Cover Story: Traditional Industries, Untraditional Times
The only real solution to Taiwan's economic woes must include a full redirecting and revamping of the manufacturing industry - and that may just require a second Taiwan Miracle.
By Laurie Underwood
For the first time in 50 years, Taiwan faces the prospect of negative annual economic growth. In mid-August, the Directorate General of Budget, Accounting, and Statistics severely slashed its prediction of 4 percent growth in 2001. The new GDP forecast rate: a shocking negative 0.37 percent.
A major factor dragging down the economy is the tough times Taiwan's 80,000 manufacturers now face, with exports off by 14 percent for the first seven months of 2001, year on year, and imports - many of which are manufacturing related - dropping 19 percent during the same period.
Taiwan cannot instantly shift from a manufacturing-for-export center to a regional services provider. The government's goal of developing the island into a thriving vacation destination, an Asia regional financial center, and a logistics hub might eventually bear fruit, but only after much time and vast effort. But even then, these projects will not bring the island back to annual economic growth rates of 6 percent any time soon.
The only real solution to Taiwan's economic woes must include a full redirecting and revamping of the manufacturing industry - and that may just require a second Taiwan Miracle.
Wrong Side of the Digital Divide
The first thing policymakers say about their efforts to bolster Taiwan's ailing traditional industries is that existing government assistance programs have been hindered by the prevailing mindset that low-tech and even advanced manufacturing in Taiwan is a lost cause.
A case in point: The central government in 1999 set up an NT$30 billion development fund offering financial capital to traditional industries. The fund, which provides low-interest loans to traditional manufacturers upgrading their technology, was renewed in mid-2000 after President Chen Shui-bian took office. In theory, approved manufacturers receive funding at 2 percent below the prime lending rate.
But the fund has had limited success because local banks, reeling from an official non-performing loan rate of more than 7 percent, are reluctant to lend to traditional manufacturers, even those with a solid business performance. Wang Jiann-Chyuan, director of the Taiwan Economy Division at the Chung-hwa Institution for Economic Research (CIER) says even after the Central Bank of China gave banks some "moral persuasion," many financial institutions remained "very hesitant to lend money" By some estimates, only 30 percent of available funds have been loaned out to manufacturers - a fact that has reportedly angered President Chen.
How Bad Is Bad?
Exactly how grim is the news about manufacturing in Taiwan? Actual figures on this vast sector contain some surprises. Certainly, the local manufacturing sector has shifted dramatically in the past decade, mainly because labor-intensive "light" manufacturing has steeply declined. From 1989 to 1999, light manufacturing saw its production values drop by 18 percent, while employment numbers fell by 30 percent (see chart, page 18). Meanwhile, the share of Taiwan exports from traditional manufacturing dropped from 35 percent to 20 percent during that decade, and the manufacturing sector's contribution to Taiwan's GDP dwindled from 25 percent in 1998 to 19 percent in 1999.
However, production values for more capital-intensive infrastructure manufacturing grew 66 percent during the past 10 years, while technology-intensive production shot up by 147 percent. The result: combined production values from all sectors of manufacturing in Taiwan increased by 55 percent during the past decade.
Figures tracking the past 18 months are a bit more sobering. The production index, which compares output values against the previous year, shows a marked decline in most sectors of manufacturing (see chart, page 20). Many traditional manufacturers are now preparing for a further downturn, especially after Taiwan enters the WTO. One example: Taiwan Sugar Co. announced in late August plans to shut down six sugar plants and to reduce its 29,000 hectares of sugar farms to 9,000 hectares by 2005.
The message in these numbers is that only large, capital- or technology- intensive manufacturing industries can continue to grow in Taiwan. But many of Taiwan's 80,000 manufacturers are small or medium-sized enterprises. And economists and policymakers know that few of these companies can make an overnight switch to trendy service industries such as tourism or emerging fields such as biotech. Instead, the government is helping manufacturers increase their survival chances by upgrading technology, internationalizing and improving global logistics, and (when viable) focusing on R&D and marketing campaigns.
Surviving, Even Thriving
The story of Taiwan's manufacturing industry is more complex than a simple tale of manufacturing orders streaming from Taiwan to cheaper offshore production sites. For one thing, capital-intensive manufacturing industries should remain stable, and some sectors might even grow in the coming years. Economist Wang of CIER points to Taiwan's textiles sector as an example. Upstream synthetic textiles manufacturing has performed relatively well even in the past decade because it has evolved into a highly automated business capitalizing on economies of scale.
Comparisons to other countries also suggest that there may be opportunities for local manufacturing sectors to grow. Chen Po-chih, chairman of the cabinet-level Council for Economic Planning and Development (CEPD), stresses that in the United States, manufacturing contributes more than 30 percent of the GDP, compared with less than 20 percent in Taiwan. "We should have the ability to maintain or even to develop manufacturing here," he says.
