Wed, May 24, 2006 - Page 8 News List

Innovation is the key to survival

By Craig Meer

National accounts figures released by the Directorate General of Budget, Accounting and Statistics on May 18 gave cause for momentary celebration, and were indicative of an economy that is performing moderately well.

The country grew at 4.93 percent in the first quarter, and looks set to deliver 4.31 percent for the whole year. This comes on the back of solid numbers for last year: Real GDP expanded by an average of 4.09 percent in the four quarters to December. Economic growth is a must for any society that wants to provide new jobs and increase the total pool of wealth. It is doubly important for Taiwan, which faces an imminent threat from China and must pay a security premium to compensate.

While last week's growth statistics were welcome, they were far from ideal. The devil resides in the detail. Almost all of the country's recent economic expansion is attributable to exports, which grew 14.52 percent in the first quarter. Almost none was attributable to consumption, which rose by a lackluster 1.29 percent, or investment, which actually contracted 3.96 percent.

The second of these figures is the real concern, as investment today dictates the nation's production capacity tomorrow. Part of the reason that corporations are not investing in Taiwan is, of course, China. Production is somewhere between five and 10 times cheaper over there, and only a stupid businessperson would ignore this differential.

But the main reason is closer to home. Taiwan is running out of things that it can produce for world markets that are competitive based solely on price. The country's cost base is approaching that of North America and Europe, at least in particular areas within these regional economies, and that spells death to a host of industries that are currently the nation's bread and butter.

Consider chips as an example. The semiconductor industry is worth around US$30 billion to the national economy annually, but a significant proportion of the production cycle can now be easily established in the lower-cost centers of China and India. Moreover, China's first 300mm wafer fabrication plants -- the most advanced in the industry -- came on line early last year.

None of China's fabs match the quality and efficiency of those in Taiwan; however, it is only a matter of time before they do. At that point, the policy debate about whether to allow Taiwan Semiconductor Manufacturing Corp or any other bulk chip producer to build cutting-edge plants in Shanghai will become academic. If China can produce the same chips for a 10th of the price, why would you even try to compete? So what then should Taiwan do?

The answer is actually quite simple: innovate. Seek to make and trade goods and services that push the limits of the international production possibility frontier. No one invests in the US due to cost considerations alone; they do so primarily because the US is home to ideas and processes that are unique in the commercial world. This is the only model for the country's future growth.

True, there is a small but dedicated core of firms in the country that refuse to compete on price. Take the PC manufacturer Shuttle Ltd. Shuttle is a niche producer of "small form-factor" PCs that are second to none in terms of their internal design. Through painstaking attention to detail, the company manages to cram all the components of a standard computer tower into a unit one third of the size.

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