When Taiwan's traditional manufacturers started to drift to the mainland back in the 1980's, most of them were looking for a way to survive. A few stayed, trusting to imagination and creativity, and several prospered. But can Taiwan's remaining traditional industries go on meeting the challenges coming out of the sunset?
Jackson Lee began to learn how to make umbrellas as a seventeen-year-old apprentice. He prospered. But when he decided to relocate his umbrella factory to the Chinese mainland in 1988, he found himself facing an uphill task. For starters, just getting from Shenzhen in Guangdong Province to his newly built plant in Meixian involved a thirteen-hour car journey. And once he arrived, he was completely on his own. "Given the political climate in those days, you couldn't expect any help from the ROC government," he says. "It took all my energy just to learn the rules of the game there. And you could never estimate accurately how much money you'd need to get things done."
But Lee had sound reasons for making the move. At that time, the daily wage of a laborer in his new factory was just two Renminbi, or 54 US cents at the then prevailing rate of exchange--a little more for piecework. But if that laborer had done the same work in Taiwan, he would have earned the local equivalent of US$18. Another important factor was land, which was (and is) much more expensive in Taiwan than China.
Taiwan had become a less attractive place for traditional manufacturing industries, in other words, even though the island's economic miracle owed them a lot. The sneakers, textile, toy, umbrella, and other labor-intensive businesses started to emigrate during the mid-1980s, fanning out through Southeast Asia and mainland China. The statistics spoke for them selves. In 1987, the year before Lee relocated, Taiwan's umbrella exports reached their peak of NT$10 billion (US$350 million at the then exchange rate of NT$28 to the US dollar). After that, however, they steadily declined, and ten years later they were worth no more than NT$670 million (US$20.5 million at the 1997 rate).
Today, the labor market on the mainland is no less attractive than it was thirteen years ago, even though Lee says now he has to pay his workers at least sixteen Renminbi (US$2) a day. Many of Taiwan's industries must make hard choices. "Manu facturers who stay in Taiwan are facing rising costs, because local workers are demanding more than ever before," notes Susan S.C. Chien, secretary-general of the Taiwan Toy Manufacturers Association. "Then the price of the product goes up until it costs 30 to 40 percent more than if it had been made on the mainland, and unless you're producing really high-end things, that's not competitive. If we're talking about not particularly sophisticated production processes, mainland manufac turers can easily duplicate toys of the same quality." According to Chien, about 80 percent of Taiwan's toy manufacturers have moved their production lines to the mainland. As to umbrella manufacturers, "only two small companies are still producing on the island," Jackson Lee says. "But I think they'll move soon."
The truth is that many competitors from all over the world are converging on China, eager to win a share of anticipated profits, and Taiwan is no exception. The previous government tried to stem the tide, to little avail, and its successors are having no better luck. But there are still a few reasons to stay home. "Some Taiwanese toy manufacturers deliberately choose to set up factories on both sides of the strait," Chien says. "First they develop and make new products in Taiwan, then they shift to the mainland for mass production." A welcome side effect is that this makes it harder for mainlanders (and Taiwanese businessmen on the mainland) to counterfeit new lines too quickly.
Liao Ban-chang, general manager of the Taiwan Bicycle Industry R&D Center, says that the island's bicycle manufac turers adopt a similar strategy. First they produce expensive new products in Taiwan's comparatively small factories. One year later, just enough time for those glossy items to have become obsolete in the land of their manufacture, the scene shifts to the mainland or Vietnam, where the makers churn them out in vast quantities for the export market.
There are exceptions. For example, Chien Shing Stainless Steel Co. will stay in Taiwan. Indeed, it is spending about NT$13.5 billion (US$410 million) on a new factory--one of very few major investments on the island by traditional manufac turers in recent years. "Our production already relies mainly on automation instead of labor, so there's no need for us to leave Taiwan," says a Chien Shing executive. "The mainland's policies aren't stable yet. China tries to attract Taiwan's business men with various incentives, but who knows what's really in their minds?"
Given that many of Taiwan's traditional industries have moved their production facilities to the mainland, should the ROC government be worried about the "hollowing out" effect? No, says Susan Chien. "Let's look at Japan. Almost all its manufacturing is now done outside the country. When an economy like Taiwan's develops, some of its industries are bound to go offshore."
