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Direct Cross-strait Links:

Panacea or Poison?

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Panacea or Poison?

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Are direct sea and air links with China a remedy for economic woes or a sugarcoated poison pill imperiling Taiwan's autonomy? Should Taiwan be gripped by fear or buoyed by hope?

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Panacea or Poison?

By Fuyuan Hsiao
From CommonWealth Magazine (vol. 413 )

The telephone at Taipei-based freight shipping company Metro Great has been ringing off the hook for days. Recently, Tseng Shang-bin, the boss of Metro Great, which handles about one quarter of the cargo coming in and out of Wufenpu, a Taipei shopping district specializing in inexpensive garments, has been receiving numerous calls from customers asking, "Won't you lower shipping rates now that everything is shipped directly?" (i.e., directly between Taiwan and China).

Cutting Shipping Time from Ten Days to Two

In the past Tseng helped customers ship ready-to-wear clothing from production bases in Dongguan in China's Guangdong Province to Hong Kong on barges. In Hong Kong the freight containers were transferred to larger seagoing vessels for transport back to Taiwan.

One such container would contain about 40,000 to 50,000 pieces of clothing. And it took seven to ten days from loading the garments onto ships until they arrived at the store's doorsteps in Taiwan. If the clothes are shipped directly rather than transshipped via Hong Kong, Taiwanese consumers will be able to get fashionable clothing designed in South Korea, made in China and sold in Taiwan within just two days.

On Dec. 15, 2008, usually rainy Keelung Harbor is enjoying surprisingly sunny skies, as four 10,000-ton class cargo ships based out of Taiwan slowly set out from wharf W16 with long bellows of their horns, beginning their inaugural voyages to Xiamen, Shanghai and Taicang in China. Eric Kuei, general manager of fruit exporter Fruit Taiwan Corporation, has long awaited this historic moment.

Kuei, who previously worked in the electronics industry, is shipping 500 crates of atemoya fruit, and 100 crates each of wax apples and guavas on a container vessel for delivery to a Shanghai-based trading company. Counting out the travel time on his fingers, Kuei explains that fruit leaving Keelung today will reach Shanghai supermarket shelves tomorrow morning, the perfect time for its sale. Before direct links, when the fruit had to be shipped from the southern port of Kaohsiung, the journey took eight days to Shanghai, which took a heavy toll on freshness. "Custard apples that had been picked 80 percent ripe were already rotten when they arrived in Shanghai," says Kuei in detailing his former predicament.

Thanks to direct air and sea links, goods come and go at a faster pace. China exports clothing to Taiwan, and Taiwan sends fruit to China. Places that once were remote are now just a stone's throw away. Direct sea and air links are beginning to impact the everyday lives of Taiwanese people.

In particular, the opening of a total of 74 sea and river ports on both sides will make a deep impact, since more than 90 percent of cross-strait cargo is shipped by sea. Bilateral trade reaches about US$100 billion.

Big Risk or Big Opportunity?

The administration of Taiwanese president Ma Ying-jeou has been in power for barely seven months, but Taiwan's opening toward China has already reached dimensions exceeding everyone's expectations. Against this backdrop it does not come as a surprise that Tsai Ing-wen, chairperson of the major opposition Democratic Progressive Party (DPP) and a former head of the Mainland Affairs Council, keeps warning that direct links also entail risks for national defense, quarantine and economic equilibrium.

What can Taiwan do to balance the benefits and disadvantages of direct links? Let's first talk about the benefits and opportunities.

First of all, there will be at least a faster flow of goods and people, costing less time and money. This is probably the most widely felt benefit of direct sea and air links.

A think tank of the ruling Chinese Nationalist Party, or Kuomintang (KMT), estimates that Taiwan will be able to save transport costs on the order of NT$31 billion and 110,000 hours of travel time per year thanks to direct air and sea links. The think tank predicts that the saved time and costs will contribute 0.01 percentage points to the island's economic growth rate.

Benefits for the Man in the Street

Saving costs ranks top on the agenda of entrepreneurs, but the man in the street is also happy if he can keep more money in his pockets.

