Financing Capital ” Both For Funding And Exit Taiwan's stock market has one of the highest liquidity in the world. The average monthly liquidity (transaction volume · average total market value) is about 30%. The presence of international institutional investors is insignificant. The retail players control the market. It provides excellent revenues for listed companies to raise funds (by right issues) and exits for venture capitalists. However, in the start-up world, funding is not always readily available. Capitalization of Start-Ups Except for the semiconductor and a few other blessed industries, most start-up companies in Taiwan lack funding. Up until the mid-1990s, most of Taiwan's banks were state owned. These banks are mostly risk-averse and SMEs (small and medium enterprises ), so they generally have difficulty borrowing money from the banks. In fact, even Taiwan's listed companies have such difficulties and as a result they have one of the lowest debt-to-equity ratios in Asia: about 30%. What this implies is that most companies have to borrow money within their own network (often friends , relatives of the owners , or even loan sharks) and be operating cash-flow positive. This somehow crafts the uniqueness of Taiwanese companies: flexibility . The following case shows how adaptable successful Taiwanese companies can be. Case Study: United Microelectronics Corporation United Microelectronics Corporation (UMC) is the second-largest fab in the world. Its growth, however, has not been smooth sailing. Within its relatively short span of 20 years of existence, it has changed its overall strategies and product offerings many times. When it was first established in 1979, it manufactured ICs for digital watches . Today, the company does not design its own ICs, but manufactures ICs for its customers according to their designs. Its evolution demonstrates the flexibility typical of many Taiwanese companies. In 1982, the U.S. government opened its market for telephone equipment, hence stimulating the growth of the telephone manufacturing industry in Asia. UMC was fast to capture the opportunity, planning for the production of telephone ICs long before the market liberalization took place. The company formed strategic partnerships with leading telephone manufacturers in Taiwan, Hong Kong, and South Korea. The strategic partnership covered telephone equipment specifications, product development, technical support, and priority of supply of products. Such partnerships not only secured orders from these partners but also guided the company's product roadmaps . The partnership was very successful with its tone/pulse switchable IC, capturing huge market share. In 1983, among the top 500 enterprises in Taiwan, UMC ranked number one in terms of revenue growth and number two in terms of profit growth. In 1983, however, the telephone IC market collapsed due to overstocking and price wars among telephone manufacturers, leading to market consolidation. As a result, many telephone manufacturers in the region cancelled their orders. Immediately, UMC was hit badly ; its monthly revenue dropped 60% in one year. In the second half of 1984, however, the company's sales doubled , thanks to its swift switch into the fast-growing markets for music, calculator, and digital watch ICs. On the technology front, UMC worked closely with external institutions, including: -
Transfer of CMOS ROM and cache memory technology from Elite and Integrated Silicon in 1989 -
Transfer of EPROM technology from Brigh in 1990 -
Transfer of BiCMOS technology in 1991 from ITRI -
Codevelopment of 486 CPU with MSI in 1991 -
Codevelopment of RISC 80 MHz SPAC microprocessor with ITRI in 1993 Since UMC had acquired a wide range of semiconductor technologies, it was ready to go into SRAM production when SRAM prices escalated at the beginning of the 1990s. However, the high profit margin of SRAM attracted many newcomers, including Korean giants such as Samsung. Commoditization and oversupply of SRAM led to a sharp price decline. In 1995, UMC decided to reduce its dependence on SRAM. Before the collapse of SRAM prices in mid-1996, UMC had successfully reduced its involvement in SRAM from 50% to 10% of its revenue. During the same period of the 1990s, the company was also active in CPUs, PC chipsets, and telecommunications ICs. With too much diversification, however, UMC's management resources were spread too thin. Some of the product range faced stiff challenges from Intel: To resolve it, UMC had to make the tough decision to either terminate or spin off those businesses. By 1997, UMC had shed most of its product lines, leaving only IC contract manufacturing as its main business. The company has huge success in terms of growth and profitability as illustrated in the Table 14-1. Table 14-1. UMC Revenue and Net Income Growth | | Revenue (U.S.