The Traded Clusters

Figure 48 Taiwan’s Traded Clusters Employment Composition.

Source Taiwan National Statistics Bureau

From this map, we clearly see something is in an alarming stage. The Distribution and Ecommerce, the largest cluster of all is at a declining pace. Although the decline is small

Business Services, 9.63%

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at -1.51%, the employment size of the cluster is the largest cluster (10%) among all clusters, which can mean a big upset. The other declining clusters such as Transportation and Logistics are the supporting industries of all distributions for products, which may have been impacted by the drop of the production industries. This directly impact the North district cities, New Taipei and Taipei, with their specialized employment. The north is a highly populated area and business centers. It will have a full impact to Taiwan economy. Furthermore, the Downstream Metal is an important production product category, which has a 21% drops, and its complementary industrial cluster of Production Technology and Heavy Machinery has declines of 2% which gives a clear indication that the hardware production businesses are facing severe competitions. The next question one would ask is which cities are directly impacted and why? What should people do to overcome the declines? There are two choices, knowing the industry is declining in a fast rate, and affects the supporting industries to drop. One choice is to ignore it and let it die.

Another choice is to improve the business environment and make it competitive, so that it wins back the businesses it has lost. Collectively in these clusters, there are more than 10% of the workforce facing hardship due to employment decline. Some workers found jobs in other clusters, and some remained unemployed. As part of MOC framework^31F31F32, several interviews and site visits to the Machinery and Production and Downstream Metal Products companies reveals the following issues^32F32F33:

Over 90% of Machine Tool companies are small businesses. It is difficult for them to acquire public funds from bank loan or private investments if they want to upgrade their businesses. This is a capital-intensive industry. In order to update the business

environment, the cost of up-to-date automation equipment may take a twenty-year business loan to payback. Small businesses with limited capital on-hand need a smooth policy to allow them to grow.

Most investors nowadays are looking for fast return deals. Equipment heavy capital takes too long for their expected quick returns. Also, the return margin is too small for their

32 A Microeconomic of Competitiveness course is offered at Harvard Business School taught by Porter, Ketels, and Ramirez-Vallejo in Winter 2015.

33 The Machinery Association, interviewed on August 4^th, 2015 indicates the government funding issue to the SMEs.

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high apatite. At a Machine Tool workshop in Taichung, the keynote speaker talked about how difficult is to convince the government to create an industry upgrade policy to help the local owners, especially on the basis of business loans.

Most small businesses in the industry are family run, and some owners are at the

retirement age. First, it is difficult for the business owners to find the owner replacements or to sell the companies. Second, it is even difficult to hire a manager to handle the operation. Not so many are willing to come to an outdated factory to work. The

production type of factory takes skills, knowledge, and experiences to phase in. Provided the businesses are mostly in a rural area, most of young people prefer to live in the metropolitan for their social activities, and even trainees are hard to be found.

Vocational training used to be very popular in Taiwan in the 1970s through 1990s. Due to the change of education policy in 1994 to liberalize the education system (Hallinger, 2010, p. 8). Most vocational schools had been converted to Colleges and Universities over the past 20 years. The old technical masters are retiring without trained technicians, and the industry is facing severe labor shortages.^33F33F34

Orders fluctuate due to competition. Customers are not always loyal when it comes to price war. Other related industries such the glass industry has lost a big customer, Ikea, to China’s low pricing in 2009. The industrial cluster, already small, got together, formed a coalition taking orders collectively, and distributed the orders to different specialties such as glass with metal framing, glass with wood products, glass with Alumni, so the whole village survived through the down time. They have realized one thing. Price war is not a strategy, which echoed Porter’s theory. Instead, they insisted on improving customer services for restocking and guaranteed for manufacturing returns. In 2011, they won back Ikea’s orders due to the service quality. Cut price is not a strategy, and it can hurt you.

The fluctuations of orders deter manufacturers to invest capital-intensive equipment.^34F34F35 Another issue which hit the socks industry hard was the Free Trade Agreement signed by the US and Korea. Overnight, Shetou socks manufactures lost one-third of their orders in

34 Interviews by Waterson Company in Yunlin. July 2015 and Feb. 2016. Also interviews in 2013, 2014.

35 Data from Chiahui Chen, IEK, ITRI.

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the whole region. It devastated the manufacturers. Some companies recovered by specializing their products into sportswear or using organic materials. Some closed the businesses. Through the interviews in the area, one company focus on specializing sport’s stockings who could not convert the manufactory into larger businesses due to the current factory site did not have a building permit. Many factories were embedded in their

farming residents with a space built-out. The place was built 30 years ago without a permit. In order to obtain a business loan, it needed to show that the factory is a safe facility with a building permit. Without proper permits, the company could not expand.

They either had to move-out, or rebuilt the factory. There was no interim solution

provided, and these factories were facing immediate challenges to upgrade or downgrade due to severe oversea competitions. Taiwan, without a proper international identity, lost deals with numerous unfair competitions based on political marginalization. Taiwan makes most of its national balance from trade surplus. Taiwan ranks 5th in the trade surplus countries behind the Netherlands in 2015. It used to be fourth, but Taiwan is gradually losing its sustainability mostly due to the unfair trade status and losing international competitions. The impacts on economics are caused by politics largely.

