The government, together with large corporations, has launched initiatives to help small and medium-sized enterprises address the challenges of digital transformation, stringent ESG requirements, and intergenerational management systems.
Small and medium-sized enterprises (SMEs), which represent 99% of all enterprises in Taiwan, have been cited as a linchpin to the country’s rapid post-war development. Yet SMEs across the island now face challenges that the pioneering generations could not have envisaged. How these are tackled will be key to whether SMEs remain a driver of economic growth.
The historical circumstances behind Taiwan’s SME success are a topic of debate. While the country’s post-war economic development followed a similar trajectory to that of South Korea, with both governments initially relying on import substitution policies, trade protection, and repression of financial markets, the approaches diverged with the transition to export-led growth. As South Korea gravitated toward a chaebol (large conglomerate) model, Taiwan maintained a “small is beautiful” philosophy. The Kuomintang government’s inheritance of industrial monopolies from the Japanese colonial regime is seen as one reason for the reluctance to foster larger private enterprises that might have posed competition for the state-owned corporations. Whatever the reasons, SMEs had space to grow.
Comparative studies of the footwear and bicycle industries highlight the divergence in economic development between the two countries. By the 1980s, Taiwan’s exports were spread over hundreds of smaller firms, while Korea’s had consolidated into a few dozen. The gap widened through the 1990s as the number of Korean firms decreased while new players entered the market in Taiwan. Contrary to theories on industrialization as an inexorable trend toward consolidation and Marxian ideas of capital concentration, Taiwan’s SME sector has continued to grow incrementally.
Some of the most frequently observed issues relate to the roots of SMEs as family-run businesses. The challenges faced by subsequent generations in maintaining the success of their trailblazing forebears are myriad and impact several areas vital to sustained growth.
“There are so many problems facing second-generation successors,” says Charo Wu, who covers SMEs as a reporter for CommonWealth Magazine. “Some of these relate to intergenerational communication while others could include old-fashioned management systems and ESG (environmental, social, and governance) requirements from clients.”
Often the younger generation simply lacks enthusiasm for assuming the mantle. “Traditional family businesses often seem too boring for younger people, so they may be reluctant to take over,” says Ko Chi, supervisor of global affairs at Meet Global, a startup community platform.
Charles Liu, an investment manager working with SMEs, agrees. “It’s normal for smaller companies to disappear as younger family members either aren’t interested or don’t want to spend decades learning the business,” he says. “But it’s also natural law. Times change, and markets change.”
Another problem is a reluctance to hand over the reins. “Often the core power remains with older family members or employees, and when the time comes for the son or daughter to take over, they might already be in their fifties or sixties,” says Liu.
Based on analyses that support this view, Taiwan’s Ministry of Economic Affairs (MOEA) has launched initiatives designed to address the phenomenon. Maria Chia-ying Wu, deputy director general of MOEA’s Small and Medium Enterprise Administration (SMEA), points to research showing that 50% of SME owners in Taiwan are over 50 years old, with many of them over 60.
“This can be a barrier to digital transformation and [understanding of] green topics,” Wu says. Second-generation SME leaders are generally keen to adapt to global trends, but often, “[they] don’t have enough digital education to assist with upgrading their existing technology.”
The SMEA consequently launched a digital growth plan for SME leadership succession in 2020. A crucial component is a program called NexTech Academy, which helps “develop digital transfor-mation capacity.” Wu emphasizes that the academy does not espouse a one-size-fits-all approach but involves recruitment of industry experts with experience specific to the businesses in question. “Different companies face different issues, so we help them to customize their tools,” she says. “Using data analysis, we can help them modify their business operations.”
The program has received glowing feedback, says Wu. She refers to a case of a NexTech Academy participant who was reluctant to take over her parents’ business because of long working hours, which she believed had been detrimental to the family’s lifestyle. However, after being persuaded to look into the company’s operations, she discovered it was failing to meet the production requirements of its foreign clients.
“The foreign company wanted a delivery forecast and inventory management based on concrete data rather than just hope,” Wu explains. “She felt she could change this, so she joined the program to find out how.” The program, says Wu, helped the woman turn things around for the company.
While many children and grandchildren of SME owners decide to chart a different course, they might use the family firm as a “reference source,” says Liu. “For example, if it’s a textile business, it’s common for them to do something related to fabrics but maybe more technologically advanced.” He notes that new business ideas might even be spin-offs from the original family line – a point that is echoed by other observers. “The second generation might lead innovation, with responsibility for coming up with new ideas and products and even investing in startups,” says Ko.
The energy transition
Another challenge for Taiwan’s SMEs is the increased focus on ESG in supply chains. In 2016, President Tsai Ing-wen announced a goal of obtaining 20% of Taiwan’s electricity through renewables by 2025. The following year, the Renewable Energy Development Act facilitated direct purchases through Corporate Power Purchase Agreements.
