Taiwan Today

In addition to its status as a leading international trader, Taiwan has more recently acquired the reputa­tion of a leading global investor—a phenomenon that has led to drastic changes in the nature of Taiwan's economy and its enterprises.

The island's rush to send investment capital abroad began in 1987, when gov­ernment-approved outward investment (excluding money destined for mainland China) leaped 80 percent to US$102 mil­lion. The figure continued growing at an extraordinary pace, reaching US$218 mil­lion in 1988, US$930 million in 1989, US$1.55 billion in 1990, and US$1.65 billion in 1991.

The total amount of approved invest­ments sent abroad from 1986 to 1991 period topped US$4.52 billion, of which US$1.93 billion or 43 percent went to Asian countries, US$1.47 billion or 33 percent went to the United States, and US$716.8 million or 16 percent went to Europe. Large as they are, these figures represent only a fraction of the actual amounts, since many enterprises, notably medium- and small-sized ones, have not registered their investment in factories in Southeast Asia.

According to host govemment statis­tics, Taiwan investments in Southeast Asia during the period in question ex­ceeded US$12 billion, including US$4.9 billion in Malaysia (where Taiwan inves­tors fund an estimated 800 manufacturing operations), US$3.4 billion in Thailand (2,000 manufacturing operations) and US$2.77 billion in Indonesia (800 operations). This makes Taiwan a primary source of foreign investment for those countries.

This article is an abridged version of "Outward Investment Alters Taiwan's Corporate Structure." which appeared in Business Taiwan (Taipei: 14 December 1992).

Vietnam is the latest hot spot for Tai­wan investors; the US$700 million they poured into that country from 1988 to 1991 period makes Taiwan the largest supplier of foreign investment there. In the first half of last year alone, the Viet­namese government approved another US$600 million in investments from Tai­wan. According to the Investment Com­ mission of the Ministry of Economic Affairs (MOEA), Taiwan investments in Southeast Asia are concentrated in electronics and electrical appliances, textiles, chemicals, basic metals and metal products.

Taiwan investors started entering mainland China in 1987, when the ROC government began allowing local resi­dents to visit relatives there. This gave Tai­wan's business people a chance to survey the mainland's investment environment.

Until recently, investments in the mainland were much more limited than those in to Southeast Asia, mainly be­ cause of restrictions imposed by the ROC government. With the relaxation of gov­ernment policy, however, investments in the mainland have quickly caught up be­ cause of geographic proximity, linguistic and cultural similarities, and land and labor costs that are even lower than those in Southeast Asia.

By April 1992,2,582 mainland investment projects with a total paid-in capital of US$837 million had been registered with the MOEA. Most of the investments were in such fields as bicycles, services (KTVs, restaurants), footwear, plastic products, metal products, and electrical appliances. According to statistics released by mainland Chinese authorities, however, Taiwan had 3,815 investments worth US$3,4 billion there at the end of 1991.

The MOEA estimates that all outward investment from Taiwan from 1986 to 1991 period amounted to US$19 billion, ranking the island 9th in the world as a supplier of foreign investment capital.

This ranking is even more impressive con­sidering Taiwan's relatively low per capita income, which reached US$8,050 in 1991.

The surge in outward investment was prompted by changes that have made Tai­wan's industrial environment unsuited for labor-intensive production: soaring labor costs, chronic worker shortages, sky-high land prices, steep appreciation of the local currency, and increasing environment-related disputes.

In addition, unbridled stock market growth gave entrepreneurs easy access to funds for outward investment. The high value of the N.T. dollar made investment abroad a bargain, and the lifting of foreign exchange controls by the government in 1987 facilitated the outward flow of capital.

