One of the key challenges of investment management is identifying and taking advantage of the technological disruption of an old economy. During a recent visit to Taiwan, Kunjal Gala, Senior Investment Analyst at Hermes Investment Management, found a country still at the forefront of innovation, despite recent political uncertainty.
Taiwan’s tech industry is at a crossroads. While the dynamic entrepreneurs of Silicon Valley pioneered the app-driven economy, Taiwan remains influenced by first-generation tech industrialists – in a world where the growth of smartphones, tablets and PCs, as well as supporting infrastructure, is diminishing.
Political winds are also creating some cause for concern, as President Tsai Ing-wen seeks to reduce dependence on China, leading many Taiwanese companies to express worries over the government’s inflexible attitude to investments to and from the regional powerhouse.
However, despite a confluence of headwinds, we see reasons for optimism. For example, a number of Taiwanese companies are diversifying and selling successfully in North America and Europe. Taiwanese companies are exploiting Moore’s Law, establishing mass scale automated manufacturing, increasing the usage of industrial automation, pioneering an ‘internet of things (IoT) platform, entering the global automotive supply chain in advanced driver assistance systems (ADAS), as well as participating in recent advances in virtual and augmented reality.
Smartphones and beyond
Smartphones have become nearly ubiquitous in the western world and there are few large economies, such as India, where penetration is yet to catch up. The opportunity is in the functionality of the phone – continually increasing applications in today’s smartphones require ever more powerful application processors, benefiting the likes of TSMC.
TSMC benefits from the increasing semiconductor content per phone, a trend we expect to continue. The company is progressing on its technology roadmap to mass produce chips on 7 nanometer nodes in 2018, a development allowing them to enter the high-end server/data centre market. The foundry business is becoming increasingly challenging, and high capital requirements represent a major barrier – TSMC spends US$2bn on R&D and US$10bn on capex in advanced technology – making foundry a possible business proposition for very few corporations. TSMC is a tough competitor with an enviable track record of execution and profitability.
Hardware opportunities remain
Technology hardware is arguably the least dynamic segment of the market, but it nevertheless offers opportunities for investors. The continuous decline in personal computers, notebooks and now tablets is not surprising – considering the rise of powerful smartphones. However, there is potential in industrial PCs, and thus we are bullish on Advantech, the global leader.
Industrial PCs benefit from increasing factory automation globally and high barriers to entry due to customised design requirements and a long timeline for supplier qualification. Building on this core competency, Advantech has become ‘future-ready’ through the addition of new capabilities in middleware and software, as well as its ability to deliver bespoke IoT solutions for end customers across industry verticals. This approach demonstrates the ability of the company to move up the value chain and earn high margins. Advantech is confident it can double its business as IoT is built out by enterprises and governments in the creation of smart cities.
ADAS in the fast lane
Regulators are demanding more advanced active safety measures in automobiles and car makers are using technology to differentiate from their competitors, resulting in the rapid adoption of ADAS. ADAS has evolved from ultrasonic parking sensors into camera and radar-based systems – including automatic parking, surround view cameras, collision warning, lane detection, blind spot detection and emergency brake assistance. ADAS is a stepping stone towards fully autonomous driving.
Tung Thih Electronic is a company we like in this area, benefitting from the twin forces of increasing penetration of ADAS in China and their own entry into the General Motors global supply chain. Therefore, we see potential for strong growth as the company benefits from a rapidly expanding product pipeline in a segment of the market with high barriers to entry.
A clear vision of the future, along with R&D and innovation, constitute essential characteristics of a successful technology business. Taiwan will have to nurture top talent, processes and technologies to sustain its lead in the region and mitigate the growing threat from Korea and China. By using what they are good at to expand into new areas, Taiwanese companies are future-proofing business models – providing prospects of attractive long-term growth for investors.
Fewer bargains left in fashionable emerging market debt