Introduction for Making Money

Introduction

It is difficult, when they are a world away from each other, to understand the connection between American consumers and Asian manufacturers. What most Americans hear is the unfortunate rhetoric about how some named Asian country is undermining the US economy, how that country is using its cheap labor, low-priced products, and manipulated exchange rates to capture if not destroy American jobs. That named country is currently China. Thirty years ago it was Japan. What Americans do not learn are the actual details of events and policies leading to the decline of American manufacturing jobs and to the huge and growing trade deficit that the United States has maintained with a series of Asian countries since the 1980s. Despite so much information being available in the internet age, Asia, to most Americans, remains a fog. Asian manufacturers are usually nameless and faceless, and Asian states are mysterious, portrayed as monolithic, often authoritarian, regimes that somehow conspire against the best interests of the United States.

Caricatures aside, the decline in American manufacturing is real enough, but the causes of that decline are less than obvious. As we will show in this book, the changes in both the US and Asian economies are parts of larger changes in the global economy. We push the beginnings of these changes to 1954, when in order to encourage investment in manufacturing, the US Congress passed tax-reform legislation allowing for accelerated depreciation on the construction of “property used in . . . trade or business,” for “buildings as well as machines.”⁴ On the books for the next thirty years, this new tax law produced an unintended boom in the construction of shopping centers. When the legislation was passed, there were fewer than 500 shopping centers of all sizes in the entire United States, of which no more than two dozen qualified as major malls.⁵ By 1970, after just fifteen years, the United States had over 10,000 shopping centers and hundreds of major malls. By that date, a revolution in retailing was well under way. This tax-reform bill yielded a result opposite to what Congress intended. It not only produced a precipitous and permanent decline in the contribution of manufacturing to the US economy but also kicked off the late twentieth-century transformation of the global economy. This transformation centered more on selling products than on manufacturing them, an approach to making money that we identify as demand-led capitalism. This book is about that transformation, a capitalist transformation that has engulfed the world since the end of World War II and that has left no part of the globe untouched.

We tell the story of this transformation from the perspective of one of the most important groups of capitalists leading the change: Taiwanese businessmen and businesswomen. Starting in the late 1960s, Taiwanese businesspeople developed enduring relationships with large American (and later European) retailers, such as Walmart and Target, and factory-less merchandisers, such as Nike and Apple. By the 1980s, the Taiwanese had become the most prominent contract manufacturers in Asia, and they remain so today, nearly forty years later.

Most writers explaining East Asian industrialization do not differentiate Taiwan from the four other Asian countries (Japan, South Korea, Hong Kong, and Singapore) that, by adopting an “export orientation,” experienced rapid economic growth in the 1970s and 1980s. From afar, these economies may look similar, but up close, they are quite different.

Equally important, most of these writers confuse economic development and capitalism. Economic development is a term that applies to countries; theories of economic development put forward accepted wisdom about how specific national economies grow or fail to grow and by how much. Capitalism is a term that applies to the activities of firms methodically interacting in markets for the purpose of making money. Most writers give much of the credit for the success of post–World War II East Asian economies to the economic policies crafted by state planners, that is, to theories of economic development. Although national governments and national policies are important, what these writers miss are the connections among firms that rationalize, on a global scale, the methodical pursuit of making and selling products for a profit. This dimension incorporates a story about the growth of, and tremendous changes in, post–World War II capitalism.

During the past thirty years, we have interviewed over 800 owners and managers of Taiwanese firms in both Taiwan and China, and followed some of them as they, successfully or unsuccessfully, rode the waves of the global economy for the last three decades. We interviewed some of them as many as ten times during that period. These Taiwanese businessmen and businesswomen are among the unheralded leaders of the new global economy. One of the most important characteristics of the global economy today is the centrality of retailers and merchandisers that contract most or all of their manufacturing from firms they do not own. We use the term big buyers to identify these retailers and merchandisers,⁶ and we call the firms where they place their orders contract manufacturers. For most of the last fifty years, Taiwanese businesspeople have been responsible for a sizable percentage of contract manufacturing worldwide. Just how large this percentage is varies over time, but we can get some sense of it by knowing that, in 2012, ten of the top twenty exporters from China were Taiwanese companies, all contract manufacturers.⁷ Another indication of Taiwanese companies’ global prominence is the 2013 Manufacturing Market Insider’s list of the world’s top contract manufacturers, showing that Taiwanese businesspeople own three of the top five and four of the top ten companies on that list.⁸ By contrast, Mainland Chinese own only one of the top ten firms on the list, Americans three firms, Canadians one, and Singaporeans one. Even the most prominent Taiwanese companies on these lists are little known outside Taiwan because they do not sell products under their own names, but rather are the main manufacturers for major US merchandisers of consumer electronics, such as Apple and Dell. Other major contract manufacturers in Taiwan produce a huge array of products, including most of the world’s footwear and many of the private label goods sold by major American retailers, such as Walmart, Target, Costco, and Home Depot.

The “Made in China” label that identifies China as these products’ country of origin does not tell us who owns the firms making those products, and many of those firms are Taiwanese owned. The largest Taiwanese contract manufacturers in China are only the tip of a huge iceberg. There are around one million Taiwanese living in China, ⁹ most of whom are associated with the 90,000 plus Taiwanese firms currently registered in China.¹⁰ Most of these firms are engaged in contract manufacturing, either assembling the final product or making some component that will go into a final product or providing a service to firms making those products. If we add all the exports produced by Taiwanese firms in China to the exports from firms in Taiwan, then Taiwanese businesses make up the largest single group of contract manufacturers in the world.

