These doubts and opinions have been offered before by academics here in Taiwan, but when world-renowned economic competitiveness expert Professor Michael Porter of Harvard came to Taiwan as a guest of the government and endorsed the same views, speaking with great resolve, it immediately sent tremors through Taiwan. What this foreign scholar said sounded at the same time new and familiar. How can his message enlighten people here in Taiwan? What sort of actions can it set in motion? And most important, how can Taiwan become more competitive?
On a late afternoon in early April, the day after spring vacation ended, cabinet members and other high-level officials gathered in the meeting hall of the Executive Yuan to attend a lecture by a foreign expert. That man, Michael Porter, had just come from a visit with President Lee Teng-hui, and he entered the hall together with Premier Lien Chan. His talk on "Raising National Competitiveness" wouldn't end until 7:30.
On the following morning 300 major industry executives sat in the lecture room of the Regent Hotel to hear Porter speak. Though words slipped from Porter's mouth as fast as firecrackers exploding off their string, few used the earphones to listen to the simultaneous interpretation, demonstrating the high level of English held by the business community in Taiwan.
Not a Taiwan expert
In Taiwan for just 26 hours, Porter delivered his two speeches right after Switzerland's Institute for Management Development released its annual rankings of national competitiveness-in which Taiwan dropped from 18 to 24. With the resulting hubbub, Taiwan's newspapers were still talking about what Porter said long after he left.
Vice Premier Hsu Li-teh praised Porter for being enlightening and "gently prodding." Lee Yuen-tseh, president of the Academia Sinica, was less enthusiastic: "These ideas have long been stated by people in Taiwan." Many executives said that Porter had indeed outlined a clear strategy for making Taiwan's economy more competitive, but noted that there was always a huge gap between theory and practice. Many held that Porter revealed an ignorance regarding certain aspects of trade and economic relations between Taiwan and mainland China, which showed that he was somewhat out of touch with the current situation here.
These varying assessments were as good as predicted by Porter. Lecturing to a packed house of executives and academics he reminded his audience that the onus was on them, that they had to "accept responsibility . . . for creating a prosperous economy!" In his speech Porter also stressed that "I am not an expert on Taiwan; you are the experts on Taiwan. . . . I may say some things about Taiwan that maybe are not even true."
Porter held that what he had to offer were conclusions drawn from 20 years of experience traveling to dozens of nations and working with various governments and thousands of companies doing research studies. His ideas could be summed up in a few basic principles about the rise and fall of industry and national might. He said he hoped his comments, like pebbles thrown in a lake, would stir up some discussion and thus cause some change.
In The Competitive Advantage of Nations, published in 1990, Porter advanced the now famous "Porter's Diamond," a four-sided framework in which the vague concept of competitive advantage is turned into something clear and concrete. From organizations as small as a single company to those as large as a nation, the basic forces at work in shaping competitive advantage are herein clearly exposed.
"Prosperity in a nation comes from only one thing, and that's productivity" is how Porter explained a nation's competitive advantage. A country with high productivity will have a strong currency and high wages, and this will result in wealth and improving living standards.
Porter pointed out that previous ideas about national power and competitive advantage focused on countries with vast territory and abundant natural resources, which ideally were backed up by military strength. With global competition in production, however, the definition of competitive advantage changed. Large nations such as India and Russia have struggled on the borders of poverty, whereas small nations with small populations, such as Switzerland, Holland and Singapore-free from complicated political and economic problems-have been able to adapt quickly and achieve prominence. In this respect, Taiwan has been fortunate in having no natural resources to rely on, Porter argued. It has been able to achieve such great strides because the people here have had to rely on their own efforts.
Seeking higher profits
Yet competitive advantage is a moving target that varies from industry to industry.
For instance, the idea that competitive advantage equals efficiency is already pass*: With the standardized large-scale production that has been Taiwan's strength up to now, fast growth is possible, but there is a limit to the wealth a nation can acquire using this model. Porter asked people to reflect upon German companies, many of which are as competitive as any in the world despite their 30-hour work weeks. The reason for this is that they create unique products that are of high quality, and they have strong brand names and service, which give their products high added value.
