Program: Thursday, November 27, 2003

THANKSGIVING SPECIAL-Taiwan: Innovation Island

11/27/03:THANKSGIVING SPECIAL-Taiwan: Innovation Island

DARREN GERSH, NIGHTLY BUSINESS REPORT ANCHOR: It`s an island the size of the Maryland with an economy the size of Russia. It`s a world leader in notebook PCs, LCDs and wireless networking. And now it wants the world to take a new look at this mix of high-tech, ancient culture and stunning scenery. It`s Taiwan, an island of innovation. Good evening, everyone. The markets were closed today for the Thanksgiving holiday. So tonight we`re going to take a look at one of the places that makes our own high tech economy run: Taiwan. We call it "Innovation Island." Taiwan is a key supplier for market leaders like HP (HPQ) and Dell (DELL). But in high-tech, you have to move fast to stay ahead. Taiwan is a dangerous place to visit before the holiday shopping season. Suddenly you realize you really need a spiffy new tablet PC. These sleek wireless gizmos look pretty good, too. And please, don`t even get me started on the LCD TVs. This island can give a visitor a powerful case of techno-envy. And in a way, that is the Taiwanese entrepreneur`s role in the global economy: to pump out new technology, whether it`s notebook computers for Dell or PDAs for HP, and to do it cheaper and faster than anyone else.

BOB YANG, EXECUTIVE VP, INDUSTRIAL TECHNOLOGY RESEARCH INST.: All these people, they`re also engaging global competition too. So getting the new technology, taking the most advantage of these new technologies is absolutely crucial for their survival.

GERSH: And for years, the island has not only survived, but thrived. Taiwanese companies make more than half the world`s computer monitors, two-thirds of the world`s notebook computers, and almost all of the motherboards. But Taiwan`s advantage is under assault.

YANG: Taiwan, I think, especially with the rise of China, can no longer stay in the comfortable cocoon of the low-cost manufacturers. We need to become innovators. We need to become strong in design, in creating new product.

GERSH: That`s a message that reaches to the top of Taiwan`s government. Vice Premier Lin Hsin-I runs economic policy in Taiwan. Like the former auto industry CEO he is, Lin pulls out a flip chart to explain where Taiwan is and where it needs to be. The bottom line of the graph is the value chain beginning with R&D, moving to manufacturing, and finally marketing and branding. The vertical line is value-added.

LIN HSIN-I, VICE PREMIER, TAIWAN: These two sides is the high value-added.

GERSH: Innovation and marketing, these high-profit, value-added sweet spots, are in the corners of the graph. Manufacturing is at the bottom.

LIN: So it`s the smiling curve.

GERSH: So where would Taiwan - you want Taiwan to move where on this smile graph here?

LIN: In Taiwan, very strong in this manufacturing and assembly. So we have to segment, different segment with the developing countries, with upgrading more value-added manufactures.

GERSH: Over and over again, people here talk about the need to move off the bottom of the smiling curve and move up to nanotechnology, biotechnology and other knowledge industries. If that sounds familiar to Americans it should.

LIN: We can see that American firms, they are grading up, more new economy, more high value-added, more high-tech industry. I think it is a similar case.

GERSH: There is another similarity with the U.S., this rich country now finds it is too expensive to produce low-end products here. Unemployment, for decades almost non-existent, now hovers near 5 percent. Former Premier Vincent Siew is advising the current government on how to create jobs by moving to a knowledge economy. But the change requires new policies and attitudes towards R&D and education.

VINCENT SIEW, CHUNG HUA INST. FOR ECONOMIC RESEARCH: This is a new trend that people start to learn that we have to be very quick with more knowledge.

GERSH: Some Taiwanese entrepreneurs are leading the way. At ZyDas, these chip designers are working to improve Wi-Fi transmission quality and access range. ZyDas President Norman Hung says many Taiwanese companies are focused solely on cutting cost. With companies like Dell slashing prices, PC manufacturing is already a micro-profit industry. The price pressure is one reason Hung has made ZyDas into what he calls a "second generation design house." The focus here is on innovation.

NORMAN HUNG, PRESIDENT, ZYDAS: So we are trying to do the total solution for the customer, not just only a chip with a better cost structure.

GERSH: And just in case anyone misses the change, he`s putting it on his products, replacing the "Made in Taiwan" with "Designed in Taiwan."

HUNG: So we are not just focused on the manufacturing only, we actually can do the whole system design right now.

GERSH: If Hung and other entrepreneurs here succeed, Taiwan will be offering more and more cool stuff to test the budgets of holiday shoppers. Whether it`s Saudi Arabia, China, or Taiwan, every nation wants to develop knowledge industries like biotechnology. But how can a small island hope to compete in such an expensive effort? The answer, by teaming up with companies in the United States. You`re looking at a biosensor, a combination of advanced biology and computer engineering that could one day allow machines to diagnose diseases. That`s a long explanation for what the lab workers here call an "electronic nose." This artificial sniffer is part of Taiwan`s strategy to break into biotechnology. Johnsee Lee is leading the effort at Taiwan`s Industrial Technology Research Institute.

