The Taiwanese stock market has shed more than 2,200 points over the past four months. From confident talk about breaking through the 10,000-point barrier, authorities have had to resort to various measures to prop up the market as it has fallen from 9,973.12 points on April 27 to 7,715.5 on Wednesday; falling lower than the 10-year moving average.
Taiwan might be facing another stock market disaster, as markets around the world have been falling sharply, bringing the TAIEX with them. However, the TAIEX did not follow suit when other stock markets were seeing record highs, so it now seems to be falling through a bottomless hole. The TAIEX might be performing worse than any other stock market in the world, including the Greek market, despite that country’s bankruptcy and need to borrow money from the international community. It is lamentable to see Taiwan, once an economic miracle, come to this.
A stock market is a window into a nation’s economy, and although the weakness of the TAIEX also depends on institutional investors, it basically reflects the collapse of the Taiwanese economy. The continued fall reveals the cruel reality of Taiwan’s economic data. First, the GDP forecast for this year of 3.28 percent has been adjusted downward to 1.56 percent, and people are now beginning to wonder if it will remain above 1 percent.
Second, during the first half of the year, exports fell by 7.1 percent, and last month saw another drop of 11.9 percent. Export orders have fallen for four consecutive months, and might even see negative growth over the year.
Third, in June, the overall economic indicator changed from yellow-blue to blue as both the leading and the coincident indicators continued to fall and the momentum for economic growth weakened.
Fourth, manufacturing production value dropped sharply in the second quarter, by 9.21 percent, the biggest decline since the financial crisis in 2009.
Fifth, Taiwan has seen net capital outflows for 20 consecutive quarters, reaching a total of US$200 billion.
Sixth, overseas Chinese investments in Taiwan have declined, while Taiwanese investments in China have been increasing.
All this indicates that the economy is doing worse than during the financial crisis. Whose fault is this? The economic decline is the result of the government’s pro-China trade and economic policy, although the government continues to blame international factors.
Today, government officials are finally telling the truth. Central bank Governor Perng Fai-nan (彭淮南) said that as the Chinese supply chain improves, it will be more of a threat than an opportunity for Taiwan over the next three to five years. In the short term, it will have a direct impact on exports of intermediate goods, which will result in intensified cross-strait competition and cause the loss of talent. In the long term, as the Chinese supply chain becomes increasingly complete and meets Beijing’s strategy of expansion, it will have an impact on Taiwan’s position in the international division of labor.
The central bank’s report clearly points out that flat panels, LEDs, petrochemical products, mobile phones, machine tools and electronic components will suffer from Chinese competition. Only in foundries and integrated circuit design, where Taiwan possesses core technologies, will the nation continue to maintain a lead.
However, China is pushing from behind and this must not be ignored. In short, industry is facing its greatest challenge, namely, that the model by which export orders are accepted in Taiwan and production made in China will be replaced by a new model whereby both the placing of export orders and production will take place in China.
After industry began to move across the Taiwan Strait on a larger scale, and China-based Taiwanese businesspeople used cheap Chinese labor, making China their production base, the practice to accept orders in Taiwan and produce overseas added to GDP and the nation enjoyed a short period of pseudo-prosperity.
However, the truth behind this period was that most of the jobs created were in China, especially in the electronics industry, which was the main engine behind Taiwan’s exports. In the information and communications industries, almost 90 percent is produced in China. This has created a situation in which GDP has grown by 50 or 60 percent over the past five years, while workers’ salaries have fallen to where they were 15 or 16 years ago.
The tragedy is that as China has been working hard to foster its own industry and quickly develop the “red” supply chain, the advantage of China-based Taiwanese businesspeople has shrunk and exports, in particular to China, have dropped drastically. This is unsustainable.
The impact of the red supply chain is nothing new. When traditional industries — such as the textile, bicycle and shoe industries — first entered China, competing Chinese businesses soon began to appear, because the technical barrier to entry was not high. In response to this severe challenge, some businesses closed down and left, but even more actively invested in transforming themselves and developing special technologies and brand recognition.
There were some success stories as businesses in the textile industry, for example, developed new materials with new functions for the leisure and sports sectors, and bicycle manufacturers developed key components and brands and managed to extricate themselves from the sweatshop competition in China.
Today, the electronics industry production value is huge and semiconductor and flat-panel manufacturers are now huge businesses. As they are faced with the competition of the red supply chain, they come under even greater pressure not to fail and they should learn from the experience of the traditional industries and find new ways of dealing with this challenge.
Beijing’s strategy to foster new industries is focused on overcoming competitors in terms of sheer volume. Large production often results in falling prices and cut-throat competition. Although the nation is resource poor, Taiwan has a well-educated workforce and it should make use of its advantages instead of competing with China on production scale. Here are a few points that should be part of a strategy for dealing with the red supply chain.
First, aim for competition based on quality rather than quantity. Second, develop core technologies and occupy a key position in the supply chain. Third, research, development, operation and production should be concentrated in Taiwan to be able to transform business benefits into national wealth and create true prosperity.
Taiwan’s economic decline is clear. This is a manufacturing war between Taiwan and China. Unfortunately, this is something that the government has failed to recognize as it organizes conference after conference and proposes plans to revive the economy. Even worse, the government continues to lean toward China and look upon it as its economic savior.
President Ma Ying-jeou (馬英九) has made the mistake of treating the enemy as his benefactor, and for the remainder of his time in office, the economy will continue to deteriorate.
Translated by Perry Svensson
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