Of course, to reap wealth and profits, apart from raising efficiency and adding value, it's most important to reduce unnecessary costs. Many real costs arise from complying with miscellaneous government regulations and inadequate infrastructure. Porter didn't avoid taking Taiwan to task for excessive government paperwork that wastes industry's time and money, and for inconvenient transportation that puts pressure on industry to increase inventories. Such costs do nothing to raise productivity.
Chen Fei-lung, CEO of the Nanchow Group, could easily relate what Porter said to the food industry here. One might expect Chinese food products to be extremely competitive, but because of government measures to protect agriculture, sugar and flour prices are very high and it's virtually impossible to import semi-processed foods from abroad. The result is that costs are raised for Taiwan's food industry. Because Taiwan is preparing to enter the World Trade Organization, protectionist barriers against importing foreign food products will have to fall, but these changes are the last that Taiwan need make before joining. In the meantime Taiwan's food processing industry is in a funk, with companies either moving their operations abroad or simply giving up.
A love-hate relationship
It's precisely because the definition of competitiveness is constantly changing that adaptability and awareness are two essentials for being competitive. Government has previously lacked these attributes, and Porter also had many suggestions about how government should adapt itself.
"In Asia, governments have tended to play a more substantial role in directing the economy," Porter said. People who are familiar with the history of industry in Taiwan can offer a string of examples, especially from the recent extremely successful promotion of the semi-conductor industry, which bureaucrats like to talk about a lot: The entire industry was born only a few years ago, and the whole process of its rise-from the return from abroad of talented people with foreign production and management skills, to the establishment of experimental plants by the Industrial Technology Research Institute (which were turned over to private firms after research was completed), to even such matters as finding banks to provide capital-all was successfully accomplished under the direction of government. Yet Porter argued that big government is no longer the way to go.
Porter took an example from the book he is now writing called The Two Japans. Japanese industry can be divided into two distinct halves. In one half-including cars and electronics-the government rarely interferes. In the other half-finance, services and most recently computer software-the government has again and again adopted protectionist measures, but the industries are all weak, hopeless cases. And so letting go to allow industry to face the competition is in fact a way of producing an extremely competitive domestic market. If this is so, outstanding industries should emerge by themselves without needing the government to help cultivate their first shoots.
The government ought to cast aside its role of leading industry, Porter argues, and only be responsible for providing a good environment for business development-focusing on providing physical infrastructure, administrative infrastructure, and developing human resources and science and technology. In "the new game" of future global competition, the government ought not meddle directly in research and development for industry; money for research at government institutes would be better spent on support of universities and inter-company research by industry. Such efforts would reap much broader benefits.
On this point, Shang Wu, the chairman of Chung Shing Textile, disagrees. He wonders, "Does Mr Porter understand the state of Taiwan's universities and the ability of each industry here to carry out its own research and development?"
From his own understanding of Dupont, Shang Wu notes that the company's research and development wing employs 3000 PhDs from various fields, and that its library can have research materials translated from any language into English in 24 hours and from English into any other language in 48 hours. Can this kind of startling research power be acquired by Taiwan universities and industry? Is there any way to improve the weak research and development capabilities here, which are in need of urgent attention?
Not set in stone
The concept of "big government" is firmly and deeply rooted, and it's not only industry that is not yet willing to accept that government should take an entirely hands-off approach. Government policy-makers will also find it hard to adapt. One official who is responsible for strategic planning argues that government has a wider scope of vision, and can balance global industrial trends with domestic needs to establish an industrial policy, and he fears that Taiwan's industry "isn't strong enough to be able to rely entirely upon itself."
Still, this official resents the responsibility that government is seen to bear. After the Swiss Institute of Management Development in Lausanne released those rankings of national competitiveness, there was a chorus of voices attacking government for not doing enough. Yet when Porter was lecturing to a room full of business executives, he expressed his surprise about this: "Can a private sector that is many times larger than government escape all blame for a drop in national competitiveness rankings?"
Even though he stressed that he wanted to break the myth of big government, Porter still gives government a heavy load to bear. He sees its principal duty as presenting a clear "economic vision."
