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Innovation in Taiwan: Will It Work?

Taiwan’s president, Ma Ying-jeou, sat in a low leather chair looking out over the vast presidential conference room of his Taipei office. On the wall behind him hung a portrait of Sun Yat-sen, the Chinese icon who is credited with the revolution a century ago that ended two thousand years of imperial rule.

Under Ma’s feet lay a light blue carpet festooned with white representations of ocean waves. Overhead, white cloth, styled like ship sails, covered the ceiling lights—all of it intended to represent Taiwan’s journey away from mainland China.

Asian conference rooms are unlike those in the West. There’s no mahogany conference table. Instead, plush chairs are arranged in a U shape. And the conference leader, in this case President Ma, sits at the center with his conferees to his left and right—university professors, think tank leaders, and government officials from Asia and the West who were there for a conference on the East China Sea debate between Taiwan, China, and Japan.

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The president had invited the conference speakers to his offices for a talk about his East China Sea Peace Initiative. Ma and his aides like to note that it has received a lot of positive publicity, but in truth that’s about all it has produced.

I was the only journalist in the group, and unlike everyone else, I asked a question about Taiwan’s stagnant economy, whose GDP growth has been in the low single digits or worse for more than a year, with wages for Taiwanese workers frozen for a decade or longer.

What was the president going to do about this?

Ma looked a bit startled. But he recovered quickly and began to talk about the need for more international free-trade agreements. Taiwan has a grand total of seven, five of them with small Central American states. In this arena, as in so many others that affect Taiwanese life, many nations are afraid that signing an agreement with Taiwan will offend China, which still views Taiwan as a runaway province.

But then Ma transitioned to what he and everyone else in the room regarded as the heart of the matter: “We need to revitalize our economy by moving from manufacturing efficiency to innovation and added value.”

Innovation. Three days later, Ma staged a news conference in which he announced the creation of the new Presidential Innovation Award, a $66,858 prize for the greatest “innovations or designs” that are turned “into profitable businesses.”

Even before that, his push for innovation had already reverberated though the government and private sector, where I found widespread agreement that this initiative may prove to be the greatest challenge in Taiwan’s six-decade history.

“There has been no new industry here in Taiwan, not really, in thirty years,” said Cyrus C. Y. Chu, minister of the National Science Council. “We just follow and pick up what the Japanese don’t want to do.” He and others agreed that turning Taiwan into a font of innovation will require a significant change in the nation’s culture.

As it is, the state primarily manufactures products that other nations design. It’s the world’s largest producer of laptop and desktop computers. But as that industry has plummeted worldwide, overtaken by tablets and smartphones, so has Taiwan’s economy. Ma has correctly diagnosed the disease afflicting his nation’s economy, but he will have to discover the medicine as well as administer it.

 

Since the industrial revolution, Asia has not shown itself to be capable of significant innovation. Even when Japan was at its manufacturing zenith in the 1970s and 1980s, prompting books like Ezra Vogel’s Japan as Number One, it generally took other people’s inventions and turned them into more marketable products, as in the case of the incredibly successful Sony Walkman.

RCA, the American company, invented the audiotape cartridge in 1958. Then Philips of the Netherlands introduced the compact cassette in 1962 and began marketing tabletop music players under the Norelco brand. Sony eventually took those inventions and created the Walkman in 1978—a portable compact-cassette player with a shoulder strap and earphones so you could listen to music on the go. The Walkman, followed by the Discman, were not dethroned until 2001, when Apple’s iPod came along.

Taiwan has shared this emphasis on improving manufacturing efficiency. That’s been the nation’s major focus because, for decades, its economy has been centered on what’s called “original-design manufacturing,” universally known among the Taiwanese as ODMs—production plants that manufactures products designed someplace else, generally in the West. Foxconn, the company that manufactures the Apple iPad and other devices, is a Taiwanese ODM based in China.

“We do have innovation in the production process, but not in the final product,” said Chung-Ming Kuan, the Council for Economic Planning and Development minister. “So the value added is quite limited.”

But now the profit margin for those factories has slipped to an average of about one percent, Taiwanese officials say, helping bring on the economic malaise. As the Ministry of Economic Affairs put it in a new publication, Taiwan needs to “extend the industrial value chain to areas of logistics and R&D.” Taiwan’s “policy objective,” it adds, is to “refine Taiwan’s industrial structure” to “accelerate technological innovation.”

The reasons for the failure to innovate are varied, but as Dale W. Jieh, deputy chief trade negotiator in the Ministry of Economic Affairs, put it: “It’s not one hundred percent of the reason, but it’s highly related to cultural traditions. In the West, you highly value individuality and encourage kids to express themselves honestly. That’s not the case here.”

In Asia, conformity is key. For example, in China today, and in Taiwan until recently, left-handed children are forced to become right-handed like everyone else. Parents bind chopsticks to the child’s right hand with rubber bands. The same kind of conformism plagues the education system.