Taiwan’s entry into contract manufacturing began in the late 1960s. From the outset of industrialization in Taiwan until around 2000, the value of Taiwan’s exports to the United States exceeded the value of South Korea’s exports, even though South Korea has more than twice the population, geographical size, and gross national product (GNP).¹¹ By 2000, however, most of the largest Taiwanese exporters had moved some or all of their manufacturing operations to China, which allowed South Korean exporters, most of whom maintained their primary manufacturing plants in South Korea, to surpass Taiwan’s level of exports. After the 1980s, however, the largest business groups in South Korea, namely Samsung, Hyundai, and Lucky-Goldstar (LG), moved away from contract manufacturing and began to build their own brand names, with products they designed, manufactured, and merchandised. Still, were we to total all the exports of Taiwanese-owned firms, regardless of their location, this sum would certainly exceed the total exports of Korean-owned firms, which include cars from Hyundai and smartphones from Samsung and LG.

Taiwan is a small and rather odd location for businesspeople who are so globally prominent. It is a mountainous island located off the southeastern coast of China. Its population is slightly over 23 million, smaller than New York State’s, somewhat larger than Texas’s, and a dwarf beside Mainland China’s 1.3 billion. Since the 1970s, the global community of nations has not recognized Taiwan as an independent country. That was when nations around the world, including the United States, normalized their diplomatic relations with Mainland China. Because China claims Taiwan as one of its provinces, and because China requires all nations with which it has diplomatic relations not to recognize Taiwan as an independent state, Taiwan became a political isolate. Unlike the Vatican and Palestine, Taiwan has not been granted even the status of an observer state by the United Nations. Nonetheless, in all other respects, Taiwan is an independent country, and among the most economically advanced and politically progressive countries in Asia.

How did people from this small country become so integral to the global economy in the second half of the twentieth century? That is the question we answer in this book. An essential part of that answer is the story of global capitalism itself in the last sixty years, but another, no less important part of the answer includes some special characteristics that allowed Taiwanese businesspeople to create their own, very successful forms of contract manufacturing. These characteristics, mostly social in nature, shaped their fortuitous beginnings and gave them enough organizational flexibility to make money in a constantly changing global economy.

In the following pages, we introduce these characteristics with accounts of two businessmen who met very different fates in their quest to make money.

The Commanding General of Low-Flying Planes

The first time we met Lai Chuan-lin, in 1990, he told us, “I am the Commanding General of everything that flies in the United States under two hundred feet.” He laughed when he said this, but he was also serious. We stood in the showroom of his company, Thunder Tiger, located in an industrial park near Taichung, in central Taiwan. Examining model after model of remote-controlled, propeller-driven airplanes, Mr. Lai explained, “With the exception of one Japanese company, I supply all of the major toy companies in the US with almost all of the remote-control planes they sell. The Japanese-made planes may be better built and more expensive than mine, but my company commands the market.”

Since that first visit, we have returned to Thunder Tiger many times, and each time it seems like a new company. By the time of our second visit, in 1993, Lai had moved major portions of his manufacturing to Ningbo, in Mainland China, and in his factory in Taiwan, he had begun experimenting with new types of model airplanes. When we returned in 1994, he told us that the Mainland factory was turning out model airplanes at full capacity, and at his factory in Taiwan, he had developed a jet engine for his model planes and had begun making planes with these engines for specialized model airplane enthusiasts. By the 1996 visit, he had found the Mainland manufacturing site to be so well located, in terms of labor and resources, that he had established an industrial park and a property company so that he could attract other Taiwanese manufacturers to the same location.

When we returned to Thunder Tiger in 1997, Lai Chuan-lin was in China promoting the industrial park, but his wife, Hsieh Tsai-yun, showed us around. Hsieh, the general manager of Thunder Tiger, takes care of the books, supervises the labor, and is in full charge of the family firm when her husband is away, as he often was in those days when he was getting the Mainland businesses established. Showing us around the factory and introducing the new workers from Thailand to us by name, Hsieh told us that the jet engines did not have a ready market among hobbyists, and so they had stopped production of the jet engine targeted at that market. But, Hsieh explained, “The military is interested in our jet engines now.” “The military?” we said. Quietly, she told us that it was not only the Taiwanese military, but also a foreign air force that had contacted the company, and that they wanted the engines and the remote-control devices for drones that could confuse heat-seeking missiles in times of military combat. To satisfy the military interest, they had upgraded the engine from a five-pound version to one weighing up to fifty pounds. These bigger engines carried sufficient thrust to power much larger aircraft than just toy airplanes. In the end, Lai signed an exclusive, well-compensated contract with Taiwan’s military, but as we later learned, nothing substantial emerged from this contract, except the company’s promise not to manufacture jet engines and control devices commercially until 2015.

