If growth were to continue at the same pace, enterprises had to make major adjustments by upgrading their management systems and committing themselves to additional R&D and value-added production financial investments few small- and medium-sized firms were prepared to make.
In similar situations, large-scale enterprises in other countries have generally assumed greater roles in the economy; The ROC will most likely not be an exception.
But small to medium-sized firms have been pivotal in Taiwan's development, and local Chinese are known to love being their own bosses. Thus, despite the transformation of domestic business structures, rising protectionism in foreign markets, and an appreciation of the NT dollar, many feisty small companies are holding their ground, and are even making big money.
Is it luck, privilege, intelligence, or a secret yet to be determined that gives these successful entrepreneurs their competitive edge? In the following story, staff writer Eugenia Yun examines the approaches of three successful local businessmen as they adjust to changing domestic and international markets.
With the "good old days" now receding rapidly into the past, the government and public wonder how the economy of the ROC can adjust to much tougher competition arising from businesses based elsewhere in Asia, such as Thailand, South Korea, Sri Lanka, and mainland China. The challenges posed by these economies strike at the heart of Taiwan's business structure.
Small and medium enterprises account for 70% of local jobs, 65% of export earnings, and 55% of the GNP.
Official statistics list about 700,000 small and medium enterprises in the ROC, which account for over 98 percent of the firms in the nation. These companies also represent 65 percent of Taiwan's export earnings, 55 percent of the GNP, and 70 percent of the job opportunities. Most are family operations, in the usual Chinese pattern. Labor-intensive and low-budget, for better or worse they represent the bedrock on which Taiwan's economic growth has been based.
The government's response to the new economic realities has been to encourage development of larger-scale enterprises with upgraded management systems, and to withdraw support from programs that encourage small-scale operations. But some local entrepreneurs are not about to give up. They take novel and bold approaches to the new challenges, and their actions are being closely watched by other businessmen interested in higher profitability—or just survival.
One model worth special attention is Jeff Huang, the 45-year-old head of Inter-Classico Ltd., a shoe manufacturing company that imports value-added leathers from France, Italy, Pakistan, Australia, and the U.S. Inter-Classico supplies two of its own local factories, as well as many others based on the island, and coordinates design and sales for two wholly-owned subsidiaries.
The company has just begun wholesaling finished imported goods to retailers. Annual sales are about US$430,000, and Inter-Classico is currently experiencing added success with sales of whole plant hardware and software systems for shoemaking to mainland China and various Southeast Asian nations.
Huang would probably be working these days as an attorney or court official had it not been for his determination to make his family rich. After graduating from the Law Department of Soochow University in 1966 and completing two years of compulsory military service, he passed up the chance to practice law by taking a job in Taipei as a shoe factory worker. His monthly salary was a meager US$50, but he braved the hard times to learn everything he could about the business. By the end of six months he was promoted to foreman.
Another six months passed, and Huang rose to factory supervisor; two and a half years later he was sitting in the vice manager's seat. At this point he decided to be a lao pan, his own "boss." Although his employer offered him triple the salary he was earning to continue at the shoe factory, Huang had other ideas. He believed real wealth was impossible as long as he worked for someone else, so he decided to enter a partnership with two ambitious, though inexperienced, young men with money to invest.
In 1971 the three partners established Classic Shoe Manufacturing Company. In remuneration for his experience, Huang was given a five percent share of the annual profits, but he wanted more. By reinvesting his share each year, Huang gradually built up his stake in Classic. Over the next six years, the young firm entered into numerous joint ventures, forming a cluster of interdependent enterprises. Huang was eventually appointed chairman of the group, and his climb was further accelerated by the U.S. government adoption of the Orderly Marketing Agreements (OMAs) in the middle of the decade. The OMAs allowed Huang's little empire to generate substantial profits on quota sales.
But the bubble burst in 1981 when the OMAs ended. Many manufacturers, including Huang's partners, reckoned the good times were over and prepared to abandon ship. Huang recalls: "Subsidies from the government dried up and it was no longer a seller's market. Our profit margin was dropping year by year, but I still believed there was hope."