One major company that has taken advantage of these conditions is Teco Electric & Machinery, Taiwan's biggest maker of electric motors and a leading producer of home appliances, which set up a motor factory in Malaysia in 1990. "When we were considering whether to expand our Taiwan factory or set up a plant in Malaysia," explains Teco president T.S. Shieh (謝天下), "we found that we would have had to pay NT$I billion (US$40 million) for a 30,000-ping (24.8-acre) plot in a Taiwan industrial zone, and our total cost of land, buildings and equipment here would have run to NT$1.8 billion (US$76 million). By set­ ting up in Malaysia, our total cost was only NT$800 million (US$31 million)."

Shieh estimates that production costs in Teco's Malaysian factory are 15 per cent lower than those in its Taiwan facil­ity. Another advantage to producing in Malaysia is that motors made there enjoy preferential tariff treatment in the U.S., whereas those made in Taiwan face tariffs of 21 to 25 percent. Customs duties in As­ sociation of South East Asian Nations are also much lower for products made in Malaysia.

Southeast Asian governments are especially happy to receive investments from Taiwan, since most of the projects involved are small or medium labor-intensive operations that create large numbers of jobs. This, of course, helps boost living standards and speeds up economic develop­ment in the host countries.

As for mainland China, investment from Taiwan and Hong Kong is a major factor behind that country's rapid emergence as a leading exporter. In 1991, the mainland's exports of more than US$72 billion, not far behind Taiwan's US$76 billion, made it the 13th largest supplier of commodities to the world market. (Taiwan ranked 12th.)

About 70 percent of the output from Taiwan-invested factories on the mainland is shipped to the U.S. Mainland footwear manufacturers with Taiwan invest­ment, for example, supplied 200 million pairs (worth US$2 billion) of the 500 mil­ lion pairs of mainland Chinese-made shoes sold in the U.S. in 1991.

However much good Taiwan's outward investment does for the recipient countries, many observers at home fear a possible "hollowing out" of the island's manufacturing industry. An MOEA survey found that 16 percent of the island's outward investors had either closed down or scaled back their home operations. Among those investing in the mainland, the ratio was 25 percent.

The footwear industry provides a typical example of what is happening. In 1987, footwear manufacturers in Taiwan turned out 800 million pairs worth US$3.7 billion; by 1991 output had plunged to 370 million pairs worth US$2.4 billion. Over that same time pe­riod, membership in the Taiwan Footwear Manufacturers' Association dropped from 1,600 companies to 720.

Taiwan's private investment fell 8 percent in 1990-the first such decline in a decade-and managed only a 1.8 per­ cent growth in 1991. The share of manu­facturing in the overall economy shed almost five percentage points over the five years of 1987 to 1991, dropping from 39 percent to 34 percent. Economists con­ tend that while a decline in manufacturing's share is inevitable as an economy develops to a higher level, the speed at which Taiwan's manufacturing industry is declining is alarming.

For many of the island's manufacturers, though, overseas investment seems to be the only way to survive; and, in retrospect, the move offshore appears to have done Taiwan's economy more good than harm. For example, Kunnan Enter­prise Ltd., a leading maker of tennis rackets, set up a plant in Thailand in 1988. "The main reason for our decision," explains the company's vice president, Jeff Yao (姚鸛鳴), "was the serious labor shortage in Taiwan. That was a common problem for most local manufacturers but was especially serious for us because of the hard work and hot environment on our production line. Although we've boosted our wages substantially, to about US$800 a month, we still can't find enough workers. So setting up plants overseas is the only way for our company to keep growing."

Cal-Comp Electronics Inc., one of the world's leading calculator manufac­turers, faced a similar situation before building its Thai plant in 1990. Notes Pearce Chiu (秋平和), the company's vice president, "At our calculator factory in Shenkeng, suburban Taipei, we had such serious problems finding enough workers that we had to hire large numbers of working students. We decided then that for our labor-intensive calculator production to survive, we would have to shift it to less-developed countries."

Manufacturers report that their offshore factories play a crucial role in maintaining the health of their overall operations. Without those factories, they claim, they would have been in serious trouble by now.

