Economic Storm Winds Prompt Companies to Get Fit

In the past, Taiwan had most of its eggs in one basket-contract manufacturing for the information technology and electronics industries. The problem with this strategy was that whenever the US and European markets lost their appetite for these goods, Taiwan's electronics industry starved.

As we begin what looks like it will be a long-term convalescence from the current round of economic ills, many people are suggesting that the cure for what ails us is a transition from exports towards the development of domestic demand.

As part of its efforts to support tech workers forced to take unpaid leave, and to take advantage of a rare moment of downtime to initiate "factory overhauls," the Council of Labor Affairs (CLA) rolled out two new subsidy programs in early February: the Plan for Promoting Employment Skills in the Short Term (PPESS) for businesses, and the Short-Term Skill Plus Program (STSPP) for workers.

Under the PPESS program, the government will cover the first NT$1.9 million in training costs for companies with 200 or more employees that run employee training sessions this year. The program will also cover the first NT$950,000 in training costs for manufacturers with fewer than 200 employees and for firms in the service sector with fewer than 50 employees.

In addition, workers on unpaid leave who participate in their company's on-the-job training programs will also benefit: the government will pay workers taking 16 or more hours biweekly of unpaid leave an NT$100-per-hour subsidy for participation in training classes up to a maximum of NT$10,000 per month.

AU Optronics (left), which has instituted a "green promise" program to design environmental friendliness its TFT-LCD products, and Pihsiang (right), which develops lithium iron phosphate batteries for electric vehicles, are leading Taiwan's green energy charge.

Encouraging worker retention

According to the CLA, as of the end of 2008 17.8% of Taiwanese companies with 200 or more employees had instituted unpaid-leave programs. These measures have impacted the lives of some 202,000 workers.

The objective of the PPESS is to offer 800 companies financial assistance for employee training. As of March 23, 806 companies had applied for funding under the program. While this achieved the CLA's target, when you consider that Taiwan has some 1.15 million companies, the numbers amount to barely a drop in the bucket.

According to the CLA, only 13.6% of domestic corporations have offered training to their workers, and their average annual training expenditures have amounted to only NT$97,000. More than half of small- and medium-sized enterprises (SMEs) say they don't provide training because they have no need to do so. Why are companies so uninterested in providing worker training?

Tech companies find the STSPP's application criteria very stringent. The CLA requires that applicants maintain a 99% staffing rate during the training period. That is, they can't trim their workforce by more than 1%. That figure just isn't very practical for manufacturers. Take, for example, Taiwan Semiconductor Manufacturing Corporation, a model corporation by virtually any measure. Even in normal economic times, the company's staffing rate runs at about 95-97%. How is it to achieve 99% in a downturn?

Hsin Ping-lung, an associate professor with the Graduate Institute of National Development at National Taiwan University, describes the STSPP as "subsidizing salaries under the guise of [support for] training." Hsin argues that though the program has good intentions its implementation has given rise to disputes over the "unfairness of the subsidies" and the ambiguity of its orientation. To receive the subsidy, workers must work for a company that offers training. But what kinds of companies have the ability to offer training? Clearly, the answer is "large companies." Workers employed by small and micro-enterprises are excluded simply because their companies don't have the funds or personnel to offer training. This doubly disadvantages these workers, who already tend to earn less and be less competitive in the job market than their counterparts at larger firms.

"The STSPP is focused primarily on subsidizing salaries and only secondarily on improving job skills," says Chen Yi-min, director-general of the CLA's Bureau of Employment and Vocational Training. "The PPESS is intended to encourage companies to retain workers with the goal of stabilizing employment. After all, when firms upgrade or the economy recovers, they'll again have need of these employees. If they lay off too many, they'll have to spend even more to train new people." Chen says that government must consider how to most efficiently utilize its resources when providing assistance to companies that offer training. Medium- and large-sized enterprises employ a great many people and have a broad-based impact on the economy, making them the more likely to be primary targets for government assistance.

courtesy of AU Optronics

New energy, new opportunities

SME owners may need to update their thinking about employee training, but Hsin argues that staff training is always very tightly targeted-on developing new products, bringing in new technology, understanding new trends, retaining key staff, or preparing for an upcoming reorganization. "With the present outlook so uncertain, companies have no idea what kind of training to offer," says Hsin.

Firms and industries follow their own unique development tracks, and the differences among them can be tremendous. Many scholars nonetheless argue that a number of global trends are apparent. Firms that monitor new trends and seek appropriate niches in the value chain in new fields tend to have a better financial outlook than those that don't.

"Green" industries are now a major trend. In his first address to Congress, US President Obama on February 24 mentioned the need to develop wind and solar power, biofuels, clean coal, and highly efficient automobiles. In Taiwan, President Ma Ying-jeou acknowledged the importance of green energy in early March when he enumerated six major industries of the future-green energy, tourism, healthcare, biotechnology, cultural innovation, and precision agriculture.

San Gee, deputy minister of the Council for Economic Planning and Development, argues that green energy is the way of the future and that Taiwan needs to be a player in the field. With that in mind, the government will carefully evaluate our current resources, including things like wind speeds and our potential generating capacity, ocean temperature differentials, our solar power potential, and electric car technologies, to gain a better understanding of our strengths and limitations. It will then muster resources and offer guidance to the private sector.

