SECTION [B] - EFFECTIVENESS OF TAIWAN'S AUTO POLICIES IN ACHIEVING SCALE ECONOMIES /cont'd

(iv) Policy Conflicts
The bureaucratic conflict within the Taiwanese government's leadership also resulted in weak and sometimes vacillating automotive policies in the 1970s and 1980s. There were three main interest groups with conflicting motivations and they each attempted to influence the Taiwanese automotive development in different directions.

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.

The Ministry of Economic Affairs (MOEA), which was primarily responsible for strategic macro and sectoral planning for Taiwan's automotive industry, wanted to promote the automotive sector as a strategic industry with import liberalisation. It claimed that protectionism would make the auto sector inefficient and that it would burden the consumers with high prices and poor quality vehicles. By opening up the market, MOEA believed that market forces would make Taiwanese automakers more efficient and eventually allow them to compete successfully in the international market.

However, the economists in the Council of Economic Planning and Development (CEPD), who were in charge of the details and technical aspects of Taiwan's auto industrial policy, doubted the viability of the auto industry. Though they also supported the government's move to liberalise the market, instead of promoting the assembly industry, they wanted the policies to focus on promoting those sub-sectors with comparative advantage, such as the aftermarket parts and the motorcycle industries.

Finally, the Ministry of Foreign Affairs and top party leadership were mostly preoccupied with the diplomatic and military implications of the auto policy. For them, efficiency, consumer welfare and export potential were not as important as forming and strengthening alliances with foreign carmakers so that developed countries would side with Taiwan in the event of disputes with China.

(v) Weak Policy Networks

The problem of vacillating automotive policies was also exacerbated by the weak communication channel between the bureaucracy and the auto industry. The Taiwan Transportation Vehicles Manufacturers Association (TTVMA), which is the organisation that represents the automotive industry, played a minimal role in the formulation of automotive policies. The government deliberately excluded TTVMA from the policymaking process. The inputs from the domestic auto assemblers and parts producers in the formulation of the auto policies were crucial because they understood the conditions as well as the challenges faced by the industry. Without their participation, the policies were often not effective or even counter-productive.

In addition, the TTVMA should ideally serve as a channel for the players in the auto industry to advance their collective interests. This will help to limit the efforts by individual players to influence the government for their narrow self-interests. However, due to the weak relationship between the TTVMA and the government, the auto assemblers resorted to establishing their own political connections to influence the policymaking process in their favour. These rent-seeking activities further retarded the development of the automotive industry in Taiwan.

Negligible Exports
There are two reasons why exports were crucial for the success of the Taiwanese automotive industry. First, the domestic market was too small even if a few automakers could dominate the market. The only way to achieve economies of scale was to export a sufficient number of vehicles. Secondly, the exposure to the highly competitive foreign markets would force the protected domestic automakers to upgrade their technology and improve productivity.

Figure 2: Number of Vehicles Exported

Due to policy weaknesses as discussed above, the export performance of the automakers in Taiwan has been very disappointing. As illustrated in Figure 2, the number of vehicles exported from Taiwan fluctuated between a few hundred units to about 7,000 units during the period from 1986 to 2004. In 2005, Taiwan exported slightly more than 1,000 vehicles.

Figure 3: Market shares of top 2 assemblers in Taiwan

The abolishment of the Big Auto Plant project in 1984 crushed the Taiwanese government's hopes to consolidate the auto industry. Even now, the market remains very fragmented and uncompetitive. As shown in Figure 3, the market shares for the top two assemblers in Taiwan fluctuated between 45% and 55% since the mid 1980s. As noted earlier, the liberalisation of the market since the 1980s also made Taiwanese assemblers more dependent on Japanese technology. Since exports from Taiwan did not fit into the global strategy of the Japanese carmakers, they made it difficult for Taiwanese assemblers to export significantly.

The Kuomintang (KMT), which controlled the Taiwanese government under 1-party authoritarian principles from the 1950s to the mid-1980s, was reluctant to encourage the development of large private business groups similar to the Korean Chaebol or Japanese Keiretsu. The KMT's objectives were to preserve the delicate balance between state-owned enterprises, foreign investors and SMEs. In addition, the KTM also did not favour strong state policies, as it believed that doing so would kill market competition. Though policies that balanced state promotion with market forces worked very well with the development of the garment, electronic and steel industries, it failed in the complex automotive industry which required strong policies to consolidate the market and to promote exports.