Recently, Taiwan is relaxing its labor law to allow migrant workers to work longer and obtain residency. The law is still very protective of the locals. One of manufacturing owners in the interviews reveals that despite the management position is paying much higher than the regular level, the owner is not able to find middle management for a long time. One of the reasons being most local Taiwanese do not like to work with migrant workers. “They don’t like to lower their social status by working with migrant workers.”

quoted by the owner. These are common problems in the manufacturing area. “We also have foreign brides, and the locals don’t even want to work with them because that makes them feel foreign.” continue with the interview. In this case, education and labor training have been a conflict by the Taiwan’s Confucians’ “class” philosophy. On top of it, young people nowadays do not like to get their hands dirty. Jobs require hard labor with skills are being avoided by most young people despite the pay rate.

93 Figure 49 Taiwan Traded Cluster Dynamics.

Source: Taiwan National Statistics Bureau

Taiwan is not the first country to face the production hardship. Germany faced the similar challenges before, thus, triggered the Industry 4.0 Initiative to solve Germany’s productivity problems. With a lower birthrate and an aging society, Germany has been facing the same kind of problems. A decade ago, German government initiated a high-tech strategy policy in 2006, and publically announced the initiative in the 2011 Hanover Show to upgrade factory environment and automation, they implemented a sophisticated industry upgrades into today’s robotic automation and environmental rebuilt (Springer, 2015). Job training was designed through high school apprenticeship. Safety work clothes and air conditioning were provided. Robots replaced hard labor works which were done by human hands before.

Business Services

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I interviewed Andrea Springer^35F35F36, asking him what Germany’s progress is for Industry 4.0 and their next step. Springer replied “No further initiatives are found on this title.” It is an initiative with an over ten years of rebuilt and upgrades. They are moving on with their normal businesses. Now they can compete better in the world with the best equipment and humane environment. Springer toured Taiwan’s local factory and commented: “This would be an illegal and dangerous working environment in Germany. It will be closed down immediately.” People are inhaling heavy metal particles in an overheated wax molding tooling shop. The air is full with dust and haze in a no air-conditioned room. I held my breath not wanting to breath in the dusty workroom and left the room in less than a minute. I cannot imagine people working in that room for days and even years.

Conducting the fieldwork was eye opening for me. Without seeing the real situation, the research would be only half true. The numbers become real after seeing the true

conditions. Factory owners are still facing the same challenges every day. They try to get orders from oversea customers, invent new ways to produce with higher quality and lower costs, and design new products to meet the market demands. Many of them do not speak English, but they travel all over the world to find businesses. Trade show is especially important for them to present their products to international buyers, or find new products to imitate.

One owner said “When they see me walking through their [westerners in a tradeshow]

booths, some of them would wave their hands at me and tell me to leave. I was not welcomed because they know Taiwanese or Chinese like to copy their designs. I find ways to copy it anyway, and I can design something even better than theirs… I don’t like to go to those ‘foreign’ tradeshows because I don’t speak English well, so I quit the frontline business and stay as an OEM manufacturer… What I do today is to focus on one product but make many different versions and qualities to supply to anyone and everyone who needs this type of components…I make steel shocks for bicycles only.” The owner took me to his show room, and I saw thousands of the stainless-steels components. All of those were parts of bicycle shock system. It was a real educational tour for me.^36F36F37

36 A German scholar who has done research on Industry 4.0.

37 Interview in 2013 summer at Changhua, a student of mine in Business English class.

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This owner came to my Business English class. He barely spoke any English, but his annual revenue is around US$15 million with a growing rate of 10% each year for the past 35 years. He is over 60 years old and is getting ready to retire. He owes no loans, and banks love to ask him to have tea breaks [to sell him bank loans]. He has a factory built 35 years ago on his father’s rice field. The factory has no permit; therefore, he has no collateral for any loans to upgrade his factory. He has about 29 migrant workers in his factory, mostly from Indonesia. He said, in 2017 he will run into worker shortage

problems because Indonesia will stop sending migrant workers out of country, and I will lose all my migrant workers. Indonesia is having two-digit economic growths and has plenty of work for their own citizens. The owner also has a larger factory in Shanghai.

The business over the past fifteen years has been growing and is earning five times more revenue than in Taiwan. I asked why he does not move to China instead and still keep his business in Taiwan, especially, since China’s factory is so successful. He replied:

“Taiwan is my home. My father is old but still working in the rice field. This is where my wife, my children, and my grandchildren live. I am comfortable here as my root. I do not want my family to move to the Communist China because we are not Chinese. We are not local there. Where I was born is where my home is. This is the reason why I keep my business healthy and still growing here. One day, I will retire and come back to maintain my small business at home. I have my daughter working in the company now. My son is in China running my bigger business because that is where a young man should be, the bigger place with bigger challenges. My daughter should stay close to me because when I retire, she will take care of me. Also, I have two grandchildren nearby, and they are my real joy. I have more fun with my grandchildren than anything else now.” He opened up three different bottles of whisky at eleven o’clock on the Saturday morning and started

“wine tasting.” He said “For the westerners, they drink whisky slowly. In China, whisky is down poured.” This concluded the interview, a memorable interview.

