Diversity, quality, and low volume
Huang observes that the greatest difference between Taiwan and Korea's development lies in another area. In the past, both Taiwan and Korea used labor-intensive manufacturing for foreign firms and export processing to accumulate capital. But in the last ten years, the two nations' paths to development have gradually diverged. Korea has imitated Japan, with huge financial conglomerates leading industrial progress. At the same time, it has aggressively expanded its chemical and heavy industries. With its national resources concentrated in a few hands, the speed at which firms such as Samsung, LG, Daewoo, and Hyundai expanded was startling. Through mass production and aggressive global marketing, Korea quickly grabbed a piece of the global markets in steel, automobiles, home electronics and photo-electric products. By the end of 1996, Korea had pushed its way ahead of the other "Little Dragons" and had entered the Organization for Economic Cooperation and Development, sometimes known as the "Rich Nations Club." It had not only become Japan's main rival, but also the object of Taiwan's admiration.
Taiwan's industrial structure, on the other hand, is built around small and medium-sized enterprises. Such firms are limited in terms of capital and production capacity and so cannot take the market in one fell swoop. Instead, Taiwan's industries found their own niche--low volume and high-quality, diverse product lines and responsiveness to customers. Whether in traditional industries such as shoes or clothing, or in high-tech fields such as semiconductors, Taiwan's firms all exhibit these characteristics.
Huang takes information technology products as an example. In the case of low end monitors (14-and 15-inch), the differences between different clients' products are slight and so monitors can be produced on a large scale. Korea, therefore, has a production advantage. Most of Taiwan's manufacturers, on the other hand, have had to move their facilities to Southeast Asia and mainland China to better compete. But in the case of motherboards, which are the computer's nucleus, the design and features of those of each client are different. In addition, information technology products have a short life-cycle and clients update their products frequently. In this area, South Korea can't compete.
"Taiwanese firms are willing to put in the extra effort to satisfy the differing needs of different customers, something other Asian nations can't do," says Huang. This is also one of the reasons Hewlett-Packard's purchases from Taiwan have grown every year.
Although some time is still needed to fully understand the impact of the depreciation of the won on Taiwan's industry, local firms are girding themselves for battle. The situation in Southeast Asia, however, is very different.
More cooperative than competitive
"Southeast Asia is focused on labor-intensive industries. Its level of development lags behind Taiwan's," says Li Kao-chao. He states that the relationship between Taiwan and Southeast Asia is characterized by a mutually complementary vertical division of labor--Taiwan produces intermediate materials and key components while Southeast Asia relies on its cheaper land and labor to do assembly and export processing. Therefore the relationship between the two is more cooperative than competitive.
According to research by the Taiwan Institute of Economic Research, sharp depreciation in the currencies of Southeast Asia will have a relatively strong impact on only a few traditional export industries such as lumber, furniture, leather, rubber and textiles. But these industries only account for a very small proportion of Taiwan's exports and their influence on Taiwan's economy is slight.
However, many of the Taiwanese firms that have relocated production to Southeast Asia still buy intermediate materials and equipment from Taiwan. In addition, as those local economies prospered, they imported a large amount of consumer goods from Taiwan. This has led to Southeast Asia becoming Taiwan's fourth largest export market, after the US, mainland China, and Europe. Last year, it accounted for 12% of Taiwan's exports, of which half were intermediate materials for export processing.
Put another way, Taiwan shouldn't be worrying about greater SoutheastAsian competitiveness in exports eroding its own share of the global market. Instead, Taiwan should be worried that if Southeast Asia's exports stagnate and its economies bottom out, Taiwan won't be able to sell anything to it.
Put another way, Southeast Asia simply can't compete very well with Taiwan and, in fact, competes with the mainland. Many scholars cite 1994's33% devaluation of the mainland's currency, the Renminbi (RMB), as one of the factors which sparked the current Asian financial turmoil. The devaluation of the RMB increased the competitiveness of the mainland's exports, taking some of the wind out of Southeast Asia's sails. Now the worm has turned and it is the mainland that is sacrificing export competitiveness to protect its currency. The many thousands of Taiwan's firms for which the mainland is a primary market and production base "are all in the same boat" and the seriousness of their situation cannot be understated.
Take Yi Jinn, which produces textured yarns, for example. The mainland market accounts for 30% of its operating revenues and most of its customers there are Taiwanese exporters. Since the financial storm began, the company has seen its mainland China orders drop by 20~30%, causing its operating revenues to drop by nearly 10%.
