• Modest Improvement
  Car sales rose in 2009, but the industry still faces some severe challenges in assuring its long-range viability.
  
  BY DON SHAPIRO
  
  

• Luxury Brands Make a Comeback
  Super-sports cars join the more mainstream models in going after the affluent consumer.
  
  BY TIMOTHY FERRY
  
  

• A Foreign Auto Executive’s Perspective
  Jeffery Nemeth comments on the domestic industry’s future and Taiwan’s investment attractiveness. 
  
  Interviewed by Editor-in-Chief Don Shapiro
  
  

• Auto-Electronics Firms Eye the Chinese Market

  Taiwan’s strong foundation in the ICT industry should help in developing the emerging telematics sector.
  
  BY PHILIP LIU
  
  

Modest Improvement

Car sales rose in 2009, but the industry still faces some severe challenges in assuring its long-range viability.

BY DON SHAPIRO

Following a dismal 2008, the Taiwan car industry continued to suffer from anemic sales well into 2009. But business began to pick up in the spring and further accelerated through the rest of the year. Final figures for 2009 are expected to show sales of nearly 280,000 units (including about 55,000 imports).

“Compared to the 20-year average of 400,000, there’s still a long way to go before the manufacturing base is comfortable – we’re all operating significantly below capacity,” says Jeffery Nemeth, president of the Ford Lio Ho Motor Co., the Ford joint venture in Taiwan. “But it’s still much better than the 230,000 or so in 2008.”

One reason for the better performance in 2009 was the government’s acceptance of a request from the Taiwan Transportation Vehicle Manufacturers Association (TTVMA) for tax relief for consumers to help stimulate demand. In January the authorities announced suspension – to remain in effect until the end of 2009 – of the NT$30,000 (US$926) commodity tax on purchases of new cars with engines of 2-liter capacity or less. Since sales did not start rising until months later, however, an even more important factor in the market rebound was believed to be the gradual improvement in overall economic conditions.

The Association tried unsuccessfully to persuade the government to extend the tax benefit, perhaps phasing it out gradually during 2010. “They said there was too much loss of tax revenue,” says TTVMA Secretary General Chen Min-Teh. “We made the point that cheaper cars would increase sales volume and therefore tax income, but they didn’t go for that argument.”

Normally January is the best month of the year for auto sales. Besides the Taiwanese consumers’ traditional practice of making big-ticket purchases just before the Chinese New Year, they also tend to wait to get a new car until the new model year has begun. “If you buy a car in December, after just one month it’s considered to be one year old,” explains Steven Yang, general manger for external affairs at the Hotai Motor Co., the Toyota/Lexus distributor in Taiwan.

This season, however, the pending expiration of the tax advantage has prompted many people to do their car-buying earlier than usual. The result has been to boost the sales numbers for 2009, but that will undoubtedly take a big bite out of sales for 2010. Despite the forecasts for decent GDP growth of more than 4% for the coming year, “because of the early purchases, basically we think the market will decline a bit,” says Yang. “The total will probably be pretty similar to 2008 – somewhere around 230,000. Other makers have different opinions. Some say 240,000 or 250,000, but everyone is expecting some drop.”

The market will also have to do without the publicity boost it often receives from the introduction of a complete changeover in one of the popular existing models. Purely by coincidence, the development cycle of the major manufacturers is such that none is preparing to launch a wholly new model in the months ahead.

Instead, the biggest automotive news in Taiwan in 2010 is likely to come from separate projects by two domestic auto companies to start assembling Chinese-designed small cars in their Taiwan plants. The Yulon group is preparing to introduce models from the Hangzhou-based Geely Automobile Co. They will be distributed through its subsidiary, Fortune Motors, which until now has concentrated on marketing second-hand cars. Prince Motors, which makes Suzuki vehicles, will add cars designed by the Chery Automobile Co. of Anhui Province to its assembly line. Both the Geely and Chery models are expected to sell in the NT$300,000-$400,000 (US$9,259-$12,357) range, around 30% less than for other similarly sized cars in the Taiwan market.

Many industry observers have expressed doubt as to whether the low pricetags will be enough to overcome Taiwanese consumers’ reservations about the quality and safety of Chinese vehicles. In a recent report, analysts Frank Fan and Shirly Kuo of Taiwan Ratings, the domestic arm of Standard & Poor’s, said “we estimate that Chinese cars will only attract the interest of very price-sensitive buyers and most likely take a share of the used-car market if retailers are able to successfully manage price, distribution, and maintenance issues.”