When we returned to Thunder Tiger in 1999, Lai had started making component parts for full-sized airplanes. The composite material that he had used to make the jet engines turned out to be well suited for high-stress areas on many kinds of commercial and military airplanes. He had the manufacturing experience and the research and development skills to win bids for very lucrative orders. In passing, he also told us that he had been elected president of Taiwan’s toy manufacturers’ association. Smiling, he said, “I still make toys, but I am not sure my business should be classified that way. I am in the airplane business. I always have been.”

By the time of our visit in the fall of 2005, Thunder Tiger had changed again. No longer was Lai just in the airplane business. His remote toy automobile operation had greatly expanded. He had gotten the contract to manufacture about 50 percent of all radio-controlled race cars sold by Associated Electrics, which at that time was the world’s top brand in this niche market. Also a leading brand name in its own right, Thunder Tiger made radio-controlled cars not only under its own brand name but also for its chief competitor. In 2005, when the President of Associated Electrics retired, Lai and his wife bought Associated Electrics, to become the world’s leading producer in both remote-controlled airplanes and remote-controlled cars. Also in 2005, Lai and his wife listed Thunder Tiger on Taiwan’s stock exchange. The initial public offering was very well accepted, with the share price doubling in less than a year.

When we talked with Lai Chuan-lin in 2009, he was less upbeat. The United States, like the rest of the world, was in a major recession. The market for remote-controlled planes and cars had bottomed, and so Thunder Tiger had cut its production. Lai was not sure what was going to happen to his toy business, but he told us, with a smile on his face, that he was developing a new product. About a year before this visit, Lai had had some dental work done, and in quizzing the dentist about the procedure, he had discovered not only that the dentist’s drill operated at a relatively low RPM (revolutions per minute), but that the drill used air compression to run a small turbine that housed the drill bit. “That’s my technology,” he said. “My jet engines are little turbines and they can run at a higher RPM than those drills.” And so, seeing an opportunity, Lai explored the market for dental drills, and discovered that the new German-made, high RPM drills were very expensive and that most dentists in Asia were still using slower drills. He believed he had the technology to make a better drill at a less expensive price than the German drill, and that there was a market for that drill in Asia. Lai took us to his R&D rooms and showed us his prototypes for the new drill. They met all his specifications. Lai told us he was going to start marketing the new dental drills in Mainland China sometime in the following year.

In a more recent interview, in 2014, Lai told us that the outdoor toy business was in serious decline. The recession was bad enough, he explained, but the real reason for the decline was that young people do not play outside anymore. “They have the Internet now. They play inside. The worldwide toy business has gone indoors.” Although this business was down, there were still buyers for Thunder Tiger’s line of remote-controlled vehicles, which now included trucks, helicopters, and boats in addition to planes and cars. The best market right now was not for toys, but for helicopter drones, with mounted remote-controlled cameras, that public agencies and private businesses could use to see, in real time, what was happening on the ground.

In the same interview, Mr. Lai told us that for some time Thunder Tiger had used small electric motors to power its remote-controlled vehicles; now he had perfected an automated process to make those motors in many different sizes. Low-cost and highly efficient consumers of battery power, these motors, he explained, were one of his core technologies. Holding one of the motors vertically in his hand, he said this is a helicopter. Turning it horizontally he said it is a car or a plane. And then turning it upside down, he smiled saying now it is a hedge trimmer. “A hedge trimmer?” we asked. “Yes,” he replied, “we are in the final stages of developing a line of garden tools”: hedge trimmers, leaf blowers, grass cutters, chain saws, and pole-mounted branch cutters. Touring the factory, we saw the R&D center where the garden tools were being developed, and saw a demonstration video comparing Thunder Tiger’s chain saw with a Black and Decker gas-powered model. Thunder Tiger’s chain saw cut the log in a fraction of the time required by the Black and Decker model. “Our chain saw,” he explained, “turns at a much higher RPM than any other model on the market, and is more energy efficient too.”

On the same factory tour, we saw that the entire first floor and part of the second was now given over to manufacturing high-speed dental drills. The previous time we had toured the Taiwan factory, in 2009, Lai’s unbelievably immaculate factory was manufacturing engines for the remote-controlled vehicles. That production line had now moved to Lai’s new one-million-square-foot factory in China, and his new company in Taiwan, TT Bio, was making dental equipment, specializing in the drills. The Asian market for these drills was good and growing, but the most important market for the drills was now in Europe, where they were selling well against the German competition. The drills nearly matched the quality of the German-made drills, but sold for a third of the cost. Watching the production process, we marveled at how this factory was making the minuscule components of the drill, most less than a quarter of an inch in size, with the delicate holes and curved shapes of a turbine. All these processes Lai had learned from making the engines for his remote-controlled toys, but now they were employed in making much smaller, almost microscopic machines, with much greater precision than the factory had achieved ever before. Lai told us that he plans to spin off TT Bio as a separately listed company on the Taiwan Stock Exchange, and maybe someday, he told us, he would spin off his electrical equipment business, too.

