Taiwan Today

With 1.15 billion people, the main­land is a sizeable potential market for overseas service sector investment. But the actual number of prospective con­sumers for services is much smaller. Given the limited income of most main­landers, it is unlikely that strong markets for services exist beyond a few major urban centers.

Investors from Taiwan are aware that the mainland's service sector is still in the early stages of development. In­vestment opportunities are many, but the risk incurred is likewise great. Neverthe­less, some industries have already entered the market, and now others would like a freer hand. As indicated in the following excerpts from a three-part article first published in the Economic Daily News (經濟日報) on October 8, 9, and 10, 1991, the ROC government is currently plan­ning to ease restrictions on investment in some mainland service industries.

Taiwan's service industry entered the mainland several years ago, but because of existing policies, investment activities had been carried on surreptitiously through Hong Kong and overseas subsidiaries. Now, the Ministry of Economic Affairs (MOEA) has proposed giving the green light to service industries that wish to invest in the main­land.

Actually, until now only a small percentage of service industries investing in the mainland have had any success, namely karaoke centers (KTVS) and the restaurant business. Other service industries such as real estate, hotels, cosmetics, and advertising have become increasingly conservative and reluctant to take the initiative—if not because the return on their investments has been too low, then because the rate of return is too slow.

According to the MOEA's Political Vice Minister P.K. Chiang, "The Main­land Affairs Council [MAC] of the Execu­tive Yuan has solicited opinions from the MOEA for liberalization of service sector investment in the mainland. The primary consideration is the needs of Taiwan­-based industries."

Chiang adds the MOEA would like to eliminate restrictions on the service sector according to the same criteria it has applied to the manufacturing sector: invest­ment in the mainland may not influence the safety or economic development of Taiwan, and the goods and services pro­duced may not compete internationally with products from Taiwan.

Moreover, since the MOEA already permits some manufacturing enterprises to invest in the mainland, it has no justi­fication for forbidding investment by service-oriented enterprises. Based on these considerations, the MOEA expects to permit 146 kinds of service industries to invest, including both wholesalers and retailers. According to Tang Ming-hui, a section chief in the MOEA's Department of Commerce. "The service industries cur­rently investing or seeking to invest in the mainland are wholesalers, retailers, and personal services. The amount of capital they would be relocating to the mainland is fairly limited. Their activities would be local in nature, presenting no lateral competitive threat to economic development in Taiwan."

Chiang insists that the MOEA's sug­gestion was not made because such in­vestment is an ineluctable trend. He points out, "According to our figures, of the 2,503 registered mainland investment packages, only sixty-two are services oriented. Obviously, investment by Taiwan's service sector has not grown into some irreversible tide."

Until recently, most service sector investment has been in the restaurant business and karaoke clubs. Investment has been limited chiefly to small and me­dium-size restaurants. There are very few large-scale operations. The senior man­ager of Taipei's Tautau Restaurant, Hsu Tang-jen, has traveled frequently to the mainland to research local market condi­tions there. He notes, "Restaurants managed by Taiwanese in the mainland are best known for offering Taiwanese cui­sine." Two examples are the very well­-known House of Taiwan restaurant and the Wule Beer House in Peking.

Unlike restaurants in Taiwan which are patronized by the general public, Taiwan-run restaurants in the mainland usually cater to mainland officials and tourists. Mr. Hsieh, who manages a restaurant in Peking, also notes, "The cost of one table at an above-average banquet averages approximately US$200 (not in­cluding liquor or other beverages), or about the same as it would cost in Taiwan. But the average wage of workers is much lower in the mainland than in Taiwan. The average mainland Chinese cannot afford to eat at the restaurant, thus 60 to 70 percent of its patrons are officials ar­ranging banquets at public expense." Hsieh goes on to say that because they are on expense accounts, they never haggle over the price.

There are many problems confront­ing restaurateurs who would set up shop in mainland China. "Public transportation in the mainland is very slow," Hsieh explains, "and individual travel is not as convenient as it is in Taiwan. So, when selecting a site for a restaurant conven­ient transportation becomes a prime consideration. A restaurant must also offer a unique menu and atmosphere as well as maintain certain management standards before it can guarantee good business."

In order to preserve their unique cui­sine and maintain standards, almost all restaurants run by Taiwan-based busi­nessmen employ chief chefs and management-level employees from Taiwan. "Life in the mainland is rather bor­ing in comparison with all the bright lights of Taiwan," Hsieh says. "Even though there are quite a few restaurateurs from Taiwan in the mainland, they don't know each other. Convincing workers from Taiwan to live and work in the mainland for extended periods of time has become a major difficulty."

