As 2009 came to a close, nobody foresaw Taiwan's robust growth in 2010. The country's economy grew at nearly a 10-percent clip this year, the highest since the 1990s and more than double the 4-percent growth predicted by the government, think tanks, and most CEOs.

But because this year's strong economic performance will set a high baseline, more than half of the CEOs of Taiwan's biggest companies believe that economic growth will fall in the 4-5 percent range in 2011, returning to the pace seen before the global financial crisis battered the world economy. 

Though Taiwan's top companies have yet to close the books on 2010, more than half of Taiwan's top executives in CommonWealth Magazine's latest "1000 Top CEO Survey on the Economy" said their companies' sales this year would grow by more than 10 percent. 

More than one-fifth of all high-tech and financial enterprises expect to post better than 30-percent rises in both sales and earnings.

"This year will be a year in which TSMC sets records for both sales and profits," said Taiwan Semiconductor Manufacturing Co. (TSMC) chairman Morris Chang. The statement, which echoed what many other top executives were saying, provided a hint that stagnant wage rates and employee numbers in the private sector could finally be on the rise in 2011.

Over two-thirds (71 percent) of the executives surveyed said they would hire more people in Taiwan in 2011, and 75 percent planned to raise the average salary of their employees, the survey found. 

The optimism, however, could not hide challenges looming over the horizon. While the economy was originally expected to perform well through the end of 2010, disruptive factors have surfaced during the last two quarters. The three greatest concerns cited by CEOs are exchange rates, rising raw material prices, and global economic instability.

Exchange Rate: NT$28.6 to the U.S dollar?

Exchange rate volatility constitutes the biggest operating risk in the minds of Taiwan's CEOs, and it could continue to cast a shadow over their businesses in 2011. The survey found that more than 70 percent of respondents saw exchange rates as the biggest external challenge they expected to face next year.

The United States Federal Reserve has already engaged in two rounds of "quantitative easing," aimed at jump-starting the stagnant U.S. economy by creating money out of nothing, and many market observers believe a third round will be on the way if the American economy does not show clear signs of improvement. The Polaris Research Institute forecast that the Taiwan dollar would appreciate to NT$29.7 to the U.S. dollar in 2011, while Morgan Stanley's global currency saw it rising to NT$28.6 to the greenback, with a number "in the 20s" becoming a normal state of affairs after having been in the "30s" since late 1997.

At TSMC, for example, the impact of an appreciating Taiwan dollar brought to a halt a record eight consecutive months of revenue growth, and actually led revenues to fall by 4.1 percent from October to November.

The Taiwan dollar's appreciation is putting considerable pressure on many enterprises, especially downstream OEM suppliers who quote most of their products in U.S. dollars. Hsing-chien Tuan, the vice chairman and CEO of flat panel maker Chimei Innolux Corp., has been preoccupied for most of the year trying to iron out the rough edges of the March merger between Innolux Display Corp., Chi Mei Optoelectronics and TPO Displays Corp. But the Taiwan dollar's appreciation has complicated the company's operations even further. Chimei Innolux's revenues have been squeezed because it has had to buy raw materials priced in the appreciating Japanese yen while selling its finished products in depreciating U.S. dollars.

"The exchange rate's impact is huge. This year, the Taiwan dollar has appreciated 7.8 percent, meaning our revenues have fallen 7.8 percent, as have our profits. But our wages have increased, relatively speaking. If our labor costs were originally US$1, now they are US$1.07," Tuan says.

The greenback's weakness is also one of the main factors pushing international grain prices higher. Wang Lee-rong, the director of the Chung-hua Institution for Economic Research's Center for Economic Forecasting, said in mid-December while presenting an economic forecast that increases in grain prices would spark price increases in other commodities. That is why the CEOs surveyed cited "raw material price hikes" as their second biggest external challenge.

In its October 2010 "World Economic Outlook" report, the International Monetary Fund (IMF) described 2011 as a year of recovery, risk and rebalancing. This mixed picture and general uncertainty over global economic trends also deepened the concerns for the coming year among the executives surveyed.

70% of CEOs Satisfied with Ma Government

Taiwan is different from other countries because of the unique cross-Taiwan Strait relationship that profoundly influences how local enterprises operate. The biggest step forward this year was the signing of the Taiwan-China Economic Cooperation Framework Agreement (ECFA), which had been advocated by President Ma Ying-jeou and his administration since he took office in May 2008. The trade pact took effect in September 2010, so the survey's finding that only 4 percent of enterprises had benefited from it thus far was not surprising. The financial services sector was the biggest early winner, with 11 percent of respondents claiming gains from the ECFA.

But 60 percent of the executives surveyed – and 80 percent of those in the financial field – predicted that the ECFA would eventually benefit their companies. 

On Dec. 23, Taiwan-based Cathay United Bank Co. and First Commercial Bank Co. both decided to open new branches in Shanghai on the same day. Three other Taiwanese banks – Land Bank of Taiwan, Taiwan Cooperative Bank, and Chang Hwa Bank – also received permits from China Banking Regulatory Commission to open branches there. For a conservative banking sector long limited to Taiwan, the permits have opened the way for local financial institutions to straddle both sides of the Taiwan Strait.

Susan Chang, chairwoman of Taiwan Financial Holding Co., says that beginning next year, the Chinese branches of Taiwan's banks will begin operations, with a focus in the first year on becoming profitable, the precondition for them to provide Chinese renminbi services to Taiwanese businesses in China in year two.

