Cheap labor is often seen as the major incentive for Taiwanese businesses to move their operations to various destinations around Southeast Asia. But, as the experiences of three Taiwanese companies show, expanding operations in the region is replete with both opportunities and challenges, with the cost of labor just one factor among many. As part of the migration of Taiwan businesses to Southeast Asia, both Yung Shin Pharmaceutical Industries Co. and Cal-Comp Electronics Public Co. set up shop in Southeast Asia in the late 1980s. A "newcomer" to the region is Tatung Co.'s home appliances division. These enterprises have gone south for different reasons, but have all seen growth and the potential for further development.
Malaysia: Yung Shin Pharmaceutical
The main reason Frank Lee became interested in business opportunities in Southeast Asia was the promise of the Association of Southeast Asian Nations (ASEAN), which sought integration in the region and the reduction of trade barriers among its members. So in 1987, Lee, a member of the large family that set up Yung Shin Pharmaceutical Industries Co. in Taichung, central Taiwan in 1965, proposed extending the family-run business to Malaysia. "This country was comparatively more open to foreign investment in the region," Lee says from his head office in Kuala Lumpur, explaining his idea for using a base in Malaysia as a steppingstone to markets throughout Southeast Asia.
Many Taiwanese businesses that have moved their operations to that country did so mainly for easy access to cheap labor and raw materials such as rattan and timber used in furniture manufacturing. Others were satellite factories providing parts for international electronics brands, and they set up shop at the request of clients that had already moved there. But Yung Shin, which produces generic medicines and now has offices throughout the region, went there in pursuit of the local markets. "Other companies' products are mostly for export markets [outside Southeast Asia], but mine are for locals in the region," Lee says.
Yung Shin Pharmaceutical officially founded a company in Kuala Lumpur in 1988 selling medicines shipped from Taiwan before setting up factories in Malaysia. With offices in eight of the 10 ASEAN member countries--Brunei and Laos are the two exceptions--the company, which manufactures drugs for human as well as animal use, generated an income of NT$1.2 billion (US$36 million) last year, about 20 percent of which was from markets outside Malaysia.
That percentage is expected to grow as the company plans to end the production of pharmaceuticals for animals in Malaysia and move that part of its business to Vietnam. According to Lee, the number of pigs in Malaysia has dropped drastically in the Muslim-dominated country, from some 6 million when he arrived to less than 2 million currently due to environmental and religious concerns. On the other hand, the demand for pork has increased in Vietnam, he says. The new factory is slated to begin operations by 2011.
Yung Shin is already ranked second in terms of revenue in the pharmaceuticals and biotechnology sector in Taiwan. The Malaysian operation seems set to follow this success, going public in that country in 2004. Thanks to the company's contribution to Malaysia's economy, Frank Lee, formerly a commissioner of the Republic of China's Overseas Compatriots Affairs Commission, was conferred the Dato', an honorary title roughly equal to a British knighthood, by the governor of Penang State.
"You need to have a deep understanding of the local language and cultures," Lee says of the key to success for anyone targeting domestic markets. He says that he has been to nearly all the clinics, hospitals and pharmacies in Malaysia to which the company sells its products. "So our sales representatives won't lie to me about their visits to our customers, with whom I also have direct contact," Lee says. The company had only two sales representatives in the beginning, but now has 150, all of whom are local people, taking care of about 20,000 customers in the Malaysian market.
The growth of his company, however, does not have much to do with what he initially expected from ASEAN. "There're still many non-tariff barriers in the region, at least in the pharmaceutical sector," Lee says. From his experience, his company often finds it hard to get approval for new drugs from local health departments if local companies also produce the product. Once a health official even tried to dissuade him from registering a drug by telling him that it could be unprofitable, he says, "but that's none of his business."
Having lived in Malaysia for more than 20 years, Lee says that it seems to be difficult for Southeast Asian countries to work as closely with each other as those in the European Union, for example. "This region is too diverse in race, religion, culture and political systems," he says, explaining that this means development through greater integration is slowed.
