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Taiwan’s Performance in the Communication Products Segment

(1) The mobile phone handset industry

Most of ’s mobile phone handset manufacturers started out as contract manufacturers undertaking ODM/OEM production. Over the past few years, they have come to play a very important role within the global mobile phone industry value chain. In particular, the impact of the many years of effort expended by Taiwan’s ODM providers should not be underestimated. Several Taiwanese mobile phone makers – including HTC, and Acer – have moved into branded manufacturing, which in turn has led to a substantial enhancement of the R&D capabilities of the Taiwanese mobile phone industry as a whole.

HTC is Taiwan’s largest mobile phone handset maker; it is mainly engaged in the manufacturing of smartphones that run either the Android or Windows Phone operating system. Working through strategic partners such as Google, Microsoft and Qualcomm, HTC helps to provide the latest-model smartphones to consumers all around the world. Currently, HTC’s annual shipments account for over half of Taiwan’s total annual mobile phone shipment volume, and the company has established itself as one of the world’s leading mobile phone brands. HTC handsets are marketed in Europe, North America and Asia through collaboration with local telecommunications service providers and handset distributors. HTC is also gradually starting to make headway in the Middle East, Central and South American and Russian markets.

According to a statistical survey conducted by ITRI’s IEK, in 2012 the performance of Taiwan’s own-brand handset makers was negatively impacted by patent litigation and by shortages of key components, while Taiwan’s ODM providers were affected by the poor sales performance of their main customers. As a result, the annual production value of the Taiwanese mobile phone industry as a whole in 2012 was just US$14.66 billion, down 23% on 2011.

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With respect to the anticipated performance of the Taiwanese mobile phone industry in 2013, leading Taiwanese mobile phone maker HTC is adjusting its product strategy this year, and is expected to roll out a series of new models. If the problem of component shortages can be overcome, this should ensure that the annual production value of the Taiwanese mobile phone industry as a whole is slightly higher in 2013 than in 2012.

(2) The Personal Navigation Device (PND) industry

Personal navigation devices (PNDs) are mainly portable in-car navigation devices. Taiwan plays an important role within the global PND industry, in terms of both brands and manufacturing.

A built-in Global Navigation Satellite System (GNSS) function has become a more or less standard feature in smartphones; the trend for smartphones to replace PNDs appears to be unstoppable, and this trend became even more pronounced in 2012 when the leading smartphone vendors launched new, low-priced smartphone models that possess GNSS functionality. The main regional markets for Taiwanese PND makers are Europe and North America, where the economic downturn has caused demand for PNDs to fall even more dramatically than it has elsewhere in the world. As a result of steadily deteriorating shipment performance since 2009, in 2012 the Taiwanese PND industry posted annual production value of just US$2.1 billion, representing a marked decline. Given that there is little sign of demand for PNDs in Europe and North America picking up significantly in 2013, global market demand can be expected to continue its slide in 2013. Taiwanese PND manufacturers are starting to focus more on emerging markets, including China and ASEAN nations, anticipating that demand in these regions can constitute a new driver of sales growth. While it may not be enough to fully offset the downturn in the European and North American markets, it should at least help to mitigate its effects and slow the overall decline.

(3) The WLAN industry

WLAN (Wireless Local Area Network) devices constitute the single most important networking product category for Taiwan. According to a statistical survey undertaken by ITRI’s IEK, the annual production value of Taiwan’s WLAN industry in 2012 was US$3.28 billion, representing an annual growth rate of 10.5%. The gradual increase in the share of WLAN A/P routers that support 802.11ac or 802.11ad technology has stimulated some

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demand for replacement of existing WLAN A/P router equipment. However, with the ongoing economic downturn in Europe and North America, replacement demand in the retail segment of the WLAN A/P router market has actually declined, and D-LINK DIR-505L ZyXELCommunications there has been a corresponding fall in the WAH7130 volume of orders placed with Taiwanese ODM/OEM manufacturers by their main customers. In the WLAN module segment, Wi- Fi remains a standard feature of smartphones and tablet PCs, and continued growth in market demand for these products has stimulated an increase in shipments of Wi-Fi modules. There has also been a gradual increase in demand for 1X1 Dual Band Combo modules for use in notebook PCs, and in demand for 1X1 Dual Band for use in tablet PCs, which has helped to keep average unit prices steady.