Huang found a way out, though it was risky. Ignoring complaints that his attitude was unrealistic, he and a new partner bought out the two original partners, paying US$450,000 for the shares. Huang laid off two-thirds of his 1,000 workers, giving them a total of US$12,500 in severance pay (a generous act in those days), then cut back the number of production lines from eight to two. The new company was named Inter-Classico, Ltd., and it served two subsidiaries, Fashion Shoe, Ltd. and Growing Footwear Industry, Ltd., which were now involved in lines only Huang seemed to have faith in: ladies' leather goods, and high-priced men's shoes using unusual materials such as snake, ostrich, lizard, crocodile, shark, and kangaroo skins.
After all these painful "corrections," total sales plunged from the 1983 level of US$500,000 to US$300,000 in 1984. Yet profits remained roughly the same thanks to fewer workers, more machines, and a greater profit margin on the upgraded footwear. In the production of higher-end, value-added products, Huang found his dream fulfilled, and proclaimed the news to anyone who would listen: "Small is beautiful- it's time for Taiwan to forget mass production of low-end goods!"
Although sales are currently running at about the same annual level as 1984, Huang has continued to diversify the business. Inter-Classico now commits substantial revenue to R&D, as well as marketing. Manufacturing remains concentrated on high-end items, and the company is strong and experienced enough to sell its own production technology to foreign firms. Huang plans to have 10 to 20 outlets operating the length of the island in the near future, and they will stock both his own and imported goods.
Huang is a born-again convert to upgrading production, and not above preaching his faith to other manufacturers. He serves on the Footwear Association's board, and currently holds high positions in five other associations, including the Chinese National Federation of Industries. He also publishes Taiwan Footwear News, a monthly magazine, and the Shoemaker Says, a periodical consisting of essays on the shoe business. He expresses his latest business views in these media vehicles, and because he often laces his articles with political opinions, he has been urged by his associates to run for the Legislative Yuan in the 1989 national election.
Huang is clearly a man of action with a hard-driving entrepreneurial spirit backed by solid ideas. As such, he represents those key qualities that have made so many of Taiwan's businessmen such a success.
Ho's Seven Pyramid Enterprise produces lenses for export to seven countries.
Another comparable business whiz is Sam Ho, currently the owner of two prosperous medium-sized companies. His is a classic rags-to-riches story. Ho owns a luxurious house and cruises through Taipei in a Mercedes Benz. Despite the elite trappings, he leads a moderate and disciplined life; he has been a Buddhist since the age of 22, neither gambles nor drinks to excess, and devotes his non-office hours to his wife and three children, supplemented by a good book or golf. It is a lifestyle far different from his youth.
Ho's family was too poor to send him to high school, so he worked as a shepherd until the age of 15. Then he became an apprentice tailor, which gave him financial independence and the opportunity to attend night school to finish his education. After military service, he started working for an optical company in Taipei, and again attended night classes, this time in business administration. After 18 months of study, and the encouragement of his classmates, Ho decided to become his own boss.
In 1976, with an initial capital investment of US$2,000 and but five workers, Ho founded his optical supply firm, Seven Pyramid Enterprise Company, Ltd. Today, the company is capitalized at roughly US$700,000, has 75 employees, and is outfitted with state-of-the-art computer facilities. The firm produces eight kinds of lenses for export to France, Italy, Tunisia, Pakistan, Hong Kong, Japan, and the U.S. Currently, 23 percent of the production is directly exported overseas by the company itself.
Ho's company grew steadily until 1985, when low-end production suddenly ceased to be profitable. Up to that time, sales revenue had increased dependably every year, from US$62,500 in 1976 to US$2 million in 1984. In response, Ho decided to adopt more advanced technology and systematic management to strengthen his operation.
"Things looked increasingly grim and I knew I couldn't survive without assistance," he says, "so I finally turned to the authorities." The Medium and Small Business Administration of the Ministry of Economic Affairs took up his case, and sent experts to Seven Pyramid Enterprise to instruct employees in resin lens molding and lens dying techniques. The instructors were drawn from the Chemistry Department of the Industrial Technology Research Institute, a top government institute. The government also sent over scholars from Tamsui Oxford College to help solve managerial problems.
