"Enough for one, but three monks have no water to drink." "I'd rather be the head of a chicken than the tail of an ox." "A loose sheet of sand, without any sense of sticking together." One can often hear sayings about the purported inability of Chinese to cooperate in daily life. This habit has led to the trend of "taking on the world with a single briefcase" and going it alone for many years now in Taiwan. One constantly hears of murderous price-cutting wars. But the times are changing, and Taiwan's business environment has shifted startlingly; it is now at the point where it is not possible not to change.
Alliances are the only way to go: "After the rapid rise in the price of land and the cost or labor in Taiwan, it has become impossible to maintain the past structure of OEM cheap labor intensive export industries," notes Philip Chieh-min Wang, director general of the Industrial Development Bureau (IDB) of the Ministry of Economic Af fairs, who has deeply researched how to assist companies to form strategic alliances. Taiwan companies have been forced to come out from being in the background, doing subcontract work for others, to competing in international markets using their own weapons. In order to make the special characteristics of their products stand out and raise quality, and in order to get a grip on the market, it will be necessary for companies to invest more money and energy in research and development and in sales.
But this burden is not something that Taiwan's small and medium enterprises, with limited staffs and little capital, which have long buried their heads in the task of manufacturing, can handle. Thus, "in order to lower costs, and spread out the risks, alliances are essential for the future," says Wang.
From three years ago (1989), since the term "strategic alliance" was first imported from the U.S., it has already become a consensus among local entrepreneurs that "alliances are the only way to survive." Unfortunately, faced with this new wisdom, "everyone has intensive demands, but no one knows how to go about it, and they have no confidence as to what advantages they may gain from alliances," offers C.C. Lee, chairman of the National Association of Small and Medium Enterprises.
Thus, although there are many ideas for alliances large and small, some have never been practicable, and some have ended in discord halfway through. "Alliances commonly have the mindset of 'love but fear of being hurt,'" is how Shih Yen-shiang, director general of the Medium and Small Business Administration of the Ministry of Economic Affairs, describes current thinking.
Though that's the way it is, in an atmosphere of hesitation and "wait and see," still some business people have courageously taken the first step. They hope to work out alliance methods through trial and error. Of course, just as no clothing can suit every individual for every occasion, each alliance must be different based on the time, people, industry, and goals of the alliance.
Alliance case study number one--the lighting alliance.
"Each year the lighting industry in Taiwan produces a total of NT$50 billion in value, and accounts for more than half of the American market for imported light fixtures," points out Johnson Cheng of the Idea House Industry Co., a former advisor to the Lighting Trade Association, and the man who initiated the alliance. Thus it is an industry with great potential.
But the operators lack the concepts of R&D and design, and most of the products are copied from the ideas of others. Given the international trend of protecting intellectual property rights, this has naturally been criticized. Moreover, the important parts, like electricity-saving lightbulbs, are all in the hands of Japanese companies. Thus Taiwan's lighting industry has long been stuck at low-profit, low-end products.
Multiple-function alliances, a rarity in Taiwan: In order to increase the value-added of Taiwan's lighting products, Cheng, who returned from Switzerland five years ago, began working the circuit to raise support for the concept of a strategic alliance. The target of the first stage was to establish a "Specialized Lighting Design Center." He brought together over 20 companies who contracted to join, with the hope that specialized designers would come up with creative products that would then be sold to alliance members at a bargain-basement price. After being mass produced and sold cheaply by the companies, eight percent of the sales price would go to the center as a royalty, to serve as a fund for future research and design.
According to foreign statistics, only about one percent of the products ordinary companies come up with on their own prove marketable. But the success rate for specialized designers who have done market research and who stay in touch with trends abroad by attending exhibitions can be ten times as high. Nevertheless, Johnson Cheng states that although this all sounds great in theory, in practice it couldn't be pulled off.
Domestic lighting manufacturers have always held specialized design in very low regard; they also have given little thought to the idea of intellectual property rights. Cheng, who has lived abroad for a long time, says with feeling that the designs that take so much effort from their creators often meet derision from manufacturers: It's either "That's so simple, I can figure it out just by looking at it once, and you want to sell it to me at such a high price?!" or "Forget it. If I buy it from you, someone else will just pirate it from me, which doesn't make as much sense as coming in a little later."
