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Inflation, Government Policy Squeezing SMEs

The Alarming Decline of Small- and Medium-sized Enterprises


Taiwan has suffered a net monthly loss of nearly 1,000 small- and medium-sized enterprises over the past 12 months, as these vital cogs in the economy join the ranks of the 'disadvantaged.'



The Alarming Decline of Small- and Medium-sized Enterprises

By Jerry Lai
From CommonWealth Magazine (vol. 387 )

Over the past year, plant shutdowns, business closings and bankruptcies have befallen Taiwan like a contagious disease. From bakeries and snack shops to travel agencies, more and more 'Business for Transfer' and 'For Sale' signs have become visible along streets.

As recently as early November, the Japanese-owned Sharp plant, a 21-year-old facility in Kaohsiung's Nantzu Export Processing Zone making liquid crystal modules, issued a brief statement announcing the termination of the company's manufacturing in Taiwan, resulting in layoffs of its 400 mostly middle-aged and elderly workers.

Many publicly listed companies covering all sectors of the market have applied for capital reductions this year. In the first 10 months of 2007 alone, 91 listed companies disinvested by a combined NT$140.9 billion, setting a new record. The raising of capital over the same period set a 10-year low, at just NT$51.58 billion.

Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC) combined for over NT$100 million in stock repurchases and disinvestment; Chunghwa Telecom, TaiwanMobile, and Far Eastone, the Big Three of domestic telecoms, simultaneously made cash disinvestments; and in the chipset design and LED fields, Realtek Semiconductor Corp., Sunplus Technology Co., and Lite-On Technology Corp. also reduced their capital by between 30 and 50 percent. Nearly 47,000 companies have failed in the last year, more than the decline in 2001, when the economy suffered negative net growth.

Nearly 5 0,000 Companies Fail within Year

The sheer number of company failures is frightening. According to data from the Ministry of Economic Affairs, from November 2006 to October 2007, nearly 47,000 companies have gone out of business, reversing the steady annual growth over the past decade of the number of companies registered in Taiwan . Accounting for the number of new companies created over the same period, there was a net loss of nearly 18,000 companies. At an average of more than 1,500 companies per month, the decline is even more severe than in 2001, when the economy suffered negative net growth.

'Unless there is a change in policy, I fear that the drop in the number of companies will be a long-term situation,' says a worried Liang Chi-yuan, a research fellow in Academia Sinica's Institute of Economics .

Small- and medium-sized enterprises have been the hardest hit by company failures and factory closures. The wave of business failures has swept away 9,000 small- and medium-sized companies with capitalization of under NT$5 million over the past year, accounting for a full one-half of all company busts.

'The decline in the number of companies is the result of misguided policy compounded over the years,' says Lee-in Chen Chiu, a research fellow at the Chung-Hua Institution for Economic Research and a long-time observer of industrial policy. She contends that the government has especially overlooked the importance of small- and medium-sized business development in Taiwan 's economy.

Small- and medium-sized enterprises have come to be a 'disadvantaged' member of the Taiwanese business world. Whether in terms of turnover, exports, or domestic sales, a perusal of the 2007 White Paper on Small- and Medium-sized Enterprises shows that their development has been squeezed. While not a new problem, it has worsened over the years.

New Business Creation Losing Momentum

New small- and medium-sized business ventures have lost momentum, showing a marked decline since 2000, and accounting for a shrinking portion of sales, exports, and domestic sales (Table 1). An analysis of the rapid decline in small- and medium-sized enterprises reveals four main contributing factors:

Factor 1: No way to go on

When the costs of commodities rise, such as during the past two 'oil crises,' the government has focused on supporting production by choosing to hold down diesel fuel costs while allowing gasoline prices to climb. However, the current administration has done just the opposite. Since 2000, gasoline prices have risen more than 40 percent, but diesel has climbed more than 70 percent, making it extremely difficult for many factories to bear the burden of inflated production costs.

'The current policy protects wealthy car owners while hurting producers and those with low to medium incomes,' Liang Chi-yuan complains,

At the same time, the domestic market must cope with the outflow of consumption power. One restaurant business owner in Kaohsiung shares a recent discussion with a Taiwanese businessman based in the manufacturing center of Dongguan, in Guangdong province. They noted that nearly 5.5 million Taiwanese ' a full quarter of the population ' are now living and working across the strait in China .

'The people that have stayed behind in Taiwan are more conservative in general, and are not big consumers even if they have money,' offers a retired executive from the Formosa Plastics Group.

It's no surprise then when the owner of a restaurant on Dunhua South Rd. in Taipei complains that his regular customers used to get together in Taipei , but now these same customers see each other in Shanghai .

Factor 2: Hurried liberalization, obstacles preventing investment to return.

Lee-in Chen Chiu believes that the sudden opening of investment in production of 4,000 to 5,000 different products in China based on the consensus of the 2002 Economic Development Advisory Conference was a major policy mistake. She says the move gave Taiwan no room for negotiation and allowed upstream, midstream, and downstream production to pick up and move in one fell swoop over to China , dealing a severe blow to domestic industry. The complete removal of restrictions on notebook computers is one such example, she notes.

At the same time, the regulation preventing companies from investing more than 40% or their net worth in China also prevents a significant number of small- and medium-sized businesses from investing back in Taiwan . Chen Chiu estimates that over half of the companies that packed up and moved across the strait over this period (since the 2002 policy change) have exceeded the 40 percent upper limit. Unless the regulation is relaxed, Taiwanese businesses are barred from coming home.

Factor 3: Protectionism, labor market interference

In contrast to Japan , which undertook labor welfare adjustments over a 20-year period, Taiwan nearly did the same overnight. Regulations such as the standardizing work hours at 84 hours every two weeks, systematizing pension fund contributions, increasing the minimum wage, and allowing two-year maternity leave have placed a burden on labor-intensive industry employers. 'The high unemployment rate is the result of labor policy,' Liang Chi-yuan charges.

Factor 4: New businesses migrate to virtual world

Virtual sales channels, including the Internet and TV shopping channels, experienced growth of over 10 percent from January through September of this year, outpacing the brick and mortar retail industry by three percent. Accordingly, certain new ventures have chosen to forsake real world outlets for a presence in cyberspace or in the electronic media.

Efficient, Equitable Policy Needed

A combined 7.75 million people are employed by small- and medium-sized businesses in Taiwan , accounting for over 75% of the labor force. Among these, middle-aged and older workers occupy nearly one-half of the workforce at small- and medium-sized enterprises, a significantly higher proportion compared to that employed in large corporations.

This segment of the labor force is particularly vulnerable to the perils of unemployment. As numerous small- and medium-sized businesses cave under pressure and close their doors, greater focus should be placed on the livelihood and survival of these vital enterprises because they contribute the greatest number of employment opportunities and bear the brunt of keeping families afloat.

Translated from the Chinese by David Toman

Chinese Version: 中小企業爆倒閉潮