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CIAO DATE: 12/99
Asia is Behind—A Perspective of the Technology Industry
May 27, 1999, Hong Kong
Introduction
I want to speak about technology today. I have been in this field for more than 40 years. I have seen 2 or 3 shifts in this field in the last 40 years and I was lucky enough to join the semiconductor industry when it was very young.
Semiconductors or transistors were invented in 1948 by Bell Labs scientists, and the industry took off very shortly after that—within 5 or 6 years which means 1952 or 1953. I joined the semiconductor industry in 1955. For more than 20 years, the semiconductor was the cutting edge of the so-called high technology industry. Of course, the term high technology industry was pretty new. Before World War II, no one used the term high-tech or even technology in reference to an industry. For almost 2 decades, that is through the 50s and 60s and at least half way through the 70s, the semiconductor was the cutting edge of the high-tech industry.
Along with the semiconductor industry came the computer industry. The computer industry had bigger companies, principally IBM. Semiconductors made the computer, as we know it today possible. So, you have to say that the semiconductor industry and the computer industry were the mainstream. We were in our hey-days. We were in the news. The main stream shifted into PC’s and of course, semiconductors were what made it possible.
IBM was late in PC’s; in fact they did not think PCs were a viable product. So, the PC industry, independent of IBM, sprang up. Many companies in the PC industry began to bask in the limelight. The PC became the main stream or cutting-edge of the high-tech industry. That period lasted only about 10 years. In the late 80s and early 90s, PC’s began to decline as a favorite of investors in the high-tech industry just as semiconductors began to lose favor ten years earlier.
What took its place are communications and networks, and then in the last few years, the Internet and e-commerce. Those are now the mainstream and the cutting edge of the high-tech industry.
Asia’s Role
What has happened to Asia in all this time? When I say Asia, I do include Japan, even though I think Japan is further ahead than the rest of Asia. Compared to the United States, Japan may be fifty steps behind and the rest of Asia may be a hundred steps behind. There is a Chinese proverb that states that those that are fifty steps behind are really no better than those that are a hundred steps behind. I include Japan when I talk about Asia, although sometimes I will single them out because they are in somewhat better shape than the rest of Asia.
What has Asia done during the forty-year period? I think to put it very cryptically, we seem to always be chasing the rear end of the train. We were doing that, including Japan, in the sixties. The semiconductor industry was the mainstream at that time and Japan was chasing it very hard. They in fact, did get on. They caught it and they got onto the rear part of the train. The rest of Asia was even further behind than Japan. Taiwan, in particular, chased the semiconductor industry. Taiwan started a semiconductor effort in 1975. It was a project—in ITRI (Industrial Technology Research Institute), the research lab that I later headed for a few years.
Japan started it way before that. Japan started the semiconductor in the early sixties. Sony was one of the pioneers of semiconductors. Then when PC’s came along, Asia started to chase PC’s. About ten years after the industry got started—for semiconductors, a little longer than ten years; for PC’s, a little shorter than ten years—the mainstream has shifted to networks, internet, e-commerce, and communications. It only shifted about ten years ago, or less than ten years ago. Asia has not even started yet.
I don’t mean that we don’t know what the Internet is. We do. In fact, in Taiwan, I was talking to Michael Dertouzos, the head of the computer science laboratory at MIT. He and a group of professors are going to give seminars today in Taipei on the internet. Before I came to Hong Kong, last night I had dinner with him and I was telling Michael what I just told you. Michael protested “No, no, no, Morris, you have a lot of surface—you have a lot of people that are connected.” We do. However, we do not have any businesses that have even started to use the internet in e-commerce. We don’t have many companies that aspire to be the next “Yahoo”. In fact, in this particular case, our young consumers are way ahead of our businessmen. From the high-tech industry point of view, we are chasing the train just as much as we were twenty, thirty years ago. This has not changed.
Competitive Convergence
We seem to be doing pretty well. We can congratulate ourselves. We have sort of kept our distance. We have not let the distance from the best leading edge in high-tech—which has always been the United States in the past fifty years-grow. So in doing so, we are doing reasonably well. This business of always chasing the train results, however, in a phenomenon that is called by economists as “competitive convergence.”
Competitive convergence is a phenomenon where competitors try to differentiate themselves by virtue of operational effectiveness rather than by any type of innovation or strategy. I’ll give you an example. In Taiwan, where it has been quite successful in semiconductors in the last ten years, there are a lot of semiconductors companies now. New companies are being created every year.
