Industrial Development in the New Century

Chi Schive

President Taiwan Academy of Banking and Finance

Adjunct ProfessorNational Taiwan University

May 4, 2001

OutlineI. Megatrends in the Coming Decade 1. Production Technology in Retrospect 2. Globalization

II. Conventional Thinkings of Industrial

Development 1. Definition of Industry 2. Target Industry and Industrial Policy 3. Ambiguity and Challenges

Industrial Development in the New Century

III. Alternative Thinkings of Industry 1. Knowledge-Based

2. Organization

3. Location

IV. Impacts and Implications 1. Business Model--Global Logistics

2. Regulation--Competition vs Industrial Policy

3. Software Infrastructure--Institutional Reforms

V. Conclusions

Industrial Development in the New Century

The Tonne Age Industrial revolution - 1950s

Steel, ships, textile, construction

The Kilo Age 1960s-1970s

Cars, consumer electronics, appliances

The Gram Age 1970s - 1980s Micro electronics, robotics

The Vacuum Age 1990s

Services, systems, media

Production Technology in History

Source: Slightly revised from Jean-Pierre Lehmann,“The Future of the Asia Pacific Economies: Dynamism of Trade and Investment” presented at APEC Economic Committee Symposium The Future of Asia Pacific Economies, December 6 1999, Tokyo.

資訊傳遞速度

1950年代 越洋平信 一月

1960-70年代 越洋航空 一週

1980-90年代 電傳 Facsimile 分

1990年代 E-mail 即時

� 通道 1. 分行 2. 電話銀行 3. ＣＤ／ＡＴＭ 4. （專屬）ＰＣ銀行 5. 網際網路銀行

成本／交易ＵＳ＄ 1.07ＵＳ＄ 0.54ＵＳ＄ 0.27ＵＳ＄ 0.015ＵＳ＄ 0.010

Source: Booz Allen & Hamilton research (1996/North American)

服務通道趨勢－銀行處理成本

Source: Booz Allen & Hamilton research (1996/North American)

Lowering Real Inventory-to-Sales Ratios

Ratio of Inventory to Sales in the U.S.

World Output and Goods Trade

3.5

2.22.9

6.9

5.3

8.7

2.02.4

3.0

World Output (Growth, %) Trade Growth/

Output Growth

World Goods Trade Volume (Growth, %)

84-88 89-93 94-98 84-88 89-93 94-98 84-88 89-93 94-98

Regionalism, Regionalization of Trade

30

35

40

45

50

55

60

65

1980 1985 1987 1989 1990 1991 1992 1993 1994 1995 1996 1997

NAFTA

East Asi a

Taiwan

EU

Intra-regional Trade as a percent of Total Trade

Net Private Capital Inflows to Emerging Economies

1984-19893 1990-19963 1996 1997 1998 1999

Total Capital1 12.5 141.7 214.8 117.8 69.5 89.7

FDI

Portfolio

Others

13.1

4.4

-4.9

64.6

64.0

13.0

121.1.

79.9

13.9

145.0

66.6

-93.8

127.3

42.0

-99.8

119.2

25.1

-54.5

Asia &NIEs2 9.9 58.3 108.1 -15.1 -49.5 -38.1

Africa 2.3 3.7 5.1 14.1 7.3 14.2

Middle East &Europe

2.3 22.9 3.9 7.9 24.9 21.9

Latin America -0.2 46.1 81.7 88.3 73.6 75.3

Note: 1. Net private capital flows comprise net direct investment, net portfolio investment, and other long- and short-term net investment flows, including borrowing.2. NIEs = Hong Kong, South Korea, Singapore, Taiwan, and Israel. 3. Annual averages.

Source: IMF, World Economic Outlook, December 1998.