Factories in Malaysia and Thailand, for instance, have helped Taiwan's calcu­lator manufacturers win back orders for low-end models from competitors in Hong Kong and mainland China. This enabled the total output of Taiwan's cal­ culator makers, including that from off­ shore plants, to surge from 58 million units in 1989 to 70 million in 1990. Japan's production for 1990 amounted to between 20 million and 30 million and Hong Kong produced 70 million. (The average price of Hong Kong-made cal­culators, however, was only half that of Taiwan's models.)

Profits from overseas operations have helped companies succeed in diffi­cult upgrading efforts at home. This up­ grading is vital to their continuing viability. In many cases, offshore factories are supplying labor-intensive parts to home operations here, thereby keeping production costs down and alleviating the problem of Taiwan's labor shortage. Local footwear makers, for example, rely on their factories in mainland China to supply them with uppers and soles. Overseas operations also help Taiwan manufacturers secure supplies of raw materials and establish footholds in host-country markets.

Another effect of offshore invest­ment in mainland China and Southeast Asia is the creation of a huge demand for materials, components and parts, and machinery from Taiwan. When Taiwan's overall exports were growing at an anemic 2.9 percent in 1990, its shipments to Malaysia, Indonesia and Thailand in­ creased at shocking rates of 59 percent, 34 percent and 29 percent, respectively.

The investment-induced growth in exports to mainland China has also been impressive. In 1991, shipments to the mainland via Hong Kongjumped 42 per cent (while total exports were expanding at only 13 per cent) to US$4.66 billion, accounting for 6 percent of the island's overall exports. In the first eight months of 1992, indirect exports to the mainland rose another 38 per cent to US$3.9 billion-7 percent of the island's total. This strong demand from the mainland has helped offset sluggish orders from other overseas areas, and has helped Taiwan maintain a steady economic growth.

Moving into foreign lands has been a trying odyssey for Taiwan manufacturers, es­pecially small and medium ones. One of the major difficulties they face in Southeast Asia is unfamiliarity with local laws and regulations, which has, at times, made them subject to the trickery of local partners. They also have problems dealing with the intricacies of foreign red tape.

Another problem is the cultural and linguistic barrier between Taiwan investors and local employees. Cal-Comp's Pearce Chiu says, "Before we could send our first batch of twenty-eight managers and technicians to our Thai plant, they had to take three to six months of training in the Thai language."

Many investors resort to overseas Chinese to help bridge the gap with local employees in overseas areas. Comments Teco's Shieh, "One of the main reasons why we located our Malaysian plant in Penang was the existence there of a large Mandarin-speaking overseas Chinese community. Its members can serve as mid-level managers and bridge the gap with local workers."

Taiwanese personnel sent to overseas locations have to face worse difficulties, since they frequently must cope with a poor living environment, different culture and customs, and family problems such as separation from wives or the education of children. Furthermore, they sometimes lack sufficient manpower and have to work long and tedious hours. "Those people are pio­neers," says Chiu of Cal-Comp. "Even after office hours, they often have to inspect the plant and repair machinery."

To make overseas assignments more attractive, most Taiwan companies promote personnel sent abroad and provide them with extra allowances and regular vacations, with free airline tickets back to Taiwan, and also encourage spouses to go along. Taiwan investor associations, es­tablished with the backing of the ROC government, have set up Chinese-lan­guage schools in Penang, Kuala Lumpur, and Jakarta for the education of the chil­dren of Taiwan staff there.

Yet another problem is the lack of adequate banking support in host countries. To fill their need for operating capital, some Taiwan investors have gone to banks operated by overseas Chinese in the areas of their operations.

Those who invest in mainland China face extra problems, including the absence of a clear-cut legal framework, the expensive need to establish relations with communist officials, the unconventional work habits (by modern operating stand­ards) of mainland workers, strict foreign exchange controls, and the lack of a good infrastructure and banking support.

