TH Tung: Taiwan startup sector must create its characteristics

Mark Tsai and Rodney Chan, DIGITIMES, Taipei 0

TH Tung, chairman of Taipei Computer Association (TCA), likens the startup scene - whose fundamental elements are capital, talent, technology and market - to wine making, which depends on the sunshine, rainfall and terroir. Apart from these, the type and quality of the grapes are also very important.

That is to say, the characteristics are very important in raising the added-value. There have been so many different wines using various types of grapes around the world, but Burgundy winemakers have been sticking to one single grape for their red wine, and yet they still manage to stand out in the industry. This is because the wine from this appellation has its characteristics and clear market target.

Tung takes his analogy further to the watchmaking industry. Electronic watches are the mainstream of the market, and the popularity of the Apple Watch and other smartwatches has been rising. But the Swiss makers of mechanical watches have never lost their appeal to consumers of the high-end market segment.

Tung noted that Taiwan does not lack capital, but the concern is how to direct these investment funds into startup businesses that may stand out from their international competitors. He disagrees with the idea that the government should make a policy to encourage a massive influx of capital into Taiwan. He said that without a clear set of regulations to implement to such policies, a lot of the funds would end up not in the tech sector, but rather in the real estate market, shooting up housing prices in Taiwan and creating a bubble in the stock market.

Taiwan's characteristics

In the face of growing competition from Southeast Asia, Tung said Taiwan, with limited land and a small population, is very similar to Israel, Singapore and the Netherlands, and it needs to develop its own characteristics and focuses on specialized services in order to stand out from the global IT ecosystem, and create a "Taiwan brand." The road to innovation will lead Taiwan to see fast growth again in the future, Tung believes.

The government plays an important role in economic and technological developments. The developments in Japan and Singapore are examples. Singapore is high in the rankings of countries with a free market economy. But its government has been embracing a planned economy, having successfully turned the country into an important petrochemical hub in the area. It has also become a financial center, thanks to government policy support.

Singapore has a large population of migrant workers, all of whom stimulate developments of various business sectors that provide services and support for the workers. The city state may not be much bigger than Taipei, but it is the destination of an annual volume to 15 million tourists. To boost its tourism, Singapore has made policy changes that were unthinkable in the past, such as legalizing gambling.

Tung said the lesson to be learned from Singapore is that there must a balanced development. Taiwan should not rely too heavily on its ICT exports; it must maintain a balanced development.

Japan may not be as open to foreign workers as Singapore, but the Abe government has already introduced a new policy trying to attract more foreign workers.

For Taiwan to attract foreign talent and create an optimal environment for startups, it must introduce ways to relax the restrictions on foreign investment, such as easing the visa requirements.

The government role

While Tung shows skepticism about how market economy and planned economy can really work together seamlessly in Taiwan, he still thinks there is room for the government to make changes in terms of opening the door wider to foreign professionals.

Tung said he can foresee that the gradual relaxing of regulations and establishment of IT industry infrastructures will motivate more Taiwanese investors to return home, creating job opportunities. This would boost the startup scene in Taiwan, as well as the quality of life and jobs.

But he identified one major problem with the government's calls for businesses to move their manufacturing operations back to Taiwan from China - a trend accelerated by the escalating US-China trade war.

Relocating a plant is not just about moving the equipment and recruiting assembly line workers for the relocated the plant. It will need a team of managers to run it. The original team should be able to make the relocated plant up and running fast, but the government is not supporting the idea of letting Chinese managers come to work in Taiwan, making it difficult for Taiwanese businesses to relocate their manufacturing plants back home.

Many Taiwanese businesses have clearly shown strong intentions of returning home, but the problem with the relocating of the managers needs the government relaxing the regulations.

AI and 5G: The 'magical' innovations

While 5G and IoT promise explosive growths of the next generation, Tung noted that every era has its own "magic" that boosts the economy. Japan relied on washing machines, refrigerators and TVs to get out of the economic doldrums in the post-World War II era during the 1950s. And in the 1960s, the "magical" products were cars, color TVs and air conditioners.

Tung said the color TV fad that Sony created at the time was comparable to what we feel about the trendsetter, Apple, of the present time. The birth of air conditioners gave people more comfort on hot summer days. Tung said such changes that increase value and solve problems are what tech innovation is all about. But he thinks management of innovative technology is as important as the hardware and software technology itself.