US. $ billion

II. Conventional Thinkings of Industrial Development

Definition of Industry: Any branch of trade, business, production, or manufacture

• Output-oriented

Agriculture, Industry (mining, manufacturing, public utilities, construction), Service

• Characteristics-oriented

Heavy and Light Industry

High-tech / Technology Intensive Industry

Capital / Labor Intensive Industry

• Stage of Process (Commodity)Agriculture Intermediates Final (Consumer, Capital goods) Service

II. Conventional Thinkings of Industrial Development

Target Industry:

• Ten emerging industries in Taiwan

• 15 New Growth Areas in Japan (1995)

II. Conventional Thinking of Industrial Development

Ten Emerging Industries

• Communication• Information• Consumer Electronics• Semiconductor• Precision Instruments

and Robotics

• Chemical Specialties and Drug

• Health and Medical• Anti-pollution• Aerospace• Special Materials

Examples of new products and services

Health and welfare Home care, care equipment, home health,telemedicine, advanced medical equipment

Culture and family life support Community business, continuing education, leisuretravel, apparel

Information and communicationstechnology

E-commerce, content, GIS (geographicalinformation systems), electronic government

New manufacturing technologies Next-generation new materials, advancedproduction control robots, maintenance-freeequipment

Distribution and transport Internet mail order, third-party logistics (3PL),distribution information services

Environment Low-pollution vehicles, recycling, environmentalequipment, environmental creation and restoration

Business support Outsourcing, authorization business, solutionsbusiness

Marine business Mega-float project (ultra-large floating structures),fishing industry infrastructure

Source: Nomura Research Institute, from Review of the “Action Plan for Economic Reform”, Ministry of International Trade and Industry, March 1998.

II. Conventional Thinking, Targeted Industry

Fifteen New Growth Areas: New Products and Services

Examples of new products and services

Biotechnology Pharmaceuticals, food, chemicals,energy/environment

Urban environmental facilities New traffic systems, cable burying

Aerospace (private demand) Next-generation aircraft, hub airports, testingaircraft limits

New sources of energy and energyconservation

Solar energy, wind energy, waste-to-energysystems, clean energy, energy servicecompanies (ESCOs)

Human resources Temp staffing, vocational training, recruitmentagencies

Internationalization International transport, foreign companies,international business consulting, support forexpatriates

Housing Renovation, previously owned housing market,new building materials

Source: Nomura Research Institute, from Review of the “Action Plan for Economic Reform”, Ministry of International Trade and Industry, March 1998.

II. Conventional Thinking, Targeted Industry

Fifteen New Growth Areas: New Products and Services

Ambiguity:

• Commodity Vs. Service

Newspaper--Broadcasting--TV--Internet

R&D, an industry?

• Market and Industry

Where is a market, there is an industry.

But market and production may not be at the same place--production fragmentation.

II. Conventional Thinking of Industrial Development

• Vertical DisintegrationEmerging small and medium-sized business

• Production Fragmentation

International division of labor in line with comparative advantage

In pursuit of dynamic advantage--changes in the “Flying-Geese” pattern of development

• Target Industry and Industrial Policy

II. Conventional Thinking of Industrial Development

• Knowledge-Based Activities

• Knowledge Creation and Integration

III. Alternative Thinkings

“… modern economic growth could best be viewed as a process based on a change which raises greatly the stock of technological and social knowledge … When the … knowledge is used, it becomes the source of … increase in output and structural shifts that characterize modern economies.”

Simon Kuznets

Modern Economic Growth-Rage, Structure and Spread, 1966

Knowledge Creating Industries

Industry Society Meansproduction

Form ofproduction

Management Nationalpower

Agriculturalization Land Smallquantities of afew products

Cooperation Military

Industrialization Machines Largequantities offew products

Standardization Political

Computerization Computers,ICT networks

Smallquantities ofmany products

Computerization Economic

Creationintensification=knowledge creation

Conceptors,ideaengineering

Unique itemsof manyvarieties

Networking Cultural

Source: Sozo no Senryaku [ Strategy for Creation ] , Nomura Research Institute, 1990.

Innovation as Problem Solving

• Capability of problem solving is related to knowledge base.

• Knowledge comes from experience, publicly available information and the uncodified character of innovators, e.g., capability and tacitness.

Innovation as Problem Solving

• Technological Paradigm affected by and including three elements:

l. the needs to be fulfilled;

2. the scientific principles to be utilized for the task;

3. the material technology to be used.