With regard to the anticipated performance of the Taiwanese WLAN industry in 2013, although the share of products sold that support 802.11ac will continue to rise, there is still a 1.5-fold price disparity between 802.11ac and 802.11n, so 802.11ac will remain largely confined to high-end models for the time being; its share of overall shipment volume will remain limited. Taiwan’s networking product manufacturers have also been adjusting their strategy, beginning to increase the shipment share held by enterprise- class WLAN A/P routers, in order to mitigate the impact of weak demand in the WLAN A/P router retail market. Overall, the annual production value of the Taiwanese WLAN industry can be expected to grow by 3.8% in 2013, to reach US$3.4 billion.

(4) The Ethernet LAN switch industry

Ethernet LAN switches represent a product that Taiwan’s wired networking equipment manufacturers have been producing for many years. Although the last decade has not seen any dramatic growth, there has been a steady annual increase in shipments. According to a survey conducted by ITRI’s IEK, in 2012 the annual production value of Taiwan’s switch industry rose by 6% to US$2.253billion, although this was substantially lower than the 16.5% growth rate achieved in 2011. The main reason for this change was the lack of a steady recovery in the global economy in 2012, coupled with the failure to resolve the debt crisis affecting the European market (one of the industry’s most important regional export markets), which affected switch export performance.

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Intense market competition has led to a steady decline in average switch unit pricing; an average annual growth rate in the region of 4% to 5% is projected for the period starting from 2013. Taking into account the factors outlined above, given the limited potential for market growth, it can be anticipated that the annual production value of the Taiwanese Ethernet LAN switch industry will fall by 4% in 2013 to US$2.343billion.

(5) The xDSL CPE Industry

Taiwan’s xDSL (Digital Subscriber Line) CPE (Customer Premises Equipment) manufacturers have accumulated many years of experience in broadband access equipment R&D and production; in recent years, Taiwanese firms have accounted for over 60% of total global DSL CPE production value.

In 2012, telecommunications service providers throughout the world continued to focus on providing subscribers with higher bandwidth and a wider range of converged audiovisual services, as they competed with Cable MSOs (Multiple System Operators)

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and Pay TV providers. In 2012, the continuing European debt crisis cast a pall over the economic outlook; in this challenging environment, VDSL (Very-high-bit-rate DSL) constituted a reliable first choice for keeping costs down, and as a result many companies initiated tenders for VDSL equipment. Deutsche Telekom and AT&T were most active in this regard. With growing demand from branded vendor customers for VDSL products, the Taiwanese xDSL CPE industry was able to achieve continued shipment growth of high- end VDSL and IAD (Integrated Access Device) products. As a result, the industry’s annual production value in 2012 came to US$2.045billion, representing an annual growth rate of around 6.5% compared to 2011.

Looking ahead to 2013, given that VDSL will maintain its status as the mainstream xDSL technology, it can be anticipated that VDSL’s share of the Taiwanese xDSL CPE industry’s annual production value will continue to grow in 2013. However, with the production value of the Chinese xDSL CPE industry increasing, with no sign of an upturn in the European economy that would encourage equipment vendors to place more orders, and with the growth in VDSL shipments being outstripped by the decline in ADSL shipments, the overall annual production value growth rate for the Taiwanese xDSL CPE industry will be lower than in 2012; overall annual production value in 2013 is projected to be US$2.143billion.

(6) The Cable CPE industry

Taiwan has for many years been the world’s leading provider of Cable CPE (Customer Premises Equipment) ODM/OEM manufacturing services. Since 2008, Taiwan has consistently had the world’s highest market share, with global market share in excess of 80%. Currently, with the exception of a handful of overseas branded vendors that continue to undertake some in-house production, the global Cable CPE industry is almost completely dominated by Taiwanese firms. So far, no other serious competitor nation or industry cluster has emerged to threaten Taiwan’s position.

In 2012, leading MSOs throughout the world continued to roll out multi-screen, 3D TV, home security, voice service and other high-bandwidth, value-added applications, helping to boost the Taiwanese Cable CPE industry’s shipments of DOCSIS 3.0 products. There has also been a gradual rise in the share of overall production value held by router and EMTA (Embedded Multimedia Terminal Adapter) products. At the same time, with the growth in the multi-screen concept, the ability to stream video content between different terminal

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devices within the home has become more important, leading to an increase in the share of total shipments held by Cable CPE products that support MoCA (Multimedia over Coax Alliance) or related standards. Benefiting from these factors, the Taiwanese Cable CPE industry posted annual production value of US$1.746 billion in 2012, representing an annual growth rate of approximately 9%.

