Cover Story: Letting Go of State Enterprises
The government is committed to converting Taiwan's often money-losing state-run corporations to private ownership in an effort to improve their business efficiency. Of the 49 state companies, 31 have already been privatized through public sale of stock - and the results in most cases have met expectations. But many of the remaining cases are proving more difficult to handle because of resistance from labor unions, heavy debt, structural problems, and other challenges.
Back in the 1950s, when Taiwan was still predominantly an agricultural society, the bulk of the industrial capacity was in the hands of the country's state-owned enterprises. They included companies that were taken over from the Japanese colonial administration, such as the Taiwan Sugar Corp. (Taisugar) and the Taiwan Power Co. (Taipower), as well as corporations that were transplanted from the Chinese mainland along with the Kuomintang government, such as the Chinese Petroleum Corp. (CPC) and numerous financial institutions. These operations typically enjoyed a host of special privileges, such as monopoly protection, land giveaways, subsidies, and other favors from the government -- but they also contributed significantly to Taiwan's economic development at a time when the nascent private sector was still unable to play a leading role.
But that situation soon changed. Private companies began to prosper in the 1960s and 1970s -- the period of Taiwan's economic take-off, fed by rapid expansion of exports -- and their success accelerated sharply in the 1980s with the move into electronics and other higher-value products. At the same time, multinational companies, though chafing at the protectionist barriers that benefited the state enterprises, began to penetrate Taiwan's growing consumer market.
By the 1980s, it was increasingly clear that most state enterprises had become a drag on the country's economic growth. The government's traditional attitude toward these companies -- viewing them as a means to maintain economic control and dole out favors, and only secondarily as a source of profits -- was part of the problem. As a result, the enterprises generally were not efficiently managed -- often the top executive positions went to retired generals and others as political rewards -- and they were not evolving to face the competitive pressures of the market.
"Our state-owned companies weren't run on a market basis, so they weren't able to compete with foreign companies," says Fadah Hsieh, vice chairperson of the government's Council for Economic Planning and Development (CEPD). "They had to run their businesses with their hands tied -- their budgets had to be reviewed by the Legislative Yuan, and their personnel systems were run like a [civil service] system. They couldn't hire or lay off people on a market basis." In addition, state-owned companies are required to detail their annual capital spending plans nearly a year in advance. If one of them planned to invest in the shares of another company, it was forced to guess at the eventual share price, an impossible task in the world of modern business.
As the state-owned companies fell behind their local and international competition, the government faced a stark choice. One option was to continue to back these corporations, protecting the monopolies that allowed many of them to prosper and extracting their earnings for the national treasury. But that course risked further decay in the state sector, and in the 1980s, international sentiment, led by Margaret Thatcher, favored reliance on private enterprise and pointed to the sorry state of government-owned companies in the Soviet bloc and in China. Alternatively, the Taiwan government could sell off its shares in the state-owned companies and pocket the receipts. That option meant revoking monopoly protections, opening the market, and forcing the companies to compete.
To its credit, in 1989 the Taiwan government chose the latter course, adopting the goal of privatizing all of the state-owned companies. That year, the CEPD set up a task force to promote the privatization of public companies, and in 1991 and 1992, when the Legislative Yuan enacted a series of regulations detailing the execution of the privatization program, the process became official.
The privatization process has had its share of delays, caused primarily by problems with labor, debts, and disputes about ownership (see accompanying article), but generally, it has moved forward in a steady if unspectacular fashion. "I would say that the program has gone according to schedule by more than 80%," says Chou Ji, director of economic forecasting at the Chung-Hwa Institution for Economic Research. "This is always a tough job because employees are always against [privatization], and the government must go step by step to achieve anything."
Looking back at the history of the process, the CEPD's Hsieh notes that "we first decided to privatize the companies in 1989, and up to now we have already privatized 31 out of 49 companies." (Taiwan's definition of privatization is that more than 50% of the shares in a given enterprise are held by private investors.) That leaves 18 companies that remain to be privatized. Of those, seven are under the jurisdiction of the Ministry of Economic Affairs (MOEA) -- China Shipbuilding Corp., Chinese Petroleum, Aerospace Industrial Development Corp. (AIDC), Tang Eng Iron Works, Taisugar, Taipower, and Taiwan Water Supply Corp. Five are under the Ministry of Finance -- Taiwan Tobacco and Liquor Corp., Taiwan Cooperative Bank, Bank of Taiwan, Land Bank of Taiwan, and Central Trust of China. Another three are under the Ministry of Transportation and Communications -- Chunghwa Telecom, Chunghwa Post Co., and Taiwan Railway Administration. The final three come under the Veteran's Affairs Commission -- Veteran's Pharmaceutical Plant, Lung Chi Chemical Plant, and RSEA Engineering Corp.
