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The Economic Downturn

Seeking Advantage in Adversity


The global financial crisis is wreaking economic havoc, leaving no industry or company unscathed. But some enterprises are capitalizing on the downturn to plot their recovery and put some distance between themselves and their competitors.



Seeking Advantage in Adversity

By Sheree Chuang, Jerry Lai
From CommonWealth Magazine (vol. 408 )

Although the early part of the fall has seen a spell of hot weather, a dense chill has penetrated popular sentiment. Even at a banquet held in a five-star hotel to honor CommonWealth Magazine's most admired companies, the assembled leaders of Taiwan's symbols of corporate excellence from across the country's economic landscape invariably discussed the global financial meltdown and the inestimable toll it will take on the economy in the future.

Jau-Yang Ho, president of CommonWealth Magazine's most admired company in the petrochemical sector, Chi Mei Corporation, was one of those feeling the pain. He explained that TFT-LCD panel maker Chi Mei Optoelectronics, for which he is also responsible, is facing unprecedented declines in product prices and demand, while still under relentless pressure to take on debt in investing in new technologies. To cope with the current economic downturn, CMO has postponed its investment plans, and Ho says companies can only tighten their belts in the face of such heavy economic blows.

Ho's sentiment is easily understood because Taiwan's industrial sector has been battered by the dramatic downturn in the United States economy. In September, Taiwan's exports registered negative growth for the first time.

According to Bureau of Foreign Trade deputy director-general Chun-Fang Hsu, many companies say the real pressure will come next year. Most likely to feel the pinch are makers of electronic components, such as big-screen TFT-LCD panels, DRAM chips and PCs, which depend on exports to the U.S. market. Consumer electronics suppliers will be especially vulnerable to the economic downturn and the first to downsize, Hsu says. 

No Comfort in Numbers

Taiwan's recent economic numbers paint a worrisome picture.

Private investment is extremely weak, posting a negative growth rate of minus 9.37 percent in the second quarter and falling again in the third quarter.

In the first eight months of 2008, business start-ups were down 10.41 percent year-on-year; new factory registrations dropped 3.86 percent; and factory closings were up 26.33 percent.

Growth in domestic demand has also shrunk. In August, retail sales fell 7.16 percent from a year earlier, and outstanding mortgage, car loan, and credit card debt balances all declined for the month as well.

The Consumer Confidence Index monitored by National Central University's Research Center for Taiwan Economic Development fell to 54.32 in September, the fifth consecutive monthly decline and the third straight record low. 

The Chung-Hua Institution for Economic Research has forecast that economic growth will fall from 4.5 percent in 2007 to 3.8 percent this year, and will decline further to 3.34 percent in 2009.

Coping with Double Trouble

Exports growing at a negative rate and weak domestic demand form Taiwan's two major impediments to economic growth. Wu Chung-shu, a research fellow in Academia Sinica's Institute of Economics, says Taiwan is under so much pressure because exports have driven growth in recent years, but now when they are lagging, domestic demand remains weak and cannot pick up the slack.

Future visibility under such circumstances is cloudy at best. Taiwan's ocean shipping sector immediately felt the sting of falling exports, and pessimism seems to reign. At a gathering at the National Concert Hall in early September to celebrate Evergreen Marine Corp.'s 40th anniversary, Evergreen Group spokesman Nieh Kuo-wei said that no matter what companies do, the real problem is the serious global economic downturn. Group chairman Chang Yung-fa recently predicted that this period of economic sluggishness would continue until 2012.

Taiwan's Vice President Vincent Siew has said that the economic problems facing the world today are far more serious than those encountered during the 1997 Asian Financial Crisis, as no country can remain immune from the turmoil.

Human Greed

The current financial crisis, which like a huge hurricane has swept away everything in its wake, is just another reminder that "economic cycles have always existed," says Polaris Research Institute president Liang Kuo-yuan. When economies are overheated, it is wrong to think they will always remain at their peaks, Liang adds, because they inevitably take a fall.

The deep impact of this crisis once again reminded us that new crises often have their roots in an old problem 'human greed. Victor Kuan, the country business manager for Citibank Taiwan's Global Consumer Group, says that when an economy and share prices peak, people gradually forget whether they are walking on a big bridge, a rickety wooden one, or a tightrope.

Hoping for a Rainbow

When things have hit rock-bottom, all one can do is look optimistically to the future.

"Things always seem to bounce back in the opposite direction when they hit an extreme," says China Steel Corporation president Y.C. Chen. "Leading companies have no reason to be bearish."

Indeed, many of Taiwan's benchmark companies see this period of economic turbulence as an opportunity to test their strength, step up employee training and improve competitiveness.

