Taiwan: Rebooting the Dragon

Taiwan: Rebooting the Dragon

Morris Chang is living proof of Taiwan’s ability to transform its economy. In 1985, the China-born Chang, once a long-serving executive at Texas Instruments in the U.S., was lured to Taiwan by the government as part of its effort to develop a high-tech industry. He was hired to manage a state-funded research institute, but shortly after his arrival, an influential technocrat, Li Kuo-ting, called Chang to his office and told him: “Think about how you want to start a company.” The conversation led Chang, backed by state funding, to found Taiwan Semiconductor Manufacturing Co. , now the world’s largest chip foundry and one of Taiwan’s most prominent firms. That was just one part of the island’s big push. Other electronics manufacturers — makers of notebook PCs, memory chips, LCD panels and other essential components — also set up shop, establishing Taiwan as a force in the global IT industry.

Taiwan’s success in electronics is a prime example of economic policies that lifted the island from poorhouse to powerhouse in a generation. But these days, the model that Taiwan has followed since the 1960s — concentrating heavily on building industries that could export to the wealthy West — has been exposed as dangerously flawed. Amid the global recession, electronics exports plunged 28% in the first half of 2009 compared to a year earlier, contributing to a 10.2% contraction of Taiwan’s first-quarter GDP, the worst quarterly performance in the island’s history. The government forecasts the economy will shrink by 4.25% in 2009. Even before the downturn, Taiwan’s tech-dependent, export-dependent model was struggling. Between 2000 and 2007, Taiwan’s GDP grew on average 4.1% a year, down sharply from the average annual rate of 6.5% from 1990 to 1999.
Read “China’s Panda Diplomacy With Taiwan.”

Nowadays, Chang says Taiwan must transform itself again to ensure its future growth — and he’s leading the charge. In June, he reclaimed TSMC’s CEO post four years after relinquishing the job — even though he is 78 years old — with the goal of taking the firm into new industries, possibly solar panels and energy-saving LED lighting. “The next transformation is going to be something that requires ideas, innovation,” Chang says. “My basic concern with Taiwan is that the country needs a lot of reforms.”

That’s a common conclusion, echoed in the lunchrooms at the Hsinchu Science and Industrial Park, home to Taiwan’s tech industry, and in the office of President Ma Ying-jeou. Government and business leaders believe Taiwan needs to become more diversified and integrated into the regional economy, which is increasingly dominated by China. “The main lesson we learned in the financial tsunami is that we are only dependent on our export industry, in particular IT,” says San Gee, deputy minister of Taiwan’s Council for Economic Planning and Development. The idea is to “transform our overall economy to a different stage.”

Welcome to Chaiwan
“What do you think of Chaiwan” Christine Chen, an anchor on Taiwan’s ETTV news network, asked me during a June visit to Taipei. The term Chaiwan, she said, was the talk of Taipei. Turns out that the word, meant to connote the growing economic ties between China and Taiwan, was supposedly coined by the South Korean press. The Seoul Economic Daily, a Korean business newspaper, recently ran a series of articles under the banner: “The Chaiwan Storm Is Coming.” One noted that “the combination of China’s capital and Taiwan’s high technology … warns us of a powerful fusion of forces that cannot but present a threat to Korean industries.”

The Koreans may have reason to fret. A key plank of President Ma’s economic platform is to capitalize on an expanding China to propel Taiwan’s own growth. Though Taiwan firms have already shifted much low-end manufacturing to China, they have been operating under severe restrictions, such as a ban on direct travel between China and Taiwan, and limitations on investment, which put Taiwan at a disadvantage versus other economies in Asia that enjoyed greater access to the mainland. The regulations were a result of the tense political relationship between Taipei and China’s leaders in Beijing, who consider Taiwan a breakaway province.
Read “What 60-Year Chill Chinese Tourists Flock to Taiwan.”

Since taking office in 2008, Ma has been clearing these hurdles away. The two sides have opened the “three links” — direct air, sea and mail connections — while Ma’s administration in June permitted Chinese firms to invest in a wide range of Taiwan industries for the first time. Now Ma wants to forge a “comprehensive economic framework” with Beijing that would give Taiwan companies easier access to the China market. San, the deputy minister, believes Taiwan’s shared culture and language give its businessmen an advantage in China that could make a partnership between the two especially powerful. Taiwan “has a unique relationship with China that is totally different from other countries in Asia,” San says. “Our policy is to allow our firms to fully explore such advantages. There is a very good chance that both sides can work together to make the pie bigger.”

One important piece of that pie is the increasingly large Chinese domestic market. Traditionally, Taiwan firms have exported electronic components to China, which were assembled in mainland factories and re-exported to customers in the West. But now Taiwan companies are looking to redirect their products toward China’s wealthier consumers, thereby decreasing Taiwan’s dependence on the U.S. Flat-screen-display maker AmTRAN Technology, based near Taipei, operates factories in China that export primarily to North America, but the company is tying up this year with a Chinese electronics brand to sell TVs inside China as well. “This year, we’re putting a lot into China,” AmTRAN president Frank Wu says.

See TIME’s pictures of the week.