Written by Chun-Yi Lee.

On January 16 2016, Taiwan’s politics experienced its third turnover of ruling parties. The Democratic Progressive Party (DPP)’s presidential candidate, Tsai Ing-wen won over the vote with 56.1 %, becoming the first female president in Taiwan. The DPP not only had a sweeping victory in the presidential election result, but also won a majority in the Legislative Yuan, turning Taiwan into a DPP-green island. The election result was not a surprise to most people familiar with domestic politics in Taiwan, but this post focuses on the new government’s plans for the future of Taiwan’s economy, especially how to face China’s growing industrial capacity. When China has evolved into a self-sufficient supply chain in industrial production, what is the future for Taiwan’s industrial development?

Taiwan has long viewed its technology sector as a ‘national champion’. Since the 1990s Taiwan has aimed to transform itself from a reliable OEM (Original Equipment Manufacturer) to ODM (Original Design Manufacturer). This means that Taiwanese high-tech companies not only want to do low-end assembling or packing, but also aim to establish their own brands. However, wishful thinking will not establish brand-name companies in the high-tech sector. It requires huge support from the government, and also the supply of human capital. In terms of governmental support, the Taiwanese government played a significant role in promoting the development of high-technology industries in Taiwan. The state is important in concentrating national resources on R&D spending, and also in building up new innovation infrastructure, for instance the establishment of Hsinchu Science Park (HSP) in the late 1980s. Human capital was also important in this wave of high-technology miracle in Taiwan. As Saxenian and Hsu point out[1], attracted by the promise of better working opportunities, a return to their families, and also the missionary sense of contribution to their home country, there were a growing number of US-educated engineers who returned to Taiwan in the 1990s. Along with the establishment of HSP in 1980, this group of technological elites is the backbone of Taiwan’s high-tech human capital. It was under this condition, Taiwan’s electronic/high-technology companies went to China, benefiting from the cheap labour and numerous tax holidays from the Chinese government at the end of 80s, therefore resulted this term ‘Chiwa’, which means made in China, designed from Taiwan.

In the past ten years, conditions have changed. China has emerged as the second most important economy in the world, impressing the world with rapid GDP growth and impressing foreign investors with its cheap labour and vast domestic market. The Chinese government became selective regarding potential investors. Wang Yang, currently the Vice Premier of China, asserted ‘Empty the bird cage in order to attract better bird’ in 2009 when he was then Guangdong provincial governor. China started to select investors not only to protect the environment, but also for the purpose of industrial upgrading. It is good to be the world’s factory, but the Chinese government understood that selling cheap labour wasn’t sustainable nor profit maximizing. This is the main reason that starting from the coastal cities in 2009/2010, the Chinese government became selective in terms of investments and strategically incubated domestic capacity in industrial development. Research and development oriented capital is most welcome; stimulus funds for companies to develop R&D, the establishment of numerous ‘high-technology parks’, and also, several schemes to attract overseas students to return to motherland were advanced. China learned from Taiwan’s path of industrial development. China isn’t satisfied with being at the low end of the supply chain, and with increasing GDP it has started to move up the supply chain. The new technology elites, Huwai, ZTE, even Tsignhua Unigroup are the best examples. Certainly there is still a long way for China to reach the top designer position like Apple, but while there is only one Apple, there could be many Chinese make high-tech products to satisfy customers at all levels. That’s why the power of the ‘red supply chain’ intimidates many international companies in the sector.

So, where is Taiwan in all of this? Taiwan has to face the reality that China’s supply chain in the coming years may no longer include Taiwanese factories. It is not for political reasons, but for the market-economy principles. The term ‘Chiwan’ has already faded; there are very few companies designing products in Taiwan then manufacturing them in China, because Chinese companies can do it themselves or head-hunt Taiwanese human capital. One interviewee from the HSP informed me in 2015 that Chinese companies offer highly competitive compensation packages and promised to settle Taiwanese employees’ families in China. ‘Few of my colleagues could resist such temptation’, my interviewee confessed. This is the main and most acute problem that the new government will have to face.

Taiwan is proud to show the world that party turnover can be peacefully achieved, however Taiwan’s vitality, in the sense of industrial and technology development, is on the wane. The new government will have to find a niche for ‘green Taiwan’ in the ‘red supply chain’, or, if possible, to outshine the red supply chain, but firmly standing in the global market. The new government currently has overwhelming support from the Taiwanese people so there is no excuse that Taiwanese people didn’t give enough power to the new government to renovate Taiwan..

Chun-yi Lee is a Lecturer in the School of contemporary Chinese Studies, University of Nottingham.

[1] Saxenian, Annalee and Jinn-Yuh Hsu, 2001, The Silicon Valley-Hsinchu Connection: Technical Communities and Industrial Upgrading, Industrial and Corporate Change, 10 (4), p.905.