Many leaders of Taiwan's biggest companies are bracing for a frosty 2012. CommonWealth Magazine's annual Top 1000 CEO Survey found that 85 percent of the top executives at Taiwan's 1,000 biggest companies believe the economic prospects for 2012 are poor, a result that is both surprising and not surprising at the same time. (Table 1)

It is not surprising because Morris Chang, the chairman of Taiwan Semiconductor Manufacturing Co. (TSMC), warned at a dinner honoring CommonWealth Magazine's "Most Admired Companies" in October that the "swallows heralding spring will not be seen next year."

Yet what comes as quite unexpected is the overwhelming consensus among top executives that next year will be a struggle. The sentiment prevailed among leaders across all industries – from the high-tech to old-economy and manufacturing sectors to services and banking – and among CEOs at both domestic and foreign companies.

Regardless of how the executives feel, the great haze of 2012 is about to arrive.

The U.S. and Europe: Economic Black Holes

Taiwan's statistics bureau – the Directorate-General of Budget, Accounting, and Statistics – recently forecast that the country's economy would grow by 4.19 percent in 2012, but the CEOs surveyed by CommonWealth Magazine were far more pessimistic. Nearly nine out of every 10 respondents (88 percent) put next year's growth rate at below 4.2 percent. (Table 2)

Nearly one out of every five (17 percent) predicted their company would post negative profit growth.

Similar pessimism was seen in a separate survey conducted by CommonWealth Magazine on "Economic Confidence," which gauged the feelings of average Taiwanese citizens. Nearly 65 percent of the poll's respondents were down on prospects for the world economy next year. (Table 13)

Those with the bleakest outlooks were employed in the banking sector (97 percent) and high-tech manufacturing (83 percent), as well as government employees and teachers (70 percent).

And an even higher percentage of the general Taiwanese public felt gloomy about the Taiwanese economy. (Table 14)

In this general environment of economic gloom, the top executives said the external challenge that worried them most by far was the stagnant European and U.S. economies and weak demand (84 percent), followed by rises in commodity prices (43 percent), and exchange rate fluctuations (39 percent). A third of the CEOs, however, also cited "the higher threshold of doing business in China" as their greatest worry for next year, indicating the extent to which many Taiwanese companies with investments abroad depend on China. (Table 3)

Executives in the high-tech manufacturing sector were by far the most likely (93 percent) to cite the stagnant European and U.S. economies as their biggest external concern. The finding reflects the high degree to which high-tech businesses are global in nature and have strong links to markets in the West.

As for the biggest internal challenges, 72 percent of respondents cited "intensifying competition" as their biggest headache, followed by "no new growth drivers" (35 percent) and "a lack of talent" (34.8 percent). These were big concerns for executives across the board. (Table 4)

Lack of Confidence Hurts Domestic Demand

Taiwan's economy underwent huge change in 2011. Talk of pay raises at the beginning of the year gave way to a surge of furloughs in the high-tech sector as the year came to an end. Even the service sector, which relies on domestic demand more than exports, was forced to restrain its optimism.  

A key indicator of fluctuations in domestic consumption – the real estate sector – has been particularly vulnerable to the whims of the changing economic tide. 

Stanley Su, head researcher at Sinyi Realty Inc., says a wait-and-see mood currently prevails in the market, and he doesn't think it likely that buying interest will pick up dramatically in the coming year. At best, Su says, the market could pick up some momentum after Taiwan's Jan. 14, 2012 presidential election.

Protecting domestic demand means reinforcing employment. So to get people to loosen their purse strings, they must be given a greater sense of security in their jobs, but for many average Taiwanese, that's not the case at present.

CommonWealth Magazine's "Economic Confidence" survey found that 32 percent of respondents were worried that their employers would cut staff in 2012 (Table 15), while 36 percent feared being furloughed. (Table 16)

Among the top executives who responded to the Top 1000 CEO survey, 24 percent said they had plans to streamline their workforces (Table 5), but only 6.4 percent were ready to reduce employee numbers in Taiwan (Table 6). Executives in the high-tech sector were the most likely to be considering layoffs in Taiwan (11 percent) and 6 percent of respondents were thinking of furloughing workers (Table 7). Amid the gloom and doom, however, 56 percent of the corporate leaders surveyed said they were considering raising the pay of their employees in 2012. 

ECFA Impact Showing Limitations

Although the vast majority of respondents to the CEO survey had pessimistic economic outlooks, and about 48 percent said they had no plans to make new investments abroad, 42 percent still were upbeat about China and more than 30 percent still planned to invest in Southeast Asia and Japan. (Table 8)

The entire world is focused on China's market, and Taiwanese-invested companies based overseas are no exception. In such an environment, how much has the Economic Cooperation Framework Agreement (ECFA) signed by Taiwan and China helped Taiwanese businesses, and will it pay dividends for the two countries' economies?

Compared with last year's CEO survey, the ratio of executives who said their companies had benefited from the trade deal rose from 4 percent to about 11 percent (Table 9), an indication that the ECFA's promise of greater prosperity is gradually being realized. But at the same time, bullishness over the pact's "Early Harvest List" – under which over 500 different types of Taiwan-made products are given tariff reductions or exemptions when imported into China – seems to be eroding.

