McKinsey: Taiwan must undertake a digital transformation or risk falling further behind

Taiwan has undergone an extraordinary economic transformation. In just a few decades, Taiwan has vaulted from its position as a poor agricultural economy, to become one of the world’s largest industrialized economies. In 1961, per capita GDP was just $1,353 (in 1990 prices). By 2011, thanks to annual average economic growth of 8 percent, per capita GDP had leapt to $37,000. Today, Taiwan is the 22nd largest economy in the world, and controls the fifth largest holding of foreign exchange reserves.

After the Great Recession of 2007-2009, however, Taiwan’s economic growth has stalled, calling into question its competitive position among the world’s leading economies. Slowing growth and declining productivity have led to shrinking profits across all of Taiwan’s most critical industries.

There has been much debate in recent years about what Taiwan needs to do to pull itself out of its economic slump. But as new research by global management consultants McKinsey & Company shows, if Taiwan wants to re-ignite growth and regain its competitive position in the world, it must embrace digitization.

Taiwan is feeling the impact of the digital revolution that is sweeping the world. Long a global leader in high tech sectors such as consumer electronics and semiconductors, Taiwan should be well-positioned to capture the digital opportunity just as well as, or even better than, other advanced economies in Asia. And yet, according to McKinsey’s extensive analysis of the Taiwan economy, there are enormous gaps between where Taiwan stands today in terms of digital readiness, and where it needs to go if it hopes to leverage the full potential of digital technologies.

In their report, they assess the current digitization level of three of the most important sectors of Taiwan’s economy – high tech, finance, and the public sector – and they outline some of the strategies that both government and business need to pursue to tap fully into the digital opportunity.

The case for digitization

Since the Great Recession that began with the global financial meltdown in 2007, the competitiveness of Taiwan’s economy has progressively eroded. Productivity, one of the biggest drivers of economic growth, has dropped across all industry sectors. These sectors have pursued revenue growth at the expense of profits. As a consequence, Taiwan’s share of the global profit pool is gradually declining.

According to McKinsey’s research, there is a positive correlation between a country’s rate of productivity growth and its level of digitization. McKinsey’s Industry Digitization Index indicates that Taiwan’s economy is digitizing unevenly, with wide variations across sectors, and overall it lags other advanced economies considerably. Clearly, Taiwanese companies need to embrace digitization and develop robust digital strategies that will allow them to compete with leading companies globally.

High-tech’s $5 billion opportunity

High tech is the largest sector of Taiwan’s economy: 18 percent of GDP, and about 55 percent of the revenue of Taiwan’s top 200 public companies, are generated by Taiwan’s tech companies.

Yet the sector faces a series of challenges that threaten to erode its position: sluggish growth in the consumer electronics market, razor-thin profit margins from highly commoditized product portfolios, and intense competition from Chinese competitors that are shifting from making hardware to offering more profitable solutions and services.

As is the case with other sectors, Taiwan’s high-tech companies need to fully embrace digitization. But while the sector is the largest contributor to the economy, it is only the third most digitally advanced, according to our research. By comparison, high tech is the most digitized industry in the United States and many European countries.

While challenges remain, they are not insurmountable. The effort to go digital will be worth the effort for Taiwan’s tech companies. In addition to substantially improving efficiency and productivity, a digital transformation will allow Taiwan’s tech manufacturers to shift their focus from competing at the low end of the global electronics value chain to the high end, where higher growth and fatter profit margins reside. The upside potential of such a transformation is considerable: between US$3 billion to US$5 billion in additional annual profits.

Banking on innovation

Financial services is one of Taiwan’s most important sectors, contributing 6.8 percent of GDP and employing 4.8 percent of the workforce in 2016.

Among Taiwan’s top 200 companies, financial services firms represent 13.2 percent of revenues. Despite its commanding position in the economy, Taiwan’s financial services sector faces a series of challenges, such as lackluster revenue growth, thin profit margins, and an insufficient supply of qualified talent.

Banks will need to make fundamental changes to their business and operating models. They will need to redefine their branch functions and networks, redesign their back offices, and rethink their risk management strategies. To ensure these efforts succeed, banks will need to build out their IT infrastructure, recruit and develop new talent, and discover ways to work more agilely.

The next step for e-government

The government is one of the most digitally advanced sectors in Taiwan. Yet it is not at the level of international best practice. Realizing there is work to be done, the government has allocated nearly half of its digitization budget to digitizing internal operations and processes. To facilitate more transparent and useful communications with its citizens, the government should automate internal operations and promote broader sharing of data with people, as well as between government agencies. It should also create apps that enable government agencies to deliver better public services and improve the user experience. The government also needs to leverage data analytics technologies to improve the effectiveness of policy-making.

“To regain its competitiveness, Taiwan needs to undertake a digital transformation. This will require industry and government to take the lead in developing a robust digital strategy, foster wider adoption of new technologies, and encourage changes in mindset and culture. Only when businesses and government embrace the digital imperative, can Taiwan generate the economic growth it needs to regain its position on the world stage,” said Albert Chang, Managing Partner of McKinsey’s Taipei office.

“Capturing the full potential of digital technologies takes more than just identifying the right digital levers. The organization has to commit to a journey of transformation: one that integrates digital and business strategy; attracts and retains suitable digital talent; facilitates the shift to an agile culture and way of working; and builds commitment to the realization of the digital organization. As part of this process, Taiwan’s government should continue its efforts toward digitization, while encouraging greater participation among businesses and its citizens in the digital economy,” said Bill Wiseman, Senior Partner in McKinsey’s Taipei office.

“Fully capturing the benefits of digital opportunities will require substantial investment, and the ability to move quickly and flexibly. Done right, Taiwan’s digital transformation will help accelerate productivity growth, boost economic growth, and restore its competitive position among the advanced economies of the world,” said Jean-Frederic Kuentz, Senior Partner in McKinsey’s Taipei office.

Download the English report here.

Download the Chinese report here.