Taiwan Looks for New Economic Model

For decades, cheap labor and reliable factories made Taiwan one of the world’s best places to churn out sneakers, bicycles and, most recently, computers. But now, business is heading elsewhere and Taiwanese are getting worried.

Neighboring China and other developing nations are luring away manufacturers with lower wages, plentiful land and lax environmental regulations.

The exodus sparks daily debate in Taiwan about whether the government is doing enough to keep assembly lines running at home.

The discussion was stoked again last month by news that Japanese electronic giant Sony Corp. would stop making video, laser disc and DVD players in Taiwan. Sony said it was moving the 300-job operation to China and Malaysia.

Economic planners and executives say Taiwan is not ready to give up a large chunk of its manufacturing base, which employs 37% of the nation’s work force. But they also recognize it’s time to shift into a new era--one that’s based on service, research and developing high-end products.

Chen Shui-bian, Taiwan’s new president, frequently talks about how he wants to create a “Green Silicon Island” and a “knowledge-based economy.” But many doubt that Taiwan is ready for the switch.

Chu Li-lun, a legislator with the majority Nationalist Party, complained that manufacturers are pulling out before Taiwan is ready to enter the more sophisticated stage of post-industrialization.

Also wary is Johnny Kwan, managing director of Taiwan operations for the German chemical firm BASF. Kwan said Taiwan will have to rely on manufacturing for the next few years because companies can’t afford the transition to designing and engineering.

“Product designing is very capital-intensive,” said Kwan, who said BASF has no plans to move its three Taiwanese plants, which produce pesticides and other chemicals.

In the past decade or so, Taiwan has evolved from being a producer of low-end consumer goods to one that makes electronics.

The island--the combined size of Massachusetts and Connecticut--is now the world’s third-largest supplier of computer equipment, thanks in large part to its well-educated work force and stable politics.

But other changes have occurred in Taiwan during the past decade that make the island less business-friendly.

Taiwanese have become wealthier and the unemployment rate, currently about 3%, has remained low. Many in the expanding middle class refuse to work in factories, forcing companies to raise wages or import labor from Thailand, Indonesia and the Philippines.

Creating more headaches for manufacturers, land prices have soared and the island’s political reforms have emboldened citizen groups and environmentalists who oppose various infrastructure and energy projects favored by big business.

The electronics industry is unable to resist the cheap labor and abundant land in China, about 100 miles across the Taiwan Strait.

Compared with the same period last year, Taiwanese investment in China doubled to $1.3 billion in the first seven months this year, with 57% of it in electronics or computer-related projects.

Laptop maker Quanta Computer Inc., Taiwan’s fourth-biggest manufacturer, plans to open a motherboard plant in China. The company, which makes notebooks for Dell, Gateway and Apple, also wants to eventually produce low-end laptops on the mainland.

But Michael Wang, Quanta vice president, said the company supports the government’s view that Taiwanese firms should keep their core operations in Taiwan, while moving manufacturing to China.

“We are Taiwanese and would like to see Taiwan continue to grow,” Wang said.

Before Quanta expands its Taiwan-based research and development divisions, Wang said it must expand and retrain its ranks of engineers, who are adept at improving products but at not inventing new technologies.

One factor that has slowed the flow of investment to China is Taiwanese law, which limits how much companies can invest in the mainland. Single investments can’t exceed $50 million, and the value of a company’s China-based capital can’t exceed 40% of what it has invested in Taiwan.

The capital restrictions have kept Giant Bicycles from expanding its China factories, company President Antony Lo said. But Lo expects the rules to change when Taiwan and China enter the World Trade Organization, possibly this winter or early next year.

When it was founded in 1972, Giant made all of its bikes in Taiwan. But last year, about half of the 3.2 million bicycles it produced were made in China--its hottest consumer market.

In Taiwan, the company--with 1999 sales of $381 million--still employs 700 factory workers, who also build high-quality racing and mountain bikes for the Specialized and Trek brands.

Lo said the company has no plans to completely leave the island, but he said Giant, which also has operations in Europe and the United States, is no longer a Taiwanese firm.

“We don’t consider ourselves to be a Taiwanese company,” he said. “We are doing business globally.”