"This has given everybody a goal to work toward," Chang says. "Because of this opening, there is new development, so the financial sector has reason for optimism."

The improvement in cross-strait relations has not only directly and indirectly stimulated Taiwan's exports and economy, but also brought gains in the diplomatic arena. Taiwan's citizens have been granted visa-free status by EU member countries, the United Kingdom, Canada, Australia and New Zealand.

"Getting visa-free treatment from many countries is something the government has done very well. This is about the country's citizens being able to travel abroad with dignity," says international businesswoman Sophia Tong, the former general manager of IBM Taiwan and now Test Rite Group CEO.

Not all reaction to government policy was positive. One surveyed executive said that while companies had gained ground in 2010 and the economy posted strong growth, the rich-poor divide and government debt were problems that needed to be addressed.

Still, more than 70 percent of the surveyed executives expressed satisfaction with the Ma government's performance in its first two and a half years in office. 

Cross-strait Liberalization Seen as Slowing Down

In Taiwan's high profile five special municipality elections on Nov. 27, covering 60 percent of the country's population, the Kuomintang won three mayoral seats to the Democratic Progressive Party's two, but in the overall vote count, the DPP beat the KMT by 5 percentage points.

As a result, 47 of the surveyed executives predicted that steps to liberalize cross-strait ties would continue but at a slower pace and encompass a smaller scope.

In terms of the priorities for future negotiations between Taiwan and China, over 72 percent of the CEOs hoped that the government would continue to pursue an "Investment Protection Agreement," which, contrary to expectations, failed to materialize during recent high level talks between the two countries. 

To many executives, the pace and scope of Taiwan-China liberalization to date have actually been inadequate. They believed that the most pressing needs in improving China's business environment were "government integrity and transparency" and unresolved issues in the cross-strait relationship. In the financial services industry, 58 percent of respondents cited the most urgent problem as "market access barriers." 

"Nobody in the financial sector is satisfied with the current pace of liberalization," says Fubon Financial Holding Co. chairman Daniel Tsai. 

The main areas needing improvement in Taiwan's economic environment are the same that have been discussed for a long time – "industry restructuring and upgrading" and the lack of clarity in "Taiwan's positioning and competitiveness strategy," cited by 50 percent and 44 percent of executives, respectively. 

"Undertaking industrial restructuring is a long-term goal. It needs at least 20 or 30 years to accomplish," says Taiwan's economic affairs minister Shih Yen-shiang. To restructure industry, the government has looked to develop diverse emerging industries and promoted six major sectors. But of the six, only the larger-scale green energy sector, which includes solar cells and LED lights and components, is foreseen as generating NT$500 billion in revenues by 2015. The others, such as the biotechnology sector, "may need another 20 years before notable revenues are generated. The cultural and creative industry sector also needs a long period of time to gain experience," Shih says. 

Thumbs Up to 'Green Energy,' Thumbs Down to Creative Industries

Assessing the potential of the six emerging sectors being promoted by the government, the executives surveyed had a wide divergence of opinion because of their different fields of endeavor. The weighted scores of the top four sectors cited – "green energy," "tourism," "medical and health care services," and "biotechnology" – were tightly bunched. 

"Cultural and creative industries" came in last, seen as the sector having the least potential.

"Taiwan's market is relatively small. If the cultural and creative sector wants to enter global markets, or at least cover the ethnic Chinese market, and build a brand, it will be quite difficult. From an investment perspective, the opportunity is not very good," says WK Technology Fund managing director Frank Ho.

When it comes to the green energy sector, however, Taiwan has good opportunities, especially in solar cells and LEDs. The two products capitalize on Taiwan's high-tech talent and technical advantages, and the markets for both have plenty of room for growth. Many of Taiwan's biggest companies, such as TSMC, Delta Electronics, and AU Optronics, have invested in the solar cell and LED sectors, sensing their high growth potential.

In the executives' assessment of emerging industries, the tourism sector had a weighted score of 600 points, only 11 points fewer than the green energy sector, standing out as the service business in Taiwan with the most potential. Taiwan had 5 million visitor arrivals in the first 11 months of 2010, 28 percent higher than over the same period in 2009. Chinese visitor numbers were up 70 percent.

Those numbers could grow further in 2011 after Taiwan and China recently agreed to raise the ceiling on Chinese visitors in Taiwan from 3,000 per day to 4,000. A move to allow Chinese travelers to visit Taiwan independent of tour groups, likely to take effect in the first half of 2011, should also give Taiwan's tourism sector a shot in the arm.

Looking ahead, Taiwan's executives recognize the potential challenges they may face in the coming year, but they also have high expectations, with 88 percent of those surveyed feeling optimistic over economic prospects in 2011.

Then again, for many of the top executives, being in business means they cannot afford to be too pessimistic.

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About the Survey

The CommonWealth Magazine 2010 Top 1000 CEO survey was based on questionnaires distributed to the CEOs of CommonWealth Magazine's top 1000 manufacturers, top 500 service companies, top 100 financial service providers and 15 financial holding companies. A total of 1,270 questionnaires were sent out and 470 were returned, a return rate of 37.01 percent. The survey was conducted by the CommonWealth Survey Research Center from Nov. 29 to Dec. 17.

Translated from the Chinese by Luke Sabatier