Xu Mang, director general of the Department of Economy at the Chinese State Council's Taiwan Affairs Office, is rarely in the limelight during cross-strait negotiations. With his wire-rimmed glasses, slim figure and tall stature, Xu looks like the bookish type. Yet he plays an important role as mediator between Taiwanese investors in China and the Chinese government.

Xu Mang, who has not yet turned fifty, assumed his current position seven years ago, coming from an agricultural background. Over the years Xu has become a well-known face among Taiwanese investors in China, and their trusted counterpart when dealing with the Chinese government. At the same time he has acquired a thorough understanding of Taiwan.

Xu sits on the Cross-strait Economic Cooperation Committee, which monitors the implementation of the ECFA trade pact between China and Taiwan. How does Xu assess the impact of Chinese investment in Taiwan, and where does he see win-win scenarios?

---

Q: What role does Taiwan play in Chinese companies' plans to go global?

A: Based on the "investment development cycle" theory by British economist John Dunning, when a country's per capita GDP reaches between US$2,000 and US$4,750, that's the stage where its foreign direct investment increases rapidly. China's current per capita GDP exceeds US$4,000. We hope that investment by Chinese companies in Taiwan can grow from a little to a lot, from small to big, this year.

Chinese companies' understanding of the world is still rather limited. We are now stepping out into the world more than before, but the Taiwanese entrepreneurs who roam the world market with their briefcases in hand have much more experience about the world than Chinese entrepreneurs who have just begun to go abroad.

Operating in a comparably open market, Taiwanese companies participate in the global industry's division of labor. They have logical business management models and well oiled international marketing channels. They are fast in applying technological achievements and have more influential brands. Taiwan is a training ground for Chinese companies where they can warm up for going international.

Q: We have seen China's biggest LCD panel maker BOE Technology Group buy up Taiwanese OEM/ODM display manufacturer JEAN, and also China Electronics Technology Group become the largest shareholder in Taiwanese electronics vendor Groundjay Digi-Tech. Are Chinese companies doing this with the intention of integrating the industry chain?

A: Chinese companies have a huge market, and they have end-user products. But they lack manufacturing and R&D expertise. A classic example is that we mass-produce TV sets, but don't produce panels – these are all made by Japanese, South Korean or Taiwanese makers.

For a long time Taiwan has played the roles of R&D and manufacturing in the international division of labor. It is very strongly integrated in the industry chain, both upstream and downstream. ECFA has increased industrial cooperation across the Taiwan Strait. In Taiwan people like to use the term “integration," but I think it's actually “cooperation." That's how I feel about this issue. I don't like to talk about integration. It sounds like we want to swallow you.

Chinese companies are also transforming and moving up the value chain. We can't do without R&D and manufacturing. BOE bought JEAN on the market. These are the economic rules of private-sector companies.

Q: China still has a planned economy. Are you really saying that the government doesn't direct central enterprises (under direct control of the central government) or state-owned enterprises to engage in integration?

A: The planned economy isn't all that dominant in China anymore. Corporate autonomy in making decisions is substantial. Under the management system of the central enterprises, the investor is the “government." What the government demands is that the value of state-owned assets be maintained or increased. Assets must not be gambled away, and room for corporate development must not be reduced.

When it comes to how enterprises are run within an industry and how markets are developed, it still has the authority to set policy. Of course, the chairman and general manager are government appointees. It's not possible to have no government influence at all. Industry chain development won't be completely handed over to central enterprises or state-owned enterprises.

Q: What model should be adopted for future cross-strait relations?

A: Later on cross-strait corporate cooperation will become more diverse. A very important idea is realizing an alignment of interests in the capital markets or industry integration. For instance, property rights transactions, shareholderships, mergers and acquisitions.

Q: Toward which industries should Taiwan take a cautious attitude regarding Chinese investment?

A: I don't advocate that Chinese enterprises invest in Taiwan in the real estate market. Since Taiwan is small, speculation will drive up property prices as soon as Chinese investors arrive.

Taiwan Lacks Strength to Direct and Integrate Policy

Q: What did you learn from observing Taiwan's industrial policy?

A: Taiwan still has systemic obstacles. Taiwan's way of managing the economy is to have the competent authority plan the direction of development. But policy cannot very directly be made for a certain company. Lining the pockets of a certain industry must be avoided. China is different in that regard. If our Ministry of Science and Technology wants to support a certain company, no one will voice any objections.

The cross-strait “Bridge Project" (by Taiwan's Ministry of Economic Affairs) also reflects these problems. Entrepreneurs from both sides of the Taiwan Strait participate in these events, and they want to cooperate. But if support is insufficient on the policy side, then ultimately cooperation will only happen between individual companies, instead of a clear division of labor taking shape throughout the entire industry chain. If policy direction is not strong, integration is hard to achieve.

Q: Wouldn't it be possible that Taiwanese companies eventually still take a piecemeal approach, while China quickly integrates so that we will have no role to play when it comes to a division of labor within the industry chain?

A: You're absolutely right! (Hon Hai boss) Terry Gou has asked me this question. He asked whether the Taiwan Affairs Office could find a way so that Taiwan-invested companies in China could achieve industry chain integration. I thought about this a long time. I think it's an interesting idea.

He also felt that Taiwan-invested companies in China have a piecemeal existence, meaning everyone does his own thing. We can hardly say there is a conscious strategic deployment in the China market. We can only say that certain things develop during the process of division of labor within an industry. In the notebook industry, the parts and component makers integrated before selling to HP and Dell. That was driven by the market itself, and was not at all a conscious strategy.

Coordinated Cross-Strait Development

Assuming Taiwan had a policy, planning and integration, then, I think, Taiwan would do even better. Both sides of the Taiwan Strait should coordinate industrial development on the policy, planning and technology side to jointly develop industrial fields that are worth it, and by complementing each other where needed.

This is the same idea that Terry Gou proposed, only those involved are not just Taiwanese businesses, but companies on both sides of the Taiwan Straits.

I'll give you an example. Highspeed railways are currently developing very quickly. It's actually a very important industry chain and Taiwanese companies very much want to have a part in it. Gem-Year Industrial, a Taiwanese company in Jiashan, Zhejiang Province, makes all kinds of screws, bolts and nuts. Their fasteners are used in great quantities on highspeed railways. They're not only good in quality, but also come in many specifications and types. They can compete with German products, and their prices are lower. But that's an isolated case.

I think based on the abilities of Taiwanese companies and the technologies that various industries master, Taiwan could play a greater role in the highspeed railway industry chain. In electronics and information, for instance, Taiwan should have some very good opportunities. Japan and France are definitely trying to grab these opportunities. Their companies are big enough to talk directly to our Ministry of Railways. The scale and capabilities of Taiwanese companies don't enable them to single-handedly negotiate with the ministry.

Translated from the Chinese by Susanne Ganz