The report also noted that Taiwanese drivers “are likely to remain faithful to the dominant Japanese brands over the next few years, given the strong brand recognition and well-established sales and maintenance networks they have developed.” Echoing that theme, Steven Yang notes the combined 80% market share held by the top five brands in Taiwan: Toyota, Nissan, Mitsubishi, Honda, and Ford, which is allied with Mazda. “The Taiwanese feel ‘Japanese’ means quality,” he says. Pointing out the difficulty Hyundai has had building market share in Taiwan, despite its excellent international reputation, he says: “If the Koreans can’t overcome that, it will be even harder for the Chinese.”

Developed in Taiwan

Besides its cooperation with Geely, Yulon has recently adopted another new strategy – collaborating with several partners in the Taiwan technology sector to develop an innovative car launched this past August under the Luxgen brand. It is the first model in many years designed in Taiwan, and the company emphasizes the car’s high-tech electronics (though competitors note that the degree of reliability needed in an automobile is something that IT companies may not be accustomed to). In addition, Luxgen boasts that the 2.2-liter engine has the torque equivalence of a 3-liter counterpart and that the emissions meet rigorous Euro 4 requirements. An electric-car version is scheduled to follow in 2010, and Yulon also plans to mass produce it in China in cooperation with Dongfeng Motor.

As the interest in China implies, Taiwan manufacturers have long felt constrained, even during the boom years, by the relatively small size of the domestic market, which keeps them from achieving desired economies of scale. The situation has grown worse in the past few years. The accompanying chart provided by Taiwan Ratings shows the impact of declining economic growth and stagnant personal income on demand for new cars. Future prospects are further dimmed by the demographic realities of Taiwan’s low birth rate and rapidly aging population.

For the long-term viability of the industry, it will need to substantially expand exports, which in recent years have come to fewer than 10,000 units a year, mainly contributed by Ford Lio Ho and China Motor Corp. (Mitsubishi). This past year the Toyota joint venture, Kuo Zui Motors, joined the fray with shipments to Saudi Arabia after the Toyota head office agreed to use the Chungli plant’s excess capacity to serve the company’s global sales channel.

In a written response to questions from TOPICS, the Automotive Research and Testing Center (ARTC), said that given the limited domestic market, which is likely to stabilize at production of about 300,000 vehicles a year, “domestic manufacturers will need to actively develop the export market, whether for complete cars or parts and components.” ARTC, established in 1990 by the Ministry of Economic Affairs in cooperation with other government agencies to support development of Taiwan’s car industry, quite optimistically estimates that exports of complete vehicles could grow to an annual level of 100,000 units by 2015.

That projection assumes the success of cross-Strait negotiations in creating at least a partial opening of the mainland car market to Taiwanese companies. ARTC notes that cross-Strait cooperation, combining Taiwan’s creativity, R&D capability, and production technology with the huge Chinese market, would benefit both sides. And it envisions the addition of Taiwanese ICT and electronics technology to China’s car brands as opening the door to joint penetration of global markets.

The TTVMA has already discussed a plan for cross-Strait automotive trade with its counterpart association in China, and hopes it will be taken up in the “early harvest” portion of negotiations next year for an Economic Cooperation Framework Agreement (ECFA) between Taiwan and China. Chen Min-Teh describes the plan as calling for duty-free import by each side of an agreed-upon number of vehicles from the other. The numbers would not be equal, in view of the large disparity in the size of the two markets, but rather reflect an identical proportion of each market’s annual import volume. The two associations proposed a 1:10 ratio – with one Chinese car coming into Taiwan duty-free for every 10 shipped in the other direction.

The Taiwan government is also hoping that following the signing of ECFA, fewer political barriers will exist to its negotiating Free Trade Agreements with other countries or entering regional trade blocs. For the auto industry, that would mean additional export opportunities to Southeast Asian markets.    

With regard to the Taiwan domestic market, TTVMA has another suggestion for the government – one that could increase demand while aiding the environment and achieving energy savings. Considering that half of the 6.7 million cars on the road in Taiwan are at least 10 years old, the Association urges the government to offer subsidies, similar to the “Cash for Clunkers” program run successfully in the United States and Europe, to those who replace their elderly vehicles with new models providing better fuel efficiency and meeting higher emissions standards.  

That would give a short-term boost to the industry. For the longer run, it seems certain that export-promotion aside, consolidation will need to be part of the solution. Following the exit from the market of the Formosa Plastics Group’s Formosa Automobile in 2007, the island still manages to support eight manufacturers, though few are turning a profit. “Smaller companies are particularly vulnerable under the current economic climate,” said the Taiwan Ratings report, “because they have limited financial resources to prevent further weakening in their credit profiles as earnings continue to decline.”  

A further shakeout, and the possibility of expanding markets into China and elsewhere, could keep the industry on the road to survival.

