The Presidential Monthly Meeting was held on the morning of June 22, 2010 at the Office of the President. President Ma Ying-jeou personally chaired the meeting and listened to Japanese strategist Dr. Kenichi Ohmae deliver a keynote speech on the theme of "global economic development trends and prospects for cross-strait cooperative relations."
Full text of Dr. Kenichi Ohmae’s talk at the Office of the President:
Honorable President, distinguished attendants, it’s a great pleasure for me to be able to talk about Taiwan. I’ve been to Taiwan, as some of you may know, over 200 times. And, it’s a great pleasure for me to be able to share some of my more recent thoughts with you at this very important juncture for your country.
The world tsunami of financial crisis is not over yet, although American stock exchange has bottomed out last March. But “magnitude 8” [on the Richter scale] was of course November of two years ago, but still, everyday we still feel like it’s magnitude 4, sometimes 5. It’s not over yet. Japan is like exactly the same, still magnitude 4 or 5.
And if you look at the national debt, sovereign debt, relative to the size of the GDP, Japan is really renewing the Guinness record every year. We have over 200 percent of our GDP in debt. But this is not a huge problem, because we are the largest savings nation and we have US$14 trillion of individual savings, which government is now using by issuing the bonds and absorbing all the money.
The problem is this: The Dubai shock is now still continuing. The Dubai shock was November last year, which triggered the sovereign crisis in Greece and is now propagating into Hungary and perhaps Spain. And if you think like this, who’s next?
Because these nervous traders are always thinking about who is going to be the next, and that’s bad. Because if you do so, even when facts are not all there, it could trigger, as we have seen in the Asian crisis of 1997 and 1998. It was Thai baht. Julian Robertson short-sold Thai baht, and then they said: What about Malaysia? What about Indonesia? Boom! came the crisis, which then half a year later propagated into Korea and then triggered the Russia crisis to result in the default of Russian debt. So this is a very nervous time. Anything could happen. So this is a very difficult time, and I don’t think it’s over. Particularly the governments trying to stimulate the economy are now issuing the deficit bonds so aggressively. This is not a very good trend, and Europeans will have a huge difficulty.
The problem of economic stimuli. Our government, particularly under the LDP, spend US$3 trillion to no avail. You see, during this time Japanese people are saving, saving, saving because government said it’s crisis. So we have to stimulate the economy. And we are okay, because we are increasing the savings. Should the money come out to the market, GDP would have grown, at least at the same pace as the Americans. But Japanese mass media and government really scared the people, so we have really sort of kept our own cash in the bank, which is yielding only 0.1 percent.
So physiological economy is today the most important one. It’s not the macroeconomics, or fiddling with the interest rate, because we have made the interest rate to zero—no effect. Money supply [is] like floods—no result. It’s the psychology of the mass that is so important in stimulating the economy, developed economies like Japan.
The Democratic Party of Japan is going to worsen it because they are much more socialist, and of course, they think that distribution of wealth before they create wealth is a good thing for the government. You see, undoubtedly this will continue. And of course the world’s largest economy is the EU, as of December last year after the Lisbon Treaty. While the EU is still suffering a little bit from the too much amalgamation of countries, and particularly Eurozone of 16 countries, but the EU as whole, as the entity of [27] countries, is now the largest economy.
But more importantly, if you believe in some predictions over the next couple of years, it’s the emerging countries that would be collectively larger than even the EU. And therefore, my question to you is: Is Taiwan ready for the emerging countries? I know you’ve done well with China, but the opportunities are everywhere.
Over the last five years, the flow of global money has really changed. You know, if you look at the history of mankind over the last 200 years, the 19th century was imperialism, colonization and exploitation. Strong countries and, you know, weak countries were taken over, right? Late 20th century, it was ODA—official development aid—blessing from the rich country to the poor country. But it was governmental money.
Today, over the last five years, for the first time in human history, money is going directly from rich countries, rich people—through pension funds and savings and live insurance, et cetera—to the markets of emerging countries because you “buy index.” If you bought the index of Brazil last year, it would have appreciated 100 percent in that year because the Real [R$] has appreciated and the market has appreciated, so you have a “double yummy” of this.
