With Money to Burn, Taiwan Finds U.S. Firms Hot for Investment Cash

SAN JOSE, Calif. —  Brimming with cash and eager for a hunt, the tiny country of Taiwan is embarking on an investment binge.

Destination: U.S. companies looking for cash.

The timetable may be gradual and the early forays small, but this nation the size of West Virginia is swimming in money and is starting to spend it overseas--not just on automobiles and refrigerators, but increasingly on savings and loans, retail outlets and financially strapped U.S. electronics firms.

Overseas investing is a new and somewhat uncomfortable activity for Taiwan, a shadow nation not officially recognized by the United States.

Politically, the country that calls itself the Republic of China is struggling to install an orderly democracy. Economically, it has been preoccupied with stashing away savings, building a domestic infrastructure and feeding a magnificent export machine.

But a new spirit of openness is in the air, thanks to a government that recently has become more willing to let companies spend abroad some of the money they made from shipping televisions and textiles overseas.

Choking with $75 billion in foreign-reserve holdings--the world’s second-highest pot after Japan’s, and an amount equaling $3,500 for each of its residents--Taiwan is likely to become a more prominent investor in high-tech meccas like California’s Silicon Valley.

“I see it increasing tremendously over the next few years,” said Lip-Bu Tan, a San Francisco venture capitalist who has engineered some early investments. “They need to come out. It’s a good opportunity and good timing.”

And American companies are putting out the welcome mat.

At Mouse Systems Corp., a typical Silicon Valley dream gone awry, President Garrett Fitzgibbons credits an unexpected Taiwanese investor with saving his company.

Fitzgibbons went to Taiwan last fall in search of a new product line to help compensate for the sagging sales of Mouse’s pointing device for personal computers. He came back with something better--a much-needed $2-million cash investment in his company.

The story was much the same at nearby Dastek, where Jeffery Bastow was trying to revive a tiny San Jose computer equipment company that had a good product but bad luck.

Shunned by U.S. investors, Bastow turned to an acquaintance in Taiwan. In short order, Bastow had $1 million.

That was 2 years ago. Now, Bastow’s firm is pulling in annual sales of $10 million. “That’s the only way we got going,” Bastow said. “Without those monies we wouldn’t have gotten started.”

Like the Mouse and Dastek investments, much of the money from Taiwan comes in small parcels. They reflect in a sense the country itself, a nation of small, closely held businesses where a premium is put on being bright, nimble and your own boss.

Next to the Japanese, who appear to have arrived in the United States with carefully crafted mega-deals and strategic growth plans, Taiwanese investors seem a bit impetuous if not scattershot in their approach.

Many, though, have more than a vague notion of what they want. In return for their investment, they hope a link to American ingenuity will in some way help boost Taiwan’s own high-tech IQ, which greatly lags Japan’s and is about on par with South Korea’s.

Enhancing Taiwan’s high-tech know-how is a government-stated goal, even if that knowledge doesn’t create new manufacturing jobs in Taiwan.

“In the past we only thought we could control technology if it was in Taiwan,” said Yu-Der Chuang, an official scientific representative from Taiwan who works in Mountain View, Calif. “Now we have a more broad sense. We’re interested in using the technology.”

Often, however, Taiwanese equity investments are made with the understanding that the recipient U.S. firm might perform portions of its manufacturing or research in Taiwan.

In one recent deal, Vitelic Corp. of San Jose raised $25 million in Taiwan as part of a plan to build a factory for manufacturing semiconductors in that country.

Taiwan’s spending spree has not as yet sent off alarms in Washington. But it is raising concerns in some circles that American companies are too willing to share their technical know-how.

Clyde Prestowitz, a former Commerce Department official who has sharply criticized this country for letting technology slip into the hands of nations with government-directed economies, believes increased Taiwanese investment is another example of “turning over great influence to people who regularly participate in practices outside our borders that we would object to.”

Taiwan is still a novice in the game of international investment. It has been less than 2 years since companies and individuals have been allowed to take $5 million per year out of the country without prior government approval, and many Taiwanese remain hesitant. For one thing, sharp appreciation of the Taiwanese currency has made overseas investments risky.

“They look at the New Taiwan Dollar that has appreciated 40% (in about 3 years). Maybe it will go up another 10%, and that building in Manhattan will be cheaper,” said Lawrence Lau, a Stanford University economist. “So they wait.”

And those who are waiting don’t hesitate to spend freely at home. With so much money to spare, Taiwanese have pushed their own real estate and stock markets off the charts. In a 2-month period from early January to mid-March of this year, the stock market index gained 50%; in the first 9 months of last year it nearly tripled. Housing prices have shot so high that the government has attempted to discourage purchases.

“It’s a great gambling fever in Taiwan,” said Ralph Clough, who teaches a course on Taiwan at the Johns Hopkins School of Advanced International Studies. “There’s all this cash around.”

Yet the flow out of the country has begun. Some of the largest sums have traveled to Southeast Asia, where Taiwanese firms have reportedly invested billions of dollars in factories, hoping to offset their own rising domestic wage rates.

In the United States, the biggest deals include a planned $1.3-billion construction of a Texas petrochemical plant by Formosa Plastics, an early Taiwanese investor in the United States.

Another headline-grabber was the recent announcement of a $37-million bailout of eight insolvent Texas savings and loans by Taiwan-based Pacific Electric Wire & Cable Co. And a Taiwan investor has signed a preliminary agreement to buy the Mandarin Oriental, a San Francisco luxury hotel, for more than $50 million.