Luxury Brands Make a Comeback

Super-sports cars join the more mainstream models in going after the affluent consumer.

BY TIMOTHY FERRY

Before Fabrice de Murat became president of Modena Motori Taiwan Co., the only licensed distributor of Ferrari and Maserati cars in Taiwan, he worked as country head in Taiwan for L’Oreal cosmetics. While the difference between selling cosmetics and high-end autos might seem vast, he sees little distinction between the two tasks.

“They are both luxury goods,” he explains. “Technically speaking, we’re in the car industry, but in our business model and marketing model, we apply a certain number of rules from the luxury industry.” Those rules include “extremely restricted distribution from the point of sale,” and fewer than 100 target clients a year.

He distinguishes the sector occupied by Ferrari from that of the “mass-market” luxury car makers. “Benz and Lexus are luxury cars – they are very good cars, but they’re cars in the sense that they have a function. The function of a Mercedes-Benz – especially if it is black – is to take you from home to office. Lexus is the same. The function of a Ferrari is definitely not to take you to the office.” That function, rather, “is pleasure only,” he says.

These differences – and around NT$10 million (over US$300,000) in sticker price – point to the contrast between the two ends of the luxury car market in Taiwan. The volume sellers, Mercedes-Benz, Lexus, BMW, and others, have a longstanding presence in Taiwan but have recently struggled to maintain sales as the overall local market for autos has languished. The other end of the spectrum – the “ultra-ultra” or super-sports car market, including global brand leaders Ferrari and Lamborghini – have a much more recent history in Taiwan but have seen their market grow significantly. 

Taiwan’s market for luxury autos, like the rest of its passenger car market, has seen a considerable decline over the past few years. In 2005, a record year for the industry, 39,000 luxury cars were sold in Taiwan. That number then dropped more than 40% by 2008, to 22,000, while the rest of the car market plunged 70% over the same period. This year saw Taiwan’s overall car market rise by over 20%, a bit higher than the 16% (an additional 3,000 units) for luxury cars. The difference may be attributable to the government subsidies in 2009 that encouraged consumers to buy new cars with smaller, more fuel-efficient engines; as few luxury cars fall into that category, the program left luxury sales largely untouched.

Still, a 16% rise is no small amount, and puts Lars Pauly, vice president in charge of sales and marketing with Mercedes-Benz Taiwan, in a happy mood. Many Taiwanese seem to feel that “when times are difficult, I’ll maintain a low profile and not show I can afford a Mercedes,” he notes. “But now that the overall [economic] sentiment is getting better, many more people are again considering replacing their cars, compared to the U.S. or European markets. My impression is that the worst is over. It’s getting better.”

As of this month, Mercedes-Benz had edged out Lexus to take the position as the top-selling luxury automobile in Taiwan, selling 5,447 units to Lexus’s 5,351 for the year. BMW maintained its number-three position, with 4,700 units sold.

Steven Yang, general manager for external affairs at Hotai Motor Co., the distributor of Toyota and Lexus brand vehicles in Taiwan, notes other factors involved in 2009’s resurgence in the luxury car market. “In the beginning of this year, the economic situation was still not very good,” which prompted the major brands to try to stimulate sales by “doing a lot of promotions,” he says. According to Yang, some of his competitors slashed prices by as much as NT$1.2 million during special events. But the discounting strategy ultimately cut into profits. As a result, although the market improved this year, “profits didn’t grow the same as for sales,” he says.

Both BMW and Mercedes-Benz deny cutting prices, but acknowledge using financial schemes such as zero-percent financing and cash-back rebates to drive sales. Jess Liu, Mercedes Benz’s general manager for public affairs, observes that while incentive programs were ongoing for much of the year, luxury car sales continued to stagnate for most of 2009. Just six months ago, the company would have been happy to simply match the 2008 numbers.

“In November this year, we sold 110% over last year November, but if you look at September’s year-to-date market, it was still on last year’s level,” says Pauly. “The whole improvement only came from the last quarter.”

The question now is which quarter in 2009 best reflects the prospects for 2010: Q4’s surge or the earlier quarters’ doldrums? Pauly suggests that the market tends to be cyclical, and that after bottoming out in 2008 is set to keep on rising. He expresses confidence that the market now “will go back towards historic levels of growth,” forecasting an increase of 10% next year.

Although dwarfed by markets like China and the United States, Taiwan is considered to be a respectable market – in fact, one of the largest in Asia – for luxury models. Prices range from around NT$2 million for a Lexus to upwards of NT$15 million for a Lamborghini, assuring nice profits on each car sold.