Porter believes that a nation's competitive advantage increases in direct proportion to the extent that its populace can build consensus. Porter holds that the plan to make Taiwan an "Asia-Pacific Regional Operations Center" that the government has been promoting for more than three years isn't suitable as "an economic vision" because this plan includes six different centers for manufacturing, finance, transshipment, telecommunications and media. There are more than 139 items just regarding hardware and software, which make up one part of the index for competitiveness. It's too complicated, hard to remember and hard to understand. Yet by this he doesn't mean to suggest that efforts at progress are unnecessary. To the contrary, in many respects Taiwan is already falling behind neighboring countries in Southeast Asia and should speed up its efforts to make up lost ground.
"An economic vision" cannot be copied from others. Yet Taiwan's plan lacks anything unique, particularly in its stated goals to become centers for finance, transshipment and other services. "It sounds like you want to become another Singapore!" The skepticism of journalists (who had earlier joked, "How great could this guy be anyway? 'Porter' isn't as long as 'reporter'?") turned to admiration at this point.
Technology: star of tomorrow
Because he knows that uniqueness is always the key to success, Porter asks: "What's really unique about Taiwan? What can we find in Taiwan that we really can't find in the other countries of this region? And I think the answer is pretty clear, and I think the answer has a lot to do with technology." When he talks about technology he isn't just speaking about high tech like semiconductors, but a broader sense of technology as it is used in various industries, such as advanced agriculture, environmental technology and energy. In this respect, Porter is setting a hard new target for Taiwan to shoot for: "Asia-Pacific Research and Development Center"!
Since Porter makes his suggestions as an outside observer, how should government officials respond? Vice Premier Hsu Li-teh points out that Porter's ideas don't conflict with the original plan outlined by the cabinet. The fact is that the first goal of the plan is to make Taiwan a "manufacturing center," and what is required to be a manufacturing center is technology. All the rest-finance, transshipment, telecommunications and so forth-are just accessories that allow manufacturing advantages to come fully into play. The items are complementary, not conflicting. If people were suddenly to want to change course entirely, this would be an excessive reaction.
Raising national competitiveness in fact depends upon people's thinking, and competitiveness depends upon the entire nation coming to a consensus. These depend upon choices government makes. If government contracts are awarded through personal connections, and access to education depends on quotas set by political negotiation rather than merit, then a country is "choosing to be poor."
One senior reporter could not help but tremble when he heard this remark, because it hit home. He has grave doubts about the current domestic situation where "everything is political and the economy is at the service of politics." In addition the influence of gangsters and big corporations is pervasive, and illegal activities thrive while those who obey the law are overly restricted. The competitive advantage that Taiwan ought to enjoy is sacrificed in the resulting confusion.
Taiwan government needs a new role that is clearly defined, and Taiwan industry has also come to a turning point.
End of the old road
The model of copying others, doing contract work and processing for export is no longer workable, argued Porter. Taiwan companies should follow Acer's lead and create their own brands and marketing networks, and have their own global development strategies. Taiwan industry shouldn't merely become one flag in the multi-nationals' strategies.
Porter went a step further to point out changes to global industry: the model of providing contract labor and working as OEMs that Asian countries have used for the last 20 years will not be advantageous in the future. In the past Asia was the world's principal source of the world's cheap labor, and the best choice for multinationals. But after the global political and economic situation loosened, the countries of Southeast Asia, Eastern Europe and Latin America all started to walk along the old road that Taiwan had taken. Taiwan's labor, meanwhile, became much more expensive, and it lost that advantage.
"The bottom line is that competition is getting much fiercer, and unless Taiwanese companies shift their strategies, unless they're able to do more than they've done in the past, it's very unlikely that you can sustain this improvement in the quality of life and prosperity," Porter stressed. For the next five to ten years Taiwan industry should proceed with restructuring as soon as possible, moving from an "investment orientation" to a "creative orientation" and adopting a completely new strategy and scope of vision to face fiercer global competition. This will be a hard test. Its success or failure will determine the economic future of Taiwan.
To raise competitiveness Porter suggests that Taiwan industry should abandon the strategy of focusing on cost considerations, low unit profit and high volume and make itself into a "sophisticated country," that has more creative R&D, greater technology, better brand names, more diversity in terms of marketing strategy, and so forth, engaging in a quality, brand, and marketing war-only this will raise productivity to generate greater profits, support higher wages and lead to a higher living standards for the whole nation.