Building on his success year after year, Lai has become one of the best known and richest entrepreneurs of Taiwan’s small and middle-sized firms. The circumstances of Lai’s initial interest in airplanes did not portend the future he would have. Graduating only from primary school, Lai abandoned his education to make money to supplement his family’s income. At that time, in the late 1960s, many Taiwanese children did likewise. He went to work for his older sister, who owned a small toy store. He liked the toy airplanes there, and he remembers this moment as the time when his interest in building toy planes began. Toys were then an important part of Taiwan’s economy. In the early 1970s, small and medium-sized firms in Taiwan had just begun contract manufacturing, or OEM (original equipment manufacturing) as it is often called, and one of Taiwan’s first major exports was toys, along with plastic flowers, shoes, garments, bicycles, and sporting goods. Using OEM contract manufacturing, foreign firms, overwhelmingly American at first, ordered products from Taiwanese firms, and then sold the finished products under their own brand names. After serving two years in Taiwan’s army, as was then required of all Taiwanese males, Lai Chuan-lin began work in a factory manufacturing OEM toys. Ambitious and eager to be his own boss, Lai and his new wife decided to open their own manufacturing business. He had good relations with his former boss, who loaned him money to start his factory, and he obtained additional money from his family, including his sister. At first, he got most of his orders from other toy manufacturers, including his former employer, for whom he made parts of toys that his former employer’s factory later assembled. But after attending trade fairs in Taipei, Lai decided to specialize in remote-controlled toys. He would be the main assembler and make some of the key parts himself, like the all-important engines, but he would also rely on a network of suppliers who could quickly supply his own factories with the needed and often changing parts required for the range of products he made.

Lai Chuan-lin’s story is not unusual, although his degree of continuing success is exceptional. Many people have worked hard and worked smart for many years, and have reached a level of success and wealth not dreamed of during the generation in which they came of age. However, for every story of success, there are many stories of those who did not succeed, who almost succeeded, or who succeeded but then lost everything. Chairman T is an example of the latter group.

The Great King of Outdoor Furniture

Our first meeting with Chairman T, in 1988, was arranged by the father of one of Kao’s students, who knew him well and was willing to act as a go-between. At the time, Chairman T was one of the wealthiest and most influential businessmen in the southern Taiwan. Although he was famous for his flamboyance, we were not prepared for what we would find when we drove into his factory and headquarters compound, nestled in a canyon ringed with giant bamboo and backed by Alishan, one of Taiwan’s highest mountains. There, as we parked our very modest, locally made cars, we found ourselves surrounded by seven or eight luxury cars: a Rolls-Royce and several Mercedes-Benzes and BMWs. These cars were extremely rare in Taiwan at the time because the import duties on foreign cars made even modest imports prohibitively expensive. We soon found out that Mr. T collected expensive cars and loaned them out to local politicians, who would use them when they campaigned during Taiwan’s relatively new democratic elections.

Chairman T was known locally as Liangyi Dawang, the great king of outdoor furniture. Indeed, he made a striking presence. Physically he was very large; his voice boomed, and there was no doubt about who was in charge. Socially, however, he was very warm, displaying what Chinese call ren-ching (human emotion, sincerity, or kindness). Chairman T was rich, made wealthy by supplying Walmart, Kmart, and J. C. Penney with most of their plastic outdoor furniture. Mr. T was, truly, the lawn chair king. At that first meeting, Chairman T told us of his self-made success. He began very poor, had only the equivalent of a junior high education, and told us that he had succeeded by the sheer force of his will. He was immensely proud of his automobile collection and regarded those cars as trophies of his success.

His wife, Mrs. T, joined the interview and actively participated throughout. We immediately saw that they were an entrepreneurial team. He had developed the manufacturing processes, ran the factory, and hobnobbed with local officials and the leading businessmen in the region. His wife, who had a BA degree in foreign languages, knew English, and was the person who negotiated with foreign buyers. She also controlled the account books and knew the business inside out. Soft-spoken and charming, she was the one who told us why their lawn chair furniture was the best there was. We left that first interview somewhat bewildered, unsure of exactly what we just witnessed, and with many questions still unanswered.

In less than a year, we had another chance to interview Chairman T. This time he took us through his factory. He explained step by step how he had been able to get the big contracts from Walmart and Kmart. Many other Taiwanese firms had the same general capabilities as Chairman T. His supplier for the raw plastics, Formosa Plastics, Taiwan’s largest enterprise group in the 1980s and 1990s, would supply plastic at a reasonable cost to any business that could buy it. The big retailers would often provide samples of the products they wanted the Taiwanese to manufacture. Therefore, most businesspeople devoted few resources to research and development. Most of the design specifications were set by the buyers and not by the producers. Chairman T said his biggest advantage over his Taiwanese competitors was his ability to develop a one-step production process that gave him greater manufacturing efficiencies than other small and medium-sized firms working in plastics. With the support of a sizable number of firms that supplied him with many of the component parts, he was able, he explained, to manufacture, in his medium-sized factory with 300 workers, high-quality products for some of the world’s largest retailers, and at the same time, he was able to “cost down” the per unit value for his buyers and still make a profit.

The subsequent interview with Chairman T, this time in 1990, found that he had expanded his ambitions. Next to his own home and factory, he had built a five-story showroom that doubled as a guesthouse for his customers, the big buyers coming from the United States. The bottom two floors displayed his collections of lawn furniture, attractively arranged for his buyers to see. The third floor was devoted to a giant dining room, with a round table that could seat twenty-four people, and an entertainment center complete with a karaoke bar. The top floors provided luxury accommodations for his buyers, king-sized beds, gold-plated fixtures in the bathrooms, and panoramic views of Chairman T’s domain and the forest beyond.

