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Taiwan’s bumpy road to globalisation

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Known for being the world’s largest manufacturer in semiconductors, Taiwan’s economy has flourished. Amid the coronavirus outbreak, the state has experienced an exponential rise in product demand. Will the island be able to maintain its connections to the West while reducing dependence on mainland China when the global pandemic passes?

Taiwan has been one of the main economic beneficiaries of the last 40 years of globalisation. In 1980, the value of its technology sector was $100m (£80m). By 1989, it had reached $5bn; by 1999 it was $21bn. Today, one company alone, the semiconductor foundry TSMC, has annual sales of $35bn in a silicon sector worth around $85bn (£68bn).

Even amid the Covid-19 outbreak, TSMC said in April that it was sticking to revenue guidance of 14-19 per cent sales growth for 2020 and confirmed minimum 3 per cent across-the-board salary increases for its staff. MediaTek, Taiwan’s leading fabless chip company, also said its outlook was positive, foreseeing a 2-10 per cent increase in sales during the second quarter.

Looking still further out, Science and Technology Minister Chen Liang-gee expects the silicon sector to double in value over the next decade, fuelled by markets like 5G and artificial intelligence.

Then add the reality that Taiwan is one of the places seen as having better managed the pandemic – it was regularly reporting no new daily cases as this article went to press – and you wonder why its technology market is right now rather twitchy.

It is true that, as a relatively small economy with 23 million population, Taiwan has always been susceptible to global events. But today’s nervousness has two other significant causes.

The first is the People’s Republic of China (PRC). It has been probably the dominant factor in Taiwanese political and economic thinking since 1949, when the defeated Nationalist forces decamped to the island after their civil war defeat by the Communists. However, tensions have risen more recently since the 2016 election of mainland-sceptic Tsai Ing-wen as President of Taiwan, and the progressively more strident stance on reunification taken by PRC President Xi Jinping, particularly his position set out in the ‘Address to Taiwanese compatriots’ in early 2019. Another recent factor has been the near-collapse of the ‘One Country, Two Systems’ model used in Hong Kong but originally proposed for Taiwan, after the latest wave of protests in the former British colony.

Some Taiwanese commentators have anxiously regarded 2021 as a possible target Xi may have in mind to reintegrate the island as one of the ‘centenary goals’ intended to mark the foundation of the Chinese Communist Party. With much of the world focused on Covid-19 – including the US as Taiwan’s main military guarantor – the possibility of Xi pushing reunification sooner rather than later is today being more widely discussed.

The second factor is concern that Taiwan’s economy runs the risk of becoming a victim of its technological success. A global centre for hardware, in the last decade Taiwan has faced repeated calls from within industry and, more recently, government to up its game in software engineers and software-hardware integration. The current surge in the artificial intelligence market has explicitly exposed this shortfall.

Worries about Taiwan being too hardware-centric are compounded by a perceived five-year lag between university degree courses and industry’s requirements, as well as a demographic time bomb. Taiwan has a fertility rate estimated at between 1.21 and 1.06 and is expected to start experiencing negative population growth from 2022. These and other metrics have led Oxford Economics to rank Taiwan in last place on its 2021 forecast of mismatches of supply and demand for talent.

Evan A Feigenbaum, vice president for studies at the Carnegie Endowment for International Peace and a former US State Department diplomat specialising in Asia, has well described the broader problem: “While Taiwan might have the right economy for right now, the real challenge is for it to have the right economy for 10, 15 years from now.”

The good news for Taiwan is that these two sets of problems are not being ignored. Far from it when it comes to their acknowledgement and the construction of a basic infrastructure to confront them.

On China, Tsai’s administration has taken a number of steps that aim to reduce Taiwan’s economic dependence on mainland China, often seen as the primary way in which Beijing seeks to influence what it still officially regards as a rebel province (trade between the two has been eased in the last decade through deals such as 2010’s Economic Cooperation Framework Agreement that removed many tariffs and other commercial barriers).

As things stand, China accounts for between a quarter and a third of Taiwan’s trade. In response, there have been incentives to repatriate manufacturing (pre-dating those recently seen in Covid-19 stimulus packages from countries such as Japan) but a much broader, longer-term strategy can be found in Tsai’s New Southbound Policy (NSP). This was instituted shortly after her election to a first term in 2016 and now continues following her re-election in January.

