Foxconn employs a million workers in China, but it is a Taiwanese company.
And they are by no mean the only one. What makes Taiwanese companies dominate electronic design & manufacturing? It has a lot to do with experience and … trust.
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TAIWAN ELECTRONICS MANUFACTURERS SOMEHOW STILL STAY ON TOP
Taiwan is known, for some 45 years now, for exporting all sorts of electronics. Notebooks, but also lots of components such as power supplies, wireless modules, camera modules, lenses, IP cameras, etc.
It is home to TSMC, the world’s largest, and most advanced independent IC maker.
Certainly, over the past 20 years, a lot of manufacturing has moved to China, to the point that now some 80% of the world’s electronic products are made there.
But Taiwan’s ODM’s were among the first to move factories to China, and most of the world’s top OEM’s (contract manufacturers for electronic products) are still Taiwanese.
2022 TOP 10 OEM MANUFACTURERS OF ELECTRONICS
- Foxconn— Taiwan
- Pegatron— Taiwan
- Wistron— Taiwan
- Jabil— USA
- Flex— Singapore
- BYD Electronics – China
- USI – China
- Sanmina– USA
- New Kinpo Group— Taiwan
- Celestica— Canada
4 out of the world’s 10 top OEMs are Taiwanese owned and managed, quite an achievement for a country of just 24 million people.
The electronics industry is known for intense cost-consciousness, why are none of the big brands such as Apple, Dell, HP, and Sony “going direct” to a Chinese factory? Why are they all willing to pay for ex-pats managing their factories in China?
TAIWAN LEADS THE WORLD IN ODM: DESIGN & MANUFACTURING
It gets even more impressive is when you look at the top 10 ODM’s (companies which both design AND manufacture electronics for their brand name clients). You will find ONLY Taiwanese companies (source).
2022 TOP 10 ODM MANUFACTURERS OF ELECTRONICS
The conclusion is pretty stark: The world’s largest brands pick Taiwan 10 times out of 10 when they need a company to trust doing electronic design for them.
Compal, a Taiwanese company you have likely never heard of, actually does both the design and the manufacturing for 8 of the world’s top 10 notebook brands. They are apparently ethical enough to handle all these clients in parallel without information passing over. They know the roadmaps of all the worlds top brands clients for the next 3 years, but they want each of them to be successful. The few Taiwan electronic firms which do have their own brands, such as Acer and Asus, have put their ODM activities in completely separate companies (Wistron and Pegatron), and as their sales prove: their clients trust them completely. Interestingly, the brand Acer has its notebooks designed and made not just by Wistron, but also by Compal and Quanta.
Nobody wants to create another Huawei. Cisco taught Huawei all the intricacies on how to design and make their gear, only to see them selling those products under their own brand for less, and eventually overtaking them.
After this story came out all electronics brands started to understandably get a lot more careful.
Apparently, few of the big international brands trust Chinese management enough to “go China direct”.
WHY TAIWAN OVER CHINA?
In a practical sense, Taiwan is of course really close to China, the Taiwanese speak the same language and understand Chinese culture.
So of all the “foreigners”, they are among the most suitable to run a factory in China. Every 5 minutes there’s a plane from Taiwan going, via Hong Kong, to China.
Taiwanese and Chinese engineers both are hardworking and smart. But where many Mainland Chinese tend to be self-confident and often aggressively ambitious, in comparison Taiwanese tend to very friendly, modest, and even shy.
I say this after having worked with Taiwanese and Chinese engineers and factory bosses for 25 years. As with any stereotype, there are plenty of exceptions, but the top of the normal distribution is simply at different points.
PSYCHOLOGICAL DIFFERENCES BETWEEN THE MAINLAND AND TAIWAN
Since 1949 the two countries have seen very different histories and politics. What this difference means for businesses is that the Taiwanese seldom have the ambition to build their own brand, and if there are problems with their clients, they have the long-term vision to try to maintain the long-term relationship.
This also means that the Taiwanese tend to really evaluate if they are a good match to form a long term business relationship with you, and so will take quite some time before they send you a quotation.
Meanwhile, the stereotypical bad Chinese factory would put in some lowball offer the next day, looking for a deposit to get you hooked and get a conversation going.
