BUSINESS
EFFICIENT Taiwan Polypropylene's plant ant in Kaohsiung is a low-cost operation, but demand is not as strong as it once was. as.
THE CHINAkQUESTION QUESTION Taiwan struggles to buildI a knowledge-based economy as its entrepreneurs neurs bolt to China JEAN-FRANCOIS TREMBLAY, C&EN H ONG KONG
T
AIWAN WAS WELCOMED I N T O
the W)rld Trade Organization at a meeting in Qatar in November that was overshadowed by China's entry. For Taiwan, the Qatar meeting was a landmark event. Since the 1970s, as China's stature has risen, the island nation has progressively lost its membership in most international organizations and now has formal diplomatic ties with only 29 countries. W T O is the most influential international group of which Taiwan is a member. Many Taiwan watchers also expect W T O membership to yield improvements in Taiwan's dysfunctional relationship with China. Trade and investment links have grown over the years, but Taiwanese businesspeople in China still occasionally find themselves victims of politically motivated retaliation when relations between the two countries deteriorate. Despite the historical significance, entry into W T O largely failed to bring joy to the island. Nowadays, Taiwan is in a funk. By the end of September, the economy had shrunk 4.2% since the year-earlier period. Taiwan's gross domestic prod14
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uct experienced its largest contraction in 26 years in the third quarter. Chao-Shiuan Liu, the former vice premier in charge of the development of science and technology in the Kuomintang government who is now deputy director of a think tank called National Policy Foundation, says: "Taiwan's economy used to be heavily dependent on investment. And 97% of the industry consists of small and medium-sized companies. Obviously we have difficulty attracting people to invest in Taiwan. We have to change from an investment-driven economy to a more knowledgeoriented kind of economy" IT WILL NOT BE easy, he adds.The Liu short-term economic outlook is not promising. As part of its W T O obligations, Taiwan will have to open up its economy further. Taiwanese companies worry that they will not be able to hold their own against products made in China. Thousands of employees of state-owned firms fear losing their jobs as these monopolies are deprived of protection against imports under the new trading regime.
Business owners have a simple strategy for overcoming Taiwan's deteriorating conditions: They are relocating to China. "The amount of money that the Taiwanese have invested in China is unknown," says Gregory K.Tawes, president of Taiwan Polypropylene (TPP), a joint venture between Basell and Taiwan's Koos Group. "The government doesn't encourage [investing], and I think that the estimates are underestimated. T h e amount of money Taiwanese have invested over there is phenomenal." According to Chinese statistics, Taiwan had invested over $26 billion in China at the end of 2000. Formally entry into W T O will only have a limited effect on Taiwan. "Taiwan already has open markets with the rest of the world, excluding China," says Yen-shiang Shih, director general of the Industrial Development Bureau at Taiwan's Ministry of Economic Affairs. Import tariffs are already very low, he says. Shih points out that one of the main impacts will be on the import of fossil fuel, which for decades was the monopoly of Taiwan's state-owned China Petroleum Corp. Formosa Plastics Group was only recently allowed to become the island's second importer of fuel. Much of Taiwan's chemical industry is aging. Many plants were set up in the 1950s, '60s, and 70s when export-oriented Taiwanese manufacturers needed materials to produce clothing, shoes, and toys. These customers are now moving to China, making it likely that once-profitable plants will be retired and won't be replaced.