Although the government has acknowledged that it will miss its 2025 target, with an adjusted figure of 15.1% now forecast, the revised Climate Change Response Act passed by Taiwan’s legislature in January targets net-zero emissions by 2050. It includes a carbon fee scheme, with discounts and transferable credits for companies implementing voluntary measures, and a Carbon Border Adjustment Mechanism (CBAM), which levies tariffs on carbon-intensive imports. This is in line with the CBAM framework adopted by the European Union in December 2022.
An understanding of and integration into such regulatory frameworks will thus be vital for SMEs, as Taiwan External Trade Development Council (TAITRA) Chairman James Huang acknowledged when speaking at an event hosted by the analytics firm Dun & Bradstreet (D&B) late last year.
“To help SMEs manage ESG within their international supply chain, TAITRA has teamed up with D&B Taiwan to introduce programs including the ESG health check and ESG analysis report,” said Huang at the event – an awards ceremony for elite SMEs. Elsewhere, a D&B white paper further emphasized the issue, noting the positive correlation between ESG engagement and performance.
While ESG considerations are now unavoidable for all SMEs, they are particularly pressing for second-generation enterprises. With older business leaders either unaware of, unconcerned about, or unable to implement the required changes, traditional SMEs can fall by the wayside. Those with prior experience of the issues are at an obvious advantage.
“If the family business was related to eco-friendly products or the environment in the first place, then it’s likely the second generation will go on to an ESG model or related startup,” says Liu. If not, the outlook is often bleak.
“Many SMEs have difficulties conducting carbon reduction plans due to lack of knowledge, talent, budget, or vision,” says Charo Wu. “But they know they will be ruled out if they do nothing.”
Following the launch of a Taiwan Renewable Energy Certificate (T-REC) initiative in 2017, a further quandary arose. The certificates, which are financial instruments used to track and verify ownership of renewable power, can be purchased by companies as credits to offset carbon footprints. However, pressure from global brands, which are committed to 100% renewable energy by 2030 as members of the R100 initiative, means that even major IT suppliers in Taiwan struggle to secure their share.
“The requirements have become a headache for SMEs,” says Wu. “Many can’t get the T-RECs they need because TSMC and other big enterprises pretty much take them all – and even for them, it’s far from enough,” she says.
However, there are reasons for optimism as the tier-one suppliers realize that problems for the smaller companies will eventually lead to supply chain weakness. To address this, some of these larger firms have set up workshops to assist SMEs with ESG transition. Wu cites China Steel Corp. as an example. “They are very glad to share their experience with SMEs,” she says. “This model is kind of like a hen with chicks.”
In terms of government support, the SMEA offers a range of regulatory barrier solutions, including training courses, corporate mentorship programs, and an online greenhouse gas emissions calculator. For those who need more hands-on assistance, the administration dispatches teams of experts to diagnose problem areas and devise customized solutions.
“There might be a cooling system or another part of the factory that is not energy efficient,” says the SMEA’s Maria Wu. “They can tell you where you need to improve and how to do so.” In cases where existing equipment or components require upgrading to meet evolving ESG standards, subsidies might be available through the MOEA’s Industrial Development Bureau, Bureau of Energy, Department of Commerce, or other government agencies.
Cooperation on ESG is also being fostered through events such as the Greentech Startup Challenge, a competition organized by Startup Terrace, an agency under the MOEA. Larger corporations submit a particular problem to the competition’s organizers, who then visit factories and other premises to document the issues with video footage. After this, the startups compete to offer solutions, with the initial applicants whittled down to five candidates. Two or three months of discussions follow to decide which startup has best addressed the problem at hand.
“At first, it can be hard to persuade the companies to participate because the process takes quite a long time, and you’re getting them to show that they couldn’t solve their problems internally,” says Anita Chen, chief of international affairs at Startup Terrace. “They’d rather people didn’t know that.”
However, the companies soon realize the tangible benefits of the arrangement. “There are prizes for both sides, but the money is not so important for the corporations,” says Chen. “Instead, they get a solution, and, for the startups, their solution is validated.” She cites the example of last year’s winning combo, a startup called Startrust that paired with Delta Electronics to provide customized solutions for carbon emission data collection. The technology has since been purchased by Delta. “This is not just proof of concept,” says Chen. “This is money from [Delta’s] own pocket.”
Most important, says Chen, is the openness toward working with startups and SMEs to explore new alternatives. “Whether the company decides to continue cooperation or to acquire the startup, it represents speed and flexibility in its transformation,” she says. “This shows there is more than enough energy to cope with this fast-changing world.”