The NSP attempts to build an extra-mainland regional policy and network. It is aimed at 18 countries, mainly in south-east and south Asia plus Australia and New Zealand. The policy has four main themes: trade, technology, agriculture and medicine.

There are three notable aspects to the NSP. First, it is based on soft power – many aspects leveraging cultural and educational links – to establish ‘community’ connections to target countries. These substitute for the diplomatic ties Taiwan is blocked from establishing with countries that formally recognise the PRC.

Second, it encourages Taiwanese companies to view exports from a market-led rather than a technology-led perspective. This shows the NSP reflecting Taiwan’s need for a technological diversification that goes beyond any dirigiste objectives that might have been suitable while the country was still an ‘emerging’ economy. Its original tight focus on higher-end manufacture fed the drive into silicon and the creation of both the foundry and fabless models for semiconductors – but now more is required.

Third, it really does seek to make Taiwanese companies spread their wings. The big players – the TSMCs, HTCs, and Acers – are globally known, but there has been frequent criticism that SMEs have failed to grow outside Taiwan, with the exception of mainland China. Chang Chien-yi, president of the Taiwan Institute of Economic Research, has described how that approach needs to change, “What used to be called globalisation was actually establishing a presence in [mainland] China.”

So far, it is too early to say whether the NSP is having as much of an effect as desired. In 2019, government statistics say that foreign direct investment by Taiwanese companies in China fell by 51 per cent to $140bn (£112bn), but the most recent data comparing trading data for Taiwan’s main partners show little significant change – either for China’s share or that of the larger economies covered by the NSP.

Moreover, a number of Taiwan’s leading companies remain greatly exposed to China.

Ryan Hass, a fellow at the Brookings Institution and a former director for Taiwan and China on the US National Security Council, recently looked at TSMC’s relationship with Huawei and other mainland customers.

If, he argued, the Trump administration was to go through with a threat to decrease the percentage of US-origin technology in devices to which it applies export controls from 25 per cent to 10 per cent and then apply this against Chinese companies, it could potentially block 20 per cent of TSMC’s business.

“TSMC relies on massive scale to spread out fixed costs, push down price per unit, and pump resources into next-generation research and development,” Haas has noted. “If TSMC loses scale – e.g. by losing a market that accounts for 20 per cent of its global sales – it could lose its edge over its competitors.”

Meanwhile, for others, China retains major economic attractions, whatever President Tsai might think.

In April, Foxconn (aka Hon-Hai Precision Industries), the world’s largest high-​technology manufacturer and another leading Taiwanese company, announced that it is to build a semiconductor facility for the packaging and test of 5G and AI silicon in Qingdao. It will be directly competing with companies that supply the same services in Taiwan itself, and is Foxconn’s fourth mainland silicon investment since the NSP was launched, with previous ones having been made in Nanjing, Jinan and Zhuhai.

Earlier in 2019, Foxconn strongly and publicly denied reports that it was to cut back its general investments on the Chinese mainland.

At a domestic level, the Tsai administration has identified nine areas where it aims to concentrate research and development either to diversify or to extend Taiwan’s technology base.

The ‘Five Plus Two’ plan for innovative industries started by covering five ‘pillars’: the Internet of Things (IoT), biomedical, green energy, smart machinery and defence. The ‘Plus Two’ of agriculture and the circular economy (largely e-commerce) were added. And then cultural innovations and semiconductor/IC design rounded out the Orwellian sum.

Within the IoT element, Taiwan also aims to create ‘Asia Silicon Valley’ in the city of Taoyuan. It wants this to become a hub not only for domestic innovation but also cooperation with NSP-target countries and others. The model is to develop a regional analogue to the way Taiwanese companies themselves were able to build links and exchanges of information with the original Silicon Valley as they began to ascend their own technology learning curve.

The policy is primarily aimed at focusing the minds of small and medium-sized enterprises (SMEs) as opposed to Taiwan’s established technology giants. Here, as Evan Feigenbaum has noted, it draws upon another characteristic of the country’s original strategy for building a technology economy.

Unlike South Korea and, before that, Japan, Taiwan took a decentralised approach to company development. In those other countries, powerful industrial alliances (Korea’s chaebol and Japan’s keiretsu) led the way, and today China is also focusing its innovation around a group of ‘national champions’. Taiwan by contrast (and arguably as a result of its smaller economic size), has historically sought to build from the ground up. That history also means that Taiwan has a better developed venture-capital talent base, although a large part of it has migrated in the last five years to the Chinese mainland and emerging markets such as Vietnam.

