Promising new opportunities have been opening for Taiwan’s economic development.
Although COVID-19 has wrecked numerous economies around the world, Taiwan has been a notable exception. Remarkably, Taiwan has emerged from the pandemic not only almost unscathed, but with even greater confidence and prospects for growth than anytime during the last two decades.
Pundits have tended to focus on how well a rejuvenated Information and Communications Technology (ICT) industry will enable Taiwan to perform relative to China in terms of GDP growth. That view is rooted in outdated thinking. More significant is that Taiwan’s deft response to COVID-19 provides it with the perfect opportunity to transform its economy – as long as its government, business, institutions, and citizens work together to pursue an enlightened path toward a green, sustainable future that helps stave off the potential perils posed by climate change.
Taiwan’s government has made the 5+2 Innovative Industries Plan its “industrial transformation” blueprint. The plan encompasses: 1) biomedicine, 2) clean energy, 3) smart machinery, 4) defense industries and aerospace, 5) new agritech, 6) circular economy, and 7) the Asia Silicon Valley project. While these are related to next-generation, knowledge-based industries, such as Artificial Intelligence (AI) and the Internet of Things (IoT), they also stress sustainability.
Leveraging its success from tackling COVID-19, Taiwan should make sustainable development its core value and overarching goal, integrated into every aspect of the economy. Taiwan’s success in fighting the coronavirus demonstrates the value of social capital (an excellent public health system and highly cooperative social infrastructure) together with human capital (a well-educated, well-disciplined, and law-abiding citizenry). These are among the same critical (if often overlooked) resources that could propel the Taiwan economy to succeed in its “sustainability transformation.”
Three years ago, when economic pessimism enveloped Taiwan and shortly before the Tsai government announced the 5+2 Plan, I wrote a commentary for this magazine entitled “Getting the Taiwan Economy Back on Course.” I argued that Taiwan must “focus on its valuable characteristics and core competencies” – speed, flexibility, value (price/performance ratio), customization (ability to serve niche markets efficiently), clustering, and international connectedness with the world, not just China.
I cautioned that Taiwan must avoid the easy path of focusing on short-term gains, over-relying on the Chinese market, blindly focusing on cost cutting, emphasizing volume production, and failing to pay employees globally competitive wages. These tendencies have caused Taiwan to lose the comparative innovation edge it had in the 1980s and 1990s and to suffer the last 20 years of wage and economic stagnation.
I advocated tackling the following challenges: upgrading R&D and manufacturing techniques; adjusting Taiwan’s capability and mentality to focus more on software, innovation, and creativity; diversifying industries and markets; and revamping Taiwan’s education system to improve its STEM and English-language skills.
Finally, I recommended that Taiwan diversify into non-IC or computer-related industries by leveraging its core competencies. I suggested three potential industries: 1) high-value-added agriculture and aquaculture such as fruits, flowers, and seafood, 2) biotech and medical-related industries, since Taiwan has one of the world’s most efficient healthcare systems, and 3) sustainability industries such as green building technology.
Today, those observations seem more relevant than ever.
The U.S.-China trade dispute has been an unexpected boon for the Taiwan economy. A noticeable shift of manufacturing investments away from China to India, Southeast Asia, and Taiwan has occurred, with ICT manufacturers such as Quanta moving some of their high-end operations back to Taiwan. Popular financial TV programs around the world have trumpeted the revival and prowess of Taiwan’s ICT industry, while the Taiwan Stock Exchange and some ICT companies have enjoyed their best showing in decades.
A recent report by Evan A. Feigenbaum of the Carnegie Endowment for International Peace identified five pressing challenges for Taiwan’s future and proposed specific solutions to enhance Taiwan-based innovation, improve partnerships with the U.S. and other international players, and boost Taiwan’s standing in the global marketplace.
While Feigenbaum persuasively argues that Taiwan needs to re-orient itself away from semiconductor and chipset design and fabrication to promote new future-facing industries, he basically limits his focus to innovation in ICT-related sectors – software, machine learning, AI, IoT, data science, and cybersecurity – with some mention of the biomedical/healthcare industry. He suggests that if Taiwan can integrate advances in software with its core strength in hardware, it will create a major point of differentiation from competitors. He also urges Taiwan to add value by innovating in areas not dominated by big U.S. or Chinese platform companies such as Amazon, Google, Alibaba, and Baidu.
Feigenbaum’s analysis has received widespread attention. Though pertinent and insightful, however, it falls short of enabling Taiwan to articulate and pursue a compelling vision for its future.
Taking the lead in sustainability
Some missing elements are present in the 5+2 Plan, which sets the stage for Taiwan’s green transformation by calling for renewable energy to meet the goal of accounting for 20% of total electrical generation by 2025. Offshore wind power has been designated as the leading energy source.
Reaching the target in a relatively short period of time appeared to be an exceedingly ambitious objective. But the progress so far has been impressive. For example, the Taiwan Semiconductor Manufacturing Co. (TSMC), Taiwan’s most important company, recently inked the world’s largest Power Purchase Agreement (PPA) to date with Ørsted, the Danish company that is the world leader in offshore wind technology. The Taiwan Strait has some of the world’s best wind resources, and Taiwan’s foray into offshore wind energy gives it an opportunity to acquire the know-how needed to become a major player in the global supply chain.