JOHNSEE LEE, PRES., INDUSTRIAL TECHNOLOGY RESEARCH INST.: We are trying to focus on how to integrate some of the - our engineering capabilities to biomedical applications.

GERSH: Taiwan has developed world-class expertise over the last 20 years in specialty materials, information technology, and micro-machining. Now it is spending $300 million a year adapting that knowledge to biotechnology. But that`s not a lot of money when you consider it costs more than $700 million to develop a new drug in the U.S., which is why part of Taiwan`s biotech strategy is to work with U.S. companies.

LEE: We cannot do everything by ourselves, but we have to be able to play our role very well and become an indispensable partner.

GERSH: The island is positioning itself as a biotech outsourcing platform for the industry, offering high quality research and manufacturing know-how at one-third the price it would cost in the U.S. But in biotech, overhead is in everything. Taiwan has a ways to go before it is ready for this knowledge industry.

THOMAS MCGOWAN, ATTORNEY, RUSSIN & VECCHI: They`re not prepared to have a free-flow of human beings in and out of the country. If you`re going to have a knowledge base, you`re going to have to encourage foreigners to come live and work here, and that`s not as easy as it should be.

GERSH: Intellectual property enforcement is also still weak here. So clients may ask themselves, why put your technology at risk if you could be happy at home.

MCGOWAN: If you are a biotech company, right, you are flavor-of-the-month. There are X-number of countries around the world that would like to attract you to come do it there. Taiwan has to compete with the rest of those folks, starting with, why should you leave the U.S. in the first place? Or why should you leave Europe or Japan in the first place? Why not just do it at home, you`re a favorite industry at home?

GERSH: If it gets serious about enforcing patents, analysts say Taiwan could serve as an entry point to the greater China market and biotech center specializing in hepatitis and other diseases that are common to Asia.

JONATHAN HSU, BIOTECH ANALYST, PRIMASIA SECURITIES: We have the human resources. We have the R&D. And we have the capital, lots of people in Taiwan that are interested in investing in biotechnology.

GERSH: And now that Taiwan has detected an opportunity in biotech, it is determined to close the knowledge gap with the U.S. Here in the U.S., manufacturers worry that low-wage competition from China will put them out of business. And as more companies move overseas, there is concern that our economy is "hollowing out." So you may be surprised to hear that`s also a concern for the low-cost manufacturers who have made Taiwan an exporting powerhouse. At the Jinn Lung steel valve factory, the workers now guard the front gate. After the plant shut down, they set up watch to make sure the owner didn`t sell off the equipment or ship it to China. Huang Ho-Li was a quality engineer here for 12 years. Now he is organizing the workers` rescue team. Huang says the trouble began early this year when the paychecks were late.

HUANG HO-LI, UNEMPLOYED WORKER (THROUGH TRANSLATOR): At that time, we believed there might be some temporary difficulties facing the company, so we continued working. It wasn`t until early April that we found the boss had changed his attitude. He became very, very tough and he just refused to pay.

GERSH: The owner sold off his inventory, but he didn`t pay the workers. In June, management announced the plant would close, with no explanation. Huang suspects his job and some 200 others were shipped across the Straits of Taiwan to the owner`s other plant in Mainland China. It`s a plant Huang helped start. At the time, the owner told Huang not to worry about what he called his expansion plan.

HUANG (THROUGH TRANSLATOR): So he set up the factory in Shanghai and said he would move low-end production to Mainland China, and maintain high-end production of high-end valves in Taiwan. I never thought that the outcome would be so painful.

GERSH: The city of Taoyuan, just south of Taipei, was a center for manufacturing in Taiwan. Now many factories like this are empty and rusting, the jobs shipped to Mainland China, leaving behind a bitter debate over whether Taiwan`s economy is hollowing out. Taiwanese companies have invested $100 billion in Mainland China, giving them access to a huge market and cheap labor. After studying this cross-Straits economic relationship, Professor Tung Chen-Yuan has concluded it is helping Taiwanese companies lower costs and increase their global market share in IT manufacturing.

TUNG CHEN-YUAN, ASST RESEARCH FELLOW, CHENOCHI UNIV.: A lot of people say this kind of investment in China might create troubles for Taiwan, but I would say they create opportunities for Taiwan.

GERSH: Many analysts like Tung dismiss concerns Taiwan is hollowing out, arguing the evidence does not support it. Manufacturing employment has held steady here for much of the last decade. But while high-tech employment is increasing, workers in so-called "traditional industries" feel abandoned.