Tony Chou, center, of Cal-Comp Electronics says the company's high efficiency owes much to its management information system. (Photo by Oscar Chung)
On the other hand, he says the region offers opportunities in what he sees as less competition from the world's major enterprises. Lee says that such companies usually do not send their top personnel to Southeast Asia, instead sending them to the United States, mainland China, Europe or Japan. He says this means that one has a very good chance to achieve success in Southeast Asia.
While this may be true, there is no denying that the hard work and effort put in by Frank Lee over the past two decades has certainly gone a long way in building another distinguished and reputable Taiwanese business in the region.
Thailand: Cal-Comp Electronics
The sight of the workers in the factory site to the south of Bangkok operated by Cal-Comp Electronics Public Co. is reminiscent of Taipei Municipal First Girls' Senior High School. Dressed in green shirts, the female workers, which obviously outnumber male staff, look just like students at the most prestigious high school for girls in Taipei. "This is not a coincidence," says Tony Chou, president of the enterprise. "We dress them this way, because they are expected to be as diligent at work as those students are in their schoolwork."
Cal-Comp Electronics was founded in Thailand 20 years ago as an affiliate of the Taipei-based Kinpo Group, which was first known for calculator production in the 1970s. Cal-Comp makes a wide range of products such as printers, hard disk drives and set-top boxes for cable television for international brands such as Hewlett Packard and Panasonic, with the operations in Thailand employing nine executives from Taiwan and a total workforce of about 7,000. Last year the company generated US$2 billion in revenue from its Thailand operations, up from US$700 million in 2000.
Chou is demanding of his workers, but also of himself. His family lives in downtown Bangkok, but the dormitory in the factory compound has become his second home. "I have to ensure the quality of the products and the security of the company's assets. During the rainy season, I worry that the factory might be flooded or the pumps won't work," Chou says. He is so engaged in his job that he usually shows up at his office by six in the morning and often drives back to Bangkok to see his family only once a week, usually arriving on Saturday night.
Yet despite this impressive work ethic, long hours alone certainly cannot explain Cal-Comp's success. Its high proficiency also results from the company's smart management practices and advanced production methods. "Every single product is traceable with a barcode, so it's easy to identify the assembly line and the workers involved in its production if it's flawed," Chou says of Cal-Comp's management information system. Another feature he is proud of is the "machine shop" where a group of researchers develop simple labor-saving devices according to suggestions from workers. "It's intended to enhance the efficiency of both the workers and production line," he explains.
To save on personnel costs, the company hires so many workers from Myanmar, which borders Thailand, that they now account for half of its labor force in Thailand. As to white-collar personnel such as engineers, Chou continues to search for ways to save costs when filling those positions, too. In the beginning, he hired mainland Chinese staff for those posts. In the late 1990s, however, as the mainland Chinese economy started to take off, many of those staff members returned to their home country and Chou turned to staff from India. "But as India is on the rise, now I use more and more staff from countries such as Myanmar and Pakistan," he says.
By the late 1980s, as the Kinpo Group was deciding where to set up its first overseas location, the organization had already predicted that it would have to enter the mainland Chinese market sooner or later. At the time, however, it chose Thailand over the mainland because of restrictions on investment across the Taiwan Strait, which Chou observes have been greatly reduced since President Ma Ying-jeou took office last year.
The company went public in Thailand in 2001 before setting up factories in Suzhou, near Shanghai, in 2003. "Since going public, we're seen as a Thai enterprise too, which serves to smooth our path to expanding into mainland China," Chou says of a major reason for the company's "new identity."
Tatung Co.'s home appliance division moved to Vietnam in early 2007 to take advantage of cheap labor in the emerging economy. (Photo by Oscar Chung)
Cal-Comp's expansion to the mainland was prompted by requests from some of the company's major clients, who had already relocated there, and Chou says the move has been successful. "We finished building the factories in the mainland in a short time, and we made a profit in the first month of their operations," Chou says. "That's because we copied everything, including managerial know-how, from our operations in Thailand. If we can do well here, we can also do well there." The mainland Chinese plant created US$1.5 billion in revenue last year.