Taiwan’s biomedical industry – another element of the 5+2 Plan – is also showing signs of maturity and entering its growth phase, surpassing NT$1.2 trillion (about US$40 billion) in market capitalization after several decades of investment. Fresh off the COVID-19 success, this industry is likely to play a rapidly expanding, perhaps explosive, role in Taiwan’s sustainability transformation.
In addition, the environment may be ripe for Taiwan to quickly “green” its existing ICT industry. Leading companies such as Apple are now revamping their supply chains. Apple has committed to be carbon neutral by 2030, pushing its sustainability ambitions beyond its corporate walls to include its vast supply chain and the lifecycle of all its products. If the Taiwan ICT industry seizes this opportunity to implement sustainable practices proactively and efficiently throughout its operations, Taiwan-based suppliers will have a chance to go net zero and get an edge on their competitors.
China’s trade disputes with various Western countries also provide potentially big openings for Taiwan’s industry. As national security comes to the forefront and cost is no longer the major consideration, Taiwan gains a distinct competitive advantage over China. Taiwan-based companies should use this opening to green their entire supply chain, something that was previously impossible due to the intense cost pressure that Chinese companies exert on the market.
As China threatens to retaliate against Western competitors, Taiwan should be able to help fill the void. Besides world-leading ICT companies, Taiwan has a relatively complete and robust industry infrastructure, assets, and skills in a broad range of sectors, including steel, shipbuilding, advanced carbon fiber, machinery, and petrochemicals. With the benefit of these resources, Taiwan could become a leader in “sustainability transformation” much more rapidly and more easily than many other countries. Further, of the six major forms of capital – financial, manufactured, intellectual, human, social, and natural – Taiwan has them all, some in abundance (even natural capital, thanks to the emergence of solar and wind power).
In line with green transformation, Taiwan will need to embrace the growing international recognition that GDP is an inadequate measure of a nation’s welfare. This view has been championed by two Nobel Laureates, Joseph Stiglitz and Amartya Sen, and the U.S. Bureau of Economic Analysis recently embarked on a new initiative – “GDP and Beyond” – that broadens the concept of economic well-being to include everything from income distribution to healthcare and macroeconomic sustainability.
Companies such as Unilever and Orsted have demonstrated that willingness to look beyond quarterly results is necessary to achieve successful green transformation. COVID-19 has also served as a wake-up call that GDP growth alone cannot equal national success.
The California model
California has long led the U.S. with the most successful environmental and energy-related laws and policies, with results to prove it. Beginning in the 1960s, California imposed increasingly tough automobile emissions standards despite strong industry opposition, leading to a dramatic decrease in air pollution. Since the mid-1970s, the California Energy Commission has halted growth in the state’s per-capita electricity use, which had been growing steadily for almost 50 years, obviating the need to build new nuclear power plants. More recently, California has been replacing natural gas plants with solar-plus-storage options that are zero carbon.
A recent report from the Goldman School of Public Policy at the University of California, Berkeley predicts that plummeting solar, wind, and battery costs can accelerate the arrival of a clean electricity future. Given strong government policies to foster reliable power without coal or new natural gas plants, the report sees the feasibility of scaling up renewables to achieve 90% clean energy, reducing health and environmental damages and increasing energy-sector employment.
The California experience teaches that, to achieve sustainability transformation, Taiwan needs to set ambitious goals and take strong policy actions. Fortunately, unlike the U.S., there is no extremely powerful and deeply entrenched fossil fuel industry in Taiwan to fight those efforts. Moreover, over the last 30 years a robust environmental movement has emerged in Taiwan, with five major NGOs exerting profound influence on government policies.
Energy policy must constitute a key aspect of Taiwan’s green transformation. Besides the steady shift to renewable energy, it is even more immediately important to focus on energy efficiency measures, including setting proper price signals and reducing energy use through effective incentives and compulsory regulations.
Capital market favorites
Recently, a seismic shift has been underway in the investment world as financial capital has adopted a more favorable stance toward sustainable companies and green (ESG) investing. Evidence supports ESG investing because sustainable companies have delivered better financial results.
Such financial luminaries as Larry Fink, chairman and CEO of BlackRock, and Michael Bloomberg, the former mayor of New York and founder of the company bearing his name, have been active in urging corporate boards and executives to take sustainability to heart. In August 2019, the Business Roundtable revised its Principles of Corporate Governance to state that companies should not concern themselves only with maximizing shareholder value, but should consider the interests of all stakeholders.
Favorable market valuations for green investing encourage companies to enter sustainability-related businesses as markets channel capital toward them. Moreover, the trend encourages existing companies to act more sustainably. Companies known for sustainability, like Taiwan’s Delta Electronics, receive more attention and better valuation from global investors. If Taiwan succeeds in its green transformation, Taiwanese companies and citizens will benefit.
Creating a clear narrative
Finally – and most importantly in igniting Taiwan’s green transformation – the Taiwan government needs to enunciate a clear and simple narrative: that Taiwan can achieve a sustainable future that will be good for both business and the public.
What has been an economy based on relatively low value-added electronics manufacturing now has the potential to become a world-leading, sustainability-driven economy. Taiwan cannot afford to look in the rearview mirror to shape its future. It must be bold enough to tackle the biggest issue of our time – climate change – not only for the well-being of its citizens, its future generations, and the planet earth and all its inhabitants, but also for the future of its economy.
— N. Mark Lam is a Taiwanese-American lawyer, businessman, and author. He is currently a Visiting Expert at National Cheng Kung University (NCKU) focusing on sustainable development goals and innovation.