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Part One
The Formation of a Demand-Responsive Economy, 1965â1985
This book is divided into two parts: Taiwanâs economy and businesses before and after 1985. Why 1985? Before 1985, Taiwanâs businesspeople were confined to Taiwan. Martial law was still in force, passports were hard to get, and capital could not readily move out of the country. By 1990, Taiwanese could move themselves and their capital around the world with relative ease. The period from 1985 to 1990 was a difficult transitional period for East Asian businesses in general, and for Taiwanese businesses in particular. This was the time when these inward-looking businesses, as well as the economies in which they were located, were forced to adjust to the consequences of the 1985 Plaza Accord.
Signed in the Plaza Hotel in New York City in September 1985, the Plaza Accord raised, over a five-year period, the value of East Asian currencies against the US dollar by around 40 percent. The increased wealth in global terms led in the short term to a speculative bubble that burst abruptly in the early 1990s, plunging Japan into a long recession and periods of deflation and stagnation that continue to this day, creating industrial empires in South Korea, and shifting many Taiwanese businesses to China. For us, 1985 marks the pivotal shift in East Asian economies from which, looking backward, we can trace the organization and dynamism of Asian economies today.
Thus 1985 is the watershed year with which we begin Part Two of this book. Before 1985, specializing in light, labor-intensive industries, Taiwan had already developed a complex but largely self-contained export-oriented industrial economy. This economy was certainly linked to global buyers, who ordered goods from Taiwanâs factories, and to global (mainly Japanese) suppliers, who sold to the Taiwanese some of the components that went into the products they made. But it was between these opposite ends of the supply chain that Taiwanâs economy realized its industrial potential internally and in historically significant ways. Taiwanese businesspeople led the development of contract manufacturing in Asia. They took the inspiration for this type of manufacturing from the Japanese, but drawing on their own patterns of social relationships, they extended and adapted it to Taiwanâs small-firm economyâall before 1985. By that date, Taiwanese businesses had already become the leading suppliers of a vast range of goods ordered by American retailers and brand-name merchandisers. After 1985, Taiwanese contract manufacturers helped to accelerate the global retail revolution that has substantially changed the global economy in the twenty-first century.
As we will explain in Part One, 1965 is the year when the fortunes of East Asia in general and of Taiwan in particular turned toward rapid, export-oriented industrialization. Looking at Taiwanâs economy in that year, however, one can find little evidence of a decisive shift. Agricultural production had been growing steadily from the late 1950s, and exports of agricultural products to Japan were substantial. The Taiwanese government had encouraged exports as a way to obtain foreign exchange revenues and thus to sustain the hope that Chiang Kai-shek and his one-party government, the Kuomintang, would once again become the legitimate government for all of China. Some nonagricultural exports had begun, but their numbers were limited. So in 1965 itself, there was no sign that within just a few years the Taiwanese economy, along with the economies of Japan, South Korea, and Hong Kong, would move into hypergrowth.
Part One of this book gives the background to the 1985 pivot point in Taiwanâs economic history. Beginning with 1965, it describes Taiwanâs transformation over the subsequent twenty years. Its chapters identify the varied threads that have been woven into the fabric of Taiwanâs emergent economy, the shape and texture of which becomes clear only in the late 1970s and early 1980s. In Chapter 1, we give an overview of Taiwanâs economy as it existed in this first watershed period. In Chapter 2, we switch to what was happening in the American economy in same period, and then we join what was happening on both sides of the Pacific Ocean together. In Chapter 3, using various examples from our interviews, we describe the process by which Taiwanâs small-firm economy reorganized as a demand-responsive economy. In Chapter 4, we show how Taiwanâs small and medium-sized firms cooperated with each other to form a socially meaningful approach to manufacturing products. Then in Chapter 5, we analyze the economy as a whole, as a going concern that incorporated large business groups and small and medium-sized firms in an increasingly integrated demand-responsive economy. To further illustrate the distinctive path collectively taken by Taiwanese industrialists, we contrast Taiwanâs export economy with that of its East Asian neighbors, Japan and South Korea. Through this comparison, we show how Taiwanese manufacturers were the ones most able to form collaborations with American retailers and merchandisers, collaborations that progressively transformed the global economy.