But clearly, manufacturing in Taiwan must make a sharp change in direction toward producing carefully chosen niche products aimed at specific upscale markets. The darling niche-market success story, oft mentioned by economists and officials, is Giant Manufacturing Co.
Giant, which bills itself as the "world's largest manufacturer of quality bicycles," is the reason Taiwan now ranks as the world's third- largest producer of bicycles, with export sales of NT$29 billion in 2000. Chen commends the company for "upgrading its product with new materials and new designs, and upgrading production through robotics." Chen stresses that Taiwan-made bikes used to wholesale for around US$40 per unit, but today Giant ships some models at US$5,000 apiece. He is also pleased that upscale bike components such as gearshifts are now made locally, rather than in Japan. All this has made Giant the pride of local politicians spreading the message that manufacturing in Taiwan is not dead.
Economist Wang Jiann-Chyuan points to other traditional manufacturers that have successfully upgraded their technology, especially incorporating e-commerce, to improve efficiency and profitability. He lists Yue-Long Motor Co., Formosa Plastics, and Yamaha Motorcycles - companies that Wang says have developed "enough technology to overcome the transition." Ministry of Economic Affairs officials name Asia Chemical Corp. as another that has improved its bottom line via automated manufacturing and e-commerce.
Competing In China, Not Against China
But the best hope for survival among many of Taiwan's traditional companies is not to compete with China but to compete in China - for its domestic market. "Some [Taiwan] firms are doing well because they invested in mainland China and they [have developed] a regional name brand," says Wang. Mainland success stories include publicly listed Cheng Shin Rubber Industrial Co., for its Maxxis brand, Taiwan Sakura Corp.'s electric household appliances, Uni-President's instant noodles, and Want Want Group's snack foods.
The CEPD encourages a slightly different strategy, urging Taiwanese companies to maintain part of their operations here but to link more efficiently to Taiwan-invested manufacturers in China and throughout Asia. The goal, says Chen Po-chih, is to "connect local firms to Taiwan- invested firms in other countries" through improved logistics.
Another strategy for manufacturing survival is to follow the lead of Taiwan-based shoemaker Pou Chen Group. The company began its operations in Taiwan, then expanded to China and Southeast Asia. Today, Pou Chen is the world's largest shoe manufacturer, employing 220,000 workers and producing 18 percent of the global shoe supply for clients including Nike, Asics, and Reebok. The good news for Taiwan is that the company has brought new business back to the island by opening a large-scale research and logistics center - an operation the company did not have back when its production was based here.
Through its logistics operations, Pou Chen can efficiently package orders of different shoe brands into a single container for shipment to a specific retailer. The center "allows customers to order on demand," says Wang. He says combining manufacturing with logistics is now a necessity for local industries. "You can't just offer pure manufacturing - you can't compete with China," he says. "You need to combine manufacturing with packing service, distribution, logistics management." Chen Po-chih agrees, stressing that when Taiwan companies move their production to the high end and incorporate value-added logistics into their services, they enjoy a "second chance."
To give more local manufacturers this new lease on life, the government recently has taken several steps to promote logistics services. Chen is proud of Taiwan's establishment of a "twin port" in Kaohsiung linking the airport and seaport to create a duty-free export-processing zone. "It will be very convenient for firms to carry out logistics," he says. In addition, the government has helped to form several new private logistics companies.
Government Help: More Walk, Less Talk
As the president's Economic Development Advisory Conference issued it conclusions at the end of August, securing assistance for Taiwan's traditional industries was one of the key objectives announced. Economists and business leaders both recognize the shortcomings of the government's existing development funds, which have suffered because of the hesitancy among banks to lend to manufacturers. For manufacturers, most important are the conference directives to secure Taiwan's water and power supply, and to ease restrictions on foreign professionals, including those from China, who are working on development projects in Taiwan (see page 19).
There is certainly room for increased government programs to benefit traditional industries. Outside of the under-used NT$30 billion technology development loan program, the other large-scale government program is a NT$10 billion science and technology fund providing grants to traditional manufacturers with promising research projects. Many of these operate as projects commissioned to the Industrial Technology Research Institute. Examples of ongoing research using these grants include medical equipment and high-security alarm systems using infrared lasers.
Despite these government efforts, frustration is palpable. Asked whether the government has been taking the right steps to bolster the manufacturing sector, Wang Jiann-Chyuan says, "Now is the time to take action, not to talk too much. The programs we have are good, but the issue is how to realize them."
The biggest problem facing Taiwan manufacturers, Wang says, is fear: "We face some serious competition from mainland China now. That means personnel and companies and financial capital are all leaving." Wang urges the government to take significant action to combat the current crisis of confidence. "I think mainland China has the strategy of just sitting there, waiting because Taiwan is losing confidence," he says. "The government should [work together] to really get something done - encourage some foreign firms to set up regional headquarters here or attract some big investments. Then we can raise confidence and move on."
