Major multinationals are engaging in research and training programs in Taiwan.

How can Taiwan’s highly successful – but low margin – contract electronics manufacturing prowess be leveraged to create innovative brand leaders as higher-margin “internet of things” (IoT) businesses?

That is the ambitious task given to the government’s Asia Silicon Valley Development Agency (ASVDA) as part of Taiwan’s 5+2 Innovative Industries Plan headed by Deputy Minister of Economic Affairs Kung Ming-hsin. The agency – headquartered in Taoyuan with branch offices in Taipei and Silicon Valley – was launched in 2016 with initial funding for 2017 of NT$10 billion (US$361 million at the then exchange rate), with plans to add NT$5 billion (US$170 million at current exchange rates) annually.

The government announced on July 26 that the overall technology budget for 2019, including ASVDA, will total NT$116.3 billion (US$3.8 billion), up 5.12% from this year.

The goal of the project is to raise Taiwan’s global market share in IoT from 3.8% in 2015 to 4.2% by 2020, and to 5% by 2025. This increase in market share would take place at the same time as the total pie is expanding rapidly. A 2015 report by the McKinsey Global Institute predicts that by 2025 the overall economic value for IoT will come to US$3.9 trillion or more.

IoT connects “dumb” items not traditionally wired to the internet, making them “smart.” At the simplest level it involves adding RFID (radio-frequency identification) chips to allow sensors to track items, for example to improve logistics. At the more complex level, it includes everything from “smart” home appliances to self-driving cars to entire “smart cities.” Most analysts are predicting that the biggest gains in value will come from using IoT in manufacturing to bring significant gains in quality, efficiency, and productivity. That could provide a big boost to Taiwan’s large manufacturing sector.

Taiwan is well positioned on the hardware side of IoT, excelling in critically important areas like electronics, precision machinery, and consumer goods. But since that alone won’t make Taiwan a true IoT leader, the government is seeking to move Taiwan up the value chain beyond contract manufacturing. Speaking earlier this year, Minister Chen Mei-ling of the National Development Council (ASVDA’s parent agency) pledged that Taiwan would have its first “unicorn” in two years and another three in six years – a “unicorn” being a young firm with a market cap of at least US$1 billion. (For more on startups, see Taiwan Business TOPICS’ May cover story.)

The government is aware of the challenges Taiwan will face in tackling these ambitious goals. Critically, the hardware side of IoT needs to married to the software side, especially with an eye to data mining and management of the vast amounts of information these products tend to produce. This effort requires strong data, software, and artificial intelligence skills – attributes Taiwan is not well known for. The other main challenge is to produce truly innovative companies and brands that can become high-margin companies or even “unicorns” – something that will require capital, a culture of daring innovation, and an international presence.

To remedy the weakness on the software side, the government has launched several initiatives. Public universities are revising their curricula and launching online courses, and funds are being budgeted for scholarships to support advanced study broad. These programs will take some time to bear fruit, however. In the meantime, in an effort to attract more foreign talent with existing skills, specifically including IoT professionals, the legislature passed the Act for the Recruitment and Employment of Foreign Professional Talent, which came into effect this February.

Although those initiatives can be expected to bear fruit in the long run, there are some worries about available resources in the short term. Sam Webster, President for Asia at IoT firm Exocite, for example, expresses concern about the current talent shortage. He urges the government to “provide hiring/tax subsidies for companies to hire top talent, both domestic and international, to accelerate innovation of IoT products.”

The government is also bringing universities, research institutes like the Industrial Technology Research Institute (ITRI) and Institute for Information Industry (III), and companies together to share resources and experience. An IoT “dream team” of companies has been formed, headed by Acer’s renowned founding chairman Stan Shih and including such companies as Chunghwa Telecom, Lite-On Technology, and KPMG.

Different companies are taking the lead in developing “smart” IoT applications in various business fields, including healthcare, traffic, agriculture, manufacturing, home appliances, commerce, and energy. Efforts are also underway to create new standards and integration systems to ensure that different projects can fit together seamlessly.

One of the key initial goals set by ASVDA is to attract two major foreign firms to set up bases of operations in key fields in order to bring in needed expertise. The organization beat that goal in the first five months of this year with commitments from four of the biggest names in the growing IoT business: Microsoft, Google, IBM, and Cisco, all members of the American Chamber of Commerce in Taipei.

In January Microsoft announced plans for a US$34 million R&D center in Taiwan to grow its artificial intelligence business, including “intelligent input” and industrial integration. Microsoft has been bullish on the response, according to Michael Chang, a spokesperson for the company. “We have received very good initial results on the talent recruiting front,” he commented by email. “In March/April, we ran a series of campus recruiting events at major universities and several focused industry recruiting events. We are very excited about the candidates’ talent, skills, and technical capabilities.

Because of the rapid growth of the engineering staff in the Center, we are looking for a new location for the AI R&D Center.”

In March, Google unveiled its “Intelligent Taiwan” initiative, which includes plans to increase employment in the AI area from 100 to over 300 employees, and to help Taiwan train over 5,000 personnel in AI this year alone. According to Google Taiwan CEO Chien Lee-feng, Taiwan is already the site of Google’s largest R&D center in Asia, focusing on the three aspects of AI, hardware, and cloud computing.

The Google initiative has three main thrusts: “Intelligent People,” geared towards the training and development of technologically prepared personnel; “Intelligent Economy,” designed to use AI in cooperation with local firms to boost competitiveness; and “Intelligent Ecosystem,” aimed at digital network software, hardware, and datacenters to boost local industry.