From Korea comes a piece on Taiwan's dynamic OEM makers and their world-class technology:But take apart an iPhone or an iPod and inside you'll find some unfamiliar names, like Hon Hai, Quanta, and Inventec. These are Taiwanese companies that provide outsourced manufacturing for other companies instead of producing goods with their own brand names. The iPhone and the iPod are being built at the Chinese plants of these Taiwanese companies.
Although they are OEMs (original equipment manufacturers), don't for a minute confuse them for subcontractors living off wages. Taiwanese companies boast the world's highest cost competitiveness, as well as high tech and high quality manufacturing capabilities. They are so reliable that even Steve Jobs trusts them. In fact many high-end global products such as Sony's PlayStation and Hewlett-Packard and Dell's laptops are built by Taiwanese companies.
These Taiwanese companies are rapidly building up their capabilities in design, planning and R&D based on the know-how that they have been cultivating by producing such goods. That's given rise to conglomerates like Hon Hai, which recorded sales of W24 trillion last year. Since 2000 Hon Hai has seen its sales grow on average more than 45 percent every year. With that sort of formidable growth -- nearly 10 times in just six years -- Hon Hai has become a subject of keen interest in the world's IT industry.
Korea and Taiwan feel themselves to be rivals and have very different economic structures. In Korea the State is tightly linked with the major industrial conglomerates, called chaebol, and has been successful in keeping its businesses at home, while Taiwan's small and medium-sized enterprises (SMEs) shift their manufacturing operations to China. In recent years Taiwanese have complained that South Korea has overtaken Taiwan in terms of GDP per capita. But Koreans have successfully re-invested at home, whereas Taiwan has been planting its seed corn in China. Nevertheless, Koreans still feel they have a ways to go....
Some time ago, Business Week magazine listed the world's top 100 IT businesses. Taiwan was home to 14 of them, the most of any Asian country. Hynix Semiconductor was the only Korean business on the list. It was the same in "How We Compete," a book published by the MIT Industrial Performance Center that examines successful business strategies in the globalized era. The book features case studies of nearly 20 Taiwanese companies, including TSMC, a semiconductor OEM, Compal Communications, a laptop manufacturer, Asustek Computer, BenQ, which has taken over Siemens' cell phone division, and Pou Chen, a footwear company that has expanded into electronics. Samsung Electronics is the only Korean company in the book.
Twelve Korean companies are listed on the Fortune 500 while only three Taiwanese companies made the cut. Nonetheless Business Week and MIT are paying more attention to the Taiwanese economy with its nimble and tech-savvy small- and medium-size companies. The Korean economy is now facing the limit of its growth, despite having fostered several conglomerates with global brands, because it has a weak SME foundation compared to Taiwan. That's why we should pay more attention to the "Taiwan model."
Taiwan OEM firms are probably the world's most successful, but it is easy to see that the OEM model as a model for a national economy has serious limits. In the old days it produced an economy with an extraordinarily equitable distribution of wealth. As Robert Wade pointed out in Governing the Market, the glittering high-rises in Korea that appeared to contrast so strongly with Taiwan's cramped five-story flats back in the 1980s were a signal of high income inequality in the former. But the OEM model in Taiwan depended on low-cost labor, which meant that it became increasingly unviable as incomes rose. It was also a family-run economy, which meant that many firms were unable to run up the technology ladder since they lacked the management and engineering skills. This drove many firms out of Taiwan to China, where they can continue to pay low wages and run things the family way. The result was, however, stagnant income growth at home, since an economy's ability to raise income depends on pushing up its skills and productivity, meaning that even though the economy is growing (in fact it is doing quite well at the moment), rising income inequality cancels out any feeling among ordinary people that their lives are improving. By contrast, in Korea the government was able to keep its major technology enterprises at home and continue to use the home nation as an export base, whereas Taiwan's enterprises, out of the government's grip, clamor to shift their manufacturing to China.
Another issue identified by scholars with Taiwan's OEM economy is that the economy is organized around a certain mode of production and cannot shift. Taiwanese firms are not only good at OEM making, they also excel at every aspect of supply-chain activities that is related to OEM, such as logistics. But they lack a broad base of economic skills -- they are dependent on the State for R&D inputs, for example. Although the public sector's share of R&D spending fell from 50% to 37% through the 1990s, it remains at nearly four times the level it is in advanced countries. Taiwan as a nation also spends proportionately less on R&D than other nations, and Taiwanese firms typically invest less in R&D than their foreign counterparts (reference). The choice to invest limited resources in supply chain organization management means that own-brand development and innovation are lower. Note also that unlike the US, where business and academia are mutually dependent, Taiwan's OEM makers do not have well-developed relationships with the universities. Thus, while the rest of the economy moves into the 21st century, Taiwan's universities continue to churn out graduates aimed at satisfying the needs of an economy that ceased to exist sometime around 1985....
