International prices for raw materials such as crude oil and steel are increasing steadily. Although many people worry about a return of inflation, quite a few Taiwanese businesspeople overseas have found that they are unable to pass their rising costs on to consumers. As a result, they are unable to maintain previous profits and order levels, and some have even been forced out of business. But these seemingly contradictory phenomena are in fact caused by the same factor -- globalization.
An incomplete understanding of globalization has caused large numbers of businesspeople to invest in China over the past few years. The negative long-term effects caused by this are now beginning to show. Unless Taiwanese businesspeople change their strategies, they may not be able to survive these problems.
Since the 1980s, large numbers of low-wage workers from developing countries have entered into international competition. This cheap labor has enticed manufacturers from Taiwan and other countries to invest in China and other developing countries. Some manufacturers have even increased production and profits as a result of this cheap labor.
In a climate of global free competition, however, someone is always prepared to start or increase production as soon as there are profits to be had. For many products, this will result in overproduction and falling prices.
It is this situation that, in the past few years, has led to global deflation, falling profits and an "era of minuscule profits." Due to increased production of many products and the great investments by some developing countries -- either to gain market share or initiate grandiose, impressive projects -- there has been a rapid increase in demand for many raw materials. This in turn has led to supply falling short of demand, and rapidly increasing prices for raw materials. If manufacturers try to pass this cost increase on to consumers, they can be easily undercut by competitors who keep their prices low. This would cause manufacturers with already razor-thin profit margins to be unable to stay in operation.
Simply put, these phenomena occur because global supply of raw materials and consumer demand cannot increase enough to keep pace with the massive increase in the intermediary processing industries. This is one of the results of globalization.
Although many businesses already are unable to make a profit, the situation may deteriorate further still. Even though the businesses engaging in manufacturing in these developing countries already are unable to turn a profit, some investors still believe that they are able to do so by taking a greater share of already existing markets. They therefore continue to invest regardless of whether there is a market glut.
Many developing countries in particular are able to gain market share because of high unemployment figures and low labor costs in many local regions. If financial controls are unsound, cheap capital will be available in these countries, capital that may not even have to be returned. As a result, investment continues to increase unchecked, causing further rises in the cost of raw materials and falling prices for many consumer goods.
Entrepreneurs should recognize this trend and refrain from doing all they can to invest in developing countries in blind pursuit of short-term profits. An example often used in economics textbooks says that if a person in a movie theater stands up, he will be able to see better, but if everyone in the theater stands up, they will not be able to see any better. The result of everyone taking advantage of low labor costs to increase production is falling prices on consumer goods, increased raw material prices and diminishing profits. A few manufacturers may be able to survive and even thrive, but the numbers of losers and the magnitude of their losses will be terrifying.
In the past, Taiwanese manufacturers have done everything they can to invest abroad in order to gain short-term profits. The successful few were then used as examples to conceal the losses of others and encourage more investment in China. The difficulty and danger of going down this road is now clear for all to see. It is to be hoped that businesspeople, politicians and academics will realize that they should stop blindly encouraging investment in China.
The current situation of rising material costs and falling retail prices makes it difficult for these developing nations to make a profit and continue to improve. Although production and market share for certain products may increase substantially, there are only a few products that will achieve substantial profits as a result.
Many products that were previously exported from Taiwan are now manufactured and exported from China, but the price they are fetching is not even one-third of their former price. This shows that conditions in recent years are far less favorable to the development of emerging nations than in the days of the "four little dragons" (Taiwan, South Korea, Hong Kong and Singapore).
Many people look with admiration at China's rapid growth over the last few years. But when compared to the pace of development experienced by the "four little dragons," we see that their growth exceeded China's by between 50 percent and 100 percent.
With more and more developing countries entering into global competition, the availability of materials will be restricted, making further growth for China and other emerging economies more difficult. Those who put their faith in the huge Chinese market and invest there are likely to suffer devastating losses.
International trends show that investing in countries like China to take advantage of low labor costs is far from the best way to develop a company or nation. In international economic competition marked by an overabundance of cheap labor and an insufficient supply of materials, we need to rely on superior technology to achieve victory.
We need to develop a knowledge economy to produce goods that cannot be made in developing countries and avoid competition based on low wages.
In we follow this policy and focus on creating a knowledge economy, there is no need to shift operations to developing nations to reduce production costs. We should instead invest more domestically. Japanese companies are now following such a strategy.
Take Canon. After many years of overseas investment, the company has decided to manufacture its high-end products domestically, aiming to keep 80 percent of its capital investment at home over the next three years. According to Canon's director, the company can no longer afford to compete on prices with developing nations. But if the competition is based on picture resolution, Japan will be the winner.
Canon wants to put its money into research and development, to rapidly develop a range of new products. The key is that the development team and the production team should be geographically close to each other, to ensure maximum opportunities for communication and exchange. Because of this, Canon has decided to repatriate production lines back to Japan.
This is one of the reasons many push to keep the manufacturing sector alive at home, and not send money abroad in search of cheaper labor. It is a pity that many of our business leaders, statesmen and academics cannot appreciate the wisdom of this long-term policy.
Products that embody new knowledge or technology have higher profit margins, because competition is not as intense. Since these products can be sold internationally and don't target a single national market, there is no need to move production to a specific location. If the product is unique, then there is also little reason to fear restrictions from other countries who want to protect their own industry.
If we had adopted this strategy earlier, Taiwanese businesspeople in China would not be facing their current difficulties -- nor would we have the problem of the image and technology of Taiwanese products gradually falling behind that of South Korea.
The situation is already clear. Taiwanese should wake up and shake off the dream of low-cost competition and the myth of the potential offered by the China market.
Translated by Perry Svennson and Ian Bartholomew
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