CEPD emphasizes that privatization has been adopted not as an end in and of itself, but as a means to make the state-owned companies more efficient by combining private-sector know-how with the pressures of a competitive market. A study in 2002 by the Taiwan Institute for Economic Research of 26 companies that have been privatized for three years showed that in most cases production volume, assets, and equity had expanded following the change, while the debt ratio decreased. In all but two cases, employee productivity also increased.
"When we talk about privatization, the main purpose is to bring entrepreneurship into the companies," says Hsieh. Merely the threat of eventual privatization in many cases has had the effect of trimming bloated budgets, reducing corruption and cronyism, and providing companies with opportunities to raise new capital.
A good example of how allowing free-market mechanisms to work has helped to revitalize state-run companies even before they are privatized -- a process that has picked up speed since Taiwan's January 2002 entry into the World Trade Organization -- is Chinese Petroleum. Although the company is still state-owned, it has been forced to abandon its monopoly position in the oil-refining and upstream petrochemical markets, areas in which it is now competing with the private Formosa Plastics Group. The liberalization of Taiwan's petroleum market began in 1996, when Formosa Plastics began to build a naphtha cracker, and was further fueled in 1999 when the government eliminated a ban on natural gas and fuel imports by private companies.
In 2000, Formosa Plastics launched its line of petroleum products, in direct competition with Chinese Petroleum. Nonetheless, CPC still controls 70% of the market, and is one of the most profitable state-run businesses in the country, earning more than NT$400 billion (US$11.8 billion) in revenue each year, with assets of about NT$500 billion (US$14.7 billion).
Another example of a company becoming more efficient prior to privatization is Chunghwa Telecom. Many Taipei residents remember the old Chunghwa as an unhelpful monopoly that charged exceedingly steep rates for overseas telephone calls. The new Chunghwa remains majority state-owned, but it has been forced to accept the liberalization of the country's fixed-line telecom network. Chunghwa's improving productivity has allowed it to keep pace with its private-sector competitors. In the first three quarters of 2003, it beat both Taiwan Cellular Corp. and Far EasTone in earnings per share, and in the same period, it posted an after-tax profit of NT$36.4 billion (US$1.07 billion).
Chunghwa Telecom's profitability and growing reputation for good service have made it possible for the government to sell some of its shares to private investors. In August 2000, Chunghwa first sold shares domestically, and in July 2003, it held an IPO on the New York Stock Exchange (NYSE), becoming the first state-owned company to list there. Altogether, 20.5% of the company has been sold to the public, while the major shareholder, the Ministry of Transportation and Communications (MOTC), still holds 66%. Along the way, Chunghwa also became the first state-owned company to sell shares in Japan. Through a series of investment "road show" seminars overseas, it succeeded in getting international investors to overcome their skepticism about the operations of state-owned companies.
Normally, profitable companies like Chunghwa Telecom are easier to privatize. "It's generally easier to privatize a company that's making money, but only if they're facing competition from other companies," says Hsieh. "If a company isn't run like a private enterprise, even it it's earning money, it's difficult to sell the shares."
Both Chunghwa Telecom and Chinese Petroleum were scheduled for privatization by December 2003, but both companies missed their deadlines (see accompanying article). Nonetheless, the CEPD is pleased with their overall progress. "Actually whether they meet the target date or not is not central at this stage," says Hsieh. The objective, he stresses, "is to make these companies run on a sound business basis."
Two other companies that missed the December 2003 deadline -- AIDC and China Shipbuilding -- are in much worse shape than Chunghwa Telecom and Chinese Petroleum. The struggles of these two companies help illustrate the difficulty of the privatization process.