For 2013, IP video broadcasting services will remain the main focus of competition in the cable market, stimulating a continued wave of MSO DOCSIS 3.0 replacement demand in North America and Europe. Shipments of IP video gateway products are also expected to grow, helping to boost the industry’s production value. In addition, significant demand for Video over WiFi service is expected to emerge in North America, Europe and South Asia, adding greater diversity to the IP video broadcasting market. The overall production value of the Taiwanese Cable CPE industry in 2013 is expected to be around US$1.851 billion,representing a growth rate of 6%.

The ICT Sector’s Upstream Key Component Industries

The impressive performance of Taiwan’s ICT sector in terms of hardware manufacturing and brand development is supported by a powerful, comprehensive value chain comprising upstream component manufacturers. These upstream supporting industries include IC design, IC manufacturing (including IC foundry operations), IC packaging and testing, the TFT LCD panel industry, the touch-screen panel industry, the printed circuit board (PCB) industry, etc. Taiwan ranks among the world’s three largest producer nations for all of the above component categories, and as such Taiwan plays a very important role in the global ICT business. The current status of the individual sub-industries is outlined below.

(1) The IC design industry

Taiwan’s integrated circuit (IC) design industry benefits from an effective division of labor among up-, mid- and downstream firms, and from Taiwan’s strength in ICT technology. The IC design industry also possesses significant cost advantage, outstanding technology, and flexible production capabilities. As a result of these advantages, the industry has come to play a key role within the global ICT sector.

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With a history that now stretches back over 20 years, Taiwan’s IC design industry has successfully coped with constant change (in terms of product life cycles) and today is an outstandingly successful industry whose importance within the global ICT sector is growing steadily greater. The internal structure of the Taiwanese IC design industry is being constantly transformed, but the industry constitutes one of the most important pillars supporting the ongoing growth of the wider Taiwanese IC industry. According to statistics compiled by ITRI’s IEK, as of 2012 there were approximately 260 IC design firms in Taiwan. Strong, worldwide demand for smart handheld device ICs has helped the industry to get back on a growth path.

The results of a statistical survey conducted by ITRI’s IEK show that, in 2012, the Taiwanese IC design industry as a whole posted annual sales revenue of US$13.855billion (including overseas production). The leading Taiwanese IC design firms – including MediaTek, MStar, Novatek, PHISON, , , and Richtek – have been working actively to develop the smart handheld device IC market, and have also begun to make inroads into the high-end IC market that was formerly dominated by leading international semiconductor companies. The product lines that offer the highest growth potential now include smartphone ICs and tablet PC ICs; Taiwanese IC design firms have already mastered 45nm technology, and are now moving up towards 32nm and 28nm technology. In the future, the ongoing trend towards digital convergence can be expected to drive continued growth in demand for smartphone and tablet PC ICs. ICs for use in smart handheld devices will constitute the main driver of revenue growth for the Taiwanese IC design industry in the near future.

(2) The IC manufacturing industry

Taiwan’s IC foundry industry enjoys a globally dominant position, and it plays a vital role within the wider Taiwanese IC sector. In the future, as the cost of developing advanced new production process technology and building new fabrication facilities grows ever higher, specialist IC foundry companies can expect to receive a steady stream of orders from both fabless IC design houses and integrated device manufacturers (IDMs); the role played by the IC foundry firms will become ever more important.

Taiwan’s three largest IC foundries are TSMC, UMC and VIS. In 2012 these companies benefited from the explosive growth in demand for mobile devices (particularly

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smartphones and tablet PCs), which led to a continuing increase in demand for application processor and baseband ICs. Taiwan’s IC foundries possess world-leading advanced production processes and large-volume production technology. IC design firms have been placing substantial orders with Taiwanese IC foundries, helping to stimulate dramatic growth in the foundries’ annual production value. TSMC saw its annual production value rise by 18.5% in 2012. TSMC had capital expenditure of US$8.33 billion in 2012, a record for the company; anticipating continued strong growth in demand,

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TSMC has announced that its capital expenditure in 2013 will be even higher, at around US$9.5 – 10 billion, supporting a further expansion in the company’s production capacity. UMC, Taiwan’s second-largest IC foundry, will be completing its acquisition of the Chinese IC foundry He Jian Technology (Suzhou) in 2013, which represents a major step forward for UMC in its efforts to develop the huge Chinese IC market. UMC can be expected to continue this development of the Chinese market in the future, which is likely to result in improved profit margins.

