Planning for Taiwan’s Future Prosperity

Photo: NDC

An Exclusive Interview with National Development Council Minister Kung Ming-hsin

Taiwan has done a stellar job of managing the COVID-19 pandemic, and has experienced comparatively minimal economic damage. Now it is time to start thinking about how it can capitalize on its strong high-tech capabilities and the international goodwill it has earned to become a key player in a changing world economy.

Taiwan Business TOPICS was fortunate to have the opportunity to speak with newly appointed National Development Council Minister Kung Ming-hsin this July about his economic outlook for Taiwan, how the government is helping the hardest-hit industries, and how it plans to cope with changes to global supply chains. Below is a condensed version of his remarks.

NDC Minister Kung Ming-hsin discusses his outlook for Taiwan’s economic recovery with TOPICS Deputy Editor Jeremy Olivier. Photo: NDC

How much of a setback has the Taiwan economy suffered due to the coronavirus? How fast do you see the recovery happening?

Since Taiwan has weathered the COVID-19 pandemic comparatively very well, any negative effects it has experienced result mainly from the rest of the world being impacted more severely. Once we have a widely available vaccine, the virus will become like just another flu bug. But until then, globalized industries will have to deal with the consequences of the pandemic.

For Taiwan, the most immediate and noticeable impact has been to international tourist numbers. According to the Taiwan Tourism Bureau, within the first five months of 2020, tourist visits fell 75% from the same period last year. This has resulted in revenue losses of NT$300 billion for this sector.

Another effect of the pandemic has been a substantial reduction in consumer spending. With a growing proportion of the workforce unemployed or forced to work reduced hours, there has been a corresponding decrease in consumers patronizing restaurants or engaging in leisure activities.

Fortunately, Taiwan was able to contain the coronavirus without needing to initiate a lockdown. And despite a drop in traditional consumer activity, e-commerce and delivery platforms have gotten a real boost. As restrictions have begun easing starting from early June, and with the government’s stimulus voucher program kicking off in July, we expect that spending will normalize in the second half.

Thirdly, the pandemic has pushed nations to implement much more proactive, expansionary monetary policies – delivering economic relief packages, raising budgets, and increasing borrowing and money supplies. Given Taiwan’s good position throughout the pandemic, money has been continuously flowing into the country, causing the New Taiwan Dollar to increase in value. However, this is troubling to us because a change in currency value could also influence real estate prices. We will therefore need to find a way to cope with this possibility.

Lastly, exports have been and will continue to be heavily impacted by the virus. The Directorate-General of Budget, Accounting and Statistics estimates that the real growth rate of exports in the first half was minus 3.1%. Things don’t look so great for the second half either, as output is expected to decline even further.

Which sectors have been the hardest hit, and what will it take to restore their vitality?

Of course, the decline in tourists to Taiwan has severely impacted travel agencies, airlines, and hotels. Although hotels and travel agencies that focus on domestic tourism have seen some revival in recent months, those that cater more to international travelers are still suffering. We need to help those hard-hit businesses.

Traditional industries such as textiles have also taken a big hit. Taiwan has a lot of firms that produce functional textiles, especially for sports – running shoes, for instance. However, with international sporting events on pause, sales of these goods have suffered. In addition, the postponement of the Tokyo Olympics has forced these companies to put all of the materials they’d prepared for the event in storage.

Besides textiles, there has been lower demand for installation of machinery, leaving Taiwan’s machinery and machine tools manufacturers gasping for air. Traditional industries overall have experienced losses of 10 to 20%.

Other the other hand, Taiwan’s ICT [Information and Communications Technology] industry has been doing quite well through this period, experiencing growth of around 20% in Q2. The virus has forced us to make lifestyle changes and working from home has increased demand for certain resources. As a result, there needs to be an increase in data centers and servers, and much of that is produced by Taiwanese companies.

As for recovery, we will need to see how quickly the COVID-19 vaccine is developed and distributed. In the meantime, we must rely on other methods to reduce the spread of the virus and its consequences. This is expected to be quite difficult for companies in the industries I mentioned, and we will therefore need to provide them with some extra support. Our relief package 3.0, announced in late July, allocates NT$130.6 billion to aid cross-border activities, as well as traditional exports.

Given the impact of the pandemic and U.S.-China trade tensions, the current situation is widely seen as a time of potential major transformation for the international economy and supply chains. What can the Taiwan government and business sector do to take the fullest advantage of this opportunity?

We have witnessed the changes the U.S.-China trade dispute has caused over the past couple of years, and the current pandemic has accelerated a number of existing trends. One thing we are anticipating is a rapid increase in Industry 4.0 transformation, considering the changes taking place to our lifestyles, workstyles, and factory operations. To be ready for this change, we will need to continue to boost our “smart” capabilities. Taiwan has been working on this since 2016, so I think we are on the right track.

A major shift is also happening in the industrial division of labor. In the past, this structure was based on keeping costs down. The supply chain would be divided into many segments, with most production taking place in low-cost locations. However, the virus has proved that these supply chains are extremely vulnerable. The distribution of production is very complex and if there is a problem in one portion, the entire supply chain is affected. In the future, we will want to move toward shorter, less complex supply chains.

So, the question now is who will gain a greater share of these new supply chains? In the future, we will not focus so much on minimizing the cost of production, but rather on which suppliers can play a critical, irreplaceable role in that production. This represents a huge break from the previous mindset. Taiwan will begin moving in that direction, producing components that cannot be easily replicated.

