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A Different Take on Taiwan’s Low Wages

The ‘Hidden Costs’ of ‘Hidden Champions’

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The ‘Hidden Costs’ of ‘Hidden Champions’

Source:Crossing

Labor groups have long blamed Taiwan’s low wages and long working hours on exploitative employers. But in this Op-ed piece, Universal Cement Corporation Vice President Jack Hou offers a more expansive view of what the real problems are.

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The ‘Hidden Costs’ of ‘Hidden Champions’

By Jack Hou
Crossing

Writer’s note: This essay is being written out of a sense of frustration at a time when labor rights controversies have risen to the surface again. I want to make it clear that I’m not defending exploitative practices, but I do think the issue needs to be looked at from a fresh perspective to better understand its underlying causes.

I recently heard some older generation business leaders talk about Tesla, and they were sure “Tesla will go bankrupt” because it has not developed a model of mass production that “can keep costs down” and is losing money on every car it makes.

They also criticized the company for demoing an electric truck even before successfully mass producing the new Model 3, and questioned the sanity of Tesla founder Elon Musk for wanting to get involved in making rockets.

When I heard those opinions, I couldn’t help but feel a bit confused; my brain just kind of froze.

It wasn’t because their criticism of Tesla completely lacked merit, but rather because it revealed the fundamental gap in management philosophy between the majority of Taiwanese business leaders and American CEOs (particularly in the high-tech sector).

It’s not necessarily a question of right vs. wrong. Instead, the differences in attitudes and thinking are more the result of where they are positioned in the supply chain.

Changes recently proposed to the “Labor Standards Act” in Taiwan have sparked controversy and a fierce war of words. But there has been little discussion of why the so-called “evil employers” seem to “squeeze workers’ benefits.” So I want to use the Tesla example to first touch on the dilemmas and difficulties faced by Taiwanese companies in recent years from a business perspective.

Image: Sergio Monti Photography@Shutterstock

The World’s Hardware Store

“Corporate sustainability” has been a hot topic in Taiwan for a long time, but that’s less because companies want to continue to innovate and expand and more because they simply hope to “pass the torch” to the next generation. Judged by international standards, most of Taiwan’s publicly listed manufacturers are in fact family-run “small and medium-sized enterprises.” I recently participated in a forum hosted by a family-run enterprise, and the topics discussed revolved almost entirely around “grooming a successor.”

“Passing the torch” is not that important in mainstream corporate culture in the United States.

Facing intense competition or even a battle to survive, the heads of these companies are willing to empty their pockets to quickly recruit the smartest talent and “bet on a dream,” but they also remain willing to move on at any time, taking things day to day and treating the company as a “commodity.”    

If results do not meet expectations, they try to cash out the company, kind of like waiting for the right price for futures. They seek out investment banks or private equity funds looking to sell.

But if the company is successful and creates more “value,” then these leaders suddenly become kings of the world and gain a following. A few years later, however, under the stress of intense competition, that glory can prove fleeting, a not uncommon scenario. (Yet these CEOs, like Musk, continue to be paid annual bonuses and earn high incomes and are also still able to launch new businesses.)  

As the “world’s hardware store,” Taiwan doesn’t seem to have any significant role to play in the value creation chain led by American companies. But Taiwanese enterprises have quietly exerted themselves, decade after decade, one generation after another, giving everything they have.

‘Hidden Champion’ or ‘Hidden Laborer’

Take the example of Tesla. How it innovates and leads the market is something so many people have discussed that I don’t have to go into it, and it is also perceived as cool, amazing and trendy.

But Tesla’s finances, like that of many Silicon Valley “unicorn” companies – privately held startup companies with massive valuations that have not shown a profit – can only be described as a massive black hole. Yet people still idolize the company as Silicon Valley’s Tesla! After all, everybody knows Musk is going to build a rocket to go to Mars.

So would you invest in a company with such a terrifying financial picture? To many investors, the answer is “yes.” (Tesla’s stock on the Nasdaq has risen more than 60 percent over the past year.)

When confronted with a company that faces constant delays in getting out its products, would you want to do business with it? To countless manufacturing contractors in Taiwan, the answer is also a resounding “yes,” because once you gain a foothold in the Tesla supply chain, you become a “Tesla-concept stock” and can get a boost from being associated with the EV maker. 

But what happens if we take Tesla’s financials and shipment situation and impose them on a domestic vehicle brand (such as Luxgen)? I think anybody would “disrespectfully” keep their distance from the company.

In fact, any corporate CEO who has the guts to burn through US$11.41 million on marketing and administrative expenses in just six months while their company is still not profitable is truly something else. But people still say, “Musk wants to make rockets to go to Mars” and “Have you thought about what a huge breakthrough it would be for mankind to go to Mars?”

Maybe the above argument is the result of my experience in recent years – I have personally witnessed the rise and collapse of “unicorns” in China (including those who make electric vehicles). Of course, when Chinese unicorns were the hot thing, we also thought about getting into their supply chain. But after their empires have fallen, I’ve also witnessed vendors who bet on them be stuck with bad debts, forcing them to suspend operations or leaving them unable to pay their employees’ salaries or bonuses.

