Global Taiwan Brief – Volume 2, Issue 3
Taiwan: A Key Link in the Global Semiconductor Supply Chain
By: Russell Hsiao
Economic Priorities for Taiwan’s Nascent “New Southbound Policy” Office
By: David An
Parsing Signals from the 2016 Academic Forum of Cross-Strait Think Tanks
By: Jessica Drun and Yevgen Sautin
Emulating the “Golden Gate”: How Kinmen is a Potential Conduit Toward Peaceful Exchange Across the Strait
By: Oliver Thomas
Reassessing Taiwan’s Defense Industrial Policy: Learning from Norway and Singapore
By: Huan-kai Tseng
Taiwan: A Key Link in the Global Semiconductor Supply Chain
Russell Hsiao is the Executive Director of the Global Taiwan Institute and Chief Editor of the Global Taiwan Brief.
In President Barack Obama’s last remaining weeks in office, the President’s Council of Advisors on Science and Technology (PCAST)–an advisory group comprised of the nation’s leading scientists and engineers–released a report Ensuring Long-Term U.S. Leadership in Semiconductors. The objective of the 32-page report, published on January 6, was to “assess the challenges and opportunities facing semiconductor innovation, competitiveness, and security, and [outline] recommendations for action to address them.” In particular, the advisory group warned about the dangers posed by Chinese industrial policy in this sector and underscored Taiwan’s important role in the global supply chain for semiconductors.
According to the International Trade Administration, an agency under the Department of Commerce, Taiwan is the top market for semiconductor manufacturing equipment and the sixth largest US export market for semiconductors. Indeed, Taiwan’s semiconductor production industry boasted sales of approximately $71 billion in 2015. According to the World Semiconductor Trade Statistics, the global semiconductor market in 2015 was worth $335.2 billion, which means Taiwanese companies make up more than 20 percent of the global market share.
The PCAST report highlighted Taiwan, along with the United States, South Korea, Japan, and Europe, as current leaders of the global semiconductor industry. The group warned, however, that while China still lags behind the market leaders in most subsectors within the semiconductors industry, the Chinese government’s industrial policies—primarily through subsidies and zero-sum tactics—aimed to achieve global leadership through non-market means by 2030. Examples of China’s zero-sum tactics include regulations requiring customers to “buy only” from Chinese semiconductor suppliers, forced transfer of technology, theft of intellectual property, and collusion.
As noted by the PCAST report, semiconductors are not only essential for modern technologies such as computers, cellular telephones, solar panels, medical diagnostics, and self-driving cars, but they are also critical to defense systems, including the F-35 Joint Strike Fighter and the Humvee. The Congressionally-mandated US-China Security and Economic Review Commission pointed out in its 2016 Report to Congress that “[s]ince 2014, China-headquartered firms have proposed or finalized more than 30 mergers and acquisition deals in the semiconductor industry, totaling nearly $20 billion.” Ostensibly in response to China’s mercantilist industrial policy, PCAST called on the US government to enforce trade and investments rules by coordinating responses “with other countries to increase effectiveness and reduce the risk of retaliation.” The report highlighted Taiwan’s countermeasures, such as prohibiting and restricting “Chinese acquisition of Taiwanese semiconductor technology by not approving any mainland Chinese acquisitions of, or investments into, any domestic semiconductor firms. The Taiwanese government has also launched a public-private partnership with industry to co-invest in R&D.”
Another key, Taiwan-related recommendation of the report is for the United States to work with allies to strengthen global export controls and inward investment security. Specifically, the report recommended that:
The United States should work with like-minded partners to develop principles (insofar as possible) for acceptable and unacceptable market behavior, and to help build their administrative capacity to effectively implement appropriate controls and pursue needed investigations, since many countries are currently far less capable than the United States in this regard. Led by the Department of Treasury and Commerce, and by the Intelligence Community, this effort should provide global partners with technical assistance, training, and diplomatic support to identify risks and vulnerabilities and to remediate them.
The function of PCAST is to make policy recommendations in areas of science, technology, and innovation to the President, and to specific working groups, such as the PCAST Ensuring Long-term U.S. Leadership in Semiconductors Working Group that prepared this report, whose 19 members include leading American academic and business leaders. Recent reports endorsed by PCAST include: Science and Technology to Ensure the Safety of the Nation’s Drinking Water, Technology and the Future of Cities, and Accelerating U.S. Advanced Manufacturing, to name only a few.
