The MOF has been striving to do this very thing, and has led the relief efforts. And the CBC, which controls monetary policy, has been providing its full cooperation in creating a loose capital market. "Luckily, the US dollar has been softening. Since there are fewer worries about depreciation in the NT dollar, interest rates can fall," says Casper Shih. In Shih's opinion, if the defaults crisis had occurred a few months earlier when the government was struggling to support both the stock market and the exchange rate, Taiwan's situation could have been like that of other East Asian nations, unable to either advance or retreat. If nothing else, the timing of the explosions of these financial "land mines" on Taiwan is worth celebrating."Less investment. Less investment."
In comparison with East Asia, especially Japan and Korea, Taiwan has another ace in the hole-its numerous strong and vigorous SMEs. Although several dozen SMEs have applied to the government for aid, when one considers that there are around one million SMEs on the island, the percentage experiencing problems is quite small. With the current crisis afflicting mostly large firms, SMEs-"Taiwan's treasure"-are being looked at once again.
"These large groups have always laughed at us SMEs for not having any idea about financial legerdemain," says C.J. Lin, head of Proton Electronics. But now, not having huge ambitions and not having the power to do whatever they like are looking like assets for these SMEs.
Returning to the large firms, the groups affected by this current crisis account for about 3% of the Taiwan Stock Exchange's total capitalization. Have the companies with which they do business also been affected? What view should producers take?
"All the 'land mine' shares that should have blown up have pretty much done so. If those that are left pull back, if they stop before it's too late, they should be able to avoid misfortune," says Chan Cheng-tien, chairman of Yi Jinn Industrial and of the Taiwan Synthetic Texturized Industry Association. Chan laughingly says that whenever the chairmen used to get together, their conversation revolved around investment. But when they see each other now, they remind each other, "Less investment. Less investment."
Chan says that the U-Land Group's King Textiles is a customer of his Yi Jinn Industrial. Fortunately, although King Textiles is facing financial losses, its operations are sound and it is still making shipments as usual. But King Textiles doesn't have the cash to make debt payments. "It is selling the us fabric it produces to repay debt. Besides, we have a textile plant that can absorb their production, so there is no loss to us," says Chan.Cooperating to get through the crisis
Ching-tai Resins Chemical, a company which holds 20% of the domestic water-proofing materials market, was also affected by the financial crisis at U-Land Construction. U-Land stopped work on a project, so one of Ching-tai's clients, a contractor specializing in water-proofing projects, was forced to return a shipment of materials to Ching-tai. Although the cost of water-proofing materials at one construction site may only amount to something under NT$1 million, to an SME capitalized at only NT$200 million, this is not small change.
"Fortunately the materials hadn't been used yet. Our only losses were personnel and transportation costs," says Liao Ta-shang, president of Ching-tai. He notes that compared to big contractors and steel structures firms which rely on one or two large jobs a year to make their money, their losses weren't bad at all.
"The links between Taiwan's upstream and downstream firms are very solid, and everyone tends to stick together," say Liao. He further states that in the case of this kind of sudden crisis which causes firms to return goods or be late with payments, everybody tends to yield a little and distribute the losses to get through. Everyone hopes for long-term cooperation, and forcing the collapse of a downstream client certainly isn't in your own interest.
What makes the current crisis more of a headache is that the firms most affected are big ones which have no history of bouncing checks. Most companies don't have the resources to conduct credit checks on their customers. Liao says that in facing the likelihood of further bad orders and returned shipments in the future, you can only accept that you can't cover every contingency.
C.J. Lin, however, states, "This current wave [of troubles] is no storm." Lin, accustomed to the rapid changes and high risks of the electronics business, says that in running a business, you can't expect every year to be a banner year. The smooth sailing of recent years has allowed people to forget that the usual situation in the market is that the strong succeed and the weak fail. He offers the following words of advice to his fellow business people, "Be conservative with your finances and aggressive with your core operations." Lin expresses the hope that everyone has learned something from these recent troubles.
William B. Lin is deputy managing partner of Deliotte Touche Tohmatsu International, a firm which currently provides auditing services to 80-90 listed companies. Lin states that although there is a never-ending supply of rumors on the market, difficult financial straits are not the norm at the 1,000 or so large and small firms his company has audited.
