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Taiwanese Go South (Int'l Edition)


International -- Cover Story -- Asia

TAIWANESE GO SOUTH (int'l edition)

Stan Shih, chairman of the Acer Group, Taiwan's premier personal computer maker, is less concerned these days about rapidly expanding his company's production in China. Frustrated by slow-moving Chinese bureaucrats, Shih is moving production from high-cost Taiwan to cheaper neighbors in Southeast Asia. Acer earlier this year, for example, signed a deal to produce motherboards at the former U.S. military base at Subic Bay--and began production at the Philippine site just 57 days later. "In Southeast Asia, it's very easy," says Shih. "You can make a decision, ramp up--and you're in business."

A wave of Taiwanese investment is spreading across Southeast Asia. Drawn by cheaper labor, growing markets, and attractive government policies, companies from Taiwan have invested over $25 billion in the seven countries of the Association of Southeast Asian Nations (ASEAN)--about equal to the island's investment in China. Taiwan has emerged as one of the top three foreign investors in the Philippines, Malaysia, and Vietnam. And Taiwanese are moving from labor-intensive industries into areas ranging from high tech to finance.

FEAR OF CHINA. Throughout the region, Taiwanese are becoming increasingly visible. In Kuala Lumpur, they send their children to a Taiwanese school. In Jakarta, they live in a neighborhood dubbed Little Taipei because of its concentration of Taiwanese residents. In Ho Chi Minh City, Taiwanese businessmen meet monthly at a Taiwanese-built golf course. A Taipei property developer, the Jin-Wen Group, wants to build a $524 million shopping center, office tower, and residential complex in downtown Saigon. The goal, says company executive Chang Chin loftily, is to build one of the city's defining landmarks. "We want this to be a must-see for foreigners," he declares.

All these forays have been encouraged by the Taipei government, which launched a "Go South" campaign almost two years ago. The government wants to build alliances with ASEAN countries that see China as a major competitor, decreasing the island's economic reliance on its rival in Beijing. Two-way trade between Taiwan and the ASEAN countries hit $12 billion in the first half of 1995, up 30% from a year before.

But Taiwan's trade with China is about as large and is also growing quickly. Many Taiwanese fear that they are becoming too committed to China, explains Raymond Wu, an administrator at a Subic Bay industrial park being built with $23.5 million from the Taiwanese government and more than $200 million in pledged investment from Taiwanese companies.

Taiwanese have more than just business reasons to look South. President Lee Teng-hui wants to use the promise of Taiwanese investment in the region to gain more recognition for his isolated government. The island doesn't have diplomatic relations with any ASEAN member, but in early 1994 Lee still traveled to Indonesia and Singapore on a "vacation"--where he happened to meet Indonesian President Suharto and Singapore Senior Minister Lee Kuan Yew. Says Steven Wu, a division director at Taiwan's Industrial Development & Investment Center: "Economic power is our leverage."

The strategy isn't without its risks for Taiwanese businesses. Southeast Asia, although more predictable than the mainland, still presents challenges. Citing rising labor costs and difficulties with its workers, Taiwan's largest manufacturer of nonathletic shoes, Ever Rite Group, is closing one of its two factories in Indonesia. On Oct. 2, another Taiwanese company, Pan Viet Corp., was ordered to pay $281,000 in fines to its former Vietnamese partners. And Taiwan's state-owned Chinese Petroleum Corp. is struggling to find a new partner for a proposed $2 billion oil refinery in Vietnam. Its French partner, Total, pulled out because Hanoi insisted on putting the refinery in remote central Vietnam, adding 33% to the cost of the project.

Moreover, the Taiwanese are finding that the political payoff of its economic diplomacy has its limits. After promising greater economic ties with Indonesia, the Taiwanese hoped that Suharto would reciprocate by inviting Lee to the 1994 Asia Pacific Economic Cooperation (APEC) summit. "Go South was really a `Go to Indonesia' policy," observes Steve Fang, former head of the Taiwan Business Club in Jakarta. But with Beijing steadfastly opposed to Lee's presence at the APEC summit, the invitation never came.