And that’s why, our money, which is about $8 trillion in the OECD—excuse me, $80 trillion—is called “homeless money.” If there is a good opportunity to invest, they go to that country. Therefore, the emergence of emerging economies is real, and will stay here forever.
You see, it’s the first time that our money, which is not needed in a hurry would go overseas. Because return on investment in your own home country is not that much. I think the best we can do in Japan is about 3 percent. But if you go to Turkey, India, Brazil or Indonesia, for example, return could be 100 percent. That’s why your money goes directly to this. That’s why the flow of the capital has fundamentally changed. And you have to follow the flow of the money, you see.
I would say in conclusion—let me state the conclusion first. Taiwan is entering into a new era. With respect to China, Taiwan has come through cautious but very successful three steps, in my opinion. Now, Taiwan is at the crossroad again. Taiwan has been at the crossroad many times, so is not news to you.
I think the incidents of Hon Hai, particularly its subsidiary Foxconn—I call this “Hon Hai shock”—is accelerating the end of phase three. And phase three was of course an era of manufacturing-based Taiwan. This particular word [“Chiwan”—China + Taiwan] was created by the Koreans because they are so worried about the success of Taiwan in China. They say, “Ahhh! After all, it’s Taiwan! We cannot compete with Taiwan companies in China. You see, this word, however, characterizes the success of your corporations in the mainland.
Phase four is professional services and financial sectors and need to surpass the roles played by Hong Kong and Singapore relative to China. And this is a challenge.
So, as I say, the first phase was a very cautious sort of setting up your plans in places like Donggang and Shenzhen, et cetera—very limited—but you have to go through Hong Kong, later through Macau. Phase two expanded this to the rest of the world—manufacturing—particularly using China as a base for exporting to the rest of the world. Phase three, what the Koreans call Chiwan high-tech enterprises have become quite competitive and even established global branding, which was Taiwan’s dream for a long time.
I remember, 20 years ago, you know, we sort of discussed how we can establish a brand. And my discussion partner was Stan Shih [founder of Acer Computer]. So he was long longing to establish a brand, but he couldn’t do so. And of course, you have excelled in direct trade. So those are the sort of three steps you have come.
Now let me sort of grind the ax here. Five years ago, you have asked me to debate with Gordon Chang. Remember him? I refused, of course, but your previous government—let me tell you—was so wishful that “The Coming Collapse of China” was recommended reading. OK, and CNAIC [The Chinese National Association of Industry and Commerce, Taiwan] had arranged a debate between Ohmae, who said, “No, China could become our customer. You should trade with them,” versus the “coming collapse school.” Of course I refused this one.
And I said that the window of opportunity for Taiwan was only five years after that time, and then the Chinese companies would have become so strong that the advantage of Taiwan would disappear. Five years critical window, I said. Luckily, CNAIC members and others did not listen to [the] then government in Chang’s cautious [mentality], and they went along with aggressive expansion programs in the mainland.
And I thank you for supporting my view—and also thank goodness! Had you followed that cautious approach, you wouldn’t have achieved this one. Thank goodness!
You have really sort of surpassed, you know, your results are quite good. And now Taiwan, over half of your GDP, dependent on exports, is driven by trading with China. So there’s no evidence of collapse of China! If you look at other countries in Asia, dependence on China is increasing in most countries. Some of you are worried that, aren’t you overdependent on China? I would say no. You are leading the group. You’re taking advantage of your strength, but not overdependent. Japan was overdependent on the United States at one time. But we used that strength to go into ASEAN and Europe and, later, global.
You have to use your strength. You have to have some kind of stage from which to spring. You see, overdependence at a certain time in history is absolutely necessary. You’re overdependent on parents at some time, but you have to spring out, you see. And this is extremely important for people here to recognize. Therefore, the question is, can you spring out from this level to the rest of the world? Or more into the Chinese domestic market? Those are the challenges.
And let me just—you know, let me excuse myself because I have just recently summarized in Japan in a published television program on why Taiwan is winning all over the place. Why the Japanese electronics companies are “taken to the cleaners” by the Taiwan electronics companies?
So that’s a one-hour video and presentation. So this particular one is taken from that television program. But anyway, I have seen your history of the two country’s relationships. And in some of these negotiations, I was also luckily involved in the thinking process. But after the current government has assumed the position, I think the two countries’ relationship has accelerated in the positive direction, even to the point of making the Koreans call it Chiwan. And now you have 370 flights a week. If you look at the past history, it was very cautious charters. And started out only on the weekends, et cetera.
