"Everybody is really shaken," says Jason Cheng, president and CEO of ASUS spin-off Pegatron Corp., after returning from an extended vacation in the United States that gave him little pleasure.

Cheng originally went to the U.S. to visit a few old friends, unsuspecting that a simple vacation would become a harrowing journey. He says that when the U.S. subprime mortgage crisis first erupted last year, Americans saw it as no more than a reoccurrence of the bubble-burst that hit high-tech markets in 2001. Then international crude prices began soaring, and Americans were suddenly reminded of the two oil crises they faced in the 1970s that led to stagflation. Last month, the two federally-backed U.S. mortgage-financing giants Fannie Mae and Freddie Mac appeared on the verge of bankruptcy, and Americans began worrying that another Great Depression of the 1930s loomed.

"A lot of people are selling their homes," Cheng observes, sensing that the trend may impact his business. "We have to adjust the targets we set for the third and fourth quarters, which are usually peak seasons. We can't be too aggressive."

To gauge the impact of the global economic downturn on Taiwan's companies, CommonWealth Magazine's survey center and four correspondents conducted a questionnaire survey of 1,982 CEOs of top local enterprises between July 21 and 25. Of the 197 responses received, 60 were answered directly by CEOs or chairman of the companies. The results were more alarming than might have been expected.

Everyone Feeling the Pain

Compared to a similar survey conducted in April when some 70 percent of enterprises were confident that the economy would take a turn for the better after the installation of a new government in May, 99.5 percent of enterprises in the latest survey said they were feeling the pinch of the sluggish economic environment.

More than 60 percent felt weak economic conditions would persist well into the future, with 48.4 percent expecting the downturn to last from one to two years and 13.2 percent guessing it would last from two to three years. Another 31.6 percent were somewhat more optimistic, believing the economy would begin recovering in six months to a year. (Table 1)

Among different industries, the financial sector was the most pessimistic. Not one financial institution believed the economic slump would end within six months, while two-thirds predicted the doldrums would last between one to two more years, far higher than in electronics manufacturing (45.5 percent), conventional industries (47 percent) and the service sector (45.2 percent). The result suggests that banks will grow more conservative in their lending practices, and Taiwan's government should be aware of the possibility that the credit crunch plaguing the U.S. could also emerge at home.

"Right now, there are too many uncertainties," says Daniel Wu, chief investment officer of the privately-held Chinatrust Financial Holding Co. "Even if companies' earnings are still strong right now, the U.S. is facing long-term problems that will take three to five years to deal with. If the U.S. goes into recession, Asia will definitely feel the impact."

Decline in Earnings Widely Anticipated

The financial sector's caution reflects its pessimistic earnings outlook for Taiwan's enterprises. The survey found that 79.3 percent of enterprises expected their profits to be down this year, while only 7.4 percent of them anticipated stronger earnings. (Table 2)

When asked to estimate by how much profits would fall, the largest portion of respondents (29.1 percent) answered between 5 and 10 percent, but rather alarmingly, nearly one-fifth said earnings could decline by more than 25 percent. (Table 3)

Even getting a feel for third- and fourth-quarter profits is proving difficult amid global uncertainty. The high-tech industry, whose main markets are in Europe and the U.S., and the financial sector have the poorest earnings visibility of any sector in Taiwan at present. Twenty-seven percent of high-tech enterprises said they simply could not estimate the impact of the current economic downturn on their annual earnings, while 25 percent of financial institutions, whose profitability is closely tied to global equity markets, said they could still not accurately forecast earnings for the year.

Across all industries, 66.5 percent of enterprises indicated that they were not optimistic about earnings in 2009. (Table 4)

Despite broad support among a majority of Taiwanese CEOs for the new administration's policies aimed at stimulating economic growth (Table 7), the global economic gloom seems to be overshadowing what brightness these measures might bring.

The muddled profits picture influenced how enterprises viewed the prospects for the local stock market, the economic window on the health of the private sector.

