The Taiwan Banker

To improve Taiwan's investment environment, we need to develop a good business model and export it globally; we can't just focus on the domestic market Recently, Premier William Lai led a meeting focused on accelerating investment in Taiwan. Lai hopes to improve the investment environment here, which has been stagnant since 2000. As a state investment firm, Taishan Investment Consulting Co. is paying close attention to this matter. Chief executive officer Wu Rong-i, a former vice premier, has extensive experience with economic policymaking. To improve the investment environment in Taiwan, Wu believes that regulations must be relaxed, mindsets should be changed, and the public and private sectors should cooperate. Below are his comments. Taiwanese firms must shift their focus away from cost reduction If Taiwan wants to attract investment, it needs to do things to attract investors. The best way to make the country friendlier to investors is to make systemic changes. In the past, Taiwan was an agrarian society. It produced products like canned pineapple, sugar and bananas. It later focused on light industry, producing many goods for everyday use. At that time, Taiwan exported 200 million pairs of shoes to the United States per year. We can say that this period was the apex of Taiwan's economic boom, and indeed, compared to the situation today, it's a bit hard to imagine. Taiwan later began to export many types of consumer electronics devices, such as televisions, radios, computers and other ICT products. But those industries have declined too. Beginning in the late 1980s, Taiwanese businesspeople began to invest heavily in China. The annual level of investment rose from US$3 billion to US$4 billion, and then to US$10 billion. During Ma Ying-jeou's presidency, it climbed even higher. Had it not been for the Sunflower Movement, which forced the government to jettison the Cross-Strait Trade in Services Agreement, Taiwan would have been even more economically dependent on China. Since Taiwan relied too heavily on China in the past, local industry was hollowed out, as employment opportunities decreased. Now is the time for Taiwan to change that. However, strengthening the investment environment will require a change in mindset among many Taiwanese firms. Quite a few of them still prioritize cost reduction over research and development. Innovative Taiwanese firms like Taiwan Semiconductor Manufacturing Co. (TSMC) and MediaTek are the exception, not the rule. In the past, many local firms failed to develop strong R&D capabilities, instead assuming the large China market - which offered preferential policies to Taiwanese businessmen - would ensure their prosperity. As a result, these companies never developed R&D capabilities, and are unable to innovate. Of course, China was not entirely altruistic in its efforts to attract Taiwanese investment. In some cases, Chinese firms appropriated technology from their Taiwanese partners and became their competitors. For years, Taiwan had superior technology to China, but China has narrowed the gap considerably. Today, many Chinese companies compete with the Taiwanese across different global supply chains Overturn the traditional mindset and upgrade industry Taiwan's economic growth has been falling steadily since 2000. Annual GDP growth was above 7% from 1980-1990 and in the following decade roughly 7%. Yet from 2000-2010 it was just 3.8%, and 3.6% in 2010. Now, the Taiwanese economy barely expands at 2% a year. To be sure, slower growth is natural for a country as its economy matures. Still, Taiwan's neighbors South Korea and Singapore have managed higher growth rates than Taiwan. That suggests there is something wrong here. It's true: Investment is low; tax revenue is insufficient, driving down government consumption; and so private consumption is also weak. Overall, the impact of an aging population, stagnant salaries, and the wealthy spending overseas instead of at home have pushed down the weight of private consumption in GDP. Meanwhile, fixed-asset investment has changed for the worse. The average growth rate of fixed-asset investment was above 8% from 1980-1999, compared with -.06% from 2000 to 2009. The bursting of the dot-com bubble and the global financial crisis played a role in creating that dismal figure. While those crises have past, the damage to Taiwan caused by a decade of negative investment growth has been severe. Manufacturing, which accounts for the largest share of Taiwan's GDP output, is not prepared to meet the challenge of the next global economic crisis. Thus, it is imperative that we upgrade industry in Taiwan. The government is promoting the 5+2 initiative, focusing on the Internet of Things (IoT), hardware and software upgrades, and green energy. Taiwan has certain advantages in these areas, but needs investment to strengthen them. The problem is that many companies here are unfamiliar with these new sectors and are unwilling to risk funding projects that could fail. That mindset isn't going to help Taiwan activate its industrial transformation. We need to change our way of thinking, not use the same tired methods to stimulate investment, such as tax cuts and exemptions. They are insufficient given the current economic situation. Financial institutions need to change lending rules How can financial institutions help boost Taiwan's investment environment? To begin, they need to lend more, and to different kinds of borrowers than in the past. Taiwanese banks currently have NT$30 trillion in savings and have NT$22 trillion in loans on the books. Why is NT$8 trillion sitting idle? The reason is that banks are accustomed to requiring collateral such as real estate in order to extend a loan to a customer. That is how local banks have traditionally managed borrower risk. However, this method is dated; many of the world's top ten firms by market capitalization today are software companies. Their assets are not physical buildings, but their know-how. In Taiwan, however, most of the top ten companies in terms of market value are manufacturers. That has not been helpful for software companies, which have difficulty accessing credit. Software firms need to develop an ecosystem of their own, complete with working partners, investors and access to credit. Recently, I went to Silicon Valley with Taichung mayor Lin Chia-lung. We heard many companies share new ideas and discuss new technology. However, this alone is not enough to make them successful; they must have links to the market. There are many firms in Taiwan with innovative ideas, but can they find investors and get access to credit? This is a conceptual problem. Financial firms need to understand that Taiwan can't really compete with China in hardware. At the same time, as an increasingly advanced economy, we can't just depend on hardware manufacturing. Further, over time, regulations need to be changed. The FSC needs to change its mindset and relax regulations. Many people say Taiwan has no attractive investment opportunities. In reality, there are many new ventures here that require funding, but they can't access the capital they need. Taishan Investment Consulting Co. was created to address this problem. Currently, private equity and venture capital focus on the Series B and Series C funding rounds. At this point, startups are relatively mature and risk is lower than in the Series A round. Yet many new ventures are at the Series A stage - it is often the case that this is precisely when they need funding the most, but banks do not want to lend to them. It is Taishan's role to help startups get access to the funding they need. Many startups have good technology but lack expertise in management and marketing. They also attract people from a wide variety of different fields who are starting their own company for the first time. It is a significant challenge to get the company up and running smoothly. Taishan not only provides funding to startups; it also offers assistance in marketing and management. Further, I believe that Taiwanese society is not accepting of failure. This is an obstacle startups must overcome, because many new ventures are not successful. Banks want to see real estate as collateral to hedge against big losses. But private-equity and venture-capital firms, which invest in a variety of ventures, understand that they will not all succeed. They only need to invest in a few successful ones, and they will see attractive returns. Thinking about investment from a global perspective Some people suggest the government should help to find more investors in Taiwan. I think this too is a traditional way of thinking. As long as the investment environment is attractive, foreign investors will come. You don't have to pursue them. On the other hand, Taiwan has plenty of capital that can be invested overseas. In the era of globalization, it is essential to think about how you can best allocate your assets. By cooperating with Silicon Valley, Taishan hopes to bring Taiwanese technology overseas. Taiwanese firms can expand to the U.S., but leave the R&D here, where costs are competitive. The goal will be to bring high-end products to the U.S. market. This business model can be applied to countries involved in the New Southbound Policy too. If we can develop a successful business model and export it, it will be a boon for investment in Taiwan.