At the same time, we expect the government to become much more involved in this process, in contrast to the more hands-off approach governments have taken during the free trade and globalization trends of the past few decades. In fact, governments can become key players, especially where it concerns the rapid consolidation of resources. We saw this in the Taiwan government’s successful mask-sourcing efforts. Under normal circumstances, just installing the machines to make these masks might require up to half a year, but with government communication and coordination, we were able to do this in just one month.

President Tsai Ing-wen tours a factory producing face masks in February. Minister Kung says that Taiwan’s mask-sourcing efforts are an example of how Taiwan can become a key player in future economic development. Photo: Presidential Office

In the future, we won’t limit our role to just face mask production; we will also get involved in numerous different industries and areas, including smart-city development. These are areas considered to be within the public sphere. It is therefore important for the government to work closely with the Taiwanese public on these initiatives.

Another thing I want to point out is that industrial development isn’t limited to industry itself, but also concerns issues of national security. During this pandemic, we’ve seen that if certain industries are strong, national security is bolstered. This is why we are moving ahead vigorously with developing and ensuring sufficient inventory of important materials under the government’s six core strategic sectors initiative.

For Taiwan to maintain the attention and trust it has recently been receiving from the international community, it cannot go it alone. How can it work with the world’s big companies to plan for the development opportunities that the next generation will bring?

In the past, Taiwan industry mostly played the role of follower, and it therefore didn’t need to pay too much attention to future industrial developments. But as time goes on and Taiwan’s position improves, industry leaders will diminish, and we will have to start planning for the next generation. Our Department of Industrial Technology previously introduced the A+ Program, which aimed to encourage companies to invest in R&D for high-value-added, cutting-edge technologies. We want to expand that program in the future, focusing on three main areas: 5G, which will completely transform international communication and IoT operations; AI and how to put big data to good use in providing better services; and semiconductors, which are the core component for all of these technologies.

In addition, we are expecting similar infectious diseases to appear every few years. We will thus need to go a step further in researching how to turn our experience combining technologies to fight COVID-19 into a “total solution” to share with the rest of the world. Taiwan’s digital economy and medical information collection are already quite thorough and up-to-date, but we need to think about how we can use DNA big data, AI, and other tools for data analysis on a large scale. I think this will play a major role in improving the accuracy of medical treatment.

Information security is also a critically important issue, both in terms of industrial competition and national security. Taiwan has an opportunity to combine important sectors to create a future information-security plan, especially with the arrival of 5G.

While multinationals may have cybersecurity standards, as industries continue developing, Taiwan can really get involved in the latest trends, especially given its status as one of the top targets of hackers and cyberattacks. It can serve as a test bed for these new defense systems. Several multinationals have already expressed interest in collaborating with Taiwan in information security, including Microsoft, Google, and Cisco.

In terms of overall economic health, Taiwan is doing just fine. Over the past four years, our economy has grown an average of 2.6% per year, and we hope to increase this number in the future. The more effort we put in, the more we will exceed that figure. The future looks bright and opportunities are numerous. For example, our three major investment programs targeting Taiwanese businesses operating in China have raised a combined NT$1.7 trillion in investment funds and repatriated capital.

These suppliers may not, in the end, shift all of their China operations back to Taiwan. Nevertheless, Taiwan’s efforts over the past several years to increase smart manufacturing – as well as the introduction of 5G-powered smart factories – will hopefully encourage companies to use Taiwan as a hub for more high-end manufacturing processes. This would increase competition and improve Taiwan’s general economic outlook.

During your presentation at an AmCham luncheon in mid-May, you mentioned that the government plans to make Taiwan an R&D hub for AI and high-end manufacturing and develop Taiwan’s space industry. Can you tell us more about how the Tsai administration plans to achieve these goals in the next four years?

We plan to continue working on moving high-end production back to Taiwan. As for low-end production, the key segments will probably move to ASEAN countries, with another portion taking place in Europe and the U.S.

We also plan to strengthen domestic industries via three major campaigns aimed at assisting them with introducing smart manufacturing-related technologies and equipment, as well as assistance with big data analysis and AI. Those campaigns are:

  • Making industries “smart”: Creating smart production lines for printed circuit boards, servers, textiles, food, and others.
  • Digitalization: Improving the digitalization capabilities of small and medium enterprises and promoting clustering of the key characteristics of these enterprises to improve supply-chain information flow.
  • Innovative applications: Accelerating the usage of 5G and AI applications among SMEs.

As for Taiwan’s space industry, the Ministry of Science and Technology has already launched a national program, which focuses on launching remote sensing and radar satellites, as well as promoting private space exploration enterprises.

Future 5G development will have a major impact on communications, but the issue with 5G is that its high frequency and short range of transmission will leave many places without adequate coverage. We will thus employ low-orbit satellites to compensate in cases where 5G is not sufficiently available.

Meanwhile, we can play a part in developing satellite communication systems, such as producing components. Taiwan’s communication systems are quite good, but we will need to conduct further research into how satellites can improve these systems. We will do some satellite launches, but the main focus will be on improving Taiwan’s strong suit of producing ground-based receivers and installing communications equipment on existing satellites. Taiwan’s hardware sector is very strong, so we won’t rule out the possibility of working with multinationals such as SpaceX or Amazon.

I’d like to leave off by thanking AmCham Taipei for its efforts. The Chamber has worked hard to collect and present the Taiwan government with many great suggestions from many different industry areas over the years. Regardless of whether we can immediately resolve all the issues, we’re aware of what they are, and it is very important for us to continue working through them in the future.

— The interview was conducted by Jeremy Olivier, with editorial assistance by Jack Lee and Patrick Lu, and translation to English by Henry Kuo.