LCD-the display, supposedly there will be a shortage, so people now have jumped in to invest in LCD’s in Taiwan. Now this is reminiscent of what happened ten, fifteen years ago when the PCs were hot. Everyone jumped in to make PC’s. Monitors were in demand. A lot of investors and businessmen jumped in to make monitors.
In every field, competitive convergence resulted. You can’t dissuade somebody that has a settled mind to not jump into the fray. You tell him, “So and so is already doing this business and so and so is also doing this business. You are starting something that is just like them.” His answer would be, “I’m better than those sons of bitches. I know how to cut my costs better. I know how to control my overhead better. I know how to manufacture a little bit better.” Yes, he may be better than those other people, but those are refinements in operational effectiveness. Those other people may be better than he in some other refinements of operational effectiveness.
As a result, competitive convergence occurs and what are the consequences? The commodization of all these things. Everything is a commodity now. Everything that is in that category; monitors, PC’s, D-Rams and LCD’s are already a commodity. It will be more so when a lot of this capacity is created. What does commodization mean? It means a low margin for one thing, and all these companies have lots of sales—billions of dollars of sales. Their margin—in the case of monitors—is two or three percent net. In the case of PC’s, you are lucky if you get five or six percent net. In the case of D-Rams, you are lucky if you get a positive at all.
Another result is that there is not enough money for R&D and all the energy of the management is spent on improving operational effectiveness which means “how to get more bang for the buck”—a dollar there, a dollar here, maybe switch the advertiser to get a more effective one, etc. They don’t really have enough energy left to think about innovations or the future. It gets to be a degenerative cycle. It gets worse and worse. More and more commodization and lower margins. Now, a very good friend of mine who I admire in many respects has often said: No matter how low the price gets, Taiwan will play a role in it. I say, “I don’t want to join that.” I would rather talk about more value added than cutting out costs to make the price lower and lower.
How do we get out from this quandary? It’s not going to be easy, or else, I don’t think we would be in this quandary. But let’s talk about it anyway. I think it is a cultural problem. It is also a training problem, and it is a lot of other problems. There is no risk taking—but I think it’s as more of a group of people that can get themselves out of the quandary. I used Taiwan Semiconductor Manufacturing Corporation (TSMC) which was a strategic innovation in the sense that we identified a niche for ourselves. That niche happened to be an ever-growing niche in the total pie. The total pie is the semiconductor.
We identified this niche—thus foundry. We thought it would grow, although we were not sure. It was a pretty big risk to think that niche would grow, or even not shrink. We combined that with what we perceived to be a competitive advantage of Taiwan, which is making waivers. We were pretty sure that it was a competitive advantage. We combined it without feeling that the niche would grow. I think that if anybody uses the same kind of approach, that is, taking more risks, I think those people could get out of the quandary. So let me suggest what the things that one might do to get out of the quandary.
Risk Taking
Risk taking is still not a part of the culture in Asia—everywhere in Asia, Japan, Hong Kong, Taiwan. Maybe now some people think that they are taking risks because you always say in Asia—Hong Kong, Taiwan and the PRC—there are a lot of entrepreneurs. Hence, don’t the entrepreneurs take risks? My answer is no—not really, because they are part of the strategic convergence that I was talking about. They are the ones that take risks in the sense that they want to get into business, start their own business, because they are better than those people that are already in the same business. They are not taking the kind of risk that I am talking about—to be in an entirely new business, to be something that nobody has done before. That is the kind of risk taking we lack in Asia. The reasons are several, I think.
I think the existing companies usually encourage the so-called “proven way,” something that has worked before, instead of innovation. Something that has not been tried, something that has not been found to work before is considered to be too risky. Most companies would not even do it. So that is the kind of corporate culture we have in Asia. How could you build and breed risk takers from this corporate culture? You also need to talk about societal culture, which matters a lot. A person that takes a risk in starting a completely new business and then fails, what happens to him? In Asia, he is a marked man. I have seen examples of that—it’s very real. A fellow who took a risk as an entrepreneur failed in his first venture. I have heard it talked about five years after he failed—that this guy is a loser.
Now, in the United States, people don’t think of anything about failing. I have interviewed a lot of people and have tried to recruit them into TSMC or WYSE, and they would tell me “I did this and that, I failed here because of this reason. I failed in the second one because of that reason. I failed in the third one.” He almost seemed to be proud of them! It’s a very different culture, and yet some of the best companies are started by people on their third or fourth try. If they had been marked as failures earlier, they would never had a chance to start the third or fourth one. We would not have those successful companies now.