THREE-PRONGED ATTACK. That's why Taiwan's focus has shifted toward other countries where the political rewards are more lucrative, particularly the Philippines. Manila's leaders seem open to Taiwanese overtures: The father of Philippine President Fidel V. Ramos was once ambassador to Taipei, and shortly after his election in 1992, the younger Ramos sent his vice-president, Joseph E. Estrada, to Taiwan on a business mission. And most importantly, Ramos will host next year's APEC summit--to be held at Subic Bay.

So no matter the obstacles, Taiwan seems determined to make its Go South strategy work. The Chinese military exercises that followed Lee's June visit to the U.S. plunged cross-straits relations to their worst point in years. While the Chinese have recently tempered their rhetoric toward Taiwan, many on the island remain wary. A third of executives questioned in a recent poll by the United Daily News in Taipei said Southeast Asia had the best overseas investment climate. Only 10% chose China. "Taiwan companies can't give up on the long-term mainland China market," says Jiann-fa Yan, a researcher at the Institute for National Policy Research, a private think tank in Taipei. "But instability means that they just can't count on their big investments there."

To make the ASEAN strategy work, the Taipei government has put together a three-pronged attack that in some senses is more elaborate than Japan's or South Korea's. The Taiwan formula relies on a combination of foreign aid, investments from companies affiliated with Taiwan's ruling Kuomintang (KMT), and investments by state-run companies. Neither Japan's nor South Korea's ruling parties can rely on companies they control to assist their countries' offshore pushes.

The International Economic Cooperation Development Fund, which is Taiwan's foreign aid program, has a budget of $400 million, with much of it going to projects in ASEAN countries. The deals include $23.5 million for the first stage of the Subic Bay industrial park. The IECDF is also backing similar parks, with $50 million invested in Hanoi and $15 million in Indonesia. The IECDF helps to get other Taiwanese companies to follow its lead. "We play a leading role, but we don't invest that much ourselves," says Executive Secretary Yan Chou.

Many of the companies that pony up capital are related to the KMT, which has a $3 billion empire composed of more than 100 enterprises. One such company, Central Trading & Development Corp., is building several large-scale projects in southern Vietnam. They include a Ho Chi Minh City export processing zone, a $200 million power plant, and a $250 million project to create a new section of Ho Chi Minh City called Saigon South. "We inspired the Go South policy," boasts Lawrence Ting, CTDC chairman, who says that 60% of the company's business is now in Vietnam.

The other powerful tool in Taiwan's arsenal is state enterprises. Chinese Petroleum Corp. wants to build a naptha cracker in Indonesia as well as a refinery in Vietnam. The company had to close its naphtha cracker in the southern Taiwanese city of Kaohsiung, responding to pressure from residents angry about pollution. Such environmental concerns illustrate some of the changes state enterprises face at home, where the government is preparing to enter the World Trade Organization by ending monopolies and expanding competition. "We have to go overseas. We have no choice," says Wenent P. Pan, vice-president of CPC.

This base of government support allows many Taiwan investors to take bigger risks and operate more nimbly than bigger Asian rivals. "Taiwanese are more flexible than the Japanese," says Kuo Wen-jeng, deputy director of the international division at Chung-hua Institute for Economic Research, a Taipei think tank. "They are more inclined to do local sourcing, and Taiwanese are more active than Japanese in tech transfer."

Of course, Taiwan executives aren't acting out of simple altruism. Environmental concerns aside, structural changes in the Taiwanese economy are forcing them to move. Just as Taiwanese small and midsize companies have branched out in search of cheap labor, now larger companies are following--and not just to find low-cost workers. Chailease Enterprise Ltd., part of the Koo family empire that also includes Chinatrust Commercial Bank, has joint ventures in Thailand, Indonesia, and the Philippines to help companies lease equipment. Says Clara Hsieh, Chailease senior vice-president for international services: "We're a bit like the Japanese in the early 1970s, investing with the long term in mind."

