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Is Taiwan hollowing
out?
By John Berthelsen
For
the past decade, concern has been growing that Taiwan's
economy is hollowing out as its manufacturing industries
increasingly move the 100 kilometers across the Strait
of Formosa to mainland China, where labor and assembly
costs are a fraction of those on the island.
The
economics seem inexorable. China, with 1.3 billion
people, has an average per capita gross domestic product
(GDP) of US$4,300 in purchasing-power parity. Taiwan,
with 22.6 million, has average per capita GDP four times
that much, at $17,200. Fifty-four years of feverish
capitalist striving have moved Taiwan far up the
development ladder compared with China's command economy
and priced its labor largely out of the assembly
business.
Taiwan, which with South Korea became
one of Asia's first tiger economies, was only expected
to grow by an anemic 3.3 percent this year, before the
severe acute respiratory syndrome (SARS) epidemic drove
it down to an even more anemic 2.65 percent. Private
investment fell a stunning 12.2 percent between April
and June. Even government spending fell by 3.1 percent.
With SARS out of the way, the government is spending
NT$577 billion (US$1.68 billion) to prime the
public-construction pump, which it hopes will lead to an
increase in GDP in the third and fourth quarters.
The island republic is obviously ailing. It
reached its peak growth rate 16 years ago, at 12.7
percent. Taiwan's vaunted high-tech industries, which
owe their very existence to export, have taken a bath in
the three-year-old collapse of the global high-tech
bubble. The shift to mainland manufacturing, slowed
initially by cross-Strait politics, is happening much
more abruptly than it needed to, with serious relocation
pains. By one estimate, as many as 300,000 Taiwanese now
live in or near Shanghai.
But don't bet against
Taiwan. The 1970s and 1980s were regularly punctuated by
the same warnings about the US economy as industry after
industry moved its assembly facilities to ever-cheaper
free-trade zones overseas, most of them in Asia. Then an
undeniable explosion occurred in US innovation and
suddenly manufacturing didn't matter that much any more.
It now represents only 14 percent of US GDP and 15
percent of jobs. Nonetheless, the US economy moved into
high gear throughout the 1990s before the twin high-tech
and stock-market bubbles popped in 2000.
Even
with the three-year global economic slowdown, the US
economy only briefly shifted to recession, although
growth has remained largely stagnant and unemployment
has risen. The country's technological prowess remains
unparalleled.
It is Taiwan's banks that are
hollowing out its economy, not its manufacturers, which
remain vibrant. As with Japan, the banks for decades
concentrated on lending for (or playing) the stock
market, property and traditional industries. And, as
with Japan, in 1990 Taiwan's property and stock markets
blew out. The property market spent most of the 1990s
deflating. The stock market's key index fell from a peak
of about 12,500 to below 2,500. It has since recovered
to about 5,400, still far from its highest point
When the Asian financial crisis hit in 1997, the
crisis in Taiwan's financial sector worsened. Saddled by
huge debts that are believed to amount to as much as 15
percent of all loans, tied to zombie companies, the
large majority of them politically connected, the banks
are unable to provide the development capital that
companies need to expand. The banks have never managed
to extricate themselves from bad loans to the property
and equity markets. Those problems continue today,
largely a legacy of the Kuomintang, which ran the
country as its own piggy bank from the time it was
driven off the mainland by the communists in 1949.
The reform government of Chen Shui-bian, with
little experience with economic policy, has continued to
flounder. According to William H Overholt, writing for
the International Institute of Strategic Studies in the
United States, under Chen the government spent vast sums
to prop up the stock market instead of paving the way
for a market-clearing, intervened to shore up the
currency instead of letting it drift downward, supported
an overvalued property market, and forced the banks to
do national service by carrying insolvent conglomerates
and rolling over loans.
Non-performing loans, an
issue that the government simply has not addressed and
appears unlikely to, are estimated at 15 percent of all
loans. Net losses in 1999 were estimated at US$26.7
billion, or 11.5 percent of GDP. Financial institutions
in Taiwan wrote off a minuscule combined total of
NT$84.7 billion (US$2.4 billion) in 2002, mainly in bad
loans and selling off overdue loans, according to the
Central Bank of China's annual report, released this
week. In mid-2002, with too many lenders, too many bad
debts and too much corruption, the bank sector was
estimated to have at least NT$1.5 trillion in
non-performing loans.
The Taiwan Stock Exchange
is famously volatile, with nearly 85 percent of shares
in retail investors' hands, compared with about 20
percent in the United States. The private investors'
proclivity toward stampedes - either up or down -
necessitates frequent government interventions to
stabilize the market.
