What Next for Taiwan Firms in South Africa?

"First-world infrastructure, third-world costs." This is how C.S. Liu, general manager of Derlon Textile (Pty) Ltd, describes South Africa. For businessmen from crowded Taiwan, who are always short of land for development, the RSA-where only 40 million people live in an area of 1.22 million square kilometers-is an attractive investment location.

Derlon, located in Lady-smith in central South Africa, covers an area of nearly 50,000 square meters. It began installing equipment in 1987, and began production the following year. "The former chairman evaluated the investment environment in many places, including mainland China and southeast Asia, looking at costs, wages, potential market, and so on, and finally decided on South Africa, because it offered a better living environment for his staff and children," explains Liu.

Derlon, which has more than 30 years of history in textiles in Taiwan, today has 800 employees. The factory operates three shifts, seven days a week, and sells to more than 150 downstream makers of sweaters in South Africa.

Low-priced dumping

Following on Derlon's success, 50 or 60 other Taiwan firms set up. downstream operations in the RSA. But recently competition from mainland China has hit them hard. Nearly ten Taiwanese firms have closed, some moving to the PRC. The market has shrunk by nearly 30%. The number of employees at Derlon was once nearly 1000, but then fell as low as 600 before coming back to 800.

Of course, adds factory head C.H. Lin, another reason the company needs fewer workers is automation. He says that it takes three years to train a new employee, and that unions are very powerful, so the firm has to move toward automation.

"Everything about South Africa is great except two things: the labor unions, and the crime," says C.S. Liu. Crime has been a major factor in the withdrawal of some Taiwan investors in recent years.

"At one point last year four factories owned by Chinese were robbed in a single week." Everyone regrets the decline in civil order since the handover of power in 1994. Most of the stories one hears about Taiwan firms in South Africa these days involve crime. Even the consul-general in Johannesburg was robbed by armed men during a dinner party.

Risky business

Huang Shu-li, the RSA correpondent for the United Daily News, described the frustrations of Taiwan business people in South Africa in a Spring 1998 article: "This year around lunar new year, there were two incidents in the Chinese business district in Johannesburg in which black robbers were killed at the scene. One was a case of a Taiwanese business person firing in self-defense. The incident sparked anti-Chinese feelings among local blacks, making Taiwanese business people feel more threatened and unsafe."

The report also described a case in which a Taiwanese owner of a clothing wholesaler caught employees stealing things. When she called police, all she got was a stern warning not to waste police time on such "small thefts." Angry, she went next door to a Taiwanese-owned appliance wholesaler to complain, only to discover police handcuffing and carting away a number of his employees who were caught red-handed having already loaded 75 stolen fans into a truck while the manager was doing his accounts elsewhere!

C.C. Chang, manager of sales and finance at Derlon, says: "A few days ago the chief of the Johannesburg police retired and declared that, first, the crime problem will definitely not get better, and two, as a result of long-standing racial hatred, there is now a violent tendency in black culture." While not happy about these things, at least Chang was grateful for the official's sincere warning that in the future, people will just have to defend themselves.

Besides civil order, another concern for investors is local labor unions.

The impact of the new labor law

Labor legislation in the RSA has been modeled on that of Europe. It is generally thought that this is unsuitable to a developing country. As C.C. Kan, formerly posted to RSA by the ROC Ministry of Economic Affairs and now a successful businessman, wrote: The two most controversial parts of the labor law that took effect in November of 1996-collective bargaining for wages, and creation of a labor-management council for enterprises with more than 100 workers-are unsuited to a developing country.

Drawing on economic theory, he points out that developing countries must have faster growth to reduce unemployment, so it is necessary to set labor rights at the lowest possible standard, with the labor market determining employment and wages. If supply of a certain type of labor exceeds demand, naturally wages will fall, and if the reverse, they will naturally rise.

Only in this way can production costs be minimized to attain international competitiveness, create a large number of jobs, and thereby benefit all workers. As the economy develops, labor rights standards can be raised to include things like a minimum wage, fewer hours, pensions, and so on. Asian countries such as the Little Tigers have all followed this formula.

But RSA labor groups oppose adoption of the East Asian economic model. Moreover, they will not shrink at bloodshed, and the government, for political reasons, does not dare to interfere. Existing labor legislation is a serious obstacle to South Africa's economy, making it impossible solve the high unemployment problem within a decade.

Quoting the analysis of a labor law specialist, Kan says that the new labor law does not make it impossible for employers to manage their businesses, but it does require a complete change of attitude toward labor relations. You have to see workers as friends of the company. You have to share profits with them, let them know the operational status of the company, and cultivate their loyalty. That is, you have to adopt a liberal management style so that labor and management cooperate and share.

Liberal management

Kan's two companies (see the accompanying article) both stress employee welfare, including bonus and employee stock programs. His computer company even has a nursery school so employees don't have to worry about their kids being left home.

The management at Derlon Textile also is careful about employee happiness and welfare. "We always maintain a friendly attitude toward employees and show respect for their ideas. If there is a problem, we communicate and listen." The main concerns for Derlon right now are wage levels and productivity. They recognize that achieving economies of scale will entail moving toward automation.