Another problem is the dual­-currency system. Mainland China has one currency for domestic use, renminbi (RMB), and one for international use, for­eign exchange certificates (FEC). RMB is non-negotiable on the world market and can be used only within the borders of mainland China. On the other hand, FEC can be exchanged on the international market. But the currency is not widely available to the average mainlander, and people who do have it prefer to spend it on imported goods which require FEC. Most restaurants established by people from Taiwan accept both FEC and RMB. "Only FEC can be taken out of mainland China," Hsieh says, "so some restaurants encour­age diners to use FEC by charging a 10 to 15 percent surcharge on bills paid in renminbi." He adds that remitting earn­ings abroad has not been a problem.

Although food processing indus­tries have invested in the manufacturing sector, for the moment they are hesitant to enter the service sector. They are biding their time, waiting for the emergence of a stronger service sector economy before opening convenience shops. President Enterprises, which is preparing to set up processing plants simultaneously in Peking, Shanghai, and Urumchi, is very cautious about investing in wholesale or convenience stores, even though President operates over one thousand such stores in Taiwan. Vice Chairman of President Enterprises Kao Ching-yuan says, "Convenience stores are growing rapidly in Taiwan, but President absorbed many years of losses before reaching this point. In terms of GNP, the mainland is not ready for convenience stores, so President is, for the moment, not considering regional development of these stores in the mainland."

Assistant manager of Kasumi super­market Li Chung-hsing echoes Kao's concerns. "Once the mainland's indi­vidual GNP reaches US$5,000, there will be a better environment for managing supermarkets. Add to this the fact that supermarkets in Taiwan are still in the development stages with no time for dis­tractions, and you will understand why the probability of their establishing supermarkets in the mainland in the short term is so very low."

Another obstacle facing those entering the service industry sector is the structure of the national retail market. Assistant man­ager of President's Food Division Kao Hsien-ming explains, "Businesses from Taiwan have just begun setting up factories in the mainland. The mainland's retail sector operates through state-run outlets, therefore President will have to work with those state-run stores in selling products we manufacture there. Later, we will gradually expand our sales network."

Other service industries, while con­vinced of the potential, have had only mixed success in mainland China. Inter­national advertising companies, for ex­ample, have enjoyed limited success, but their Taiwan-based counterparts are still in the wait-and-see stage.

Although the MOEA has already pro­posed opening the mainland market to investment by Taiwan's advertising companies, most of their Taiwan-based clients are still not permitted to conduct business openly or directly there. Taiwan advertising firms thus believe that this is the "empty promise" stage. But Dentsu, Young & Rubicom, a joint venture by Japanese, U.S., and mainland Chinese advertising companies, has struggled for six or seven years to set up branches in Peking and Shanghai, and now has hopes of establishing a third branch in Canton.

The general manager of Dentsu, Young & Rubicom in Taiwan, Hsiung Chi-lung, says that his "brother" company in the mainland has entered a golden era. The 1990 accounts for the Shanghai area, for example, were double those of the previous year. "Waiting until everyone else says 'go' will be too late," Hsiung says, "especially since the growth of ad­vertising in Taiwan is slowing—although all indicators are up—and the mainland market is growing annually by 15 to 20 percent. The mainland obviously still has room for growth in the future."

Not all observers are as positive. As recently as a year or two ago, ad company representatives began traveling to the mainland individually or in small groups to investigate market conditions, but most came back very disappointed. One ad­vertising executive says, "Everybody feels the mainland market is comparable to the Taiwan market of thirty years ago. Consumer buying power is weak, and products from Taiwan can't just go waltzing into the mainland. So everybody has adopted a wait-and-see attitude."

Many years ago, the Hong Kong­-based Ogilvy & Mather Worldwide set up offices in Peking, Shanghai, and Canton, but their arrangements are still quite primitive. Not only are the local branches restricted to using FEC, they cannot freely distribute advertisements. Ogilvy & Mather Worldwide is currently discussing the feasibility of a joint venture with local advertising companies. Sung Chih-ming, chairman of Ogilvy & Mather (Taiwan), indicates that when first entering the mainland market, it is wise to set up a multifunctional liaison office. The mar­ket's potential is growing, and the money spent on advertising there is quickly ap­proaching Taiwan levels. This is primarily why they are searching for joint venture partners. Advertising companies in Taiwan might consider taking a little more initiative.