So why do notoriously “conservative” Taiwanese tech vendors still love to chase after “high visibility, high risk” unicorns? Well, it’s just the reality of the market.

Maybe 20 years ago, before the global tech market was consolidated into only a handful of brands, you still had Compaq, Gateway, eMachine, and others in the computer category alone that gave Taiwanese contract manufacturers and component makers partnership options and some leverage on pricing.

But in a tech sector that has grown increasingly consolidated, customer numbers have dwindled, and among those remaining, many are unicorns whose longevity is questionable. For Taiwanese companies, including tech manufacturers and precision contractors often described as “hidden champions,” it’s an incredibly difficult environment.

The simple law of supply and demand indicates that with so many vendors going after so few customers, that small pool of customers will be able to dictate pricing and payment terms. But even if as a vendor you’re given lousy conditions, you can’t afford not to accept them, because if you don’t, others will. Afraid that a customer won’t be able to make payment? Others aren’t.

As to whether these unicorns are “sacred beasts” or “lame horses”? You can’t ever be sure, but the mindset is that if there are orders out there, you have to go for them. If a customer is able to place a big order, what are you waiting for? Go for it.

‘Hidden Costs’ of ‘Hidden Champions’

With the global industrial chain structured like this, and with Taiwan not having seen any dramatic overhaul or transformation over the past 20 years, industrial change cannot happen overnight. At a time when competition is intensifying and customers have more power than ever to set the agenda, even Taiwan’s highly competitive “hidden champions” face major obstacles.

A short while back, I interviewed a low-level supervisor at a company known as a “Tesla concept stock” and a “hidden champion.” I asked him why he was considering leaving his current position to join a sunset industry.

This supervisor told me that “overtime was the norm” at his current company. People who do not work overtime are seen by management as “uncooperative,” he said, and with base salaries as low as they are, he has no choice but to work overtime. He also understands the company needs employees to work overtime to get orders out on time, but feels it should only be needed occasionally or to deal with unexpected circumstances rather than represent the “norm.”     

I understand that becoming a “hidden champion” is anything but easy. The leaders of these companies work extremely hard and have strong international orientations, spending more than half of their time overseas to drum up business or manage the company’s factory. As CommonWealth Magazine reported in a series on people daring to venture abroad, “these hidden champions rely on their acute instincts in reading global markets to react quickly to customers’ needs.”

But while responding quickly to market changes, managers of Taiwanese companies also have to figure out how to strictly control costs to be able to penetrate customers’ supply chains and reduce the risk potential failure could bring.

That brings us to the heart of the matter: “hidden” champions passing on their “hidden” costs to “hidden” places. The mindset of these companies’ bosses mirrors that of the older Taiwanese businessmen who badmouthed Tesla: they go after orders aggressively but remain conservative and pragmatic.

To serve American (or European or Chinese) unicorns, they do everything possible to strictly control every cost while operating the company sustainably to stay in business. Ultimately, they end up sacrificing the health of countless numbers of employees.

The View from the Top of the ‘Food Chain’

Drawing on facts emerging from the United States recently, I want to point to a truth that has been hardly mentioned amid the controversy that exists in Taiwan over labor rights.

Taiwanese vendors constantly work overtime and pursue any savings they can simply to gain a foothold in a supply chain led by an international brand. Because of that, bosses in the United States benefit and can use this profit on the so-called “marketing and administrative expenses.”

On the one hand, they continue to “market” their dream of “making the world a better place” to get countless consumers around the world, including in Taiwan, to completely buy into the product and service brands they promote. On the other hand, they invest more resources and talent in “administering” their supply chain, including small factories in Taiwan, in pursuit of its desire to “have a good horse without allowing it to eat grass.”

Unquestionably attractive? When major international companies engage in their “marketing,” might they, like the head of a certain “shared economy unicorn,” harass female colleagues and end up having to apologize and resign? And because of the scandal, the company then needs to strengthen its “administration” by creating a gender equality division. But who ends up footing the bill for the new division’s budget?

The answer, of course, is us, who live in Taiwan, continue to work ourselves to exhaustion doing overtime and then spend our paychecks buying cool things or services provided by those international brands, enjoying momentary pleasures.  

As the leaders of these unicorns live glamourous lives in a world in which dreams (outer space, driverless cars) become increasingly divorced from reality (financial statements), nobody in Taiwan seems to pay much attention. Taiwanese companies continue to aggressively take orders and have their people work overtime, employees continue to curse their bosses, and everybody continues to believe unquestioningly in the “values” and “vision” of these overseas unicorns rather than thinking of taking their place. And people continue to muddle through, able to survive but unable to get ahead.    

Here’s an example of what I’m talking about. A big international smartphone company (and there aren’t many left) told several Taiwanese suppliers that it would “consider” giving its orders to whichever of them could help test and verify a certain technology for free within a three-month period.