Success abroad, however, does not mean that Taiwan's entrepreneurs are al­lowing their home operations to wither away. Many local manufacturers have worked out a division of labor between their operations in Taiwan and overseas. Kunnan Enterprise, for example, uses its Thai plant to turn out tennis rackets that retail for between US$100 and US$150, while its Taiwan factory produces rackets that sell from US$150 to US$400. Cal-Comp's plant in Thailand concentrates on low-end products such as hand-held and printing calculators, while its Taiwan plant focuses on higher-end items, such as digital organizers, which carry free on board prices of US$20 to US$30 per unit (as well as facsimjle machines). Teco produces standard motors in its Malaysian plant and special and custom-made mo­tors in Taiwan.

"Our strategy is to constantly create innovative products for our Taiwan plant," explains Kunnan's Jeff Yao, "and then transfer them to our Thai plant after they have lost their uniqueness." To cre­ate those innovative products, Kunnan maintains a strong research and development center with sixty engineers in Tai­wan. The company's R&D effort absorbs about 3 percent of its revenues.

Cal-Comp holds to a similar strategy. Board director Ray Chen (陳瑞聰) com­ments, "We collect market information and create new products here every year in accordance with market trends and technical developments, and present those products for our OEM [original equipment manufacturer] customers to choose from. The ability to constantly turn out new products is the main factor in our growth."

To support this effort, which costs about 2.5 percent of total revenues, the company has an R&D center with 200 engineers in Taiwan. The center is also re­sponsible for designing automated equipment, which is manufactured in the company's own machine shops and then installed on its production lines. In addi­tion, the R&D engineers strive to improve product designs so as to reduce the number of components needed and thus cut production costs. The combination of new products, econorruc designs, and high productivity has enabled Cal-Comp to secure steady long-term orders from leading international-brand manufacturers.

The footwear manufacturers that have remained in Taiwan have managed to maintain the viability of their opera­tions here by automating production, de­veloping new materials, improving designs (partly by adopting computer­ aided design processes and hiring foreign designers), upgrading production meth­ods (thereby enabling them to accept specialized, small-volume orders), and strengthening their marketing.

Many manufacturers, after setting up factories offshore, have transformed their Taiwan operations into headquarters for high-end production, R&D activities, re­ceipt of orders, procurement of materials, and the provision of technical assistance and personnel training for the overseas plants. Ray Chen of Cal-Comp comments, "The most important advantage of Taiwan is its well-educated manpower, especially mid-level managers and tech­nical personnel. Taiwan will always be the manufacturing and operational head­ quarters of our international corporate structure. "

In contrast to Southeast Asia and mainland China, where Taiwan capital has gone mainly into manufacturing, people in Taiwan have invested in the U.S. largely to gain marketing channels (the U.S. is the island's largest export market) and access to mar­ket information and advanced technology. Investments in Europe also focus on marketing, including distribution warehouses.

According to the Coordination Coun­cil for North American Affairs, Taiwan manufacturers have invested in 220 Sili­con Valley companies. These ventures, which operate in such areas as PCs, ICs and computer software, have a total capitalization of US$690 million and pro­vide jobs for 13,000 people.

A substan­tial number of Tai­wan companies have acquired existing American firms for their sales channels and technology. An outstanding example of this is the US$335 million acquisition of Wyndham Foods, the third-largest biscuit maker in the U.S., by Taiwan's President Enterprises in 1990.

This acquisition has advantages for both sides, explains Kao Chin-yuan (高清愿), vice chairman of President Enterprises and chief executive officer of the President Group: "Due to the similar business nature of Wyndham and President, joining forces enables the two companies to reinforce each other's operations and al­lows President to accelerate its expansion. Wyndham's well-established sales chan­ nels, for instance, can help us market President's products in the U.S." This ac­quisition was so successful that President spent another US$60 million to buy Fa­mous Amos, a prominent American cookie maker, in September last year.