Most of the companies that have already been privatized, or are targeted for privatization, make goods or provide services that enjoy market demand. That is not the case with AIDC, which formerly manufactured the Ching-kuo Indigenous Defense Fighter (IDF) jet and co-produced the F-5 fighter jet. But the IDF was never a world-class fighter, and when Taiwan was able to buy modern F-16s from the United States and Mirage 2000s from France, the government cancelled the IDF program. The last plane rolled off the AIDC assembly line in 2000, leaving AIDC with a spacious plant filled with little-used machines and too many workers.
The current number of employees, 3,300, is down from the peak of 4,500, but still much more than the company needs. Although AIDC now builds a small number of cockpits for the Sikorsky S-92 helicopter, and produces parts for the Boeing 717 passenger jet and the Bombardier BD-100 business jet, it has had trouble attracting high-volume contracting work from overseas manufacturers.
Some parts of AIDC are attractive to foreign investors: Canadian aerospace manufacturer Bombardier is interested in AIDC's engine-building facility, says Yang Kuan-chang, section chief of the privatization department in the MOEA's Commission of National Corporations (CNC). "There are some parts of AIDC can make money, especially the engine business, but not every part of AIDC can make money."
The answer, according to the CNC, is to break up the company. Part of it will become a joint venture, and the rest will either be publicly listed or allowed to expire. "We need to find a different way with AIDC," says Yang. "We plan to spin part of it off into a new business joint venture, and list part of it in the market." AIDC, meanwhile, must attract more business from overseas, or from the Ministry of National Defense.
Another company that failed to meet its December 2003 privatization deadline is China Shipbuilding. Years of state support, necessary to keep the company afloat, have left the Kaohsiung-based corporation with a US$590-million debt. The company has trimmed its staff by nearly half and cut its payroll one-third, which has returned the company to the break-even point, but those measures do not begin to address the debt problem.
To make China Shipbuilding more attractive to investors, CNC would like to further reduce the number of employees, but concedes that finding a solution for the company has been an uphill battle. "We wanted to privatize China Shipbuilding by the end of 2003, but it isn't easy to achieve -- in fact, it was mission impossible," says Yang. "Year after year China Shipbuilding loses money because of their interest burden. They need to borrow money to buy material from overseas, but Taiwan's labor costs are high, and shipbuilding here is not very efficient compared to Japan and Korea."
CNC has set a new target date of December 2004 for the sale of China Shipbuilding. There are two ways to deal with the debt, says Yang. If the government's holdings in China Shipbuilding are sold on the stock market, the debt will be reflected in the share price. Alternatively, the company's assets could be sold off, the debt retired, and the company liquidated. The final result is likely to be a compromise, with the older Keelung shipyard liquidated, the main yard in Kaohsiung retained, and shares then sold in a public offering.
Ironically, the global shipbuilding industry is booming, as the world's shipping companies boost their fleets to meet a sudden surge in shipping demand. China Shipbuilding has won contracts worth more than NT$50 billion (US$1.47 billion) to build more than 40 cargo ships in the next several years.
"These companies, all under the MOEA, were supposed to be privatized by the end of 2003, but apparently that's not possible," says the CEPD's Hsieh. "But these companies are becoming more profitable, so although they aren't privatized at some point."
One fringe benefit of privatization is the revenue the government earns from selling its shares. "Talking about the benefits of privatization, since the first privatization until now, we have a total revenue already of more than NT$500 billion (US$14.7 billion) from selling these companies," says Hsieh. "That revenue goes straight to the government." And at a time when the government is under heavy fiscal pressure, those sales have been a valuable source of income to help hold down the amount of budget deficit.
Good-bye Taiwan Salt, Hello Taiyen
By Brian Asmus
From a staid state enterprise making one of the most mundane of commodities -- industrial and household salt -- the Taiwan Salt Co. has transformed itself into a diversified operation that is one of the darlings of Taiwan stock investors. Now reorganized to form the Taiyen [Chinese for Taiwan Salt] Group, the company is often cited as the leading success story of the privatization process.
Fully privatized on November 18 last year, culminating a three-year process, Taiyen now engages in three major areas of business in addition to the traditional salt -- organic photo conductors (OPCs), collagen products, and personal-care items such as soap, shampoo, and toothpaste. OPCs (used in office printers) last year contributed about 20% of revenues, collagen (mainly for cosmetics) 30%, and personal-care products nearly 2%. The proportion for salt is dropping steadily.