Only then will they try to find out if they can actually make your product, to the quality level required, and how much it would cost them to do so. After that, they will “update” their cost to you of course.
CHASING THE ‘CHINESE DREAM’ LEADS TO INSTABILITY
For the economic growth of China, it is fantastic that almost everyone is super ambitious to get ahead and eager to start his own business.
But if you need a complex electronic product designed, you don’t really want half the engineers to leave in the midst of a project, maybe even (start a) competitor, leaving your development stuck with firmware which nobody else knows how to finish. Signing an NDA with the Manufacturer doesn’t help much when the engineers who worked on your project have already left.
In China, both factory workers and engineers are known for jumping ship for a few % extra salary after only 6 months in the job.
I just talked with a factory boss whose Taiwanese factory’s worker turnover was 5%, whereas his Chinese factory’s turnover was 20%, and that is considered low.
In many Chinese-managed factories, 30 to 40% of the workers simply don’t show up after the Chinese New Year holiday.
Another Taiwanese boss I know in China hires 2 engineers for every position, in the hope that one is still there when the other leaves.
THE ‘GREATER CHINA SUPPLY CHAIN’ IS STILL THE KEY TO COMPETITIVENESS
Electronics firms looking for alternatives to China may consider countries such as Vietnam due to its lower labor costs. But labor as a percentage of the total cost of, say, an iPhone is not more than 5%.
For many years now, China has been ‘out-cheaped’ on labor by countries such as Vietnam, Indonesia, or Myanmar.
But, the reason that 80% of the world’s electronics is manufactured in China, is its unsurpassed ecosystem of electronic components.
“Uprooting an entire supply chain is a nightmare task,” said Jon Cowley, an attorney in the Hong Kong office of Baker McKenzie, a global law firm, who advises corporate clients on tariffs and supply chains. “It takes years, if not decades.” (https://www.nytimes.com/2019/06/29/business/us-china-trump-trade-truce.html)
Working with a Taiwanese electronics ODM you have the advantage of having direct access to the Greater China supply chain, and for me, this incredible eco-system of component vendors is most important in the design phase.
ELECTRONIC DESIGN AND ASSEMBLY NEED TO BE CLOSE
If you want to achieve any sort of Time To Market, you need to engineer in very close cooperation with the vendors making your custom parts.
There is no universal DFM, there is only optimization for any given supplier’s factory where we adjust our designs so they can make and assemble the parts as efficiently and reliably as possible.
Doing the whole design in a vacuum half a world away is going to cause a lot of delays when you finally transfer it to the factories in Asia.
Take the iPhone, for example.
A lot of different parts are needed to build a product such as an iPhone: touch screens, camera modules, lenses, batteries… Many of the parts needed are custom-made, think plastics, circuit boards, cables, springs, displays, and rechargeable batteries.
And guess what, many of these component makers are also Taiwanese owned. Not just TSMC for IC’s, but also Catcher for housings, Largan for camera modules, and ZDT for PCB’s.
Each custom part is a new product in itself, which needs prototyping and continuous optimization during pilot runs.
All these custom parts come together during assembly, so this is where the compatibility issues between all these parts become clear.
For some mysterious reason, most part suppliers prefer that the OTHER component manufacturer changes their design, and reworks the 10,000 parts they already made.
So a lot of discussion and negotiation is always needed. Since all key assemblers and many key component makers are Taiwanese-owned, they all have their main R&D in Taiwan, and so this is where all compatibility issues are hashed out.
So naturally, clients like HP, Dell, and Siemens all have a lot of their R&D in Taiwan as well. This is a major reason for the stickiness of Taiwan’s hold on high-end electronic design & manufacturing.
Trying to coordinate all this from across the ocean with 12 hours time difference is hugely inefficient, so both the design and the final assembly need to be done as close to the component suppliers as possible.
Every time Foxconn opens a new assembly facility, it demands its top 20 suppliers to set up a new factory next to that new assembly plant.
With close access to the ‘Greater China supply chain’ is still crucial to many electronics brands, it’s no surprise that the world’s top electronic brands all feel that Taiwanese ODMs are best placed to design and engineer their electronics.
Taiwan is close enough to China to fully leverage the supply chain, but in splendid isolation to be protected against IP and other risks.