This time, moreover, Chairman T had more on his mind than plastics. In 1990, Taiwan was in the midst of a speculative boom, soon to become a bust. The Taiwanese stock market had reached historic highs, over 14,000. The property market was just as hot, with some property values doubling and even tripling in a year’s time. This speculative boom had been set off by the Plaza Accord, which had raised the value of Taiwan’s currency in relation to the US dollar by about 40 percent in the five-year period after 1985. Although the cost of labor had gone up, the value of Taiwanese money and investments had gone up even more. The Taiwanese felt rich, and many had dreams of getting richer, including Chairman T. At this interview, Chairman T talked mostly about his investments in the stock market, in property, and in several businesses in Cambodia and other Southeast Asian countries. He was also deeply involved in local politics, even contemplating running for office himself. He felt he was on the verge of even greater wealth and success.

In the following few years, Kao and his team saw Chairman T occasionally. Chairman T did run for office and was narrowly elected, but his investments began to fail, one after another. After the revaluation, the relative rise in local wages pushed up the per unit cost of his products. But Chairman T elected not to move his factory to China, as others in the area had started to do, and as his big buyers had requested. That move would have taken him out of local politics, and besides, he had a lot of other promising investments. Losing his cost advantage, Chairman T gradually lost his lawn furniture contracts with his big buyers, first one leaving, then another, and soon he had no orders and no reason to run his factory. The contracts had gone to Chairman T’s uncle and nephew, who were his local competitors in the region and who had moved their factory to China. In the same period, the property market bottomed, the stock market crashed, and Chairman T’s overseas investments failed. Chairman T left politics under a cloud of corruption charges, lost his factory and buildings to debt collectors, and eventually left Taiwan. A few years later, we heard rumors that he was living in Mainland China, where he had invested in aquaculture, but we had no proof of that. Then in 2011, we read in the local Taiwanese papers that he had fallen from a boat and drowned in Tonlé Sap, the huge lake near Siem Reap in Cambodia, where he ran fish and shrimp farming businesses.

Explaining Asia’s Great Transformation

In the nearly thirty years that we have been talking to Taiwan’s businesspeople, we have heard many stories like the ones we heard from Lai Chuan-lin and Chairman T. Telling each person’s story individually and chronologically, as we have just done here for two businessmen, we have reached the conclusion that these narratives share many common themes—establishing a family firm, receiving help from relatives and friends and even former bosses, searching for marketable products, getting contracts, developing a network of suppliers, expanding, upgrading, diversifying, and most of all, having the desire to make money and the rapidly changing means to do so. Although all the stories have similar features, each person’s account of what he or she has done is also unique. Each account tells of fortuitous beginnings, of lucky and not so lucky breaks, and of distinctive personal styles. We have been listening to these accounts for many years now, but taking them as a whole, we realize that these stories do not reveal the secrets of Taiwan’s remarkable economic transformation.

Though interesting, these narratives miss the global context in which Mr. Lai’s and Chairman T’s decisions were embedded. This context provides the frame that sheds light on the transformation that, in the course of a generation, changed Taiwan from a poor, agriculturally rooted society to one of the most advanced industrial economies in the world today. This transformation was not the one time only occurrence often referred to as a take-off transition from a traditional to an industrial economy. Instead, as has happened with all economies in today’s world, Taiwan’s integration into a global capitalist economy has created a continuing transformation, a constant process of changing and adjusting to economic and social forces that both emanate from within and come from outside the country. Each time we interview the owners of these firms, some for the first time and some repeatedly over the years, we encounter a new Taiwan, a new Asia, even a new global economy. These visits do not give clues about a singular explanation for Taiwan’s remarkable changes. Rather, each interview provides a glimpse into a dynamic, ever-changing global capitalism, in which Taiwan and Taiwanese industrialists are now forever entrenched.

Between 1986 and 2016, as we have conducted hundreds of interviews with Taiwanese businesspeople and developed databases to systematically compare Taiwan’s economy with the other capitalist economies of East Asia, we have become less and less confident that the prevailing interpretations of Asian capitalism are even remotely adequate to explain the complexity of the changes that have occurred just in the last three decades.¹² The principal explanation for Asian capitalism for much of this period has been the developmental state theory, which contends that a state’s economic policy and an efficient bureaucratic corps of officials promoted and virtually created the Asian economies that we see today. At its base, developmental state theory is a political economy perspective on how economies develop country by country. As we show in this book, however, developmental state theories are not theories about capitalism, global or otherwise. They are theories of national development, country narratives stripped of their global context. Many economists have also offered somewhat different interpretations of economic development, stressing that macroeconomic incentives (e.g., financial institutions that promote open markets for capital and labor; transparent, profit-oriented firms; no unnatural barriers to trade; and so forth) created the conditions that led to rising levels of GNP or some other such indices. Some other scholars have emphasized the importance of Confucian culture in Asia—the importance of education, family, and obedience—in providing the human foundations for national development. And we ourselves, along with others, have offered sociological explanations that highlight the role of social institutions and business networks in Asia. To some extent, all these explanations for a country’s economic development are correct and complementary, even though they represent alternative points of view that are rooted in different disciplinary perspectives.

