BUSINESSWEEK ONLINE : AUGUST 14, 2000 ISSUE
INTERNATIONAL -- ASIAN COVER STORY

Uneasy Collaborators (int'l edition)
To China, Taiwan investors are both welcome and suspect

  
Flourishing Trade: Shipping traffic in the port of Kaohsiung, Taiwan
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Huang Chun-che flips on the police-issue siren in his Nissan Cefiro and steps on the gas as he winds through downtown Dongguan. Huang has just finished blasting clay pigeons at the skeet-shooting range he manages, a place where he and other Taiwanese businessmen living in the southern Chinese city go to let off steam. Weaving from lane to lane, Huang gripes that the tangled traffic is making him late for the next appointment. But it is a snarl he helped create. In the last 10 years, Huang, and others like him, transformed what was a sleepy city into a veritable Taiwan Town.

Located in the middle of Guangdong province's industrial-export belt, Dongguan is home to some 40,000 Taiwanese and 3,000 of their factories. Their imprint is everywhere--from the luxury villas to the flashy karaoke bars where businessmen flirt with young women. In the city's northwest, China's first Taiwanese-run school is nearing completion. Every week, it seems, a delegation of Taiwan officials arrives to check out the community or meet with Dongguan officials.

It's a collaboration that has flourished across China: Some 250,000 Taiwanese on the mainland run factories and companies responsible for some 12% of the country's exports. Taiwanese investors have pumped some $40 billion into the mainland economy. Their real contribution may be even greater, since many disguise their activities through Hong Kong front companies to avoid antagonizing their own government, which has long been leery about becoming too dependent on China.

NEW WAVE. Moreover, Taiwanese investors are moving well beyond the small-time activities of cowboy capitalists like Huang. In many ways Huang, who also manages an office equipment factory, represents the first wave of Taiwan businessmen: makers of low-end clothing, shoes, and furniture. The new wave, by contrast, is dominated by Taiwanese multinationals that are establishing high-tech production lines and sometimes cutting deals with China's most powerful people. For example, Winston Wang, son of Taiwanese petrochemical tycoon Wang Yung-ching, has plans to build a semiconductor plant in Shanghai, according to some Taiwanese sources. His prospective partner is none other than Jiang Mianheng, son of Chinese President Jiang Zemin.

But the March election of Taiwan President Chen Shui-bian is sending jitters through China's Taiwanese community, despite its connections and aggressive expansion. In the past, President Chen has backed independence from China, a matter of grave concern in Beijing. Taiwan investors fret that a diplomatic downturn could derail their ambitious mainland agenda. The disappearance in June of General Pan Hsi-hsien has heightened their anxieties. The former chief of personnel at Taiwan's National Security Bureau, Pan went missing after taking up a senior position with a Taiwan electronics company in Dongguan. The Taiwanese believe he was nabbed by China's State Security Ministry and is being held for questioning. Beijing has not confirmed these reports.

The fear is that Beijing may be trying to use Taiwan businesses on the mainland--especially companies run by the handful of executives who advise President Chen on economic policy--to extract concessions from his government. Who better to push Chen away from independence, the theory goes, than the men with the most to lose in China?

Some Taiwanese warn that political pressure from Beijing could prompt them to curb their expansion plans. But most investors are simply hunkering down for the long haul, hoping that common sense will prevail. ''We're afraid,'' acknowledges C.M. Wu, managing director of Acer Peripherals (Suzhou) Inc., which makes CD-ROM drives, monitors, and other computer gear in China. ''But we still want to expand.''

The truth is, neither Taiwan nor China can afford to disengage. For Taiwanese companies facing rising costs at home, China offers a nearly limitless pool of cheap labor and engineering talent. Taiwan's tech powerhouses also crave access to China's market. For Beijing, the Taiwanese provide plentiful jobs at a time when bloated state enterprises are laying off millions. They also bring the latest technology and management systems, which China needs as it prepares to join the World Trade Organization.

The hope in many quarters is that the burgeoning economic relationship actually will lead to a lasting political thaw. ''Both governments and the people win'' with Taiwanese investment, says H.D. Yeh, chairman of Dongguan Primax Electronic Products Ltd., one of the world's largest computer mice producers and employer of 3,500 workers in China. ''We hope that through this economic cooperation, both governments can keep the peace.''

Beijing certainly has much to gain from seeing the flood of Taiwanese investment continue. Today's biggest investors are the likes of computer equipment companies Proview, Delta Electronics, and Acer (ACRRF). They are building factories that are turning China into a major electronics export platform.

Evidence of the high-tech migration is obvious on the manicured grounds of the Suzhou New District, a special economic zone in Jiangsu, the coastal province where Taiwan investment is growing fastest. Acer Peripherals has sunk $80 million into a 6,000-worker facility. The place resembles a college campus, with training facilities and a soccer field. A few miles away, Sampo Group has opened a $22 million plant that makes parts for personal-computer monitors. Not far off, Yageo Corp.'s $98 million factory produces resistors for such corporate giants as IBM, Acer, and Philips Electronics.

