As growth stalls and reliance on China grows, the country
must reform to preserve its status as an Asian success
©Bloomberg
On your bike: commuters wait to cross an intersection in
Taipei’s rush hour
Taiwan is one of Asia’s great success stories.
Its 23m people have more purchasing power than the Japanese or the British, and
its quality of life is among the highest in Asia. It is one of the world’s most
research-intensive economies, spending the equivalent of 3 per cent of its
output on research and development, more than most economically advanced
nations. Anyone who owns an electronic device probably uses something made or
designed at least partly by a Taiwanese company.
Taiwan is also one of Asia’s most robust democracies, with a solid two-party
system and a vibrant civil society. Even the once-pervasive threat of military
conflict with mainland China, which regards Taiwan as a renegade province, has
greatly receded after a thaw in relations engineered by Ma Ying-jeou, president
since 2008.
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Yet many Taiwanese are anything but optimistic. After decades of double-digit
growth during its rise from pre-industrial poverty, the nation has been snagged
in an upper middle-income trap. Growth has averaged about 4 per cent in the past
five years, not bad by western standards, but not enough to keep up with
faster-growing rivals. Last year, the
economy
mustered growth of only 1.3 per cent, among the lowest in Asia, although the
government expects it to grow 3.6 per cent this year.
More worrying than headline growth is concern that Taiwanese industry could
lose its competitive niche. Its technology is world-class. But its biggest
companies are mainly thin-margin component or contract manufacturers, which rely
on others to sell to the final consumer. “Taiwan may be structurally ‘stuck’ one
level below the branded, high-margin top layer of economic activity where the
richest countries exist,” says Joe Studwell in his recent book,
How Asia
Works.
True, Taiwan has forged new business opportunities from its improved
relations with mainland China. But that comes with risks, leaving Taiwan heavily
reliant on an economy that has itself started to slow and could hit even more
bumpy times. Nor is it comforting for many Taiwanese to rely on a country whose
self-avowed goal is to take Taiwan over, if necessary by force.
“Is China our only hope?” asks Justin Su, president of Hotai Motors, which
represents Toyota and Lexus in Taiwan. “
Opening
up to China was a road we had to take. But still, where will Taiwan go from
here? Taiwan needs to develop its own competitive advantages.”
In the 1980s and 1990s,
Taiwanese
manufacturers were among the first to go into China to build factories where
labour was cheaper. Now, those manufacturers are getting squeezed between even
cheaper competition on the mainland and smarter competition from South Korea.
The latter has been far more successful than Taiwan at increasing production and
creating brands capable of commanding premium prices. South Korean companies
compete directly in sectors such as flat panels, computer memory and
smartphones. To Taiwan’s dismay, the Koreans often beat it when it comes to
branding, speed to market and R&D spending.
About half of Taiwan’s exports are
electronics,
but it boasts no Samsung or Sony. Instead, a local champion is
Taiwan
Semiconductor Manufacturing Company, a chip manufacturer that dominates its
sector and has a market capitalisation of more than $60bn, but which is hardly a
global brand. Perhaps its best-known company is
Foxconn,
which earns profit margins of under 4 per cent by assembling other companies’
products, including iPhones for
Apple.
Taiwan’s problems do not end there. With a fertility rate below that of Japan
or South Korea – at 1.1 child per woman, the third lowest globally – its
potential
workforce will start shrinking as early as 2015. Even so, many of Taiwan’s
brightest are opting for better-paying jobs in Shanghai, Hong Kong or the US.
Taiwan’s real wages are below their 2000 level as many local companies have
expanded their Chinese operations rather than creating jobs at home.
The island is also hemmed in politically. Only 23 governments have diplomatic
ties with Taiwan, mostly small nations such as the Solomon Islands and Honduras.
As free-trade agreements have spread throughout Asia, Taiwan has been left out
by nations fearful of offending Beijing. “Taiwan is separated from international
society while other countries are aiming at globalisation,” says Mikio
Higashiyama, Taiwan chairman for
Mitsui &
Co, a Japanese trading company. “This is a huge problem.”