The more interviews we did, the more we tried to make sense of what businesspeople told us, the more skeptical we grew about how useful any of the alternatives were in actually interpreting what was happening in Asia. During these years, we saw the conditions of Asian economies change, sometimes gradually and at other times suddenly and with great drama, as they did after the Plaza Accord, during the Asian financial crisis of 1997, and during China’s extraordinary growth since the year 2000. Most of the standard explanations take the high road, the one that goes in the direction of parsimonious abstractions. Lofty sounding explanations that elevate messy governments to a singular entity called “the state,” or that discover in all social relationships an essential cultural core, called guanxi, seemed to us to lack grounding in the lives of those who actually experienced the changes and by their actions created them.

Lai Chuan-lin did not talk much about the importance of the state, even though he did receive some support from Taiwan’s government to continue his work on jet engines. But he had no help from any government official for years and years when he was first getting his company going. He could not even get a bank loan. Far from helping him, the government was in fact his biggest obstacle when he transferred his factory for remote-controlled airplanes to China, and like other Taiwanese businesspeople, he ended up evading government regulations to accomplish what he felt he needed to do. Equally, like all the other businesspeople we interviewed, Mr. Lai did not talk about Confucianism or guanxi, conceived abstractly, or macroeconomic incentives.

By contrast, Chairman T talked about the state all the time, but not in terms of incentives offered to him by government officials or even in terms of proposals for economic policy that the government might develop. Chairman T’s business was well established and entirely export oriented, and separate from his interests in the state. Chairman T was himself a politician, caught up in the drama of local factions and the ins and outs of party elections. He was not concerned with bureaucratic policies directed toward business as much as he was concerned with the process of getting others and later himself elected to office. This concern was with raucous, rough-and-tumble politics, and with his role as a local boss. There was nothing efficient or rational or even bureaucratic about his engagement with the state.

Listening to the people we interviewed, we found it difficult to pull their words into the explanations offered by those scholars who had never talked to a Mr. Lai or a Chairman T, or any other businessperson for that matter. Most of these standard interpretations were removed from the people who actually ran the economy, made the decisions, propelled the continuing transformation, and got their hands dirty in the details of business. Lofty explanations require lofty heights, not necessarily ivory towers, but at least comfortable locations in capital cities and congenial conversations with key officials who are willing to take the credit for making crucial decisions that businesspeople like Mr. Lai and Chairman T have never heard of or that have any measurable influence on the decisions they make. These explanations are basically static, the unmoved causes that push development forward—the state, social institutions, such as the family, even global economic incentives.

The cause of our skepticism with the contending alternatives, including some of our own previous work, was the continual process of economic change that we witnessed. It became apparent, throughout the period of our collaboration, that there is nothing static about Asian economies. From the perspective of businesspeople, nothing stands still, no decision is final, everything is in flux, no one can rest. Trade statistics confirm what businesspeople tell us. Taiwan’s economy has gone through tremendous changes in the past four decades, and not just Taiwan’s. All the economies of Asia have changed, as have the economies of most countries in the world, and the past four decades have been the most extraordinary. Mainland China is today’s best example of such a rapid transformation, but China’s export economy is merely a continuation of a pattern that other East Asian countries started in previous decades.

On the surface, these Asian economies appear remarkably successful, but if we dig deeper, for every firm that is successful and profitable, we find many other firms that fail. During the years of its most rapid growth, Taiwan had tremendously high rates of firm failure, especially if one counts those firms that simply closed their doors without any of the legal formalities that accompany bankruptcies in the United States or Europe.¹³ Taiwanese businesspeople recognize that success and failure are constant companions, that any firm, large or small, can be forced to close its doors. This awareness seems to be a primary motivation to keep moving forward, to keep just in front of the curve of advancing markets. None of the contending explanations does justice to the dynamism that pervades all the economies of Asia and the rest of the world as well.

Although we are skeptical about finding a single satisfactory explanation for Asian economic development, we have not abandoned the search for a way to account for what has happened and is continuing to happen in Asian economies. We realize that it is impossible to tell the story of Taiwan’s growth without also incorporating the lives, the work, and the perspectives of those who make up these economies: the businesspeople who own and manage the firms that constitute the aggregated entity that we call the economy. On examination, many theories of Asian development are not interpretive explanations in the sense that Max Weber recommended, namely explanations that involve adopting the subjective understanding of the people who are economically engaged and who have a stake in what happens, which would include government officials as well as businesspeople. Many theories merely posit great forces that move societies and economies, without acknowledging that social and economic changes result from people’s conscious decisions, although not always with the consequences that these people intended their actions to have. These are theories that have no hands or feet, or heads for that matter.

The Sociological Foundations of Making Money

Reflecting on years of research and interviews, we have found one constant in the midst of continuous change. Strange as it may seem, this constant helps to explain the change. Businesspeople have told us repeatedly that, in reference to their firms, they do what they have done in order to make money. As obvious and as trivial as it may seem, to the people we interviewed, making money is the single most important criterion by which they measure the success of their firms. Rational calculation in pursuit of making money is the central tenet of capitalism, and this tenet is the core principle of Taiwanese businesspeople. They have embraced capitalism.

In listening to their words, we have come to understand that this concern for making money is not a sign of greed. Most people talked, in a personal way, about the need to provide for their parents or their children, about their social responsibilities to friends and communities, and about the desire to achieve social status and a good reputation. But however practical or well-meaning their personal goals, they all see that the way to realize these goals, in the context of their businesses, is by making money. The measure of their firms, indeed the measure of their success in the business world, is whether they make money or not, and how much.

