China is at a crossroads, as it strives to transform and upgrade its social and economic structures. The Chinese government’s 12th five-year plan (2011-2015) places the emphasis on three goals: a green economy, people’s wealth and national strength, and transition from the second category of manufacturing industry to the third category of service sector business. With the mainland’s rapid development and shifting landscape, Commonwealth monthly reported that Taiwanese business people are struggling to cope with the latest environmental protection regulations, labor issues and industrial restructuring.
Environmental protection now weighted with economic development
In China’s latest five-year plan, “Green energy takes the top priority. There are trends of prevailing nationalism and an anti-wealth sentiment. The combination of these three factors might get out of control,” Leu Horng-der, professor of business administration at Chung Yuan Christian University, told Commonwealth.
“You cannot expect China to remain as a cheap manufacturing base. All Chinese people want to be wealthy, and they also want to protect their rights,” said Li Chin-ping, general manager of the MiTAC computer factory, in Kunshan, Jiangsu, a coastal province of China. One of the most important new realities is that Chinese people are no longer willing to accept economic development at the expense of environmental protection.
The emphasis on original equipment manufacturers (OEMs) has been the major business model adopted in Taiwan business for a long time. The flaw in this idea is that it pays attention to production efficiency, manufacturing yields, the supply chain and customer care, but ignores corporate social responsibility (CSR) and stakeholder engagement.
In the past Taiwanese business people only dealt with the government. Now they “must communicate frankly with the local community, and seek support from the local people to justify their operations,” said Leu.
China has adopted the most advanced environmental protection regulations from other countries, but has not yet been able to fully implement them. Taiwanese businesses are faced with an increasingly regulated environment, but must also work with government officials who are often granted with too much discretion with regard to the legal requirements.
Fair distribution of wealth expected in China
A goal that is clearly written into China’s five-year plan is that the income of urban and rural residents should be doubled. China wants to shake off the stereotype of the country as the low-cost factory of the world, and wants to let its citizens gradually enjoy a fairer distribution of national wealth. “The labor wages of the Yangtze River Delta region in 2015 will match those in Taiwan,” predicted Yorkson Chu, general manager of the AU Optronics factory, Suzhou, Jiangsu province.
Even if businesses go to set up factories in the less developed western Chinese provinces, they will not be able to pay low wages or seek preferential treatment, stressed Commonwealth. What worries the Taiwanese business community is not only labor shortages, but also the quality of the workforce. Due to a high rate of staff turnover in China, skilled workers are in short supply, which in turn affects production yields.
In July 2011, when China announced an increase in the workers’ provident fund, the turnover rate of employees soared. The 2011 the turnover rate of direct labor (DL) at AUO’s Suzhou factory was about 15 percent, 2.5 times the level in 2010. “We are doing fairly well. Many companies at the Suzhou Industrial Park suffer a turnover rate as high as 25 percent,” said Chu.
Rapid changes makes planning difficult
With China’s industrial structure transitioning from high energy consumption and polluting manufacturing industry towards a cleaner and greener service sector economy, Commonwealth reported a phenomenon in the Yantze River Delta region where factories are now surrounded by business districts and residential areas. This causes problems for Taiwanese businesses too.
About a decade ago when a Taiwanese manufacturing company came to Yushan township, Kunshan City, the factory was surrounded on all sides by rice paddy fields. Now the same factory is bordered on three sides by commercial developments.
The frustration felt by such companies by the rate of change and the unpredictable nature of the China’s officials was summed up by a spokesperson for the company who noted that land is expensive now, with a hundred acres worth a billion Chinese Yuan (over US$150 million) when developed. “At the time of setting up the plant, the local government repeatedly guaranteed that this was the industrial district, and was never designated for residential housing or retail developments, but now they do not follow the original planning,” he said.
There are 3,953 Taiwanese firms in Kunshan, accounting for 60 percent of the total industrial output of the city.
As the trade war between the US and China intensifies, other foreign companies fear they will lose out, especially Taiwanese businesses stuck in the middle.
The plight of such companies is clearly illustrated by the comments of a top executive at a Taiwanese food giant. “Taiwanese firms must take a low key approach because the sky above and the ground below are controlled by someone else,” he said. Commonwealth stressed that only through constant adaptation and innovation can Taiwanese firms avoid being sidelined from China’s economic transformation.