[News] Innovation is the key to survival
Innovation is the key to survival
By Craig Meer
Wednesday, May 24, 2006,Page 8
National accounts figures released by the Directorate General of
Budget, Accounting and Statistics on May 18 gave cause for
momentary celebration, and were indicative of an economy that is
performing moderately well.
The country grew at 4.93 percent in the first quarter, and looks
set to deliver 4.31 percent for the whole year. This comes on the
back of solid numbers for last year: Real GDP expanded by an
average of 4.09 percent in the four quarters to December. Economic
growth is a must for any society that wants to provide new jobs
and increase the total pool of wealth. It is doubly important for
Taiwan, which faces an imminent threat from China and must pay a
security premium to compensate.
While last week's growth statistics were welcome, they were far
from ideal. The devil resides in the detail. Almost all of the
country's recent economic expansion is attributable to exports,
which grew 14.52 percent in the first quarter. Almost none was
attributable to consumption, which rose by a lackluster 1.29
percent, or investment, which actually contracted 3.96 percent.
The second of these figures is the real concern, as investment
today dictates the nation's production capacity tomorrow. Part of
the reason that corporations are not investing in Taiwan is, of
course, China. Production is somewhere between five and 10 times
cheaper over there, and only a stupid businessperson would ignore
this differential.
But the main reason is closer to home. Taiwan is running out of
things that it can produce for world markets that are competitive
based solely on price. The country's cost base is approaching that
of North America and Europe, at least in particular areas within
these regional economies, and that spells death to a host of
industries that are currently the nation's bread and butter.
Consider chips as an example. The semiconductor industry is worth
around US$30 billion to the national economy annually, but a
significant proportion of the production cycle can now be easily
established in the lower-cost centers of China and India.
Moreover, China's first 300mm wafer fabrication plants -- the most
advanced in the industry -- came on line early last year.
None of China's fabs match the quality and efficiency of those in
Taiwan; however, it is only a matter of time before they do. At
that point, the policy debate about whether to allow Taiwan
Semiconductor Manufacturing Corp or any other bulk chip producer
to build cutting-edge plants in Shanghai will become academic. If
China can produce the same chips for a 10th of the price, why
would you even try to compete? So what then should Taiwan do?
The answer is actually quite simple: innovate. Seek to make and
trade goods and services that push the limits of the international
production possibility frontier. No one invests in the US due to
cost considerations alone; they do so primarily because the US is
home to ideas and processes that are unique in the commercial
world. This is the only model for the country's future growth.
True, there is a small but dedicated core of firms in the country
that refuse to compete on price. Take the PC manufacturer Shuttle
Ltd. Shuttle is a niche producer of "small form-factor" PCs that
are second to none in terms of their internal design. Through
painstaking attention to detail, the company manages to cram all
the components of a standard computer tower into a unit one third
of the size.
But examples like Shuttle are few and far between. Why is this the
case?
At least part of the answer is cultural. If you have lived in
Taiwan for any length of time, chances are you have heard someone
explain away a badly performed job by saying it is chabuduo. The
direct English translation of chabuduo is "near enough," but when
used in commercial settings it is probably best rendered "I know
I've done a bad job, but I don't get paid enough to care."
If you're an employer, the solution to this attitudinal enemy of
excellence is to pay your staff more and expect more from them.
This will actually save you money. Smart and dedicated staff are
more productive than dumb time-servers, and ultimately you will be
able to make do with less people.
But culture is only part of the story, and by far the least
intractable. The suppression of Innovation in the country is also
attributable to ineffective capital markets. Smart firms have a
tough time getting the investment dollars they need here, despite
the fact that Taiwan saves 25 percent of its national income and
the financial system is awash with cash.
Yahoo, co-founded in the US by Taiwanese entrepreneur Jerry Yang
(楊致遠), was established in 1994, incorporated in 1995 and went
public a year after that. Sales last year reached US$1.5 billion.
It is difficult to think of an equivalent growth story for an
intellect-intensive firm in this country. Yahoo's growth was only
possible in an open financial system that provided the right kind
of investment at the right time.
Taiwan's financial system, by contrast, is still dominated by a
dozen sluggish state-owned banks, and mired in a web of stifling
regulations. If you should manage to traverse the tortured
procedure to list your company on the Taiwan Stock Exchange, your
stock would then be at the whim of the exchange's investors and
their herd mentality, or reduced to fodder for someone's insider
trading scheme.
Gone are the days when people like Wang Yung-ching (王永慶) or Koo
Chen-fu (辜振甫) could build a major enterprise from a street
stall. Taiwan no longer has a low-cost edge, and must rely on
intelligence to build wealth. And to become a clever country, it
needs to start investing like one.
Craig Meer is a Taipei-based business writer.
Craig Meer is a Taipei-based business writer.
http://www.taipeitimes.com/News/editorials/archives/2006/05/24/2003309847
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