Tawes One exception is Formosa Plastics' Mailiao complex, which opened up just recently on Taiwan's central west coast. In the late 1980s, Taiwan authorities denied Formosa permission to set up the complex in China and helped the company build it in Taiwan instead. Establishing themselves in China is a short-term solution that buys Taiwanese HTTP://PUBS.ACS.ORG/CEN
businesses only a few years of time, Liu claims. Unless Taiwanese firms develop some sort ofworld-class competitive edge, he says, they won't be able to survive in China any better than in Taiwan. He cites McDonald's as an example. Anyone can make hamburgers, he says, but the McDonald's management system is unique. Liu says he has noticed some Taiwanese companies—a minority, he claims—that are "doing fine" in China. But according to his analysis, the source of their success is improved management after moving to China. It is increasingly difficult for poorly managed firms to succeed in China. Multinational corporations are expanding there, and Chinese companies are improving their management, he says. Bin M. H. Rei, a professor of chemical engineering at Chang Gung University in Taoyuan, Taiwan, says that enthusiasm for China is excessive. There are only about 100 million Chinese with a per capita income exceeding $800 per year. Over 9 0 % of China is much poorer. OPERATING IN TAIWAN does have disadvantages, Shih says. Compared with most other Asian countries, the cost of labor, electricity and land is high. Moreover, compliance with environmental regulations is becoming increasingly complicated. On the other hand, the island is well located opposite China and just south of Japan. Taiwan has energetic entrepreneurs, expertise in international trade, and a welldeveloped industrial base featuring efficient transportation. The exodus of Taiwan's industry to China can be seen as an escape. It maybe that Taiwanese managers have failed to develop a unique competitive edge and now see China as the only market where they stand a chance. But a kinder view suggests that migrating to China makes eminent sense. China, located next to Taiwan, is widely viewed as the world's most promising emerging market. Taiwanese firms have cultural affinities to China. Multinational companies are hampered by a shortage of Chinese-speaking staff in middle and senior management positions. C. H. Hsu, vice president in charge of China business at Chi Mei Corp., the world's largest producer of acrylonitrilebutadiene-styrene (ABS), is optimistic about the prospects for Taiwanese firms in China. "We see the Chinese as compatriots. They are like brothers we didn't meet for a long time," he says. "This is our biggest advantage compared with European or American companies. For us to do busiHTTP://PUBS.ACS.ORG/CEN
INVESTMENT
Formosa Plastics' China Strategy
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an a foreign company build large petrochemical plants in China and be profitable? If any company can, it is Taiwan's Formosa Group. The firm just completed construction of the giant Mailiao complex in Taiwan, and the experience is still fresh in the minds of its engineers. And it's highly improbable that a no-nonsense group like Formosa would pursue a "strategic" project in lieu of a profitable one. Formosa is indeed seeking to vastly expand in China. Last spring, C. T. Lee, president of flagship company Formosa Plastics Corp. (FPC), was optimistic that construction of a $6 billion complex featuring a 1 million-metric-ton-per-year ethylene cracker would soon begin. He expected that Taiwanese authorities would begin to allow large investments in China. But by December, Lee's enthusiasm was gone. Taipei has indeed relaxed its policies toward the mainland. But it still does not allow investments in transportation, infrastructure, and basic chemical production. The Taiwanese government has permitted sister company Formosa Chemicals & Fibre to go ahead with the construction of an acrylonitrile-butadienestyrene (ABS) resin plant on China's eastern coast. But FPC has yet to get authorization to build a polyvinyl chloride plant at the same location. The cracker remains a dream. There was a time early on when Lee was not interested in building in China at all. What troubled him then was not the expected objections of the Taiwan government. Rather, it was that Chinese customers have the frustrating habit of not paying for what they order. Lee's opinion about getting paid in China has changed. There are now so many Taiwanese manufacturers in China that they could form the bulk of Formosa's customers on the mainland. For instance, sister company Nan Ya Plastics has already set up several Chinese plants manufacturing PVC pipe using PVC made by Formosa. Other than Taiwanese customers, Lee says that in past years there have emerged in China numerous cooperative enterprises that are run like private com-
panies and do settle their bills. As for the state-owned companies that tend to be the greatest defaulters, Lee says they are finding out that suppliers will not handle their orders if they don't pay up. C. H. Hsu, a vice president at Taiwanese ABS producer Chi Mei Corp., says the biggest problem with Chinese customers is still payment collection. He has observed that the companies with cash to pay their bills tend to be import-export firms not interested in manufacturing. As for the capable Chinese entrepreneurs that do manufacture, he says they have difficulty obtaining financing. Now that China is a World Trade Organization member, Hsu is counting on foreign banks that are more likely than Chinese ones to provide financing to such firms. In the meantime, Chi Mei has been leaning on Chinese import-export companies to provide financing to Chinese manufacturers. So far, FPC does not sell much material to Chinese companies and does not even have a sales force on the mainland, Lee says. Most of the contracts are settled in Taiwan. Even when Formosa delivers the product in China, negotiations take place in Taiwan, where the customers' headquarters are located. Surprisingly, Lee says competition is "fierce" in China. He acknowledges that the country is a major importer of petrochemical products. However, profit margins are pressured by the need to pay import duties of about 16%. The high import duties are one of the main reasons Formosa is considering manufacturing in China instead of exporting from Taiwan. Lee isn't worried about China's insistence on owning a 50% stake in ethylene crackers; he is confident Formosa can convince Chinese authorities to allow it to be the sole owner of its petrochemical facilities in China. Then, with no local company investing resources, Chinese planners should quickly approve any feasibility studies. However, Lee is clearly frustrated by Taiwan's refusal to allow basic chemical investment in China. Asked whether it made sense to look at FPC as a barometer of the profitability of making petrochemicals in China, he snaps, "No. Because we don't have approval from the government."