In this way, the design alliance proved abortive, and the lessons were quite painful. But Cheng argues that they developed talent for four or five specialized lighting design firms (albeit still all operating in the red), and anyway no one in the past even raised the idea of "design." But now it often appears in trade journals, and design competitions are held every year. Further, the results of the lighting design class run by the alliance were pretty good. At present the China Productivity Center has taken it over, "so at least we've had a little impact!" concludes Cheng.
Where to look for a sales model for alliances: Besides cooperative design, Cheng also had the idea for a "collective sales body." Unfortunately this also proved less than a success. His initial concept was to target the European market. Nine companies signed contracts to join the alliance, with each company responsible for a different product, such as hanging lamps, floor lamps, and so on. These were separately manufactured but jointly marketed.
Unfortunately, some of the products of the nine participating companies sold well while others sold poorly, so that the manufacturers of the latter were dissatisfied: "We shoulder the same expensive costs, but why am I getting so many fewer orders than the others? It's not like I couldn't make what they are making." As a result the contracts proved worthless. If only one company cancelled their contract, then the old price-cutting wars would resume and destroy everything.
Although the experience of these novice alliances is disheartening, a trend of alliances in the lighting industry has already taken shape. At present many companies are involved in collaborative activities, including a restructured body for collective sales to Japan. This year the "Japan sales team" has already made two trips, and the team concept has won a great deal of attention from large Japanese enterprises. The "99 Lighting Life Plaza" established by over 4O different companies working together already has eight shops which have joined, and there have been clear increases in sales. Then there's the "energy-saving fluores cent light tube investment plan" managed by Kao Hsiao-wen, a Ph.D. from the United States; as well as the "Lighting Industry Development Center," which has already received the go-ahead and help from the Industrial Development Bureau.
The lighting alliance could be seen as the first multiple-function alliance in Taiwan. Although it has revealed a number of flawed ideas, now that the trend has been initiated, after a period of learning by doing, "the space for cooperation in the future should be larger and larger," says Cheng, retaining his optimism despite disappointments.
Alliance case study number two: electrolytic capacitors.
The research and development alliance of operators in the field of electrolytic capacitors is another case of a pact initiated and organized by the operators themselves, and so far it has been running along very smoothly.
The organization was established last year. Chang Cheng-hung, assistant manager of the Lelon Electronics Corp. in Taichung and a man who has been heavily involved in the project, points out that electrolytic capacitors are used in all electrical products, and their technological level is very deep. "In terms of the electrolyte, which is like lifeblood and affects the life expectancy of a capacitor, we must rely on Japan for higher-functioning stuff, and of course they won't sell us the best, so there is no way to raise the quality of the capacitors we produce."
Interdependent "production" and "research": Due to considerations of international competitiveness, Lelon, which stands at the head of this industry domestically, organized ten or so companies of comparable scale to establish the alliance. After going through the Medium and Small Business Administration at the Ministry of Economic Affairs, they got on track with the Institute of Industrial Materials at the Industrial Technology Research Institute (ITRI) and began the work for raising the quality of electrolyte and capacitors.
There already have been breakthroughs. Just taking electrolyte, six new formulas have been devised which give life expectancies of from 2,000 to 5,000 hours, and their costs of production are at least 50% lower than the cost of importing them from Japan, so the results have been excellent.
In this alliance's program, the government subsidizes 80% of the costs. In the past two years, each participant has only had to shell out between NT$- 100-200,000. Moreover, the R&D committee which oversees the plan has four Ph.D.s and six M.A.s, complete with an integrated lab. "If we had to go it alone, how could we have done it?!" asks Chang Cheng-hung rhetorically.
But what makes Chang most proud is that the operators who are part of this alliance have each fulfilled their responsibilities to the full. In order to show the ropes to the ITRI researchers, full of orthodox training but lacking in practical experience, in the past half year ten of the alliance enterprises have allowed them to come to their factories for training. Each of them took their electrolyte formulas--"which are usually kept under wraps like small babies"--and gave them to ITRI for reference, saving a great deal of time that would have been wasted reinventing the wheel.
"The sincerity of the companies has really been inspiring," states Alex Y.M. Peng, research manager of the Surface and Coating Technology Laboratory at the Materials Research Laboratories at ITRI. "Anytime we just make a single call that we have some things we want to know, they will give as much time as possible to us." Because the two sides support each other, in the brief span of a year there have already been several accomplishments. Small scale production has already begun at ITRI, which has been provided for trial production to the manufacturers in the alliance.