And if you look at the recovery from the Lehman crisis, your country is the most impressive of any other country I know. So I don’t know why people are complaining, why some journalists are complaining—a very impressive, and to a large extent, this is due to your success with trading with China, because China was able to alleviate the downturn after the Lehman crisis.
Your government has also done an exceptionally good job in providing a competitive environment compared with Korea, China itself and Japan. This is the international competitive ranking. And if you look at the progress of the last three years, it’s quite obvious. Taiwan companies are now the driving force behind China’s exports, and of course, if you look at top 200 exporters by region of origin, you rank Number Two, only after the Chinese companies, and many of these companies from Taiwan are OEM or ODM, electronics-oriented companies. So you have certain strengths and some of our companies are wiped out. Companies like JVC, Kenwood, Pioneer are suffering due to the strengths and smarts of your companies.
I would analyze that you have the strengths in four areas—all related to people, Taiwan people. Some by government policies, some by nature, but you have to know, that this is your strength, because many times, you don’t know these things. Number one—communication capability. There is no other nation on Earth who has the capability to communicate with the Japanese, and in the English language, and with Chinese as native tongue. And this is because you procure critical components and machinery from Japan, production in China and sell to the rest of the world.
Well, nobody else can do this as well as you can. Therefore, some of you are now saying [the] Chinese language is OK, and everything, or English and Chinese OK. I don’t think so. This key factor of successful Taiwan companies, even in the mainland, is their ability to import Japanese engineers.
You see, some Chinese companies import Japanese engineers, but they can’t communicate; they can’t use Kato-san very well. They can’t use Sato-san. And Koreans hire some of these Japanese retirees, but they look down Japanese like this: “So, finally we can hire the Japanese!” And this attitude alienates the Japanese. Taiwan business people are very good. Kato-san, onegai shimasu! Oh, you are very good. So Kato-san introduces even better ones—Sato-san and Tanaka-san—everybody wants to work for Taiwan companies! Nobody else has the chemistry to be able to use some of this expertise accumulated in Japanese engineers. Only you can do it.
Science and engineering emphasis. There is only one country in the world who continues to do this. We used to do this, but that was President Kennedy’s days. And [your] government’s emphasis of STEMs—which is science, technology, engineering and mathematics—is amazing. And, of course, if you go to a graduate school in these fields, I understand that you can avoid being drafted. I don’t know if that’s the reason. And then, scientists and engineers have wealth of a high salary, which is not the case in Korea, [and] which is not the case in China. Right? So this is very unique. And therefore, this creates a global source of high-tech education, and the graduates are all over the United States, all over the world, all over here. OK?
And the next one is deep penetration into Silicon Valley. Your representation in Silicon Valley is far more than any other country, perhaps with the exception of Israel. Right? And therefore, your companies can now form a network of companies, and therefore you can concentrate on what you are good at, but your networking to be a complete force.
And the next one is something very unique to Chinese people: You don’t want to work for a company forever. If you learn the trick, you want to be the head of the chicken, as opposed to the tail of the cows or bulls. Amazing! But, some of your companies have used this tendency very well—spin-off, spin-off, spin-off! You see, Koreans never do this. [In] Korea, everybody works for Samsung, or LG for life, and they [Samsung and LG] have diversification, but Taiwan companies don’t do this, because they don’t want to lose high talent. You see, they are unique. I would say, Koreans form chaebols and we form zaibatsu for this reason. You are now sort of spinning off, and making these young, aggressive, deep-specialized companies. That’s the strength of you!
Here is the overseas student in the United States. While your absolute number is not so high, but per capita is very high, particularly compared with other countries. And here is the entrepreneur’s IPO [initial public offering] in the United States. You are ranked, in absolute number, No. 3; per capita is only after Israel. And, of course, these are the companies and entrepreneurs you are very familiar with. It’s not only in high-tech areas, but in companies like Zappos. You know, selling shoes on the Web, which was bought by Amazon at a billion dollars.