Among other data points, the ITA report indicated that are a variety of export opportunities for US companies, which include “semiconductors (especially sensors and communications ICs) used in the Internet of Things (IoT),” which the report assesses will be a major demand driver over the next 10 years. These trends tracks with the current government’s Asia Silicon Valley Development Initiative—which centers on the IoT. Furthermore, under the Global Cooperation and Training Framework, which was signed between the United States and Taiwan in June 2015, the two sides have held two rounds of the Digital Economy Forum, which explored ways in which the United States and Taiwan can collaborate on high-tech entrepreneurship and education. As next steps, Washington and Taipei should deepen cooperation through this channel by addressing the pressing challenges highlighted by the PCAST report in the semiconductor supply chain, and coordinate and implement policies consistent with the recommendations of the PCAST report.
The main point: The PCAST report represents a positive recognition of Taiwan’s important role in the global supply chain for semiconductors. Washington and Taipei should deepen cooperation in this sector under GCTF by coordinating policies consistent with the recommendations of the PCAST report.
Economic Priorities for Taiwan’s Nascent “New Southbound Policy” Office
David An is a Senior Research Fellow at Global Taiwan Institute. He was previously a political military officer at the US State Department.
The “New Southbound Policy” (新南向政策) is a signature policy of Taiwan’s current Tsai Ing-wen administration, setting the direction to deepen Taiwan’s linkages among industries and societies with countries in Southeast Asia. What began as a DPP presidential campaign platform in 2015 is now a top government priority. Two months ago in November 2016, President Tsai declared that the New Southbound Policy had “entered a new operational phase,” with a New Southbound Policy office that will start work on June 15, 2017.
For President Tsai to add former Taiwanese Foreign Minister James Huang (黃志芳; 2006 to 2008) as the head of the New Southbound Policy task force and office is promising and shows that this policy office will have teeth. What does it mean for this New Southbound Policy to enter a new operational phase? In particular, what should the New Southbound Policy Office focus on as its top economic priorities, and what can it learn from others’ experiences in advocating for businesses overseas?
Considering Taiwan’s track record, the most promising direction for Taiwan’s businesses is to set up manufacturing operations in the region. In support of Taiwan’s businesses, two of Taiwan’s stated economic goals in the New Southbound Policy include making concrete progress on investment projects and expanding bilateral and multilateral partnerships. These will occur in a context of political, cultural, and educational events and activities throughout the region, with a focus on ASEAN countries. To achieve these goals, Taiwan will especially look to second generation immigrants of Taiwan descent in the region as the best connectors in this effort.
The Pou Chen Corporation (寶成工業股份有限公司) is an archetype of Taiwan’s southward economic pivot. It is Taiwan’s largest manufacturer of athletic shoes for brands such as Nike, Puma, Adidas, and though it had expanded production in China in the 1980s, in recent years it has been increasing its output from factories in Vietnam and Indonesia. Countless other Taiwanese companies have the same story to tell, especially as the investment climate in China is becoming less favorable due to rising costs, more market access limits, less qualified human resources, inconsistent enforcement of laws, and an overall less welcoming atmosphere—which is even described in official US State Department reports. Looking South is an increasingly attractive alternative for Taiwan’s businesses.
In the macroeconomic picture, there is much room for growth in trade between Taiwan and the region, and the Tsai Administration has picked the right time. Development Bank of Singapore (DBS) economist Ma Tieying mentioned that, “China’s slowdown, rebalancing and rising wages are prompting Taiwanese firms to adjust overseas strategies … ASEAN markets are attractive, thanks to strong growth, low-cost labor, and ongoing reforms and economic integration.”
Furthermore, a quick comparison between Taiwan and South Korea shows Taiwan’s economic promise in South and Southeast Asia. In 2015, Taiwan exported $2.9 billion to India, while South Korea exported $12.2 billion; Taiwan exported $3 billion to Indonesia, while South Korea exported $7.8 billion in goods to Indonesia. As a fellow “Asian Tiger,” Taiwan’s economy, focused on high-tech electronics, is comparable to South Korea. Though South Korea currently has a stronger trade presence in the region, Taiwan’s advantage is that Taiwanese businessmen and women carry over skills from more abundant experience managing expansive factories outside of Taiwan, in the PRC. There have been over a million Taiwanese businessmen and over 100,000 Taiwanese invested businesses in the PRC, compared to around 75,000 long term South Korean residents and 10,000 South Korean companies in the PRC.[1] Taiwan’s business management experience outside of Taiwan in the PRC is tenfold that of South Korea. Taiwan’s asset is not only its growing trade presence throughout the Asia region, but its valuable experience managing companies from a distance, and the numbers show there is room to grow.
