ALL YEAR LONG, the boss of Taiwan's most successful hi-tech company - Morris Chang, the chairman of Taiwan Semiconducter Manufacturing Co Ltd (TSMC) - made clear he was no mindless follower of foolish fashion. Other Taiwanese companies might flock to the mainland with their investment dollars, but not TSMC. Even if Taipei reversed policy and encouraged such spending, he insisted, his company would wait at least three to five years before joining the throng. Then, two weeks ago, a prestigious advisory panel - with Mr Chang as a member - told the Taipei Government it was time to change course. Once President Chen Shui-bian had agreed, Mr Chang quickly said TSMC, too, would open shop on the mainland because it could not afford to be left behind. When it finally gets there, TSMC will find lots of company. Thousands of Taiwanese businesses have invested an estimated HK$467 billion in China, where they produce a large and growing share of 'Taiwanese' products. This migration gives Taiwan an economic challenge that goes beyond the present global downturn, and so far it has no clear solution. But if China is partly the cause, many also see China as part of the cure. But not all of it, as over-reliance on the mainland might prove dangerous. The cyclical downturn is problem enough on its own. July exports were down 28 per cent, and recent figures showed an economy shrinking at an annual rate of 2.4 per cent, the worst record for 25 years. Among other things, this means tougher times at the island's Hsinchu Science-based Industrial Park, where many engineers are paid partly with stock options. Like other relatively small global players, Taiwan alone cannot reverse the cycle. It might adjust social and economic policies to ease the pain and encourage job creation in a declining market. But it needs the big economies to put themselves right, and resume purchasing and investing patterns of recent years. And a recovery would still leave the long-term structural issue, which worried Taiwanese call their 'hollowing out' problem. For years, Taiwan has thrived by making hi-tech products and components for others, sold worldwide under such brand names as Dell, Compaq and Hewlett-Packard. But rising costs are driving many Taiwanese manufacturers - and jobs - to the mainland in particular. Similarities of language and culture, plus the lure of a potentially huge domestic market, combine with cheaper land and labour to pull them across the Taiwan Strait. 'The migration of manufacturing is removing a long-term driver of demand, and in the near term, service industries cannot pick up the slack,' warned an HSBC economic report earlier this year. As another observer puts it: the Taipei Government 'is not so sure it can preserve enough jobs as the economy changes'. The migrants include producers well up the technology ladder. A recent Taipei Computer Association survey found that 25 per cent of Taiwan's information-technology (IT) companies have factories on the mainland, and the list is growing. For example, Quanta Computer Inc and Mitac International Corp - which supplies laptops to Dell Computer Corp - plan to expand mainland operations. Thus, most Taiwanese business and government leaders hope to exploit a trend they realise cannot be stopped, even though some politicians would rather apply the brakes for security reasons, as they fear Beijing might gain an economic stranglehold. But the others have two distinct policy lines under consideration. One is to make Taiwan a major service centre providing finance, shipping, technology and management for production sites across the strait. The second is to diversify and improve the island's own economy, such as by developing higher levels of IT and new areas such as bio-technology. But with legislative elections pending, getting the needed policies in place is difficult. 'We face the challenge of upgrading, but the problem is there is no direction,' complains an official of the People First Party, a leading opposition group. Beyond that, closer integration with the mainland will require establishing the 'three links' of direct trade, transport and communications. But Beijing is certain to demand a political price, and how far Taipei will go remains unknown. Nothing significant is likely to happen before a new coalition government is organised after the December 1 poll for a new legislature (plus local officials) and power-sharing relations with Mr Chen are worked out. But if the politics are overcome, Taiwan would have several possibilities. For example, the southern city of Kaohsiung could become a transit centre for Shanghai and other mainland areas which lack deep-water ports. 'Sixteen million containers a year now go to Hong Kong or Osaka for trans-shipment,' says an academic who has studied the issue. He says Kaohsiung has 'a six-year niche' before new port facilities in Shanghai begin operations. Likewise, Taipei would be only 80 minutes from Shanghai if direct flights begin. Taiwanese companies could then keep their headquarters on the island and have easy access to mainland factories. Upscale and lucrative services such as design and marketing would stay at home, with other work shifted across the water. Moreover, if the island and the mainland both join the World Trade Organisation (WTO) on schedule, Taiwanese officials are convinced the WTO's market-opening terms would make exchanges easier. Among other things, that would end the need for semi-secret shipping which now detours through Japanese waters. Sometimes papers indicate the freight clears through Japan; sometimes the shippers don't bother with the paperwork. Whether these two tracks can prolong Taiwan's remarkable prosperity isn't clear. For one thing, Taipei would have to reorganise its closed, debt-ridden financial markets if it wants to become a financial source for others, and that would meet resistance. And it is unproven whether Taiwan - mostly a maker of goods which outsiders design and sell - can learn to initiate such services for the mainland. In any case, would executives want to remain even an 80-minute flight from their operations rather than move headquarters right next door? Neither is it certain whether Taiwan's domestic economy can become an important source of bio-technology or advanced IT research, development and production on its own. Its companies remain much better known for application than for innovation. So far, planners have not gone much further than stating general goals. Yet Taiwan has many assets. Included are a skilled engineering force, familiarity with world markets, entrepreneurial experience and social stability. It has met previous economic challenges and moved up the industrial scale to increase living standards. It could happen again, but this time Beijing has to help. Robert Keatley is the South China Morning Post's Editorial Adviser