“You know, the Chinese value system is that everybody wants to go to a good school, get a good degree, get a good job, and then have a good life,” said Ma-Li Yang, editor of Global Views, a magazine published in Taipei. “It will take time to change.”

Taiwanese officials and others told me that children who want to vary from that track and perhaps try something new and innovative are usually ordered to take the good, safe job and ignore their individual passions. Asian parents generally hold far more sway over their children than we do in the West. And many Asian children, while driven to learn and earn, also realize they can go back and live with their parents, as so many young Asians do.

Once these young people “get a good job,” said Chen-Shen J. Yen, a fellow at National Chengchi University, “you don’t see that concerted effort to brand new products. Everybody’s goal is to be the boss. They’re much more interested in that than they are in innovation.”

Bruce Fuh, director general of Taiwan’s San Francisco consulate (known as the Economic and Cultural Office because Taiwan can’t have an official embassy in the US), says, “We Taiwanese are not a hands-on kind of people.” The idea of two young men working together in a garage to create a great new innovation, the American image of how innovation begins, feels as foreign and inappropriate as anything can be, in both Taiwan and China.

 

Taiwan’s government knows it faces a mammoth task in changing the entire nation’s fundamental culture so its people can begin to innovate. Its first step has been to set up science parks intended to foster innovation.

At the Hsinchu Science and Industrial Park, for instance, a video introduction for visitors describes the place as “Taiwan’s Silicon Valley.” But Grace Chen, a park administrator, acknowledged that “seventy percent of our companies here are ODMs”—even though the park’s rules stipulate that Hsinchu is dedicated to research and development, not “mass production.” Then she leaned over and added in a whisper: “For Taiwanese, it’s really impossible to do R&D without making money.”

In the administration building’s main lobby, she showed me some of the park’s best recent innovations in lighted glass cases. Among them:

  • One of those digital picture frames that displays a rotating array of photographs. But turn it over, and this one also takes photographs.
  • Flat paper speakers housed on the back side of a picture frame displaying an Asian flowery drawing on the front.
  • A television remote control with a built-in mouse and a keyboard behind a hinged flap on the back, so you can manage your Internet-enabled TV and even write a text or e-mail.
  • A half-orb shaped translucent alarm clock that displays varying colors and differing sounds, such as ocean waves or birds chirping, depending on the time of day.

“They call it innovation, but really it can just be a teacup that’s more cute,” said Ma-Li Yang, the Global Views editor. Even for more viable innovations, she added, “We don’t know how to make them into marketable products. Of a thousand ‘innovations,’ 0.16 percent become companies.”

As it is, when asked about possible innovations, the ideas seemed lame. Some officials talk about manufacturing raincoats, boots, diving suits, golf clubs, and tents. Others propose turning Taiwan into a medical-tourism state, where others from the region can come for diverse medical needs.

No wonder the Global Competitiveness Index 2013, published by the International Institute for Management Development, in Switzerland, noted that “with poor product innovation and little increase in added value, Taiwan is certainly not able to create fortune.”

 

In September, China opened a so-called “special zone” in Shanghai, similar to Taiwan’s science park. The idea is to free up the capital flow to and from the zone so the nation’s larger bureaucratic and economic rules do not burden aspiring creators. It’s too early to know what the zone may produce, but China’s social norms are little different from Taiwan’s. After all, the vast majority of Taiwanese are of Chinese origin. Chinese schools, like those in Taiwan, focus exclusively on teaching students to pass exams and follow the norms. There’s no premium put on individuality. Even former Prime Minister Wen Jiabao once complained that “students don’t need only knowledge, they have to learn to act, to use their brains.”

KPMG, an international financial advisory firm, recently surveyed Chinese technology executives and found that only twenty-four percent thought China was best at creating innovation. After all its economic success, China doesn’t even have venture capital firms of the sort that line Sand Hill Road in the center of Silicon Valley. Just over a third of the Chinese executives said they believed the United States offered the best chance of creating “disruptive technologies” such as the iPod, which destroyed the compact-disc market—or the digital camera, which destroyed the film-camera industry.

Consider how many global brands China has. There’s Lenovo computers, which came to be after the company bought IBM’s personal computer industry decades ago, and the appliance manufacturing giant Haier, which was heading to insolvency until it partnered with a German firm in the early 1980s, got an infusion of innovative technology and equipment, and then took off. It’s hard to think of others.

Another problem generally unique to China is that its people prefer foreign brands, including garishly labeled clothing and accessories, household appliances, and cars. Audi has long been the most prestigious brand for wealthy Chinese.

Of course China also steals technology, through cyber espionage and copying of Western products that are manufactured there. Still, the nation that centuries ago invented the compass, fireworks, and explosives is patenting a large number of products these days. The problem is, according to an American economists’ report in October, the increase in patents is “highly dependent on collaboration with inventors” in “advanced economies”—primarily the US.

