Opportunity and Challenge

China's rise has spurred economic development in East Asia. Nevertheless, with the dawn of a new era of cross-strait relations, Taiwanese businesses, which were supposed to be the most favored by a policy that "untied" their hands, are now facing huge changes in China's investment environment.

"Now at the saturation point with regard to foreign capital and having an abundance of domestic capital, China has in recent years gone from 'promoting investment' to 'selecting investment'. It has also done away with heavily polluting, energy-intensive, and low-added-value traditional industries, instead supporting high-tech industries in an approach known as 'new birds in old cages'-one bird flies out of the cage, a new one is welcomed in." Chen Te-sheng, a researcher at the Institute of International Relations at National Chengchi University (NCCU) has written that the Chinese business environment has turned a huge corner in its thinking. Taiwanese-invested enterprises, especially those in traditional industries, are facing intense competition and a weeding out process. They face the same pressures now in China that 20 years ago prompted them to relocate their operations there. Should they move again? Or should they bite the bullet and upgrade their technology? Once again, Taiwanese businesses are facing a dilemma.

In an attempt to modernize trade regulations and institute social justice measures, recent PRC policy changes have come fast and furious, catching Taiwanese businesses, accustomed to looking on from the sidelines, completely unawares. For example, in August 2007, export tax refunds were eliminated on 553 items and lowered on 2,268 items; since January 2008 a tax rate of 25% has been applied to both domestic and foreign-invested companies (a ten-percentage-point increase for foreign companies). Outward remittances of profits are subject to a 10% dividend income tax. In addition, an "employment contract law" has been put into effect that compels every enterprise to sign an employment contract with its employees. This requires a company to pay social insurance premiums for its workers and to pay them severance pay. For large-scale, traditional Taiwanese enterprises easily employing over 100,000 people this has been a significant blow.

The headquarters of traditional Taiwanese manufacturers-the Pearl River Delta-is a good example. Keng Shu, associate professor at NCCU's Graduate Institute of East Asia Studies, visited China twice last year to conduct surveys. He discovered that Taiwanese businesses in the Pearl River Delta were considering whether to stay or leave, and that the decision criteria would be their degree of globalization and whether they owned or were leasing the land they were on.

"With increased labor costs, Taiwanese enterprises with low global involvement that lease property will either choose to close their factories and pull out their capital or to move to inland provinces. Firms with low global involvement and who own property will normally choose to go from a labor-intensive industry to a service industry or move to high-tech manufacturing. Companies with high global involvement that lease property will leave the Pearl River Delta for Vietnam or Indonesia, while those who own property face a dilemma with regard to moving."

Wu Jung-hua, chairman of the Shenzhen Taiwan Businessmen's Association, mirrors the boom and decline of the Taiwanese businesses in this area as he describes the changes in the local labor force. He says when he first arrived 17 years ago to invest and set up a factory, as soon as he hung up a recruiting sign the line of workers at the door stretched for hundreds of meters. Three years ago when labor was tight, not enough workers could be hired. But recently there have once been again plenty of workers, since many businesses have closed their factories and gone out of business. More than 100 shoe factories have gone under in Dongguan alone!

Chen Te-sheng thinks that rather than continuing to rely on low costs and preferential policies, Taiwanese companies should emphasize brand names or the demands of the Chinese domestic market. Only by undergoing such a shift will these enterprises have room to grow.

An excellent example of this is Chang Jung-wu, chair of the Yungching Group.

In 1988 Chang began to move his investments overseas from Taiwan, setting up manufacturing in China, Vietnam and Indonesia. In the Guangzhou area alone he had over a dozen contract shoe factories with over 30,000 staff producing international brand sports shoes.

Two years ago he began to turn his attention to China's burgeoning domestic market and started to "fly the brand name flag and move into the service field." In Kunming, Yunnan, he planted tea and in Guangzhou operated ten "Pu'er Zhang" outlet teahouses. Last year he branched into the food and beverage industry, opening five Western-style restaurants in Guangzhou named "Xishifeng." He expects to open such restaurants across China within five years. He is also into real estate and by the end of 2008 the first 280 villas of "Guangshuo Upper City" will be offered in Qingyuan, Guangdong. In the future he will use this brand to build houses nationwide.

"The value of the RMB continues to rise and the capital amassed by Taiwan businesses must be invested," says Chang Jung-wu. Branding and diversification is the road the Yungching Group, as well as all other Taiwanese businesses, should be taking in the future.

"China cannot do the rest of the world's manual work forever, and Taiwanese businesses cannot live be forever chasing the cheapest pastures." Chen Te-sheng says that from another perspective, Taiwanese businesspeople are lucky, having witnessed two economic take-offs and having had two chances to transform their businesses!

A challenge has again presented itself. This time Taiwan businesses will use China's vast interior to find ways to survive and prosper. At a time when cross-strait relations are opening up, Taiwanese businesses should catch the wind, spread their wings and soar!