Beijing is rolling out a range of incentives to keep Taiwanese companies happy. Last December, the government made it easier for them to get loans and strengthened laws providing legal protection. Local governments coping with mounting unemployment are slashing taxes and land-use fees. Guangdong's government has opened special information offices for Taiwanese investors and launched a Web site where business people can post complaints and suggestions.

The trouble is that even as China beckons with one hand, it intimidates with the other. Or at least it seems to. Taiwanese factory owners complain of being targeted in a wave of crackdowns by Chinese officials over labor standards and customs rules. Often, it's hard to tell whether the Taiwanese are being singled out. But it seems clear that companies most visibly associated with President Chen are the most likely victims of politics. ''Business leaders who support Taiwan independence and have a bad influence, but still hope to benefit from China's strong economy, are not welcome,'' says Jiang Changfang, a Guangdong official responsible for Taiwan affairs. Chinese officials also have warned Hong Kong companies to shun Taiwanese who oppose Bejing's line.

TAX CRACKDOWN. Executives at plastic and electronics company Chi Mei Industry certainly believe they are being targeted. Group Chairman Hsu Wen-lung is a longtime Chen backer and now advises the President on economic policy. In May, 20 tax inspectors descended on a Chi Mei plant near Nanjing and scrutinized its books. Company officials say the inspectors found no irregularities but made clear the crackdown was tied to Hsu's support for Chen. The company also says authorities have threatened its mainland customers with special tax scrutiny. Chi Mei has sunk $200 million into China, but now threatens to freeze future investments.

In a move that some Taiwanese analysts viewed as a deliberate snub, high-ranking Chinese officials refused to see Acer Group Chairman Stan Shih, another Chen adviser, when he visited Beijing in April for a computer show. Acer officials in Taipei play down the incident, but its executives in China worry that Beijing could block its future investments. In the past, Acer avoided cross-Strait politics, says J.T. Wang, the Taiwan-based chairman of Acer Sertek Inc., the group's sales and marketing arm. ''But now the politics comes to us.'' That means that Acer must assure Beijing it opposes independence and backs the view that Taiwan is part of China.

But some Taiwanese executives are mostly irritated at their own government. After being badgered by previous President Lee Teng-hui to go slow in China, many expected Chen's election to lead to a friendlier climate. Indeed, during the campaign, Chen vowed to quickly lift decades-old restrictions on direct transportation, communication, and postal links. His top aides suggest they will do so soon.

For now, though, many constraints remain. Taipei still bans investment in finance and transportation as well as in products it considers technologically advanced. Taiwanese companies cannot assemble PCs or motherboards containing anything more powerful than a 486-class microprocessor, for example. Nor are they supposed to make semiconductors and high-speed cable modems. Taiwan's government also has capped individual investments at $50 million and restricted how much capital companies can invest. ''Our businesses should aim for the global market, not the mainland market,'' says Tsai Ing-wen, chairperson of the Mainland Affairs Council in Taipei, which oversees cross-Strait relations. ''We do have a national security concern.''

Not surprisingly, Taiwanese businessmen have devised numerous schemes to skirt the rules. Many route their investments through companies in Hong Kong, the U.S., or Japan. Several Guangdong-based companies admit they don't divulge to Taipei the amount of money they've put in China or disclose whether they are making products on the restricted list.

PRAGMATISM. Despite the mixed signals, there are signs that pragmatism will win out. In July, legislators from Chen's Democratic Progressive Party and the Kuomintang--the old ruling party--visited Dongguan to see how Taiwanese investors are faring. In Beijing, Taiwanese politicians met Vice-Premier Qian Qichen, who called for better contacts. And Tang Shubei, former head of China's Taiwan Affairs Office, attended a Taiwan investment conference in Dongguan.

Many Taiwanese just think the controversy will blow over. There have been many stormy episodes in cross-Strait relations, and each time Beijing has refrained from harming commerce. A crackdown now could discourage the kind of big, technology-intensive investments China needs most. The less optimistic view is that the time is coming for Beijing to tighten the screws. With Hong Kong and Macau safely returned to the motherland, President Jiang and other top leaders have made unification with Taiwan a top priority. And now that some of the island's premier technology companies have big money at stake, Beijing is gaining valuable leverage. Taiwanese industry has long learned to thrive despite political ambiguity. By putting Taiwan's factories at risk, Beijing may be sending the first warnings that the era of carefree neutrality is coming to an end.

By Dexter Roberts in Dongguan, with Alysha Webb in Suzhou, and Mark L. Clifford and Brent Hannon in Taipei

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