Tai­wan’s New Leader In­her­its a Mess

The is­land’s econ­omy is deeply in­ter­twined with China’s “I won’t pro­voke, and there won’t be any ac­ci­dents”

Bloomberg Businessweek (Asia) - - GLOBAL ECONOMICS -

It was a to­tal vic­tory for Tsai Ing-wen. Not only did the Tai­wanese op­po­si­tion leader trounce the can­di­date of the rul­ing Kuom­intang on Jan. 16 to be­come the is­land’s first fe­male pres­i­dent but vot­ers also re­warded her Demo­cratic Pro­gres­sive Party with its first par­lia­men­tary ma­jor­ity.

Even as she cel­e­brated, Tsai was ad­dress­ing wor­ries that her party’s proin­de­pen­dence stance would hurt the econ­omy by alien­at­ing its big­gest trade part­ner, China. “I won’t pro­voke, and there won’t be any ac­ci­dents,” she told sup­port­ers on elec­tion night.

China and Hong Kong ac­count for about 40 per­cent of Tai­wan’s ex­ports, mak­ing the main­land’s slow­down es­pe­cially painful. Tai­wanese ex­ports to China and Hong Kong dropped 12.3 per­cent last year. Tai­wan’s econ­omy grew only 0.9 per­cent in 2015, ac­cord­ing to econ­o­mists sur­veyed by Bloomberg, down from an ear­lier fore­cast of 1.6 per­cent. The Kuom­intang strat­egy of boost­ing growth by im­prov­ing main­land ties turned off many Tai­wanese. The KMT is “too close to China,” says Tsai sup­porter Li Yu-ju, a grad­u­ate stu­dent. “Tai­wan’s econ­omy over­re­lies on China.”

Tsai, a grad­u­ate of Cor­nell Law School, wants to re­duce that de­pen­dence. The is­land is in eco­nomic cri­sis. Slump­ing global de­mand for PCs im­per­ils lo­cal com­pa­nies such as Acer and Asustek that flour­ished dur­ing the PC boom. Smart­phone maker HTC, once the premier ex­am­ple of a post-PC Tai­wanese tech com­pany, now has a mar­ket share of about 1 per­cent. Con­sumers around the world pre­fer Ap­ple, Korea’s Sam­sung, and Chi­nese brands Xiaomi and Huawei.

Main­land elec­tron­ics com­pa­nies have an in­creas­ing num­ber of home­grown sup­pli­ers, prompt­ing wor­ries of what the Tai­wanese call a “red sup­ply chain” that will make Tai­wan’s com­pa­nies ir­rel­e­vant. In 2014 main­land chip­mak­ers pro­vided 29 per­cent of China’s semi­con­duc­tors, up from 20 per­cent in 2010.

“Many Tai­wanese com­pa­nies find it is too late to beat China and have no choice but ex­plor­ing ways to par­tic­i­pate in China’s rise,” San­ford C. Bern­stein an­a­lysts Mark Li and David Dai wrote in a Jan. 4 re­port. Bei­jing-based Ts­inghua Un­i­group in Oc­to­ber said it had agreed to pay $600 mil­lion for a ma­jor stake in Pow­ertech Tech­nol­ogy, a chip pack­ag­ing and test­ing com­pany based in Hs­inchu, Tai­wan’s tech hub. In De­cem­ber, Ts­inghua Un­i­group un­veiled plans to spend $2.1 bil­lion for 25 per­cent po­si­tions in two other Tai­wanese chip com­pa­nies, Sil­i­con­ware Pre­ci­sion In­dus­tries and Chip­MOS Tech­nolo­gies. Tai­wan’s reg­u­la­tor in charge of for­eign in­vest­ment has said ap­proval of all three is un­likely. Dur­ing the cam­paign, Tsai warned of the threat main­land in­vest­ment poses for Tai­wan. The govern­ment will get around to eas­ing re­stric­tions on main­land in­vest­ment in the is­land’s chip com­pa­nies, Li and Dai ar­gue, but the chance of that hap­pen­ing soon is “nearly im­pos­si­ble.”

Some Tai­wanese see the whole is­land as a lab. “Tai­wan is not so big, so we are able to use the na­tion as a test bed for new, in­no­va­tive ser­vices,” says Y.C. Chang, man­ag­ing di­rec­tor of Far East­ern Elec­tronic Toll Col­lec­tion, part of the Far East­ern Group. The con­glom­er­ate teamed


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