Sanctuaries for troubled firms
According to figures from various Taiwanese business associations in Guangdong Province, more than half of the 22,000-plus Taiwanese firms in the Pearl River Delta (90% of which are export processors) are operating in the red, 30-70% are dealing with shrinking revenues, and about 10% are facing bankruptcy. Labor-intensive industries, including shoe manufacturing, textiles, toys, and ceramics, have been hit hardest. Taiwanese firms in Yangtze River Delta, being mainly 3C firms and selling part of their output into the domestic market, have been less badly affected; yet the outlook for them is hardly rosy.
Ye Chunrong, president of the Taiwan Merchants Association of Dongguan City, points out that the PRC government didn't understand how the new policies would harm business until mid-2008. Not only did these policies hurt export firms, they have also led to a reduction of domestic growth. In June, there was a policy turnaround, with tax rebates on exports raised from 0-5% to 11-14%. Unfortunately, the move was too little, too late. It didn't stem the firms' bleeding, and plummeting orders in the wake of the global financial crisis have only made a bad situation worse. It is still anyone's guess when the economic climate will improve.
Due to the severity of the situation, both Taiwanese firms and academics have called for the ROC government to establish special industrial parks or trade zones that will serve as a sanctuary for these troubled Taiwanese firms from the mainland, providing land, labor, and tax incentives. The firms themselves have requested that the allowed percentage of foreign workers rise from the current 30%, and that the minimum wage be eliminated for foreign workers. The hope is that these new policies will lead to a third stage of life for these firms, enabling them to successfully return home.
A lifeline for Taiwan exports
"Trying to get Taiwanese firms to return during these times of economic crisis is intended not only to help these firms but also to pave a new way for Taiwanese exports," says noted economist Ma Kai, chief editorial writer for the Economic Daily News. Ma points out that the Taiwanese firms that were among the mainland's leading exporters were not the only victims of the PRC's reconfiguration of its export industry; export firms based in Taiwan itself were hit even harder.
"When exports collapsed for Taiwanese firms on the mainland, how could the midstream and upstream Taiwanese firms that supplied them survive?" asks Ma. With clothing manufacturers in Dongguan going bankrupt, the midstream fiber, fabric and dye-processing companies and the upstream petrochemical firms are also experiencing hard times because they lack customers and have swollen inventories.
Ma emphasizes that Taiwanese firms in the mainland have long been among the ROC's most profitable. Taiwan's huge trade surplus with the PRC (which stood at US$34.4 billion in 2007) has been the strongest pillar of Taiwan's economy. But the potential for this kind of damaging economic chain reaction had long been underestimated, and early on the government didn't focus on the troubles that Taiwan firms were facing and how it could help them. It wasn't until mid-November 2008, when the Directorate-General of Budget, Accounting and Statistics announced that Taiwan was experiencing negative growth and industrial production was shrinking at a rate of 12.6% for Q3, that people started to pay attention to the severity of the situation and discuss the idea of establishing special zones for Taiwanese exporters.
"MIT" regains its cachet
Ma points out that the intent of the PRC authorities in reorganizing the export industry when things were overheating two years ago was to winnow out weak firms, leaving only the strong behind. The thought was that the less competitive firms wouldn't be able to afford the high rents and labor costs and would voluntarily move to inland provinces. This would reduce labor shortages along the coast and bring greater prosperity to central and western China. While the plan may have appeared good on the surface, it was poorly thought out: Export firms that import materials and use local labor have "two heads abroad" (both suppliers and markets). Forcing them away from the coast makes it extremely difficult for them to survive. It's not as if they will successfully be able to move because you tell them to.
At a loss for what to do, Taiwanese firms have recently been moving to countries such as Vietnam and India. In light of this situation, why not just establish special zones in Taiwan's ports, and bring the firms from coastal China back home? Manufacturing costs in Taiwan may be higher, but by coming back these firms will be closer to suppliers and key parts. Secondly, for those products that are ultimately destined for the Taiwan market, when you substitute "Made in Taiwan" for "Made in China" you can immediately raise your price by 20%. That helps the bottom line.
A policy goal with heavy costs
Ma Kai's focus is on providing a sanctuary for Taiwanese firms that have nowhere safe to go. But a look at the firms targeted by the proposed special zones presents an entirely different picture.