ICT vendors have been able to make a living as long as there are customers buying their products. But in the AI and 5G era, things may work differently for businesses. With so much R&D going on and so many innovative ideas emerging, it is the infrastructure of smart city that will be necessary to materialize the R&D and innovative ideas of businesses. That means that businesses' efforts alone will not be sufficient; it will need strong government support - from the national to local levels - to upgrade and rebuild the cities in order to materialize the AI and 5G applications.

Tung thinks 5G, AI, edge computing all offer good opportunities for Taiwan's startup sector. For example, it is much easier to implement self-driving in Taiwan than in Australia, where the vast territory and sparse population makes it cost-inefficient to make intensive and extensive deployments to enable self-driving.

For 5G, China and South Korea are looking to begin commercialization in 2020, but it may take Taiwan two to three more years to catch up, Tung said.

He said 5G development involves a lot of investments. The costs for 5G licenses and infrastructure constructions are key to whether smart city and self-driving cars can succeed. If the operators have to spend big in deploying their networks, consumers will have to pay expensive rates, undermining the popularity of 5G. But if the operators have to sacrifice their profits in order to boost the number of users, it will leave them with few resources to continue building and improving their networks.

Unicorns and disruptive businesses

According to Taiwan's government figures collected between 2007 and 2014, the survival rates of startup businesses from the first to fifth year of operations are 89%, 78%, 69%, 62%, and 57% respectively. They are similar to those in the US, Germany and other countries that are known for their startup scenes.

Tung said it is not easy for Asian startups: The risk of investment is high, and it is very difficult for one to last beyond 10 years. Startups may all want to become unicorns - privately owned businesses whose market cap is estimated at more than US$1 billion - but Tung pointed out that few unicorns have been able to make a profit. He said the aim of incubating a unicorn should therefore focus on what value and service it can bring to society.

The mentality of investors has changed. In the past, a company that wanted to get listed on a stock market would have to make profits for several years before it could stand a chance of submitting an application for listing, according to Tung. But now investors look for companies with potential, allowing them to go public before making profits. Google and Facebook are examples. Google offers Google Map, Gmail and Android, with skeptics initially asking how it could make money by offering so many free services. But these companies have now become giants whose market cap and revenues are among the top of all IT firms in the world. Their operations have also changed fundamentally people's life and disrupted all business models and supply-demand patterns.

But different countries have their own unique situations and progress of development, Tung said, disclosing that some governments in this world may still require their suppliers to provide PCs that can support floppy disks - which still functions as a main storage format of their data.

If Taiwan wants to play a leading role in the next wave of IT development, it must create a friendly and diverse environment, making the best use of its talent and resources, according to Tung. It would then be able to help its enterprises and startups compete with international companies on an equal footing.

But the slow progress in making rule changes cannot be totally blamed on the government because there are many areas in AI, such as the medical sector, that need extra caution in planning. He said policymakers must seek advice extensively, and learn from other countries, in order to find a new way for the development of Taiwan's startups and emerging technologies.

Taiwan aspires to become the Asian Silicon Valley, but Tung said such an ambition should not simply mean building more factories. It must be implemented with a broader vision and clearer directions in the form of an international industrial park. Tung suggests that a tariff-free repair hub within one kilometer of the airport could save a lot of time and paper work, shortening the time to fix devices sent from abroad. Such a value-added operation would attract international investors and make it a new practice for the IT ecosystem. That is the reason why Pegatron (where Tung is chairman) maintains international repair centers in Taoyuan, Japan, California and Shanghai, with a total workforce of over 2,000. Income from services will only increase when the quality of services increases, Tung maintained. Running repair centers in places where labor costs are high may increase the operation cost of a company, but the high value from shortening the repair time will increase customer satisfaction and their willingness to pay more for the services.

The turning point

Japan enjoyed years of post-war prosperity until 1985 when the Plaza Accord was signed, stalling its economic growth since. Tung said the kind of global economic conflicts that Japan fell prey to is not unique, the latest case being the escalating US-China trade war.

The US-China trade row is definitely presenting challenges to the world, but Tung thinks every generation has its own challenges and opportunities. The oil crisis in the 1970s actually prompted the four Asian Tigers to successfully transform their economy. Tung added that it may still take some time before Taiwan can successfully transform its economy.

TCA chairman TH Tung

TCA chairman TH Tung
Photo: Michael Lee, Digitimes, May 2019