Lin believes that Taiwan's businesses are very responsive and capable of making adjustments. For example, when the Tuntex Group encountered troubles, chairman Chen You-hao called a press conference. He both put an end to the rumors and took the necessary actions to keep his company afloat, announcing that it would eliminate its construction division and focus on its core businesses-textiles and petrochemicals. Another example involves Yang Tien-sheng, the chairman of Pan Asia Bank, also known for his political connections. Under pressure as the bad debt ratio at his bank crept upward, Yang has announced that he is willing to allow another entity to take over the ownership and operations of Pan Asia. If the chairmen of these business groups can break away from the mistaken idea that they must blindly expand and can pull themselves out of trouble, the current situation should be manageable.A personal philosophy
But many people in business say that resolving the "land mine" problem is just an initial step. Changing the business climate by persuading businesses to refocus themselves on their fundamentals is the long-term task.
S.T. De says that many firms have gotten caught up in the enthusiasm for the stock and foreign exchange markets over the last few years. The reason is that a finance department with a staff of only 10 or so can add hundreds of millions of dollars a month to a company's income. This is more than the more than 100 persons working in production, sales, and research and development earn for the company in a year. That being the case, what company wants to work hard for its money?
De, who claims to have been involved in only one stock transaction in the last 10 years, experienced a lot of pressure last year when the government was struggling to hold the NT dollar-US dollar exchange rate at 28 to 1. He himself stated to the media that the NT dollar was about to undergo a large depreciation. With this kind of foresight, all he had to do was sell NT dollars-essentially just hold out his hands-to reap a foreign exchange windfall. But he didn't and was called an idiot by his friends because he didn't.
"It just wasn't worth it to let financial manipulations take precedence over the hard work of my entire staff to make a few hundred million dollars. It would have destroyed the company's structure and its development of its fundamentals," says Tai. But his "stupid" personal philosophy has now been proven correct.
Just as a company must build sound ideas and practices within itself, so must the national economy.
Over the last few years, market players have bought access to the stock market through shell companies and taken on a "heroic" aspect. An example is the Han Yang Construction's Ho Hsi-fong, who in just a few short years accumulated a personal fortune of more than NT$100 billion. Or the New Magnitude Group, whose companies, because their share prices seemed to defy gravity, became a target for retail investors' purchases just before the group ran into trouble. Almost without exception, the chairmen of those companies which have recently encountered problems-Panvest, the An Feng Group, Hung Fu Bills Finance-were famed for their excellent political connections.
William Lin says that the "heroic" style of a few business groups has caught the attention of the media, but very few people have actually thoroughly investigated or been critical of this style of doing business. This abnormal situation has swayed the hearts of many business people. The many who stuck to the slim margins of their core businesses were viewed as fools. As a result, seemingly everybody then jumped on the "play the market in the morning, play golf in the afternoon" bandwagon, competing to see who had the least to do and who had the most money.Why not let the weak ones fail?
Taiwan Securities' Joseph Chiu observes that in this defaults crisis, the government has tended to focus on how to provide relief to companies, rescue the stock market and keep liquidity in the capital markets. But in fact, capital markets are not tight right now. It's just that financial institutions are unable to find good companies to which to lend money.
Chiu says that this defaults crisis wasn't caused by mainland China launching missiles or by an implosion of currency exchange rates. Instead, it was caused by the poor management of domestic companies. He wonders why the government doesn't take it in stride and let market forces do their work. "If the government wants to exert itself by propping up the stock market, how is this any different from these big groups supporting their own share prices? They will get themselves into a position where they have to keep on doing it," states Chiu.
Facing these kinds of doubts, an official at the MOF states that these relief measures are aimed at "firms whose operations are normal but are facing short-term capital flow problems." Firms whose operations are abnormal are not receiving assistance from the government. Their losses cannot be turned over to the government, nor can they be borne by the public. The cases of Chinese Automobile and Kuoyang Construction, both of which have excellent political connections but nonetheless saw their applications for aid denied, demonstrate his point.
Looking more closely, the MOF's efforts to provide aid to firms and support the stock market are only rescue missions. In the long term, only adjustments to industrial policy will be effective.