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1
THE SPROUTS OF CAPITALISM
Bamboo in Springtime
In 1965, Tah Hsin Plastics was the only factory that Kao remembers seeing between Taichung City and Tunghai University, a distance of about fifteen kilometers requiring a bus ride of about forty-five minutes. Swaths of sugar cane and rice filled the slopes of the basin in which Taichung City lies, a landscape broken then only by streams, dirt roads, and a few small villages. In that year, Kao started his freshman year at Tunghai University, a small liberal arts college of about 800 students at the time. The United Board for Christian Higher Education in China had founded Tunghai University in 1955, after having had to close all the Christian-sponsored universities in China. The board had located this new university on Dadu Shan, a substantial hill halfway between Taichung City and Wuchi, a small fishing village on the Taiwan Strait, directly across from Fujian Province on the Mainland, a hundred miles away. Wuchi would later become the site of the Port of Taichung Harbor, and between 1965 and the end of the century, almost all the land between Taichung City and Wuchi would be switched from agricultural to industrial and commercial use.
In 1965, getting to Tunghai University involved a journey. Kao had to take a train trip of nearly four hours from his home in Taipei to Taichung City. It would have taken much longer had he gone by bus on the two-lane paved road that linked Taichung City with Taipei to the north and Kaohsiung to the south. From the train station, he took a bus to the university. Along the two-lane road that he traveled, he would see many people on bicycles and numerous three-wheeled pedicabs, but very few cars. The familiar sights, apart from the lone plastics factory, were ponds filled with ducks being raised by local farmers, water buffalo pulling plows, and peddlers selling their wares along the side of the road.
Located midway between Taichung City and Tunghai University, Tah Hsin Plastics stood out like a sore thumb. The factory made rain gear: plastic boots and plastic coats. But by the time Tah Hsin Plastics sold the land on which its factory was located and moved its operation to China, almost no vacant land was left along the road between Taichung City and Tunghai University. In 1984, when Hamilton arrived in Taiwan, a few scattered plots remained, but by the end of the century they had all disappeared. Taichung Harbor Road, a broad avenue of six lanes lined by trees and with a chaotic mix of motorcycles, cars, trucks, and buses, had replaced the two-lane road.1 The North-South Freeway now intersects the avenue just down the hill from the university. Taichung Harbor is the third largest container port in Taiwan. Although still well behind Taiwanâs largest port, the Port of Kaohsiung, in size, Taichung Harbor is becoming increasingly important. For several decades, Taichung Harbor had been preparing for direct trade with the Mainland, which did not start until 2008. Before that time, it was a principal port for imports of grain and automobiles into Taiwan, but little else. Now Taichung Harbor is a principal port for exporting intermediate plastic and metal goods to China.2 Along both sides of Taichung Harbor Road, from Taichung City to Tunghai University and beyond, high-rise buildings have sprung upâJapanese department stores, American banks, multistory apartment buildings, and many hotels.
Behind this high-rise facade are the factories that have made this area of Taiwan famous. As of 2011, the greater Taichung area contained 31,890 registered firms, employing over 400,000 employees. Most of these firms are small, with an average of 13 employees per firm.3 The area is best known for metal working, machine tools, and electronics. In the early 1980s, the area was known as the âfootwear kingdomâ (tzuhsieh wangguo), so-called for being the center of athletic shoe production. The area was also known for making garments, furniture, and bicycles. The factory owners producing these latter products have mostly moved their facilities to China, but other factories producing other products have filled the void.
Somewhat down the hill from Tunghai University, but curving up behind it, like half a horseshoe, is Taichung Industrial Park. In this park, there are currently 1,037 registered enterprises, including Thunder Tiger. In 1984, the time when we started our collaboration, the industrial park was a recent creation, and there were few firms there, mostly just sugar cane fields. Thirty some years later, the fields are gone and the park is filled to capacity. A second industrial park, the Central Taiwan Science Park, was established in 2003 on the other side of Taichung Harbor Road from Tunghai University and the first industrial park. This park, too, is now full, with 210 registered enterprises. The local government has just opened two more parks. One is the Chungkang Export Processing Zone, located south of the first industrial park, in the area where the footwear and garment factories were once located. This park now has 71 registered enterprises. The second, the Taichung Precision Machinery Park, also adjacent to the first industrial park, now contains 138 registered firms. Both of these parks are still growing.
These four parks are filled with an amalgamation of different kinds of factories, producing such products as flat screen panels to be used in everything from TV sets and laptop monitors to cell phones; optical lenses for digital cameras; audio systems, plastic cases, and other devices for smartphones; and made-to-order semiconductor chips for locally made products. Although its factories are in Vietnam, Thailand, and mainly, China, Pou Chen, the worldâs leading manufacturer of footwear and one of Nikeâs chief supplier, has its world headquarters nearby. In the surrounding area, there are also networks of firms specializing in digitalized machine tools, the very machines that will make the products for the next wave of exports from Taiwan, China, and Vietnam.