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BUSINESS ness in China is comparable to Americans doing business in England." Unlike international companies that painfully abide by all rules and regulations, Taiwanese managers often ignore Chinese regulations that they know will not be enforced, according to the manager of a Taiwan-based chemical company "I have been to plants with Taiwanese investors in China where they build the buildings illegally" the manager says. "They build an apartment building to house the people in the plant on the other side of the plant, shielded from the road. These guys don't think twice. If they think that they can make money at it, they are in there before anyone else." Managers of Taiwanese firms claim that a winning combination is formed when multinational companies choose to team up with the Taiwanese in China. Gary Lee, financial director of Kaohsiung, Taiwanbased Eternal Chemical, offers an example of successful cooperation between multinational andTaiwanese companies in China. The total construction cost of a powder coating resin plant near Shanghai in a 5050 joint venture with DSM was $ 6 million instead of the $10 million it would have cost had DSM built on its own, Lee claims. He says the plant was built according to DSM's specifications. Most savings were achieved by purchasing Chinese-made parts.
is all the more surprising considering Chi for a company like Basell to utilize TPP," Mei Corp.'s long track record in China. Tawes says. According to Hsu, Chi Mei began exHe adds that T P P and Basell executives porting to China in 1985. He had his first have been studying numerous investment contacts with Chinese officials in 1987 in scenarios in China. "The most important Hong Kong when Taiwan still banned aspect, from Basell's point ofview," he says, "is we have Chinese-speaking people trained in management, technical, and other issues who know Chinese culture and who can operate on the ground in China far more effectively" Taiwanese managers claim to find in China cultural affinity in a large and undeveloped market that resembles Taiwan 25 years ago. But operating in China, even for the Taiwanese, is not straightforward. Formosa's Lee says one of the obC. T. Lee stacles to the company's goal of set- C.H.Hsu ting up an ethylene cracker in Chicommercial relations with the mainland. na is a Chinese regulation preventing The company's first China joint venture, majority ownership of such basic chemical a $1.6 million coloring compound plant plants by "foreigners." Another petroin Jiangsu province, was set up in 1991. chemical executive states that it is essenChi Mei now has several hundred miltial for a foreign company to have full manlion dollars invested in China in plants agement control of its operation to turn a manufacturing polystyrene, ABS, and colprofit in China. oring compounds, and in facilities such as warehouses. THE COMPLEX political relationship beHarassment of Chi Mei by Chinese autween Taiwan and China can occasionally thorities began shortly after the election of affect business. Hsu says his company's Chen Shui-bian as president of Taiwan in China operations were targeted by authe spring of 2 0 0 0 , according to C. H. thorities for several months in 2000. This Hsu. Chen belongs to the Democratic Progressive Party which favors TaiONE OF THE competitive features of wan's formal independence from ChiTaiwanese companies is their singuna. Hsu Wen-long, chairman and lar fixation on containing costs. C. T founder of Chi Mei, was one of Chen's Lee, president of Formosa Plastics, numerous advisers. claims that Formosa's construction costs are 3 0 - 4 0 % lower than the inFor six months, starting in May dustry average. 2 0 0 0 , about 4 0 inspectors representing several ministries began exHe explains that the Formosa group tensive audits of Chi Mei's Chinese prefers to build plants on its own with operations. C. H. Hsu says they were little assistance from outside conlooking for laws broken by Chi Mei tractors. "Normally, our project team in China. "It was eventually solved beincludes chemical, electrical, and mecause they could not find any major chanical engineers. After the conproblems," he says. The audit did not struction, the chemical engineer will paralyze the company, but it was seribe in charge of the plant," Lee says. ously disruptive. "So, people in charge of operations are involved from the very beginning Still, C. H. Hsu harbors no grudge in design and procurement." against Chinese authorities and is in fact very positive about Chi Mei's fuTawes, an American chemical enture in China. The arbitrary auditing gineer who was sent toTPP by Basell, to which Chi Mei was subjected is not says T P P is among Basell's five most likely to be repeated now that both cost-efficient polypropylene plants in countries are W T O members. the world. "TPP, like many Taiwanese Moreover, C. H. Hsu says, "No matcompanies, has a very low-cost menter who is president of Taiwan, relatality," he says. Tawes adds that Taitions will improve." He claims that Chi wanese workers are exceptionally diliMei will quadruple its Chinese ABS gent and do not mind putting in extra STREETWISE Taipei business owners may capacity currendy 125,000 metric tons hours. "It would certainly make sense soon feel the effects of WTO membership. 16