Ho Ming-lang, deputy director-general of the Industrial Development Bureau (IDB) at the Ministry of Economic Af fairs, also plays down such concerns. He points out that a degree of relocation is the natural result of a changed industrial structure and is not exclusively due to pressure at home. Apart from increasingly expensive land and labor in Taiwan, tradi tional manufacturers have to confront challenges from emerging overseas competitors that are making giant strides in pro duction know-how. An obvious example is the island's garment industry, which in recent years has been on a slippery slope.
Taiwan's clothing manufacturers used to have no problem competing with countries rich in cotton and oil, even though the island had to import those materials. "That's because we had the know-how, but now we're losing this advantage because they're catching up fast," Ho Ming-lang says. And China, braced by a series of economic reforms, is starting to present an ever more formidable profile. "They used to have all state-run enterprises, and we weren't scared of them," Jackson Lee says. "But now we're facing private businesses that are much more competitive."
The ROC government's attitude to these problems has been to boost high-tech industries in the hope of counterbalancing the departure of their traditional brethren. So, for example, they built science-based industrial parks in north and south Taiwan, and this had a wonderful effect on trade figures. Ho says that in 1986 Taiwan was the number-one exporter, in terms of quantity, of fifteen different items, two-thirds of which belonged in the traditional sector. Now, however, twenty items manufactured on the island claim the biggest market share in their respective sectors--but two-thirds of them are high-tech products. "The total output value of exports is on the increase," Ho says. "If you think of it like that, you don't have to worry about Taiwan's industrial transformation."
Ho likes to see things in terms of industrial globalization. "Some people worry about Taiwan's industries being hollowed out, but in terms of internationalization that shouldn't be an issue," he notes. "If you can't find a suitable site here, you can just buy huge tracts of land on the mainland, or even Mongolia, if you like." Liao Ban-chang of the Taiwan Bicycle Industry R&D Center also recognizes the importance of this. "If you want to internationalize the industry, you have to be ready to go wherever's necessary," he says. "The Chinese mainland is part of the world, and Taiwan's bicycle manufacturers must be there to expand into world markets."
The fact that an industry relocates is not necessarily an indication that it is heading for disaster, as many observers seem to think. But as capital- and technology- intensive industries grow "hot," labor-intensive enterprises frequently become associated in people's minds with so-called sunset industries. Traditional manufacturers can often rely on stable markets and regular profits--everybody needs to buy clothes and have an umbrella. "But now people want to get rich quick, so they invest in high-tech industries," Jackson Lee says. Nevertheless, he remains optimistic. "There are no sunset industries, just sunset managements. You've got to be able to adapt. But that doesn't mean you should drop what you're doing and put your money into something else. You should stay put and concentrate on R&D."
Susan Chien agrees. "You're unlikely to survive if you don't keep up with the times and meet market needs, but as long as you're able to make breakthroughs, you still can come out on top," she says. For many industries, upgrading existing operations is more important than overseas expansion. "Anyone who's still doing OEM [Original Equipment Manufacture] here is dead meat, because China, with its lower production costs, is doing a much better job at present."
What does keeping up with the times involve? Jackson Lee recently hired a fifteen-strong team to design umbrellas that would appeal to Australian and Japanese buyers. "Traditional industries can become competitive by combining products with technology developed by high-tech industries," he says, referring to materials such as the carbon fiber that is used in the manufacture of umbrella shafts and ribs. "We tell high-tech manufacturers our ideas, and they provide solutions and help us create new kinds of umbrellas." Not all of the ideas work out, of course, and Lee estimates that only about one in five of his company's new ideas translates into mass production. "But you have to go on doing the research, or you won't have any chance at all."
Toy manufacturers have also responded to pressure and moved on. Susan Chien says many of them have already reached the ODM (Original Design Manufacture) stage, where they both design and manufacture new products, which are marketed alongside the buyers' well-known brands through established sales channels. "But we've yet to reach the OBM [Original Brand Manufacture] stage, because it's not easy for a new brand to win solid recognition."