Partly as a result, Taiwan’s exports have been falling as a share of global
shipments since 1993. Back then, both Taiwan and South Korea accounted for about
2.3 per cent of global exports. By 2011, Taiwan’s share had dropped to 1.5 per
cent, while South Korea’s had risen to 3.3 per cent.
In an interview with the Financial Times, President Ma, re-elected to a
second term last year, says Taiwan cannot grow faster without a fundamental
overhaul of its economic structure. Its companies must add greater innovation to
their efficiency, he says. That will require painful deregulation at home and
further opening up to international competition.
Mr Studwell says Taiwan probably requires nothing less than a “Thatcherite
shock ... to crack all those ossified vested interests”.
President Ma may not be strong enough to administer such bold reform. His
popularity has sunk to 14 per cent amid fears among many in Taiwan that
deregulation and liberalisation will destroy small businesses and exacerbate
inequality in a relatively egalitarian society. There are also fears that
farmers, currently cushioned from outside competition, could suffer.
. . .
Many in big business, too, remain sceptical. Bowei Lee, chairman of
LCY
Chemical, Taiwan’s largest solvent manufacturer, speaks for many
industrialists when he says reforms have stalled, and the government remains too
bureaucratic.
Free trade is central to Mr Ma’s strategy. Taiwan has signed the Economic
Co-operation Framework Agreement with China, which has been called the most
significant deal between the two since they split after the Chinese civil war in
1949. Mr Ma is pushing to deepen that agreement, which so far applies only to a
relatively limited number of products. He also hopes to conclude free-trade
agreements with New Zealand and Singapore this year. The idea – or the hope – is
that after its deal with mainland China, Beijing will interfere less in Taiwan’s
talks with third countries.
Last month, Taipei restarted trade negotiations with the US after resolving a
years-long dispute over imports of American beef. The president is also planning
new free-trade zones to encourage more foreign investment in high-value
industries, though he warns legislation might take a year or two to get through
Taiwan’s argumentative lawmakers. “This is the only way forward,” he says. “Our
trading competitors are already so far ahead of us that if we do not begin now,
it will be impossible to increase our growth rate.”
If Taiwan is to push its way up the value chain, much of the heavy lifting
will have to be done by the private sector. Yet thin-margin contract
manufacturers find it hard to invest sufficiently in developing innovative
products or marketing them directly to consumers. Those that have tried have a
mixed record. Giant, now the world’s largest bicycle maker by revenue, made
smart early investments in higher-end bikes and racing sponsorships. That
strategy paid off. It now commands 5 per cent of global market share, but 10 per
cent of revenue. Others have found it tougher-going.
HTC, the
smartphone maker, struggles to compete against its larger, richer competitors,
such as
Samsung
and Apple.
President Ma argues that business, conscious of how much it is falling
behind, is more prepared than before to go out and compete. “People have
developed a better understanding that, if we do not implement reform, our
economy will grow at a snail’s pace,” he says.
If Mr Ma’s drive to restructure the economy has had limited impact, he has
had more success in improving relations with the mainland. Until fairly
recently, the Taiwan Strait was considered the most dangerous flashpoint in Asia
because of Beijing’s pledge – which still stands – to invade Taiwan if it ever
dared to declare independence. Under Chen Shui-bian, the previous president,
Taiwan came close to calling a national referendum on full independence,
prompting threats of attack from Beijing.
Mr Ma has transformed matters. Shortly after he was first elected in 2008,
the two sides began the first regular direct flights across the strait. Now
there are hundreds of flights a week between Taiwan and dozens of Chinese
cities, from Kunming in the south to Dalian in the north. Taiwanese travelling
to the mainland are mostly businesspeople, happy to avoid lengthy layovers in
Hong Kong. Mainlanders coming the other way are
mostly
tourists. More than 2m came last year and have sparked a boom in hotel
construction and luxury store openings.
