EVENT: TCI Network Asia Conference 2022. ORGANIZERS: TCI Network, Microeconomics of Compettitiveness (MOC) from Harvard Business School, and Industrial Technology Research Institute (ITRI ). TOPIC: Production Service in Supply Chain: A business model incubated in Taiwan. KEY SPEAKER: Janet Tan, San Jose State University, California, USA. DATE: 1st July 2022 CHAPTER: Asia

1. Production Service in Supply
Chain – A Business Model
Incubated by Taiwan’s
Entrepreneurs
Janet Tan
7/1/2022

2. Cluster Definition
• The cluster definition was derived by “grouping 778 6-digit NAICS
industries in manufacturing and services in 2009” (Melgado et al.,
2014)
• This definition post a problem, the NAICS definition separates the
production and services in a segregated the way.
• How is “Production Service” clusters differentiated?
• What is “Production Service”?
• What role does Production Service play in a supply-chain?

3. Where is Taiwan?

4. Production Services vs Branding
• Production Services have been sprouting after the rise of Asian
production economy in the 70s.
• K-Mart contracted Taiwan’s fashion production is an early start of the
production services, in the “the Asian Miracle” of export-led growth
from the 60s (Hamilton et al., 2007, Introduction).
• Both Taiwan and S. Korea’s economies have developed from the same
period, but
• Taiwan differs from S. Korea that Taiwan focus on production services,
and S. Korea focus on branding approach. E.g TSMC vs Samgsung

5. Definitions
• Branding (Jevons, 2005) – many definitions
• Supply-Chain – division of labor and expertise
• Production Service – enabling Blue Ocean strategy for customers to
compete

6. Taiwan – Started Electronic Production Service
Business Model in Supply-Chain in the 60s
• Taiwan started its Export-led economy (Production Service) in its 60s.
• Kmart sourced it clothing products from Taiwan.
• Started ITRI (technology research center) focusing on Electronics and Hi-tech market.
• In the late 60s, scholars migrated to US and Europe to acquire knowledge and gain
experience.
• Foxconn (Hon Hai) started in 1974 producing precision machinery for businesses to
produce electronic components to earn export income.
• In the 80s, Taiwan earned “the Computer Kingdom” reputation and COMPUTEX
TAIPEI (started in 1981) is still being hosted every year.
• Semiconductor cluster was incubated in the HsingChu science park. TSMC was born
along with several other companies.
• In the 90s, flux of scholars returned and were recruited in academic and commercial
sectors.

7. Success and Economic Contributions of the
Production Service Business Model
• 15 years growth (CAGR)
• Over 93% of Manufacturing Business are in Production Service (non-
branded), and 84% of products manufactured are exported.
• 2 strong cluster for both employment and revenue: Information
Technology and Analytical Instruments (IT) and Distribution and
Electronic Commerce
• 56% of IT revenue is from Semiconductor (4.26% of Taiwan Total)

8. -50.00%
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-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
Employment Growth (2006-2016)
Employment (2016) Employment CAGR (2006-2016) Linear (Employment CAGR (2006-2016))
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
0
2E+09
4E+09
6E+09
8E+09
1E+10
1.2E+10
1.4E+10
1.6E+10
Revenue Growth (2006-2016)
Revenue (2016) Revenue CAGR (2006-2016) Linear (Revenue CAGR (2006-2016))

9. Apparel, 0.34%
Automotive,0.92%
Biopharmaceuticals,0.18%
Business Services, 1.67%
CommunicationsEquipment and
Services, 0.92%
ConstructionProducts and Services,
2.55%
Distribution and Electronic
Commerce, 2.06%
Downstream Chemical Products,0.60%
Downstream Metal Products, 0.59% Education and KnowledgeCreation,
0.29%
EnvironmentalServices, 0.19%
Financial Services, 2.14%
Fishing and Fishing Products, 0.04%
Food Processingand Manufacturing,
1.25%
Footwear, 0.08%
Furniture, 0.15%
Hospitality and Tourism, 0.48%
Information Technology and
Analytical Instruments, 7.54%
Insurance Services, 6.40%
Jewelry and Precious Metals, 0.07%
Leather and Related Products,0.02%
Lighting and ElectricalEquipment,0.74%
LivestockProcessing,0.15%
Marketing, Design, and Publishing,0.67%
Medical Devices, 0.13%
Metalworking Technology,0.94%
Nonmetal Mining, 0.04%
Oil and Gas Production and
Transportation,0.00%
Paper and Packaging, 0.38% Performing Arts, 0.06%
Plastics,1.90%
Printing Services, 0.22%
Production Technologyand Heavy
Machinery, 1.62%
Recreationaland Small Electric Goods,
0.81%
Textile Manufacturing,0.77%
Trailers, Motor Homes, and Appliances,
0.54%
Transportationand Logistics,1.40%
Upstream Chemical Products, 3.90%
Upstream Metal Manufacturing,2.59%
Video Productionand Distribution,
0.09%
Vulcanizedand Fired Materials, 0.55%
Water Transportation,0.71%
Wood Products, 0.09%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
-50.00% -40.00% -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00%
Revenue
Shares
Revenue CAGR (2006-2016)
Revenue Composition (2006-1016)
4.26% of total revenue is from Semiconductor,
and 56% of IT revenue is from Semiconductor
4% of total revenue is
Production Service
Cluster.
Electronic parts
,components, computers,
and optical parts. 38% of IT.
And others

10. The Most Important Clusters is IT:
• Information Technology and Analytical Instruments – Semiconductor
Foundry (TSMC) and Electronic Manufacturing (Foxconn) are both in
this cluster.
• Manufacture of Electronic Parts and Components and Manufacture of
Computers, Electronic and Optical Products produce 38% of
manufacturing revenue
• 84% of Semiconductor revenue is production service to customers
who needs a customized ASIC chip, and 80% of those are exported.
• 4% of total revenue is Semiconductor product that are branded by
Taiwan which is half of the IT cluster.

