Taiwan's Strong ICT Players Seek New Arena in Auto Electronics

The global auto industry is undergoing a revolution with basic structural changes. Manufacturing conglomerates that have long manipulated the global market, especially in Europe and the U.S., are being forced to restructure and modify their traditional production modes under high cost pressures that have weakened their competitiveness, while, on the other hand, they are adopting more and more high-tech, multi-functional electronics parts and systems to substitute for heavy, large mechanical parts and components.

Thanks to rapid advancements in information and communication technology (ICT), intelligent cars are no longer just a dream, and the previously fixed and closed supply chains of global automotive makers are opening to innovative products at lower costs.

Big Pie

The global production value of automotive electronics, according to statistics compiled by global consulting firm Strategic Analytics, reached about US$122.4 billion in 2005, far outstripping the US$60.5 billion value generated by the notebook PC sector. The value is expected to sharply grow to about US$163.4 billion in 2008 due to the climbing rate at which modern cars are adopting electronics parts-in 2001, only about 23% of all auto parts were electronic, but the figure rose to 29% in 2005, and is expected to outstrip 40% in 2010. The more luxurious a car model is, the higher the ratio of electronics parts and systems it has.

The eye-catching growth of auto electronic systems and the rapidly expanding market (global automobile production volume is expected to top 70 million units in 2010, compared with about 60 million in 2005) are drawing the attention of manufacturers around the world.

Taiwan lacks the strong support of a sound homegrown complete-automobile manufacturing line due to its limited domestic market. However, there are many world-class ICT conglomerates on the island that can team up with the carmakers that are already here to actively diversify into the new field.

World-class Taiwan ICT makers are beginning to tap the automotive electronics business, industry sources say. Hon Hai, the world's largest maker of barebone PCs, connectors, and game consoles, recently acquired a local original equipment (OE) automotive wire harness supplier. Quanta Computer (a world-class contract notebook PC maker) and Compal Electronics (a leading IT and electronics maker) began aggressive deployments in the new business sector about two years ago in hopes of improving upon the thinning profit margins in their core businesses.

Another group of local companies actively developing their auto electronics business consists of local automakers, such as the Yulon Group. Yulon is the parent company of two carmakers, including Yulon Motor, a local assembler of Nissan and GM car models, and China Motor, which assembles Mitsubishi and Chrysler autos. Yulon has been actively supporting the development of auto electronics on the island to further strengthen its own R&D capability and technical independence, and Ford Lio Ho Motor Co., the local subsidiary of Ford of the U.S., has been trying to link local ICT makers with Ford's global supply chains to save costs for its American headquarters.

The initial results of the local companies' efforts, however, have not been as fruitful as originally expected, with most still selling products to the aftermarket instead of tapping the OE market.

Still a Few Years Off?

"It (entering the automotive electronics business) is more difficult to execute than our original expectations, but we have to continue moving forward and find some established partners in the line for technical integration or cooperation," admits Terry Kuo, chairman of Hon Hai. "That means it might still take us several years to be successful." Such comments are rarely made by Kuo, a "big hitter" who can effectively manipulate the global ICT market, but who still found obstacles in the auto electronics field.

Quanta has also been going after automotive electronics. The company recently acquired a majority stake in local Dingtian Science & Technology Co., Ltd., a leading GPS module developer and maker, and will begin shipping in-car GPS navigation devices to TomTom of Germany in the first quarter this year. Even so, Barry Lam, chairman of Quanta, also admits "Making notebook PCs and automotive electronics products are really two very different things."

There are many hindrances ahead, but there are also good opportunities. Over the past few years, many European and American carmakers have been forced to make changes in their cost structures and operational policies.

GM and Ford, the top-two automakers in the U.S., just decided to cut about 60,000 jobs, while Chrysler announced in late January that it plans to cut 6,000 jobs. In addition, major tier-one parts suppliers, including Delphi and Visteon, have also experienced financial woes in recent years. The crises of those global leaders mean chances for newcomers, industry sources say.

Another eye-catching opportunity for Taiwan automotive electronics makers is the booming automobile market in mainland China, which is growing at an average of 30% per year.

No one with knowledge of the industry doubts that the international automotive electronics line is still controlled by a small group of players including the major automakers and their tier-one parts suppliers. However, the global reputation of Taiwan's strong ICT industry, which is so good at cost- and quality-control, is causing the market leaders to consider additions to their tightly controlled supply chains.

Many procurement representatives of international carmakers and tier-one parts suppliers have visited Taiwan to find possible partners in the past two years, including Motorola Automotive, Magna, BMW, and Fiat, and most of them have established some form of cooperation with ICT partners on the island.

