Taiwan contract manufacturingAs countries around the world seek to reduce their exposure to China, Taiwan finds itself in the center of the process. I just spent two months in Kaohsiung, Taiwan (working on a large multi-country project involving China, Taiwan and Indonesia) and during my time there I heard much about Taiwan’s response to the trade crisis. My preliminary thoughts are as follows.

First some history. Taiwan was a true pioneer in contract manufacturing. That is, manufacturing products solely for the export market. This process began in the 1980s. I remember the first Timex watch plant built in Zhongli in 1981. Taiwan created the free trade zone model subsequently copied by China in the 90s. The system developed rapidly. By the end of the 1980s, Kaohsiung was the third busiest port in the world, shipping out the products produced in Taiwan’s free trade zones.

In the 90s, it was Taiwanese businessmen who took that export processing expertise to China. The success of the Taiwanese in China was overwhelming. By the 2000s, virtually all Taiwan’s low end manufacturing had moved to China. As in the United States, what remained in Taiwan was largely limited to high tech manufacturing in the semiconductor business or production of specialty materials in the plastics and metals industries.

As we approach 2020, Taiwan business people are now considering what to do about China. The current response has focused on moving China based export processing factories to other countries in Asia. Virtually any Taiwan business person you meet will share with you their stories of moving to Vietnam, Thailand, the Philippines and Indonesia. Some are even moving to Mexico and Central and South America. They are seldom completely happy with the results of their moves, but move they must.

After a number of discussions with Taiwan business people on China, I began to notice one strange feature of their plans: nobody mentions moving to Taiwan itself. Even though Taiwan was the export manufacturing powerhouse of the 1980s, the same Taiwanese who pioneered that development are not considering a return to Taiwan.

In my meetings with Taiwan trade officials, this issue was raised as a primary concern. Stated as a slogan, Taiwan’s conservative politicians want to follow the policy of the United States and “Make Taiwan Great Again.” They want to restore Taiwan’s place as a manufacturing powerhouse. They want to step back from being brokers of products made elsewhere and get back into direct manufacturing.

But how will this be done? One set of programs is being promoted by Han Guoyu, the new mayor of Kaohsiung. Working with Terry Guo, the chairman of Foxconn and newly announced presidential candidate, Han has been promoting a two-phased program.

In phase one, Taiwan companies will be provided incentives to return to Taiwan from China. For example, Foxconn is working on a proposal with the Kaohsiung city government to establish a large cloud networking center. This is planned as the initial move to attract other Taiwan owned electronics manufacturers to set up operations in what is planned as a major electronics industrial park. In phase two, the Taiwan government will revive the free trade zone system to attract foreign investors to move their manufacturing operations from China to Taiwan.

Many of these companies, both Taiwan and foreign owned, would be returning to where they started in Asia. It would be a return home. And it would make Taiwan great again.

The problem with this plan is that it will require substantial financial and policy support from the Taiwan government. To convince these companies to return to Taiwan, at least the following would be required:

  • Exemption from income and VAT tax.
  • Preferential tax policies for foreign management personnel.
  • Cheap land and buildings and subsidized rent.
  • Adequate power at subsidized rates.
  • Access to labor. Taiwan has a severe labor shortage. Manual labor from S.E. Asian countries and management from North America and Europe will be required.

The Taiwan government is fully aware of what policies are required. These policies were provided in the 1980s and Taiwanese business people saw how successful these policies were in China in the 1990s. But when Taiwan introduced those policies in 1980, Taiwan was a struggling, developing country. When China adopted these policies in 1990, China was a struggling, developing country.

The Taiwan of today is a prosperous, post-industrial country. It is not clear whether manufacturing incentive policies can be successfully adopted in an advanced country that has left behind physical manufacturing. Some would argue that Taiwan should accept its new role and imitate Hong Kong and Singapore to become a finance and services center for Asia and the world. As in many modern countries with a fully democratic political system, Taiwan has several competing visions of the future.

So it is not clear what direction Taiwan will take. Han Guoyu is running for president and if he is elected the “Make Taiwan Great Again” program will receive a boost. We are already seeing some moves in this direction in Kaohsiung. So as foreign companies continue looking to reduce their exposure to China, Taiwan will likely be included many lists of alternatives.