Sometimes, too, Taiwanese companies set up wholly owned U.S. distribution concerns, an attempt to escape their past of making products sold only under well-known U.S. brand names.

But far less public are the smaller arrangements, like those with Dastek or Mouse, or with the Taiwan immigrants who draw on relatives back home to fund their small high-tech ventures that dot San Jose industrial parks.

“I know it’s happening, but I don’t have any written proof,” a Commerce Department expert on investment said.

Even Taiwan government authorities concede that actual investments may be 10 times higher than reported figures. “Businessmen do things through their own channels,” said Frank Huang, a member of the economics staff of the Coordination Council for North American Affairs, Taiwan’s official representative in Washington. “Government doesn’t have any power to stop it.”

Taiwan authorities report that they approved $123 million destined to flow into U.S. industrial and service sectors last year, up from $70 million in 1987. But a Taiwanese publication, the China Times Weekly, recently estimated that the 1988 investment was 10 times the reported figure, although the article did not specify whether it was including investments in real estate or securities.

A report commissioned by the American Institute in Taiwan, the U.S. office in Taipei, estimates that investment flows to the United States will increase steadily, reaching $1.25 billion a year by 1991, with electronics leading the way. Chuang, at the Coordination Council for North American Affairs office in Mountain View, has compiled a computer listing of 70 small Silicon Valley firms that already have Taiwan financing.

A number of informal gauges show the interest and pace picking up momentum. Ralph Thomson, a Palo Alto consultant who helps forge international links, has gotten 14 inquiries from potential Taiwanese spenders in the past 2 months, more than from any nation other than Japan.

Chuang gets four or five calls a week from prospective Taiwanese investors wanting to plant a stake in Silicon Valley. Whether they’re interested in making full-scale investments or in building other technology ties, he often can link them with one of the 1,600 local Taiwanese immigrant engineers whose names he keeps in a computer database.

But that number is still only a fraction of the thousands scattered across the United States. In the past decade, U.S. universities awarded more engineering doctorates to students from Taiwan than from any other foreign nation--400 in 1987 alone. Many of those graduates chose to stay in America.

Chuang is not alone in this trans-Pacific matchmaking. This month the government-owned Bank of Communications is opening its first U.S. office in San Jose, the heart of Silicon Valley, where it expects to help Taiwanese link up with high-tech firms.

And Linda Vincent, a venture-capital specialist from Needham, Mass., recently gave a seminar in Taipei on U.S. venture opportunities and reported the crowd of 150 to be “eager.”

Special funds have even sprung up to serve as conduits for Taiwanese investments. Last year, for example, Wang Laboratories, the Massachusetts computer maker, formed a venture-capital fund with $45 million from Taiwanese government and private sources, and 80% of it is to be invested in America. Two other U.S.-based venture capital outfits have raised about $40 million in Taiwan.

Ta-Lin Hsu, who manages the Asian venture capital operation of the Hambrecht & Quist investment firm, argues that Taiwanese interest in U.S. technology has evolved through a number of stages.

The first wave represented by his generation, Hsu believes, came to the United States to get an advanced degree and stay employed for life by an IBM or a Hewlett-Packard. “The first priority was a stable job--to find a gold rice bowl,” he said. Hsu himself worked for IBM for 12 years.

Then came what he calls a second breed: Students who earned their degrees, did their time at large corporations and followed the Chinese tradition of striking out on their own. In the process, they have defined a new genre of American entrepreneur--an immigrant inventor who stays in the United States but looks homeward for financing support.

Ted Liu, for one, a Taiwan native with an engineering Ph.D. from the University of California, started a computer-related company in Silicon Valley 2 years ago. Today, 20% of its funding comes from Taiwan sources.

“It’s a good place to get money,” Liu said. “If there are resources I can take advantage of, I say why not. . . . It gives me an excuse to go back there.”

Finally, Hsu’s theory goes, there is the modern generation of investors who come from Taiwan with one thing in mind--making money. The young tycoons “are very aggressive and shrewd,” he said. “They don’t come here to tell you they have a degree from Berkeley. They come to say my company does $35 million and earns 9% after tax. They’re businessmen, pure and simple.”

Hsu might have in mind companies like the Acer group, Taiwan’s most aggressive personal-computer maker, which in 1987 bought a small San Jose minicomputer maker. More recently, Acer absorbed a small computer service company in Southern California and is actively searching for more acquisitions.

“Acer will continue to buy to make us grow,” said Edward Chang, chairman of the U.S. subsidiary, Acer Technologies Corp. in San Jose. “We want to quickly reach $1 billion.” Still small by U.S. standards, the parent company had 1987 sales of $330 million.

Perhaps more illustrative of the relationship between the new Taiwanese investor and the anxious American recipient is the story of how Taiwan’s Microtek International Inc. came to invest in Mouse Systems Corp.

With Mouse floundering and large U.S. companies refusing to help, Fitzgibbons made a last-ditch visit to Taiwan in search--he thought--of a new product line.

Paging through a magazine, Fitzgibbons’ escort spotted an ad from Microtek and immediately recognized it as a maker of optical-scanning equipment where an acquaintance of his worked as a secretary. Microtek, a $30-million firm, had recently gone public in Taiwan with a market valuation of $100 million.

Fitzgibbons expected his subsequent meeting with a Microtek vice president to last a few minutes. It lasted hours. A few weeks later, he was meeting with the company president, this time in California.

Three months later he had enough cash to keep Mouse alive and the prospect of future collaboration on technology and production.