Though their approaches to the mainland market differ greatly, Dentsu, Young & Rubicom Inc. and Ogilvy & Mather Worldwide both use the same kind of personnel—advertising managers trained in Taiwan. In the last year or two, Dentsu, Young & Rubicom's Taiwan company has trained two foreign manag­ers to go to Shanghai where they were promoted quickly and earned higher salaries. Ogilvy & Mather Worldwide has seen a willingness among its staff in Tai­wan to work in the mainland, so in Octo­ber 1991 they sent an employee to help establish a branch in Shanghai. By the beginning of 1992, that office will be staffed by three workers from Taiwan.

Taiwan's largest advertising agency, Union Advertising Inc., has always felt that entry into the mainland market was a long-range goal. Assistant General Man­ager Liu Tu-hsing says, "In these last two to three years, in accordance with gov­ernment policies, there have not been many instances of Taiwan-based compa­nies openly setting up factories or directly selling goods in the mainland." Union Advertising Inc. will wait for Taiwan's business sector to take the first step.

In view of the present situation be­tween the two sides of the Taiwan Straits, it is not very likely that Taiwan advertis­ing agencies will make any big moves to enter the mainland market just now. But most people in the business predict that in another three years the move into mainland markets by Taiwan advertising agencies will be much better defined.

One service industry which saw a flurry of success has since fallen on hard times—real es­tate. The high tide of Taiwan investment in manufacturing industries has ebbed in the years since visits to the mainland were first allowed, and sales of development property in industrial zones have also fallen. Real estate companies that developed or sold properties in the mainland ended up simply trying to con­serve their original capital rather than turn a profit.

Since the average mainland Chinese cannot easily afford to buy a house, most of the lots in housing developments are sold to businessmen from Hong Kong, Macao, and Taiwan, foreign business­men, old Chinese soldiers returning to their hometowns in the mainland, or resi­dents of Taiwan buying houses for their mainland relatives. Industrial develop­ment property is sought primarily by businessmen from Taiwan, with some demand from Japan and Hong Kong. Businessmen from other countries are also potential customers but account for only a small percentage of sales.

In addition to a weak market and limited profits, investment in mainland real estate has also come up against many other difficulties. Wang Shu-yuan, general manager of Yorkshire International Co., says: "The responsibilities and authority of the various mainland ministries all overlap and are ill-defined in an exceedingly complex system. Those investing for the first time in the mainland can end up spending a lot of time and money without reaching their objectives."

Currently, real estate development, especially in mainland China's south­eastern coast, seems to hold the greatest long-term potential. In the past, most Taiwan real estate companies entered the mainland market as agents, not develop­ers. Yet many of these companies were secretly collecting information on the market there while waiting for a better opportunity to invest. "Although the mainland's long-term prospects look good," Wang says, "the pace of reform there is very slow. Nothing will change much in the next five years."

For the hotel industry, competition from state-run enterprises is not a prob­lem. But hoteliers from Taiwan say sup­ply outweighs demand for joint venture hotels, making this a bad moment for investment. The number of tourists visiting the mainland has fallen since the Tienanmen incident. Although the number of travelers to the mainland has increased in recent months, the number of new hotels opening there has also risen, sparking a price reduction war and mak­ing the market more competitive than ever before. A room in a four-or five-star hotel in downtown Peking costs between US$100 and US$125 per night, but if one pulls a few strings, the price can drop to as low as US$60 to US$80.

Staff in joint-venture hotels in the mainland are paid twice as much as their counterparts in the state-run establishments while occupancy rates have fallen. It will now take much longer to earn re­turns on capital invested. In addition, the mainland has a serious shortage of pro­fessional hotel workers. The wages demanded by non-mainlanders for working there are another burden on investors. Hoteliers note that while many world­-renowned hotel chains have set up bases of operation in the mainland, most of them have only sent professional staff to manage the operations without directly investing capital.

The proposed liberalization of service sector investment in mainland China will al­low direct investment in a number of busi­nesses. This move will certainly simplify the investment process by eliminating the need for indirect investment through Hong Kong or overseas subsidiaries. It is difficult to gauge just what sort of impact liberalization will have on the amount of investment.

Attractions are great. A plentiful supply of cheap labor and a potentially large market are inducement enough for some investors. But other potential in­vestors feel the problems far outweigh the benefits. For example, the service sector is still relatively undeveloped, and al­though labor is plentiful, there are unfair labor laws and a scarcity of trained help. It is difficult to compete with the state-run enterprises, although in some cases it is possible to work with them. Some areas of the service sector, such as the hotel industry, are now saturated. Finally, the mainland has not passed legislation to encourage investment in the service sec­tor. Even if restrictions are eased, service sector investors will in all likelihood remain cautious.