Younger Wu, professor at the Technology and Science Institute of Northern Taiwan's Department of International Trade, notes that many everyday necessities in Taiwan are imported from China. Wu, who formerly headed the Department of Aviation and Navigation at the Ministry of Transportation and Communications, believes that if transportation costs decline, the end user will also enjoy lower prices. For instance, half of the gravel that Taiwan's contractors use comes from Xiamen or Fuzhou. Before direct sails were allowed, the gravel was shipped via a third territory to Anping port in Kaohsiung or Taichung Port, so that shipping costs accounted for half of the gravel's costs. Now that direct passages are possible, "it is only logical to expect real estate prices to come down," says Wu.

Direct transportation links not only make exchanges of goods and people faster and more economical, but also create new patterns of transportation. Now an express boat ride to China has become an option in formerly time-consuming cross-strait travel.

The eyes of Jen-ho Chiao, chairman of Excalibur International Marine and once secretary general of the semi-official Straits Exchange Foundation (SEF), light up at the mention of ships.

Chiao's company has already applied for the Taichung-Xiamen route for its high-speed cargo-passenger ferry Ocean LaLa. A one-way trip takes only four and a half hours. Chiao also hopes to buy another 10,000-ton class cargo-passenger ferry that would exclusively ply routes to eastern China.

"We look at a mix of seventy percent cargo and thirty percent passengers. We want to seize the market for direct passages," he says in describing his company's ambitions.

Hung Ching-tan, chairman of Wagon Shipping, Taiwan's largest shipping agent, is equally euphoric about the industry's prospects. His office is decorated with a large map of waterways in the Yangtze River Valley, the region that stirs his ambition. Regardless of how bad the economic slowdown will get, Hung still plans to spend NT$3 billion to acquire cargo and passenger shipping services between Keelung and Taicang. The ferry would leave Taiwan in the evening and arrive in China after a good night's sleep the following morning.

"If you can reach the outskirts of Shanghai on a 13-hour boat ride, direct shipping links can compete with airplanes," says Hung, who considers the Yangtze River Valley – the world's largest source of cargo and the largest source of cross-strait passengers – to be a business opportunity worth going all out to seize. Moreover, many Taiwanese investors in China have been prodding him to launch the ferry service.

Regional Integration, Flexible Deployment

Direct transportation links have also opened another window of opportunity. Companies gain greater flexibility regarding logistics and the location of their production bases, which will change the present division of labor across the Taiwan Strait.

Tsai Yung-yu and his brothers run the world's largest screw manufacturer by capacity, Kaohsiung-based Jinn Her Enterprise. Tsai, who serves as the company general manager, originally planned to open another factory in China's Wuhan City, but when he heard that the river ports on the Yangtze would be opened for direct links, he immediately changed course. Tsai decided instead to spend money on expanding the capacity of the company's factory in Gangshan on the outskirts of Kaohsiung City, while turning the Wuhan site into a warehouse for distributing goods abroad. In the future, products made in Taiwan will be directly shipped by sea to the Wuhan warehouse. Tsai even plans to buy his own ship to service all the company's warehouses throughout the West Pacific, from Russia to New Zealand.

Tsai's main consideration for this major strategic turnabout was that direct links make it possible to move key production lines back to Taiwan, which makes sense economically and also satisfies customer demands. Citing safety concerns, Jinn Her's key customers in Europe and the United States have been insisting on top-end products made in Taiwan.

"In the future we won't need to set up factories in China. A new factory costs hundred of millions of U.S. dollars. If we use the money that we would normally spend on interest payments to pay shipping costs, we still make a surplus. So what's the point in going through the hassle of running over there?" asks Tsai rhetorically. He believes that direct transportation links allow Taiwanese companies to develop the most efficient logistics model. Downstream production is left to Chinese factories, while upstream key technology remains in Taiwan. Then competitors in China won't be able to imitate products and also won't be able to steal talent from Taiwanese companies.

Leslie Koo, chairman of Taiwan Cement, which owns several production bases throughout southern China, is also aware that direct links will change the company's global logistics system. With two days' travel time shaved off thanks to direct cross-strait transports, inventory and sales can be managed with much greater flexibility. Koo notes that regional integration and the cash flow cycle will speed up and that the cement maker will be able to respond to sudden market changes more rapidly.

Conventional industries can use direct links to integrate regional production, create synergies and save costs. High-tech industries can use the shorter delivery times to reduce inventory and free up working capital for day-to-day operations.

K.Y. Lee, chairman and CEO of AU Optronics (AUO), once said that the lion's share of the LCD panel maker's inventory is on container ships at sea. Now that cargo spends four to five days less at sea, inventory can be reduced, which means the company can spend several billion Taiwanese dollars less on inventory.