Venture Capitalists
Venture capitalists, I often think—I don’t know if there are any real venture capitalists in Hong Kong, although I do know that there are quite a few so-called venture capitalists in Taiwan. I say they are “so-called” because they are very different from the ones in Silicon Valley. For instance, what is the difference? The difference is this: in Silicon Valley, the venture capitalists fund ideas that are new. They will not fund ideas that have already been in use. If you want to start a company and you try to get venture funds, and you tell the venture capitalists that this is something that nobody has done, the chance of your getting funding is pretty good. If you tell the venture capitalists, “I’m starting a company, and it’s like company A, company B, company C and they are all in business, and they are quite successful,” the chance that you will get funding is very low.
In Taiwan, it is just the reverse. The venture capitalists will fund those ideas that have been “proven.” When you bring a brand new idea to them, they will say, “This is risky. How do you know it’s going to work?” When I started TSMC, of course I already had decades of semiconductor experience behind me. That really helped. TSMC was initially almost half funded by the government. Ronnie Chan just referred to Dr. K.T. Li. He was indeed a strong supporter. It was already okay by him. He knew me for many years, so he thought I was okay, although he did not understand the difference between foundry and whatever.
He didn’t understand. I wanted to start a foundry and now in the government there were lots of people that did not understand the semiconductor industry, but there were also a few people that did. Those that did not understand semiconductors decided that, “If K.T. Li says okay, then it is okay.” Those that did understand semiconductors wanted to probe further. They said, “What is this foundry thing? I have never heard of it. Let’s call in some knowledgeable consultants, like Arthur B. Little, like Dataquest, and so on.” I think you understand the ramifications of that.
I was telling Michael Dertouzos the same story last night. As soon as I said what I just said—they wanted to call the consultants—Michael said, “Oh, no.” That was indeed what was going to happen—I was certain of it. So I stopped that, fortunately, because of my background experience. I said, “In the United States, whenever there was a question, the consultants came to see me, not the other way around. I am the consultants’ consultant.” Anyway, K.T. backed me up on this and the consultants were not called in and that was the luckiest thing that happened to TSMC.
Missing the “Big Picture”
Let me continue. I was talking about venture capitalists—in Taiwan, there is very little risk taking. I think I will close now by pointing out another thing. That is, a global outlook is also missing in much of Asia. I think that is probably not a serious problem in Hong Kong. I think you are probably the most cosmopolitan city—perhaps in the whole world, and certainly in Asia. In much of the rest of Asia, including Taiwan, a global outlook is missing. People still look at their own country, their own region. In Taiwan, it seems to be a big thing to be number one in Taiwan. Well, in the high-tech industry, I just shout as loud as I can. Being number one in Taiwan, in Hong Kong, or even in Asia means nothing. The market is global and the competition is global. As soon as you start something in any of these places, you compete with the best in any place else. Being number one in Hong Kong, or Taiwan or Asia means nothing—is my first statement.
Second statement: being number one in the world has only a temporary advantage because the field moves so fast. If you want to be number one in the world for a long time, it requires developing new technologies and new products all the time, finding new ways to do your business all the time, or even finding new businesses. The last, heaven forbid, is really the last thing you want to do. Normally before a company has to find new businesses in order to stay number one in something, the top management has to be completely changed over. It is the most difficult thing for a company to do. Intel is doing it in a modest way; they do not want to talk about it much, but the service thing is a new business.
Being number in one in the region means nothing, being number one in the world only has a temporary advantage. If you want to be number one in the world, it requires that you need to develop things all the time. I see a lot of grim expressions. Let me say something that may ease your mind a little bit. You don’t have to be number one in the world to live well. That is true as long as you are not one in a huge crowd. If you are one in a huge crowd, then God help you. But you certainly don’t have to be number one in the world to live well. Lots of people are not number one in the world and they live very well indeed. General Electric used to have—maybe still does—have this dictum of each business having to be the top two or three in its field. It depends on business. I think some of you would admit even five or six—or even ten D-ram industry has got fifteen or twenty. And while most of them are not living well, they are still living.
Questions and Answers
Question 1: What do you do in TSMC to promote risk taking internally?