The company is planning more joint ventures around the region but is staying away from China. "The legal system has to be effective," says Hsieh. "Once a loan goes into default, can you take action?" In China, she says, the answer isn't clear.

ETHNIC TENSION. Like Acer, higher-tech companies are making the move, too. Advanced Semiconductor Engineering Inc., the world's second-largest independent packager of integrated circuits, has a plant in Penang, Malaysia, to supplement its major facility in Kaohsiung. From a global offering last summer of depositary receipts that raised $131 million, ASE is using $30 million to expand the Penang plant.

ASE wants to expand to the Philippines as well. Already, it uses Filipino workers in Kaohsiung. Since the Taiwanese government will only allow them to work in Taiwan for two years, ASE wants to send them to a plant in the Philippines, so their training won't be wasted. "The workers are great," says Jeffrey Chen, assistant vice-president of ASE. "They're educated, English-speaking, willing to work third shifts and overtime."

Even when everything is proceeding smoothly, there is always a nagging fear lurking in the background: ethnic tension. Overseas Chinese historically have been victims of persecution in many Southeast Asian countries, and Indonesia has one of the worst records. After an attempted communist coup in 1965, thousands of Chinese accused of being leftist sympathizers were killed. Until late last year, the Indonesian government banned the use of the Chinese language for commercial purposes. Even now, the Taiwanese trade office imports its promotional literature in a diplomatic pouch. "You have to understand the situation here," says Eugene Chan, secretary for economic affairs at the office. "It's rather tense."

Chou Hsien-ming knows just how tense the situation can be. Principal of the Jakarta Taipei School, founded three years ago in the capital's Little Taipei section, Chou knows that his Chinese-language school, one of only two in all Indonesia allowed to teach Chinese, can be a magnet for Indonesians who are anti-Chinese activists. His security guards escort all visitors to the school, which gets 50% of its budget from Taipei. At the start of each school year, officers from the Indonesian immigration police, military intelligence, and the Education Dept. inspect the passports of each child to make sure that the school does not enroll any local Chinese students, who are supposed to stay in Indonesian schools. "All of our students have passports," says Chou. "I'm very, very sure about that."

Those tensions don't exist for Taiwanese companies who conclude that they should "Move West"--to China. Big companies like President Enterprises have already put millions of dollars into the mainland and aren't about to pull out now. Even companies with big bets in the ASEAN countries are still looking to China, too. While Acer's chairman Shih complains about the lengthy delays involved in moving to China, he says the company nonetheless has hopes for the mainland. "We have to be in China," he says.

DELICATE BALANCE. That leaves all of Taiwan industry performing a delicate geographic balancing act. Even though there is greater cultural affinity on the mainland, upcoming elections in Taiwan are likely to aggravate geopolitical and military tensions. The KMT's Lee, who will likely win the March presidential poll, still favors eventual reunification with China. However, candidates from the opposition Democratic Progressive Party, which favors outright independence from China, may pick up strength in December's parliamentary elections. That may further anger leaders in Beijing.

Pressure will also build for Taiwanese to venture farther away from home. As Western, Japanese, and Korean companies flock to Southeast Asian countries, some Taiwanese talk about taking the Go South campaign a step further, to countries where the competition is less intense. Business leaders now mention Cambodia, Burma, and India as new destinations for Taiwanese investment. The Taipei government is even encouraging companies to think of a proposed export-processing zone in Paraguay, the only South American nation with diplomatic ties with Taiwan.

Therefore, tensions with the mainland are forcing the Taiwanese not only to expand in Southeast Asia but to establish a global presence. "If we only concentrate on Chinese-speaking areas, we're restricting ourselves," says Kuo Wen-jeng of the Chung-hua Institute for Economic Research. Taiwan needs "to buy insurance so we're not depending only on China."

Given the volatile relations with the mainland, Taiwanese will likely continue looking southward--and outward--for that insurance.By Bruce Einhorn, with John Winzenburg, in Taipei, with Michael Shari in Jakarta, Michael Di Cicco in Subic Bay, and Ken Stier in Ho Chi Minh City


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