So, it’s very, very impressive. You see, recognizing this chart—Japanese: zero! See, we are so dependent on the language and mother country Japan. We don’t even have one single person who is going to join the ranks of these people. So, this is a very impressive human talent. Taiwan’s strength in one word—people. I think human talent. This will not go away! That’s why in competition, even with China, you are strong. You see, you are educated and brought up to compete and excel. Not many other countries keep this mentality. We used to be like this. Now, you are the envy of our country! You see, we lost that.
This is the list of fast-growing companies in the Asia-Pacific. Taiwan is No. 1 in absolute number. You see, some of these companies [INAUDIBLE] may be familiar to you. Okay? And its appalling: we had only less than 10 IPOs last year in Japan—less than 10 IPOs! And of course, companies like OmniVision fully utilizing the Chinese overseas students’ network, are forming a very impressive board and horizontal alliance with companies like TSMC and Syntec, et cetera. Therefore you don’t have to be a complete company. You can do what you are very good at and form the network. This is typical of the Taiwan approach. And of course, this idea of spin-off—every time you spin off, young, aggressive, specialist companies are born. Not bad.
And Acer, the remaining sort of PC company, is going to become No. 1, perhaps this year or at the latest next year. In the dynamic growth market of PCs, finally they have really spun off and sorted out their business system to specialize in marketing, initially in Europe and now worldwide—spinning off all over the place! Not only Acer, but UMC, ASUS and BenQ.
Phase III’s success should be recognized and remembered, because it shows the Taiwan people’s enormous capability to fight and win if opportunities are presented. I think you believe in this one. Therefore, I shouldn’t be the one telling you this, but I still would like you to be reminded that you have the people’s strength. It’s not the size of a country. It is the quality of the individual that is the strength of a country. Global resources are brought together, horizontal division of labor with other countries, entrepreneurs in Silicon Valley, of your own origin and their friends. Good strategy to win niches at the beginning and expand later horizontally or vertically. OK?
Knowing China inside out, an envy of Koreans, who call it Chiwan, as I said, admiration first but now turning into fear, particularly after ECFA. Koreans are so afraid that they are going to negotiate with China in FTA. But let me tell you, the negotiation is going to be very tough. You see, even in negotiating with the mainland, you have excellent human talent. We don’t. Koreans don’t. So wish them good luck. Wish us good luck. I don’t think [we] have equivalent of your negotiators.
But frankly, Taiwan got lucky because China, during these past years, with competitive skills and low wages, was an almost unlimited supply of labor. Therefore, the question is how long can you continue. This is the difference of Taiwan, Japan and Korea. Koreans are going downstream. Japanese are still all vertically integrated. Taiwanese are really sort of concentrated on one function—excel. And now a niche is the key factor for success and, later when they make money, expand horizontally or vertically. Stan Shih’s famous “Smile Curve” flipped over, because manufacturing was huge volume, turned out to be profitable. Amazing! It’s against the theory, but you’ve done it.
Now you seem to be splitting into manufacturing side and global marketing side. And these global marketeers like Visio, ASUS, et cetera now are asking other Taiwan companies to produce, but they have become a global brand. If you go to Akihabara, Japan’s electronics town in Tokyo, we never thought we would see Taiwan brands in Akihabara, but this is a recent view I took [showing photo]. You see, it’s all over. And Giant and Johnson, et cetera. So now you have begun to have some recognized brands, and believe me, like Acer, they will become global brands. ASUS became a global brand very quickly. So did HTC.
ECFA is a very carefully crafted vitamin for Taiwan’s continued success. And this is of course a view from Japan. In Japan, the progress that you are making in ECFA negotiation is reported almost every week. Everybody is paying attention. And therefore, I may not be accurate in this one. Maybe Dr. Chiang [Pin-kung, Chairman of the Straits Exchange Foundation] could elaborate on this. But the way we see it from outside, is it’s the first of its kind in Asia and is bound to influence and encourage other countries for FTA-type negotiation, particularly with China. It’s detached from the political process of negotiation. President Ma, as reported in Japan, sealed [put aside] the governance [i.e. political] discussion during [his] term, which we never thought was possible. But it seems possible and working. And there’s a clear PGA rule, if you’re a golfer, agriculture and labor imports are OOB—out of bounds. It’s a very good, you know, metaphor.