Ho was ecstatic with the results: "Not only did my company grow by 40 percent from 1985 to 1986, a solid foundation was laid for future development. Business revenue jumped to US$1.8 million in 1985, and to US$2.7 million in 1986!" But the skyrocketing profits hit a ceiling in 1987, as Ho faced a challenge every local businessman feared: appreciation of the New Taiwan dollar (NT$).
"The annual revenue is bound to drop if the NT dollar keeps appreciating, and rising labor costs add to the burden," Ho says. He complains that his salaries are high by local standards, but he cannot cut them because the labor market is too tight. Many of Taiwan's lens makers are tackling the same problem by simply moving their factories to mainland China, where labor costs are cheap. Numerous Hong Kong firms have already done the same.
Some experts have suggested a solution to the problem might be to import cheap labor from other Southeast Asian countries. But Ho warns of difficulties: "If we all rush to invest on the mainland, it will earn us short-term profits. But we will not bother to upgrade our local production for the higher-end markets, which will simply mean Taiwan's economic structure remains the same, with the added complication of unemployment, perhaps. If we bring in cheap foreign labor, there are bound to be social conflicts, especially if the workers decide to settle here. The only real solution is to upgrade our industry and concentrate on value-added, high-end products. Once this is accomplished, we could afford to keep a part of our economy focused on low-end production. It wouldn't be harmful to us under those circumstances to transplant some factories to the mainland. "
Ho thinks the process of upgrading can help weed out the less "fit" companies, and business expansion will eventually prompt firms to merge with their raw material suppliers or traders, which would improve efficiency. Ho has built up his own operation over the years, including the establishment of a wholly-owned subsidiary, Seven Praise Optical Company, Ltd. It is not an easy task: "To be a boss in a big enterprise is easier than to be one in a small business, since the big operation can hire all sorts of professionals to handle thorny problems, while the president spends time at charity affairs or on golf courses building up the company image. The head of a little firm has to take all the knocks himself."
Ho has a heavily-loaded daily schedule, and even his evening social engagements are part of work and related responsibilities as a committee chairman, federation director, or association president. But he knows enough not to over-tax his energies: "I've learned a good lesson from some of my predecessors. As soon as they began living the 'good life' they lapsed into self-indulgence; soon their health declined, then their businesses started to falter. That's why I became a strict Buddhist in my early twenties. I try to maintain a simple and regular life."
Although Ho's entrepreneurial life seems anything but "simple" to observers, he is proving that hard work, determination, and foresight do payoff, and his experience is a valuable model for other local businessmen.
Sunny Chen came to success with a far different background. Unlike Huang and Ho, he started off with the twin advantages of a middle-class upbringing and a solid education. Nevertheless, his road to success was all uphill, and he ran into hardships as daunting as any of his fellow entrepreneurs. The 31-year-old head of HOZN Auto & Soft Company, Ltd. recalls the early stages of his business:
"In 1981, my brother invested about US$125,000 to establish HOZN with help from our parents. He hoped the enterprise would make marketing the computer software programs he designed easier. But the operation floundered for two years. I got out of the army in 1983, and joined HOZN, along with one of my friends, to handle marketing while my brother focused on design. But two more years of toil couldn't pull the company out of its deficit."
Then a single order turned the company around. "An American customer ordered data switch circuits," Chen says. "The market for these items was minuscule, but the profit margin was enormous. My brother, my friend, and I spent a long time sweating over whether it wouldn't be better to focus on computer accessories rather than software as the target product of HOZN. We collected stacks and stacks of statistics, plus all the market information we could get our hands on. All the facts seemed to point to computer accessories as having a strong market potential. In technical know-how, HOZN had a foundation that couldn't be beat, and in marketing we were as strong as any local company around. So we decided to go ahead."