R&D is the easy part, sharing it is hard: Although there have been considerable research findings for the alliance, which marks the end of its first stage at the end of December of this year, now comes the hard part--how will the new formulas developed be turned over to the manufacturers?
"Right now the idea is to set up a nonprofit foundation to manage these findings," suggests Chang. This foundation could add a suitable profit margin on to the results and then sell them to the manufacturers, and can demand higher fees from non-alliance enterprises. More importantly, a certain percentage of profits could be set aside as a fund for continued research. This would keep the researchers who took so long to learn the ropes from moving on to something else, thus losing the chance for extending the technology.
Of course, some of the alliance companies ask, "Why make everything so difficult? Just give us the formula, and that will be fine." Faced with divisions of opinion within the alliance, Chang Cheng-hung has his bottom line: On the one hand, the demands of each enterprise are different. Some companies want to mass produce the 5,000 hour formula; others would have more than they knew what to do with using the 2,000 hour version, so it would by no means be appropriate just to turn everything over in an undifferentiated way. Moreover, after the technology is transferred there could be a "swarm" effect and piracy, and even technology outflow, immediately creating new competitors. These potential side-effects must all first be weighed.
"R&D is the easy part, sharing is the hard part," say Chang, putting his finger right on the crux of the problem. The question is whether or not the alliance can find a graceful solution by the end of this year, and show competitors Korea and Japan that in Taiwan "unity is strength," or whether it will disintegrate into the old habits of the law of the jungle. Everything depends on whether the entrepreneurs can take a long view of benefit for the whole industry, or just see the profits sitting in front of their noses.
Alliance case study number three--the bicycle alliance.
Similar alliances initiated by operators but helped along by the government have been established quickly in the last two years. Of these, the Taiwan Bicycle Industry R&D Center could be considered the earliest to take shape.
An R&D fund is a voluntary loss: "Taiwan is a bicycle manufacturing stronghold, but there has never been any way to upgrade quality," points out Simon Lee, who served in ITRI for 20 years and has now resigned to take the position of general manager of the bicycle R&D center. For example, more than 70% of the gear changers for middle and low-end American bikes are provided by Taiwan suppliers, with exports reaching 10 million sets a year. A look at the number seems to be glorious, but for the really high-grade stuff the only choice is Japan, and high-quality gear controls must be imported from that country.
In order to fight back, after a long period of consideration, the Bicycle Trade Association--under the leadership of 12 companies which are representative of manufacturers of all types of parts--finally formally established a nonprofit R&D foundation in June of this year.
In terms of the division of fees, the 12 original alliance companies contributed different amounts depending on their size and the relationship with the parts they develop. In addition, the Industrial Development Bureau threw in NT$20 million. The result was a trust fund, from which only the interest could be drawn; the principal could not be moved. More than ten researchers with backgrounds at ITRI, in manufacturing or in academia were recruited; operators, the government and academia put forth representatives to serve as board members and inspectors, responsible for overseeing the operations and progress at the center.
Unusually, "the initial payment for the starting companies was completely voluntary," says Simon Lee. Thus if a given company wants to commission the center to do improvements to a given product in which they have a direct interest, the fees for that are collected separately under the principle "the user pays." For example, one item at the top of the research agenda is the gear-changing mechanism. Thus Chuan Fei enterprises, the largest manufacturer of gear-changers in the country, not only coughed up the initial NT$3.3 million alliance fee, this year they have put forward another NT$4 million to independently ask the R&D center to do research into improving the quality of the gears.
Despite having been established for only a short time, in the last two "preparatory" years the bicycle R&D center has already come up with sixteen applications for special patents to provide to manufacturers for mass production. Moreover, an even more important breakthrough has been creation of equipment for precise measuring of the mutual tolerance of the bicycle frame and the other parts (in the past they could only make rough guesses), which saves the enterprises the trouble of muddling through for themselves.
Small, specialized, and all our own: So far things have been rolling right along at the research center. But under the principle that "if the government puts up the money, everyone should share in the results," the other 200 or 300 bicycle companies who have not joined the alliance will in the future be able to use the "individual commission, user pays" method to employ the R&D center.