We already have advantages in photovoltaics, for example. Taiwan produced nearly NT$100 billion worth of crystalline silicon solar cells in 2008, accounting for 16.7% of global production.

But Cyrus Chu, an academician in the Institute of Economics at the Academia Sinica, notes that Taiwanese production consists largely of individual cells. We sell few modules, which are assembled from the cells, and few systems, assembled from modules, on the international market. Putting large numbers of solar cells together into systems requires mastery of connection and transmission technologies. Taiwanese firms don't lack the technology, but they do lack experience in the meat-and-bones of contracting, building, and actually running these kinds of projects. As a result, they've had a hard time winning bids in the international marketplace.

Chu proposes allowing the industry to run trial projects on the wide-open, flat, sunny fields of Penghu to gain that experience. Moreover, if Penghu were ultimately to become a gambling destination, we could put solar power systems on the roofs and outer walls of the casinos as well, making them perhaps the world's only "green casinos."

photo by Hsueh Chi-kuang

Changing gears

With the economy changing and an industrial reshuffle underway, it is vitally important to have a blueprint for industrial development. Nonetheless, we have to refrain from moving too quickly. And this advice applies both to government efforts to map out a new direction for the economy and to businesses' attempts to change directions and redeploy assets.

Johnsee Lee, president of the Industrial Technology Research Institute, has written that he worries about the private sector's rush to invest in the construction of solar cell manufacturing facilities. Because solar power costs two to three times as much as power generated conventionally through the burning of fossil fuels, solar markets the world over continue to rely on government subsidies. Rapid and excessive investment in plant construction might well result in excess supply. Lee's concern is that Taiwan's solar power industry might well end up following in the footsteps of the local DRAM industry-overinvesting, engaging in intense price competition, then bleeding red ink until everyone throws in the towel.

Lee believes that Taiwanese firms developing solar-power businesses need first to invest in R&D to gain a grasp of core technologies, particularly those related to the manufacturing process and to improving the efficiency of cells. They also need to create a long-term R&D strategy aimed at developing advanced technologies such as thin-film and organic photovoltaics with an eye to acquiring patents of their own for key technologies.

But Taiwan's "green energy" objectives aren't limited to the development of emerging and future technologies. Many people see it as a means of resolving one of Taiwan's most vexing industrial problems-the state of the DRAM industry.

Taiwan has had its own DRAM industry for 20 years, and local production accounts for 20% of global output by value, a figure second only to that of Korea. Last year, the turning of the business cycle and the financial tsunami made people realize that local DRAM makers' shiny exteriors were nothing but hollow shells. Semiconductor manufacturing processes are upgraded yearly, and companies that lack their own in-house technology have to pay for expensive technology transfers from industry leaders abroad. But the recent downturn in demand has left Taiwanese DRAM makers without the means to do so. Saddled with collective liabilities of some NT$300 billion, Taiwan's six DRAM producers, including ProMOS and Powerchip, have had no choice but to approach the government for help.

Choosing to bail out the industry rather than individual firms, the Ministry of Economic Affairs (MOEA) has decided to invest NT$30 billion in the formation of the Taiwan Memory Company. The MOE hopes that successful technology transfers from US and Japanese firms will give the local DRAM industry a new lease on life and enable it to move beyond the contract manufacturing model it has long depended upon.

Is there any way out for these six deeply indebted companies? Experts note that photovoltaic manufacturing processes are similar to those for DRAM and much of the manufacturing equipment is identical. If the industry can be induced to change directions, or can attract professionals left jobless by the recent downturn, photovoltaics might offer an effective means of killing two birds with one stone.

AU Optronics (left), which has instituted a "green promise" program to design environmental friendliness its TFT-LCD products, and Pihsiang (right), which develops lithium iron phosphate batteries for electric vehicles, are leading Taiwan's green energy charge.

Manufacturing's realignment

A number of Taiwanese companies, such as Mosel Vitelic, have already redeployed their resources with an eye to the future. AU Optronics, which is pushing the notion of a transfer from IT to ET (technology in the service of energy and the environment), is another case in point.

In 2008, AU, a major LCD-panel maker, gathered together more than 100 senior executives for three days and two nights of brainstorming about the outlook for the next 10 years. They came up with a new vision for the company-"Bright Innovation, Amazing Life"-and announced a new "green promise," explicitly stating that in 2010 AU would use R&D, procurement, manufacturing, logistics, services, recycling and reprocessing, and employee participation to "increase the recycling of resources, decrease greenhouse gas emissions, and reduce water usage."

To help create a greater sense of unity among the 40,000 people it employs at seven locations in Taiwan and mainland China, AU has since 2001 run a virtual university that offers courses in nine major areas, including engineering, the sciences, management, quality assurance, leadership, and innovation. The company, which won a 2008 CLA award for employee training, also runs classes covering professional expertise and corporate culture. All told, it spent NT$35 million last year to provide each of its employees with an average of 55 hours of training.