The choice proved overwhelmingly correct. The company's revenue in 1984 totaled US$150,000, then climbed to US$375,000 in 1985, to US$1.5 million in 1986, and then leaped to a whopping US$8.3 million in 1987 (US dollar figures adjusted in line with the appreciation of the NT dollar, which moved from 40 to 1 in 1985 to 28 to 1 in a less than a three-year period). The average growth rates were, respectively, 250 percent, 386 percent, and 450 percent. Chen currently has his sights set on US$17.8 million in revenue for 1988, which would not be too surprising in light of the record so far.
HOZN does more than supply computer accessories these days, as it is also a marketing and R&D company. Simon Chang, a business-administrative advisor and Chen's special assistant, believes the success of the firm lies in precisely these two areas: "On the average, HOZN spends 5 percent of its annual profit on research and development. The average in the U.S. is three percent, and in the ROC it's only one percent. HOZN also spends 10 percent of its revenue on marketing to counter the appreciation of the New Taiwan dollar. Our policies are far-sighted compared to most small to medium-sized enterprises in the ROC."
Chen adds that the only real way HOZN can remain secure is by developing new products. Even the fact that each of the company's new creations is almost instantly counterfeited as soon as it hits the market does not alarm the young entrepreneur, since HOZN has systematized its operation to always keep a step ahead of the market. "We never have to resort to monetary manipulations to escape damage from the rising NT dollar, or from less-than-fair competition," Chen says, "because we run the business rationally, with foresight. The firm can profit no matter what the current challenge is in the local environment."
One reason for success—HOZN pumps 5%of its profits into R&D.
Orders keep pouring in, and HOZN actually needs to expand to meet the rising demand. But Chen challenges conventional wisdom with his own ideas on how to accomplish the expansion: "I don't want a bigger company. When I say expansion, I mean creating more related firms, each financially responsible for itself. The group may be under the same umbrella, but if one line of production fails, it won't necessarily pull down the entire operation since the problem will be confined to one firm. Besides, the Chinese love to feel important; each one dreams of being a boss. So why not use such a frame of mind to my best advantage? Why not let anyone with sufficient skill become the local chieftain of his enterprise? If my business expands further, I think I will try to break it into 20 or more subsidiaries, each responsible for a specific part of the overall endeavor."
Chang agrees with his boss, but also retains a sober view of the strengths and weaknesses of small businesses. He points out that small firms have serious drawbacks. For one thing, employee turnover is high, as experienced personnel move on to bigger companies which pay more. A small company has trouble taking firm root in a field. Also, the limited budget under which a small enterprise must operate places constraints on how much money can be allocated to R&D, which works against higher-end, value-added production. Thus, companies in an advanced economy tend to increase in size, as well as in commitment to specific lines of production.
Nevertheless, Chang lauds the advantages of small businesses: "Despite the drawbacks, small and medium-sized enterprises still have the advantage of greater flexibility in the face of changing market conditions, at least in the context of the overall economy. If one fails, others can replace it more easily. Large-scale corporations tend to build up so much momentum that they can't adjust to a sudden market change, and that throws them right over the edge."
Both Chang and Chen prefer to focus on the bright side of the small business picture. They emphasize that family-sized firms built up the economy of the ROC, and that these businesses will remain an indispensable part of the society for a long time to come. They still feel comfortable in the small-to-medium circle, confident that things are not about to change too drastically on Taiwan, at least in the short term.
"But times have changed, which means there are new rules to the game," Chen says. "If you want to succeed in a small business in Taiwan these days, you'll need brains as well as will power to keep up with progress."
The rules are changing indeed, especially as Taiwan ties itself ever more firmly into international banking and money markets, as well as world commerce. Businessmen like Jeff Huang, Sam Ho, and Sunny Chen are already far removed from the classic stereotype of the small entrepreneur; they have moved away from the traditional, often-chaotic, family-centered firms of their forefathers to form operations both systematic and modern. They belong to a generation blessed with exposure to a comparatively internationalized environment, and as a result, exhibit a broader perspective. Educated, prosperous, and dedicated to their fields, the three businessmen not only provide instructive models for the new generation of local entrepreneurs who aspire to similar goals, they graphically illustrate the shift in the structure of Taiwan's enterprises.