Taiwan’s luxury car buyers generally resemble those of other developed nations. The majority are male, between the ages of 40 and 50, and obviously affluent. In some ways, though, Taiwan’s customers stand out. Pauly says he was surprised upon first coming to Taiwan by the number of Mercedes customers who are entrepreneurs rather than high-level executives at big corporations. “In Taiwan you have quite a lot of small companies,” he notes, “and Mercedes is a typical car for the owner of a small to midsize company.”

Status symbol

Brand perception also distinguishes Asian consumers from their Western counterparts, Pauly says. “What is a bit special for all of Asia is status. That’s of less importance in Europe nowadays, but here Mercedes is still a symbol of ‘I made it!’ and ‘now I can afford it and show this to my friends.’” And while Taiwanese tend to be lower-profile than the more ostentatious customers in China, they are often far more demanding. “Taiwanese customers have very, very high expectations when it comes to the quality of vehicles,” says Pauly. “In other markets people are willing to accept small failures, but here they have the highest expectations I have seen.” Aftermarket service is thus a core element in maintaining the brand loyalty that each maker depends on to support sales during slack economies.

The high-end car dealers – Ferrari, Lamborghini, and Porsche – report a similar customer base, composed largely of entrepreneurs, particularly in the technology sector, and also male and middle-aged. But with Ferrari’s pricetag starting at NT$11 million and Lamborghini’s even higher, the target buyers are a much more select group. David Szu, director of sales and marketing for Universal Motors Traders, the importer of Porsche (as well as BMW and several other brands), estimates that for the high-end car makers, “I would say the usual suspects are around 100 to 150 people (entrepreneurs and corporate tycoons) and their families.”

Despite the limited number of potential buyers, the segment continues to do well by the standards of this exclusive market. Ferrari sold 45 units in 2009, up from 41 in 2008. Maserati’s sales also rose. Lamborghini sold 27 units in 2009, the first year of its corporate-partnered dealership. These numbers compare favorably with other relatively affluent markets in Asia. Lamborghini sold 40 cars in Hong Kong in 2009, and 70 in Singapore – its top market and model for success in Asia. De Murat describes Taiwan as a “steady and solid medium-sized market” for high-priced luxury cars.

The super-sports car market is a recent addition to Taiwan. Although Porsche has been in Taiwan since the early 1970s, most of the other brands arrived only in the past few years. Following Ferrari’s official debut in 2005-2006, Lamborghini, Bentley, Aston Martin, and others have opened up shop in Taiwan. Most are located in the Neihu district of Taipei, in close proximity to their target customers in Neihu’s tech sector.

While some may see signs of an emerging “M-shaped society” in the entries of these high-end autos, regulatory issues figure more prominently than economics. “The history of super-sports cars in Taiwan was blocked by rules about pollution, emissions, consumption,” notes Ferrari’s de Murat. “Roughly, you take the California rules and make them more complicated to get the Taiwan rules, the worst! It was not so much the rules as their implementation.” He said Taiwan’s approach to regulations governing fuel consumption and the environment “was very theoretical and many were contradictory. No performing car was able to pass.”

Three major developments now allow super-sports cars to be legitimately imported. First was Taiwan’s entrance into the WTO in 2001, which brought its import regulations more into conformity with international norms. Further, growing environmental awareness in recent years put a spotlight on emissions and fuel consumption, with European manufacturers leading the way. “European norms for emissions are the most accepted worldwide, bringing everyone, including us, to respect that,” says de Murat. “Pollution and emissions are not anymore an issue, which is why it became easier to import cars.”

The legacy of Taiwan’s restrictions on importing luxury cars can be seen in what is known as parallel importing or the “gray market.” Parallel importing has a long history in Taiwan; in fact, most of the legitimate importers of luxury cars started out that way years ago. In the past, the only way to import a luxury car, particularly a high-performance sports car, was to bring it in through an unauthorized importer. To get the cars to pass regulations, the engines were often adjusted, resulting in poor performance, and buyers enjoyed little service.

Now that industry players have begun opening up corporate shops or entering into joint partnerships with their previous parallel importers, the parallel market seems set to sharply contract. Ferrari notes that of the 211 Ferraris registered in Taiwan, 80 came in via the gray market, with the rest through the official dealership. In 2009, de Murat says, no Ferraris came in through the gray market.

Still, the gray market continues to challenge legitimate distributors. BMW launched a program to trace the serial numbers on their cars to ensure that they were correctly imported; fines will reportedly be levied against dealers in Europe who sold to Taiwan buyers without authorization. Nevertheless, some companies, notably Mercedes-Benz, continue to experience a high level of activity on the parallel market, principally because that enables the cars to come in at lower prices, despite the risks regarding quality and servicing.

