R&D is key
Taiwan’s service sector has potential, but although it accounts for almost 70% of GDP, it still only provides 30–50% of Taiwan’s real economic growth. As such, it has limited ability to drive economic development.
“This year, our excess savings rate reached a record high,” says Kung, “meaning that some people want neither to spend nor to invest.” Kung explains that excess savings are a nation’s total savings minus its total investment. The excess savings rate is this figure expressed as a percentage of GDP. From 2004 to 2008, Taiwan’s excess savings rate was 5–8%. In 2009, it climbed to 10.5%. This year’s excess savings are forecast to reach NT$1.5 trillion, a rate of 10.23%, a figure second only to that of the eve of the financial tsunami in 2009.
Kung reminds us that stable consumer spending growth is dependent upon growth in permanent incomes. In other words, consumers only feel comfortable spending when they know that their incomes will continue to grow in the future. The corollary of this is that when incomes fail to increase, domestic demand is very likely to stagnate.
One solution, says Kung, is to stimulate the consumption ability of high income earners. He explains that Taiwan’s top quintile in terms of household income have an excess savings rate of 35% and account for 70% of all of Taiwanese household savings. This quintile’s excess savings rate is 10 percentage points higher even than that of Japan’s top quintile. If these wealthy households were to cut their excess savings to Japanese levels, it would provide an NT$400-billion boost to the domestic consumer market.
Aside from stimulation of consumer demand, our service sector is in urgent need of structural transformation.
According to Tu Jenn-hwa, an associate professor in the Graduate Institute of National Development at National Taiwan University and director of the Department of Business Development and Policy at the Commerce Development Research Institute, Taiwan’s service sector is largely comprised of small and medium-sized enterprises that lack the resources to upgrade equipment or undertake R&D. Even those which would like to move out into the global marketplace are hard pressed to do so. They just can’t compete with giants like the US’s UPS or Germany’s DHL, shippers with global service networks, hundreds of their own airplanes, and enormous R&D capabilities.
Located near the Cologne/Bonn Airport, the DHL Innovation Center attracts hundreds of thousands of visitors annually. This “laboratory of tomorrow” focuses on developing new logistics solutions to meet client needs. Examples include a smart truck that figures out the best route from the point of collection to the point of delivery and a smart temperature sensor that monitors the temperature of goods in transit and has pharmaceutical and food transport applications.
Salaries are another issue for the local service sector. Low pay has long made it hard to attract and retain talent. Fortunately, salaries have begun to rise in recent years.
“Recruitment has been a major obstacle to the development of the tourism industry,” says Chai Chun-lin, vice chairman of Hotel National and chairman of the Taichung Tourist Hotel Association. He says that 30-some international-class hotels will be opening in Taiwan over the next few years, and expects their need to hire dozens of senior executives and hundreds of middle managers to initiate a battle for personnel.
In fact, many service sector enterprises have come to realize that skilled workers are crucial to improving their competitiveness, and are acting accordingly.
When Lung Yen Group built a 26-hectare cemetery at Baishawan in New Taipei City’s Sanzhi District two years ago, it hired renowned Japanese architect Tadao Ando to design the facility, which transformed interment from a local ritual into a branded corporate operation. Last year, NTU’s Department of International Business incorporated Lung Yen into its curricula as a case study. The school also began working with the company to develop internship opportunities for its students.
Tourism
But given that Taiwan is at root an exporter with only a small domestic market, is the recent blossoming of the service sector destined to wither on the vine? Are any of the industries that make up the sector likely to flourish over time?
Kung says that because Taiwan’s economy is relatively small, consumer spending growth will depend not just on domestic demand, but on international trends. Spending will rise when consumers feel wealthy, which is to say, when the global economy and Taiwanese exports are booming.
Setting aside the question of the global economic recovery, many people see tourism as the best and most competitive of Taiwan’s service industries.
Mainland Chinese tourists have been flocking to Taiwan in ever greater numbers since being permitted to travel to the island in 2008. Their numbers eclipsed those of our Japanese visitors for the first time in 2010, when they accounted for some 30% of all visitors to Taiwan.
Last year, a record 6 million international tourists traveled to Taiwan and pineapple cakes were among their most popular purchases. Over the last decade, industry sales have soared from NT$1.5 billion to NT$25 billion, and Vigor Kobo is about to become the first company to list on the over-the-counter securities market on the strength of its pineapple cake sales. The company has introduced new technology and a spirit of innovation to Taiwan’s pastries industry, and has even gone so far as to build a NT$300-million “Pineapple Dreamworks” in New Taipei’s Wugu District. The attraction features a 10-meter-long escalator, constructed by the team that built the Pavilion of Dreams for the Taipei International Flora Expo, and designed to look like a tunnel through the heart of a giant pineapple, complete with buzzing insects and pineapple scents.
Diversifying
Contending for tourism dollars is a must for every nation, and economist Ma Kai argues that tourism is even more important to Taiwan than manufacturing. “But so far we’ve been content with just crumbs,” laments Ma.
In his view, the problem is that Taiwan has focused only on mainland tourists, thinking that they represent easy money. He counters that relying on mainland tourists is even riskier than depending on exports to the mainland because trade has a reciprocity that tourism lacks. If the mainland were to halt cross-strait trade, it would harm itself as well as Taiwan. But if it were to stop its public from visiting Taiwan, only we would suffer.
Ma says that Taiwan’s natural and cultural assets are on a par with those of Thailand and Malaysia. Why then can’t we attract the large numbers of European and American tourists that they do? One reason is that over the past decades, both government and the industry have paid scant attention to the task of developing the fundamental capabilities of the tourism industry. Another is that the corrugated-steel buildings and plethora of vendors that populate Taiwan’s scenic areas give the sites a third-world look. Still another is that our accommodations are more expensive than those of Korea in spite of the latter’s higher cost of living. If we are to diversify our risks, we have to turn the industry around and begin attracting tourists from other nations soon.
When it comes to a blueprint for the development of Taiwan’s service sector, research conducted by the Ministry of Economic Affairs suggests that we should not only develop our “fine foods economy,” but also aim to be the Chinese-speaking world’s premier destination for affordable luxury, a shopping paradise, an Asian hub for advertising services, and Asia’s top expo and convention center. All have potential and all will require fostering cooperation between industry and academia, honing the private sector’s development skills, and cultivating multidisciplinary talent to succeed.
Fine foods, tourism, online shopping, healthy living, pet care… the industries of the service sector are mutually reinforcing. If we develop them one step at a time and stay grounded in reality, we will all benefit from the improvements to Taiwan’s service sector.