In addition to Taiwan’s stated goals of overseas investments and partnerships, this renewed focus toward the South should be accompanied by greater official assistance to Taiwan’s businesses in the region. Taiwan already runs an impressive network of de facto embassies throughout the Asia region, officially known as cultural and economic resource offices. Through these offices, Taiwan’s officials can improve assistance to lobby local governments on behalf of Taiwan’s businesses, and perhaps expedite business permits and resolve legal disputes.
Taiwan can also borrow lessons from US government assistance to American businesses overseas. When the stakes for an American business are high, as in the billions of dollars for an international public tender, then it is no longer a private corporate interest but becomes a US national interest to win the international competition. At that point, the US government advocates on behalf of that company in an effort for the United States to win the business over other competitor countries. When multiple US companies are involved in the same competition, then the US government can only send its diplomats to perform “generic” advocacy, so it cannot favor one specific US company in a bid. However, when only one US company is involved, then the US can perform exclusive advocacy to put the entire US government behind that one company in that one bid.
Official advocacy is coordinated through the US Department of Commerce, which runs foreign commercial service offices at the US embassies. US State Department diplomats and officials in other departments like the Department of Defense also fully support US interests in major international business competitions. When the US government officially supports a US business, then the appropriate talking points will be included in the various meetings with relevant foreign counterparts to encourage a decision that favors US business. Taiwan could do the same, or heighten current advocacy in support of its businesses overseas through the New Southbound Policy.
From my personal experience working at the US Department of State, Japan’s 2011 multi-billion dollar F-X fighter aircraft competition comes to mind. As part of that effort, I travelled with a State Department and Department of Defense delegation to US Pacific Command in Honolulu to meet with Japanese counterparts to negotiate and advocate for US aircraft. With the encouragement of former US Assistant Secretary of Defense Chip Gregson and other senior officials, Japan ultimately selected the US’ F-35 aircraft over other European alternatives.
Will Taiwanese businesses in the Southeast Asia region manage to capitalize on existing opportunities to set up manufacturing operations? Furthermore, will this pivot south deliver the expected benefits for Taiwan’s economy; create jobs for Taiwan’s youth, shore up Taiwan’s new plans to be the center of an Asia Silicon Valley, or in any way serve as a practical alternative to the past trend of investing heavily in the People’s Republic of China? Time will tell, and for the current Tsai government’s sake it would hopefully happen before the next election in 2020.
Taiwan’s populace will be looking for the tangible results of the New Southbound Policy, and Tsai’s Administration has just a few years to deliver. As Bill Clinton famously said, elections are primarily determined by the state of the domestic economy, just before he won in the 1992 election against George H.W. Bush. Tsai’s prospects for re-election, and the economic future of Taiwan, will look much brighter if she can prove that a renewed and strengthened economic and diplomatic policy of looking south is beneficial.
Subsequent articles on Taiwan’s New Southbound Policy will address how Taiwan can work with the United States in new ways in Southeast Asia, how it can deal with China’s influence in the region, the political and economic challenges that Taiwanese manufacturing businesses will face, and recommendations on how to overcome these challenges.
The main point: There is great promise in Taiwan’s New Southbound Policy to uncover new trade opportunities, and improve Taiwan’s economy, but Tsai has just a few years to prove it.
[1] David Shambaugh, China Goes Global (Oxford, UK: Oxford University Press, 2013). Page 100.
Parsing Signals from the 2016 Academic Forum of Cross-Strait Think Tanks
By Jessica Drun and Yevgen Sautin
Jessica Drun is a Bridge Award Fellow at the National Bureau of Asian Research. She was previously a Boren Fellow at the National Taiwan University. The views in this essay are the author’s own and do not necessarily reflect the position of any organization with which she is affiliated. Twitter @jessicadrun.
Yevgen Sautin is a Chinese history Ph.D. student at the University of Cambridge where he is a Gates Scholar. He was previously a Boren Fellow at the National Taiwan University. The views in this essay are his own. Twitter @YSautin
On November 30, 2016, Zhou Zhihuai (周志懷) stated in his opening remarks at a cross-Strait forum that China does not oppose finding a “creative substitute” to the “1992 Consensus” so long as it affirms that both sides belong to “One-China.” Zhou is the Executive Vice President of the National Society of Taiwan Studies (全國台灣研究會執行副會長) and the current head of the influential Chinese Academy of Social Sciences (CASS) Institute of Taiwan Studies (ITS) (中國社會科學院台灣研究所).