As well as its trade deal with the mainland, Taipei won a prized agreement
from Beijing to make the island the second
offshore
renminbi clearing centre after Hong Kong. Many Taiwanese bankers hope
renminbi bonds and investment products will liven up the island’s struggling and
overcrowded banking sector and help cut transaction costs for the thousands of
companies doing business in or with the mainland.
Restrictions on mainland capital investments in Taiwan are also loosening.
The idea, says Kuan Chung-ming, minister of the Council for Economic Planning
and Development, is to put “mainland China’s muscle” to work in Taiwan, rather
than just using the mainland as a place to build factories. A day after
regulators said they would lift the cap on mainland investment in the banking
sector,
Industrial and
Commercial Bank of China announced plans to buy 20 per cent of Bank SinoPac,
one of Taiwan’s largest.
. . .
Yet opening to mainland money remains politically sensitive. While Taiwan is
seeking to attract Chinese money, it wants to minimise Beijing’s potential
influence over its own business and political environment. Chinese investors,
for example, can take only small stakes in crucial sectors such as technology
because of concerns about protecting intellectual property. Deals are sometimes
delayed while regulators comb investments from supposedly non-Chinese sources to
ensure none of it is a front for mainland capital. Many Taiwanese are also
suspicious about mainland Chinese seeking influence over the island’s media and
swaying the debate in a pro-Beijing direction.
Mr Ma’s emphasis on expanding trade and investment links with China has
worked to an extent. But many worry that Taiwan is putting all its eggs in one
basket. William Stanton, the former de facto US ambassador to Taipei, warned
that depending too much on China economically would give Beijing dangerous
“leverage” over Taiwan.
For some the cost could be even greater than that. Tsai Ing-wen, the former
opposition leader defeated by Mr Ma in last year’s presidential election, says:
“What China wants is to move inch by inch so that we are seen to accept one
China.”
Like many Taiwanese, she is sceptical of Mr Ma’s plan for jump-starting the
economy. And, like many others, she regards it as potentially fatal for Taiwan’s
freedom.
A social schism widens across the strait
Despite growing trade links between Beijing and Taipei, Taiwan is drifting
away from the mainland politically and socially,
writes Sarah Mishkin.
The expansion of trade ties under Ma Ying-jeou, Taiwanese president, has
already had an impact. An estimated 200,000 China-based Taiwanese flew home to
vote in the election that returned him to power last year. Most of them backed
him out of concerns that a victory by the opposition Democratic Progressive
party, which has historically supported Taiwanese independence, would antagonise
Beijing and damage business links.
Still, polls find that more and more citizens identify themselves as
“Taiwanese” rather than “Chinese”, even those whose families arrived in 1949
when the defeated nationalist army fled the mainland.
A survey done by Taiwan’s Mainland Affairs Council, which handles
cross-strait ties, found that Taiwanese think Beijing is less hostile now than
it was to Mr Ma’s pro-independence predecessor. However, the percentage who
perceive Beijing as hostile to Taiwan’s people has risen slightly in the past
decade and is now at about 46 per cent. “The two sides across the strait are
indeed interacting more and more in more and more aspects but the Taiwan
identity is getting stronger and stronger,” says Chang Tieh-chih, a Taiwanese
journalist. “Down the road, after 10 years, no one knows what will
happen.”
Even in China, says Chang Mau-kuei, a sociologist in Taipei, the image of
Taiwan has improved.
Many Chinese netizens follow Taiwan’s elections closely, some of them
praising the system and the candidates’ openness to answering questions and
meeting voters.
“I don’t understand. It seems like democracy is something suitable for
Chinese people. Why can we on the other side of the strait only sigh?” writes
one blogger.
For opposing the Communist government, says Mr Chang, “Taiwanese were seen as
bad guys, renegades. Now look at the gangsters – actually they are doing
well.”