Is the Taiwan economy a model to emulate? I doubt many Taiwanese would think so.
UPDATE: This post drew many great responses. That's what blogging is all about. The New Hampshire Bushman takes issue with me, and so does Bent.
[Taiwan] [Korea]
Korea's economic model should be studied further before it is emulated. The chaebol basically run the entire nation and everything good and bad, social, economic as well as political, can usually be traced to them. Although the electoral system is fairly democratic, the overall sociopolitical structure is seen by many as oligarchic or aristocratic.
ReplyDeleteSo many interesting points, Michael. I especially like how you highlighted that Taiwan is more of a SME/family-driven model, compared to the large Korean chaebols.
ReplyDeleteSo let's say my family in Kaohsiung has been making OEM golf clubs for 20 years, but for the last 5 years we had to move our manufacturing to China to keep our heads above water. Would there be any incentive to bring our business back to Taiwan?
I agree wholeheartedly with what you say about own-brand development and innovation. IMHO, Taiwan must do something to develop this part of the service economy. You surely know a lot of bright students...can the creative minds that come from Taiwan's universities help make this shift?
What is the governmental action(DPP KMT..dou ke yi) that can address these problems?
Could they offer Taiwanese small businesses money under a contract that restricts them from leaving?
Excellent post that really got me thinking.
- Spencer
SMEs are natually not as able to keep their roots in Taiwan as big corporations.
ReplyDeleteIn most of SMEs, management and ownership are often inseparatable. This makes it hard for them to recruit and retain talents. The lack of talents in turn limits their ability to grow and compete with bigger and better organized companies. Many of them don't even have sales and/or marketing functions.
These companies know how to make high quality products very well, but they don't know how to sell the products themselves. Their R&D capability is also low, as you have pointed out. As a result, they are often forced to stick with what works for them: low cost manufacturing. They are also often stuck with just a few buyers. As buyers demand lower price, they either have to relocate their factories to lower cost countries or loose orders.
Many of these businesses end in the 2nd generation.
IMO, Taiwan needs more conglomerates and heavy industries in order to get to the next level and be a truly developed country.
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ReplyDeleteI had a crazy dream recently. I dreamt of the current Taiwan stock market is driven up by US hedge funds and private equities funded by China, and the ultimate goal is to collapse Taiwan economy through fiancial transcations and forcing Taiwan dollars to devaluate. However, it is just a crazy dream.
ReplyDeleteWarden Said:
ReplyDeleteBeing at NCKU Michael, have you noticed how the business college is dominated by the industrial management department. Dean Wu is the first non-IM dean of the business college. Classes there on production/Ops and linear programing stuff for production, not to mention software development for supply chains just blows away anything I've seen in the US.
People often talk about OEM as if there simply is a choice and firms can step out of that. It isn't so easy.
Keeping in mind that the only market that really matters (up to now at least) is the American market. If you brand, that is the place to do it (mostly due to economy of scale). But branding means marketing, and marketing is the hard part. Capturing the minds of Americans is just really a difficult thing for engineers in Taiwan to get their heads around.
Add to this the fact that once you enter this realm, those Americans fight back! American firms live on lowering price/demand elasticity, and they are not beyond using any dirty trick to do it. Look at IBM/Lenovo and the hit they have taken. On the other side of this rock/hard place is Walmart and the big box stores. They don't leave much time for a firm to do anything but constantly improve the supply chain.
Meanwhile, American firms like FedEx are working to take over the logistics of other firms, so clearly logistics is a profitable area. I'm not so sure this is a space without a future.
I'm very doubtful that any changes in research funding (currently the NSC supports much of the real R&D for Taiwan firms), will help in the branding area. BenQ's big shift was to bring on a foreigner at the top; not many Taiwanese or Chinese firms would be willing to do that, and even if they did, changing the internal company orientation to a customer focus, well . . . I'm not holding my breath.
