Mon, Dec 19, 2005 - Page 8 News List

Editorial: Taiwan needs an offshoring edge

Many people have tended to attribute the slowdown in the growth of the domestic manufacturing sector in recent years to the mass relocation of production to China, which resulted in a combination of capital outflows and declining trade surpluses. Few have addressed the trend of outsourcing of technical service jobs as a byproduct of the movement of manufacturing jobs overseas in the recent past and the possible impact that this may have had on the nation.

In fact, there is an ongoing shift in Taiwan's economy in which the service industry has grown to complement the manufacturing sector in supporting the nation's economic growth, as the former's production value now accounts for more than two-thirds of GDP as of the third quarter of this year.

Unfortunately, the service sector has never received the same amount of attention from the government as its manufacturing peer, which has benefited from infrastructure development, tax breaks and other business incentives. And now this sector is facing challenges that may occur faster than those in the manufacturing sector, especially as the jobs that are being lost are white-collar jobs.

A government proposal drafted recently by the Council for Economic Planning and Development targeting "offshore work" paints a picture of how the government sees the necessity of developing the nation's non-tradeable goods sector. It relies mainly on the knowledge-based economy and the service sector to attract foreign investment.

In terms of the proposal, the government hopes to develop a niche market for Taiwan's service sector, backed by the nation's information technology (IT) manufacturing edge. To make its point, the council cited an Annual Global Services Location Index poll released last month by US-based management consulting firm AT Kearney as saying that Asia remains at the forefront of offshore outsourcing (or "offshoring"), pointing out that there is no reason why Taiwan should not share in this investment.

The poll analyzed the top 40 service locations around the globe against 40 measurements in three categories, namely cost savings, people skills and business environment. The results show that India, China, Malaysia, the Philippines, Singapore and Thailand make up the first six of the 10 most attractive locations for offshoring of service activities such as IT, business processes and call centers, followed by the Czech Republic, Chile, Canada and Brazil.

Taiwan is not on the list, unfortunately. But the findings of the poll deserve our attention.

First, India remains the best offshore location, but China appears to be catching up fast, thanks to its improved infrastructure and relevant people skills. Moreover, China is also becoming a low-cast option for servicing established markets in Japan, South Korea, Taiwan, Hong Kong and Singapore, as pointed out by AT Kearney.

Second, despite higher wage levels, the Singaporean government's support is paying off and is making the city-state a favored offshoring location on the back of its strengths in business continuity, intellectual property protection and data privacy.

Third, the Middle East and Africa appear to be the next frontiers in offshoring, partly due to the regions' low-cost, quality workers and a historical exposure to European languages.

As Taiwan has lost its manufacturing jobs to other low-cost nations in Asia, the government is targeting the service sector to support the economy. The direction is correct, but the question is, "Is Taiwan ready?" Does it offer an investment climate favorable to recruiting technological personnel from overseas? If Taiwan cannot improve language and technical skills throughout its population, address existing security concerns and improve the regulatory system and other competitiveness drivers, it has no chance of gaining an offshoring edge over its rivals.

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