$ million) | EBIDTA | Net Income | Net Income (% of Revenue) | | 1993 | 310 | 121 | 74 | 24 | | 1994 | 469 | 249 | 197 | 42 | | 1995 | 746 | 448 | 407 | 55 | | 1996 | 684 | 290 | 232 | 34 | | 1997 | 760 | 231 | 295 | 39 | | 1998 | 558 | 158 | 133 | 24 | | 1999 | 882 | 343 | 318 | 36 | | 2000 | 3,091 | N/A | 1,494 | 48 | | Source: UMC Annual Reports . | At the same time, many of UMC's spin-offs such as Mediatek and UniMicron are faring very well as independent entities in the Taiwan capital market. Mediatek's market capitalization ranged between U.S.$1.97 billion to U.S.$5.57 billion in 2001 while that of UniMicron ranged between U.S.$250 million to U.S.$756 million. | Such is typical of Taiwanese companies. Driven by the need to survive, Taiwanese companies constantly struggle to generate cash to sustain their operations. As a result, we can see that most of the start-up companies in the earlier period did not engage in R&D activities as much as their counterparts in Israel or the U.S. They preferred to invest in manufacturing facilities, doing subcontracting work for other companies and generating precious cash right from the beginning of the company's existence. It is only during the past five years, when venture capital funding has been more readily available, that Taiwanese start-ups have been able to allocate more into R&D. As for the Taiwanese semiconductor industry, the government was the venture capitalist that started it all. Professor Wu Se Hwa is dean and professor of the Department of Business Administration, National Cheng-Chi University. His research interest is in technology and asset competitiveness analysis, technology strategy, and knowledge management. Professor Wu spent many years studying the growth of the semiconductor industries in Taiwan. Wu Se Hwa The economic advantage of Taiwan's semiconductor industries Threatened by Japanese semiconductor companies' growing market share in the 1960s, U.S. semiconductor companies decided to outsource certain parts of the semiconductor manufacturing processes, such as IC packaging and testing, to the developing countries , so as to lower the total cost of IC manufacturing. For example, from 1969 to 1973, Texas Instruments and RCA established IC packaging companies in Taiwan. In the early 1970s, Taiwan was forced to withdraw from the United Nations. Many realized that to survive, Taiwan had to develop itself. To support the economy, the government decided to focus upon the semiconductor industries. As the amount of capital investment involved was huge, the government decided to lead the charge. An advisory council, the TAC (Technical Advisory Council) was established. Its members constituted mainly Taiwanese engineers working in the U.S. After studying different strategies to develop semiconductor industries, TAC recommended buying technology from RCA. After much negotiation, RCA transferred its seven-inch IC technology to Taiwan for a consideration of U.S.$3 million. The technology transfer included IC design, fabrication, packaging, and testing, and other tacit details such as logistics, accounting, and production management. In 1977, a research plant was established. It had a capacity of 4,000 three-inch wafers per week. Its first product was an IC used in the manufacturing of digital watches. Within four months after commencement, the plant's yield rate was at 81%, exceeding that of RCA (80%). By September 1978, the research plant had produced more than 1 million digital-watch ICs, and the plant was profitable. Subsequently, the plant successfully designed and manufactured ICs for toys, telephones, and memory chips. However, such success did not bring much joy. Because of the short life cycle of the semiconductor manufacturing, a lot of money had to be invested to upgrade the research plant and the government was not willing to continuously finance such capital requirements. Furthermore, the semiconductor engineers trained in the research plant were very mobile. They could have easily moved on to join foreign companies and hence defeat the plan of establishing Taiwan's own semiconductor industries. Therefore, the government decided to spin off the research plant as an independent company, and that company became UMC. From its humble beginning of producing simple consumer electronics ICs, UMC is today the second-largest foundry in the world, with market capitalization of U.S.$20 billion. At the same time, Taiwan has become the fourth-largest semiconductor producing region in the world. | |
