Taiwan
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Hoping for a Tech Turnaround
By JASON DEAN
TAIPEI, Taiwan -- In January, following the worst year in industry history, Taiwan Semiconductor Manufacturing Co. Chairman Morris Chang predicted that each quarter of 2002 would be better than the last. In May, the world's biggest contract chip maker said it would boost its investment in new plants and machinery this year.
But as quickly as July, things had changed. Mr. Chang said the recovery had "paused." Taiwan Semiconductor's revenue would decline in the second half, and the company would slash capital-expenditure plans. In September he said the pause would likely extend through the fourth quarter. Last week, Mr. Chang said it was too hard to predict an upturn in the first quarter, but that "next year should be better than this year."
And so it has gone for much of Taiwan's export-driven economy this year. While the island has shaken off the worst of last year's historic slump, many of the challenges facing its economy remain acute. Questions about the health of the U.S. economy, worries about the impact of World Trade Organization membership, fears of unemployment, concerns about the impact of China's economic ascent, the gloomy combination is crimping confidence in Taiwan's economy despite a return to steady economic growth after last year's slump. "It's all happening at once," says Wang Lee-rong, chief forecaster for the Chung-hua Institution for Economic Research, a government-affiliated think tank. "In this environment, people get more cautious."
There are reasons for optimism. Most economists expect Taiwan's gross domestic product to expand by more than 3% this year, a far cry from growth rates twice that high in the 1990s, but much better than last year's record 2.2% contraction. Companies are faring better than they did last year, though many didn't do as well as they had hoped. Taiwan Semiconductor, reeling from its optimistic outlook, is still expected to grow its revenue more than 20% this year, and to boost its earnings 70% or more.
Beyond this year, however, the outlook for Taiwan's economy is murkier. GDP growth projections for 2003 range from the anemic, such as HSBC Securities' 1.8% forecast, to the robust: Goldman Sachs expects growth to hit 5.5%. What analysts do agree on is that the island needs to take aggressive steps to solve the problems that still nag its economy.
Mixed Reviews
President Chen Shui-bian's administration isn't waiting idly for the global economy to catch its second wind, but its efforts earn mixed reviews. The government's main economic initiative this year was "Challenge 2008" plan, an ambitious US$75 billion package of public and private spending to boost tourism and enhance research and development, among other things. Some analysts expect the plan to help, while others point to a trail of past stimulus plans that have yet to be fulfilled.
Taiwan: Economic Overview
The praise is much heartier for the surprising progress in financial reform this year. A new finance minister, Lee Yung-san, has leaned on the island's ailing banks to tackle their balance sheets problems and consider consolidation. The result has been the most positive surprise for Taiwan's economy this year, with banks writing off or selling billions of dollars of problem loans, and two unprecedented bank mergers.
The next steps, however, will be more tricky. The cabinet has asked the legislature to expand the Financial Restructuring Fund to NT$1.05 trillion (US$30 billion), or about 10% of GDP, from NT$140 billion. Most of the additional funds will be injected into cleaning up bad loans at the messiest financial institutions. Economists have been urging just such a move, but opposition legislators may balk at the expense, given the island's dwindling tax revenue and widening budget deficit. Finance officials also have been talking up ambitious plans to sell the government's stakes in the mammoth state-owned banks, which could help pay for the balance sheet cleanup. But such plans have foundered in the past. And then there is the need to shut down the most hopeless financial institutions, a notion that has already elicited howls of protest from Mr. Chen's opponents.
"We still have a long way to go" on Taiwan's banking reform, says Nicholas Bibby, regional economist at UBS Warburg in Hong Kong. Mr. Bibby and other analysts say following through with financial reform is crucial to jacking up the domestic economy to compensate for soft export demand. That goal so far has proved elusive for the government: despite record-low interest rates and oceans of liquidity at Taiwan's banks, lending continues to shrink. Domestic investment plunged 20% last year and, according to HSBC's estimate, likely will edge down an additional 0.7% this year.
Merger Mania
Meanwhile, Taiwan's companies are working to cope with the changing global tech economy. Lite-On Group, one of Taiwan's biggest contract makers of keyboards, monitors, and other personal computer components, is merging four of its units to bolster its negotiating power with suppliers and customers. Chief Executive David Lin says the move was a direct response to customer Hewlett-Packard Co.'s acquisition of Compaq Computer Corp. this year. "We have to respond to outside changes," says Mr. Lin, who believes his merger will save the resulting company about NT$3 billion over the next year.
Mr. Lin says the company also is scaling back its hiring to contain costs, and the company already has moved much of its production to China, where it operates 18 factories. That helps explain another source of unease in Taiwan: China's economic juggernaut. The rapid growth of the island's giant rival while other markets are flagging has in many ways been a boon to the island. It became Taiwan's biggest overseas market late last year-although much of what Taiwan sends across the strait is used to make goods for re-export to the U.S. and Europe-and exports in September soared 171%.
The government has continued to lift restrictions on trade and investment across the strait. In the last several months it has approved an unprecedented US$47 million mainland cargo company investment by China Airlines, Taiwan's government-controlled flagship carrier, and submitted revised regulations to the legislature that could help pave the way for direct transportation links across the strait, which Taiwan has banned since 1949. Although actual flights and ship traffic to China is still probably distant, economists say when it does come it could give the island a significant boost.
Yet many in Taiwan still worry that the Chinese economic juggernaut is denuding Taiwan of its enterprises and jobs. While the unemployment rate has leveled off for now, at about 5.35% it remains near record highs, exacerbating the perception of job shifts to China. That and the massive wealth that has been wiped out in the slumping stock market are damping consumer sentiment.
Lyn Yang, for example, says she has cut her monthly spending on new clothes and other nonessentials by as much half this year. The 27-year-old, who works as a product tester in a patent processing company, says several of her colleagues were laid off just a few months ago. "My wages haven't fallen, but I'm afraid of being laid off any day now," she says, browsing among racks of 20%-off items at a Mitsukoshi department store in downtown Taipei.
--Chen-wei Pai contributed to this article.
--Mr. Dean is a staff reporter in The Wall Street Journal's Taipei bureau.
Write to Jason Dean at jason.dean@wsj.com
Updated October 28, 2002 |