Making money is an important topic in Taiwan because everyone knows that making money is not an easy thing. Business failures are very common, part of a continuous cycle of opening and closing businesses in pursuit of finding a product that big buyers will purchase or of making a component or delivering a service needed by those making products. Whenever businesspeople meet, their conversation inevitably turns to where the profits are, to what products are hot, to who is doing what, and to how much they are making. Even in Chinese families, over the dinner table, there are ongoing and surprisingly sophisticated discussions on wealth and well-being and how to achieve them. It is no coincidence that the standard greeting at the time of the lunar New Year is gungxifatsai, “wishing you wealth.”

In reflecting on what people tell us and on the decisions they make, it is clear that making money is a collective process fundamental to capitalist economic activities, and as a collective process, it is also a sociological phenomenon. At first glance, it would seem that making money is highly individualized, merely an outcome of individual calculation and execution. But however individualized the calculation, it is immediately obvious that all such calculations incorporate a social world, a world of many actors sharing the same social conventions and understandings. Howard Becker has shown that, even for such seemingly private tasks as composing and performing music, one must enter an established world of conventions about musical notations, set instruments on which to play the music, and existing venues where music can be publicly performed, ranging from local bars to concert halls, MTV, and now YouTube.¹⁴ To step outside this established world of music means that one must reinvent much of what one normally takes for granted. Relatively simple tasks become onerously difficult. Inventing a new system of musical notation or creating new instruments becomes an obstacle and not a help to the goal of writing music for people to hear. Conformity and acceptance of the established world is so much easier and less risky, and leads to much greater success than any other course of action. Becker calls this acceptance of established conventions, the “power of inertia.”

Even more than performing music, making money requires acquiescence to known worlds, worlds of products and worlds of business that allow few exceptions, that are relatively unbending, and that rest squarely on codes and conventions and often tacit knowledge that insiders share. These worlds of making money are the worlds of capitalism, worlds in which, as Weber put it, “capitalist acquisition is rationally pursued . . . [and] is oriented toward the calculation of capital.”¹⁵ As we will describe more fully in the following chapters, these worlds of making money have several dimensions that are worth outlining at the outset.

First, there is always the dimension of individual calculation. Our interviews show that businesspeople must necessarily and continuously strategize on how to position themselves and their firms relative to other people and other firms. Calculations never occur in an economic or social void, but rather always occur in a world that is already fully occupied, filled with previous calculations brought to fruition. That is what makes careful planning so important, and it is through calculation that one objectifies the known world and strategically enters into it as a known and knowledgeable actor.

Second, insofar as businesspeople incorporate others into their calculations, they must enter a world of common understandings, in regard to the roles people play, the rules they may (or may not) follow, and the relationships they establish and maintain. When businesspeople enter into such a shared universe of meaning, then making money becomes a collective endeavor. All tasks, from simple to complex ones, call on shared understandings of how to proceed.

Third, when people act on the basis of shared understandings, they objectify themselves in relation to others. They take on roles that others will recognize and act in ways that others can immediately grasp, and they expect others will relate to them in a similar manner: employer to employee, debtor to creditor, business colleague to business colleague. In submitting to the known world, the world in which they are known and knowledgeable, they also enter into a self-reinforcing reality, a constructed reality that is shared and is made real by consensual meanings and correctly interpreted actions. Such a reality is reflexive, because in the course of making money, one’s own actions and those of others become objects on which calculations are based. Such a world is a constantly interpreted world, evaluated for its possibilities, assessed for its opportunities, manipulated for better control, and made the foundation for predictions. Individual calculation is only possible in a world where actions exist within a range of predictability and where risks can be assessed with some confidence that they can be avoided or reduced most of the time. The more businesspeople do business in a reflexive world the better they are at calculating, in relation to others, the chances of their own success in making money.

Fourth, in the business world, such a reflexive reality can be thought of as an economic way of life. Such a way of life is not closed, and in fact can be extraordinarily dynamic. But it is a consensual world, a world with considerable continuity. Like language, where communication is only possible with a common medium, business is accomplished only when common rules exist. Again like language, the medium of business cannot be switched at anyone’s whim, but over time, and sometimes quickly so, the vocabulary of business changes. New practices come in at one end, and old practices die out at the other—all without centralized planning and intervention. Such a way of life is constantly being made and remade through people’s actions, and is therefore constantly in motion, forever subject to change.

Drawing on our thirty years of study and reflection on this topic, we believe that in order to understand and interpret Taiwan’s spectacular economic growth and its integration into the global economy, one needs to understand the intersubjective framework within which Taiwanese businesspeople exist, their economic ways of life. The economic ways of life that exist in Taiwan today were not there in their present forms even in the 1970s at the start of Taiwan’s economic growth, but grew gradually as businesspeople and interested actors, including government officials, began collectively to draw out of a rich cultural repertoire the understandings and conventions that have allowed the Taiwanese to have the good fortune to be in the right place, at the right time, and with sufficient flexibility to propel themselves forward into the league of industrial economies through their ability to make money.

