NDC Chief Chen Tain-jy
Time for Government to Kindle Investment
A new government took power in Taiwan on May 20, and its top economic planner, Chen Tain-jy, is already feeling pressure to quickly energize an economy in the doldrums. His solution? Have the government take the lead in rekindling investment.
Time for Government to Kindle InvestmentBy Sara Wu, Rebecca Lin, Yi-shan Chen, Jenny Cheng
From CommonWealth Magazine (vol. 599 )
National Development Council (NDC) chief Chen Tain-jy is the only official in the new government’s Cabinet who was also a Cabinet official during the previous Kuomintang administration of President Ma Ying-jeou. As a student, he studied electrical engineering in college but switched his field of interest to economics and international trade when he went abroad to pursue advanced degrees.
That broad background makes a rarity among economists, one of the few with the depth of knowledge to understand industrial issues and sectors, science and even technology. During the tenure of President Chen Shui-bian of the Democratic Progressive Party (DPP) from 2000 to 2008, Chen Tain-jy was assigned to head the Chung-Hua Institution of Economic Research, and he managed to reorganize the economic think tank.
In 2008, he served as the first head of the Council for Economic Planning and Development (which became part of the National Development Council in 2014) in the Ma administration and introduced “consumption vouchers” to keep Taiwan’s economy from completely crashing during the global financial crisis.
Issuing the vouchers, which gave each Taiwan resident NT$3,600 to spend within a limited period of time, was considered a successful short-term economic stimulus plan internationally, and many countries sought to learn from it.
Chen, who turns 63 on June 24, was just a few months away from retirement as an economics professor at National Taiwan University in April when Lin Chuan – who was named the new government’s premier – came calling and asked him to serve as the head of the NDC and as a minister without portfolio. Chen collaborated with Lin on an economics textbook and is seen by the premier as his Cabinet’s most central economic adviser.
Stop Investment from Further Sliding
This year may also be the toughest economically for Taiwan since the global financial crisis, and Chen finds himself in the same position in government now as he was back in 2008.
He describes the current economic scenario as one in which cyclical factors are converging with structural problems, which is why there are few obvious answers to Taiwan’s economic doldrums. But Chen was clear that both short-term and long-term initiatives have to be planned if the problems are to be solved.
Chen sees little chance the global economy will improve much in the short term, meaning efforts to revive exports would only have limited impact, and domestic consumption has been relatively stable, leaving investment as the main vehicle for kick-starting economic activity.
Investment currently only accounts for 20 percent of Taiwan’s GDP, and boosting it by another percentage point would mean an extra NT$160 billion to NT$170 billion injected into the economy. That, Chen said, is the urgent priority for the next six months.
“Investment must not slide any further. We have to let everyone know what’s worth investing in Taiwan. We have to give people confidence in Taiwan,” Chen says.
The longer-term plans will address structural problems such as statutory, land and labor market bottlenecks and industrial transformation challenges.
“I already have a headache,” jokes Chen, though his smile carries the weight of one who knows there’s no turning back. “It’s a very big challenge,” he admits.
So how exactly does this experienced economist plan to stimulate investment? The following are excerpts of CommonWealth Magazine’s interview with the new NDC chief.
CommonWealth Magazine (CW): Taiwan’s economy is stagnant. What is your diagnosis of what’s ailing Taiwan’s economy?
Chen Tain-jy: Right now, cyclical factors and structural problems have become intertwined. It will take longer than normal to recover from this downward cycle, and the structural problems are daunting. It’s a big challenge.
We are currently devising short-term and long-term plans. In the short-term, in the next six months, we hope to lift up investment and restore the confidence of investors. In the long-term, we want to address Taiwan’s structural problems and change the industrial structure and operating models.
Our foundation isn’t bad but investment is very sluggish and has continued to decline. If the downward trend is not stopped, it will make structural reform very difficult, and we won’t be able to withstand the pressure.
Companies have immediate expectations of the new government. We have to get something going to give people confidence. So the first priority is to rekindle confidence and interest among private companies in Taiwan’s investment environment.
CW: Why have you proposed a “three-carriage” strategy?
Chen: The first “carriage” is a NT$100 billion “industrial innovation and transformation fund” to encourage existing domestic companies to invest in structural transformation.
The First Carriage: Transformation Fund
Government Funding but Private Sector in Control
Companies have many ways to transform their operations. They can restructure their organization, merge with others, expand into new businesses, make overseas acquisitions or bring in new technologies. The government can work with private sector fund companies and provide investment if new capital is needed in the transformation process.