How did Taiwanese vendors respond? By having their R&D people work tons of overtime, of course.

Once the testing process was completed, the big customer then gave the Taiwanese vendor an estimate of the quantity of product it would need within the next six months, to be shipped in partial deliveries depending on the market, and said it would not pay for the tooling costs.  

What was the Taiwanese supplier to do? It, of course, did what it could to amortize the tooling costs and cut costs to the max, this time working its production people to death. (Or its employees in China are worked to death or commit suicide by jumping off a high building, only for the international brand to express “shock and regret” and pledge to strengthen “supply chain audits” – meaning it will set up a new auditing unit in the United States. Then, because the new unit adds to the company’s headcount, it has to again strengthen the supply chain’s “cost controls.”)

Finally, the Taiwanese supplier began making deliveries, but the big brand’s sales fell short of expectations, leaving behind a stockpile of unused components. In dealing with this dead inventory, the customer asked the supplier to eat part of it. The customer’s attitude is: “Who knew my forecast would be off? But if you blame me for this, don’t even think about doing business with me again.”

So what can the Taiwanese supplier do? Lacking orders, it has employees take unpaid leave.

Image: Quartz

The Fundamental Changes Needed

While the above situation is frequently confronted by Taiwan’s relatively high-paying tech sector, local companies also have to face a difficult political environment no matter what they do.

When the economy is strong, Taiwanese companies “squeeze” their employees by demanding overtime to get orders out the door, and national legislators grandstand for their own benefit by highlighting the problem of “overwork.” In economic slowdowns, when companies put employees on unpaid leave, those same legislators play up the “evils of unpaid leave.” If a company runs up big debts or is poorly managed and wants to shut down but Chinese investors come along willing to buy it, the legislators scream that a “Trojan Horse” is sneaking in or that unscrupulous businessmen are selling out Taiwan.

I’m writing a lot of this out of frustration. I absolutely don’t mean to excuse the habit of Taiwanese companies squeezing their employees or underestimating the ability of American brands to innovate or set trends. It’s just that I want to describe the problems facing Taiwan today from a different perspective and offer a different interpretation.

Ever since Taiwan’s economy took off, its strengths have been export processing and component manufacturing. Over the past 10 to 20 years, we have tied our economic lifeline to manufacturing, but this model can no longer support “corporate sustainability” in today’s unforgiving international environment.

Labor rights have inevitably suffered. Many companies have decided to move offshore to cut costs. Those that have stayed in Taiwan generally rely on technology and make “key components” that have yet to see prices depressed by major producing countries to grab market share. Yet while they make key components, even they are struggling to survive under the existing rules of the game in the global industrial chain. If you’re not a “leader of the pack” or a “world No. 1” similar to Largan or TSMC, you have little leverage in setting the agenda.  

To put it bluntly, “industrial transformation,” “commercial innovation,” and “increasing value-added” are all slogans that have been uttered for decades, but from governments and companies to individuals, how many have been truly determined to put those slogans into practice?

How can we change the low wages and long working hours currently plaguing Taiwan? I’m just a small businessman, so I can only offer my observations and do everything in my power to invest in R&D talent, develop unique technologies and try “innovation.” Of course, I’m not capable of drafting a “white paper” that discusses “industrial transformation” and policy directions.

Image: Shutterstock

In writing this essay, I only hope to spur discussion by pointing out the position, constraints, and helplessness of Taiwanese industries (mostly manufacturers) in the global value chain. I hope that more smart people with vision will show more real concern for these structural problems rather than exchanging verbal jabs and try to come up with solutions.

When the proverbial “pie” steadily grows smaller, everybody ends up with less no matter how it’s distributed. Workers’ interests are important, of course, and I agree that the distribution of the spoils should be more equitable. But perhaps when facing the current labor-management problems, we should not stay stuck on the issues of “labor-management conflict” and “distributive justice” but also consider how to overcome the obstacles Taiwan is facing and keeping the “pie” from shrinking further (the hope of “growing the pie” has long gone).

This will only happen if we first get a grip on “the truth” about Taiwan’s compromising position in the global industrial chain.

Translated from the Chinese article by Luke Sabatier


Jack Hou is the vice president of Universal Cement Corporation and a columnist at Crossing


Crossing 
features more than 200 (still increasing) Taiwanese new generation from over 110 cities around the globe. They have no fancy rhetoric and sophisticated knowledge, just genuine views and sincere narratives. They are simply our friends who happen to stay abroad, generously and naturally sharing their stories, experience and perspectives.  See also CrossingNYC.

Additional Reading

♦ The Secrets Of The Hidden Champions
♦ Taiwan’s Economic Miracle Long Gone: Chronicling a 20-Year Decline

「隱形冠軍」的「隱形成本」,是「隱形的你」──勞權爭議的另一面,台灣能否擺脫「沈默五金行」宿命?

This article presents the opinion or perspective of the original author / organization, which does not represent the standpoint of CommonWealth magazine.

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