HUANG (THROUGH TRANSLATOR): This kind of hollowing trend taking place is not because Taiwan`s workers became lazy or they decided to quit working. Taiwan still has a high-skill labor force. The point is that the management deliberately left for cost concerns. They abandoned very high-skilled workers here.

GERSH: Professor Chen Pochih fears Taiwan`s high-tech sector is also at risk. Through tax incentives and political pressure, Chen says China is forcing Taiwanese companies to shift high-tech manufacturing to the Mainland.

CHEN POCHIH, CHAIRMAN, TAIWAN THINKTANK: In some sense China is targeting the good industries in Taiwan.

GERSH: China is now Taiwan`s leading trading partner, but Beijing considers the island to be part of its sovereign territory. And critics like Chen worry the Mainland is using its economic muscle as leverage.

CHEN: They also use this market opportunity to force Taiwanese businessmen to support China politically, and China still using hundreds of missiles and also hundreds of jet fighters to terrify Taiwanese people.

GERSH: But Tung says his research proves China would have much more to lose from a conflict with Taiwan. If trade were disrupted, Tung estimates it would hit Mainland China`s economy five times as hard as Taiwan`s and cost 10 million workers on the Mainland their jobs.

TUNG: China`s leverage is minimal, I mean, almost non-existent.

GERSH: The issue is heating up as Taiwan`s president, Chen Shui Bien, runs for reelection next March. But opinion here seems to be split between those who see opportunity in China and those who think it will be the death of more factories like this. At Jinn Lung, some of the workers were weeks away from getting their pension.

HUANG (THROUGH TRANSLATOR): We have taken hold of this place, humbly hoping that the management can show their willingness to help us. We sincerely hope that the company can resume production, because we want our jobs back.

GERSH: We tried to reach the factory`s owner, but the phone number had been disconnected. Since the factory closed, fewer than 20 percent of the workers here have found new jobs. And Huang is left to ponder the future his children will face if more manufacturing jobs head to China.

HUANG (THROUGH TRANSLATOR): This question is very difficult for us to answer. We find it painful to face this question.

GERSH: But it is a question Taiwan can no longer avoid. Like anywhere else, Taiwan`s most precious natural resource is its people, but as the island trains its next generation of young leaders, more and more of them are leaving home to get an education. Many are heading east and west. It`s about 10 in the morning and the students are already lining up outside this hotel ballroom. Did I mention these students are here on Saturday morning? The draw is one of the most famous U.S. products in the world, a degree from an American university. This education fair gives colleges from California to Wisconsin a chance to pitch their schools to an eager crowd. Ruth Harrold has come from Jacksonville to talk up the benefits of the University of North Florida.

RUTH HARROLD, UNIVERSITY OF NORTH FLORIDA: The reason we chose Taiwan was because we felt that there is a very good market for students here, students who are interested in studying English as a second language. I`m the director of the English language program.

GERSH: Even though it is half a world away, Taiwan sends more students than Canada to U.S. universities. And for those universities, it`s an important source of revenue: 28,000 Taiwanese now study in the U.S., but very few are eligible for scholarships. And many will pay as much as $30,000 a year to earn their degree.

HARROLD: I think that they`re attracted to our quality of education because when they come back to Taiwan - to work in Taiwan, they have an international degree, first of all, from the United States, which is a prestigious place to have a degree from. And also, I think that they can find jobs with American companies that are located here in Taiwan.

GERSH: Amy Tu works at Ernst & Young in Taiwan. She`s here looking into programs for a Master`s degree in accounting or international business. Tu thinks an American diploma will help when she returns home.

AMY TU, STUDENT: The United States is a powerful country, so if you get a good degree in the U.S., you can easily find a job. I don`t know, I love the U.S.

GERSH: In the competition to educate young minds, the U.S. is still number one. But increasingly, many of Taiwan`s best students are heading for Mainland China. To find out why, I met in a caf, with a group of students working towards advanced degrees in Beijing. Simon Liang works at a foundation encouraging closer contact between students in Taiwan and Mainland China. He hopes to find a job on the Mainland after school.

SIMON LIANG, STUDENT: Because I think the future of China is very, very, very good. It may be the center of Asia, even the world in about 20 years later or 30 years later.

GERSH: China and Taiwan have been at odds for more than 50 years. And these students are bridging the cultural gap. Yang Ya Wen noticed the differences when she arrived at Peking University.

YANG YA WEN, STUDENT: Taiwan culture is much more close to American culture.

GERSH: But as a student of Chinese literature, she is now learning about Mainland Chinese culture as well.

YANG: I think it is a chance for us to open our eyes.

GERSH: Still Yang hopes to go to Harvard for her Ph.D. Taiwan`s government doesn`t recognize many degrees from the Mainland, and it worries about a brain-drain if more students decide their future lies in China. But Tango Chen says it`s important for Taiwanese to understand everything they can about China, a country that insists this island is part of its sovereign territory.