Overall, Taiwan’s luxury car sellers are guardedly optimistic about their future prospects. Even while forecasting a return to lower numbers in the general market, all see the luxury segment remaining strong. Even some long-standing worries – such as the high numbers of Taiwanese living in China and the drain this has had on car sales – may be fading. The opening of direct flights and China’s high luxury tax, which makes luxury automobiles 20% costlier in China, have motivated some highly affluent consumers to buy their “weekend” Ferraris or Lambor-ghinis in Taiwan instead.

Recently, a global survey on luxury goods by market research firm Synovate found that what Taiwanese aspire to most is owning a luxury car. Taiwan, it seems, will continue as a strong market for the high-end brands.

A Foreign Auto Executive’s Perspective:

Jeffery Nemeth comments on the domestic industry’s future and Taiwan’s investment attractiveness. 

Jeffery Nemeth, president of the Ford Lio Ho Motor Co., this month completes his tour of duty in Taiwan and moves on to become head of the Ford operation in South Africa. This was his second posting in Taiwan; from 1999 to 2002 he was CFO at Ford Lio Ho. Nemeth was active in AmCham Taipei as a board member, co-chair of the Transportation Committee, and for the past year as Vice Chairman. He was interviewed for Taiwan Business TOPICS by Editor-in-Chief Don Shapiro.

In this current slower market, how are the manufacturers trying to stimulate consumer interest?

The car industry is always all about product. Whenever you see a company in trouble, usually the way it’s saved is that it comes out with some great product – we call it a product-led recovery. For example, Yulon was struggling in the late 90s and then they came out with the Cefiro, which was a big winner for them. An example outside the car industry is the iPod for Apple.

Here in Taiwan, Ford launched the TDCi – the diesel power train line-up – and at first people didn’t realize the benefits to fuel economy of the combination of diesel engine and power shift transmission. The car enthusiasts understood it, but for the most part that level of technology is new to Taiwan. The auto manufacturers in the past tended to invest on other features, things like GPS, leather seats, and power seats, so the Taiwanese customer wasn’t really used to having world-class technology in their cars. When we brought the power shift and TDCi in, it took a year just to educate the consumers, but now we’re doing really well – in fact, we can’t build enough cars, especially the diesels. Consumers are becoming more aware of the environment, and of how their purchase decisions can contribute to environmental improvement.

What is the major impact of those new technology models?

Although it increases the cost of the product, it gives customers more value for the money. In the near future you’re going to see some Chinese products like the Geely and Chery coming in to Taiwan [in cooperation with local car companies]. They’re going to have uncompetitive fuel economy and marginal emissions, but they’re going be cheap. So what you’ll see is a polarization in the market. Some customers just want to have basic transportation, while others will take into consideration how they can help the planet. Then there will be those who don’t find either one of those options appealing. It’ll be interesting to see what happens to the brands in the middle that have neither cheap cars nor environmental technology.

The cost of fuel is obviously an important factor. Taiwan’s EPA is proposing a new fuel tax that’ll substantially raise the cost of fuel over the next ten years. That will make cars with better fuel economy that much more attractive, even though the initial purchase price is a bit higher.

As the market opens to Chinese-model vehicles, what will that mean for the Taiwan auto industry?

Certainly there will be more choices for the consumers. In some aspects, China is very aggressive on electrification, and government agencies there are putting the infrastructure in place to support battery-charging systems. Presumably that will eventually also give the Taiwanese more opportunity to get electronic vehicles, but the charging infrastructure has to be here too, and that will probably take some time. More likely the impact will be on the low end of the market, with an influx of the “cheap and cheerful” kinds of cars from the Chinese brands.

I’m not sure how the Taiwanese are going to accept that. This is a mature market, and the Taiwanese are very sophisticated consumers with high brand consciousness. As an emerging economy, China is going to have a completely different consumer purchase dynamic from Taiwan’s. Here most of the car-buyers already own a car, and the younger people buying their first car are highly influenced by parents who have owned cars for years. But for many people in China, not only are they buying their first car, it’s also the family’s first car. The Taiwan consumers have experience to draw on, and they’ll expect a certain level of performance, functionality, quality, and technology in their cars.

What are the main challenges for Taiwan’s auto industry, and what should industry and government be doing to ensure that it is a sustainable industry?

Long range, the Taiwanese automotive industry needs to be part of a bigger market. At a level of 300,000 or 400,000 cars per year, which in the medium term is probably what we can expect, there’s just not enough room for a lot of manufacturers – especially when you think that just 90 miles away is a 13-million vehicle industry this year, with a forecast of going up to 20 million in the next five to seven years. The economies of scale in China are going to be much greater than they are here in Taiwan. Component suppliers here will have less scale and less investment capability to put in automation and other things to become more cost competitive.