Looking at the greater Taichung area today, it is hard, even for those who have lived their entire lives there, to remember what this area looked like in the 1960s. And it would have been impossible for those living in 1960s to have foreseen the transformation that would occur over the next fifty years.
The Watershed Year
The initial turning point in Taiwanâs export-oriented industrialization occurs in 1965. The watershed event of that year occurred a thousand miles to the south of Taiwan, in the Gulf of Tonkin, where in May the US government accused a North Vietnamese ship of firing on an American ship, prompting then US President Lyndon Johnson to proclaim that the spread of communism had to be stopped lest all of Asia succumb, one country after other, in a so-called domino effect. This moment was the height of the Cold War, a struggle between the democratic imperialism of the United States, on the one hand, and the communist imperialism of the Soviet Union, on the other hand. Asia was the battleground, the hot war zone where the struggle between these two political systems broke into long open conflict.
Immediately after World War II, in 1948 and 1949, Chiang Kai-shek and his nationalist armies had been defeated by Chinese Communist forces, with little or no assistance from the Soviet Union. Chiangâs army, leaders and members of the nationalist party (the Kuomintang, also known as the KMT), and government officials fled the Mainland for Taiwan. More than 2 million people landed in Taiwan in 1949, including Kao, at the age of one, along with his parents and siblings. Within one year after that, combat started in Korea, the location of another civil war that was captured by the currents of the Cold War; United Nationsâ forces intervened, squaring off against North Korean and Chinese Communist armies. The Korean armistice was signed in 1953. But armed conflict in East Asia began again in 1959, with the shelling of Kinmen Island, located only several thousand meters from the Mainland. Held by the nationalist army, Kinmen was Chiang Kai-shekâs closest outpost to China, and in 1959, the object of constant bombardment from the Mainland.
Farther south, the Vietnamese Communist armies had defeated the French in 1953, and the country had been partitioned, like Korea, into a northern communist and a southern democratic government. Skirmishes and intrigue between North and South Vietnam had continued to occur, and by the early 1960s, the United States had begun to supply military assistance to the South Vietnamese. The Gulf of Tonkin incident was a continuation of the Cold War confrontation that had started immediately after World War II and, by the 1950s, seemed almost like a normal progression of events.
Responding to Lyndon Johnsonâs call to arms in 1965, US armed forces were mobilized, and local draft boards accelerated and widened the conscription of young men. Hamilton was among those drafted and among those who eventually went to Vietnam. In the same period, Kao, then a student at Tunghai University, remembers seeing flotillas of B-52s and C-130s flying in and out of Ching Chuan Kang Air Force Base, then the biggest base in Taiwan, and located just a few miles from Tunghai University. One of Kaoâs college friends was the son of the commanding general of the base, and gaining entrance when many could not, he watched the planes come and go at close hand, and occasionally saw the body bags of soldiers being carried from their deaths in Vietnam to their burial in the United States. He remembers seeing the C-130 transport airplanes loaded high with agricultural goods to feed the American forces in Vietnam. That was the first time he ever saw lettuce, a crop grown widely in Taiwan in the war years by local farmers, but not consumed there.
Although, in the midst of war and conflict, it is difficult to recognize transforming trends, it is now possible to look back and see the beginnings of a new era. The majority of Taiwanâs farmers had only a few years earlier been peasants, tenant farmers plowing the fields of absentee landowners and living near subsistence, surrounded by poverty. Shortly after Chiang Kai-shek and the âMainlandersâ arrived in Taiwan, the Kuomintang government embarked on an ambitious land reform program. The two primary goals of land reform were to break up the power base of the big landowners and to return the soil to those who tilled it. These goals had both political and economic ends. On the political side, the forces of the Kuomintang would be unopposed by any other group. On the economic side, the Kuomintang wanted to enhance agricultural production, not so much to help the farmers as to ensure Taiwanâs self-sufficiency in rice and other stables. The government needed agricultural self-sufficiency in order to outlast a blockade, should the Mainland forces attack, and they needed ample supplies of foodstuffs should they have the chance to fangung dalu, retake the Mainland. Through the 1950s and 1960s, Taiwan maintained one of the largest standing armies in Asia. Around 600,000 troops, one person out of every twenty, stood ready to attack or defend.
Fifteen years of waiting is a long time, but for the Mainland immigrants in Taiwan, the 1950s and early 1960s were essentially a hiatus, a period when many, including Kaoâs parents, kept their suitcases close at hand, ready for the return trip home. Taiwan was merely considered to be what Chiang Kai-shek called fuxing ji...