11. IT is important for Taiwan, and Semiconductor is
the core value for Taiwan’s Production Service
Business model
• Semiconductor industry produces 10% of total manufacturing
revenue out of 9% of manufacturing labor pool.
• According to 2016 Taiwan Census Data, 93.18% of Semiconductor
Manufacturing is non-branding products and 80.40% of the non-
branding products are exported. Only 1.35% of Semiconductor
companies are self-branding.

16. Semiconductor Foundry Service Model

17. Comparison on Electronics and
Semiconductor Production Services
2022 TSMC Foxconn
Revenue 491.08 B (TWD) 23.55 B (TWD)
Net Income 202.73 B 845.14 M
Net Profit
Margin
41.28% 3.59%
Stock Price 87.26 (USD) 54.6 (USD)

18. Diamond
Analysis
Firm
Strategy,
Structure,
and Rivalry
Demand
Conditions
Related
and
Supporting
Industries
Factor
Conditions
Gateway of
Pacific Ocean,
Hardworking
culture, low
wages, safe
healthcare,
highly
educated
population,
Weakness:
not good at
marketing
and English
deficiency.
Transportation & Logistics (ocean freight), e.g.
Evergreen,
Strong Precision Machinery & Equipment
Production
Machinery and
Production
Technology with
high demand by
the export-led
economy. Trades
demanded by
Japan, Europe,
and America.
Foundry business provides semiconductor
production services for all ASIC chip developer to
compete in their market spaces. Foundry services
as a supplier and help their customers to compete
with the Blue Ocean strategy. R&D in foundry
production technologies creating high barriers for
competitors to compete.
Government Policy:
Created Technology Parks and Research
Institution (ITRI) with tax incentives and
built infrastructure in the 70s for
Economic Development, especially for
high-tech.

19. Taiwan’s national competitiveness – S & W
• Taiwan has established the Production Service Business Model that is a
winning strategy and suitable for the local social and economic conditions.
• Language limitation –W
• 98% SMEs – S & W
• Low salary level – S & W
• Knowledgeable human resources -S
• Hardworking - S
• Obedient – S
• High workmanship -S
• Innovative -S
• Democracy & Free Economy -S
• Government policies and the building of infrastructure in the 70s – S

20. Opportunities and Threats
• Opportunities
• The rise of electronic and computer industry
• Globalization
• Fast development of Transportation and Logistics Industry
• Threats
• East Asian Tiger's competitions
• Rise of China
• Regional Competition – ASEAN, Korea, Japan

21. Strengths:
Knowledgeable human resources
Hardworking
High workmanship
Innovative
98% SMEs
Democracy
Seasoned & highly educated policy makers
Weakness:
Language limitation
Sales/marketing
Opportunities:
The rise of electronic and computer industry
Globalization
Fast development of Transportation and Logistics
Industry
Threats:
East Asian Tiger's competition
Rise of China
Regional Competition – ASEAN, Korea, Japan
Taiwan’s National Competitiveness
“TSMC’s strategy is to build competitiveness based on Taiwan’s strengths the global opportunities.” by
Morris Chang (TSMC founder)

22. Taiwan’s Success
• Foxconn – service branding
• TSMC – service branding
• Giants – product branding (very small percentage, part of 2% total
brands)
• Many hidden champions in the local villages, mostly production
service companies
• Production service has been a proven strategy for Taiwan’s economic
contribution to the world.

23. Challenges for Cluster Mapping To Analyze
the Production Service Business Model
• Production Machinery, Electronic Components, and Semiconductor
industries are qualified in the NAISC’s code as the manufacturing
industry, not the service industry
• Since Cluster Mapping is using the NAISC code to categorized
Information and Manufacturing clusters. The Production Service
clusters are blended in the manufacturing clusters.
• Redefinitions are needed for Production Service, and it is an essential
part of supply-chain business models.

24. Q & A
• Thank you!

25. -50.00%
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0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
Aerospace
Vehicles
and
Defense
Agricultural
Inputs
and
Services
Apparel
Automotive
Biopharmaceuticals
Business
Services
Coal
Mining
Communications
Equipment
and
Services
Construction
Products
and
Services
Distribution
and
Electronic
Commerce
Downstream
Chemical
Products
Downstream
Metal
Products
Education
and
Knowledge
Creation
Electric
Power
Generation
and
Transmission
Environmental
Services
Financial
Services
Fishing
and
Fishing
Products
Food
Processing
and
Manufacturing
Footwear
Forestry
Furniture
Hospitality
and
Tourism
Information
Technology
and
Analytical
Instruments
Insurance
Services
Jewelry
and
Precious
Metals
Leather
and
Related
Products
Lighting
and
Electrical
Equipment
Livestock
Processing
Marketing,
Design,
and
Publishing
Medical
Devices
Metal
Mining
Metalworking
Technology
Music
and
Sound
Recording
Nonmetal
Mining
Oil
and
Gas
Production
and
Transportation
Paper
and
Packaging
Performing
Arts
Plastics
Printing
Services
Production
Technology
and
Heavy
Machinery
Recreational
and
Small
Electric
Goods
Textile
Manufacturing
Tobacco
Trailers,
Motor
Homes,
and
Appliances
Transportation
and
Logistics
Upstream
Chemical
Products
Upstream
Metal
Manufacturing
Video
Production
and
Distribution
Vulcanized
and
Fired
Materials
Water
Transportation
Wood
Products
Employment CAGR (2006-2016) Revenue CAGR (2006-2016)