So in the long run, car manufacturing in Taiwan will need to be closely tied to China links. If cars and parts can be sent duty-free across the Straits, it’ll be an opportunity for Taiwan to take advantage of that huge market. WTO commitments require Taiwan to continue to reduce tariff levels, so without access to other markets, the domestic car-manufacturing base will erode as imports become more and more affordable here. A do-nothing approach amounts to a going-out-of-business strategy. But if we can actively get access to other markets – both China and Southeast Asia – there’s a chance for Taiwan’s auto industry to have a future. The domestic market is just not big enough to support it by itself.

Besides negotiating an Economic Cooperation Framework Agreement (ECFA) with China to free up trade, what else should the government do to promote the industry?

Taiwan has a strong background in IT and a lot of well-educated, innovative people. With the advent of more and more electrification of vehicles, there’s a great opportunity for synergies between those two industries. If the government could promote investment in brainpower through a green technology fund and provide incentives for R&D in automotive applications, it could be a way for Taiwan to carve out a niche in the global industry. The challenge, of course, is the need for speed and the fact that China is pouring resources into its own effort.

Speaking not just as an auto executive but as a foreign investor in Taiwan, what do you see as the strengths and weaknesses of Taiwan as an investment environment?

When you’re investing in a foreign country, you look primarily for a capable and available workforce, a stable government, and a stable banking environment. Taiwan has all three. On the other hand, it’s expensive to bring foreign nationals into Taiwan because of the tax regime. Also the capital markets are not as efficient in Taiwan as they are in some other countries – making it more difficult to raise capital locally – and Taiwan has a limited number of tax treaties with other countries. So for foreign investors, Taiwan is very, very attractive from a stability standpoint, but not so attractive from the standpoint of financing and taxation. 

How about as a living environment?

The living environment in Taiwan is great. I’ve been based here twice now, and just in the course of ten years the difference is very noticeable in air quality, the availability of international brands, and the higher quality of goods and services. The educational institutions are excellent, and living standards are at an international level. I always tell people that Taiwan is the best-kept expat secret in Asia. It’s a very easy place to live, the transportation systems are good, and the people are very gracious.  Even if you don’t speak Mandarin, that’s not an issue, especially in Taipei.

The one thing that’s disappointed me as a Taiwan resident is the limited tourism infrastructure. When my family has traveled around Taiwan, sometimes we’ve been very impressed with the facilities, but oftentimes we’ve been disappointed. So we’ve made some travel decisions to go off the island instead of vacationing in Taiwan, just because we weren’t sure what we were going to get here in terms of service and facilities.

That’s unfortunate because Taiwan is an incredibly beautiful place. I know that well, because I’ve been in every nook and cranny of Taiwan over the past six years on test drives. Since it’s hard for me to conceptualize, in the abstract, how the customer is going to experience a vehicle, I need to have a hands-on experience in all driving situations.

How difficult is it to manage people here compared with some other countries?

The Taiwanese are very hard workers. They’ve got a great work ethic and a “can do” attitude. It’s been a real pleasure working with them. They’re very participative, thoughtful, and process-oriented, so it’s very easy to manage in that regard. When they say they’re going to do something, they generally do it. Compared with some other places I’ve worked, in Taiwan there’s less of a gap between management and the line workers in business acumen, in education, and in commitment to the company and to the business, which makes everything much more efficient. Management doesn’t have to work so hard to convince workers an initiative is the right thing to do. The workers connect the dots very quickly, and that makes decision-making faster and implementation faster. In that regard, it’s a great place to work and a great place to do business.

Auto-Electronics Firms Eye the Chinese Market

Taiwan’s strong foundation in the ICT industry should help in developing the emerging telematics sector.

BY PHILIP LIU

Aided by Taiwan’s robust ICT (information/communications technology) industry, local manufacturers are moving into the auto-electronics sector, hoping to take advantage of its huge market potential given the growing trend for smart and environmentally friendly cars. They are particularly focusing on the Chinese market, now the world’s largest auto market, in view of Taiwan’s geographical proximity and cultural/linguistic ties, as well as the thaw in cross-Strait relations.

An impressive embodiment of the initiative is the equipment contained in the “Luxgen”-brand vehicles developed by Yulon Motors and launched earlier this year. The cars are equipped with a built-in 3.5G communications module, 10.2-inch audio-visual entertainment system, satellite navigation device, 360-degree surrounding view system, and night-vision device. It takes 24 CPUs to provide the needed computing power, compared with seven or eight in most other luxury models.

