Nothing is More Urgent than Improving the Investment Environment
China Times Editorial (Taipei, Taiwan, ROC)
June 3, 2016
Executive Summary: For 30 years the Mainland market has been a source of Taiwan's prosperity. In recent years however, that has changed. Many SMEs have been swept out of the Mainland. Worse still, since last year, even large scale enterprises have been losing money and moving out. The government is nurturing “five innovative industries”. But while doing so, it must remember to facilitate investment for all businesses. Only increased investment can create jobs, increase wages, and promote economic growth.
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For 30 years the Mainland market has been a source of Taiwan's prosperity. In recent years however, that has changed. Many SMEs have been swept out of the Mainland. Worse still, since last year, even large scale enterprises have been losing money and moving out.
Six years ago, Guangdong promoted its “empty the cage for a new bird” policy. Coastal provinces followed suit. They reduced export tax rebates, combined taxes, passed a new Labor Contract Law, introduced processing margins, and enforced environmental regulations. Taiwan businesses on the Mainland faced wave upon wave of pressure. The highest concentration of Taiwan businesses is in Dongguan. In recent years hundreds of Taiwan businesses have washed out. Some even “abandoned their plants and fled to Taiwan overnight”. As of last year, over 200 manufacturers closed their doors and left the Mainland in search of greener pastures.
This is not limited to SMEs. In recent years, large enterprise investment in the Mainland has fallen. In the early days the Mainland market was enormously lucrative. Many companies even split off their Mainland divisions and listed them on the exchange separately. Now however, they face powerful operating pressures. Last year for example, TCC and Asia Cement lost money on the Mainland. First quarter estimates indicate a net loss. Baocheng, the world's largest shoe factory, quietly moved its operations to Southeast Asia, Vietnam, and India. Its production capacity there already exceeds that on the Mainland. The percentage of Mainland production continues to fall. Obviously the Mainland is no longer Taiwan's investment paradise. As the new government sees it, the time is ripe for its New Southern Strategy, which has every reason to succeed. As a result, the new DPP government has mobilized the machinery of government and begun a full court press.
Unfortunately, the reality is very different indeed. The new government's approach will only repeat the same mistake that predecessors have made for decades. Taiwan has long sought developing nations offering low cost and loose regulations to set up factories, where environmental regulations, labor rights, and corporate responsibility can be ignored, as long as deals can be struck with the local governments. But as soon as wages rise, incentives are withdrawn, labor rights are enforced, and environmental regulations lead to rising costs, they begin looking for another, even more backward and even lower-cost place to set up shop. This is a "nomadic" investment model that has superficially enabled Taiwan businesses to survive. But in fact these businesses will never be able to grow. Sooner or later they will run out of greener pastures.
Businesses seeking to transform themselves may have invested on the Mainland, returned to Taiwan, or followed the government's "New Southern Strategy” and headed south. But all of them must go down the same path. Should the government or businesses go west or go south? These must be market and business decisions. The government's focus should be on improving Taiwan's investment environment, in order to attract increased investment in Taiwan.
Taiwan businesses have encountered problems on the Mainland. Superficially, the problems are the result of the Mainland economic slowdown, falling demand, rising wages, more stringent labor conditions, higher environmental protection costs, and stricter enforcement of the law, from the central government level to the local. But the real reason is the transformation and upgrading of the Mainland economy. The Mainland economy has gone from higher volume to higher quality, and from world factory to world marketplace. Taiwan underwent this economic and social shift earlier. Businesses must seize this opportunity to transform and upgrade themselves. Only that constitutes a sustainable business model.
Externally, the new government can of course push its “New Southern Strategy”. But it must not squander capital overselling it. From any perspective, whether international trade or international politics, the benefits are limited. The government's priority should be Taiwan's largest slice of the pie, cross-Strait trade. It must not discourage cross-Strait economic and trade exchanges by political means and force businesses to turn south.
Internally, the new government must do more. It must address the “five shortages” that undermine business investment. These "five shortages" are water shortages, power shortages, job shortages, land shortages, and talent shortages. Even more importantly, it must improve government efficiency. No sooner did the new government assume power, than the EPA announced it would terminate sub-soil mining rights, without even bothering to understand the concerns of other ministries. Its failure to examine the scope and duration of mining rights casts doubt on the government's competence. When Largan Precision sought to increase investment in Taiwan, finding a building site alone took years. When TSMC sought to build in the Central Taiwan Science Park, protests by tree huggers led to long delays. Such situations discourage businesses from investing in Taiwan.
To top it off, businesses face growing anti-business sentiment at home. The general public and social groups oppose investments and development. This also discourages business investment. Formosa Petrochemical, Taiwan's leading domestic petrochemical company, once invested 70 to 80 percent of its capital at home. Now it invests 80 percent of its capital overseas. The reason is relentless criticism from environmental groups, government inefficiency, and insurmountable obstacles to plant expansion. As a result, it was finally driven overseas. The government is nurturing “five innovative industries”. But while doing so, it must remember to facilitate investment for all businesses. Only increased investment can create jobs, increase wages, and promote economic growth.