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A One-Country Supply Chain Won’t Work

Earlier this year, Taiwan's Ministry of Economic Affairs announced it intended to develop a smartphone supply chain within its country. Bad idea.

Specifically, the ministry said it was seeking foreign investments for production of Active-Matrix Organic Light-Emitting Diode (AMOLED) displays on the island.

The dubious rationale given for the new policy was cost cutting. In fact, there is a back story to the government's new policy.

It all started in early 2010 when HTC, Taiwan's largest mobile handset manufacturer, launched its HTC Desire. At that point, HTC was using an AMOLED display sourced from Samsung. But Samsung is also HTC's rival in the smartphone market, and when HTC began selling too many Desires for Samsung's liking, the Korean manufacturer cut off AMOLEDs to HTC, leaving the latter in the lurch.

It's a case of co-opetition that didn't work. Co-opetition is a strategy that says that business relationships can be based both on cooperation and competition. Rivals can sometimes benefit when they work together.

Samsung obviously calculated that it was better off with more competition with HTC and less cooperation. In fact, its competitive actions against HTC have been fierce.

Samsung is currently under investigation by Taiwan's Fair Trade Commission for allegations that Samsung paid students to attack HTC's smartphones on Facebook. In January, Samsung disclosed that it had been fined $10,000 by the commission for an advertisement that featured misleading information about the Samsung Galaxy Y Duos GT-S6012.

The Taiwan ministry's hope, according to a published report, is that Taiwanese smartphone makers would smartphones using parts and components made in Taiwan.

There's nothing wrong with trying to attract investments and create jobs in your country, but the goal of creating a localized, integrated supply chain isn't the way to go.

First of all, it's not necessarily going to cut costs. The very premise of economic globalization is that the transportation and logistics costs that are incorporated in any given product are so minuscule that they are irrelevant.

It even goes against the idea of specialization within capitalism going all the way back to Adam Smith. And, of course, Adam Smith and may others would disapprove of the Taiwan's government heavy-handed interference with market forces.

Other suppliers
Also, Samsung isn't the only AMOLED supplier around. There are several in Japan and surely one or more of them will be willing to become a trusted source of supply for HTC.

It's too bad the Samsung-HTC relationship didn't work out, but in the end, each company must act in its own perceived self-interest. It's the relationship that counts. That's what makes for strategic sourcing and that is how the supply chain can provide a strategic and competitive edge.

Hopefully, that's a lesson learned for HTC. Let's see if that rubs off on the Taiwan Ministry of Economic Affairs.

12 comments on “A One-Country Supply Chain Won’t Work

  1. prabhakar_deosthali
    June 20, 2013

    In a dual relationship where you are a supplier as well as a competitor, it is natural for a company to give priority for its own products over supplying the components to its competitor.  So Samsung in my opinion did nothing wrong when it curtailed the AMOLED supplies to HTC.

    Taiwan as a country has a right to protect the interests of its manufacturers and its policy decisions regarding becoming self reliant in sourcing of components can also be regarded as a step in the right direction.

  2. Tom Murphy
    June 20, 2013

    I agree Prabhakar, that Taiwan has the “right” to protect its markets.  But I think it is dumb to do so.  If the US or Europe acted that way, the world would be furious.

  3. _hm
    June 20, 2013

    In long term Government interence in economy or free market is detrimental to organization. Does HTC needs government help? Probably not. They can look for other avenues for AMOLED or other parts.

     

  4. ahdand
    June 21, 2013

    Tom: True, you cannot take such decisions which affects most or the majority of the population.   

  5. Houngbo_Hospice
    June 22, 2013

    It is indeed not “always” a good thing for the govenment to intervene in free markets, but we should forget that free markets are created, maintained and curated by the government (s). The rules of the market are set by the country where the business operates even though they should be conformed with the international business regulations and policies.

  6. Houngbo_Hospice
    June 22, 2013

    Protectionism is bad for international trade, but this is sometimes necessary to protect local producers and jobs from foreign competition. In this case of Taiwan, there's nothing wrong with trying to attract investments and create jobs in the country, but it will be difficult to sustain a localized, integrated supply chain there. 

  7. SP
    June 24, 2013

    While its difficult to believe if one country wants all the smartphone supply chain locally when they want to sell global. But since the country in discussion is Taiwan, its quite possible and can be real. Another thing on Samsung, why would they want to compete in bad taste, first it was with Apple and now with HTC. Guess it has something to do with their business strategy.

  8. Ashu001
    June 24, 2013

    Peter,

    I wanted to know if you are tracking the Bill S.544,currently making its way through Congress.

    The idea is ostenibly to create a “National Manufacturing Strategy” but if you look at the way the Bill is shaping up currently ;its quite clear that Congress intends to FORCE Organizations Headquartered in the US to bring/Keep a specific Percentage of their Manufacturing within the US.

    How do you think the Chinese/Brazillians/Europeans are gonna react to this Move?

    The Ground reality is this-We are entering a Fresh Age of Protectionism today Globally.

    Will it turn out similar to what followed the Smoot-Hawley Nonsense which led to World War 2????

    I hope Not.

    But When was the last time you heard of Politicians(anywhere) doing something sensible???

    Regards

    Ashish.

  9. Ashu001
    June 24, 2013

    SP,

    I really don't know much about AMOLEDs manufacturing sites Globally[The Technology in question here] but I am reminded about the furore caused by the Chinese Rationing Rare Earth Exports out of the country ostenibly to protect the Environment.

    Why don't we look at this move by the Taiwanese as a Hedge?

    If other countries (which currently manufacture AMOLEDs) follow Samsung's Example then Should'nt the Taiwanese have some form of Insurance?

    Lets look at it that way and things become much simpler to understand and appreciate.

    After all,the Smartphone/Semiconductor industry is very-very important to Taiwan today.They have every right to protect this Vital industry.

    Regards

    Ashish.

  10. t.alex
    July 29, 2013

    It does not make sense from the competition and the cost viewpoint to have everything within the country. This won't last long, unless the product is super-good. 

  11. Ashu001
    July 31, 2013

    Alex,

    Why not?

    What if all your Clients are in just one Country?

    And the Compliance Regulations also make sense to stick around there?

    I would'nt mind keeping my entire Production in one and the same Country ,especially if the Country is as Huge as China/USA/Russia/Brazil/India.

  12. t.alex
    August 6, 2013

    Yep it might work. But the reality is the clients will always look out for better alternative, out of the country of course.

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