• Functional

Knowledge Integrating Industries

Petaloid Industry

III. Alternative Thinkings: Knowledge Integration

T. Murakami, Encouraging the Emergent Evolution of New Industries, Nomura Research Institute, 2000

IV. Impacts and Implications: Infrastructure

Livelihood

National Competitiveness

Other Industries

MarketDom.Gov.

Exp.

Demand SideDemand Side

NewActivitiesinExistingBusiness

New

Enterprises

Innovations

Capital

V.C.

Banking

FinancialMarket

Supply SideSupply SideFactor Market

Management

Other Labor

R & DPersonnel

LaborMarket

B2BB2CG.L.

New Business/Investment

IT Infrastructure

Hardware Software

Foreign

Knowledge-Based Economy Paradigm

LaborCapital

ICT

The Foundation of the ICT Industry

R&D PeopleVenture Capital

Institutional Setting

III. The Foundation of the New Economy

Knowledge-Based

Rule-Based

New Economy

IV. Impacts and Implications: Government Role

Infant industry or infant entrepreneur?

Are government officials smarter?

Will the state-owned company be necessary?

Are means at hand, --tariff, subsidies, and regulations--still available or necessary?

Limits of fiscal and monetary policies.

Global Logistics: A New Business Model

• Changes in business environment, production fragmentation

• New technology available

• A knowledge creating and integrating business

Production Sharing of Taiwan’s Information Industry

1995 1996 1997 1998 1999*

Total 100.0 100.0 100.0 100.0 100.0

Taiwan 72.0 67.9 62.6 57.0 52.7

China 14.0 16.8 22.8 29.0 33.2

Thailand 5.0 5.5 5.9 5.4 5.3

Malaysia 7.2 7.4 5.6 4.5 4.0

Other 1.8 2.4 3.1 4.1 4.8

%

* Estimates.Source: Market Intelligence Center, Institute for Information Industry.

1. DELL sends a request to Taiwan upon a Singaporean client order

2. The U.S. firm sends CPU to Taiwan

3. China sends cases and power supplies to Taiwan

4. China sends semi-assembled parts to Taiwan

5. Malaysia sends PCB to Taiwan

6. Taiwan sends DRAM mainboard and semi-assembled parts to Singapore

7.China send monitors to Singapore

8. Singapore assembles and sends the finished PC to the client

9. DELL sends the payment to Taiwan

Singapore

China U.S.

DELL

5

PCB

6

1

2

4

Order

CPU

MO

NIT

OR

9

DRAM main-board

8 PC

7

Source: Compiled by CEPD.

3

Taiwan as a Global Logistics Center

Taiwan

Malaysia

Steps 1 to 8 take 2 to 5 days to complete

Operation Characteristics in Taiwan: from OEM to GL

R&D Manufacturing Marketing andDistribution

OEM

R D Mfg Marketing andDistribution

ODM

R D Mfg Logistics M

ODL/GL

Before the mid-1980s

In the late 1980s and early 1990s

After the mid-1990s

: Local operations

Japan

Taiwan U.S.

I: InvestmentM: Materials/IntermediatesQ: Finished product/commodityS: Strategic alliance

Before the mid-1980sLate 1980s and early 1990sAfter the mid-1990sASEAN

I&M

M

I&MQ

QS

Q

Q

Taiwan’s International Division of Laborfrom Triangle to Diamond

China

I&M

Q

S

全球運籌中心

總體經濟調整建立符合國際規範之經營環境，減少人員、資金、資訊進出障礙，改善兩岸經貿往來

資訊流

商流 物流

資金流

改善通關作業，縮短運送時間及提升配送能力

累積科技及製造能力，使台灣成為國際市場的主要貨品供應者

協助跨國資金調度及支付建立網路系統，便

捷資訊傳遞與處理

電信中心

製造中心 海、空運中心

金融中心

From APROC to Global Logistics Center

Conclusions

“The true heroes of our time are those who bring to all society the tools for a better and fuller life. In the last decade, their achievements have been more amazing than in any other period of human history.” In the coming decade, it will be more so.

Henry O. Dormann