In April of 1997, both the ruling and opposition parties were at the height of their obsession about establishing Taiwan as an Asian-Pacific operations center, with China as the market and production base. That was when renowned management strategist Michael Porter created a storm in Taiwan's political and economic circles by suggesting that the plan for such a center was too complicated. He said Taiwan might strive for success as a technology island, rather than battling with Hong Kong and Singapore to become an operations center.
Last month, Porter returned to Taipei to give another speech. He pointed out that in the past few years most Taiwanese enterprises continued to rely on old and out-dated strategies, bringing little improvement to the organizations themselves. He expressed deep disapproval of local businesses relocating to China simply to take advantage of cheap labor and production costs, saying that relocating does not alleviate the root of their problems.
In fact, moving west will only trap Taiwan in a zero-sum game of price competition with China. As a result of this game, the profitability of Taiwanese enterprises will by definition decline, eventually causing them to shut down and relocate across the Strait. This will also cause Taiwan's industry to be forever trapped in the OEM/ODM production model.
Porter hits the bull's eye on the cause of Taiwan's current economic downturn -- seeking the easy way out by investing in China, rather than striving to upgrade methods and plants, or engaging in research and development. In the past, traditional industries were like this, and high-technology industries have been repeating this route over the past two to three years. Within the time span of a few years, traditional industries have just about vanished and the stock market has become riddled with stocks priced cheaper per share than the cost of one egg or a dumpling.
Once-thriving industrial parks have become ghost towns. Employees who served their employers for years are now unemployed. Bad loans by banks grow in number. Ten years of boldly marching west has created suffering for everyone. Fortunately, Taiwan still has a "no haste, be patient" policy under which the high-end computer, information data and chip industries have managed to keep the economy on a string.
Unfortunately, however, many in Taiwan continue to ignore Porter's caution and the suffering of the unemployed, as they loudly demand for the lifting of the "no haste, be patient" restriction. Those who hope to make their fortunes in China have their personal interests, rather than the collective interest, in mind.
Porter also pointed the way out of Taiwan's predicament, which is keeping the manpower, capital and brains that are pouring into China at home, striving to develop new products, improving research and development and leaving behind the OEM model. Porter said the two sides of Taiwan Strait should simultaneously grow from the current economic foundation and try to keep away from economic policies that would benefit one at the expense of the other.
Porter told Taiwan to decrease investments centering on China's cheap labor and focus on domestic research and development and industrial upgrade. If economic relations with China could develop in the manner Porter suggested, the past mistakes in investment strategies will surely be corrected and replaced with the right trade-focused investment strategies to maintain Taiwan's economic lead over China.
While the Economic Development Advisory Conference engages in heated discussions about lifting the "no haste, be patient" policy, Porter's words are surely a strong blow to those who are only interested in cheap labor and boldly heading west.
Huang Tien-ling is a national policy advisor to the president.
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