Data shows that last year, Taiwan's trade surplus with Hong Kong (and the mainland) was a record-setting US$26 billion, three and a half times Taiwan's overall trade surplus of US$7.6 billion. The situation is the same as that in Southeast Asia in that the overwhelming majority of the products Taisells to the mainland are intermediate materials which are purchased by Taiwanese firms doing export processing. If the competitiveness of the mainland's exports begins to weaken and the trouble spreads to Taiwanese firms, it is possible that Taiwan could begin running a trade deficit.
The good news is that many Taiwanese firms, whether they are engaged in sales or production, are employing a "double down" strategy in Southeast Asia and the mainland. If mainland demand shrinks, then these firms will throw themselves into opening up Southeast Asian markets to make up for lost mainland revenues. If production costs drop in Southeast Asia, then they will transfer a portion of their production there. By distributing their risk, no matter where these firms are producing or selling their goods, money is going to continue to flow into their pockets.
Positive, but for how long?
Because Taiwanese firms have their own niche markets, they feel that the effect on them has been negative in the short term, but will be positive in the long term. If they can but survive the current depressed prices and this period of economic adjustment, Taiwan's sound firms will look very good in comparison to their beat-up rivals.
Sylvia Hu, a market analyst specializing in the Korean market at the Institute for Information Industry, has her doubts. She wonders how long this positive "long term" will last. And what comes after this "long" period?
William W. Shang, president of Chung Shing Textiles, feels that Korea's technology and production capacity have not been destroyed overnight; they still exist. And neither Southeast Asia's natural resources nor the economic vitality that has been created by the development of the last few years have disappeared. He uses the metaphor of a race to illustrate his point: "Maybe your opponent has fallen down in a turn and losta heat, but that doesn't mean he's out of the race. With the guidance of a good coach, he'll be right back in the thick of things in the next heat, and you can't really predict who'll win in the end."
Ray B. Dawn, director of Research Division Ⅵ at the Taiwan Institute of Economic Research, thinks that the financial storm is losing some of its strength. If things go smoothly in each country--the political situation remains stable, there are no riots, and economic reforms are implemented-- "there will be a two- to three-year recovery period." In other words, Taiwan can use the time while these other economies are licking their wounds to move in. "To the north, it needs to catch up with Korea. To the south, it needs to increase the lead it has over the countries of Southeast Asia," states Dawn.
Lately many firms have become interested in acquiring or investing in companies in South Korea and Southeast Asia, a policy which Dawn approves of. He says that for something like a semiconductor plant, construction and equipment costs run to tens of billions of NT dollars. "They are built of money." If it happens that the supply of capital is cut off, others can take advantage of a company's financial needs to become partners in it or acquire it. He feels that turning a rival into an ally is a good approach. Not long ago, there were rumors that Samsung, Daewoo and others were interested in approaching Taiwan for financial assistance. Taiwan's northward ambitions may be on the verge of becoming reality.
A warning to Taiwan
Hu, who has a deep understanding of Korea, reminds Taiwan's industries not to be overly optimistic. She says that its current economic slowdown and limited capital mean that Korea is facing a redistribution of resources, "but regardless of how it changes, high technology will still be its first priority. It won't be easy for Taiwan to take a piece of its pie." And buying into a firm only helps it to weather the crisis and rebuild, something of limited benefit to Taiwan.
In fact, it is Taiwan's firms which are clearest on these points. Last year, Acer and Taiwan Semiconductor were involved in discussions on building a chip packaging plant with Korea's Anam Group, the world's largest chip packager and the possessor of much-desired technologies. Negotiations had been wrapped up, but the plans had to be brought to a halt because the regional financial crisis had left Anam unable to raise the money to buy into the partnership.
If these companies think so highly of Anam, why didn't they loan it the money themselves? Acer had it reasons. Philip Peng, vice president of corporate finance and investment management at Acer, says, "If Anam didn't put its own money into the venture, it wouldn't have been much hurt if the venture failed. It would therefore have taken this joint venture less seriously." He says that Acer hopes for a close partnership and real cooperation. Therefore Acer is not really very concerned about a delay; it can wait. And when Anam has the money, they will see what happens.
Korea has invested big money in research and development and in buying technology from Europe and the US. It naturally has a technological edge over Taiwan in industries such as semiconductors, photo-electronics, consumer electronics and cars. And Taiwanese firms naturally would like to take advantage of the depreciation in South Korea's currency to buy technology from it. But the recent shocking accusations involving Taiwan's Nanya Technology have poured cold water on these plans.
