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Taiwanese Enterprises in China

Entrepreneurs Turn Landlords


Entrepreneurs Turn Landlords


With soaring operating costs and razor thin profits, more and more Taiwanese SMEs in China can no longer hang on and are reduced to leasing their facilities to local Chinese managers.



Entrepreneurs Turn Landlords

By Benjamin Chiang
From CommonWealth Magazine (vol. 490 )

Over the past year an increasing number of Taiwan-based small- and medium-sized enterprises (SMEs) in China's Pearl River Delta and Yangtze River Delta regions have been quietly turning to rent collection, throwing in the towel on businesses they've toiled for a decade or more in building and renting their factory equipment and premises lock, stock and barrel to local Chinese managers in their thirties.

In China, many Taiwanese-owned plant facilities continue to operate night and day, but the boss has long since been swapped for a Chinese national.

The global subcontracting chain initially strung together by Taiwanese companies has now morphed into "sub-subcontracting" plants operated by young party officials, with the long-established Taiwanese companies left no alternative but to retreat to the sidelines, reduced to the role of rent collectors.

As this scenario plays out, it's almost enough to make a guy like Tsai Cheng-fu weep.

The vice chairman of Airmate China, the world's largest maker of electric fans, Tsai has no difficulty pinpointing the key factor behind the latest wave of Taiwanese companies pulling out of China: "With operating costs in China rising incrementally and weak consumer spending in European and U.S. markets, this has become the straw that is breaking the backs of small Taiwanese companies."

The director of a Taiwan-financed maker of plastic optical components that Tsai has known for more than 20 years unexpectedly stops by to bid Tsai farewell: "He's already rented his plant to a local manager, because he's no longer able to operate here," Tsai says.

Rapidly rising wages in China have been squeezing the life out of Taiwanese companies there, a dilemma that profoundly touches Tsai, who only recently celebrated the 20th anniversary of the opening of his company's Shenzhen plant. In 1992 when the plant began operations in Shenzhen's Baoan District, the basic monthly wage stood at 245 renminbi, for an hourly wage of about 1.2 renminbi. That now stands at 1,500 renminbi per month. "The workweek has also been shortened so that the hourly wage now stands at 13.3 renminbi – an eleven-fold increase. But the prices our products fetch in export markets have done nothing but drop," he says.

Tsai's departing friend struggled mightily for a few years, but when his master's degree-wielding son declined to take over the business, the 60-year-old entrepreneur had no choice but to grudgingly lease his factory of 400-plus employees to the local manager who had worked under him for nearly a decade; he now collects 100,000 renminbi per month in rent.

This phenomenon has now spread northward from the Pearl River Delta to engulf the Yangtze River Delta.

In industrial zones where Taiwanese businesses are concentrated like Shenzhen, Dongguan and Kunshan, tens of thousands of small Taiwanese-owned factories that "have annual business turnover in the tens of millions of renminbi but can barely count their profits in the hundreds of thousands are simply leasing out their production lines," observes Liu Fang-rong, CEO of Friendly Business Group.

As Liu describes it, "early on, Taiwanese companies only made money off China's 'social capital,'" with the whole of Chinese society undertaking the social costs of the tax avoidance, environmental pollution and underpayment of social welfare contributions that allowed Taiwanese businesses to operate.

Competitiveness in China Long Gone

China has now returned to a normalized operating environment. Payments that could once be avoided are now accounted for to the last dime.

It is precisely because of those Taiwanese companies that once operated under the radar that the social costs of operating in China have been laid bare and Liu must each day shuttle among five or more Taiwanese companies to assist them in setting up their legal and taxation systems.

Taiwanese business operations in China now find themselves in a perilous situation. Like a row of falling dominoes, the knock-on effect has begun to impact the market share of Taiwanese products in the China market, which have been in a freefall in recent years.

This decline has been far more excessive for Taiwanese products than for the products of other countries like Japan and South Korea. At the end of the day, the reason is that "Taiwanese exports to China were largely goods sold to Taiwanese business customers operating in China," in Liu's analysis. Once the scale of Taiwanese business operations in China began to shrink, Taiwanese exporters across the strait were hit hard. That pain will continue with this wave of Taiwanese entrepreneurs shutting down their China operations or subletting their facilities to Chinese companies.

Once Chinese nationals take control of the procurement for those operations they'd "prefer to source goods from the local Chinese supply chain more cheaply than from Taiwan, then turn around and hit Taiwanese competitors with lower-cost merchandise," says the head of a Taiwanese maker of printed circuit boards in Shenzhen's Longhua District. More than a few of his Taiwanese compatriots in the same business have gone under in recent years due to increasingly fierce price competition from Chinese competitors.

Those Taiwanese companies in China that have not managed to upgrade their production in a timely fashion will soon find themselves swamped amidst a wave of sweeping changes in the global business climate.

Translated from the Chinese by Brian Kennedy