Mark,
ReplyDeleteI haven't checked on any of this for nearly a year and have no time to do so right now, but is it really true that Taiwan is doing worse than South Korea in PPP terms? What I found from looking at figures last year was that South Korea had quickly increased GDP over the last few years apparently at the expense of PPP, and that while Taiwan's GDP had fallen below that of South Korea's, her PPP had forged far ahead (that gap may be closing or closed now). To refer you to one very-quickly-googled site that seems to bear out this take on things:
http://www.photius.com/rankings/economy/gdp_per_capita_2006_1.html
What would explain that Taiwan has a great differential between GDP and PPP, but South Korea does not? I'm just guessing here, but most likely reasons I can think of are (a) South Korea has chosen with WTO accession to keep high import duties in place (to protect the chaebol) for a much longer period of time than Taiwan has (b) South Korea has higher personal income tax rates (with some of that tax revenue being channeled to the chaebol).
Though wage leveling-off is a very real problem here in Taiwan, Taiwanese seem not to notice that it is partly their purchasing decisions that make income seem so crimped. For example, parents are spending more than ever on private education services, people are buying more insurance of all kinds than they used to, and every "tourist destination" in Taiwan that features a field of flowers has a steep admission fee (Would this last point get factored into PPP calculations? I would guess not, though maybe it should be.)
A student of mine just returned form South Korea, where she was dumbfounded to find out a McDonald's hamburger cost twice as much as here in Taiwan. That fact alone doesn't prove anything, I know, but I also know from some quick looks at the Korea Herald last year that the South Korean public is abreast of their Taiwanese counterparts in complaining about feeling squeezed economically.
Taiwan's media, of course, explores none of these matters, so the pat "South Korea is doing much better" dogma has taken seemingly unshakeable hold. The obvious question is whose interests does this dogma -- possibly a canard -- serve?
Vin, I did a bit of fact checking on your question about PPP. The site I had read used a non-standard model, and you're correct that Taiwan is ahead of Korea in PPP terms. However, it hasn't been gaining. At no point in the last decade was Korea's PPP GDP as high as Taiwan's, but the the gap has been closing. All of the US dollar based- GDP data in my last comment was correct.
ReplyDeleteIn purchasing power terms, Taiwan is ahead of Korea 29,500 to 24,500 per person. The report actually put Korea's cost of living at half again what Taiwan's is!
In 2006, Taiwan's GDP was $346.4 billion (15,016 per person), compared to Korea's $1.196 trillion (18,383 per person).
Per Capita GDP
Korea in 2000: 10430
Taiwan in 2000: 14281
Korea in 2006: 18383
Taiwan in 2006: 15016
Obviously not every country will grow like Korea did recovering from the 1998 crisis. However, Taiwan's growth has been very, very poor, both compared with other similar economies, and its growth in the 90's.
Vin said:
"the pat "South Korea is doing much better" dogma has taken seemingly unshakeable hold.
Look at the numbers yourself. There's a bit more to the idea than dogma.
For your convenience, I've prepared a 2000-2007 IMF report with the relevant information on GDP, both real and purchasing power adjusted.
IMF 2000-2007 Korea vs Taiwan Report
Don't underestimate the creativity of the Taiwanese. If you look at U.S. patents issued in 2006, Taiwan ranks 4th in the world and on a per capita basis they are almost equal to the U.S. and Japan (both just slightly ahead) and better than Germany. South Korea with more than twice the population lags behind with just 5908 to Taiwan's 6360 (moreover, Taiwan's patents have exceeded Korea's over each of the last 14 years). So at least on this measure Taiwan is more than holding its own.
ReplyDeleteAnon writes:
ReplyDeleteMark,
My point was that the media in Taiwan never talks about PPP; it only talks about GDP. But most economists agree that PPP is the more salient indicator of how consumers are doing. And isn't it consumers a.k.a. voters that the Taiwan media is playing to when it makes economic comparisons between Taiwan and South Korea?
If you check again the figures in the link you posted, you will see that Korea is not gaining at all on Taiwan in PPP, but is actually falling further behind. Taiwan's edge was about US$5,800 in 2002 (the year Taiwan acceeded to the WTO [Korea acceded in 1997, if I recall correctly]); the gap has grown every year since and now stands at(estimated for 2007) US$7,700. Both countries PPP incomes have grown by seventy percent or more in the last eight years, so the percentage of difference of the PPP gap has maybe declined, but is that the more relevant way of looking at the matter? No consumer can spend a percentage of difference of a gap; more money he CAN spend.