Morris Chang: We make it a part of our merit performance—we changed it two years ago. Frankly, I did not look at the criteria of merit review before that. Then when I looked at the merit review criteria, I found that they were about the same as those that I had seen in many companies before. Things like quality of work, quantity of work, leadership qualities, teamwork, etc. Those are not the same things as what is in our value statement. Innovation, which is in my mind synonymous with risk taking, is a part of our value system. So we made innovation, the ability to innovate oneself or the ability to lead or stimulate a group to innovate to be one of the major criteria for a person’s merit performance. When we recruit somebody new, we also follow the same criteria. I think you really have to practice at it—it certainly is no good just talking—you have to put your money where your mouth is. Merit performance is very important in TSMC. Even though like every other company, merit review variation may be only a few percent, but that few percent swings a lot of profit sharing which is the bigger part of the compensation.
Question 2: I have a question that has to do with chasing the train. The difficulty between America and China between the alleged espionage is going to cause problems for cross-pacific genuine technological sharing. In terms of the ambitions of places like Taiwan, the Hong Kong government and China, could you address what you think is going to be the situation in the short term while we have this? What you see personally as domestic political pressure on technology? Where do you think it might end up?
Morris Chang: I don’t think I’m qualified to answer your question, frankly. I follow the situation in the United States very closely, but still I haven’t lived there for quite a while, and this thing happened quite recently so I haven’t had a chance to talk with my American friends very much yet. I certainly don’t know very much about what’s happening in the PRC, so I’m afraid I’m not qualified to answer your question.
Question 3: One question one being number one in the world. In some of the high tech areas in Asia, what other businesses, besides foundry, do you think Asia has the competitive edge to become the number one leader in the future?
Morris Chang: I think that perhaps new components and particularly new display components—not the TFTL CD, but I’m not convinced at all that TFTL has to be the winner in the indefinite future. In semiconductors, it has been clear that for at least twenty years that Silicon Valley is the winner. I don’t think that TFTL CD has nearly the same kind of status in displays as silicon IC did in semiconductors. So there may be new possibilities in displays, and thus an almost divergent field. So rather than plunking down three hundred million dollars, if you could put down fifty million dollars on the development phase of new display technologies, you may have a winner. It’s pretty high risk, but when you win, you win big because then it is not a commodity.
Question 4: What do you think of Hong Kong’s plans for a cyberport?
Morris Chang: I am not entirely familiar with the plan. Now, if it is a plan to set up infrastructure for the high tech-industry, then I am all for it. I think the government does have a role in setting up infrastructure. I am defining infrastructure in a broad sense. It means land, buildings and facilities; it also means education, training people, and a good living environment for the more creative people. The more creative people actually require a different living environment from most other people. They don’t say very much—the most creative people don’t talk a lot, but they want something and people don’t usually think about that. I have found out that in the last ten years when I was trying to attract some creative people from Silicon Valley to Taiwan, one of the objections is the living environment. Not so much the money, but the living environment, both materialistically and culturally. It’s that sort of thing. The government should do those things. I don’t think the government should edict that certain industries should be created. That is a losing game. The government is not nearly so smart as to be able to do that: let the risk takers, let the entrepreneurs, and let the market do that. If you define industrial policy as creating the proper environment and infrastructure, I’m all for it. But if you define it as a more active intervention in picking the winner, then I think it is a losing tactic.
Question 5: You talked about commoditization and in fact, the Internet seems to accelerate that further. At the same time it seems to create new brands. Do you see this kind of brand created in Asia or do you think again, as seen earlier, is going to be the U.S. brands?
Morris Chang: I’m sorry, you are talking about the new brands created about Intel?
No—Internet is further accelerating the commoditization because it is empowering the consumers. But at the same time it is creating some new brands as you mentioned. Do you see the new brands being created in Asia as a result?
Morris Chang: I think so—I think given time it will.
Question 6: Today at lunch you talked about a need for companies to continue to innovate and move up the ladder and you talk about Asian companies who are relatively resistant to the kind of risk taking that leads to the sort of innovation. What sort of conditions do you think have to be met in Asia? Is it education; is it more people returning from Silicon Valley, before this sort of innovation can be more popularized?
Morris Chang: Again, I think it is a big issue. I think you have to ask what makes success. Here, there is a huge cultural gap already. In Asia, what makes success is not innovation, it is primarily networking and relationships. In the United States, I think networking has a very secondary importance. I was in the United States for thirty years and at least fifteen of those, I was at a very high-level management position. I had no network at all. But I think I knew how the dynamics of industry was, I knew what it took to innovate and so on. So you have this whole hierarchy of values that are different. You ask a few more people to come back from the United States to help. But you first have to change the ground rules and the rules of the game. What makes a company successful? In an old established traditional company in Asia, the boss thinks that following the old way is the best way. A few people from Silicon Valley are not going to change his thinking. You have to change the rules of the game first. That is what is so difficult.
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