The traditional National Development Fund is a venture capital fund that invests in startups and not in publicly listed companies. This fund is different and is aimed at bringing about structural transformation.
Any new investment in any sector in Taiwan can be financed through the fund. If an existing company wants to invest but cannot borrow enough from banks or is worried that raising funds on capital markets will dilute existing shareholder equity, it can use the transformation fund. The government will eventually exit the companies invested in, so those companies don’t have to worry about ceding management control of their businesses if they invest with the fund’s backing.
CW: What are the challenges of operating the fund in the current environment?
Chen: A big challenge is managing the investments after they are made. It will take more than just giving companies money for them to transform. We should also provide technical support and management guidance as they transform their businesses.
CW: Over the past three years, many domestic private equity funds have had trouble finding investment targets because company leaders have been afraid to give up management control of their businesses in exchange for capital injections. Will this be less of a problem if the government gets involved?
Chen: The government will eventually have to pull its money out (of the companies it invests in), so we don’t want management control. When investments are initially made, we will establish exit strategies to make it clear to the beneficiary of the funds that we will pull out, and there will be a clear deadline, such as five years or 10 years. We will also consider ways to pull out if things don’t go well, such as forcing the company to disband. If we don’t have an exit strategy, we will not make the investment being considered.
We do not rule out cooperating with private equity funds. But what’s most important is that we want to take care of small and medium-sized enterprises (SMEs) looking to re-engineer themselves, and private equity funds may not be interested in these companies. Beyond commercial considerations, the national fund also has to consider the overall development of different sectors and shouldering risk.
This is another difference between a national fund and private venture capital. At present, the government hopes to invest in individual companies and take stakes of 20 percent or less. We will absolutely not take more than a 50 percent stake in any company.
CW: Companies fighting to survive know they need to transform themselves. Why does the government feel it should put up so much money to do this?
Chen: Companies know they’ll have a hard time surviving if they don’t change, but they face many obstacles.
We’re not concerned about companies like MediaTek or Hon Hai that have a lot of cash. The government is targeting SMEs. Many small companies do not have deep pockets, so investing in a new business means increasing capital or finding a partner, raising fears of a dilution in management control. The government can help with this. Some SMEs are also facing succession problems, and we can look for new people or have them engage in transformation in partnership with other companies.
The goal of the fund is to invest in meaningful projects and kindle domestic investment. Capital formation accounts for 20 percent of GDP at present, and that has to get back up to at least 25 percent. An increase of 5 percentage points would add an additional NT$850 billion. That’s a big challenge.
The Second Carriage: Five Leading Sectors
Linking Supply Chains to Save Exports
CW: The five “innovative” sectors being promoted by the government are your “second-carriage” for rescuing investment. But none of these sectors are very big. How will you use these five industries to drive investment?
Chen: We will mainly leverage the domestic market to attract new investment in these five sectors.
Take green energy. Right now, almost 100 percent of Taiwan’s solar cell capacity is exported, and its supply chain is limited to solar cells. Now the Council of Agriculture has opened up 1,000 hectares of farmland that has subsided or is not easily cultivated to solar power generation, creating domestic demand. Domestic demand can be used as a lever to encourage new investment.
The domestic solar energy industry chain can also move downstream from cells into modules, power plants and even power plant management. This downstream integration can generate an opening for services and increase industrial value. If this is done well, we can export it.
In the defense industry, we hope that AIDC (Aerospace Industrial Development Corporation) can become a flagship company and integrate Taiwan’s aerospace sector, and also use fighter jet opportunities to hone its capabilities.
The creation of an “Asian Silicon Valley” to integrate software and hardware would capitalize on domestic market applications to develop systems. The logic behind promoting the five sectors is the same – to enable domestic market demand to help the sectors achieve systematic integration and change the export mentality while also pushing domestic sectors in the direction of downstream integration to create value for services.
CW: Based on the previous experience with import substitution, such as for home appliances or cars, Taiwan has never been able to successfully export what it learned to make. Why will the experience built this time through domestic demand be competitive internationally?
Chen: Because these different fields are moving in step with the world rather than copying others. The idea is to create a system that does not already exist in the international community.
For example, to respond to food safety issues, you could create an information flow system that tracks chemicals, tracks their flow. This is the Internet of Things. It does not exist anywhere. We hope that startups will develop the systems. Other countries will have similar needs, creating opportunities.
Under international trade norms, we cannot use “local content rate.” Maybe we can use an innovative purchasing method to purchase services and equipment that currently do not exist on the market. The government’s advantage is that it can control demand and have businesses make products tailored to us.
CW: You mentioned the key being restoring confidence in investing. What area do you think will see the quickest results?