A Bear in the Bourse

When the CEOs of CommonWealth's Top 1,000 Enterprises, almost all of which are publicly listed or foreign-based, were asked, "How much confidence do you have in Taiwan's stock market for the second half of the year?" only 53.7 percent responded "confident" or "very confident." The balance, 46.3 percent, said they were "not confident" or "completely lacking in confidence." (Table 8)

Ironically, the sector with the most cautious economic outlook, the financial sector, is the most bullish on the stock market, with 71.5 percent expressing confidence in the local bourse's performance over the second half of the year.

Electronics manufacturing and conventional industries, on the other hand, were generally bearish, with 51.1 percent and 53.6 percent, respectively, saying they were "not confident" or "completely lacking in confidence" in the market's short-term future.

Layoffs Looming, but Limited

Almost all of the enterprises responding said they were preparing survival measures to overcome the economic slump that could still regress into stagflation. Among the tactics embraced: 68.6 percent said they would consolidate their organizations and revamp their processes to lower costs, 50 percent would adjust their workforces and 45.2 percent would adjust their pricing strategies. (Table 5)

"Winter is usually a time to lay a foundation," said an executive at Kuozui Motors, Ltd., metaphorically describing the vehicle maker's plans to revamp its approach in the short term. "When the economy is strong, there are too many orders, and the ones we don't want, we pass on to others. We normally ignore those little sesame seeds that fall to the floor, but now we have to conscientiously pay attention to them."

What is quite surprising is that 42.6 percent of the enterprises said they would increase investment in employee training in preparation for the future, with the financial sector (66.7 percent) and electronics manufacturing (45.5 percent) the most aggressive in this area. The trend indicates that many enterprises will capitalize on the slowdown to reinvent themselves internally.

Looking more closely at the numbers, different industries are taking widely varying approaches to the impending economic challenges. In the capital-intensive electronics manufacturing sector, 43.2 percent stressed they would retain earnings to get through the winter, a strategy similar to that adopted by a number of optoelectronics and semiconductor vendors who recently announced that they were deferring capital investments. On the other hand, in conventional industries, which have been hardest hit by rising commodity prices, 59.8 percent of enterprises said they would raise prices to reflect their costs.

If any silver lining can be drawn from the survey, it is that only 9.7 percent of the enterprises questioned plan to lay off employees, and only 1.7 percent anticipated cuts in pay. Not one respondent in the financial sector said his or her company would cut staff.

However, 56.6 percent of enterprises did say they were leaning toward reducing their workforces through natural attrition, simply by not filling vacancies, while 34.3 percent have nixed the idea of pay raises. Conversely, around 5 percent of the respondents said they were recruiting talent and would raise wages. (Table 6)

"With Wall Street suffering heavy losses, now is the best time to poach top talent away from others," said Yuanta Securities vice president Lawrence Lee.

One Kaohsiung-based enterprise in a conventional industry thinks raising wages is actually good for business. Eric Lee, chairman of century-old traditional Taiwanese pastry maker Jiu Zhen Nan, increased the salaries of all employees by 3 to 5 percent in July, in part because he sensed his employees would have a tough time making ends meet without a pay raise at a time of high inflation. But he also made the move to bolster esprit de corps, as he will depend on his employees to implement a number of cost-cutting measures necessary to address the economic downturn.

As a manager at Kuozui Motors says, "Many ideas to increase revenues and lower costs can only be conceived by those who are personally facing the difficult economic conditions."

A number of companies have already taken concrete action, including Far Eastern Department Stores. Since June, the company has turned off its outdoor signage after business hours, saving itself NT$650,000 a month. It has also purchased automatic hand dryers to discourage customers from using paper towels and has ordered that the air conditioning, as well as electrical office equipment like printers and monitors, be turned off at 6 p.m.

"A lot of things can be done without making any extra effort," says Far Eastern Department Stores manager Cheng Chia-hui.

Companies are bracing for tougher times ahead, but the wisdom they forge through their efforts will provide even more practical solutions that motivate their people in meeting the challenge.

Translated from the Chinese by Luke Sabatier

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Chinese Version: 全球經濟陷入衰退　如何苦中創樂