The production value of Taiwan's automotive electronics line was only about NT$70 billion (US$2.19 billion) in 2005, compared with US$134.13 billion worldwide, suggesting great room for possible growth for the island's manufacturers.

Moves

To prepare for the challenge posed by limited domestic new-car sales volume in Taiwan, a few years ago Yulon began transitioning from lower-margin automobile manufacturing to the higher-margin automotive electronics business. In late 2005, the group set up an automotive electronics subsidiary with capital from local ICT makers. Industry sources explain that Yulon plans to utilize homegrown automotive platforms as an integrated platform for proving the quality of its automotive electronics systems and parts. Yulon also targets shipping products to foreign technical partners such as Nissan, Mitsubishi, GM, Chrysler, and Renault.

Industry sources have said that Yulon made a safe, smart decision by starting small in the local market in the initial stage, and then expanding to the export market in the future if conditions allow.

An even safer way to enter the automotive electronics business has been adopted by Ford Lio Ho, which plays a bridge role by directly introducing local ICT makers to Ford's overseas affiliates. Currently, Ford runs a global procurement office that is actively seeking potential auto-parts and systems that can help cut the company's costs. If the office can find lower-cost parts that meet with Ford's quality and durability standards, the company-and its suppliers-will greatly benefit.

Competition Or Cooperation?

The core problem in integrating the ICT and automotive electronics businesses is whether the companies involved should cooperate or compete with each other. For example, Globaltop Partner I Venture Capital Corp., the first Taiwan venture-capital fund to focus on automotive-related investments, recently announced plans to close. The fund was mainly initiated by Lin Hsin-yi, former chairman of China Motor, and was expected to play a central role in the development of Taiwan's automotive electronics line.

Under the government's strong support, the so-called IA (IT + Automobile) project kicked off in 2005 with the goal of developing Taiwan's automotive electronics line by integrating the related resources of the governmental, academic, and private sectors.

Therefore, in the third quarter of 2005, Taiwan's Ministry of Economic Affairs (MOEA) announced a plan to spend NT$10 billion (US$312.5 million) over next five years to develop the industry. The Taiwan Electrical and Electronic Manufacturers' Association (TEEMA) formed an Automotive Electronics Committee in late 2005, and a broad strategic alliance was also set up with the Automotive Research and Testing Center (ARTC), Metal Industries Research & Development Centre (MIRDC), and Industrial Technology Research Institute (ITRI) to develop Taiwan's auto electronics line.

According to Rock Hsu, chairman of TEEMA, policy will not change at all after the closure of the Globaltop Fund, but "the absence of the fund will lead to a lack of a important vehicle for integration."

Hsu says that he anticipates that a second, similar fund will be established in Taiwan. Yulon, in fact, is actively trying to do so, and Hsu urges all TEEMA members to participate in it.

The closure of the Globaltop Fund and the withdrawal of some IT conglomerates from the automotive-electronics joint venture initiated by Yulon, according to industry insiders, reflect the complicated cooperation ties between local automakers and ICT companies. Initial signs have shown, the insiders point out, the two sides have different attitudes and policies regarding the integration project, as well as some biases and contradictions that make cooperation difficult.

The core problem, according to the industry experts, is that the operational mode and basic concepts of ICT companies are totally different from those of carmakers. The product life cycles and response times of the former, for example, are much shorter and faster than those of the latter (about six months, compared with four to six years), and if an ICT company does not participate in a carmaker's new-model development, there is no chance for it to receive an order later.

In addition, the production-volume goals of the companies in the two sectors vary greatly. ICT companies often target a basic production volume counting in units of one million, while automakers count in hundreds of thousands.

Another problem, the experts add, is that all major ICT companies in Taiwan are also leading players in their fields in the global market, while local carmakers mainly have small sales volumes in the limited market in Taiwan. The globally leading ICT firms have so far been unwilling to subject themselves to the control of the relatively smaller automakers in Taiwan, the experts say.

However, if the ICT companies continue not to cooperate, their chances of tapping global automakers' supply chains are very slim. Successfully entering these supply chains requires more than high technical ability and competitive prices. If ICT makers do not fully understand this fact, the experts say, they will have a difficult road ahead.

A modern car is basically an integrated platform that carries electronic and electrical components that must pass stringent safety tests and inspections to avoid any mutual interference. A PC can be rebooted easily when it has an electrical malfunction, but a car running at high speed cannot.

Some big IT conglomerates in Taiwan, the experts say, may try to effectively and rapidly tap into global automakers' supply chains through acquisitions of established auto-parts suppliers in Taiwan or other nations. But one thing cannot be forgotten, they add-very few companies in Taiwan have really tapped into the global OE (original equipment) market by directly supplying parts to carmakers.

There are always chances, the insiders say, but making the most of those opportunities require open-minded cooperation.