What do you predict Taiwan's economic growth rate will be for the year that has just begun?

That was one of the questions asked by the CommonWealth Magazine Survey Research Center in our Top 1,000 CEO survey, targeted at the CEOs of 1,000 leading manufacturers, 500 service companies and 100 financial institutions in Taiwan. The 427 CEOs and top executives who responded were cautious in their assessments of the prospects for 2010, giving far less optimistic projections than those made by Taiwan's top economic research institutes and agencies.

Of Taiwan's four most authoritative economic forecasting units, the Taiwan Institute for Economic Research was the least optimistic, projecting 4.21 percent growth for 2010. Academia Sinica's Institute of Economics was the most optimistic, forecasting a 4.73 percent growth rate, and the government's Directorate-General of Budget, Accounting and Statistics and the Chung-Hwa Institution for Economic Research were in between. The average growth forecast of the four organizations was 4.48 percent. (Table 1-1)

But 90 percent of the CEOs, who are active on the economic battlefield every day, pegged the 2010 growth rate at below 4.5 percent, and 63 percent projected growth at lower than 4 percent, a less optimistic appraisal than those made by the government or the economic research institutes. (Table 1-2)

Conservative Outlook

Raymond Sung, the chairman of Simplo Technology Co., Taiwan's 104th-ranked manufacturer, predicted growth would fall in the 3.5 to 4 percent range.

"Taiwan had negative growth last year. Why would growth suddenly rise above 4 percent? If it does, I'll applaud the government," Sung says.

Simplo Technology, the world's largest maker of laptop batteries, was one of the few companies that grew despite the global economic downturn. Its 2008 growth rate ranked 79th among Taiwan's top 1,000 enterprises, and its after-tax net earnings ranked 50th. Sung observes that Taiwan's exports contribute more than domestic demand to the country's economic growth, and exports are dominated by information technology products. While he has seen signs of a recovery, he doesn't believe it is sufficient to spark a strong rebound because of strong pressure from customers for information technology companies to lower prices. As prices follow a downward trend, achieving growth becomes more difficult. Sung says that when it comes to revenue and earnings growth, enterprises must work twice as hard for half as much.

Although CEOs have a relatively cautious outlook on Taiwan's economic prospects, 85 percent of them were optimistic about the global economy (Table 2), and their expectations of a gradual worldwide recovery led them to express optimism over revenue and earnings projections for their own businesses. Executives in the technology sector were the most optimistic about growth of revenue, while executives in the financial services sector had the highest expectations for growth of earnings. (Tables 3, 4, 5)

The CEOs believe the greatest external challenges they will face this year are rising commodity prices, global economic uncertainty, and currency appreciation. Two of these concerns echoed those voiced by Morris Chang, the CEO and chairman of Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chipmaker. Chang recently cited rising commodity prices, exchange rates and environmental issues as challenges to pay attention to in 2010.

In terms of exchange rates, the Taiwan dollar stood at 32.3 to the U.S. dollar at the time the survey was published. Simplo Technology's Sung said that if the currency appreciates to 31 or 31.5 to the greenback, companies should be able to absorb it because they have already hedged against exchange rate risk.

"But if the Taiwan dollar went up to 30, it would be extremely serious for exports," Sung says, as he starts making calculations out loud. An exchange rate of NT$30 to the U.S. dollar would represent a 9 percent appreciation, he says, which would deal a huge blow to a technology manufacturing sector that averages gross margins of 3 percent.

Over the past two years, however, some observers have felt that the country's currency policy has left the Taiwan dollar undervalued to benefit the country's exporters while putting private consumption at a disadvantage. The voices of those criticizing this approach are growing.

Favoring ECFA but Skeptical of Government's Negotiating Skills

Nearly 90 percent of the executives who participated in the survey said they support signing an economic cooperation framework agreement (ECFA) with China. (Table 6)

Their reasoning is that with the inception of the ASEAN plus one (China) free trade zone, signing an ECFA will help Taiwanese-invested companies in China be more competitive. They also believe such a deal will open up the possibility of launching trade negotiations with other areas.

The five sectors mentioned as candidates for preferential treatment under the deal's "early harvest" program – financial services, textiles, petrochemicals, machinery and auto parts – accounted for NT$2 trillion in exports in 2008, with one-third of the total directed to China, reflecting their considerable influence.

Although executives widely support President Ma Ying-jeou's initiative to sign an ECFA, 45 percent are not confident that his administration has the negotiating skill to protect Taiwan's interests. They also believe the measures proposed by the government to help vulnerable industries and workers cushion the blow of the trade pact are inadequate. (Tables 8, 9)

The government has already opened the door to Chinese investment in Taiwan, and 60 percent of the executives indicated they would be willing to enter into strategic partnerships with Chinese investors, allow them to buy a stake in their companies, or set up joint ventures with them. (Table 10)

In 2009, cross-strait business visits, the depth of discussions, and the range of cooperation all grew markedly, the result of the Ministry of Economic Affairs' bridge-building initiative and growing private sector interaction.

But concerns have accompanied the expanding ties, with many worried that they may hurt vulnerable conventional industries and undermine the rights of Taiwan's workers.

"Taiwan's most serious problem in the future will be unemployment," says Inotera Memories Inc. president Charles Kau. A corporation is an organism, he says, and to survive, it must find on its own an appropriate location where it can exist. Many industries have already relocated to China, and Taiwan is gradually becoming service-sector oriented, but it has only developed the general service and commercial service sectors, where average salary levels are relatively low.

"I am pessimistic about Taiwan's future employment rate and salary level," Kau says.

According to DGBAS figures, Taiwan's average salary over the past 10 years has fallen to half that in Singapore and South Korea.