The gathering in which the suggestion was made, the Academic Forum of Cross-Strait Think Tanks (兩岸智庫學術論壇), is a multi-day conference held in China, founded by CASS, and co-hosted each year by Chinese and Taiwan academic institutions and think tanks.[1]
The Academic Forum was established and first convened in June 2014, to mark the 30th anniversary of the founding of CASS’s Institute of Taiwan Studies and aimed to build upon 30 years of progress in cross-Strait relations. A major impetus for the forum was the positive momentum generated by the meeting in February 2014, between the Minister of Taiwan’s Mainland Affairs Council Wang Yu-Chi (王郁琦) and the Minister of China’s Taiwan Affairs Office (TAO) Zhang Zhijun (張志軍)–the first official contact between the two sides since the Chinese Civil War.
The inaugural forum paid homage to this landmark event by featuring opening remarks from Li Yafei (李亞飛), Vice Chairman of the TAO and Vice President of its corresponding Association for the Relations Across the Taiwan Straits (ARATS). He commended the importance of the research undertaken by CASS’s Institute of Taiwan Studies and the forthcoming discussion among the participants and think tank representatives. Li went on, however, to espouse the importance of the so-called “1992 Consensus” and opposition to Taiwanese independence as the foundation of peaceful development across the Taiwan Strait. CASS Secretary General Gao Xiang (高翔) reiterated these views, asserting more explicitly that the then-opposition Democratic Progressive Party’s (DPP) “pro-independence stance” served as the primary impediment. Accordingly, the conference discussion centered on deepening cross-Strait cooperation within the framework set by the then-ruling Kuomintang (KMT) and the People’s Republic of China.
As the DPP swept the local elections in 2014 and the parties mobilized for Taiwan’s 2016 presidential elections, the October 2015 conference appeared to take on a softer tone, with greater consideration of the future of cross-Strait ties under a likely DPP administration (though the milder rhetoric may also have been due to less fanfare surrounding the event and the absence of government officials). Zhou, who became ITS director in 2013, called for the DPP to develop a “new model (新模式)” for cross-Strait relations, while representatives from KMT-leaning think tanks questioned whether the DPP could formulate an acceptable “alternative (替代方案)” to the “1992 Consensus” and noted the need to “stretch and even go beyond (延伸甚至超越) it.” Interestingly, the focus—at least according to publically available sources—was on what a future Tsai administration would do, rather than on China’s response.
Thus, Zhou’s recent hinting that the PRC would be willing to find a new formulation to serve as the basis for cross-Strait relations marks a shift. While other Chinese scholars and officials have before called for an acknowledgement of the “historical fact” of the 1992 Consensus and acceptance of its “core connotations” (the “One-China” principle) in lieu of outright acceptance of the Consensus, Zhou’s statement appears to be the first to explicitly indicate openness to an alternative formulation. In his speech, Zhou first reiterated the official government position on Taiwan, as outlined by Li and Xiang in their remarks. Beyond this baseline, however, Zhou noted that there exists a possibility for “creative” new substitutions for the existing framework, though this flexibility has its limits and should not be seen as a radical departure from existing policy.[2] Zhou explicitly stated that both sides of the Strait belonging to “One-China” is a sine que non for cross-Strait relations and policy. Thus, “two Chinas” or “one China, one Taiwan” policies remain anathema for Beijing.
His statement naturally raises the question of whether he is relaying the views of the Chinese government. Although there was speculation that he would be removed as head of the CASS Institute for Taiwan Studies for favorably analyzing Tsai’s inauguration speech, which did not explicitly affirm the “1992 Consensus”, Zhou’s retention of the role, his statements, and continued public involvement with cross-Strait issues suggests that he still enjoys the official confidence of Chinese authorities. Further, CASS, falls under the organizational framework of the State Council, and is a source of high-level briefing papers for senior policy makers on various foreign and domestic policy issues including Taiwan Studies.
Hence, Zhou’s remarks may be interpreted as a signal by Beijing that it may be interested in reversing the recent deterioration of cross-Strait relations or at least halting the negative trajectory. Supporting this assertion, a Taiwan participant noted that Zhou called for “efforts to eliminate cross-Strait pressure points” (著力消除兩岸壓力點). Such a move could be motivated by several factors, ranging from the broad strategic uncertainty that has beset the region in the lead-up to Trump’s inauguration to perceived Japanese militarization amidst a deepening relationship between Taipei and Tokyo. Indeed, State Council Member and former Foreign Minister, Yang Jiechi, recently traveled to New York to meet with the incoming US National Security Advisor Michael T. Flynn. Yang is believed to enjoy the personal confidence of Xi Jinping. Given the many flashpoints in the region and heightened volatility due to greater uncertainty, the Chinese government may be reassessing its strategy writ large. It is likewise too soon to tell if the December 2, 2016, Trump-Tsai call prompted another strategic reassessment.