The transformation took more than introducing new products. "The culture needed to be changed," says chairman Cheng Pao-ching. Previously, the corporate culture was highly bureaucratic, stifling creativity. "We couldn't ask much from our people," said Cheng. "There was no efficiency, and no ability to fire people or reward talent and initiative."
The company was losing money, and with the government pushing for privatization, the prospects were either to turn things around or face bankruptcy. Cheng first had to gain the cooperation of the workers and their unions to work harder, which he did by both communication and example. "They saw I was coming to work at 6 a.m., leaving at 9 p.m., and not taking off to play golf."
Throughout the privatization process, the number of employees was maintained at 460. No layoffs occurred, but productivity soared. Earnings per share have doubled from NT$2 in 2002 to NT$4 last year. Instead of a large deficit in 2002 as forecast, Taiyen made a profit of NT$500 million (US$14.7 million) and paid employees a belated 4.6-month bonus. Cheng estimates that profits in 2003 will come to NT$1 billion (US$29 million), and the bonus will be even larger.
Although the OPC business is quite successful -- Taiyen expects to be ranked as the world's third biggest producer for last year -- this division may be spun off because it is too remote from the company's other lines, said Cheng. More central to the company's plans is its collagen business, which is benefiting from technology transfer from Biocare in the United States.
Cheng attributes the company's fast turnaround to its high quality (it managed to achieve Six Sigma levels in only half a year) and attention to service. Calls on the 24-hour service hotline must be answered in three rings, and email answered within one hour (though the average is only six minutes).
The emphasis on quality, said Cheng, has allowed Taiyen's "Lu Miel" cosmetic line to become one of the top two sellers in the Taiwan market. He believes the marketing strategy he devised -- using youthful-looking older women rather than young models -- has also been a factor. In the personal-care category, Taiyen is now making soap and shampoo with living organisms, which "are good for you and also the environment," said Cheng.
Preparing to "go international," Taiyen has set up representative offices in the United States, Canada, and Japan, and is looking at doing the same in Europe and Asia. Cheng aims to have overseas sales account for 20% of the company's total revenue in 2004 and 50% within five years. China Steel:
Private and Even More Profitable
By Brian Asmus
During its years of majority government ownership, the China Steel Corp. was known as one of the most profitable and efficient of the state-run enterprises. Its integrated steel mill in Kaohsiung was one of the "Ten Big Projects" that built up Taiwan's infrastructure in the 1970s.
Originally planned as a private company with a large but minority government share, China Steel was founded in 1971 and reorganized as a state company in 1977 after private investment fell short. Conversion back to a private corporation took place in 1995 when the government sold off 20% of what was then a 67% stake in the company. The government now still owns 23.5% but plans to divest itself of these shares through public offerings in April and October this year.
"China Steel's privatization was very successful and we are now viewed as a model by other countries," said Wu Chun-hui, China Steel's investor relations manager. "Since privatization, our pretax profits have grown sharply from NT$18 billion (US$530 million) to NT$45 billion (US$1.3 billion) last year. During the same period, the number of employees dropped from nearly 10,000 to 8,600, mostly through attrition." Total revenue in 2003 came to NT$128.6 billion (US$3.8 billion).
Besides removal of the company's budget and investment plans from legislative purview, one of the biggest changes brought by privatization was the ability to pay merit bonuses to employees to encourage improved work performance. According to Wu, the company's labor union supported privatization and never raised any obstacles. As for company's executives, "our only concern was ensuring that the government didn't sell its stake to a hostile party," said Wu.
Since privatization, China Steel has continued to focus on its core competencies: the manufacture and transport of steel and other metal products. Following privatization, the company carried out its phase-four expansion plan, which increased annual production of crude steel from 5.6 million tons to 9.55 million tons. An indication of the company's efficiency is that the designed production capacity of the mill is only slightly above 8 million tons a year.
Currently, 72.4% of China Steel's production is sold in Taiwan. "We have a major advantage in the domestic market since we are the only integrated steel mill on the island," said Wu. "We also benefit from computerized, state-of-art facilities, experienced workers, and close proximity to customers and the Kaohsiung harbor. We therefore have little to no transportation costs." About a third of exports go to China, where most of the customers are Taiwan-invested companies.
For long-term expansion, China Steel is considering constructing a new production facility near Taichung Harbor in central Taiwan. Wu said the board of directors expects to make a decision on this project, estimated to involve NT$46 billion (US$1.35 billion) in investment, in March.