In terms of sales, the company has also built up to today's scale step-by-practical-step. "With so many things to do, it was difficult to know even where to begin. I almost didn't survive these last two years." In the past five years of market development, managers have traveled an average of 10,000 kilometers per month drumming up business. Derlon handles everything itself, from importing materials to production, marketing, and transport. That is why they decided to set up in centrally-located Ladysmith. Another reason they chose a relatively small town was the government's attractive incentives under the "decentralized industrial zone" plan.

Diplomatic aftershocks

Cape Town, which has been called the third most beautiful city in the world, also has a number of successful Taiwanese business people. Take for example Henry Yuan Hong-jen, an agent for seafood sales who also does supply and maintenance for deep-sea fishing fleets sand George Lin, who started by importing shoes and now has five retail stores. They all are very satisfied with their living environment. Despite worries about crime, they say that it is only necessary to be a little extra cautious to avoid it.

They have been more worried about what to do in the face of the breaking off of diplomatic relations between the ROC and RSA, and about the rapid changes in the political and economic environment in South Africa.

Take for example the "equal employment law" and "affirmative action." These require that the proportion of blacks and women in management level positions be increased within a limited time; companies with more than 50 people must have blacks in management positions. Yuan and Lin both strongly approve of the principle involved, but managers need education and experience, as well as training, so it will be a problem to try to rush things.

The decay in the larger environment, plus high unemployment, contribute to a serious crime problem, and may lead to a vicious cycle affecting economic recovery. Taiwan business people, who mainly deal in consumer goods, find it hard to be optimistic.

Tim H. Yang Tien-hsing, director-general of the Taipei liaison office in Cape Town, says that the concerns of Taiwan business people are not unfounded. Many larger investment projects were canceled after the break in diplomatic ties, and investment has fallen from a high of US$1.8 billion in 1989 to US$1.2 billion at present. The lack of diplomatic relations has far-reaching effects. For example, where crime involves Chinese organized gangs, there are no extradition treaties.

Diplomatic aftershocks

Cape Town, which has been called the third most beautiful city in the world, also has a number of successful Taiwanese business people. Take for example Henry Yuan Hong-jen, an agent for seafood sales who also does supply and maintenance for deep-sea fishing fleets sand George Lin, who started by importing shoes and now has five retail stores. They all are very satisfied with their living environment. Despite worries about crime, they say that it is only necessary to be a little extra cautious to avoid it.

They have been more worried about what to do in the face of the breaking off of diplomatic relations between the ROC and RSA, and about the rapid changes in the political and economic environment in South Africa.

Take for example the "equal employment law" and "affirmative action." These require that the proportion of blacks and women in management level positions be increased within a limited time; companies with more than 50 people must have blacks in management positions. Yuan and Lin both strongly approve of the principle involved, but managers need education and experience, as well as training, so it will be a problem to try to rush things.

The decay in the larger environment, plus high unemployment, contribute to a serious crime problem, and may lead to a vicious cycle affecting economic recovery. Taiwan business people, who mainly deal in consumer goods, find it hard to be optimistic.

Tim H. Yang Tien-hsing, director-general of the Taipei liaison office in Cape Town, says that the concerns of Taiwan business people are not unfounded. Many larger investment projects were canceled after the break in diplomatic ties, and investment has fallen from a high of US$1.8 billion in 1989 to US$1.2 billion at present. The lack of diplomatic relations has far-reaching effects. For example, where crime involves Chinese organized gangs, there are no extradition treaties.

Who will listen to us?

Moreover, more and more laborers are out of work because of Chinese competition, and the resulting anti-Chinese sentiment has also affected Chinese from Taiwan.

Tim Yang suggests: "The most urgent task for the ROC right now is to guide overseas investors to move toward higher tech, to distinguish between Taiwan and the PRC." The ROC could offer more information on local overseas markets to show what business opportunities exist, and also offer low-cost loans and technical assistance.

As Henry Yuan, who is also vice-director of the Taiwanese business association in Capetown, says: "The government has resources and expertise. If they simply had the determination, they could be of great help to us."

Naturally, larger firms like Derlon will continue to utilize their expertise to develop new products and markets. But they cannot control the larger environment.

"How long can we operate here? What can we do if something happens to one of our staff?" Liu Chiao-sung's questions reflect the concerns of all Taiwan investors in South Africa. Who can give them the answers?

Who will listen to us?

Moreover, more and more laborers are out of work because of Chinese competition, and the resulting anti-Chinese sentiment has also affected Chinese from Taiwan.

Tim Yang suggests: "The most urgent task for the ROC right now is to guide overseas investors to move toward higher tech, to distinguish between Taiwan and the PRC." The ROC could offer more information on local overseas markets to show what business opportunities exist, and also offer low-cost loans and technical assistance.

As Henry Yuan, who is also vice-director of the Taiwanese business association in Capetown, says: "The government has resources and expertise. If they simply had the determination, they could be of great help to us."

Naturally, larger firms like Derlon will continue to utilize their expertise to develop new products and markets. But they cannot control the larger environment.

"How long can we operate here? What can we do if something happens to one of our staff?" Liu Chiao-sung's questions reflect the concerns of all Taiwan investors in South Africa. Who can give them the answers?