If Beijing is indeed amenable to an alternative formulation to the “1992 Consensus”, then this shows a maturation of its approach to Taiwan—specifically in how it engages with the DPP. Following the tumultuous years under previous DPP President Chen Shui-bian, the PRC government appears to have applied resources to remain engaged with the DPP and its affiliates during the KMT administration through unofficial channels, such as think tank conferences like CASS’s Academic Forum, in order to keep abreast of DPP perspectives and to convey Chinese views. Zhou’s statements highlight not only the continuation of these efforts—specifically as official channels between Taiwan and China remain closed—but also represent a means for China to draw back rhetoric to fit strategic needs without committing to a very public and potentially risky policy shift at the official level. Despite these steps, the Chinese Communist Party continues to be clear in its preference for the KMT over the DPP as its negotiating partner across the Strait. Zhou was keen to emphasize that, in addition to continued adherence to the “One-China” principle, the two sides must not dismiss or devalue the historic role of the KMT in forging cross-Strait relations, particularly during the previous Ma Ying-jeou administration. On a related note, sources on the Taiwan side say that CASS’s Academic Forum did not extend invitations to DPP-affiliated scholars or think tanks, though it did seek pan-green individuals who later debriefed the party and called for future inclusion of DPP think tanks at the conference.
Furthermore, the onus for restarting relations and for devising a “creative substitute” is clearly still on Taipei. It remains to be seen if such an alternative is possible. To the PRC the basis for relations remains the “One-China” principle, while the DPP’s party platform asserts that Taiwan is “sovereign and independent” and “does not belong to the People’s Republic of China;” these seem to be inherently contradictory and incompatible.
Finally, the degree of flexibility in China’s position should not be exaggerated. Zhou himself was adamant that neither “extreme” nor “flexible” Taiwan independence will be tolerated and that China is willing to fight and shed blood over the island.
The main point: Zhou Zhihai’s comments show the potential for an alternative cross-Strait modus operandi, though it remains to be seen if the central government will adopt this strategy from its toolkit and whether the DPP is capable of coming up with a mutually acceptable formulation.
[1] For reference, the inaugural Academic Forum of Cross-Strait Think Tanks only included Chinese organizations as co-sponsors. In 2015, Taiwan’s Foundation on Asia-Pacific Peace Studies (亞太和平研究基金會) and 21st Century Foundation (財團法人21世紀基金會)—both blue or blue-leaning think tanks—served as co-hosts. 21st Century Foundation joined again in 2016. See: http://cass.its.taiwan.cn/zjlc/sy/201409/t20140904_7220489.htm, http://2011csr.xmu.edu.cn/Taiwan/Journalism?id=a653b09f-ec44-4176-a53d-fe745e01c93c, and http://news.sina.com.cn/o/2016-11-30/doc-ifxyawxa3181783.shtml.
[2] CCP’s 2007 17th National Congress used almost identical language regarding the need for Taiwan to recognize the “One China” principle as Zhou Zhihuai used in his speech: 「台灣任何政黨，只要承認兩岸同屬一個中國，…，什麼問題都可以談。」
Emulating the “Golden Gate”: How Kinmen is a Potential Conduit Toward Peaceful Exchange Across the Strait
Oliver Thomas is a recent alumnus of a State Department funded Fulbright Grant where he taught and conducted research on Kinmen, Taiwan. He currently works for the Foreign Policy Initiative’s Center for Military and Diplomatic History.
Tien Hung-Mao (田弘茂), chairman of Taiwan’s semi-official Straits Exchange Foundation (SEF, 海峽交流基金會) made a trip to Kinmen Island (金門) in late December 2016 to discuss future commercial engagement with China. During the visit, he maintained that Kinmen will serve as a “model spot for peaceful cross-Strait relations.” Both the People’s Republic of China (PRC) and Taiwan possess a keen sense of how history works to influence their strategic endgames, and America should continue to participate in this process to better understand Beijing’s intentions and strategy in the Strait, and the Chinese Communist Party’s (CCP) initiative to uphold the so-called “1992 Consensus.”
In short, by viewing Kinmen as a “middle ground,” the United States may have a better indication of what cross-Strait relations will look like under the Tsai presidency. The Taiwan Strait crises of the Cold War era are not mere isolated points in the evolution of cross-Strait affairs. In fact, the tiny overlooked islands that served as contentious battlegrounds during the Chinese Civil War remain at the nexus of cross-Strait dialogue.