(I also expanded on this when interviewed about manufacturing electronics in Taiwan as an alternative to China on QualityInspection.org).
TRUST IS KEY IN SELECTING AN ODM PARTNER
The development of a new product can take more than a year of effort and a lot of budgets. So as a client, you invest a lot in the relationship, in development fees, time, and IP.
The tricky thing is that at the start of a design project, it is difficult to fix the final cost of the unit because the exact components and the design of the product are not done yet.
Having invested that much in the venture, a client becomes vulnerable, because moving a complex product to a different manufacturing partner with a different set of component suppliers will again take a lot of time and money, while the market window for consumer electronic products can close after just 6 months.
So to ask another company to do both your design and manufacturing you need a lot of trust. See China ODM Factory Electronic Design: 7 Pitfalls To Avoid.
A good partner does not abuse the trust placed in them. Seeing that the Taiwanese firms have been able to retain their clients for so long is a big vote of confidence.
There simply is no better place in the world to have your electronics designed, and your manufacturing managed.
HOW DO I CONVERT MY ‘MADE IN CHINA’ PRODUCT INTO ‘MADE IN TAIWAN’?
With the US-China tariff was going on many companies are seeking alternatives for China. Simply shipping a product originally made in China to Taiwan, does NOT make it made in Taiwan. Declaring it as such is a fraud, and can have serious repercussions.
We know that under US law a ‘substantial transformation’ of the product needs to take place in a country for a product to be classified as ‘Made in Taiwan.’
To clarify this matter, I asked Dan Harris, author of China Law Blog, about the exact % of transformation required, and he replied in this post of mine on LinkedIn:
I was slow to respond to your substantial transformation question because the concept is complicated and fraught with danger and should be answered by an international trade lawyer, which I am not. Before President Trump started slapping tariffs on China, I had never heard of substantial transformation and I had no idea how to determine a product’s country of origin. But because your question deserves a good answer, I asked Adams Lee, one of our international trade lawyers, to write on it as part of his already planned post on how to respond to the China tariffs.
That post just came out and can be found here: US-China Tariff Updates: What You Can (and Should NOT) do NOW.
There is no definitive answer beyond saying that whether a product has undergone a “substantial transformation” in a third country (Taiwan) such that it will be deemed to have been made in Taiwan (and not China) for China tariff purposes must be made on a case-by-case basis.
As a lawyer there is just no way I am going to give my blessing to anything involving transshipping and tariffs without doing some serious due diligence first.Therefore, I would suggest to electronics importers seeking a way out of China that if PCBA and final assembly are done in Taiwan, there should be enough value-added in Taiwan to call a product ‘MIT: Made In Taiwan,’ even if they use many Chinese components that have been shipped over. However, while my recommendation may be correct, it’s important at this time to get legal advice about your products if you’re planning to use Taiwan, or another country, as an alternative manufacturing base in this way.
CONCLUSION
Taiwanese ODM Electronics firms have a good 40 years of experience maintaining great relations with Western brands and are very close to China and its unparalleled electronics supply chain.
So while 80% of the world’s electronics are made in China, the whole top 10 of the world’s ODM’s are Taiwanese owned. And for good reason: Taiwanese ODM‘s are known for good quality, reliable production lead-times, fair prices, and above all good business practices.
In the long run, that last one is really what will keep a business relation sound.
When moving production to a different country you do need to make sure that enough ‘substantial transformation’ of the products takes place, real work needs to be done.
With its complete infrastructure and access to the Greater China supply chain, Taiwan is the obvious choice for global electronics brands who want to move out of China.
HAVE QUESTIONS ABOUT THE DESIGN AND MANUFACTURE OF ELECTRONICS IN TAIWAN OR CHINA? TALK WITH US
Titoma provides B2B companies with the complete design and manufacturing of embedded electronic products, both in China and Taiwan.
Unlike most ODM manufacturers we offer our clients complete ownership of the IP, so nobody is locked in.
We engineer our products in Taiwan and are very well tapped into the China/Taiwan Component Eco-system, so key to remain competitive.
We involve a few trusted factories, right from the start of the design. This way we make sure everybody is aligned, and by avoiding surprises we avoid delays, assuring the fastest possible Time To Market (hence our name Titoma).
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