Taiwan’s struggle to relight its fire

Times are tough in the ‘little dragon’ economy. Stagnant wages are feeding concerns about future growth. Can Taiwan come back? asks Ben Chu

It’s an island off the coast of a continental land mass. Wages have been at a standstill for around a decade. The country had an unusually rough time in the 2008 global financial crisis and growth has been lacklustre ever since. The country’s leaders are worried about export growth prospects, but the economy is suffering from a historic dearth of business investment. It may sound like Britain, but actually this is a description of Taiwan.

We tend to have an image of the contested Chinese province of 23 million people as an economic success story. Taiwan was one of the “four little dragons”, along with South Korea, Singapore and Hong Kong. Between the early 1960s and the 1990s they managed to catapult themselves from sub-Saharan African levels of deprivation into the First World. Now, adjusted for the purchasing power of the local currency, Taiwan has a higher per capita income than Britain.

But the truth is that Taiwan has slipped behind its Little Dragon peers over the past decade. And the government of President Ma Ying-Jeou is grappling with a suite of problems that economic policymakers in London would find rather familiar.

What’s going on? It’s a tale of globalisation, adaptation, political neglect and missed opportunities. The old Taiwanese model was simple. The backbone of the economy was low-cost and low-margin manufacturing, which local factory bosses performed on behalf of big Western brands. Whether it was churning out computers, textiles, or toys on behalf of foreign firms, Taiwan did it cheaper than the competition.

But then mainland Chinese labour came on-stream in the 1980s and 90s following Deng Xiaoping’s liberalising reforms and the Taiwanese found themselves out-competed on labour costs. The Taiwanese bosses adapted. They moved their factories, wholesale, to the mainland. Hon Hai Precision, better known as Foxconn, was the most prominent example. Today it is a massive contract manufacturer for Apple and other global technology firms.

That offshoring strategy inflated corporate profits, but it crushed domestic Taiwanese labour power and helped to hold down wages. Average real wages have not grown in Taiwan since 2000. South Korea, which has held on to most of its manufacturing jobs and also diversified into other areas such as shipbuilding, has done better, with real wages rising by 3.8 per cent per year since the turn of the millennium. Hong Kong and Singapore have also grown wages, thanks to their financial services specialisation.

Taiwanese business was, in a sense, spoiled by those massive profits gleaned from cheap Chinese labour. It allowed them to put off investment in research and development. They were also slower than South Korea in investing in own-brand technology. Worse, the cross-border China investment strategy itself now seems to running out of steam as wages in the mainland creep up and costs grow.

Huang Tien-lin, a former adviser to the Taiwanese President, blames successive governments for Taiwan’s predicament. He argues that they were captured by big business interests and facilitated labour offshoring without simultanously demanding more R&D to create high value-added jobs. Now, like the UK, Taiwan finds itself rushing to catch up as it seeks to secure an economic future for itself.

When I visited Taiwan last week I picked up a mixture of pessimism dotted with islands of hope. Elliott Fan, an economics professor at National Taiwan University, says Taiwan needs to remove protections from swaths of industry, reform the education system to encourage creative thinking, and boost investment.

“The next few years will be a critical time for Taiwan,” he says.

Mr Ma’s administration has declared its intention to sign more free trade agreements. And some firms understand that a shift needs to take place. HTC has been having a hard time over the past two years, but it has nevertheless successfully made the leap from being a contract manufacturer to selling its own-brand smartphones. The same is true of the PC makers Acer and Asus. The chip maker VIA is experimenting with digital shop signage. Even Foxconn is looking to manufacture its own-brand gear.

There are some smaller success stories. CyberLink has a niche designing photo and video editing software. Earlier this year Orange Electronics, a Taiwanese outfit that makes pressure monitors for car tyres, attracted a sizeable investment from the US auto parts firm Standard Motor Products.

There are, of course, profound differences between Taiwan and the UK. Taiwan has no national debt, whereas in the UK it is heading towards 100 per cent of GDP. Unemployment is just 4 per cent in Taiwan, versus almost 8 per cent here. Yet both countries are looking to grow national income through high value-added exports. And so, of course, are Japan, South Korea, Germany, and even increasingly China. It’s a competitive world out there in the market to manufacture the devices, machines and software to power our lives. But where will the future be made?

After defeat at the hands of the Communists in China’s civil war in 1949, the Nationalist forces of Chiang Kai-shek fled to Taiwan. They lived with the constant threat of invasion through the Chairman Mao years. But despite that history of enmity, Taiwanese firms were quick to seize the economic opportunity presented by cheap mainland labour when China finally opened up 30 years ago. The Taiwanese leveraged their linguistic ties and opened factories on the mainland. And now, in the wake of a landmark 2010 trade deal with Beijing, some smart Taiwanese firms are in a good position to sell to the mainland Chinese consumer.

Apixia is a firm that manufactures digital dental imaging hardware, which is cheaper and more convenient than the clunky old X-ray machines. They see big opportunities from selling into mainland China. “There are 60,000 licensed dentists in China today but they will have 450,000 in 10 years,” says chief executive Douglas Huang.

Taiwanese firms also have a strategy to deal with China’s rampant piracy: ignore it and focus instead on quality. Ozaki is a firm that manufactures innovative cases for iPads and other accessories for Apple products. “[Chinese piracy] is impossible to stop,” says Ozaki’s boss and founder, Freeman Liu. “The fakers are very, very small. When you catch them you can’t find the boss. So we focus on creation instead.”

It’s a message echoed by Papago!, a manufacturer of sleek video cameras for car dashboards which are designed to help drivers prove they were not responsible in accidents. They face a market of cheaper replicas in China. “We can’t compete on price so we try to offer something more to customers,” says spokesman Rex Hou.

Taiwan is also reaping the benefits of tourism from mainland China. “Most of the boutiques in Xinyi [the financial district] would not be here if not for mainland Chinese tourists,” remarks one local with a smile.

For many Taiwanese, business will always come before politics.