Kinmen is a small island only two kilometers off the coast of the PRC. Kinmen, directly translated from Mandarin, means “Golden Gate,” and stands as a historical reference to the island’s geo-strategic and commercial importance. When assessing cross-Strait relations in 2017, the island’s reputation will precede its role as a potential bellwether for cross-Strait relations. On the beachhead at PRC-administered Xiamen (廈門), there is a billboard reading, “和平統一, 一國兩制” which in English says, “Peaceful unification, one country made up of two systems.”
Looking through binoculars from Kinmen, one can easily make out the PRC political propaganda, reminding residents of the danger their neighbor poses. In opposition to the PRC assertion of sovereignty, Xiao Jinmen, also known as “Lesser Kinmen” (小金門) houses a similar sign that retorts on behalf of Taiwan, “三民主義統一中國” translating roughly to “Three People’s Principles to Unify China.” The Three People’s Principles became the philosophical cornerstone of the ROC’s counterattack to take back the Chinese mainland after the KMT fled to Taiwan, and remains influential with regard to Taiwanese political identity.
The cross-Strait signage raises interesting questions involving Chinese and Taiwanese national identity and political agency on the larger global stage. The propaganda phenomena allude to the importance of geography when understanding cross-Strait relations. Moreover, Kinmen serves as a distinct symbol of Taiwan’s dynamic national identity and how identity affects policy. Indeed, the small island still continues to influence cross-Strait political economy as tensions ramp up in the South China Sea. Though military engagements are currently absent, the prospect of peace remains uncertain. However, a tumultuous war-torn past could give way to economic and cultural exchange, as both China and Taiwan attempt to achieve geopolitical ends in the region through different means, as seen with the 2010 Economic Cooperation Framework Agreement.
Leading up to the so-called “1992 Consensus,” bilateral initiatives to curtail military confrontation began in dialogue between the Association for Relations Across the Taiwan Straits (ARATS) and Straits Exchange Foundation (SEF). These talks sought to establish cooperative policy to combat crime across the Strait while facilitating the exchange of goods, mail, and citizens. Almost ten years later, President Chen Shui-bian made Kinmen a vital feature in bilateral agreements with the PRC in his proposed “Mini Three Links” (小三通) agreement and “Active Opening” policies. Such legal moves opened the floodgates for a crossflow of PRC-Taiwan culture, goods, and people. Though Taiwan sought to protect strategic industries such as semiconductors from global market competitors while abiding by the Wassenaar Agreement to terminate dual-use technology sales to China, the subsequent President Ma Ying-jeou worked to liberalize cross-Strait exchanges after his election in 2008. The “Mini Three Links” had the potential to become the “Big Three Links.”
Now, in 2017, Kinmen facilitates a relatively peaceful bilateral relationship with the PRC to bolster its economy, ensure a flow of natural resources, and maintain connections with relatives who live across the Strait. Kinmen relies on both the PRC and Taiwan for entrepreneurial ideas, kaoliang liquor consumers, tourist income, and water supply. The Kinmen government seeks to increase transportation to and from Xiamen by ferry and through the construction of a new bridge. With increasing movement, Kinmen hopes to raise incentives for investment from Chinese private businesses. Kinmen’s annual marathon and natural habitats also draw numerous Chinese tourists, students, and investors across the strait, thereby facilitating future economic connections. Indeed, investment traffic has continued to increase even after President Ma left office.
However, Kinmen is seen as a political outlier and maintains a distinct identity that is not always congruent with national interests. Still, this disconnect may prove useful as Taiwan comes to terms with the implications of a pluralistic identity and seeks to moderate tensions from national parties vying for extreme cross-Strait liberalization or restriction. Commercial interconnectedness in the Strait will aid Taiwan’s initiative to achieve a more level diplomatic playing field with Beijing while seeking to establish political independence, at least in theory. Kinmen serves as a prime site in which leaders and students from both the PRC and ROC can engage with one another to resolve current tensions between Tsai and Xi. Since a meeting is unlikely to be in the cards for Tsai and Xi, Taiwan could benefit from using Jinmen as a sort of economic and cultural recon center to get a sense of Beijing’s geopolitical intentions.
Recurring military conflict and changing national identities have, in a sense, shifted the political climate between Taiwan and China, respectively forcing them to reflect on their decisions to engage in warfare while also noticing the long-term benefits of regional knowledge and stability for Taiwanese market growth. If eventual independence is the desire of the Taiwanese people, president Tsai could harness the soft power benefits provided by Kinmen.