Turning Taiwan into a Must-go Destination

Direct sea and air links not only increase companies' flexibility when it comes to logistics and global expansion, but are also a plus for soliciting foreign customers.

Winbond Electronics chairman Arthur Y.C. Chiao views the opening of direct transportation links as a "major change in Taiwan's basic conditions," which eventually will have enormous effect overall. Chiao, who doubles as chairman of the Taiwan Electrical and Electronic Manufacturers' Association (TEEMA), cites as an example the Taitronics trade show, which TEEMA holds every October. After visiting the electronics exhibition, customers usually want to personally inspect the factories, many of which are based in China. In the past they had to spend an extra day traveling to China, which is why in recent years more and more international customers have been skipping Taiwan and attending electronics fairs in Hong Kong instead.

Chiao had a strong sense of urgency as he saw that "Taiwan was being passed over." But he expects international buyers to now be more willing to attend trade fairs in Taiwan because of the convenient and time-efficient direct flights to Chinese production bases, which ensure a seamless transition between sales and production locales.

Acer CEO J.T. Wang has made some personal observations too. Wang argues that without direct links Taiwanese investors have been forced to establish separate organizations and separate staff with core competencies in China to ensure time efficiency, which makes it easier for Chinese competitors to steal their business models. Therefore, in the past economic integration between Taiwan and China has been lopsided in favor of China.

After the implementation of direct links, enterprises' core competencies can be retained in Taiwan, while only business units with non-core competencies remain in China. Then Taiwan will regain its competitive edge, the Acer boss predicts.

James Wang, CEO of networking equipment maker SerComm, is unequivocal about the benefits of direct links. "Taiwan's position as a decision-making hub has been thoroughly secured," he declares.

Video conferences between SerComm's Taipei headquarters and its factory in Suzhou have become a daily routine. But as James Wang observes, many problems can only be solved in face-to-face meetings. "It's just like in the TV series ‘Crime Scene Investigation' – before the forensic experts can do an autopsy, they first need to go to the scene of the crime," he says.

Over the past few years, James Wang, who grew up in Kaohsiung, has been agonizing over whether he should move the company headquarters to Shanghai. He is greatly relieved that now there is no longer any need to make that decision. "Meetings will be held in the place where the boss is," he asserts.

The Renaissance of 'Made in Taiwan'

If direct links are to generate maximum effect, the government needs to figure out how to use this opportunity and how to redefine Taiwan's competitive advantages.

Wang Jiann-chyuan, vice president of the Chung-Hua Institution for Economic Research, regards direct links as a new opportunity for Taiwan amid the global economic downturn. If Taiwan makes good use of this new scenario, it will be able to create new economic advantages that could lead to a revival of "Made in Taiwan," the economist predicts.

Jack Yu, chairman of logistics service provider Elite International Management and Marketing, firmly believes that the direct transportation links will bring a second boom for goods made in Taiwan. Taiwanese companies will ship back half-finished products from their Chinese factories to Taiwan to do the final 35 percent of processing and finishing. As goods "Made in Taiwan," they will then be sold around the globe, Yu predicts.

But won't it be too costly to ship goods back and forth between Taiwan and China at various stages of manufacturing? Not necessarily. The sea transport of a standard shipping container, which can hold tens of thousands of handsets or cameras, costs less than US$150. "Costs for shipping goods back to Taiwan are less than one NT dollar per unit. After the handsets or cameras have undergone deep processing and are labeled ‘Made in Taiwan,' they can be sold at a price that's more than NT$1,000 higher (than if they were made in China). Of course it pays off," Yu asserts with confidence.

Taiwan Also Has a Price Advantage

Keen Perception Industries, a Taiwanese maker of all-terrain vehicles and motorbikes, is a case in point.

Company president Michael Wu analyzes Taiwan's "price advantage." Keen Perception's Chinese factory makes the vehicle bodies, which are shipped back to Kaohsiung Port where the engines are fitted and the vehicles assembled for sale. It is cheaper to send the vehicle bodies back to Taiwan by sea than to truck them to other factories in China, because road transport there is 50 percent more expensive than sea transport. Moreover, China imposes tolls on national roads, as well as many local roads. Wu asserts that if all these costs are taken into account, "no matter where you do it in China, it won't be cheaper than if you finish products in Taiwan."

