This story appears in the November 4, 2012 issue of Forbes Asia. Subscribe to Forbes Asia
BY RALPH JENNINGS
Since the 1990s manufacturing and other jobs have streamed out of Taiwan and into China. That's depressed Taiwanese wages, leaving them unchanged in real terms for a decade. The stagnation has driven middle-class workers to live with their parents and spike plans to raise children. But now it's spurring growth in both ambitious startups and established companies weary of the growing costs and headaches of doing business in China. In short, Taiwan is becoming more competitive.
One winner is Phison Electronics, a fabless flash storage device maker that has used its Taipei base to gain market share worldwide. Taiwan's low wages for a developed country--an average of just $12,275 a year in the high-tech hardware sector--gives 12-year-old Phison an edge against rivals in South Korea, the U.S. and other developed countries. And they give the company the flexibility to spend more when it needs to recruit above-average talent, improving productivity and inventiveness. "A salary that's higher than the norm is the first thing that we use to attract people," says Allen Yu, assistant to the chairman.
Phison pays engineers with three to five years of experience an average of $80,000 a year, including an annual performance bonus. By the end of next year it plans to add 150 engineers to its staff of 620. It would be harder to grow that fast in Silicon Valley, where engineers earn easily more than $100,000 a year. "If we hire people from Silicon Valley, we always have to pay more," says Yu. Phison, which reported $1 billion in revenue last year, occasionally brings on foreign engineers, but most are locals who are in their 30s and have the passion to put in long, late hours, a hallmark of Taiwan's labor culture.
Taiwan's manufacturers have invested $120 billion in China over the past decade or two. The ensuing competition has forced factories left behind to cut costs--indeed, labor costs for Taiwan manufacturers fell by an average of 4.5% each year from 2001 through 2010, according to the U.S. Bureau of Labor Statistics. So today Taiwan's wages lag well behind the pay in Asian peers such as Singapore and South Korea, according to a study by investment bank DBS. Nominal wages in Taiwan rose by an average of 0.9% a year from 2000 to 2010, including a 4.9% plunge during the 2008?09 global financial crisis, says the DBS report. At the same time inflation averaged 1.1% a year, says Wai Ho Leong, regional economist with Barclays Capital in Singapore. "Real wages have stagnated in Taiwan, mainly in the period after the Asian financial crisis," he says, referring to the 1997-98 regional slowdown.
Manufacturing still accounts for a quarter of Taiwan's economy, says Sukhy Ubhi, an economist with Capital Economics in London, often competing with companies just across the strait. On top of that, Taiwanese manufacturers at home tend to contract with offshore brands looking for low-cost production. "That means you have to be very cost-efficient and you are very much a price-taker," says Tony Phoo, an economist at Standard Chartered Bank in Taipei. "You don't have very strong bargaining power during the negotiating process."
Workers hardly expect change. Taipei-based Cathay Financial Holdings found in its September 2012 Citizens Economic Confidence Survey of 9,365 people that 27% of respondents had seen salaries drop in the past half-year and expected a further decline in the six months ahead. Another 64% of respondents said salaries had not changed over the past half-year and that they did not expect them to shift in the coming six months. People in almost every field complain of trouble paying for a home, helping their parents in old age and raising children--in some cases canceling pregnancy plans for financial reasons. Taiwan's fertility rate is one of the world's lowest, a top concern for economic planners worried about long-term economic productivity.
Jessica Hsu, 30, earns $1,360 a month in two food-service jobs but says she needs $1,700 to help her brother and parents pay off their home over the next nine years to avoid foreclosure. She barely makes more than she did at age 16, when she started working. "The problem is in the government's hands," she says. "They can make things such as interest rates cheaper. But everything is going up." Her savings plan by default? "I have no time to spend any money."
An account executive at a large Taiwanese technology consultancy says her managers have eaten into wages by trimming performance bonuses, regardless of how much business she brings in. Even after a decade of employment with different firms her monthly pay of $2,050 is virtually unchanged, leaving less money to give to her aging parents.
Business associations, their members struggling to compete with companies paying much less in China, lobby against increases in the minimum wage. In September the government backed them by quashing a proposed 1.42% increase in the monthly floor of $640. The labor minister who proposed the increase quit.
Higher-than-usual unemployment among the country's 10 million-strong workforce is probably also keeping a lid on wages. Taiwan reported a 4.4% unemployment rate for August, down from a high of 6.1% in August 2009 toward the end of the recession but higher than the 2.9% monthly average since 1978.
Meanwhile, pay in China has been creeping up, surpassing the monthly minimum wage of $158 in most cities and provinces this year, while labor regulations are tightening there and raw material prices are rising. That's making Taiwan look like a better deal for companies, and some are returning from China. Over the past five years 455 Taiwanese investments, valued at $6.5 billion, have come back to Taiwan, according to the island's economic affairs ministry. In 2006 just four came back. "Cost convergence--rising wages in China but stagnant wages in Taiwan--could at one point make investing in Taiwan more appealing," says Silvia Liu, a Taiwan economist with UBS.
Taiwan's low pay levels leave room for growth for businesses such as Phison that want a stable, first-rate local workforce and that do something original enough to name their own prices. Because wages are low, those companies can afford to raise them to retain good employees. Software is a prime example--it's taking off in Taiwan after the country focused for decades on hardware that's now easy to make elsewhere. "Most of the innovation [in Taiwan] is coming from software opportunities, so they are paying increasingly high rates for engineers," says Jamie Lin, founding partner of Taipei tech investor appWorks Ventures. Entry-level engineers are paid $681 to $1,022 per month, he says, but pay is rising for people trained in software with more than three years of experience.
Genie Capital, a mobile-app developer in Taipei with 18 employees, is also paying up for the staff it needs. "In our subsector it's getting more competitive in terms of hiring talent," says Ryan Carag, a partner in the company. "In order to keep good talent, we've been having to fight poaching. We've offered a couple of guys raises and counteroffers, things of that nature."
TeamChem, a small Taiwan outfit that makes solder mass and conductive film for mobile phones, also pays above the norm to limit turnover among its 20 employees, says General Manager Sunny Han. TeamChem pays engineers $2,047 to $2,389 a month, he says. "We're still growing, and our wages are higher than the government's minimum," he says. Otherwise, he says, "it's hard for us to attract good people."
