciplinary talent.

Based on the industry's current trajectory, the PMC expects it to hit the NT$1 trillion target ahead of schedule in 2009. Though this is clearly good news, difficult challenges are equally obviously before us. As a nation, we hope to see our precision machinery industry nurture its strengths and move to the next level, taking its place with our high-tech industry on the global stage.