"Sometimes policy doesn't need to be nice. The government could take this opportunity to make it clear that businesses must stand on their own two feet, and to list those points which are important to the development of strong industries in the future." Chiu uses the four industries which the financial community views as high-risk-construction, steel, textiles and food-to make his point. He says that these four industries have over-invested and profits are very thin. If they cannot come up with some way to add value, they face extinction.
Taiwan's resources are limited, and over the last few years we have been fortunate that the new information technology and semiconductors industries have been able to support the economy. Capital from the banking system needs to continue to flow to such outstanding industries to distribute the risk of bad loans. In the future, Taiwan must continue to strengthen these stronger industries while also developing new "star" industries. It is only in this way that Taiwan's economy can continue to move forward.Anticipating a rebirth
Looking at corporate structures, Lin observes that Taiwan's businesses are largely family-run. Boards of directors are usually controlled by a few members that the families of the major shareholders feel they can trust. As a result, they can do anything that they want to. The Kuang San Group's Tai Yu Foods is one of Deliotte Touche Toh-matsu's auditing clients. Between the company's quarterly review of the books, Tai Yu spent more than NT$9 billion to buy shares in other firms belonging to its parent company. However Tai Yu was not able to pull off the transactions smoothly, and when the news came out, the business community was shocked.
"In theory, shares of listed companies are distributed, and the company belongs to all its shareholders. In reality, these entrepreneurial families operate behind the scenes. Small shareholders only have the right to be ripped off," sighs Lin.
Chiu Shean-bii, a professor in the Department of Finance of National Taiwan University's College of Management, feels the same way. He says that there is no way the government can make daily checks on the books and finances of these companies. Hence, he recommends that it import the "outside director" concept long used overseas. In many nations, the law stipulates that the board of a company must contain some given ratio of "outside directors." These persons are well-known professionals who are not necessarily shareholders in the company on whose board they sit, but who nonetheless have the power to speak on and check the company's major policy decisions.
In Chiu Shean-bii's opinion, although the relief measures put forward by the government in this current crisis are not exactly legal, because they seem the best solutions to a no-win situation, no one is really blaming them. But emergency relief measures always have damaging aftereffects on the economy in the long term. If we are to both rescue these companies and put them on a sound foundation, the current problem is building a more comprehensive system of financial regulation.
Measures are being taken to fix the system. The Securities and Futures Exchange Commission is currently looking into regulations on cross holdings between parent companies and their subsidiaries, and is cracking down on insider trading and trading by friends and relatives of insiders. At the same time, financial institutions are reviewing their lending procedures.
"Everybody knows the direction we need to take to put things in order. It's just a matter of whether the government has the determination," says Chiu Shean-bii.
For the moment, the wave of defaults seems to have come to a halt. Looking to the future, getting through this downturn will not be easy. And rebuilding a proper attitude towards business is the only way to secure the soundness and stability of Taiwan's economy.
How many of the mighty have fallen?
Business groups involved in major defaults in 1998:
Groups hit by the crisis
|
Date of crisis
|
Related firms
|
An Feng Group |
Late July |
An Feng Steel, Feng An Metal |
Van Yu Paper |
Late August |
Van Yu Paper |
Tong Lung Metal |
Late September |
Tong Lung Metal |
U-Land Group |
Late September |
King Textiles, U-Land Air |
Rajah Construction |
Late October |
Ace Union Foods |
Central Bills Finance |
Early November |
--- |
Panvest Group |
Early November |
Chinese Automobile, Lei-Chu Enterprises, Chaplet System |
New Magnitude Group |
Early November |
Pony and Goldenway, S&T Copper Industrial, CIS Technology, Taifang Development, Tycoons Group |
Hung Fu Bills Finance |
Early November |
Hung Fu Construction |
Han Yang Construction |
Early November |
Kuoyang Construction, Pan International |
Taichung Machinery Works |
Mid November |
Taichung Machinery Works |
Kuang San Group |
Late November |
Medium Business Bank of Taichung, Tai Yu Foods, Kuang San Construction |
(data collated by Laura Li/graphic by Tsai Chih-pen)