From Korea comes a piece on Taiwan’s dynamic OEM makers and their world-class technology:

But take apart an iPhone or an iPod and inside you’ll find some unfamiliar names, like Hon Hai, Quanta, and Inventec. These are Taiwanese companies that provide outsourced manufacturing for other companies instead of producing goods with their own brand names. The iPhone and the iPod are being built at the Chinese plants of these Taiwanese companies.

Although they are OEMs (original equipment manufacturers), don’t for a minute confuse them for subcontractors living off wages. Taiwanese companies boast the world’s highest cost competitiveness, as well as high tech and high quality manufacturing capabilities. They are so reliable that even Steve Jobs trusts them. In fact many high-end global products such as Sony’s PlayStation and Hewlett-Packard and Dell’s laptops are built by Taiwanese companies.

These Taiwanese companies are rapidly building up their capabilities in design, planning and R&D based on the know-how that they have been cultivating by producing such goods. That’s given rise to conglomerates like Hon Hai, which recorded sales of W24 trillion last year. Since 2000 Hon Hai has seen its sales grow on average more than 45 percent every year. With that sort of formidable growth — nearly 10 times in just six years — Hon Hai has become a subject of keen interest in the world’s IT industry.

Korea and Taiwan feel themselves to be rivals and have very different economic structures. In Korea the State is tightly linked with the major industrial conglomerates, called chaebol, and has been successful in keeping its businesses at home, while Taiwan’s small and medium-sized enterprises (SMEs) shift their manufacturing operations to China. In recent years Taiwanese have complained that South Korea has overtaken Taiwan in terms of GDP per capita. But Koreans have successfully re-invested at home, whereas Taiwan has been planting its seed corn in China. Nevertheless, Koreans still feel they have a ways to go….

Some time ago, Business Week magazine listed the world’s top 100 IT businesses. Taiwan was home to 14 of them, the most of any Asian country. Hynix Semiconductor was the only Korean business on the list. It was the same in “How We Compete,” a book published by the MIT Industrial Performance Center that examines successful business strategies in the globalized era. The book features case studies of nearly 20 Taiwanese companies, including TSMC, a semiconductor OEM, Compal Communications, a laptop manufacturer, Asustek Computer, BenQ, which has taken over Siemens’ cell phone division, and Pou Chen, a footwear company that has expanded into electronics. Samsung Electronics is the only Korean company in the book.

Twelve Korean companies are listed on the Fortune 500 while only three Taiwanese companies made the cut. Nonetheless Business Week and MIT are paying more attention to the Taiwanese economy with its nimble and tech-savvy small- and medium-size companies. The Korean economy is now facing the limit of its growth, despite having fostered several conglomerates with global brands, because it has a weak SME foundation compared to Taiwan. That’s why we should pay more attention to the “Taiwan model.”

Taiwan OEM firms are probably the world’s most successful, but it is easy to see that the OEM model as a model for a national economy has serious limits. In the old days it produced an economy with an extraordinarily equitable distribution of wealth. As Robert Wade pointed out in Governing the Market, the glittering high-rises in Korea that appeared to contrast so strongly with Taiwan’s cramped five-story flats back in the 1980s were a signal of high income inequality in the former. But the OEM model in Taiwan depended on low-cost labor, which meant that it became increasingly unviable as incomes rose. It was also a family-run economy, which meant that many firms were unable to run up the technology ladder since they lacked the management and engineering skills. This drove many firms out of Taiwan to China, where they can continue to pay low wages and run things the family way. The result was, however, stagnant income growth at home, since an economy’s ability to raise income depends on pushing up its skills and productivity, meaning that even though the economy is growing (in fact it is doing quite well at the moment), rising income inequality cancels out any feeling among ordinary people that their lives are improving. By contrast, in Korea the government was able to keep its major technology enterprises at home and continue to use the home nation as an export base, whereas Taiwan’s enterprises, out of the government’s grip, clamor to shift their manufacturing to China.

Another issue identified by scholars with Taiwan’s OEM economy is that the economy is organized around a certain mode of production and cannot shift. Taiwanese firms are not only good at OEM making, they also excel at every aspect of supply-chain activities that is related to OEM, such as logistics. But they lack a broad base of economic skills — they are dependent on the State for R&D inputs, for example. Although the public sector’s share of R&D spending fell from 50% to 37% through the 1990s, it remains at nearly four times the level it is in advanced countries. Taiwan as a nation also spends proportionately less on R&D than other nations, and Taiwanese firms typically invest less in R&D than their foreign counterparts (reference). The choice to invest limited resources in supply chain organization management means that own-brand development and innovation are lower. Note also that unlike the US, where business and academia are mutually dependent, Taiwan’s OEM makers do not have well-developed relationships with the universities. Thus, while the rest of the economy moves into the 21st century, Taiwan’s universities continue to churn out graduates aimed at satisfying the needs of an economy that ceased to exist sometime around 1985….

Is the Taiwan economy a model to emulate? I doubt many Taiwanese would think so.

UPDATE: This post drew many great responses. That’s what blogging is all about. The New Hampshire Bushman takes issue with me, and so does Bent.