Nevertheless Porter explains that while these goals are ambitious, they suit a country that hopes to enter the ranks of the five most competitive nations by the year 2000. Still, he says that there is no need to anxiously try to accomplish all his suggestions at once. There is, however, quite a gap between these expectations and the current reality in Taiwan.
"Taiwan-style creativity"
Hsiao Jui-hua, the director of the Chaotai Consulting Company, attended the lecture, and she uses the term "different levels" to describe this gap. Whereas Porter, a top consultant to multinationals, speaks about global strategy, she herself serves medium-sized and small businesses that have the attitude that "the quicker they make money the better" and that "it's best to quit while you're still ahead." To have brand names, marketing networks, and sophisticated technology and R&D, you've got to spend a lot of money, and when you spend it you can't be sure you're going to be able to get it back.
"You've got to ask your client, 'How long are you preparing to run this business?'" From their responses you know that strategies that are too long-term and grand are beyond the reach of the 98% of Taiwan businesses that are small and medium sized." Hsiao thus gets to a key perspective of most of those running Taiwan's businesses. And the proof of this pudding was in the make-up of the audience at Porter's speeches: most of those attending were executives from multi-nationals or large Taiwan firms, or were government bureaucrats. Few small businessmen would be willing to pay to see some famous scholar talk.
Porter's ideas may be hard to implement right away. But Wan Yi-ning, assistant general manager of the China Productivity Center, who has a deep understanding about industry, points out that although Taiwan industry may not be creative in terms of brands, design and marketing, in some areas Taiwan is on the cutting edge, and the results are already apparent, especially in manufacturing processes and management.
In certain respects Taiwan's information industry leads the world, says Yang Ting-yuan, head of Winbon Electronics. Taiwan may not decide how new generations of personal computers are shaped, but in manufacturing processes, Taiwan companies have attained a level of detail that would be hard for foreign firms to imagine. In "creating" the motherboard industry and making use of extremely complex satellite supply system, Taiwan has been able to put together motherboards more quickly and cheaply than any other nation in the world, thus helping to bring on the ubiquity of the computer.
Similar examples can be taken from the bicycle, shoes and plastics industries.
Wan Yi-ning points out that throughout Southeast Asia, whether in Tucheng (a Taipei suburb), Shenzhen, Shanghai or Penang, everywhere Taiwanese firms go they establish their own tight networks that can best answer such questions as these: What place produces what raw materials or semi-processed goods? What channels should be taken for transport? Where can things be assembled? How do you get them through customs? Not only do manufacturing industries up and down stream have smooth interfaces at every link with high levels of mutual understanding, the firms of every industry have realized that it is in everyone's interest to integrate and maintain the best possible model of cooperation combined with competition-so-called "copetition." Working together as a network to compete against foreign companies, Taiwan firms have acquired a level of manufacturing sophistication in no way inferior to that of multinationals, and this has been a deciding factor in Taiwan's continuing lead over other industrializing nations such as Malaysia and Thailand.
Never giving up!
Another interesting part of Porter's speech was a new economic vision that he offered. He pointed out that Southeast Asian nations such as Taiwan have a misconception that "high-tech manufacturing" means only electronics, information technology and such. But in fact "high tech" is not so restricted in meaning: "Every industry today is high technology!" Porter's favorite example is Holland, which despite having an unfavorable climate and scarce land, has used computerization and complex marketing technology to remain one of the world's largest suppliers of fresh flowers.
In raising competitiveness, it "doesn't matter what particular products you produce. That's not so important. What's important is how the nation produces those products." Porter has as one nickname "Mr. Shoes" because of another of his favorite examples: the Italian shoe industry. With their top-quality shoes marketed around the world, workers in the Italian shoe industry can enjoy wages as high as US$17 a hour, and the shoe bosses live in palaces. Yet Bangladeshi workers who also produce shoes earn only pennies an hour!
Even if Taiwan's exports have looked good over the last few years, Porter still sees a crisis. Although Taiwan companies have been very nimble and very flexible, they have tended to lack perseverance and commitment, and the result is that they tend to jump from one product area to another. If they hit setbacks while developing a product, they quickly abandon it and focus their energies elsewhere. This makes it hard to achieve success over the long term.
But the effort and commitment now displayed aren't enough, a fact shown in the way industry looks at Taiwan.