Ma Ying-jeou's Low Satisfaction Rating

CommonWealth Magazine also asked the CEOs about their levels of satisfaction with Taiwan's government leaders and financial affairs. They were most satisfied with Perng Fai-nan, the governor of Taiwan's central bank, who had a satisfaction rating of nearly 95 percent. No other member of the incumbent administration had a satisfaction rating of above 60 percent.

The bottom three officials were Finance Minister Li Sush-der, President Ma Ying-jeou and Control Yuan President Wang Chien-shien. (Table 11)

Not only has Taiwan's financial performance been poorly regarded by local CEOs, but global rating agencies have also said it had regressed. In the World Economic Forum's Global Competitiveness Report 2009-2010, the area in which Taiwan regressed the most was macroeconomic stability. The main factor was the government's economic stimulus package, which led government tax revenues to shrink and government debt to expand, sending its ranking lower. Dealing with the government's worsening budget deficit is Finance Minister's Li greatest test.

Ma had the second lowest satisfaction rating.

"Seven million voters selected your policy direction, which emphasized the economy and a measured reconciliation with China. You must therefore clearly implement these policies and loudly defend them. It's just like in the United States after the Republican Party or Democratic Party wins an election. They execute policies supported by the majority. When they try to appeal to both sides, they end up satisfying neither," said one CEO frankly.

The CEOs have the greatest misgivings about the Ma administration's ability to execute policy, from communicating and defending its plans, to implementing them and planning complementary measures. Many CEOs felt the government could have done a better job on a range of issues, from the H1N1 immunization program, to the decision to lift a partial ban on U.S. beef, to its cross-strait economic policy centered on the ECFA.

But the CEOs are most concerned that Taiwan does not have a clear direction and has been plunged into paralysis.

When asked what the biggest problems facing Taiwan's economy are, more than 60 percent of the executives said the government did not have a clear economic direction, strategy or identity. More than 40 percent cited concern over relations with China and industrial upgrading problems, and more than 30 percent mentioned the unemployment problem and the government's inability to effectively promote the six emerging sectors it has identified as having great economic potential. (Table 12)

Year of Corporate Expansion

In welcoming in 2010, the CEOs generally feel that the global economy is recovering and that Taiwan's economic growth will turn from negative to positive, which could help make 2010 the year of corporate expansion. Companies in the semiconductor, flat panel, solar cell, and LED sectors and in conventional industries such as steel and petrochemicals are all planning new investment projects, helping inject new life into local banks' syndicated loan business.

More than 70 percent of the respondents said they had no plans to scale back their operation and would in fact increase their investment, mostly in China and Taiwan. Their main growth strategies include investing in new products, completing new strategic alliances or buying stakes in other enterprises. (Tables 13-16)

Inotera, ranked 73rd among CommonWealth Magazine's top 1,000 enterprises, endured a disastrous 2009 for the DRAM sector characterized by huge losses, consolidation, and even the elimination of some players, but the company believes the situation may finally be turning around.

Kau says two factors are at play: The demand created by Windows 7 has generated demand for memory chips, and the number of competitors has been reduced. Kau's company, a DRAM joint venture between U.S.-based Micron Technology, Inc., and Nanya

Technology Corporation, expects to invest NT$45 billion between Q3 in 2009 to the end of 2010 to improve its production technology from a 50nm to a 40nm process and also expects to expand its workforce by more than 10 percent. Its R&D expenditures will also be 10 percent higher this year than in 2009.

AU Optronics, which ranked 9th among the top 1,000 enterprises in 2009, also plans to increase its capital expenditures this year, to between NT$50 billion and NT$100 billion.

CEOs believe the biggest challenges they will face internally are even more intense competition and a lack of talent. But 65 percent said their companies planned to increase staff and R&D spending, with the high-tech companies the most likely to do so. (Tables 17-19)

The Challenge of Going Green

In facing the future, initiatives to fight climate change will challenge and even threaten the development and operations of Taiwan's enterprises but also present commercial opportunities. More than two-fifths of the survey's respondents expected that meeting the challenge of carbon reduction would add huge costs to their company's operations, while 30 percent felt the green movement would generate opportunities for new products or services.

Green industries have been targeted for development by many countries. The United States, Germany, Japan and South Korea have all made investments and passed laws to encourage the development of alternative energy industries, solar power, wind power, geothermal energy, biomass energy and electric cars, and they have also set concrete targets for renewable energy generation. Taiwan has set aside 10 percent of its NT$500 billion stimulus package for green development and has put in place incentives and other measures to encourage the reduction of carbon emissions, but it lacks national strategic targets and an overall action plan. In addition, the only things that enterprises are looking to the government to provide are subsidies and incentive measures. (Tables 20-21)

Over the past year, National Taiwan University financial vice president Ming-Je Tang has grown increasingly strident in his criticism of Taiwan's lack of a clear direction and the inability of local enterprises to innovate, because he has been driven to despair by the disappearance of Taiwan's advantages. In doing so, he summarizes the challenges ahead for the government and the private sector.

"Signing an ECFA will only lower companies' tariff costs, but the most important task is for industries to upgrade. CEOs cannot ignore innovation and continue their old ways. Taiwan's businesses must re-engineer themselves or move toward the service sector. If you don't do it, others will take your place."

Translated from the Chinese by Luke Sabatier

---

Survey Method

The survey was targeted at the 2009 CommonWealth Magazine's top 1,000 manufacturers, 500 service companies, 100 financial services companies and the CEOs of Taiwan's 15 financial holding companies. It was conducted between Dec. 14 and Dec. 29, 2009.

After excluding executives who could not be reached or declined to participate, 1,109 questionnaires were sent, and 427 valid responses were received, a 38.5 percent response rate.