Chen: The Internet of Things already has a foundation. In domestic sectors, Internet of Things apps are very new, so I think that will be fast. Green energy should also be because the solar energy sector would love to see domestic opportunities.
In the smart machinery field, investment in robots and drones can rely on the existing precision machinery foundation and information communications technology. The national defense sector will create demand for the smart machinery sector and drive new development, bringing domestic demand along with it. There will be new opportunities for industry.
CW: In the past, the model was small government giving everyone the freedom to unleash their abilities. Is the government now taking on a bigger role and leading the economy?
Chen: A lot of people are saying we are returning to the era of big government. I have to admit that, at least in terms of industrial transformation and creating internationally competitive enterprises, the government will play a very active role because that’s what companies are expecting. But the government will leave the final allocation of resources up to the market and simply will help with investment.
Under this mechanism, the government first lights the fire and then it’s up to private enterprises to decide if they want to invest. We will not forge another TSMC, at least not now.
The Third Carriage: National Investment Company
Digital Services for the ASEAN Market
CW: The third carriage is an international investment and trading company. What is it?
Chen: The goal of the national-level investment and trading company is to search for and create important investment opportunities. The budget is NT$10 billion, and its role will be similar to that of the old China Development Corporation’s investment assessment and coordination divisions along with that of a big trading company.
The first job of this national investment company will be to facilitate large-scale domestic investments. If you’re looking at wind power, for example, the national investment company could set a target for paid-in capital and put together a shareholder group to raise funds and then form an enterprise to invest in offshore wind power. With NT$10 billion in capital, the company could also inject funds, as could the National Development Fund.
Another area is the export of turnkey projects. The limited scale of Taiwanese vendors makes it hard for them to engage in integrated marketing overseas. The basic function of this investment and trading company is to create opportunities and have domestic sectors participate and provide assistance.
In Indonesia, Malaysia and Thailand, for example, which are all interested in developing solar power, they don’t know how to do it and don’t have the money to do it. The national company would have the ability to arrange this type of project and successfully export complete factories.
So the international investment and trading company and the “New Southbound Policy” are related to each other. This “go south” policy is aimed at domestic demand markets, especially in the digital field.
Taiwan is in a disadvantageous position to develop a digital economy because it’s winner-take-all in the digital economy – the bigger the scale, the bigger the advantage. Taiwan’s domestic market is too small, so digital economy companies do not pay it much attention. Taiwan needs to establish itself in big markets, but absolutely not in China. The opportunities are in Southeast Asia and India.
Cooperating with these countries could lead to the development of digital economy services – that’s the most important strategic dimension of the New Southbound Policy.
If you want to prove this model is viable, it would be best to develop a system first and then get the chance to apply it in Southeast Asia and India. Exporting systems would require companies that can integrate Taiwan’s strength, and, ultimately, building the digital sectors of the future will require the use of systems.
CW: Competition in Southeast Asia is very intense. What is Taiwan’s niche?
Chen: Taiwan has always been relatively open and willing to let local interests participate in projects, and it can also cooperate with other countries. The goal will be to create unique systems tailored to the local environment to meet local needs.
For example, South Korea and Japan’s communications software has penetrated the Southeast Asian market, but it is not at all secure. The communications software developed by the Industrial Technology Research Institute, called Juiker, provides a more secure network for companies or government agencies. Southeast Asian countries are interested, and they feel it’s safer because Juiker keeps communications data in the home market.
That thinking should be applied to the future development of the internet economy: first build a small system then expand it to big markets and use economies of scale to gain competitiveness.
CW: China and Hong Kong combined form Taiwan’s biggest trading partner. Where do you think economic relations between Taiwan and China are headed?
Chen: I predict that Taiwan will become less dependent on the China and Hong Kong market as more Taiwanese businesses pull out.
It will be increasingly difficult to operate in the Chinese market because of the cross-Taiwan Strait political environment and because China’s economic structure is changing, with more emphasis being put on domestic consumption.
In its domestic market, China is tilting the playing field in favor of domestic enterprises while increasing trade barriers. And when China looks for partners, it chooses big international companies. It will be very tough for Taiwanese-invested companies in the future, so we need to bet on other countries’ markets.
How we should proceed with trade-in-services and trade-in-goods agreements (with China), I’m not in a position to say. But I feel that if we put politics aside, there is still mutual benefit in the cross-strait economy. Taiwan can assist Taiwanese businesses that have been in China for a long time and are increasingly focusing on the domestic market there as China goes through a period of structural transformation to create renewed vigor for several business sectors in Taiwan.
Translated from the Chinese by Luke Sabatier