The Taiwanese IC foundry industry’s high production capacity and first-class production process technology will ensure that the industry retains its global dominance of the IC foundry market in 2013, and the production value growth rate of Taiwan’s IC foundry industry will remain higher than the global average. In the future, besides a continued increase in capital expenditure, the Taiwanese IC foundries can also be expected to step up their investment in advanced production process technology R&D, thereby helping them maintain their technological lead over their overseas competitors and strengthening their position in the market.

(3) The IC packaging and testing industry

IC packaging and testing firms provide specialist IC packaging and testing services for other IC firms. The main focus of these services is on the use of specialized testing machinery to implement testing both before and after the IC packaging process, to ensure that ICs are of acceptable quality.

According to statistics compiled by ITRI’s IEK, in 2012 the Taiwanese IC packaging and testing industry as a whole achieved annual production value of US$13.28 billion, representing an annual growth rate of 0.8% compared to 2011. With the continuing trend towards smaller, more lightweight electronic products, the IC packaging and testing industry has begun to adopt more advanced technology, including FCCSP, FCBGA, SiP, 2.5D IC, 3D IC, fan-out, embedded dies, etc. These new technologies have come to account for a steadily increasing share of the overall IC packaging and testing industry production value.

In 2012, the annual production value of the Taiwanese IC packaging and testing industry (excluding overseas production) accounted for 50.9% of the production value of the global IC packaging and testing industry. Taiwan has thus succeeded in maintaining its status as the world’s leading provider of IC packaging and testing outsourcing services. In the short

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term at least, no other country poses a serious threat to Taiwan’s position as the global number one. The leading Taiwanese IC packaging and testing firms include ASE, SPIL, PTI, ChipMOS, and Chipbond.

Given the trend towards high-performance, highly integrated, low-power-consumption electronic components, semiconductor firms are no longer just following Moore’s Law. In the future, 3D IC will be a major focus for IC packaging and testing firms. Logic IC will be integrated with Mobile DRAM, and mobile phones will become the single most important application market. The ability to integrate Logic IC with DRAM in a similar manner to the integration of graphics chips with DRAM, making use of 2.5D IC technology to meet the requirements of high speed and high performance, offers immense potential in terms of the wide range of applications.

(4) The TFT LCD panel industry

Taiwan’s TFT (Thin Film Transistor) LCD panel industry comprises the following segments (from upstream to downstream): materials and key components, array + cell, module assembly, and terminal / system product. Over the last few years, Taiwan’s TFT LCD panel makers have been steadily expanding their production capacity. Not only has this expansion turned Taiwan into one of the world’s leading suppliers of TFT LCD panel, it has also stimulated domestic production of key components, leading to the emergence of a comprehensive TFT LCD panel industry cluster in Taiwan. TFT LCD panelsare classed as either large TFT LCD panels (10-inch or larger) or medium-sized and small TFT LCD panels (under 10-inch).

In 2012, Taiwan was the world’s second-largest producer nation of both large TFT LCD panels and medium-sized and small TFT LCD panels. Over the past year, Taiwanese panel makers have been working actively to expand their product line from large TFT LCD panels to include medium-sized and small panels. As a result, Taiwan’s production value for large-sized TFT LCD panels fell slightly in 2012, to US$24.66 billion, while production value for medium-sized and small panels rose to US$6.55 billion.

Taiwan’s two largest TFT LCD panel makers are Innolux (formerly Chi Mei Electronics) and AUO. These two companies are the third and fourth largest panel makers in the world, respectively, with production lines ranging from G3.5 to G8.5, enabling them to provide customers with a comprehensive range of panel products. In the medium-sized and small panel segment, both Innolux and AUO have been developing high-end LTPS technology.

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Other, smaller Taiwanese TFT LCD panel makers such as CPT and Hannstar have been reorienting themselves to focus on manufacturing TFT LCD panels for use in mid-range and low-end mobile phone handsets, in-car devices, and cost conscious tablet PCs.

(5) The touch-screen panel industry

Over the past two years, the growth in demand for smartphones and tablet PCs has contributed to a new emphasis on giving consumer electronics products a smart, intuitive user interface, which has boosted global demand for touch-screen panelsby30%. In 2012, the annual production value of the Taiwanese touch-screen panel industry reached US$12.83 billion. In the future, continued growth in new applications, such as touch-screen laptops and all-in-one PCs, should contribute to the continuing development of a touch- screen panel industry cluster with a comprehensive supply chain, unlike the situation in the past where Taiwanese manufacturers have had to import key components from Japan. The major panel-producing nations, including Taiwan, South Korea and China, will all be investing considerable resources in the development of new touch-screen technologies, with the aim of increasing overall panel industry value-add.