Hon Hai Group founder Terry Gou has rejoined the front lines of his conglomerate to lead a re-engineering of the organization. "There is even a sense of excitement," says one Hon Hai executive, anticipating that the gale force winds may end up producing an even stronger team. Seen from a different perspective, times of crisis actually provide opportunities to maneuver on the battlefield and achieve victory.

CSC's Chen plans to capitalize on the economic downturn by putting in place a three-year plan that will help the company conserve energy, reduce carbon dioxide emissions and lower costs by NT$10 billion. He will also spend more time on refining the management of the company and developing higher-quality, lower-volume specialty steels for downstream users. 

In 2001 when the steel industry last hit bottom, Chen had already implemented a "10/20 cost-down campaign" to help combat recession, with a goal of lowering controllable direct costs by 10 percent and indirect costs by 20 percent.

"You really don't think too long about tough economic times. You have to have confidence and build confidence and turn a negative crisis into a positive force for encouragement. Every economic crisis results in a weeding out process," Chen says.

Despite the economic turmoil, high technology stalwart Delta Electronics Inc. recently invested in a new research center in Taoyuan, the third of its kind in Taiwan, and the biggest. Delta subsidiary DelSolar Co. Ltd. also recently broke ground on a new solar cell facility that is projected to have a capacity of 720 MWp (megawatt) in 2012, expanding the company's total capacity from its current 120 MWp to over 800 MWp.

"The economy will always have cycles and experience occasional downturns. We take advantage of slow periods to built plants, which need a year or two to complete. In time, a rainbow will inevitably appear," says Delta Electronics CEO Yancey Hai.

Leveraging Gets Scratched from the Playbook

A number of enterprises have also come to realize that avoiding financial leveraging is the best policy.

One company that keeps close tabs not only on its own finances but those of supply chain partners is Catcher Technology Co., Ltd., a die casting specialist located in the Yong-kang Industrial Park in Tainan County, which got its start providing casings to notebook manufacturers. Its president, Allen Horng, cautions that enterprises must pay close attention not only to their own financial management, but also to the financial quality of upstream and downstream players in their industry's supply chain.

"Medium-sized enterprises need first to check whether they have a deep enough foundation and then determine if their finances are stable enough," Horng says. Like CSC and Delta Electronics, Catcher Technology plans to use the economic downturn to expand its core competencies.

Restaurant chain Wang Steak has already made cost-control its forte. Its corporate office's area and manpower are minimal, accounting for only 3.7 percent of total revenues, compared to the typical 8-10 percent.

Holding Still in Response to Change

In tough economic times, companies' operating strategies and principles become more clear-cut. Before Eslite Books reopened its Dunnan branch in Taipei on October 11 after 40 days of renovations, chairman Robert Wu gave store manager Tseng Chien-yu four clear instructions: 1) Confirm every store's positioning and special characteristics; 2) Stay on top of every store's inventory and sales, and pay attention to book turnover; 3) Stipulate that every employee must be in the habit of reading – every store must organize reading clubs, because book sellers must enjoy reading; 4) Strengthen communication and coordination abilities.

Many small- and medium-sized enterprises (SMEs) in the Changhua Coastal Industrial Park are coping with the economic downturn by forming clusters and entering into mutually beneficial partnerships to enhance their speed and flexibility.

Ikea glassware supplier Taiwan Mirror Glass Enterprise Co. general manager Jackson Lin believes that in the face of the global economic recession, companies must go through a three-stage process 'healing wounds, recovering strength, and regaining normalcy 'before they can push their companies to new heights. As an SME, "you have to operate conservatively and avoid becoming overstretched financially. Winning by minimizing losses and holding still in response to change – these are the keys to survival," Lin said.

As Far Eastern Group chairman Douglas Hsu has observed, the world will see many changes in the future, and this high-speed, high-risk world will be unpredictable and full of surprises. But based on interviews with businesses around Taiwan, many enterprises seem to be actively preparing for contingencies.

The news is not all bleak for Taiwan. A recent survey by The Economist ranked the competitiveness of Taiwan's IT sector second in the world, up from fourth last year and trailing only the United States.

Acer Inc.'s successful launch of the Aspire One subnotebook helped vault it past Dell and HP to lead the world in notebook shipments in September. Handset maker HTC (High Tech Computer) was cited by Business Week as producing two of the world's five most popular cell phones.

Local companies are all preparing to cope with an economic downturn, and are encouraging themselves to stand strong in the face of adversity. But they all also hope that the government will invest in the country's fundamentals by strengthening the country's infrastructure and improving the general environment, rather than simply injecting funds into the local bourse to try to prop up the stock market.

At a time when Taiwan's enterprises are all exerting themselves to deal with the weak economy, the government can help by putting forward concrete proposals to give the people confidence and hope.

Translated from the Chinese by Luke Sabatier

Chinese Version: 練兵度寒冬