But are Taiwan's traditional industries prepared to invest in R&D? Some are, and the bicycle industry can serve as a role model. In the beginning, the island's cycle manufacturers did nothing but produce goods on an OEM basis, just like many of their counterparts in other labor-intensive industries. But in the mid-1980s, they decided to invest in R&D and create their own brands in tandem with their ongoing OEM work. Today, Taiwan is home to two world-famous bicycle brands, Giant and Merida, and in the past year produced about 25 million bicycles, or more than one-fifth of the world's total. "You have to put in a great deal of time and money to do the research and then promote the product," says Liao Ban-chang of the Taiwan Bicycle Industry R&D Center. "It's a long-term project, but you won't make any headway in today's global market unless you've got guts and smarts."
Even in those shrinking areas where it is still possible to make money out of OEM, manufacturers are in a poor position to cope with mounting and increasingly aggressive competition. "When you're strong in research and design, your buyers gradually give up designing their own products and start to rely on you," Liao says. The next step is often for customers to build up strategic marketing relationships with their manufacturers, which means that they in turn can design products that are more in line with what consumers actually want.
Once the relationship matures, and provided the sales channels are adequate, the manufacturer may even end up selling related products to the customer. For example, Taiwan's bicycle manufacturers now also sell sportswear and sports equip ment. "Diversification often comes as the result of globalization," Liao notes. "If you stick to OEM, you only know where your buyers are. You never get to understand the market and find out where the consumers are."
In an era where the knowledge-based economy is becoming the economy, successful managers need to be especially creative. How do Taiwan's traditional-sector entrepreneurs measure up? Ho Ming-lang thinks that Taiwan's traditional manu facturing industry is about halfway through its journey from pure production to R&D-based manufacture. But countries such as Japan and the United States have already reached a point where they mostly sell ideas, leaving others elsewhere to get their hands dirty with the actual business of manufacturing. Can Taiwan hope to win a place alongside these elite strategists?
The ROC government thinks that it can, and has played its part by establishing and supporting special R&D centers that help traditional manufacturers achieve sustainable development. The Taiwan Bicycle Industry R&D Center, established in 1992 by the Industrial Development Bureau and private enterprises, is one example. This non-profit organization helps manufacturers with quality-control and safety inspections, and assists smaller companies with the design and inspection of new products. It also works on new technologies, for example the electric bicycle, and organizes seminars to introduce related inventions of use to bicycle manufacturers.
In addition, government agencies such as the IDB have encouraged traditional industries to develop new products. According to Ho Ming-lang, the bureau's deputy director-general, manufacturers can apply for grants of up to NT$5 million (US$152,000) to be used in the development of new technology. The IDB has also hired experts to discuss with manufactur ers how best to upgrade production.
Ho says that the IDB spends about NT$4 billion (US$121 million) a year assisting manufacturers with R&D projects, but that represents only part of the government's effort. In June last year, the Cabinet also sanctioned the creation of an interministerial task force to promote traditional industries by, for example, providing them with loans on favorable terms and other incentives designed to ease the flow of capital.
Not everyone is convinced. "The government's initiative is really only a catalyst," Liao Ban-chang says. "Traditional manufacturers should be taking action as well." Jackson Lee agrees, noting that many traditional-sector managers still harbor conservative, rigid attitudes. "They're not very keen to spend on promotional activities," he says. "They just want to maintain the status quo." Such hidebound mindsets are perhaps the biggest obstacle to upgrading Taiwan's traditional industries. "Besides, many enterprises have difficulty finding professionals willing to work for them," Lee notes. "Those people tend to go into the IC industry, where they can earn much higher pay."
But when all the problems are listed and analyzed, the biggest problem of all remains Taiwan itself. Many observers say that the country's current political and economic environments are more difficult than they have ever been. Political turmoil continues unabated, and despite suggestions that the opening of direct links with the mainland may be imminent, the level of cross-strait tension remains high. These factors have a direct effect on investors, making the prospects for traditional manu facturing industries even worse. "It seems that Taiwan has become rudderless," Susan Chien says. "We're worried, extremely worried." The sun may not yet have set on the island's traditional manufacturing industries, but in subtropical countries like Taiwan, when winter comes, night can fall disconcertingly fast.