At Porter's speech at the Regent, Hsu Hsu-tung, chairman of the Far Eastern Group, asked the question that international industry is most concerned about: How do government restrictions on investment in the mainland, which limit companies' freedom of action, affect competitiveness? Porter's response may not have been what most of the gathered executives wanted to hear, but it's worth considering.
Porter said China is very important, but "China is not the end of the universe." On the one hand, Taiwanese companies ought to expand their horizons to think globally, and on the other hand they ought to continue taking steps toward raising the level of industry in Taiwan. This would be better than abandoning Taiwan for the mainland when confronting obstacles here. Ultimately, Taiwan businesses are still going to be rooted in Taiwan.
Global competition
"It was interesting listening to Porter's speech," said one CEO who came up from Kaoshiung to attend the lecture. "He says straight out what he thinks is good and bad, not always hedging his bets like most people." Yet Porter's refusal to criticize the ROC government for its controls on mainland investment seemed to conflict with his call for "a free economy," which is one of the central tenets to his philosophy. It stirred up much debate among the executives in his audience.
On this point, Wan Yi-ning, looking at the big picture, explained: "There is indeed a contradiction here, but cross-straight relations are ultimately more a political issue than an economic one; they can't be fully explained with economic theory. Those who understand the situation thoroughly like Porter won't simplify it by viewing it purely in terms of economic theory."
People may have varying assessments about Porter's speech, but he himself claimed only to be outlining a general framework. Real implementation would require a dialogue between ROC government and industry with frank discussion about creating a common economic vision for the nation. In order to put a little pressure on Taiwan, Porter also joked that he hoped the next time he was invited to speak here the nation would will have already taken measures to move in the direction he has suggested!
Porter may not be a Taiwan expert, but his father was posted here as a US military advisor, and Porter spent two years here as a child. He still has special feelings for the place. He remembers the Tienmu and Peitou of his youth as quiet places, where water buffaloes grazed along the roads, and front doors were left open. Today, when he gazes out the window of the Presidential Suite at the Regent Hotel, the dynamism of modern Taiwan is immediately apparent. "Taiwan has been extraordinarily successful!" Porter said several times.
Amid all this talk about national competitiveness, there is one question that no one seems to be asking: Will limitless competition-even with success-bring happiness and fulfillment? But such questions can only be asked by those who are already successful. If Taiwan wants to welcome the new century of global competition, and create another 20-year miracle, the only way is to struggle forward. l
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Here one moment and gone the next, Harvard Professor Michael Porter spoke about how Taiwan should make its economy more competitive. His views stirred up much discussion. (courtesy of GIO)
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Taiwan's Changing Rank for Economic Competitiveness
Notes: (1) The 1997 ranking is a preliminary ranking only
(2) These rankings are based on criteria the IMD established last year
(3) 46 countries were compared
Source: Economic Research Department, Council for Economic Planning and Development; graphic by Tsai Chih-pen
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Disputes between capital and labor, environmental protests, consumer group activities. . . as democracy has come to Taiwan, various groups' conflicting demands have put a drag on the economy. (photo by Hsueh Chi-kuang)
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For Taiwan's bid to conquer the world economy, the information industry-"the new number one Taiwan industry"-bears the weight of great expectations. The international information technology fair held every year at the Taipei World Trade Center attracts great numbers of businessmen from Taiwan and abroad. (photo by Diago Chiu)
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Porter suggests that Taiwan aspire to become an "Asia-Pacific Technology Center." Achieving such a goal will naturally require a firm foundation in science and R&D. The government-sponsored Industrial Technology Research Institute has for many years played an important role in building just such a foundation. (photo by Hsueh Chi-kuang)
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With their factories and low-wage labor, mainland China and Southeast Asia have attracted investment by many Taiwanese companies, which have set up networks that compete against foreign firms. These may not have been included in Porter's research about competitive advantage, but they are more evidence of Taiwan's "economic dynamism." The photo shows a Taiwanese company's Shanghai factory. (photo by Diago Chiu)
With their factories and low-wage labor, mainland China and Southeast Asia have attracted investment by many Taiwanese companies, which have set up networks that compete against foreign firms. These may not have been included in Porter's research about competitive advantage, but they are more evidence of Taiwan's "economic dynamism." The photo shows a Taiwanese company's Shanghai factory. （photo by Diago Chiu）