TANGO CHEN, STUDENT: I think after we know the - research the Mainland China very well, and maybe we can make friends with them. If we don`t understand them, maybe we will be the enemy forever.

GERSH: Still for many students, the main reason to study in China comes down to cost.

LIANG: The cost to study in America is much expensive for Taiwan students. So therefore that`s why Taiwan students will not go to America.

GERSH: As a student of political science at Peking University, Chu Jung-bin points out that Taiwan must strike a balance in its relationships with the U.S. and China. He is unconcerned by those who worry about too many of Taiwan`s best students going to Mainland China.

CHU JUNG-BIN, STUDENT: Ten or 20 years ago, Taiwan also depended too much on America. Is it healthy, I don`t think so.

GERSH: But all these students say their friends or neighbors sometimes ask them why they are studying in a country that many in Taiwan still consider an enemy. Do any say, oh, you shouldn`t have gone there? (LAUGHTER)

CHU: Yes, of course.

GERSH: What do you tell them?

CHU: Well, it is a choice, it`s a free country.

GERSH: And it is a choice more of Taiwan`s best students are making. If you`re looking for the next hot vacation spot around the world, chances are Taiwan wouldn`t come to mind. The island`s tourism trade was trounced after last spring`s SARS outbreak. Still, Taiwan`s leaders are convinced they have a lot to offer in a familiar yet exotic holiday locale. Follow the path cut into the rock face and you will soon come to the fall. This is the Eternal Spring Shrine, set into the cliffs at Taroko Gorge. In some places here the river has cut a channel 3000 feet deep. The view along the tunnels and paths has made this Taiwan`s premiere tourist attraction. Taiwan is now aggressively marketing beauty like this in the hopes of convincing more tourists to make the island part of their Asian itinerary. Tourism virtually disappeared when SARS swept across Asia. But the reminders of the disease are everywhere, including these thermal scanners at the airport. But now the government is telling visitors SARS is over. And business travelers, at least, are coming back.

STANLEY YEW, HONORARY CHMN., TAIWAN VISITORS ASSN.: Business is always the first one. They come back because it`s been a long waiting period for them, and now everybody has rushed back and do business. The hotels actually are enjoying good business right now.

GERSH: With hotel occupancies heading back up, Taiwan has launched an international campaign to build up its travel industry, declaring 2004 "The Year of Taiwan Tourism." The first step is to bring more meetings and conventions here.

YEW: And we believe that is a big market for Taiwan. We do have good conference - convention facilities. We have some good sight-seeing spots.

GERSH: While most people think of Taiwan as a business destination, the government wants to convince more people to take their vacation here. The goal is to double the number of tourists over the next six years. Tourism officials are inviting students and other test groups to come sample Taiwan`s culture and scenery. The idea is to reintroduce Chinese-Americans to their culture.

YEW: The parents want them to come back and to see something, where Taiwan certainly has been doing quite well in how to transform the old, traditional culture into a modern one.

GERSH: Tourism is the kind of service industry Taiwan has traditionally had difficulty developing. But it is trying: new boutique hotels like the Evergreen Laurel now offer exquisite decor, special amenities like plasma TVs, and personalized service 24 hours a day. Any time of day? (LAUGHTER)

ALBERT HSU, ACTING GEN. MGR., EVERGREEN LAUREL MOTEL: Yes. Just like your 7-Eleven.

GERSH: Well, if a 7-Eleven had bathrooms like this. And in a way that`s part of the problem. While Taiwan has a vibrant nightlife, great food and good markets, it is also expensive compared to the rest of Asia. And the testy relationship between Taiwan and Mainland China has blocked direct air routes between the two. If the politicians can work out a compromise, the best hope for Taiwan`s travel industry may be to bring more tourists from the Mainland here, or to market Taiwan as a stopover for Americans on a vacation tour of China.

VINCENT TANG, GEN. MANAGER, REBAR CROWNE PLAZA: And then of course, if they have another schedule to Mainland China, then it`s a very good comparison.

GERSH: But for now, Taiwan`s tourism potential remains underdeveloped. If you`d like to learn more about Taiwan and the issues facing it, we invite you to visit our Web site, NBR.com. I`m Darren Gersh, for all of us at NIGHTLY BUSINESS REPORT, thanks for watching and happy Thanksgiving.

Nightly Business Report transcripts are available on-line post broadcast. The program is transcribed by eMediaMillWorks. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Community Television Foundation of South Florida, Inc. Nightly Business Report, or WPBT. Information presented on Nightly Business Report is not and should not be considered as investment advice. Copyright (c) 2003 Community Television Foundation of South Florida, Inc. ALL RIGHTS RESERVED. Terms of use.