“The incorporation of the IT and ET [environmental technology] elements is what distinguishes the Luxgen brand, enabling it to face up to global auto brands,” said K.C. Hu, president of Yulon’s Luxgen division, at a forum in July organized by the Bureau of Foreign Trade. “The transplantation of technology into a car is a sophisticated task, involving the critical issue of driver/machine interface,” he added. “While our rivals may install mobile phones inside the car, we have created an auto ICT technology enabling drivers to easily manipulate the device when the car is moving.”

A number of the key auto-electronics technologies in the Luxgen were developed by the Hua-chuang Automobile Information Technical Center Co., set up by Yulon together with several major domestic IT firms – including HTC, Ever-Light, and E-ton – to engage in R&D related to smart and environmentally friendly cars. Altek Corp., another Yulon affiliate, was responsible for developing several of the driving assistance systems incorporated in the Luxgen, including the 360-degree surround-view display, back-up driving system, and central-lane deviation warning system.

Yulon is a newcomer to the auto-electronics sector, which emerged three or four years ago with the entry of such major domestic tech companies as Hon Hai, Quanta, United Microelectronics (UMC), and ASUS. These enterprises were attracted by the high margins, long product life, and huge market potential afforded by auto-electronics, especially at a time of steadily thinning margins on existing products, including PCs and mobile phones.

If the engine is the heart of an automobile, industry players liken auto-electronics to the nerves and joints. Quality and safety, rather than price, is the most crucial factor for such products, resulting in strong profit margins. In addition, the life cycle for auto-electronics can be five to 10 years, compared with just several months for many ordinary electronics items. 

The Industrial Economics and Knowledge Center (IEK) of the semi-official Industrial Technology Research Institute (ITRI) estimates that global output of auto-use semiconductors, the core of auto-electronics, alone will be worth US$18 billion in 2009. The figure is expected to grow at an annual clip of 12%, reaching US$24 billion by 2012. IDC, a Massachusetts-based IT industry research organization, predicts that the global telematics market – essentially the incorporation of automation in automobiles – will grow by over 20% to reach US$42 billion in 2010.

The Market Intelligence Center (MIC) of Taiwan’s Institute for Information Industry (III) forecasts that from 2007 to 2012, the global telematics industry will grow at a compound average growth rate of 37%, compared with just 2% for mobile phones and 7% for notebook PCs.

In recent years, the market has been boosted by regulations in many developed countries requiring the mandatory installation of safety- and environment-related devices such as TPMS (tire-pressure monitoring systems), electronic auto-body stabilization systems, OBD (on-board diagnosis) devices, OBM (on-board management) systems for monitoring waste emission, and emergency-notification systems.

Over the past several years, Taiwan has gradually built up a strong auto-electronics supply chain, especially for in-car electronics devices. According to the Ministry of Economic Affairs (MOEA), the output value should reach NT$200 billion (US$6.3 billion) in 2009. The major products being made in Taiwan include auto-electronics components, electronic ignition devices, monitoring devices, in-car communications devices, in-car audio-visual entertainment devices, HUD (heads-up displays), instant-speed devices, GPS (global positioning systems), and driving assistance systems.

Some manufacturers have established themselves as among the leading suppliers in their respective sub-sectors. Sino American Silicon Products, for instance, a maker of silicon wafers for auto-electronics applications, counts Toyota suppliers among its customers. The company entered the auto-electronics sector in 1998 and operates manufacturing facilities in both Taiwan and China’s Kunshan. Its auto-electronics products, which now account for 40% of its total output, have received safety certification from major automakers. In is currently gearing up to tap the gasoline-electric hybrid-car sector.

Actron Technology Corp. identifies itself as the world’s second largest automotive diode maker, with a 30% global market share that trails only Japan’s Sanken and equals that of Germany’s Bosch. It manufactures in plants in both Taiwan and Qingdao in China, and plans to start production next year of diodes for voltage regulators and ABS braking systems (for which it would become only the second supplier in the global market).

Increasing numbers of Taiwan auto-electronics firms have been accepted as parts of the supply chain of international automakers. Chroma ATE Inc., for instance, is the sole supplier of PEM (power engineering management) systems to Tesla Motors, a leading U.S. electric-car manufacturer, which provides the Taiwan supplier with proprietary technological support. Chroma ATE is also supplying the PEM for Yulon’s Luxgen.

Taiwan Semiconductor Co., a manufacturer of automotive rectifier-diodes, is a certified supplier to Hella, the world’s third largest producer of auto-electronics; BYD Co., a Chinese electric-car maker; and Bosch. In addition, Hu Lane Associate, which makes auto terminals, has joined the supply chain of several major Chinese car companies, including BYD. It has also passed the certification to supply to the NICE Car Co. of Britain, for its new MyCar electric car.