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per year, within three years. Within 10 years, he expects that the firm's capacity in China will exceed that of Chi Mei in Taiwan. Chi Mei decided several years ago to stop investing in basic chemicals in Taiwan. Nowadays, its main investments in Taiwan are in the electronics sector, mostly flat-screen displays. Indeed, it is doubtful whether it makes sense at all for Taiwan to expand petrochemical capacity Although the island is overall an importer ofpetrochemical products, Tawes says there is now an oversupply of polypropylene in Taiwan. In the export market, Taiwan is at a disadvantage because of high production costs. Chang Gung University's Rei questions the need for the island's proposed seventh and eighth ethylene crackers, the construction of which is being delayed by environmental concerns and lack of financing. One analyst at a major banking firm even muses that the sixth cracker, part of Formosa's Mailiao complex, was "a mistake." He predicts that a third of the complex's oil refining capacity will lie idle for a few years because of oversupply in Taiwan. In an attempt to rejuvenate Taiwanese industry, the National Policy Foundation's Liu says he has been attempting to speed up the creation of high-technology businesses by setting up an association called the Mount Jade. "THE MEMBERS INCLUDE almost all our research-oriented university presidents; the heads of the important research institutes; all important venture capitalists; and business people, lawyers, and finance managers. That is, all the essential elements to make a new high-tech start-up successful," Liu says. Taiwan's government can only play a limited role in promoting the emergence of a knowledge-based economy in Taiwan, says Shih of the Industrial Development Bureau. "We are a free market," he notes. What the government can provide is research and development incentives in the form of subsidized land in industrial parks, industrial loans, tax credits, and even research grants in some cases. However, it will take more than government incentives to change the modus operandi of Taiwan's entrepreneurs. In the past, these entrepreneurs have proved extremely proficient at spotting new markets and supplying them with low-cost products. It may turn out that they continue to do this—but in China this time. Shih provides a telling statistic: In the Shanghai area alone there are already up to 300,000 Taiwanese residents. • HTTP://PUBS.ACS.ORG/CEN
SOOTHING THE PAIN Albemarle fine-tunes its fine chemicals strategy to add small-batch capabilities
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LBEMARLE IS A FORCE TO BE
reckoned with in analgesics. Its ability to produce ibuprofen and naproxen means it has huge current Good Manufacturing Practices (cGMP) capabilities. W h a t it did not have were small-batch capabilities. Albemarle was missing out on opportunities to capture and scale up new drugs for pharmaceutical customers. But with the $74 million acquisition of the custom and fine chemicals business of ChemFirst six months ago, the company is in a better position to fill unused capacity in its largescale fine chemicals facilities. Mark C. Rohr, Albemarle's president and chief operating officer, explains: 'Albemarle
competitive with any operation anywhere in the world," Rohr says. The additional capacity will give Albemarle "a chance to maintain pretty good influence over the marketplace," he adds. But competition from Indian producers is likely to keep ibuprofen prices at current levels for the long term, he points out. So to relieve the aches and pains of the analgesics business, Albemarle is hoping that a dose of fresh business to scale up and produce new active drug ingredients for pharmaceutical customers will fill its reactors. T h e company has already attracted some new business because of the ChemFirst acquisition. "Our kilogram c G M P facilities are swamped with inquiries right now," Rohr says. And the company has a couple of early-phase drug candidates under development with customers. "We now have a hepatitis drug in Phase I I I , an anticancer compound in Phase II, and two cholesterol drugs in Phase II." Medicinal chemicals are not the only area where Albemarle is planning to make better use of its existing fine chemicals capacity. Rohr promised a year ago to get more heavily involved in the $35 billion agricultural chemicals market as compounds came off patent. "By the end of this year, we will be doing more with offpatent agricultural products," he says. And Albemarle expects to make more of its aluminum alkyls capacity through a venture in which Atofina will upgrade the alkyls to butyl and octyl tin heat stabilizers for polyvinyl chloride. "We are using existing assets so there will be no capital invested to get this joint venture to work," Rohr says. The economic slowdown has hit net earnings at Albemarle, Rohr admits. The firm's earnings were $54 million on sales of $678 million through the third quarter of 2001, down 37% compared with a year ago. But with these plans, Albemarle won't have its head in its hands waiting for the upturn.—MARC REISCH
We now have a much better chance of growing our pharmaceutical capabilities/' was sitting there with large cGMP capacities and the horsepower to manage it. We would try to grab opportunities as they came by our door in Phase II or III {clinical trials}, when you need the large-size equipment. But by then, most companies had already made a commitment to whomever had made the first couple of batches for them." ChemFirst changes all that for Albemarle. "Now we have a full range of technical capabilities," Rohr says. "We can take customers from kilogram quantities to 5,000-gal-plus reactors. We now have a much better chance of growing our pharmaceutical capabilities." It's no secret that analgesics producers have some excess capacity around. Competition from Indian producers has hurt prices for ibuprofen, particularly in Europe, Rohr admits. And though Honeywell has mothballed a naproxen line in the Bahamas, it's only helped a bit. Then, too, Albemarle is expanding its annual ibuprofen capacity by 25% to 5,000 tons, which will make it the largest producer in a world market where 14,000 tons are sold each year. "Our operation is cost Rohr
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