Might this not lead to the situation of companies trying to grab control of, or redundantly commissioning studies of, similar products or functions? Lee says this is possible, but that such concerns could be included in the scope of the initial evaluation after receiving a commission and provided to the enterprise for reference, so that the company can decide for itself if it wants to go ahead and spend the money anyway.
"Logically speaking, the conflicts of interests generated by such an alliance R&D center should not be all that serious," suggests Lee. Some of the larger corporations have their own research teams, and they only seek help from the alliance R&D center for larger mechanical design work. Everything else, like downstream detail work on shape, handlebars, and so on, they do themselves rather than turning it over to "outsiders." For one thing, this is to protect company secrets, and for another it distinguishes their products from those of other producers.
Johnson Cheng, founder of the lighting alliance, notes that such a "small scale and specialized" R&D center established through cooperation between government and industry has always been the most effective weapon for German industrial alliances. On the one hand it centralizes resources, achieving the goals of simplifying costs and increasing efficiency; and on the other it is founded of, by, and for the specific industry, so it can closely accommodate its needs. As for the bicycle R&D center, "so far the patent conversion rate [i.e. the rate at which patented technologies are converted into commercially viable products] is as high as 60%, almost three times higher than the Japanese average of 21%." This is the thing that Simon Lee is most proud of.
Reflecting on this, the number of small specialized R&D centers set up by industrial associations with subsidization from the Industrial Development Bureau has reached seven. Besides lighting and bicycles, industrial research alliances are being actively pursued in shoes, precision machinery, stone materials, plastics, and other areas.
"In fact the degree of difficulty of the technology in traditional industries is not very high. You only need a real commitment, and money, and you can get results very quickly," says Philip Wang of the IDB. The only thing is, at this stage, it would be very difficult to ask small and medium businesses to organize the alliances and put up all the cash themselves. Thus in the initial three to five year start-up period, it is still essential for the government to show some initiative and put up money and prestige.
Alliance case study number four--palmtop computers.
Although the main trend for the future seems to be small, specialized R&D centers belonging exclusively to a single industry, the Industrial Technology Research Institute--which has been in a league by itself for the past nineteen years and has accumulated countless resources--is still the center of attention.
ITRI--An R&D treasure chest: In the past several years ITRI has changed from being a closed ivory tower to actively joining the front lines with industry, leading the way in R&D alliances for many high-technology or new products which seem to have great potential. The "first generation notebook computer alliance" fashioned two years ago by the Computer and Communication Research Laboratories (CCRL) at ITRI created an immediate sensation.
Unfortunately, "R&D is the easy part, sharing is hard." The notebook computer alliance, organized by 46 firms, produced alliance product types in the brief space of half a year, and won considerable attention at international exhibitions. But after the technology was transferred, the manufacturers who took it over began a flurry of little maneuvers, and the price-cutting situation was "ruthless." By the time the bloodletting was through, a mere three companies were left extending the alliance blueprint and continuing to produce alliance products. The intersection of success and failure at the alliance is disheartening.
In fact, not long after the alliance was set up, Sid Wang, manager of the Computer Planning and Marketing Department in the CCRL, had already given thought to the problem of orderly marketing after the products had been developed. Not only had he reached a "consensus" with participating firms that in the future products should stress differentiation to take advantage of different market niches, they should also try to set a "floor price" and strictly prohibit operators from destructive price-cutting tactics.
The problem is that no number of preventive measures can hold up against the considerations of profit when companies are competing for orders and market share. Moreover, foreign buyers see this as the main point, and won't come up with orders until after the companies have made their best pitch. Having already invested in production, small and medium operators who most fear backlogs of assets and idling of capital have no choice but to give in and sell whatever they can at the price the buyer is willing to pay.
After painful lessons, the palmtop computer alliance mapped out by the Computer and Communications Research Laboratories last year made a major shift in its structure. First the number of companies was greatly reduced. At present there are only nine. Moreover, all the technical work, from materials purchasing to the design and quality control of the main board to the certification of the keyboards, is to be divided up among the participating firms. The CCRL will only be responsible for planning and the major specifications.
Carefully choose your allies: "What's most improved this time is that all nine members are manufacturers with actual production experience," says Jonny Kuo, president of Kingtech, one of only two companies from the notebook alliance to participate in the palmtop alliance (the other being the Hsin Kai Company). Last time not only were there a number of "laymen" with no experience in computers who were just hoping to get a free ride, even worse were the many trading companies who just wanted to keep their foot in the door. "Trading companies don't actually produce anything, and had no sense of participation in this production alliance. They couldn't care less if the sales price covers costs, because if the product doesn't sell, they can just ship it back to the factory anyway," he points out. Precisely because the trading companies didn't go through the "labor pains," they were the first to cut prices and create price chaos.
