Monday, March 08, 2004
MIHALCA ON CHINA
Economy binds China & Taiwan
Cross-strait links are growing and that's a good thing, says Matei Mihalca
You see them at airport immigration counters in China holding beige booklets that look like, but are not quite, passports. They seem a bit ill at ease - only a few months ago, Beijing arrested seven as spies and paraded them in front of television cameras confessing their crimes.
Most are a bit tense as their documents are checked, but pass without problems. You hear them speak Chinese, but notice a slight accent. They are Taiwanese investors and business people in China, residing in a country whose government claims their birthplace as its own.
Beijing hasn't renounced the use of force to make that claim a reality. But many Taiwanese don't seem to mind: around 500,000 live in Shanghai alone. On March 20, Taiwan goes to the polls to elect a new president. The growing number of Taiwanese based in China, and the closer economic ties they represent, will likely impact the result of the election.
As opposed to only a few months ago, it now looks like the pro-Taiwan independence incumbent, Chen Shui-bian, will lose to the more moderate 'pan-blue' camp led by Lien Chan and James Soong. This bodes well for cross-straits relations.
It's estimated that China has attracted some $ 70-90 billion in investment from Taiwan, out of a total of $ 450 billion in overseas investment to date. It's hard, however, to determine an exact figure because the Taiwan government restricts investment to China. For this reason, much of it has been indirect, from capital accumulated overseas.
This exodus has dented the island's manufacturing sector. Manufacturing used to contribute 60 per cent to Taiwan's GDP in the 1960s; it now stands at only 35 per cent.
Unemployment is 5 per cent. The focus is very much on China and the opportunities it represents. The CEO of one multinational corporation recently travelled to Taiwan to hire a manager for its business there. He came away rather puzzled: "No-one wanted to talk to me about Taiwan. All the candidates we interviewed told me, 'Sure, this is an interesting first step, but I look forward to a regional position where my responsibilities would include China.' I felt like saying, 'This is a Taiwan position. Focus on Taiwan. Don't talk to me about China!'"
In the 1990s, most Taiwanese capital in China was invested in light manufacturing - primarily of shoes, textiles, and food - but the focus has gradually shifted from labour-intensive to capital-intensive industries: Taiwanese are now building billion-dollar semiconductor and flat-panel display fabrication facilities in China.
This change reflects the new-found ability of Taiwanese companies to access bank lending in China and the liquidity residing in the country's banking system.
Taiwanese are also making new investments in service industries like retail and tourism. These investments capitalise China's burgeoning domestic consumption.
Selling to Chinese consumers, as opposed to using China as an export base, is not easy. For one thing, utilising China's fragmented, primitive distribution system is a challenge.
Also, Taiwanese have long been used to do business mostly among themselves. Decades-old business relationships are not uncommon. Selling locally in China marks a break in this pattern: working with new partners in a strange land.
It means creating trust, which is a challenge in China's post-Cultural Revolution environment, and even more so when outsiders are involved. Finally, business in China is different from the model Taiwan knows best - contract manufacturing. In contract manufacturing, the focus is on quality and cost. The service provider doesn't build a brand - that's left to the client. China is at a different stage. Brands are being built.
Competition is fierce, and margins under pressure, but the answer is more brand creation, not yet a ruthless focus on costs. China needs, and rewards, innovation.
Rewards? Yes. Consider the story of Uni-President, one of Taiwan's largest food companies, headquartered in the sleepy city of Tainan in the south of the island.
Uni-President has been active in Taiwan for more than three decades. In this time, it's developed seven 'mega-brands' which have, on average, sales of $ 30million.
Uni-President entered China in the early 1990s. The company sells instant noodles, beverages, and other food products, and operates various franchises, including Starbucks and 7-Eleven in certain Chinese localities. In a little more than a decade in China, Uni-President has developed six mega-brands there. The largest of these mega-brands has sales of $ 300 million, ten times the value of its equivalent in Taiwan.
Uni-President is not alone. The leader in China's frozen foods market is Long Fong, a Taiwanese-owned company that entered China in 1991. The founder, Hector Yeh, sold his previous venture in Taiwan and used the cash to set up Long Fong in China.
Identified with premium quality and hygiene, Long Fong is by far the most popular frozen food brand in China, with almost 15 per cent market share in frozen rice balls and dumplings.
So far, trade and investment between Taiwan and China have been mostly one way. Taiwan has been reticent to open its markets to Chinese capital, goods, and services - supposedly for national security reasons. This is now changing: last year, imports from China to Taiwan rose by 38 per cent, to $ 11 billion, while exports to China rose by 20 per cent, to $ 35 billion.
Taiwanese companies like Uni-President are not only selling in China. Uni-President imports Chinese products, such as seed snacks from Anhui province, to Taiwan and sells them in its 7-Eleven stores on the island. Chinese beer is now sold in Taiwan, although Taiwan Beer, the market leader on the island, is not yet allowed access into China because the authorities there feel its name has 'separatist' political connotations.
On the other hand, Tsingdao Beer and Yanjing Beer, from mainland China, now have 8 per cent and 5 per cent, respectively, of the Taiwan market.
It's important to put the movement of people between Taiwan and China, also so far still mostly one way, in historical perspective. Internal migration among Chinese provinces has always been significant.
In imperial days, such flows involved mostly people at the very top and very bottom of society.
At the top, the so-called 'rule of avoidance' meant that officials could not serve in their home regions - an imperial practice the Communist government has continued. At the bottom, migrant labour was mobile.
The Communist Party has tried to restrict this mobility with a strict household registration system. But official barriers cannot prevent people moving across internal or external boundaries. Even today, many thousands of unskilled workers and prostitutes from China work in Taiwan despite an official ban.
The artificial separation of Taiwan and China during most of the twentieth century is an aberration waiting to be addressed. Taiwan restricts the entry of mainland Chinese for most types of visits. There are no direct transportation links; a stopover in Hong Kong, Macau, or Okinawa is required.
A trip that should take only a few hours at most can take the better part of a day. The reason for this ridiculous state of affairs is mistrust, mostly on Taiwan's part toward China.
The Taiwanese who are now based in China are helping to remove one element of this mutual mistrust. They are not only investors - company owners - but also ordinary employees, including young professionals: advertising executives, computer programmers, many of them not employed by a Taiwanese company.
Many work for multinationals, some have their own businesses, while others work for local companies. Few think about returning to live in Taiwan. This human investment may, in the long run, matter more than all the financial capital Taiwan has put to work in China. matei_mihalca at hotmail.com
(The writer's column on Greater China appears on alternate Mondays)
Business Standard Ltd.