The percent of executives who said their companies had "not yet benefited (from the ECFA), but will in the future" fell from 61 percent in 2010 to 46 percent this year, and those responding that it would have "no effect" on their operations rose from 27 percent to about 35 percent. (Table 9)

The executives with the most optimistic outlooks for China's market were concentrated in the financial services sector. (Table 10)

As Yang Chia-yan, a division director at the Taiwan Institute of Economic Research, explains, "ECFA is no longer a buzzword that catches people's attention." On the other hand, dramatic changes in operating conditions in China over the past year have given Taiwanese companies new reasons to feel hesitant about doing business there.

While CEOs favor Ma, the Public Is Divided

When asked to choose from among the China policies of Taiwan's three presidential candidates, the executives backed President Ma Ying-jeou by a wide margin. Sixty-three percent said they supported Ma's policy on China, compared with 6 percent who backed Democratic Progressive Party chairwoman Tsai Ing-wen and less than 2 percent who supported People First Party chairman James Soong. (Table 11)

Ma's economic policies were favored by nearly as big of a margin, with 55 percent backing the incumbent, 8 percent backing Tsai and less than 1 percent supporting Soong. (Table 12)

The executives believed that the most urgent task of the person elected president would be to improve elements of the "overall economic environment." Were Ma to win re-election, his top priorities, the respondents said, would be to tackle "Taiwan's economic positioning and competitive strategies," "government efficiency," and "the wealth gap." Were Tsai to win, her priorities would be "relations with China," "Taiwan's economic positioning and competitive strategies," and "government integrity and transparency."

While top executives overwhelmingly backed Ma on relations with China and the economy, average citizens responding to the "Economic Confidence" survey were more divided, with the gap of support narrowing between Ma and Tsai. Compared to the CEOs, the general public's support for the president's cross-strait policies fell to 36 percent, while 18 percent favor Tsai Ing-wen's stated approach. (Table 17)

Ma's economic policies won a 31-18 margin over his main rival. (Table 18)

Soong, who is trailing far behind the two main candidates in general opinion polls, received 5.5-percent backing for his China policy and 4.5-percent support for his economic platform.

Democracy Must Not Lose

Two separates surveys – one of Taiwan's corporate CEOs, the other of average citizens – yielded divergent results that are worthy of attention.

Difficult economic times usually portend poorly for political incumbents, so it may seem odd that the president's cross-strait and economic policies received higher support in the two CommonWealth Magazine surveys than those of his rivals.

One explanation could be that because of the capricious nature of relations with China and the deepening of economic ties, the predictability of Ma's policies after having been in office for over three years gave the president an edge over Tsai and Soong.

In other words, in the electoral battlefields of "cross-strait relations" and "the economy," Ma's "incumbency advantage" outweighs his liabilities as an incumbent during an economic downturn.  

"That's not a surprise," says Chao-lung Liu, a professor in National Changhua University of Education's Department of Public Affairs and Civic Education. "Ma Ying-jeou has governed for over three years and everybody is more familiar with his cross-strait policies and tendencies. In contrast, Tsai Ing-wen's ‘Taiwan consensus' is a process. Nobody knows what the outcome will be, so of course there is less support for it."

Yet Taiwan's average citizens were not as resoundingly favorable of Ma's cross-strait and economic policies as were the island's corporate executives.

The most likely reason is that the vast majority of Taiwan's top 1,000 businesses have investments in China and thus far greater commercial interests at stake. Also, the president's approach to relations with China and economic issues has been aligned with the interests of the business community.  

Professor Liu also cautions that polls like the Top 1000 CEO Survey and the Economic Confidence poll, which focused on single issues, generally do not accurately reflect voting behavior. Voters are influenced by many factors, relations with China and the economy being just two of them. Other factors that will be in play on Jan. 14 will be national identity, the candidates' leadership ability and integrity, and the strength of their teams, as well as such issues as class identity and gender politics. These will shape different voting outcomes depending on each voter's basic preferences.

The executives' overwhelming support for Ma's policies indicates their strong tendency to be "economic voters," but that trait and the depth of their commercial and trade ties with China do not necessarily correspond to the world views of average voters. Even more importantly, significant numbers of respondents in both polls said they were "unclear about the three candidates' policy directions." Just over one-fifth of respondents (23 percent of CEOs, 21 percent of the general public) said they were unclear on the candidates' China policy, and even more (27 percent of CEOs, 22 percent of the general public) said they did not have a feel for the candidates' economic approaches. (Tables 11, 12,17, 18)

That lack of clarity suggests that negative campaigning has overshadowed substantive policy debates during the current election cycle, and the country may pay the price.

Candidates must explain their policies clearly. If an election that will determine Taiwan's future direction is decided by negative attacks, then the real loser won't be any of the candidates, but democracy itself.

Translated from the Chinese by Luke Sabatier

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About the CommonWealth Magazine "Economic Confidence" Survey

The CommonWealth Magazine "Economic Confidence" Survey was conducted through telephone interviews of adults 20 years of age or older by systematic random sampling. A total of 1,082 valid responses were collected. With a confidence level of 95 percent, the margin of error is plus or minus 2.98 percent. The survey was conducted by the CommonWealth Survey Center from Dec. 20 to Dec. 23, 2011.