Taiwan Manufacturing: More than just Apple

Taiwan’s domination of the Apple supply chain may be well known, but the country’s transformation into an innovation hub warrants as much attention. In a world that needs powerful chips, creativity and collaboration, Taiwan’s unique tech ecosystem offers numerous investment opportunities waiting to be discovered.

Nelson Yeh, Equity Portfolio Manager, Eastspring Investments, Taiwan


Apple unveiled its new iphones in September 2018, powered by chips manufactured by Taiwan Semiconductor Manufacturing Corporation (TSMC). The chips, which are expected to run applications nine times faster, uses the 7 nanometre (nm) process technology. For context, one nm is one billionth of a meter. The move from the previous 10 nm to 7 nm is a feat for an industry that has struggled with further miniaturization for some time.

TSMC can be considered the jewel in Taiwan’s technology manufacturing sector. It has a 65% share of the global semiconductor market and serves more than 150 customers globally from fabless Integrated Circuit (IC) design houses, Integrated Device Manufacturers to system companies.

The semiconductor manufacturing industry is challenging as projects are long and complex while technology cycles are short. With the huge capital outlays often required in the semiconductor business, only large capitalised companies have the technology and cash flow to thrive. The winner typically takes it all.

The Apple connection

Semiconductor chips are not the only made-in-Taiwan components found in Apple’s phones. Taiwan dominates Apple’s supply chain, with 52 Taiwanese companies providing various components ranging from Printed Circuit Boards (40%2 market share) and casing (84%3 market share). See Figure 2. If you have been wowed by the vivid photos captured by Apple phones, they come courtesy of Taiwan lens suppliers who have over a 90%4 market share of Apple lenses.

Fig.1: Taiwanese manufacturers dominate Apple’s supply chain5

Being a key supplier to Apple speaks volumes of the quality, innovation and cost effectiveness which Taiwan technology companies bring. It is, however, a double-edged sword. The share prices of many of these companies have historically waxed and waned depending on the success of Apple’s handsets. It is therefore heartening that the success and future of Taiwan’s technology sector rests on more than just Apple alone. Contrary to popular perception, the correlation of Taiwan’s various tech sub sectors to Apple is only around 0.4 over the last 10 years.

Welcome to the future

Semiconductors are powering more and more of the things that surround us. Cisco’s Internet Business Solutions Group predicted that by 2020, 50 billion devices would be connected, up from 25 billion in 2015.

The Internet of Things (IoT) is expected to boost semiconductor revenues significantly by stimulating demand for microcontrollers, sensors, connectivity and memory. The IoT has its own set of challenges. Each connected device, for example, brings data privacy and security concerns. This, however, is unlikely to stop IoT’s progress. McKinsey believes that some of the most promising IoT markets include smart home applications, medical electronics, industrial automation, connected cars and smart cities applications.

This is good news not just for TSMC, but other Taiwanese companies which are world leaders in IC design (#2) as well as IC packaging and testing (#1). Mediatek, for example, a leading fabless designer in Taiwan has been growing its exposure to Application Specific Integrated Circuits (ASIC) in automotive and networking. IC packaging and testing providers such as Advanced Semiconductor Engineering (ASE) and Siliconware Precision Industries (SPIL) are expected to get a boost from the rising demand for High Performance Computing (HPC) devices, artificial intelligence, big data applications and cloud technology.


The Taiwanese government is transforming Taiwan to become more than a low-cost center for manufacturing. “Productivity 4.0” aims to lift per capita productivity of its manufacturing industries by 60% by 2024. This will be partly achieved by developing “smart factories” in the country through Artificial Intelligence (AI) and robotics. The government will aid companies to help them develop smart machinery capabilities and has earmarked US$1 billion over the next 9 years towards this venture. Smaller capitalised companies in Taiwan are likely to benefit from process improvements and innovative applications, potentially lifting profits.

The MSCI Taiwan Small Caps Index, of which technology stocks make up close to half of the index, was up 43% in 2017. Over the last 10 years, the index returned 7.2% per annum, above the MSCI’s EM Small Cap Index’s annualized returns of 5.4%.

To foster entrepreneurship and commercialisation of innovation, the Taiwan government has also launched a startup programme “Taiwan Tech Arena” for AI, software and semiconductors. By creating a vibrant tech startup ecosystem, Taiwan hopes to facilitate technology breakthroughs. This can enhance the competitiveness of Taiwan tech companies as well as bring new products to the market place. Taiwan’s respect for intellectual property rights also goes a long way in promoting technological innovation. The nation’s rich talent implies a skilled workforce - an independent worldwide study by the OECD ranked Taiwanese students fourth out of 72 countries in math and science.

Investment worthy

Taiwan’s manufacturing sector has reinvented itself and focused increasingly on innovation over the years. See Figure 2. It is currently ranked 25th among 137 economies in terms of technological readiness and 11th for innovation6. Using its semiconductor industry as a proxy, the sector has gained 167% or 13.5% per annum in USD terms since 2011. This significantly surpasses the 54.3% rise for the overall Taiwan market or the 39.2% growth of the MSCI Asia ex Japan Index over the same period.

Fig.1: CG watch market scores: 2010 to 2016

Tomorrow’s world of electronic devices, robots, data and artificial intelligence needs chips with powerful computing functions, innovation and collaboration. Taiwan is in a position of strength to capture much of this business opportunity. For investors, Taiwan’s unique tech ecosystem offers numerous opportunities waiting to be discovered.

Nelson Yeh

Equity Portfolio Manager

Eastspring Investments, Taiwan

Paul Su

Equity Portfolio Manager

Eastspring Investments, Taiwan

1Source: Company data. 2018.
2Global iphone PCB market share. Eastspring estimates. September 2018.
3Global iphone casing market share. Eastspring estimates. September 2018.
4Global iphone front camera and rear camera lens market share. Eastspring estimates. September 2018.
5Source: Nikkei Asian Review. December 2017.Complied based on data from Apple’s supplier list.
6The Global Competitiveness Report 2017 – 2018. World Economic Forum.
7 World Economic Forum.

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