I am not trying to suggest that Taiwan's economy is doing well. From my amateur's perspective, the DPP has done a poor job on economic planning and indeed on all planning. It certainly can be argued that given the immediate PPP benefits that lowering tariffs produces, the DPP has at best failed to maximize an opportunity and at worst is now trying to take credit for a windfall. But that argument I had best leave to people who know much more than I do about it. Again, my overall points in my previous post were (a) the blue media selectively uses comparative measures (GDP, but not PPP) for political purposes; (b) the public has unquestioningly swallowed this distortion as dogma; (c)South Korea has traded PPP for GDP by not lowering its tariffs (a WTO phase-in option it chose in much greater degree than Taiwan did) and by maintaining high personal income taxes (I'm guessing on personal income taxes; I haven't researched that); and (d) the South Korean public would certainly resist the Taiwan media's propaganda that Zhou average here is suffering more in the last eight years than his counterpart there.
I would like to add a further point in this post: a local victim mentality coupled with authoritarian conditioning (via the education system in particular)makes the public here particularly susceptible to distorted and specious doomsaying such as the "Korea-is outstripping us" canard. The irony is when that Korea-U.S free-trade agreement kicks in, Korea really will start outstripping Taiwan economically. Thank Taiwan's media when that happens; instead of giving the public full and real information and analysis that could have helped speed such as financial deregulation -- something that really would bolster Taiwan's long-term economic competitiveness --, the media has shown itself time and again willing to say whatever whenever with no regard for truth, all in an effort to attract the most viewers for the least money. If you ask me, the very least we Westerners can do, whenever we are confronted in conversation with the South Korean economy canard, is point out that South Korea consumer is doing ever worse than the Taiwanese consumer. South Korean soap-opera exports may be kicking Taiwanese-soap-opera-export ass, but in PPP, South Korea is flagging. Dogma disagrees, but the figures (thank you for providing them) proclaim this true.
Patents are a terrible way of measuring creativity, especially with how broken the system has become in this era of 1-click shopping patents. By using patents as a criteria, Microsoft must be a thousand times more "creative" now than they were in the mid-80's, and America as a whole is hundreds of times more creative than it was just a couple of decades ago.
ReplyDeleteAnon, Vin
ReplyDelete1) Economic growth is measured in percentages, and doing otherwise is just pedantic.
2) You can't "trade PPP" for GDP. Purchasing power parity is an exchange rate based upon a pre-determined set of common purchases that can be applied to a number of different statistics.
3) Korea's "Big Mac index" is not double Taiwan's, or even close. It's $3.08 to $2.28.
4) Nominal GDP matters. PPP calculations are never perfect, and even if they were, they would only be the proper metric for people who don't save anything, and for people who never leave their countries- neither Taiwanese nor Koreans fit those criteria well.
4) There is no "canard" in the article. Korea's economy really is doing much better than Taiwan's is and you have to be very selective to come up with any other analysis of the data provided. Only by ignoring real GDP data, discarding data from 2000-20001, and then using estimates of data not yet released can you come up with an argument to say Taiwan's economy has been doing better. Either that, or pointing to things like the stock market or expected demand for imports. How you guys can attack the blue media for "selectively" using the most basic economic metric there is, nominal GDP, while you resort to all that hand-waving is beyond me.
No, the canard is the idea that nothing in the paper could be true unless the paper is your party's paper, and that inconvenient facts must some how be some vast PRC-backed conspiracy.
I want Taiwan's economy to do well. I'm heavily invested in Taiwan and have no plans of doing business in or investing in Korea ever. I just have a problem with people distorting the facts for ideology, be it political or religious. That kind of thing doesn't help anybody.
@Mark
ReplyDeleteTaiwan with less than half South Korea's population consistently is granted more U.S. patents. You don't think that is significant?
M$ is a bad analogy. As they are 1000s of times bigger now than in the 80s so on a per employee basis they are probably about as creative today as they were then(not very).
In 1993 the U.S. was issued 53231 patents with a pop around 250M. In 2006 they were issued 89823 patents with a pop of 300M. A 100X more patents issued?
Now I will grant you that patent law needs to be changed as many silly patents have been issued in recent years. And that patents received are hardly the be all and end all of creative measures. But I will not grant you that it is insignificant or a worthless measure. It is one measure, and frankly, a pretty impressive and surprising one in relation to Taiwan.