Late last year, AU also established an Energy Projects Office that will utilize the company's TFT-LCD technology as a basis for entering the thin-film solar power market, and began preparations to set up a pilot production line at a new facility in Taichung's Central Taiwan Science Park (CTSP).

On March 19, AU announced that its generation 8.5 foundry, located in the CTSP, had become the world's first TFT-LCD facility with a gold-level LEED certification to enter production. (Only four manufacturing facilities in the world have gold-level LEED certifications.) The facility has 17 wind-power modules and a large array of solar panels on the roof. In addition, it has been designed to reuse heat energy, collect rainwater, and recover water used in manufacturing, reducing annual energy consumption by an estimated 230 million kilowatt hours, a 21% savings. AU's efforts are a tangible response to the government and global trend towards saving energy and reducing carbon emissions.

What does the future hold for businesses in the wake of the great global industrial reshuffle? Experts agree that green energy has tremendous potential, and the government has named it one of the industries of the future. The photo shows wind turbines near the Miaoli coastline.

From exports to domestic demand

The other areas enumerated by President Ma-cultural innovation, tourism, precision agriculture, healthcare, and biotechnology-also have the potential to help turn around a Taiwanese manufacturing base long overly dependent on exports, and, by nurturing and upgrading the service sector, to stimulate growth in domestic demand.

Taiwan's service sector has since 2001 accounted for about 70% of GDP. It is, in other words, a key driver of economic development. Unfortunately, most of our service businesses remain very small, and very few have attempted to take on the global marketplace.

San Gee says that these six major industries haven't been proposed to spur near-term employment. Instead, they build on our present-day strengths and chart a course for Taiwan's medium- to long-term industrial development. If the government were to do a little more, by, for example, improving our human capital and the competitiveness of our workforce, it would also be able to create jobs at this crucial time. Dealing with root causes while also addressing the most urgent symptoms would clearly be a good thing.

Of course, there's no way that Taiwan's 23-million-person domestic market can support the world's 18th-largest economy on its own. So while these industries shouldn't orient themselves entirely towards exports, they should continue to strive to earn money from abroad.

Elaborating, San Gee says that when the government opened negotiations to join GATT (the predecessor to the World Trade Organization), the local film industry was riding high and didn't need any protection. The government therefore chose not to impose any quotas on the importation of foreign films, leaving the market wide open. While this ultimately pushed locally made films out of the marketplace, television serials produced in Taiwan have been widely acclaimed and are thriving at home and abroad.

The labor-intensive service sector accounts for about 70% of Taiwan's GDP. It is a key driver of our economy, and may well be the solution to our current unemployment woes. Take the proposed Taoyuan Aerotropolis. The facility includes an international exhibition hall, a mall, an agricultural exports zone, and a logistics center, and could create 80,000 jobs. The photo shows Taoyuan's Everterminal air cargo terminal.

An aging society

Policies aiming to develop the healthcare industry are taking into consideration Taiwan's aging population. As a labor-intensive industry, it may also help resolve our unemployment problem.

Senior citizens currently account for 9.7% of Taiwan's population and this figure is expected to rise to 14% within 10 years. In fact, Taiwanese society is aging at a rate second only to that of Japan. Moreover, the growing number of nuclear families, the declining birth rate, and the rise in the number of women in the workforce, have all made families less able to care for their elderly members.

According to Lin Wan-i, a professor with NTU's Department of Social Work, the government should be cultivating all types of caregivers now in an effort to put local workers into 170,000 caregiving positions now occupied by foreign workers. Lin believes that this would improve the quality of care and provide job opportunities for Taiwanese.

But Hsin Ping-lung has doubts about Lin's proposal, noting that when city and county governments asked private organizations to train 44,000 caregivers over the last five years, only 12,000 acquired licenses and some 10,000 ultimately went on to work in the caregiving industry. One reason for this low ratio is cost-local caregivers earn NT$40-60,000 per month versus just NT$20,000 for foreign ones. Moreover, the hours are long, the work is hard, and turnover is high. Local families who can't find local caregivers have little choice but to rely on foreign ones.

The government's current strategy for the development of the healthcare industry is proceeding along multiple tracks. Focusing in particular on families who can't even hire foreign caregivers and families in which a female family member provides care, the government is using social-welfare and health departments to provide in-home services, daycare, nutritious meals, and respite services.

Meanwhile, with CLA funding, local governments are offering caregiver training. They expect to train some 32,000 people over the next four years. To provide families with an incentive to hire local caregivers, the government is also offering to subsidize their salaries by NT$10,000 per month for up to one year. It hopes that the subsidies and the training of new personnel will gradually shift idle workers into caregiving and alleviate the current shortfall.

The financial tsunami has resulted in a major reshuffling in local industries. We used to gaze longingly at the American markets on the far side of the Pacific, but are now, in the wake of the current US recession, casting aside our old model of doing business. If we are to mitigate the impact of global upheavals on our island, we must reevaluate Taiwan's economic role and seek to balance foreign and domestic trade. How will innovative businesses rewrite their roles in the new century? How will we save businesses while also protecting workers? As we always have: through our diverse talent pool and innovative thinking.