Hu says it all started in July of last year when Nanya signed contracts with a Korean technology broker. At that time, who knew that Korea would be sucked into the regional crisis? When the authorities were tipped-off, Korea had just been given loans by the International Monetary Fund (IMF), and their national pride was smarting at the "economic bailout." The breaking of this case made Taiwan appear to Korean eyes like a thief come to steal from a burning house.
Hu remembers being shocked at seeing newspaper headlines which read "A Warning to Taiwan" when she visited Korea to gather information at the end of last year. "At such a moment, what Taiwanese would dare discuss cooperation with the Koreans?" ask many scholars.
Taiwan and Korea have been competitors for many years, and so it is very difficult to make any moves northward at such a sensitive time. On the other hand, Taiwan and Southeast Asia have been working together or many years. It seems that now is the time to move southward.
Stabilization and expansion to the south
"As a friend, Taiwan can encourage private investment in Southeast Asia," says Council for Economic Planning and Development head P.K. Chiang, who just returned from a fact-finding mission to the region. He says that the government can, by providing funds to banks, make money available to Taiwanese firms operating in the area to help them solidify their already extant operations. It can also encourage those with the resources to go further by making new investments.
"We can tread the paths of stabilization and expansion simultaneously," says Chiang. (See "Go South Ⅱ--Can Taiwan Help End Asia's Crisis?" in this issue.)
C.Y. Kao, CEO of the President Group and chairman of the Chinese National Federation of Industries, went with Chiang on his trip. Kao feels that now is the time to make investments and acquisitions in the region. With the exception of Indonesia, all the countries in the region are stabilizing and the crisis seems to be winding down.
"If you wait for things to settle down completely, they won't want your money anymore." Kao thinks that if you want high returns, you have to take some risks. But the potential reward must be greater than the risk.
The President Group currently has two factories in Southeast Asia--an instant noodle factory in Indonesia and a fruit juice factory in Thailand. But based on his own experience Kao says, "In investing overseas, money isn't the problem, people are." In setting up a factory--the construction, sales, finances, management, etc.--a few people are not enough. And on top of all this, you have to collate all kinds of information onl ocal laws, the political situation and the business environment. "If a firm relies entirely on its own resources to enter a market, it's an exhausting business!"
The recent fact-finding mission arranged many meetings between overseas Chinese business people and Taiwanese business people. But in the wake of all the hubbub, how many deals will be worked out? It's still too early to say.
Kao bluntly states, "President won't flatly refuse any cooperation, investment or acquisition opportunity. But we don't have the personnel to do research and evaluate such opportunities. We can only wait passively for our opposite numbers to send information to us."
In order to deal with the difficulty of finding suitable people overseas, Kao recommends that business people follow the same model that Taiwan employed in Central America: firms put up the capital to establish a holding company which then gathers information, makes evaluations, provides advice and invests on the parent company's behalf. This method not only saves manpower, it also reduces the risk of failure. "If you want to jump in, you'd better move fast. It would be best to have your funds ready to go and start looking for investment opportunities within a month," Kao advises. Although nearly 70 years old, Kao is as aggressive as about achieving his ambitions as a young man.
It's not over 'til it's over
Regardless of how many opportunities there may be to take investment southwards, the eyes of most firms are fixed upon the Chinese mainland. YiJinn, which has five factories in Taiwan, has already decided that its first overseas plant will be located in the mainland city of Hangzhou. And last year Acer received approval from the Investment Commission of the Ministry of Economic Affairs to set up a factory in the Zhongshan areas of Guangdong. Before the regional crisis, many Taiwanese firms had plans to move production from Southeast Asia to the mainland because currencies in Southeast Asia were relatively high and labor costs had risen. However, now that these currencies have dropped sharply, Southeast Asia has become much cheaper than the mainland and many firms will likely give up these relocation plans, choosing instead to stay where they are.
But much remains uncertain. As Hewlett-Packard's Huang Ho-ming put it, the Asian financial crisis was like a boulder dropped into a lake. The financial world was right at the point of impact, while the manufacturing industries were spread around the edges. The affects of the crisis are coming to them like waves from the center. When will an industry be affected? How strongly will it be hit? Taiwan's firms can only keep forging ahead through the waves.
While the foreign media has been heaping praise on Taiwan of late, saying that it is the least affected of the Asian economies, a "lucky survivor" which stands to benefit, local firms have not forgotten that disaster and good fortune are two of a pair.
"We can't relax. It's not over 'til it's over," says Kao.