Mark,
ReplyDeleteFirst, to Michael: I hope this is not too long.
I think you’re seriously distorting my political stance, Mark, and also many of my arguments here. But first let me say, if you’ve got figures on the comparative prices of Big Macs, I defer to you on that and accept the figures you gave. As I said originally, I was relating an anecdote; I took my student’s statement as a fact when (I now see) I shouldn’t have. Thank you.
I’m not sure how you got the idea that I support any political party in relation to this discussion. And I don’t see which blog guys I am in league with here. As I thought I made clear in my previous post, I don’t think the DPP has done a good job at all with the economy, and I’m not at all arguing that Taiwan is doing BETTER economically than Korea is. Nor am I arguing that GDP doesn’t matter. Clearly the economy is doing better in Korea, and yes, GDP does matter. What I’m arguing is that the average person in Korea feels and is worse off economically than the average person in Taiwan; that this gap has grown rather than shrunk since 2002 (indeed, since 2000); and that these two important facts are something the media here never reports. Why the failure to report this? If you want to say sheer laziness or intellectual default on the part of the media, OK, I’ll listen. Otherwise, I’ll stick with the idea that a blue media ploy is to blame, because this isn’t a case such as that of American consumers complaining about money not going as far as it did in the past; it’s rather a case of a particular country being singled out solely for its comparative better GDP, when actually that country’s citizens probably can buy even less compared to Taiwanese than was the case seven or eight years ago.
Yes, PPP is a highly imperfect measure; an article on page 19 of today’s China Post about the government-owned Central Petroleum Corporation selling gasoline at discount prices (Korea’s gas prices are twice as high!) gives a clear indication of why. But GDP is far more imprecise a measure in some cases, and is very often highly imprecise when we are talking about overall economic health. What is China’s real GDP when you correct inflated county-and-provincial reported figures and when you subtract the soaring health and environmental costs that come from full-on growth? Does even half of China’s magnificent official growth rate remain? Equally important, what is the relationship between GDP and the Gini coefficient? In China, high GDP equals extremely high Gini (high income inequality). GDP matters, but no more than PPP does. Both matter, and today, both get used, often as sobering correctives for each other (except here in Taiwan). And you can bet national economic planners sometimes intentionally swap them – and do so with very real, not pedantic, consequences. High tariffs, low exchange rates, and tax breaks for and tax-money transfers to industry are all a part of GDP-pumping, import substitution-and-prevention, export-oriented policy that, especially once an economy is developed, comes at the expense of PPP.
I am not saying South Korea is mismanaging its economy. Perhaps it is doing exactly the right thing by keeping GDP high at the expense of PPP until the FTA with the US kicks in (which will allow Korea to raise PPP without GDP taking a hit – if Korea is ready for diversification away from the chaebol, that is). Rather, I’m saying the comparisons between Taiwan’s and Korea’s economy are in many ways (not all) arbitrary and facile, and are therefore, ultimately, not of much worth; the canard I was talking about was not the idea that Korea’s economy is doing well, but rather the political-haymaking inference that Taiwanese are doing poorly in wage levels and purchasing power compared to Koreans. I hear again and again from my students that this is true. But it’s absolutely untrue. Perhaps my last post addressed to you was too strident and thus gave the impression that I merely wanted to pick an argument. To suggest that isn’t the case, let me tell you this: Over a year ago, I laid 2006 IMF-estimated PPP figures in front of three civil servants I was teaching then; the severely blue-leaning one among them dismissed the figures out of hand – would not consider the possibility that Koreans felt more pinched economically than Taiwanese do. It’s that, not you, I’m against, Mark; and it’s mind walls, not my student himself (he’s a likeable guy), that I’m against. My honest opinion is that such (authoritarian-education-conditioned) mind walls (plenty of greens have thick mind walls, too)are the biggest plague for Taiwan’s economy now. So get the last word in on me here if you want. After that, perhaps we could continue the discussion in private E-mails or by phone and thus reach an acclamation, because I guess that you, too, are against mind walls, and I’m sure there is much I could learn from you.
Vin, when thinking of fanatically green bloggers, I didn't mean you specifically. They are out there, though, and they send me emails in response to my own blog all the time. That could have made me over-react. I'm really not that into Taiwanese politics.
ReplyDeleteIn any case, I can't say much about the way Koreans on the street feel, since I don't live there. I just know what people here say.