Handicap, and this would be like a handicap 24—my handicap—not granting most favored nation status á la WTO, so it’s not sort of giveaways. A timetable is spelled out, for, maybe for future FTA, service sector, particularly banking and protection of investments and IP, these are the items that will have to come. More amazing things from our side is China has shown amazing resilience, patience and camaraderie. We never thought that this discussion would be an intelligent discussion. But it’s been, at least reported in Japan, as a very intelligent discussion. [It’s a] tremendous incentive for overseas companies to come to Taiwan as a hub for operations in China, along with 370 direct air links per week and 17 percent corporate tax. You may have a gush of Japanese companies relocating! So accommodate the Japanese also. We have to pay 40 percent tax and lots of taboos and dos and don’ts, OK? And therefore the triple advantage of this new era of ECFA, plus corporate tax, plus direct flights, direct access, direct communication.
Amazing strength. So instead of becoming, Taiwan becoming, the airport hub, you might become corporate hub, something that I dreamt of some 15 years ago with some of the colleagues who are in this room.
Two years ago, actually it’s one and a half years ago, I said that the window is now open for only two more years. And unfortunately, the sudden death of this successful Phase Three formula is coming to an end—sudden death—it’s called “Hon Hai Shock.” The Foxconn incident is spreading throughout China like a wildfire. Minimum wage plus 30 percent, which initially Foxconn announced, is now revised and doubling the minimum wage, they say. [This] gave Chinese workers [the idea] that wages are negotiable. This is bad news. Wages are not so easily negotiable, but now it’s doubled.
So, Taiwan companies are now suffering because they are perceived as a little bit exploitative. You see, this is going to impact all of you, all the Taiwan companies. It’s not just one isolated case.
Hyundai and Toyota have now so many components suppliers shut down for this reason. They are demanding twice as much wage, although we are paying premium to begin with. Never mind! They are demanding it because they use the Internet, and talking about negotiation—We want this wage!—you see, so this is very bad.
Coincidentally, the Chinese government about a month ago came up with doubling the income for the Chinese people. Very bad! So with all these things combined, Taiwan’s phase-three success cannot continue as before—I should say, continue as easily as before—due to high wages and expensive renminbi, if you look at today’s renminbi it’s already appreciated. Also limited supply of labor, particularly in the coastal regions.
Taiwan does not have alternative locations with such distinctive competitive and comparative advantages as with China because you can speak the language. If you go to Indonesia or Vietnam or other places, you are at par with others. You have to compete with the Japanese at par, you see?
So you had a unique opportunity in the dynamic phase of China’s growth, but in terms of manufacturing OEM, ODM formula, you have difficulty in other parts. Not as easy a time. Wages are already cheaper in other ASEAN countries than in China. And with the doubling of the wage and appreciation of the renminbi, it’s going to be very hard to stay where you are.
Another challenge is, while your current account surplus is increasing, if you look at the content of it, you’re still earning money with goods, you see. And when manufacturing is being your strength—and I’m saying this is coming suddenly to an end—[how] do you earn your money?
Well, I’ll give you the example of Japan. We’re still making money. You have written off Japan many years ago, right? “Ah, Japan is finished,” some of you say. Don’t think so. We’re surviving. Always surplus. Huge surplus. You know what? We’re earning money on investments. You see, that life glue is the return on the investments overseas. And compare this one with yours, you are getting a little bit, but most of your income comes from trade. That’s why I think you have to move to the next phase of “return on investment.”
And with 17 percent [corporate income tax], there is an incentive to consolidate everything here in Taiwan, I would think, OK. So, phase four: ECFA, and you have to move to no-manufacturing sector; you have to move to domestic Chinese operations—marketing, sales activities—instead of just using China as a production base.
For Phase Four, Taiwan has a new challenge. This Chiwan golden formula of Phase Three does not work in the tertiary service sector, particularly in competing with Singapore and Hong Kong. You see, this is a new challenge for you. To dominate in the domestic China, which is very attractive, Taiwan needs to compete with other countries like Japan, USA, and Western European companies in marketing and branding. And this is still for you a new game.
In other words, Taiwan must compete with just about everybody in this new phase. And professional services other than IT are still to be developed even here at home. Stock exchange: It’s very important to get the traffic of exchange sitting in Taiwan to take over Chinese trading volume with velocity. Right now stock markets around the world are stealing the volume from other stock exchanges with technology— technologically superior exchange systems.