The Ministry of Economic Affairs is taking the first steps in planning special zones to attract Taiwanese companies to return home. Currently there are four goals for these zones: providing a place for Taiwanese firms' global operations centers, providing centers for the production of key parts and for the research and development of core manufacturing technology, and providing a "final product production center" for Taiwanese brands that market their products globally.
Gong Mingxin, deputy director of the Taiwan Institute of Economic Research, points out that as manufacturing costs on the mainland rise, most Taiwanese firms don't want to put all their eggs in one basket and are adopting a strategy of "China plus one." The expansion of these firms' manufacturing base from the mainland to Southeast Asia is irreversible. What with these firms' expanding manufacturing bases, the need for an operational headquarters, a warming of cross-strait relations with declining shipping costs as a result of the direct links, as well as a potential cut in Taiwan's inheritance and gift tax rate from 50% to 10%, there are ample reasons for firms to return to Taiwan and establish their operational headquarters here.
With regard to enticing Taiwan firms to return and engage in R&D and innovation, views differ.
Gong believes that since those Taiwanese firms, most of which are involved in assembly for export, have over the course of many years become adept with manufacturing processes and acquired advantages in mass production, it makes no sense for the government to twist their arms to come back and engage in research, development and innovation. First of all, that would force these companies to abandon their strong suits and instead grope their way into a riskier new realm. Secondly, R&D and innovation are what the firms that "kept their roots in Taiwan" have been continually doing. What point is there in forcing these firms to share their resources and markets with returning Taiwanese firms that have been based in the mainland?
"Industrial transformation needn't involve a clean break with the past," Gong stresses. "Rather it should involve 'adding' new things. Ultimately, 'mass production' is still an important link in producing value for these small firms in Taiwan." In the end, all these plans will be hot air if they can't control the final assembly stage.
New value in mass production
Gong suggests that after Taiwan firms return from the mainland, they can work in partnership with local firms to increase the advantages of "mass production."
"In Taiwan, as long as you have an idea, you can quickly find factories to create samples. But there is a lack of sufficient support for mass production."
As an example, Gong notes that he once observed a firm in Taoyuan that consisted of only four people. Yet, surprisingly, it produced the world's smallest robot. After finishing the design and producing its specifications, the firm could find everything it needed to create the product from factories and businesses within a few tens of kilometers around Taoyuan. Taiwan's advantage in producing differentiated products is one of its competitive strengths. Unfortunately, as a result of capital and manpower limitations, these products can only be produced in small quantities here. Progress toward the next step of mass production via standardization and commercialization has been lacking.
Consequently, it would only be worthwhile to encourage Taiwanese-owned mainland-based firms, whose strong points are cost control and precision production, to return their operations to Taiwan if they can work in advantageous ways with small firms in Taiwan that excel at research, development and innovation.
Ma Kai, on the other hand, believes that no matter whether Taiwanese firms are engaged in manufacturing or R&D, and no matter whether the products are high or low end, the government should "create an environment in which the market can determine who should return." The situation is critical right now, and Taiwanese firms need a safe harbor. All firms, as long as they are competitive and can contribute to Taiwan, should be welcome to come back.
Homecoming fear
What do the firms themselves think their next move should be?
"Going bankrupt, ceasing operations, moving abroad, moving inland or upgrading where we are." Ye Chunrong, president of the Taiwan Merchants Association of Dongguan City didn't even mention "returning to Taiwan" as an option because the ROC's corporate income tax is 25%, and its inheritance and gift taxes can go as high as 50%. Although recently the government has been working to lower taxes, such proposals will face great public opposition in Taiwan. As for those Taiwanese businesspeople who have sought their fortunes abroad for 20 years, they must be experiencing complex emotions, including frustration and melancholy, as they prepare to return home in defeat.
As we went to press, the PRC authorities announced a package of ten measures to help Taiwanese firms continue their mainland operations in the wake of the global financial crisis. But many Taiwanese firms on the mainland are watching and waiting: will Taiwan be a place they long for but cannot successfully return to, or will they be welcomed back to their homeland with open arms and in the process herald a new entrepreneurial spring? This will be a test of our government's wisdom.
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