The past year has been one of unfulfilled expectations. Taiwan's new government will have completed its first year in office on May 20, but there will be few smiles and little to celebrate on the anniversary day.

At the beginning of last year, the World Economic Forum predicted that 2008 would experience the greatest global political and economic uncertainties in a decade, but Taiwanese businessmen did not buy into that outlook. At this time last year, Taiwanese enterprises that had faced a difficult eight years were full of confidence and dismissive of negative economic forecasts, anticipating that the new government's policies of liberalization would create a new economic reality. Like birds that had been caged for many years, Taiwanese businessmen felt they would finally be set free and have the chance to flap their wings.

But with Taiwan a small island highly dependent on exports, it was ultimately unable to withstand the global financial tsunami, which drenched the wings of the freed birds and prevented them from flying high.

In 2008, Taiwan's economy grew a mere 0.12 percent. The weak performance was clearly reflected in CommonWealth Magazine's survey of Taiwan's Top 1,000 Enterprises, as the average profit margin of Taiwan's top 1,000 manufacturers, 500 service companies and 100 financial institutions last year was a meager 0.9 percent.

Inflated Expectations

The disappointment felt over dashed expectations for growth in 2008 was palpable in CommonWealth Magazine's 2009 Top 1000 CEO Survey. Nearly 90 percent of the survey's respondents were either dissatisfied or very dissatisfied with Taiwan's economic situation, the highest percentage in six years. (Table 1)

In the same CEO survey conducted in 2008, 70 percent of respondents said they expected their companies to benefit from liberalized cross-strait economic policies, but in retrospect, their expectations of the new government were inflated.

The Ma Ying-jeou administration has actively pursued more liberalized ties with China, expanding trade, and launching direct air and sea routes. It has also reopened talks after a nine-year hiatus between the quasi-official bodies representing Taiwan and China in the absence of official ties – Taipei's Straits Exchange Foundation and Beijing's Association for Relations across the Taiwan Straits. Yet despite these and other initiatives to improve cross-strait ties, only 33.6 percent of Taiwan's CEOs believe their companies have benefited. (Table 2)

"Taiwan is bound hand and foot when it comes to opening links with China," National Policy Foundation associate researcher Deng Dai-sian explained to CommonWealth Magazine. One problem, Deng says, is that the extent of the opening with China remains limited compared to commercial ties with other countries. Taiwanese companies can still only invest up to 60 percent of their net worth in China, and enterprises in strategic industries face even tougher restrictions on investing there. At the same time, Chinese investment in Taiwan is tightly regulated. Even more important, Deng says, is that ASEAN plus One (the 10 members of the Association of Southeast Asian Nations plus China) will move toward becoming a duty-free zone next year, but Taiwan will be excluded.

That will put Taiwanese exporters in a bind, because the country's trade with China and ASEAN members has been growing steadily. In 2008, Taiwan's exports to China totaled US$74 billion, or 39 percent of total exports, making China Taiwan's biggest export market. Another 17 percent of the country's exports went to ASEAN countries.

ECFA: A Double-edged Sword

Taiwan's potential marginalization from the regional trade block has led the private sector to push for the quick signing of an economic cooperative framework agreement (ECFA) with China. (Table 3)

SEF chairman Chiang Pin-kung recently revealed a meeting with Formosa Plastics Group CEO William Wong, in which a nervous Wong told him that gross margins in the petrochemical industry had fallen to below 5 percent on average.

With import duties in China for petrochemical products at 6.5 percent, and 90 percent of the products exported from the ASEAN countries to China, Japan and South Korea to be given duty-free treatment beginning next year, "Taiwan's products will not be price competitive. If these countries don't import from Taiwan, it will be an even more serious problem for Taiwan than the financial tsunami," Wong told CommonWealth Magazine.

Of even greater consequence is that "if the two sides of the Taiwan Strait have not agreed on a general framework, other regions such as North America, ASEAN and the EU will not be willing to talk to Taiwan," says one machinery company owner. "If the ECFA framework is not established, there will be no way to sign free trade agreements with other regions."

Entrepreneurs in conventional industries are not the only ones who are anxious. High-tech vendors, who are not affected by tariff barriers, feel the urgency for a framework agreement on another level.

Hon Hai Group chairman Terry Gou noted at his company's shareholders meeting in April that because China is protectionist at the local level, Taiwanese companies there have absolutely no protection. If intellectual property rights are not part of the ECFA framework to safeguard Taiwanese companies' rights, "then what's the point of signing an ECFA?" Gou asked indignantly. 

