Thu, Jan 03, 2013 - Page 8 News List

Challenges in changing dynamics

By Kung Ming-hsin and Eric Chiou 龔明鑫,邱奕宏

Another factor shaking production networks has been the impact of Japan’s 2011 disaster and the economic consequences of Sino-Japanese disputes over the Diaoyutai Islands (釣魚台) — known as the Senkakus in Japan — on Japanese companies’ production strategies. The disaster not only led to about US$200 billion in economic losses for Japan, but it also had a widespread impact due to the breakdown of the regional supply chain.

To reduce risks, many Japanese firms begin to consider shifting more advanced manufacturing sectors overseas, instead of insisting on keeping core manufacturing in Japan. In addition, recent anti-Japanese movements not only devastated Japanese firms’ operations in China, but also led to a sharp fall in Japanese investment in China, which suggests that Japanese firms are holding back on their increasing exposure to the Chinese market. In short, these “pushing” factors are likely to affect Japanese firms’ overseas production strategy, so is the structure of global production networks.

In the dynamics of global production networks, Taiwan’s position as a supplier of intermediate goods is likely to be in jeopardy for the following reasons: First, with increased manufacturing capabilities and robust domestic market growth in developing countries, Western multinationals may seek direct cooperation with local firms in emerging markets, passing over Taiwanese firms to shorten production lines. Second, most Taiwanese firms are beneficiaries of the current production network through OEM/ODM (original design manufacturer) models without their own brands. However, one lingering hazard in this partnership for Taiwanese firms is that they are extremely vulnerable to the withdrawal of orders by multinationals when new competitors emerge with more competitive prices.

Against the backdrop of changing global production networks, Taiwan has two approaches it could develop which are not necessarily mutually exclusive. The first is to further deepen and integrate Taiwanese firms into production networks in the Western Pacific to establish a solid foundation for the future leap forward in the global market. The second is to enhance strategic alliances between Taiwanese firms and multinationals in order to penetrate Asian markets. The former focuses on fully utilizing Taiwan’s strengths and places more resources into research and development, brand design and integration capability; the latter aims to promote Taiwan as a creator and designer of Asian lifestyles through merging Western technologies with Asian values and standards in order to satisfy the needs of emerging Asian markets.

With the combination of these approaches for more advanced integration, brand promotion and marketing facilitation, Taiwanese firms can not only secure their indispensability in production networks, but can also improve their positions in the global value chain and re-energize the economy.

Kung Ming-hsin is vice president of the Taiwan Institute of Economic Research. Eric Chiou is an associate research fellow at the institute.

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