 

Why is innovation so important for Taiwan—even more so than for China? The country is virtually alone; China has the place hemmed in, politically and economically. Xi Jinping, the Chinese leader, recently vowed not to compromise on China’s “core” territorial interests, including its claim that Taiwan is a province of China. Because of China’s continuing threats, Taiwan has far fewer trading partners than other industrial nations. And job opportunities are so scarce right now that thousands of educated young Taiwanese are moving to China to find work. Chinese speak the same language, after all, and the cultures are similar. Today more than eighty direct flights carry tourists, students, and businesspeople back and forth between the two states every day. Five years ago there were none.

What’s more, almost sixty percent of Taiwan’s manufacturing industries have their production plants in China, where labor is cheaper. China is also Taiwan’s largest trading partner. Large numbers of Chinese tourists are encouraging, at least to Taiwanese businesses. Mainland Chinese are eager to spend money. “They are now the primary retail customers here,” said Andrea W. Wu, president of Taiwan’s American Chamber of Commerce. “And American companies now often use Taiwan as a test market for China.”

Despite all of that, one Taiwanese official after another told me, using virtually identical language, “We don’t want all our eggs in the same basket”—meaning China’s. President Ma’s political opponents call his rapprochement with China “sugar-coated poison.”

A lively debate in Taipei right now centers around the question of whether China is gradually “buying” Taiwan—or Taiwan is instead showing many thousands of Chinese what a true Asian democracy looks like, possibly bringing change to the mainland sooner or later.

For their own part, Taiwanese simply don’t spend money, further stunting the local economy. For the most recent quarter reported, domestic spending fell by 0.38 percent.

“Most Taiwanese think spending money is very strange,” said Chu-Chia Lin, deputy minister of Mainland Affairs. “People just don’t feel secure enough to spend money.”

As a result, the nation has the world’s highest savings rate because citizens are so nervous about the economy that they refuse to spend any more than they have to. The Economic Ministry said each Taiwanese family has, on average, about $100,000 in savings accounts. Financial management is a growth industry here.

At the same time, Taiwan is home to only small- and medium-sized businesses, many of them family operations. The nation’s big companies, like Foxconn, are based in China. Taiwan-based businesses “are too small; they can’t afford publicity or R&D,” said Kuang Chung-ming, minister of Taiwan’s Council for Economic Planning and Development. That’s another reason Taiwan finds it hard to innovate. Nearly all Taiwan-based companies are too small to set up R&D offices, even if they were so inclined.

Jonney Shih, founding chairman of Asustek Computer, told me he agreed with Ma’s call for more innovation. His company makes laptop computers, but now the tablet and smartphone revolution is wreaking havoc in the computer industry worldwide. Like Dell and Hewlett-Packard, Asustek is suffering.

As for Taiwan’s industrial future, he says, “Fifty percent of our students get very good grades, but they still have no idea what they want to do. We have to provide more individualized education. Compared to the West, we’re still not good at that.”

Shih said his company’s greatest innovation was the netbook, a small laptop whose primary purpose was to offer Internet access. Other companies, including Toshiba and the British company Psion, had produced similar products earlier, but Asustek was the first to produce a dedicated netbook.

“But then Apple came out with the iPad,” Shih said with a grim smile. “So now we have to think about how we can innovate again. This is a transition era, from the PC era to the ubiquitous-computing era.”

 

While many things are still in flux, a consensus has emerged in Taiwan that changing the education system is a necessary first step toward fostering innovation.

“We need to let children do what they want in school, let them follow their instincts and interests,” said C. Y. Chu, the science council minister. Others made the same point and added that the school system is looking for ways to make that change.

“Ma is right,” Jonney Shih, the tech executive, observed. “We need more individualistic education” so that students can follow their personal passions. “More individualism, more flexibility. I try to explain that to the government because, compared to the West, we’re still not very good.”

Senior Taiwanese officials seem to be in broad agreement on this issue. But they don’t seem to have progressed very far. As it is, students are moving in a herd—filling out applications for law school, all because “everybody’s goal is to be the boss,” as Yen, the college professor, put it. President Ma is a lawyer, as have been other Taiwanese leaders.

Kuan, the economic planning minister, warned that “we can’t just jump to an innovative economy. We may be slow in the next five to ten years, but hopefully in the future we’ll get there.”

Still, “without reforms,” said Chen-yuan Tung, a professor of economics at National Chengchi University, “the Taiwan economy is doomed.”

Joel Brinkley was tactical adviser for the US Special Inspector General for Afghanistan Reconstruction and a Pulitzer Prize–winning former foreign correspondent for the New York Times. Portions of this article appeared previously on his World Affairs blog.

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