While some feel signing a framework agreement is a necessity, others are worried about the content of such a deal. According to the CEO survey, more than four-fifths of respondents were either not clear at all or only somewhat clear about the government's new policies and a potential ECFA. (Table 4)

Despite the lack of clarity, however, enterprises generally support the move to liberalize commercial ties with China. Regardless of industry affiliation, 64.2 percent of CEOs believed that signing an economic framework agreement would present their businesses with opportunities in the future. (Table 5)

Also, even though the Ma administration's performance has not met the private sector's expectations, 60 percent of the CEOs surveyed still believed that actively pursuing the liberalization of cross-strait exchanges had enhanced Taiwan's competitiveness. Worth noting is that more than 60 percent of service and financial sector enterprises agreed with the proposition, a higher ratio than in the manufacturing sector, which was long seen as the main beneficiary of closer economic ties with China. (Table 6)

Liberalization: Opportunity or Threat?

The main reason for the divergence is how each sector assesses future growth opportunities. While China's manufacturing environment has become stricter, the Chinese government's liberalization policies have led Taiwanese firms to cast longing eyes on China's huge domestic market rather than its low manufacturing costs. (Table 7)

"You can imagine that over the next 20 years, there will be no end to the growth and development of China's distribution channels," says Synnex Technology International Corp. president and CEO Evans Tu. "China has 1.3 billion people. If you're No. 1 there, it's almost the same as being No. 1 in the world."

That said, however, because everybody realizes the bountiful potential of China's domestic economy, competition there will only intensify. At the same time, a new competitive framework liberalizing trade in both directions also means that Chinese products will appear in all corners of Taiwan.

In the automotive sector, for example, Yulon Motor's president Kuo-rong Chen believes that while liberalization will contribute to the more efficient division of labor across the Taiwan Strait, it also signifies that low-cost Chinese cars could flood Taiwan's market.

Those concerns were reflected in the survey, as 73.4 percent of the respondents worried that they will face more competitors in the future, and nearly 70 percent foresaw intensifying price competition and an outflow of technology. Nearly 40 percent of the CEOs also feared that their enterprise's talent would be tempted to leave Taiwan, and one-quarter were concerned that Taiwan would lose its sovereignty. (Table 8) Taken as a whole, the survey's numbers clearly reflect the conflicting feelings of Taiwan's top executives.

Whatever their sentiments, nearly 70 percent of the CEOs surveyed said they have already prepared for greater cross-strait liberalization. (Table 9)

CEOs Take Positive Approach

At the end of April, the International Monetary Fund (IMF) issued its latest "World Economic Outlook" report in which it forecast global economic output to decline by 1.3 percent in 2009, an indication of the depth of the global recession.

Though their optimism in the new government last year was not rewarded, the CEOs have again refused to be pessimistic or be cowered by grim international economic forecasts, preferring to demonstrate a positive attitude. 

In looking to the future, 45 percent of the survey's respondents believed Taiwan's economy will gradually recover this year, and 82.9 percent said a full recovery will occur within two years. (Tables 10, 11)

The Formosa Plastics Group is just one example of this bullish approach. Struck suddenly by the global financial tsunami, the group's "big four" (Formosa Plastics Corp., Formosa Petrochemical Corp., Nan Ya Plastics Corp. and Formosa Chemical & Fibre Corp.) lost NT$80 billion in the fourth quarter last year, but that has not dampened the group's drive to pursue growth. The conglomerate still intends to invest nearly NT$300 billion in its petrochemical complex's fifth-phase expansion project to expand capacity and develop new products.

"When things hit bottom, we take a hard look at this industry. If it still has a future, we will invest in it heavily because that's the best time to invest," Formosa Plastics Group CEO Wong says. 

Regardless of how the trade environment evolves or the economy fluctuates, one thing remains unchanged: Taiwanese entrepreneurs will once again be given the chance to demonstrate the same adaptability and ambition that have carried them through severe challenges and underpinned their success in the past.

Translated from the Chinese by Luke Sabatier

---

About the Survey

The CommonWealth Magazine 2009 Top 1000 CEO survey is based on questionnaires sent to the CEOs of CommonWealth Magazine's 2008 Top 1000 Enterprises. A total of 1,372 questionnaires were sent out and 433 were returned, a return rate of 31.56 percent. The survey was conducted by the CommonWealth Survey Research Center from April 10 to April 22. 

Chinese Version: 兩岸開放　七成CEO準備好了