At the onset of industrialization, this economic way of life in Taiwan included some special characteristics that helped would-be entrepreneurs develop an approach to manufacturing that relied on cooperation among networks of independent businesspeople. As we describe more fully in Chapter 4, these cooperative networks drew directly on patterns of etiquette common among the Chinese, patterns experienced repeatedly in daily life and incorporated into, and systematized as, conventional ways of doing business in Taiwan. These are the patterns that led to Taiwan’s great success in contract manufacturing.

These patterns, however, did not develop in isolation; they matured in the context of Taiwan’s economic successes in the global economy. Taiwan’s economic way of life, initially based on reciprocity among small firms, had an affinity with making certain types of products assembled from standardized components. This mode of manufacturing, known as modularization, has become a standard feature in the process of making most products that consumers buy today, everything from shoes and clothes to smartphones and automobiles. This book, therefore, is about how the global capitalist economy and Taiwanese industrialists, mutually influencing one another, grew up together.

Notes

4. Internal Revenue Code of 1954, section 167(a). Quoted from Thomas W. Hanchett, “U.S. Tax Policy and the Shopping-Center Boom of the 1950s and 1960s,” American Historical Review 101, no. 4 (1996): 1094.

5. Ibid. A major shopping center is defined as one having a size of 300,000 square feet or more.

6. This term was first used by Gary Gereffi in his seminal chapter “The Organization of Buyer-Driven Global Commodity Chains: How U.S. Retailers Shape Overseas Production Networks,” in Commodity Chains and Global Capitalism, ed. Gary Gereffi and Miguel Korzeniewicz, 95–122 (Westport, Conn.: Praeger, 1994). The term is particularly apt because it emphasizes intermediary demand created by retailers and merchandisers, who purchase the items they wish to sell. Intermediary demand creates markets among suppliers competing to sell goods to the big buyers. We call these supplier markets, in contrast to the markets among the retailers and merchandisers selling goods to final consumers, which we term consumer markets.

7. The following list (compiled from Ministry of Commerce of the People’s Republic of China, Top 500 Ranking of Chinese Enterprises of Import and Export in 2012, June 19, 2013, http://tjxh.mofcom.gov.cn/article/n/201306/20130600167637.shtml) shows the ten Taiwanese companies among the top twenty exporters from China in 2013, and their relative rank:

No. 1. Foxconn Technology Group, Shenzhen (subsidiary of Hon Hai Precision Ind. Co., Ltd.)

No. 2. Tech-Front (Shanghai) Computer Co., Ltd. (subsidiary of Quanta Computer Inc.)

No. 3. Hongfujin Precision Electronics (Zhengzhou) Co., Ltd. (subsidiary of Hon Hai Precision Ind. Co., Ltd.)

No. 4. Pegatron Corporation (Shanghai) (subsidiary of ASUSTeK Computer Inc.)

No. 6. Hongfujin Precision Electronics (Chengdu) Co., Ltd. (subsidiary of Hon Hai Precision Ind. Co., Ltd.)

No. 9. Hongfujin Precision Electronics (Yantai) Co., Ltd. (subsidiary of Hon Hai Precision Ind. Co., Ltd.)

No. 10. Maintek Computer (Suzhou) Co., Ltd. (subsidiary of ASUSTeK Computer Inc.)

No. 11. Tech-Front (Chongqing) Computer Co., Ltd. (subsidiary of Quanta Computer Inc.)

No. 19. Compal Information (Kunshan) Co., Ltd. (subsidiary of Compal Electronics, Inc.)

No. 20. Compal Electronics Technology (Kunshan) Co., Ltd. (subsidiary of Compal Electronics, Inc.

8. “The MMI Top 50 EMS Providers in 2013,” Manufacturing Market Insider 24, no. 3 (2014), http://mfgmkt.com/mmi-top-50.html

9. ETtoday News, June 19, 2013, http://www.ettoday.net/news/20140421/348682.htm, in Chinese.

10. Ministry of Commerce of the People’s Republic of China, “Trade and Investment in Mainland China and Taiwan from January to April 2014,” June 4, 2013, http://www.mofcom.gov.cn/article/tongjiziliao/fuwzn/diaoca/201406/20140600612561.shtml.

11. Robert C. Feenstra and Gary G. Hamilton, Emergent Economies, Divergent Paths: Economic Organization and International Trade in South Korea and Taiwan, Structural Analysis in the Social Sciences: 29 (New York: Cambridge University Press, 2006), 240–49.

12. These databases figure prominently in the following: ibid.; Gary G. Hamilton, Commerce and Capitalism in Chinese Societies (London: Routledge, 2006); Marco Orrú, Nicole Woolsey Biggart, and Gary G. Hamilton, The Economic Organization of East Asian Capitalism (Thousand Oaks, Calif.: Sage, 1997).

13. Tibor Scitovsky, “Economic Development in Taiwan and Korea, 1965–81,” in Models of Development: A Comparative Study of Economic Growth in South Korea and Taiwan, ed. Lawrence J. Lau, 127–82 (San Francisco, Calif.: ICS Press, 1990).

14. Howard Becker, “The Power of Inertia,” Qualitative Sociology 18, no. 3 (1995): 301–09.

15. Max Weber, “Prefatory Remarks to Collected Essays in the Sociology of Religion,” in The Protestant Ethic and the “Spirit” of Capitalism and Other Writings, ed. Peter Baehr and Gordon C. Wells (New York: Penguin Books, 2002 [1920]), 359.