Entrepreneurs, who always react more quickly than governments, are aware of the prospects that direct links entail. For them they are not only a tool for saving costs and improving logistical efficiency, but also are a shot in the arm for tackling the global market.

James W. Huang, chairman of building material maker Romastone, which has a factory in Jiangsu, observes that Taiwanese companies have begun to take advantage of direct links to ship their products to the inland port of Lianyungang in Jiangsu Province where their goods are transferred to rail for transport to the emerging markets of Russia and Eastern Europe. "These are markets that we Taiwanese didn't even dare to think of in the past," Huang says in revealing new possibilities.

Panacea or Poison?

But not everyone is as optimistic as the business community or the new administration.

Many ask themselves whether direct links are a remedy to heal the economic recession or whether they are a poison that will make the island overly dependent on China.

Will economic integration across the Taiwan Strait prove to be a big boon for Taiwan, or an utter disaster?

The answer to this question fundamentally depends on how Taiwan defines its role.

The direct links establish a relationship of direct competition and cooperation between Taiwan and China. Be it industries, ports, human talent or resources, the two sides of the Taiwan Strait are finding themselves in a tricky seesaw struggle between already existing competition and potential collaboration, as each side tries to find its most advantageous position.

But what worries many is that the Taiwanese government has not moved beyond the superficial assessment that direct links "save time and money." So far it has failed to come up with strategic thinking on how Taiwan could take advantage of direct links and create new competitive strengths to engage in "deep processing."

Former DPP legislator Lin Cho-shui is sure that Taiwan is doomed to failure if the government positions the island as a "broker" or "agent" for multinational corporations doing business in China and views direct links as a panacea for economic woes. Lin argues that multinationals don't need to rely on Taiwan as their broker, because they established bases in China early on. "Making it the core of Taiwan's economic strategy to serve as a platform for multinationals who want to enter China – we already missed that boat," Lin avers.

Former SEF chairman Hung Chi-chang also warns that people should not go overboard with anticipation. He points out that Chinese exports have contracted sharply by 40 percent over the past two months and that cross-strait trade has also declined by 30 percent. In such times direct links are unlikely to generate immediate and palpable results for Taiwan. Furthermore, the big question is, "Who is ultimately reaping the benefits of direct links?" If only big business reaps the benefits, while the man in the street does not feel that he gets anything out of direct links, the sense of relative deprivation will only become stronger.

Direct Links to Hollow Out Taiwan?

Hung suggests that the government should use direct links to upgrade Taiwan's operational advantages and greatly improve basic infrastructure in order to dispel concerns about their negative impact. He argues that the Taoyuan Airport City infrastructure upgrade project and the subway line that will link the airport with Taipei City should be put on the fast track to completion. At the same time outdated legislation and tax standards for free ports should be amended so that people and capital are willing to return to Taiwan.

"Direct links will be useful only if Taiwan per se has strengths; otherwise, Taiwan will be hollowed out. Presently, we see the government doing nothing but opening up Taiwan with all its might without taking any stance," Hung laments. While Hung sees direct links in a positive light, he cannot help but feel concerned that the government is determining relevant complementary measures at a snail's pace.

Perhaps, with the opening of direct links in 2008, Taiwan has only now truly entered the era of globalization and all-out competition. Direct links will create imperceptible effects on every single Taiwanese.

Kong-Fah Steve Cheng, associate professor at the Department of Business Administration of National Chung Cheng University, is convinced that direct links are an important turning point in Taiwan's history and that their effect depends on what each individual makes of them.

Gripped by Fear or Inspired by Hope?

"If you view direct links as an opportunity, they will be an opportunity. If you regard them as a threat, they will be a threat," Cheng asserts.

The question is whether we let ourselves be gripped by fear or inspired by hope.

Renowned economist Lester Thurow writes in his book Building Wealth that nations, companies and individuals need to think of themselves as explorers. The most important traits of explorers are boldness, fearlessness and the will to study a wide array of knowledge, to pull out all the stops and to sail toward the unknown.

From a certain perspective, direct sea and air links have opened a new era of uncharted waters for Taiwan. As the giant ship called Taiwan sails toward a globally integrated world, it must be bold and clever in establishing footholds across the globe to make the good tides roll its way.

China is not the final destination of this voyage, but the starting point for a voyage around the world.

Translated from the Chinese by Susanne Ganz


Chinese Version: 大三通 你的機會,你的挑戰

Keywords:

好友人數