These field-interviews are only a small part of the story. From Taiwan’s Traded Cluster map (Figure 48), there is a growing Cluster, Information Technology and Analytical Instruments (IT). It is growing at an increasing rate of 1.6% during the financial crisis time. And on the left of that bubble is the Distribution and Electronic Commerce Cluster which is declining at a rate of 1.5%. The divider line is the 2008 within the traded-cluster

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bubble map. The map presents a reality. The reality is telling Taiwan’s people that a major industry is declining despite another equally big cluster is growing. It either needs innovation for an industrial structural change or let it develops naturally. Perhaps it is ready for a disruptive innovation like Industry 4.0, or it will be replaced by other international competitors, especially to the Southeast Asian regional neighbors like Indonesia or Vietnam. With a cluster employment size close to 10% of national shares, it is very important to look into the solutions. On the growing side, we see the IT Cluster is on demand on the rise despite the external shock, especially the Business Services, Metalworking Technology, and Upstream Metal Production clusters are rising quickly.

This posts opportunity for these clusters to expand with initiatives if strategy is set with clear goals for growth. The map is showing a business dynamic shift from production business into service businesses, from hard to soft, from machines to people. If Taiwan is letting go completely at a free fall, that is where it will land, toward a business service oriented information technology world. At least, that is told by the numbers in the harsh period. Thanks to the financial crisis, the split was cracked open by the external shock.

This is not to say that Taiwan is fading out with its production ability. On the contrary, Taiwan has become better and stronger production floor for very high quality electronics consumer products, especially in the Upstream Metal, and Production Technology clusters’ growth. When this happens, part of very matured and sophisticated

manufactures will remain in the top of the pyramid and being competitive, who have built the business knowledge and environment to overcome challenges and rise to the top.

Their customers demand for very high quality products like Apple. One of the hand-tools company interviewed, they have invented new machinery to speed up production by 10 times; it even surprised their American customers.

Furthermore, the cluster supporting industry shares a very strong and cohesive value-chain. They migrate in packs wherever they decide to develop in the next location. The earlier migration was from Taiwan to China. Now that Southeast Asian is on the rise, many have already migrated to Vietnam and Indonesia to find the next location to produce their products. These over long period of collaboration and partnership within the value-chain are hard to break, and they carry the name for success. Their specialty is being the best of OEM suppliers. Here we name them the “Migrant OEM”. They go to

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other nations to build the OEM clusters. No one else is able to manage to produce mass production with the highest quality without going through the learning curve. There were trained over the years to be the best OEM suppliers around. For example, Foxconn, a multinational OEM company produces over 40% of electronic products worldwide, has more than one million employees in China, Brazil, Mexico, and Europe. It not only will remain growing in China, it will also continue to develop production capacity in other developing communities. It has learned to not only survive in a developing society, it rises by learning how to teach uneducated to work effectively, and places brought to a better living standard. Foxconn is worth giving a prize as a social development agent.

Foxconn has made its brand too in OEM manufacturing clusters and taken the flying-geese lead in supply-chain migrations.

The traded-cluster map is trying to tell us a new story. The story will go beyond today’s industrial infrastructure. The researcher is not surprised to tell you that Taiwan has only one dominated cluster, Information Technology (IT). Everything else is secondary. From the tabulation, the IT cluster occupies 10% of overall industrial and services

employments. Including the supporting industries, over 50% of employments are clustered in one closely linked map^37F37F38. There are some other industries such as

petrochemical and textile industries, but each is less than 5% of the overall employments, and clusters such as biomedical industry is young and takes a long time and big

investment to develop. The spillover effects for these young industries are limited. Even Taiwan’s famous bicycle industry is a part of spillovers from the Production Machinery cluster. Although, the agriculture, Forestry, and Mining data are not included in this research, but the Food Processing and Distribution commercial clusters are included.

They still account for a vital part of Taiwan’s National Account balance.

This came not so surprising by looking at the cluster map that two largest bubbles rise up and the rests are small or local in Taiwan’s cluster map (Figure 49), which accounts for 20% of all employments. Furthermore, the same correlation test was conducted on traded-cluster with a regrouping of all cities into North, Northwest, Middle, Southwest,

38 The statistics clustering confirms this.

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South, East, and Outer Islands districts. The result is the same as the city correlation, highly correlated into one dominated specialty.

This only proves that Taiwan has developed a single industry over the past 40 years with all its resources. Did Taiwan do well? Yes, it did. Is Taiwan in a danger? Yes, very. This fits the scenario of putting all eggs in one basket. Can Taiwan be more diversified? Yes,

This only proves that Taiwan has developed a single industry over the past 40 years with all its resources. Did Taiwan do well? Yes, it did. Is Taiwan in a danger? Yes, very. This fits the scenario of putting all eggs in one basket. Can Taiwan be more diversified? Yes,