Looking past the likely demise of the Trans Pacific Partnership, the United States may seek to understand cross-Strait investment and entrepreneurial exchange through the lens of Kinmen. Indeed, this “Kinmen model,” as Tien alluded to, has the potential to offer insight into Beijing’s approaches towards dealing in the Strait, and provide an avenue to defuse the ongoing political tensions. As difficult as it may be for both entities to swallow their political pride, the late American historian Nancy Bancroft Tucker put it best: “Ultimately, Beijing and Taipei will reach an acceptable agreement only through direct dialogue.”[1] The United States has an opportunity to act as a responsible conduit in facilitating this dialogue.
The main point: The “Kinmen model” has the potential to offer insight into Beijing’s approaches towards dealing in the Strait, and provide an avenue to defuse the ongoing political tensions.
[1] Nancy Bernkopf Tucker, Strait Talk: United States-Taiwan Relations and the Crisis with China (Cambridge: Harvard University Press, 2009), 277.
Reassessing Taiwan’s Defense Industrial Policy: Learning from Norway and Singapore
Dr. Huan-Kai Tseng received a Ph.D. in political science with a focus on political economy and applied quantitative methods from the George Washington University.
Promoting the development of domestic defense industry has been central to President Tsai Ing-wen’s policy agenda, and the current billion-dollar question is how to successfully implement it. As valuable lessons for Taiwan’s future direction, this brief assesses the strategies of several small states, such as Norway and Singapore, which have been relatively successful in carving out their own niches in the defense export market, analyzes their advantages and risks, and concludes with recommendations.
This analysis builds on Global Taiwan Brief articles by Global Taiwan Institute Senior Research Fellow David An’s series of articles on Taiwan’s indigenous defense industry, and on the response from former United Kingdom Representative to Taiwan, His Excellency Sir Michael Reilly’s, which provided insight on Taiwan’s indigenous submarine program.
Small states intrinsically lack the kind of capital and industrial capability necessary to sustain complex weapon programs. Therefore, developing a domestic defense industry based on high levels of indigenous technology may be a challenge, and the prospect for arms exports—as mentioned in the Tsai administration’s current “indigenization” discourse—could be even dimmer. Nevertheless, several policy recommendations follow.
In its Defense Policy Blue Paper No. 9 (國防政策藍皮書第九號報告), the ruling Democratic Progressive Party (DPP) pledged to “utilize an approach combining international cooperation and indigenous production” to build up a next-generation military and invest 70 percent of added spending toward “indigenous defense research and development.”[1] Investing in Taiwan’s indigenous weapons systems would lead to arms exports, which generate profit, and create jobs back home in Taiwan. Indeed, the DPP has mentioned that it expects its defense industry to generate US $7-12 billion dollars along with 8,000 new jobs.
However, how much foreign content can Taiwan’s equipment contain to still count as an indigenous platform? Is Taiwan’s weapon system considered indigenously produced if it contains 100 percent Taiwan-developed content and intellectual property (IP), or 80 percent, or even 51 percent Taiwan IP with the rest constituting foreign technology content? This study suggests that Taiwan will face more challenges if it defines indigenous development as closer to the 100 percent level of unique Taiwan IP and technology content.
David Versus Goliath
Today, the global defense industry represents the culmination of the latest applied technology, industrial prowess, and the depth of capital market—ambitions that are widely shared by many developing countries. However, there are small states that are not endowed with these conditions but remain successful at positioning their defense industries in the global defense market. This is because, rather than creating their own weapon procurement programs, they adopted a variety of collaboration strategies to compensate for their disadvantage in economies of scale while amplifying their strength in innovation.
Singapore and Norway, whose economies are comparable in size to that of Taiwan, are good examples of agile latecomers that emerged successfully in the entrenched oligopolistic defense export market. Their respective national champions, Singapore Technologies Kinetics (ST Kinetics) and Kongsberg Defence & Aerospace (KDA), employ a mix of collaboration strategies in order to enhance their competitiveness with regard to domestic and international weapon procurement programs. These companies reported US $4.4 billion and $17 billion in revenue respectively, of which more than 80 percent came from international sales;[2] both have become rising US Department of Defense contractors and collaborate widely with US defense conglomerates. Taiwan could choose to do the same.
Case Studies: Singapore and Norway
Singapore manufactures a complete line of wheeled and tracked vehicles and self-propelled howitzers (SPH), and many of them utilize proven foreign platform designs and are made to US and NATO specifications. With the Terrex wheeled armored vehicle, Singapore sourced the original chassis design from Timoney Technology Ltd. of Ireland. Singapore initially bonded its partnership with Timoney by acquiring 27 percent of its shares and collaborating to submit their latest Terrex 3 design for the Australian Land 400 phase 2 competition. In a series of strategic steps, Singapore gained full control over the Terrex chassis design, then deftly switched partners by collaborating with US-based Science Applications International Corporation (SAIC) to bid for the US Marine Corps’ Amphibious Combat Vehicle (ACV) program. Singapore also licensed a Turkish company to produce licensed-built Yavuz armored vehicles for the Turkish armed forces. Through a few strategic business moves, a smaller state like Singapore made significant market share gains and profited in the international defense industry.