Local makers of information prod ucts are also enthusiastic buyers of American firms. Kun Yin Enterprise Co. purchased MSC, a U.S. computer mouse manufacturer for example, and Taiwan's Mitac International acquired computer manufacturer Compaq. Such acquisitions can be risky, however, because of the complicated and intensely competitive nature of the American electronics and in­ formation market.

One of the most notable examples of this risk is the US$11 million purchase by Great Electronics Corp., Taiwan's leading wireless telephone maker, of Pactel, a noted distributor of consumer communi­cations equipment in the U.S., in 1989. Great Electronics' idea in making the purchase was to reduce its heavy reliance on OEM orders from AT&T, which were gener­ating only thin profits at that time. Shortly afterward the U.S. was struck by a severe recession, and prices of consumer com­ munications equipment there plunged 20 percent. Meanwhile, AT&T switched its orders to mainland China, Hong Kong, and other Taiwan suppliers.

By the end of 1990 Pactel, whose name had been changed to Great Technolo­gies following the acquisition, was in debt to the tune of US$22 million. Including losses from other overseas ventures, Great Technologies deficit for the year soared to US$29 million-more than the company's paid-in capital of US$26 million. This situ­ation finally forced the company's founder, L.F. Shieh, to resign his post as chainnan.

The plight of Great Electronics underscores one mistake made by many Taiwan companies: buoyed by easy access to investment capital during the halcyon days of Taiwan's stock market boom, many blundered into large overseas ventures without adequate evaluation. Those ventures often overextended the investors' management and financial capabilities.

In years to come, the strengthening of those two areas-management and finance-so as to provide the support needed for international development will be a clitical issue for many Taiwan companies.

In this respect, the experience of Teco can serve as an illustrative example. Today, Teco is a multinational company with manufacturing operations in Taiwan and Malaysia, as well as seven overseas branches-in the U.S. (Los Angeles and Houston), Australia, Singapore, Thailand, Malaysia, and Indonesia, which are responsible for marketing, collecting market information, warehousing and distri­ bution, and after-sales services.

A key element in the successful management of Teco's global corporate struc­ture is the principle of localization. All of the branches are headed by local general managers, with managers from Taiwan acting as their deputies. Each branch has an average of only two managers from Taiwan; managerial, accounting, engineering, and sales positions are filled al­most entirely by local personnel.

"Our policy is that overseas opera­tions should obtain the manpower and capital they need mostly from local sources," T.S. Shieh comments. "Locali­zation is important in winning recognition by the host society as a local company, which can help bolster the establishment of ties with local political, social, and business communities. And this, of course, facilitates overseas operations." Localization, Shieh continues, can also alleviate the difficulties and the cost of sending Taiwan staff abroad.

Teco is naturally careful in its selec­tion of local general managers so that they can fit in with the company's management philosophy and corporate culture. The local managers from overseas branches are brought to Taiwan once a year to learn more about the Teco philosophy, culture, and system. 'The operations of our overseas branches should be modified to ac­commodate the customs and cultures of the host societies," Shieh remarks, "but the basic philosophy, ideals, and system of management should remain uniform."

The most critical challenge facing Taiwan companies today is how to maintain a vigorous home operation that can generate the managerial, technical, and fi­nancial power needed to sustain the con­tinuous development of internationalized operations. If this is not done, Taiwan-in­vested manufacturing operations in other countries will be unable to cope with the emergence of locally invested labor-in­tensive operations similar to their own. In this situation, the Taiwan-invested firms will gradually lose their competitive edge and their growth momentum.

The boom in outbound investment of the past few years has drastically changed Taiwan's economy and the nature of its companies. Many of the island's large en­terprises have successfully transformed themselves into multinational firms, and numerous small- and medium-sized com­panies have also developed extensive globalized operations.

This trend has vastly extended the influence of Taiwan's economic power. Without the continuing support of a strong base at home, however, these globalized enterprises will gradually wither away like a plant whose roots have been removed from nourishing soil.