The Central Weather Bureau has said that this year Taiwan will face a frosty winter. The economy too has cooled; for the first time, the economic growth rate did not meet the government target.

The ROC has always had industrial-led growth. In the past five years the industrial growth rate (except for 1985) has always ex ceeded the rate of overall economic growth; but last year it reached only four percent, below the overall growth rate of seven percent. This phenomenon means that the pace of growth of industry--the "engine of the economy"--is tending to slow. Since industrial products make up 98 percent of exports, stagnant industry will naturally affect exports and cause growth to stagnate.

According to data published by the Industrial Development Bureau (IDB) of the Executive Yuan, from January to July of last year, the total value of 23 of 38 major export products experienced negative growth compared to the same period the previous year (calculated in NT dollars). In the shoe industry, which was one of the top three exporters, only 60 percent of factories are operating at 85 percent capacity or above; one fourth have closed shop or stopped work. Some enterprises are unwilling to abandon their existing basis and move their facilities and investment to Thailand, Indonesia, or the mainland. Like the shoe industry, other labor-intensive industries (toys, textiles) are giving up their top ranks to competitors from Southeast Asia.

T. J. Chen, an associate research fellow at the Chunghwa Institute for Economic Research divides manufacturing into three parts: design, production, and sales. "We just handle the production side, to sell means labor, and it seems that all our industries are limited to this one side." Currently wages in the manufacturing sector are not only several times those in Southeast Asia, they even exceed those of Singapore and Hong Kong, both of which have higher per capita GNP than Taiwan. Chen continues, "In the past with our cheap wages we often stressed "If you can do it, we can do it." You can't say that anymore."

In fact, warnings about the loss of comparative advantage in low-cost labor occurred as early as six years ago. Then Minister of Economic Affairs Chao Yao-tung quickly grasped during a visit to Japan that the era of automated production was upon us. After returning he set to inculcating an automation perspective and formed the "Production Automation Executive Committee." But the plan did not meet the expected response. John Mao of the China Productivity Center suggests that in the past manpower was adequate and factories were unwilling to talk automation. Add to this that many owners built their businesses literally by hand and that it was not easy to communicate the new view, most adopted a wait-and-see attitude.

Faced with rising wages and a labor shortage, however, willingness to automate is up. Manager Mao happily notes that the first year his office sold only one set of automated equipment, and four the next, but 57 last year, and that now former advisers are coming to him for guidance.

With the rising NT dollar, improving production technology is a natural strategy, but not the only one. "We can take the path of design!" says May-Yueh Ho of the IDB. He ignores "sunset industry" arguments, pointing to Italy's shoe industry as a reason not to abandon traditional industries.

Robert M. L. Huang, General Manager of Trans-World Associcates Inc., who started off managing a simple dry goods store, believes that with the rise of the NT dollar naturally profits fell considerably, but it doesn't mean there is no room for survival. "Don't steal, sell creativity" is the method he sticks to. In the face of competition from low-wage countries in Southeast Asia, he holds fast to "You still have to buy mine."

Facing the crisis, some stay, trying to adjust in their original industry and to find new space. Others see the weak profits in manufacturing and jump across to the more promising service sector. Some wish neither to upgrade nor get out of their industry; they take their capital and facilities and invest abroad.

According to a survey commissioned by the IDB, 25.6 percent of private domestic enterprises plan to invest or increase their investments overseas within the next three years, twice the figure of three years ago. The reason: cheap labor. T. J. Chen, who planned the study, says willingness to invest overseas indicates difficulty adapting at home; there is capital but no place to invest, leading to an explosion of underground investment and stock speculation. Correspondingly, overseas investment could help ease the problems of idle capital and the lack of smooth channels for investment at home, and at the same time extend the life of industries unable to find living space at home.

Is this capital flight? An omen of dein-dustrialization? The economist Wang Tso-yung is not completely pessimistic, noting that most outgoing industries are labor-intensive. Though there could be a short term reduction in economic growth, there is nevertheless benefit: "Our labor is of very high quality, and to make low value added things is a waste." Chen adds that Japan is the world leader in capital outflow, the total 28 times higher now than in 1971, but without a crisis of deindustrialization.

In fact, overseas investment may create new investment opportunities. May-Yueh Ho says that 40% of factories which go overseas consider Taiwan as the first place to buy new machinery when expanding. Investment abroad in "downstream" industries (like ready-to-wear clothes) frees up some resources and creates demand for "upstream" industries (like chemical fibers) at home.

In the face of transformation in the larger economic environment, Japan resorted to continuous R&D and automation. Large corporations in Korea, with government support, have imported foreign technology, produced low-cost, well-designed products, and used their own sales networks to aggres sively hit the world market.

Some foreign friends express doubt: On the streets of New York, you can see Korean brands everywhere. Taiwan sells so many things to America, why can't people see your brand names?

Taiwan seems to have an enviable industrial structure, a high-quality workforce (though there is not enough being done to cultivate talent), a large amount of money from decades of frugal living (though investment has remained less than striking since 1980). . . . It seems nothing is lacking for the development of industry.

Entrepreneurs, however, can't get the kind of help from financial institutions in accepting major risks as in Japan or Korea. Therefore the high-risk, slow-return, large-scale integrated circuit factory finds no suitors. Meanwhile, when times are good, downstream electronics manufacturers can't buy integrated circuits. Small enterprises lack the R&D capabilities, while large firms prefer to buy technology with an existing market value. Nearly 60 percent of basic research is left to the government. The talent for R&D is there; it just needs improvement in the R&D environment to be put to good use.

One often hears: this takes time. Let's hope we don't hear this again, for opportunity lost will not come again.

[Picture Caption]

Is the golden age for Taiwan exports a thing of the past?

Wages on Taiwan are second only to those in Japan among Asian countries; the competitive advantage of cheap labor has been lost.

The biggest attraction for enterprises to invest overseas is cheap labor .

A division of labor-design at home and production overseas--can perhaps turn around traditional industry from the brink of collapse.

Research and development is the only road to raise the international competitiveness of the ROC (photo by Wei C. Wang)

Wages on Taiwan are second only to those in Japan among Asian countries; the competitive advantage of cheap labor has been lost.

The biggest attraction for enterprises to invest overseas is cheap labor .

A division of labor-design at home and production overseas--can perhaps turn around traditional industry from the brink of collapse.

Research and development is the only road to raise the international competitiveness of the ROC （photo by Wei C. Wang）