Some of Norway’s defense industries had humble beginnings as small gunsmith workshops but have now come be known as large, innovative, and profitable companies, specializing in compact missiles and sensor technologies. Norway’s Penguin anti-ship missile achieved early international success for its compact design and the ability to be launched from helicopters at a time when large ship-borne anti-ship missiles were the norm. Norway continued its lead in this niche market with the development of Naval Strike Missile (NSM)—which Norway later teamed with Raytheon (a US defense conglomerate) to develop into the Joint Strike Missile (JSM) that will be carried by the F-35 multirole fighter. In addition, KDA sourced the combat-proven AIM-120 air-to-air missile from its American partner, Raytheon, and integrated them with indigenously developed command and control systems, then later teamed with Raytheon to market and distribute this weapons system to other foreign customers. In the field of maritime systems, the KDA led, without being the prime contractor for the combat system and platform, the development of the MSIFC Multi-Sensor Integration and Fire Control (MSIFC) for the nation’s Spanish-built Fridtjof Nansen-class frigates. There are countless other examples of how Norway cooperated with foreign companies to develop its own defense industry, and profited together through technological and design innovation, and opening up new markets for jointly-produced equipment.
The country cases discussed above suggest that the seemingly entrenched global defense market remains plausibly open to small and medium-sized latecomers. The Singaporean case shows that sourcing and subcontracting, combined with flexible regional technology alliance strategies, allow small states to overcome a lack of experience with armored vehicles R&D and quickly emerge as an armored vehicles exporter. The Norwegian case tells the story of a small firm taking advantage of its technological edge to gain a foothold in compact missiles and system integration. In addition, both the ST Kinetics and KDA set up American subsidiaries to expand their business operations in the world’s largest defense market.
Policy Recommendations for Taiwan
These are certainly useful policy implications for the Tsai administration to consider. For example, the Ordnance Readiness and Development Center of Taiwan (兵整中心) should consider teaming with their more experienced foreign counterparts, such as the ST Kinetics and General Dynamics Land System (the US contractor that produces Stryker vehicles), to source more reliable, combat-proven hull designs (such as transmission and hydraulic drive systems) to continue to improve the indigenously developed CM-32 “Clouded Leopard” family of 8×8 wheeled armored vehicles. By the principle of complementarity, the Ordnance Readiness and Development Center can also team with foreign defense conglomerates specialized in advanced weapon modules and armor packages, market the CM-32 vehicle as a modular weapons “platform” under their partners’ brand names via licensing, and utilize their marketing and distribution channels to promote sales abroad.
Similarly, the National Chung-Shan Institute of Science and Technology (NCSIST) could exploit its comparative advantages in the fields of seeker modules, missiles, C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance), multi-beam and phased array radar technology, actively building technological alliances or teaming with foreign partners to explore further applications of these technologies (such as the Nulka case has suggested) or integrate these technologies as subsystems into foreign partners’ weapon systems. Conversely, the NCSIST should also consider sourcing foreign platforms, modifying them with indigenously developed C4ISR systems to develop new weapon systems that suit Taiwan’s unique tactical needs, then exporting them through foreign partners’ marketing and distribution channels. As global defense spending has gradually shifted away from traditional platforms to areas as C4ISR, targeting, and precision guidance, this represents a promising point of market entry for Taiwanese defense industries.
Finally, breaking into the US market is the key for promoting international sales. Recent collaboration between Taiwan’s 205 Armory and Wolf Performance Ammunition in marketing the Taiwanese-made T91 assault rifle in the US civilian market is an encouraging small step in this regard. But as sales operations expand, it may be necessary for Taiwanese defense industries to set up fully-owned US subsidiaries to manage local operations.
The main point: This article presents strategies for promoting indigenous defense industries and export from a comparative perspective, analyzes their benefits and risks, and offers policy recommendations.
[1] Defense Policy Advisory Committee, New Frontier Foundation, “Defense Policy Blue Paper No. 9: Taiwan’s Military Capacity in 2025” (Taipei, May, 2015), 7, 23.
[2] In 2015, sales in the North American market accounted for 23.7% and 27% of revenue for ST Kinetics and KDA, respectively (author’s calculation).