There is logic, history and integration within the 5+2 strategy. But there have been questions raised over issues such as the scope of the project (particularly that its breadth could dilute efforts) and how access to capital and funding is enabled (though there has been continued budgeting). The main point here, however, is that even after the best part of four years of 5+2, the programme still resists benchmarking.

What you can say is that there is a lot of activity, especially at that SME level. Innovex is a dedicated start-up conference and exhibition that has sat alongside the huge Computex event held in Taipei for several years now (both currently rescheduled for September because of Covid-19). There are also gatherings such Meet Taipei, Futex Taipei and plenty more. The AppWorks accelerator alone has helped establish 300 companies, and Taiwan’s angel-investor network is reckoned to be as many as 6,000-strong.

And yet the nervousness persists.

Taiwan faces a wide range of challenges but it seems to have a fair amount in its toolbox to address them. The ideas and framework look sound – and technologically it is continuing to enjoy some economic success. In March, exports overall were up 4.3 per cent as Asia began to open up during the pandemic, and electronics rose 23.8 per cent. Forecasts of 2.5-3 per cent growth in GDP for 2020 are the envy of much of the world.

Taiwan’s comparative success in combating the pandemic has also raised its profile in a positive way, particularly when it comes to its objectives as a leader in medicine and healthcare. It has partnered with countries as varied as the US and Denmark on Covid-19 projects.

Yet at the same time, China is flexing its muscles and that is always an issue.

In mid-April, the Liaoning, flagship aircraft carrier of the People’s Liberation Army Navy, was again tracked passing close to Taiwan. Though the mission seemed primarily a response to earlier, tense engagements with Japanese and Vietnamese shipping, one Taiwanese analyst at the Institute for National Defense and Security Research described it as Beijing’s attempt to send the message that “the US big brother is not reliable”.

“With the Chinese navy fleet’s sailing routes, it is quite obvious that China wants to show its muscle to Japan, Vietnam and Taiwan with a strategy aimed at hitting three birds with one stone,” says Wang Tsun-yen.

A further factor when considering how the Taiwanese now view mainland China is that, while there is not majority support for a provocative declaration of independence, their sense of nationhood is on the rise. In 1992, a survey by National Chengchi University found that 46.4 per cent of the population saw themselves as both Taiwanese and Chinese, 25.5  per cent as Chinese only and 17.6 per cent as Taiwanese only. By June 2019, those numbers had shifted to 36.5 per cent, 3.6 per cent and 56.9 per cent.

Then in July, with the Hong Kong protests catching nightly headlines worldwide, the Taiwan Foundation for Democracy reported that 68.2 per cent of respondents to a new survey said they would be willing to take up arms in defence of their island.

We are looking at technology, but the impact of broader social concerns cannot be ignored – and in Taiwan, issues of identity have been high up the agenda for 70 years.

Education is also a recurring concern. As well as the issues arising from a soon-to-be-declining population and the time-lag in tailoring courses to industrial waves, Taiwan seems to be having a problem maintaining what was once described by AnnaLee Saxenian, dean of UC-Berkeley’s School of Information, as “brain circulation”.

Ironically, Taiwan aims to encourage this among its own universities as part of the NSP, bringing overseas students into its system and then seeing them return home to seed their own technology economies and a positive image of Taiwan. This same process once saw elite Taiwanese students and entrepreneurs head to Silicon Valley and then return home bearing huge economic gifts, as Brent Christensen, director of the American Institute in Taiwan, has noted: “Much of Taiwan’s technology industry was established by people who studied in the United States and came back to found what are now some of Taiwan’s successful companies,” he says.

However, Feigenbaum notes that three out of every four Taiwanese graduate students who secure their PhDs in the US today stay in the US.

There are big players that are prepared to back Taiwan’s knowledge economy. Google, IBM and Microsoft have all recently established centres of excellence there for artificial intelligence research.

It is an area where President Tsai has drawn not-that-covert comparisons with the Chinese mainland. “AI development hinges not only on having the technology but also on having imagination. On that point, Taiwanese young adults who grow up in this democratic and free environment will not disappoint,” she said at the recent opening to an extension to Microsoft’s centre.

Nevertheless, it does seem that Taiwan needs to work harder to energise the resources in its youth if it is to escape the apparent hardware trap.

Bringing the young home – and to a home to which younger generations seem more attached than those before them – may in the context of Taiwan’s future globalisation be where thinking local does mean acting global.

 

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