But one big difference
between Taiwan and much of the rest of Asia is that its
manufacturers make their own stuff and sell it. Years
ago, they stopped concentrating on Ranson and Zeppo
knockoffs of Ronson and Zippo cigarette lighters and
started up the value-added chain. In much of the rest of
Southeast Asia, manufacturing is under license to
Japanese or US manufacturers while entrepreneurs
concentrate on trading property or playing markets
thronged with insider traders.
While Taiwan's
financial sector is a wreck, its manufacturing sector
appears to be going the way America's did. Its low-end
manufacturing jobs are fleeing to mainland China, but
the high-end jobs of the type that energized the US
economy aren't going anywhere. Taiwan is continuing
sustained, substantial spending on research and
development.
According to Hugh Peyman, head of
Research-Works, an Asia-based strategic analysis firm,
Taiwan's second-tier technology companies are growing
their research and development (R&D) budgets by an
average of 25 percent per year. In 2001, Peyman found,
Taiwan ranked fourth in the world, behind only the
United States itself, Japan and Germany in registering
patents with the US Patent Office. As late as 1990,
Taiwan ranked a distant 11th. It has overtaken France
and the United Kingdom in patent production, along with
its Asian rival, South Korea.
"The key point
that investors have overlooked is that Taiwan is already
established as a major creator of intellectual
property," Peyman says. "Electrical, mechanical and
chemical patents all reflect this." The full impact of
this R&D spending won't be felt until the next two
to five years, as products in development today move
towards the manufacturing pipeline. "As an owner of
increasingly valuable intellectual property, Taiwan is
no longer a grunt manufacturer," he says.
Chen
Shui-bian said on Friday that his government is seeking
to turn Taiwan into a biotech hub for the Asia-Pacific
region. The government has helped to set up 77 biotech
companies and, he said, has invested NT$53.9 billion in
the industry. Some 17 companies have already opened in
Taiwan's Tainan Science-based Industrial Park. The
government plans to invest another NT$27.3 billion in
the park by 2006, Chen said.
There are valid
concerns whether governments should attempt to steer
industrial policy. Japan has officially acknowledged
that its Ministry of Trade and Industry, which was
regarded as the architect of Japan's industrial
resurgence in the 1980s, probably hindered development
rather than helped it. Nonetheless, Taiwan is in a
furious race for nanotechnology primacy, for instance,
with as many as 30 other countries.
Nanotechnology is expected to revolutionize
science and consumer products over the next two decades
the way computers and the Internet have over the past
three. Nanoproducts, as they are called, are expected to
play a role in the fields of electronics, food,
pharmaceuticals, health care, energy, transportation,
telecommunications, construction and aviation. They are
devices so small that a very small number of electrons
govern their actions. Their molecular structures are
engineered down to a billionth of a meter, a tiny
fraction of the thickness of a human hair.
The
United States itself has committed to US$700 million in
funding for 2003 through its National Nanotechnology
Initiative, an umbrella program coordinating
nanotechnology research through 10 government agencies.
Japan's projected spending is $1 billion, with European
spending targeted unofficially to reach as high as $3.3
billion through 2006.
In Asia, total government
spending is expected to exceed $1.5 billion this year,
much of it in partnerships between Japan and other
countries. As with the others, Taiwan has formed a
national initiative to concentrate its efforts in on
basic and applied research for the next several years.
The Taiwanese regard the initiative as necessary
in the face of China's increasing competition - much of
it from Taiwan's own manufacturers who have moved
production facilities to the mainland - in high-tech
manufacturing. Along with information technology and
biotechnology, Taiwan has designated nanotechnology as
the three industries that they will focus on.
In
addition, established companies such as Delta, TSMC,
Sunplus, Ambit, Macronix and others are pouring money
into research and development in IT. "There is far more
happening in Taiwan, despite the recession, than in the
rest of industrial Asia," Peyman says.
This
emphasis on R&D is allowing Taiwan to move up the
value-added curve. As product cycles become ever
shorter, this allows for speed to market and a constant
flow of new products that is essential for industrial
survival.
Taiwan's dynamic new industries have
largely helped the government to weather its financial
problems. William Overholt writes: "Because Taiwan
initially was in so much better shape [than Japan],
Japanese-style policies have not led to Japanese-style
stagnation and risk of fiscal collapse."
Unlike
Japan, there is little domestic debt, and foreign
reserves are huge. Unlike Japan even more, "its
manufacturing sector unprotected, uncartelized,
internationally competitive", Overholt says. Its most
competitive companies get most of their funding from the
equity markets rather than from the sclerotic banks.
If anything, according to Overholt, if Taiwan's
high-tech companies had been able to move smoothly to
the mainland, as Hong Kong's did, the island would be in
much better shape today.
(Copyright 2003 Asia
Times Online Co, Ltd. All rights reserved. Please
contact content@atimes.com for
information on our sales and syndication
policies.)
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