Choosing boom over doom

Taiwan is most likely to see its first female president after next month’s election. Tsai Ing-wen, a candidate for the independence-leaning opposition Democratic Progressive Party, leads the ruling party candidate in opinion polls by double digits. In her previous bid in 2010, she lost to President Ma Ying-jeou, who called for closer cross-strait relations, by six percentage points. Ethnic Taiwanese were returning to their home districts en masse to cast ballots. But sovereignty concerns, at a time of growing influence by China, are getting the upper hand. One of the key reasons is concern about the ascent and spread of the so-called red supply chain and its threat to Taiwanese industry and the economy.

China previously assembled imported parts to export cheaper finished goods. But it is now capable of producing the parts itself. The Made-in-China 2025 plan could deal a fatal blow to Taiwan’s own industries. About 40 percent of the island’s outbound shipments goes to the mainland, of which 80 percent are parts. Most of its companies in machinery and petrochemicals have been snapped up by China. IT remains the country’s mainstay industry. The only edge Taiwan still has over China is semiconductor technology. But that, too, has changed ever since China announced an ambitious plan to invest a total of $161 billion over the next decade to domesticate and beef up its integrated circuit (IC) supply chain by mastering the entire integrated circuit production process from IC design and wafer foundry operations to packaging and testing services.

The threat became more immediate after Tsinghua Unigroup, the standard-bearer for Beijing’s IC quest, bought a 25 percent stake in Powertech Technology to become the largest shareholder in the Taiwanese chip-packaging and testing company. Taiwanese fear the mainland will eclipse their prized chip-making industry and undermine Taiwan’s rank as the world’s second-largest fabless IC producer.

But Taiwan’s foundries inevitably have to rely on China, the world’s largest chip consumer. Taiwan’s leading foundry, TSMC, plans to open a next-generation 12-inch wafer fab in Nanjing on the mainland. The Taiwanese wonder what all this means for them. When factories move to the mainland, the country’s exports will drop and growth will stall, leading to job loss. Taiwan’s gross domestic product fell 1.1 percent in the third quarter. This is why the people are backing a presidential candidate pledging to protect the country’s economic status quo.

This should not be distant news for us. The rise and proliferation of the red supply chain is putting pressure on us, as well. Korean companies now have less and less to sell to China after it has increasingly localized sourcing of parts. Exports to China in the first 10 months of this year dropped 4.3 percent from the same period a year earlier. China outpaces Korea now in consumer appliances, steelmaking and shipbuilding. The IT and petrochemical industries are also under attack. Taiwan, with small and midsize players making up its industrial sector, became more vulnerable to the Chinese tide. Are we next?

We need not be. Local producers of liquid crystal display (LCD) panels have shown the way. The global names Samsung and LG were unrivaled powerhouses in the display market in China, with superiority in cathode ray tubes (CRT) for a decade from the mid-1990s and flat LCD panels from then on. Korean brands still make up 40 percent of China’s LCD imports. The more China turns out TVs, computers and smartphones, the better for the Korean industry.

But China has also made great strides in the LCD sector. Its technology is almost as good as Korea’s and is expected to exceed Korea’s output by next year. Some feared local players had nowhere to go but down. But Korean companies instead changed the goalposts. They moved on to mastering the self-illuminating organic light-emitting diode(OLED), which is lighter and brighter than LCDs and requires no backlight, leaving Chinese rivals fighting amongst themselves in the saturated and overcapacity market. Korean firms were fast to shift from CRTs to LCDs and are again ushering the market towards OLEDs. “If you can’t beat ‘em, join ‘em” was their first strategy. They quickly moved on to the next stage to stay ahead of the competition.

The red supply current is rising fast. But Korea’s panel makers have proven that we can ride the wave and turn the tide to our favor as long as we can rely on fast action. Technology is the key to turning a challenge into a boom, not doom. So is Korea Inc. ahead in research and development, and is the government doing all it can to promote our industries? That is the big question. If not, Korean companies, too, could be swept by the great red wave.

JoongAng Ilbo, Dec. 14, Page 32

The author is the director of the China Institute of the JoongAng Ilbo.

by Han Woo-duk