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Home > Articles > The Automobile Industry

Taiwan's Automotive Policies - Part 2



Lack of Economies of Scale
A small domestic market is often cited as one of the main problems in developing a competitive auto sector. As car manufacturing requires huge and constant investment in developing new models, acquiring sophisticated technology and expensive equipment as well as branding exercises, therefore it is necessary to produce in large volumes in order to reduce the fixed cost per unit of vehicles. It is also crucial to limit the number of makes and models to enable longer production cycles and thus benefit from scale economies.

Especially in the 60s and 70s, Taiwan's domestic market was too small for the auto manufacturers as well as parts and components manufacturers to reap significant economies of scale. After the failed attempt to build a plant with annual production capacity of 200,000 vehicles, Taiwan's auto industry did not undergo any significant rationalisation as in the case of Malaysia and Korea in the 1980s and 1990s. Figure 1 shows the sales of the top four assemblers, Kouzui, CMC, Yulon and Ford-Lio Ho, in Taiwan. Till 2004, none of the auto manufacturers dominated the market and all produced less than 150,000 vehicles a year. To make matters worse, the production of a wide range of models means that the auto manufacturers faced the problems of short production cycles and uncertain demand for new models.

Figure 1: Sales of the Top Four Assemblers in Taiwan (1979 - 2004)

To achieve economies of scale in a small domestic market like Taiwan, 2 necessary but insufficient conditions must be fulfilled. [i]. Policies have to be designed such that a few domestic manufacturers could dominate the market. [ii]. Effective incentives must be given such that the car manufacturers export a sufficiently large number of vehicles overseas. To achieve these 2 conditions, government policies have to be consistent and the government institutions and bureaucracy need to have the necessary capacity to implement them. In the following, i Capital will explain why the auto policies implemented in Taiwan since the 1960s have failed to achieve both of these conditions.

Weak Automotive Policies

(i) Over-reliance on Japanese car manufacturers
In the initial phase of import substitution in the 60s, the Taiwanese government focused on increasing the local content in the CKD kits imported by the car assemblers. With very minimal design and engineering capabilities in the auto sector, in Taiwanese firms acquired technology mainly via licensing agreements with Japanese firms. In the 1970s, many of these relationships evolved into joint-venture projects. The foreign partners generally resisted the government localisation policies. With the control of more advanced technology, they steered the auto sector to their own benefits. Whether it was deliberate or not, they created an industrial structure that was in itself an obstacle to localisation. The Japanese assembled large number of makes and models and this increased the difficulty for the domestic parts and components producers to achieve economies of scale.

(ii) Negotiations with Insufficient Information
The failure of the import-substitution policies to enable firms to upgrade technology in the automotive industry implies that Taiwan's "Big Auto Plant" project would still need a foreign partner in order to access its core technology. To avoid the past mistakes, the Taiwanese bureaucrats wanted to ensure that this time there would be real technological transfer from the foreign partner.

As noted earlier, many foreign car makers were invited to submit their proposals. The conditions attached to the project, such as export and local content requirements as well as technology transfer provisions, were clearly spelt out to avoid future misunderstandings or manipulations by the foreign partner.

subsequent protracted negotiations with Toyota were also an attempt to extract maximum benefits from Toyota. However, as Toyota thought the conditions were unacceptable from the business perspective, and the Taiwanese government refused to compromise, the project failed.

Those unrealistic conditions were set mainly because the government had insufficient information regarding the technical and productive capabilities of Taiwan's auto parts industry. As a result, the government simply assumed that the requirements of 90% local content and 50% exports for the "Big Auto Plant" project could be achieved. The critical information gap also forced the government to fill in the details of the project on an ad hoc basis while negotiating with Toyota. Without the necessary information to assess the state of aff Taiwanese auto sector at that time, it is not surprising that the government made unrealistic demands and contributed to the failure of the project.

(iii) Conflicts with Japanese Regional and Global Strategies
In the 1980s, the appreciation of the Yen after the Plaza Accord in 1985 and the rapidly rising costs of land, labour and pollution control in Japan forced many small and medium Japanese firms to relocate to Taiwan, Korea, Malaysia, Indonesia and Guangdong and the larger firms to outsource as well as to invest in these countries. However, to maintain their competitive advantage, Japanese firms, with the full support from their government, continued to exert control over advanced technology, design, procurement and marketing.

As mentioned earlier, the unrealistic conditions attached to the "Big Auto Plant" project also showed the ignorance of the Taiwanese government on foreign car makers' global strategies. Since the late 1970s, surplus capacity and protectionism in the world automotive industry imply that it would be unprofitable for Toyota to commit itself to export 50% of the joint venture production. The exports from Taiwan might also compete directly with the exports from Toyota's production in Japan. In addition, the 90% local content requirement would make it harder to produce cars with good enough quality to export in large quantities.

It was also unlikely that Toyota would willingly transfer more complex technology to the joint-venture firm. First, the potential gain from the small Taiwanese auto market would not be able to compensate for the loss of control of cutting-edge technology. Secondly, Toyota might also worry about nurturing a firm that would eventually become strong enough to compete head-on with Toyota in the global market in the future.


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