The company has yet to show interest in going to Vietnam, the current hotspot for investors worldwide. "The labor movement there is quite strong and the wages will balloon in a short time. If I go there, I'll regret it someday," Chou says, adding that wage costs are not the be-all and end-all for a business, and that other requirements such as a country's infrastructure are also important. "I mean, if labor costs are everything, why don't people go to Africa?" Perhaps he is right about Vietnam's industrial environment, but what is certain is that Cal-Comp, one of the largest electronics manufacturers in Southeast Asia, seems to have proven that an enterprise does not necessarily have to move around constantly to succeed.
Vietnam: Tatung Co.
The wage gap between Thailand and Vietnam might not be large enough for some enterprises to move from the former to the latter, but the gap between Taiwan and Vietnam can be significant for those remaining in Taiwan such as the home appliances sector of Tatung Co. In January of 2007, the company shifted production of its home appliances from Tucheng in Taipei County to a newly opened industrial park in Binh Duong Province, 42 kilometers north of the downtown area of Ho Chi Minh City.
Tatung's home appliances division has the longest history in the company, with the brand being a household name in Taiwan since 1949 for its production of refrigerators, rice cookers and electric fans. Its migration to overseas manufacturing sites, however, is somewhat belated compared with the company's information technology sector, which got its start in the 1980s with Tatung (UK) in the United Kingdom. "It's because of the culture of the [home appliances] division," says Chang Che-jen, president of Tatung Vietnam Co., explaining that the division is "older and therefore more conservative."
Still, the decision of the company to end much of the production of home appliances in Tucheng--the rice cooker production lines will stay because the product is mainly sold in Taiwan--was painful, but inevitable. At the same time that the company's home appliances section moved to Vietnam, contract production of compressors, the "heart" of modern refrigerators, was moved from Tucheng to Guangdong province in mainland China to supply other refrigerator brands, which had already relocated there. In all, the changes resulted in laying off nearly 400 workers, who protested the moves.
"But production costs in Taiwan were quite high and the company wanted to enter the Southeast Asian market," says Chang, who was in charge of the Tucheng operation and proposed moving to Vietnam. He explains that wages for an average worker in Taiwan are now 7.5 times those in Vietnam and the gap was even greater a couple of years ago. Then there is the tariff issue. Taiwan's exports to Malaysia, for example, face a 35 percent tariff, in contrast with 5 percent for goods from Vietnam to Malaysia. "It was totally impossible for Tatung to sell in Southeast Asia in the past," Chang says.
Lower wages do not mean lower quality, however. To ensure Tatung's reputation for high quality products in the new market, the Vietnam branch manufactured only one-door, small-size refrigerators, mostly sold to hotels, in the first year of its operation because they are easy to make and suitable for inexperienced workers while they are still learning. "Some workers had never even seen a fridge before working for us," says Chang, adding that the company usually looks for staff from the countryside since workers from nearby Ho Chi Minh City tend to have a high turnover rate.
In addition, in the first four months of Tatung's operation in Vietnam the company's products were tested for quality in and sold only to Taiwan. The appliances made their debut in Vietnam in the fifth month when company officials felt satisfied with quality control. "We wanted to build a solid image among local consumers from the very beginning of our sales in the Vietnamese market," Chang says.
Tatung has reason to be careful building its image and brand in Vietnam given that large international brands such as Sanyo have already been there for some time. "Our brand was hardly recognized here in the first several months of sales, with each month seeing less than 200 fridges sold. We didn't have enough self-confidence then," Chang says. To compete with such giants known worldwide, Tatung's products are priced lower--15 percent lower than Sanyo's for example--although Chang thinks that is somewhat unfair since the Taiwanese brand lags in name recognition only, not in quality.
The company is addressing this weakness by increasing its advertising and number of sales outlets. Today, Taiwan remains the largest market for the company's refrigerators made in Vietnam, but monthly sales in that country's domestic market have reached 3,000 units. Sales are occurring in Malaysia, too, although at only a fraction of the rate in Vietnam. Last year revenue for the Vietnam plant totaled NT$600 million (US$18 million), up from NT$350 million (US$10.6 million) the previous year. "I'm optimistic about the brand's growth in Vietnam because more and more local consumers know it," Chang says. An old brand in Taiwan, Tatung seems ready to find its second wind in Southeast Asia.
Write to Oscar Chung at oscar@mail.gio.gov.tw