Government promotion

Aware of the huge potential of auto electronics, the Taiwan government has been actively promoting the industry’s development. MOEA, for example, has been sponsoring a number of major R&D programs regarding auto-electronics technologies, mainly related to smart cars, next-generation telematics, and electric cars. 

The programs have involved heavy investment from various government-sponsored industrial research bodies, and have resulted in the transfer of a number of key technologies to the private sector. Among the technologies that have already been commercialized are backup driving assistance and parking assistance systems developed by ITRI’s Mechanical and System Research Laboratories (MSRL) and a driving-lane deviation warning system from the Automotive Research and Testing Center. MSRL has focused its research primarily on such smart-car functions as automotive control/safety and clean power, and on electric cars. It rolled out a prototype electric car for use in urban areas in August 2008.

This June, MOEA’s Department of Industrial Technology established a Telematics Promotion Office (TPO), responsible for formulating telematics-related industrial policy and providing assistance to companies in the sector. Under TPO sponsorship, the Taiwan Telematics Industry Association (TTIA) was formed in October, bringing together leading players in the industry, including Hon Hai Precision, Universal Scientific Industrial, Yulon, and Compal.

In addition, the Taiwan External Trade Development Council (TAITRA) has held the Auto Tronics Taipei trade show every April since 2006 in conjunction with the Taipei International Auto Parts and Accessories Show. The 2009 edition, with the theme of “Green Vehicle and Energy Conservation,” saw 110 exhibitors in 250 booths displaying products in the categories of auto electronics, auto-body electronic systems, engine management systems, multi-media driving information and communications systems, auto-electronics components and accessories, auto semiconductors, GPS, and LED.  

Despite the progress, the pace of development in Taiwan’s auto-electronics industry has been slower than expected, due mainly to the high technological threshold and suppliers’ difficulty in gaining certification from major automakers, which typically takes two to three years. “It’s not easy for ICT firms to step into the auto-electronics sector, since your products have to pass rigorous environmental challenges, including temperature, humidity, vibration, and magnetic wave interference,” says Lin Dong-liang, special assistant to the chairman at Hon Hai, which is entering into production of auto connectors and wire/rods.

As the cross-Strait relationship eases, the fast-developing Chinese market is seen as a means for the Taiwanese auto-electronics industry to break through its development bottleneck. China’s total auto sales in the first 10 months of 2009 jumped 37.7% to 10.9 million units and is expected to hit 13 million for the full year, outpacing the United States to become the world’s largest, according to the China Association of Automobile Manufacturers.

MOEA is encouraging the local auto-electronics industry to develop the Chinese market first before trying to extend its reach to major European and U.S. automakers.

Taiwan and China are complementary in the auto industry, says Chen Kuo-rong, chairman of the Taiwan Transportation Vehicle Manufacturers Association and president of Yulon. He notes that Taiwan needs the scale of the Chinese market, while China needs Taiwanese technology to support its upgrading and innovation. That combination, says TPO Director Wang Wei, will foster huge business opportunities on an unprecedented scale.

Chang Chia-hsiang, concurrently the TPO deputy director and director of III’s Emerging Intelligence Research Institute, argues that Taiwanese firms currently face an excellent opportunity to tap the Chinese market, especially in view of Beijing’s plan to merge existing auto firms and foster indigenous brands. The Chinese auto makers are more likely than their Western competitors to embrace Taiwan’s auto-electronics products, so as to cut costs, as seen in the late September visit to Taiwan of Yi Tongyao, chairman of Chery Automobile, to make contact with local auto-electronics suppliers.

Recent liberalization of the Taiwan government’s policy on cross-Strait investment will lead to investments in both directions between auto-parts makers on the two sides of the Strait, says Tsai Yu-chin, chairman of Mobiletron Electronics, an auto-electronics components maker. Those investments, he adds, will make it easier for Taiwanese auto-electronics companies to enter the supply chains of China’s state-run automakers. Tsai envisions the growth of a division of labor in which automated manufacturing and quality verification is done in Taiwan, while assembly, logistics, and after-sales service is handled in China.

MOEA is seeking to assist domestic auto-electronics companies to tap the Chinese market, mainly through its Cross-Strait Industrial Bridging Program. Under the sponsorship of the program, the 2009 Conference on Cross-Strait Cooperation and Exchange for Telematics Industry was held in Taipei in April; delegates from the two sides resolved to establish a platform for systematic exchange and technological cooperation. During the conference, E-Lead Electronic signed an agreement with China’s Jilin University for joint development of new auto-electronics products, starting with a tire-pressure monitoring system.

MOEA aims to increase the production value of Taiwan’s auto-electronics industry to NT$600 billion (US$18.8 billion) by 2015.