Despite active interventions by the Taiwanese government to support her auto industry since the 1960s, until now, she has failed to develop automotive manufacturers which are internationally competitive. Section [A]. i Capital will first outline the history of Taiwan's automotive policies since the 1960s. The rationale and objectives of the policies will be briefly explained. Section [B]. i Capital will assess the effectiveness of the automotive policies in Taiwan to achieve significant economies of scale in the auto sector, in particular the assembling of vehicles and the manufacturing of complex auto parts. Section [C]. The development and performance of the aftermarket parts industry and motorcycle industry will also be analysed. Section [D]. Finally, i Capital will discuss the future prospects and challenges faced by Taiwanese automotive industry.
SECTION [A] - HISTORICAL DEVELOPMENT OF THE AUTOMOTIVE INDUSTRY IN TAIWAN
First phase: Import-substitution Industrialisation
Before the 1960s, automobiles in Taiwan, as in other developing countries, were mostly imported from Europe, Japan and the US. Due to the lack of automotive technology and the scarcity and high cost of capital, there was little development in Taiwan's automotive industry in the 1950s. Yulon Motor was the first automotive assembler in Taiwan. With the grant monies from the US and technology cooperation agreements with Willy's Corporation from the US (for Jeeps) and Nissan (for passenger cars and trucks), Yulon launched the first jeep in 1956 and later the first sedan in 1960.
In the early 1960s, as part of the strategy to pursue import-substitution industrialisation, the Taiwanese government for the first time implemented policies to promote the automotive industry. As the name of the strategy, "import-substitution", implies, the principal objective was to substitute the imports of auto parts and components by increasing the local content. This would help to save foreign exchange, create employment and develop strong forward and backward linkages so as to strengthen impir respective industrial base. It was hoped that by producing locally, there would be transfer of industrial technology and hence the technical expertise of the workforce could be upgraded.
To start a complex industry from scratch, the standard economic argument is for the government to protect and assist it so that this "infant" can acquire the experience and technological capability to compete with the more mature foreign competitors. By imposing strict regulations on the imports of completely build up vehicles and enforcing localisation requirements on domestic producers, the Taiwanese government hoped to increase the local content of the assembled vehicles gradually. The guidelines published by Taiwan's economic bureaucrats in 1961 outlined the ambitious goal to eventually achieve 100% local content. This was followed by the formation of a special automotive section in 1965 under the Ministry of Economic Affairs (MOEA). This new section drafted a policy for the inspection and approval of domestically assembled vehicles. However, all these policy initiatives lacked specific details and were not rigorously enforced throughout the 1960s. At the end of the 1960s, two more automotive assemblers, San Fu and San Yang Motor, began operations.
In 1971, the first comprehensive report to assess the state of affairs of Taiwan's fledging auto industry was published by the City Bank of Taipei. There were two main findings in the report. First, mainly due to the general mechanical engineering multiplier effect of the automotive sector, the report recommended the government to promote the automotive industry, as it was instrumental in the development of Taiwan's defence industry. Secondly, due to the lack of technology transfer from their foreign partners, the auto assemblers were mainly involved in the simple assembly of imported parts and components. As a result of this report, MOEA announced 3 major policy measures to enhance the effectiveness of the import-substitution policy in the same year. They were to increase import duties of completely built-up vehicles and auto components, to lower the domestic auto examination fees and certification fee and to allow banks to finance the purchase of domestic vehicles.
Despite the critical role of the Automotive Industry in Tai development of Taiwan's defence industry, the economic priorities and resource allocation in the 1970s were leaned towards the export promotion of textiles, chemicals, plastics and other value-added manufactures. This not only reflected the inability of the politicians in Taiwan to substantially influence the economic decisions of the economic bureaucrats, but also the recognition of economic bureaucrats of the importance of economic logic over nationalistic goals. As a result, the top economic bureaucrats neglected the Development of the automotive industry during this period.
Second Phase: Export Promotion and Liberalisation
By the mid-1970s, as a result of the heavy protection of the auto sector and the neglect of the government to assist individual firms in developing and acquiring technological capabilities, Taiwan's automotive industry was highly fragmented. Table 1 below shows that the average production per carmaker was far below the level required to achieve economies of scale. The production of only 7,992 units per assembler in 1975 clearly shows that the auto policies undertaken till then had failed miserably.
Table 1: Car Production in Taiwan
The Taiwanese government responded by embarking on the second phase of development in the automotive sector. Unlike the first phase, she abandoned the import-substitution strategy and switched 180 degrees to export promotion. This was to be in line with the Seventh Economic Development Plan (1976-1981) under which the Taiwanese government attempted to upgrade Taiwan's industrial structure such that the country can produce high value-added manufactures destined for exports. In 1979, the government approved the "Big Auto Plant" project to set up a large-scale automotive factory with an annual production capacity of over 200,000 units. This factory would produce low-priced, fuel-efficient, high quality compact cars mainly for exports. To ensure the success of this project, the government intended to look for a foreign carmaker as a joint-venture partner. The government also hoped that this project would help the local auto parts and components industries, as well as the machinery industries to gain more advanced engineering and production technology.
To retain control of the project, the foreign partner could only invest up to 45% of the total equity. China Steel Corporation, Taiwan's best run public enterprise, would be involved in the project as an investor and working partner. Consistent with the export-oriented strategy, 50% of the total annual production would have to be exported. The process of selecting a foreign partner for the project took more than two years. It was finally announced in Dec 1982 that Toyota was chosen. However, after lengthy negotiations, both sides refused to compromise and the joint venture project was abandoned in Sep 1984 (the main reasons for this failure can be found in Section B under "Weak Automotive Policies").
In the mid-1980s, tariffs imposed on the completely built-up models were still as high as 65% and assemblers were required to achieve 70% local content. From 1985, the Taiwanese government gradually reduced the tariff rates and local content requirements. By the mid-1990s, the government had reduced the tariffs and local content requirements to 30% and 50% respectively. As the market became more liberalized in the 1990s, the local assemblers became more dependent on foreign carmakers, especially the big Japanese car manufacturers. This is because the competitive pressure in the liberalised market forced the inefficient assemblers to rely more on their Japanese partners to survive.
In contrast, the exports of aftermarket parts have been more successful under the liberalised market. According to the Taiwan Transportation Vehicle Manufacturers Association (TTVMA), the value of auto-parts production grew about 4.5% annually between 1994 and 2003, this is four times the growth rate of the domestic car industry.
Since Taiwan joined the WTO in 2002, Taiwan has reduced the import tariff by 5% on cars less than 2000 cc to 25% in 2005. To comply with the accession commitments, Taiwan has also abolished the 50% local content requirements for auto parts. The Taiwanese government is expected to further liberalise the market in the coming years as it is committed to reducing the tariff of imported cars to 17.5% in 2011 and completely abolishing the import quotas after 2011.