Taiwan’s touch-screen panel industry has been able to build on Taiwan’s existing expertise in TFT LCD panel technology, and as a result has succeeded in securing global market share of more than 50% in the mainstream projected capacitive touch-screen market segment. In 2012, the Taiwanese touch-screen panel industry had the highest sales revenue in the world, followed by Japan and South Korea in second and third place respectively, with China coming up close behind in fourth place. Taiwan has thus succeeded in establishing itself as the world’s leading center for touch-screen panel production. As regards to the supply chain, while Taiwanese touch-screen makers still rely on leading international substrate manufacturers for the glass substrate used in the production of touch-screen panel, all other materials and components can be supplied by Taiwanese companies, including ITO (Indium Tin Oxide) conducting glass, the ITO film used in resistive products, optical clear resin, touch-screen ICs, cover lens, etc. Taiwanese firms have gradually succeeded in developing a comprehensive range of sizes for all of the main touch-screen technologies, including resistive, projective capacitive, one-glass solution, on-cell and in- cell touch-screen panel. At the same time, Taiwan’s panel module assembly firms have been implementing vertical integration in both the upstream and downstream directions, developing a “total solution” business model that covers everything from LCD panel to touch-screen panel.

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Taiwan’s three largest touch-screen panel manufacturers are TPK, Wintek and CMI. Between them, these three firms account for 75% of the industry’s annual production value. When YoungFast and HannsTouch are added to the list, these five companies hold a combined share of 85% of the industry’s production value. TPK is the largest touch-screen panel maker in the world; its main product is a glass projected capacitive touch-screen panel. In 2011, TPK acquired Cando, providing a substantial expansion of its production capacity. TPK has also been undertaking vertical integration, expanding upstream into cover lens manufacturing, and downstream into panel bonding, with the aim of being able to provide customers with a more comprehensive range of services. Wintek has expanded into glass projected capacitive touch-screen products; it was also the first company in Taiwan to move into one-glass solution (OGS) touch-screen sensor development and volume production. CMI is a member of the Honhai Group. It has expanded from panel production into touch-screen sensor manufacturing, integrating this with in-house cover lens manufacturing and with back-end bonding operations to provide customers with a total solution.

(6) The PCB industry

Printed circuit board (PCB), also known as printed wiring board (PWB), can be divided into three broad categories: hard PCB, soft PCB, and IC substrate. PCB functions as the “baseplate” for the assembly of electronic components, providing supporting and connecting functions. It is used in the assembly and connection of electronic components; it is a vital, basic component for all electronic devices. The quality of PCB design has a direct impact on electronic device reliability, and also affects the overall competitiveness of system products. Functioning as it does as the “backbone” for components, platforms and systems, PCBs can be thought of as the “mother” of electronics products.

There had been widespread expectation that 2012 would see a rapid upturn in the global economy. In the event, because of the failure to find a solution to the European debt crisis, coupled with the adoption of a more conservative attitude by leading international electronic device brands towards the placement of new orders with suppliers, the level of growth in demand for PCBs in 2012 was disappointing. If overseas production is taken into account, in 2011 Taiwan’s PCB industry overtook Japan to become the world’s largest PCB producing nation. In 2012, Taiwanese PCB manufacturers continued to receive a steady stream of overseas orders, as a result of which the annual production value of the Taiwanese PCB industry grew by 5.7% compared to 2011,reaching US$11.56 billion.

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Taiwan’s global market share rose to 27.6%, enabling Taiwan to maintain its status as the world’s leading PCB producer.

The current “hot-selling” items in the global ICT market – including smartphones, tablet PCS and ultrabooks – all require large quantities of high-end PCBs. Taiwan’s PCB industry has the capabilities needed to manufacture high-end PCBs, and Taiwan also benefits from a low-cost advantage. For these reasons, Taiwanese PCB makers have been very successful in securing orders from overseas customers. With market demand now starting to pick up again, Taiwan’s PCB manufacturers are now working to establish new production facilities in West China, seeking to increase their production capacity as rapidly as possible so as to be ready to cope with the impending upsurge in global demand.

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