Your stock exchange is not competitive at all, and business-process outsourcing based in Taiwan serving high-class companies’ needs in the mainland is in an early stage. So government of course needs to look after those who are left behind, because this kind of aggressive process moving forward will create some people who are left out. And therefore you have to charge ahead with full steam, particularly after ECFA, but you have to worry about whoever is left behind.
I talked about the stock exchange. Seventy to 80 percent of Taiwan’s stock exchange is individuals—which is a very good game, you know, an extremely good story. But because of this, you can’t move to high-frequency trading or algorithmic trading. And as a result your stock exchange has the honorable position of being the slowest ever recorded today. You see, the right-hand-most bar is your exchange. In some of these stock exchanges, it’s nanoseconds, not even milliseconds, let alone seconds. Because in program trading, you really arbitrage within a split second.
And this way, if you excel in technology, you can get the volume of Chinese markets like Shenzhen and Shanghai. This is the value of the trade exchanges, and the New York Stock Exchange has very old-fashioned system, so although they have lots of companies listed in New York Stock Exchange, they are losing volume—75 percent of New York Stock Exchange-listed companies are traded by somebody else! You see, they are being arbitraged.
Who did this? Well, it’s NASDAQ, [with] much superior technology and, therefore, NASDAQ-listed companies plus New York Stock Exchange [companies] being sold. This is something you need to study, as you need to steal volume of many markets in China, not only in stock exchanges but commodity exchanges, like in Dalian.
With respect to ECFA, as reported in Japan, most corporations are in support. Amazingly, the financial institutions are also in support of this. I would have thought the opposite. Some people—and the majority of the people of course are still supporting ECFA—but some, not supporting it, 33 percent, are concerned. Therefore, the government’s role is to make money with this aggressive program and use some of that money to train, or retrain, some of those who would be left behind.
So, in summary, Taiwan needs to pursue all-out efforts on several fronts simultaneously:
˙ Complete ECFA, and go beyond it, eventually, to an FTA. Surely, Taiwan can win in a fair competition. If it’s a fair competition, you’ll win, because of your excellence in management and technology.
˙ Advanced marketing and sales skills, to promote branded and high-class products in the Chinese domestic market—it’s a new challenge for most of you, although some of your food companies are already very dominant in China.
˙ Offer professional and cross-border BPO services, offshore from Taiwan. Start earning returns on investment, as I have shown you in the example of Japan, in addition to trade.
˙ Attract foreign companies to cluster in Taiwan—special operations centers—and these companies will take triple advantage of ECFA, [low] corporate tax and santong [the three direct links across the Taiwan Strait] to serve Chinese markets.
˙ Begin to tackle big, emerging markets other than China—very important for you to do so.
Now, based on the strengths that you have established with China, in education, you need to emphasize—if you want to do these things—emphasize creativity, design, senses and life, as opposed to strict engineering, science, mathematics and technology. You see, the senses are the cause of you to earn money. Today in Japan we make more money in Manga and computer games and animations than in electronics, you see. So we’ve gone to that phase. Luckily, our youngsters are very interested.
And here’s a stage for you. The world is full of opportunities, and where are you going to focus your attention, over and beyond China, is now a new theme for you. There are so many middle-income people even in Asia alone. It’s actually 1.4 billion people, within Asia alone—those who have an income above US$5,000 but below US$35,000—which is “middle class.” They can afford to buy your products, you see, and China of course is a large part of it.
But in the islands of Indonesia, you will have, collectively, 3 billion people. So we the Japanese are too expensive in wages, et cetera, but I think you can go to the middle ground, which is 1.4 billion people. I think you will do very well, even outside of China, using the strength you have gained.
And then with other countries, I think Koreans—and here is the reason why Koreans are so concerned: The spectrum of industries that they are focusing on is exactly the same as your companies are focusing on, that’s why they feel threatened. And we have some companies, like Pioneer, JVC and Kenwood, who are threatened by the success of Taiwan companies in China.
So I said all these things need to be simultaneously addressed. The next few years are probably the most critical time for Taiwan to climb onto the next global stage. There’s no time for wasteful discussion.
I think you need to move on, and I wish you great success. Thank you very much for your attention.