Today palmtop computers have already been successfully developed, and three manufacturers will be able to head to the U.S. in November for a major computer exhibition, and are ready to move into mass production. Over the next half year, alliance members will continue to test common control and other functions (such as palmtop scanners). Although results have been pretty good, Jonny Kuo is still less than satisfied with this alliance experience.
"In fact the achievements of the alliance could have come out a half year earlier," he argues, but the sense of selfishness of the collaborating firms is still too strong. Each company was responsible for one item stipulated by the alliance, turning over to them all the testing work. But the companies often kept their own test results under wraps. Some thought to allow their in-house researchers to have a little more time to "consult" the results, some let their own clients have the first look in order to nail down potential future buyers, and some simply took the technology and ran with it. So naturally, in this atmosphere of pulling and hauling, everyone was wary.
"In fact, it's useless just to rely on the technology. Some technology you can get a look at, but you can't put it to use. For technology to become a marketable product still requires manufacturing experience, capital and sales networks to match up," explains Sid Wang, the alliance planner, from the viewpoint of the "disinterested bystander." No matter what, this new attempt will provide yet another model for domestic industrial alliances.
Alliance case study number five--high definition television (HDTV).
The palmtop alliance is built on existing technology, to be used in specially designated products. The cost is extremely low (the whole project has run up only an NT$20 million tab), and there have been no major technological break-throughs to speak of. In comparison, the "high definition television technology development plan," a five-year, NT$3 billion project set up by the government, requires a completely different alliance model.
Super alliance to explore new industrial worlds: T.H. Steve Chao, deputy director of the Visual Information Technology Division at the CCRL, who has been responsible for laying the groundwork for this alliance, notes that HDTV will be the main-stream of global visual technology in the future. The key relevant technologies include high speed digital signal handling spun off from computer technology, high resolution imaging, and so on; this will be a major revolution in the visual industry. ITRI has mobilized more than 200 staff people for this project, bringing together a number of institutes--including those for electronics, machinery, materials, and optics--with the electronics industrial association, making up an unprecedented large cooperative effort for Taiwan.
This alliance is still in the first stage, which will take two years to complete. It is engaged in researching three predecessor products for HDTV--digital television, LC-projection television, and big screen image equipment. These are being mainly undertaken by three large corporations made specially responsible for their R&D--Proton, Tatung, and Sampo respectively.
These three large manufacturers build on technology produced by ITRI. Resulting products must then be turned over to the related alliance of about ten companies including Sanyang, Kolin, and Acer. The "ultimate ideal" of the group is, after selecting system standards, to be able to reach the target of manufacturing 100% of the HDTV-related products.
Chang Shin-shi, director of the Visual Information Technology Division at the CCRL, states that this "big tent" alliance benefits not only the firms that have joined the ranks. For example the photo electrical laboratory made a breakthrough in lens technology, and gave the technology blueprint to several lens factories in the Taichung area to try out. Or the breakthroughs in the new type lightbulbs that the materials laboratory wants to use as part of the alliance project have been turned over to electrical appliance firms for trial use. These companies on one side lend a helping hand, and on the other can learn a great deal for themselves.
"This snowball has only just gotten rolling," is the metaphor used by Chang Shin-shi. What this grand alliance really hopes for is that it grow larger and larger as it rolls.
[Picture Caption]
(/drawing by Tsai Chih-pen)
The lighting alliance, which includes such items as joint sales, joint design R&D and alliance shops, is the only multi-function alliance in the country.
There have already been breakthroughs in R&D of electrolyte and related materials.
Small and specialized R&D institutions will be the mainstream in the future. The photo shows the Bicycle R&D Center.
Palmtop computers made their debut at an American computer exhibition in November. The photo shows the sales conference held by alliance manufacturers. (photo by Vincent Chang)
High definition television will incite a world-wide communications revolution. (photo courtesy of the Industrial Technology Research institute)
The lighting alliance, which includes such items as joint sales, joint design R&D and alliance shops, is the only multi-function alliance in the country.
There have already been breakthroughs in R&D of electrolyte and related materials.
