MAY 12, 2000 VOL. 26 NO. 18 | SEARCH ASIAWEEK

Banking On China
Taiwan's Evergreen group has lots riding on cross-strait peace
By ALLEN T. CHENG Taipei

The color green is everywhere at the headquarters of Taiwan's EVA Airways Corp. After all, it is the dominant hue of its group parent Evergreen Marine, the world's second-largest shipping conglomerate, founded in 1968. Men don bright green jackets and women wear green skirts - like EVA's flight crews. Walls have white-and-green trim. On every floor, large, leafy green plants are in abundance. Even the building's brick tiles are green.

At The President's Ear Chen Shui-bian's coterie of tycoon-advisers have billions of dollars invested in China, which has warned of reprisals against business leaders who back Taiwan independence: CHANG YUNG-FA The founding chairman of the Evergreen shipping and airline group is Chen's senior international policy adviser for cross-strait issues. Evergreen was Chen's first major client at the law firm he joined right after finishing law school. HSU WEN-LUNG The chairman of Chi-Mei Plastics, Taiwan's second-largest plastics manufacturer, has been investing in the mainland for many years. China is an important market for the company's petrochemicals. NITA ING She heads the Taiwan High-Speed Rail Corp., the consortium building Taiwan's $14-billion bullet train, the world's largest build-operate-transfer project. Her family-run investment holding company has invested $80 million in a petrochemicals plant in the mainland and is developing a $300-million shopping mall in Shanghai. STAN SHIH Chairman of Acer Computers, Taiwan's leading personal-computer maker. The company operates half a dozen factories in China. The largest facility assembles PCs in Dongguan, Guangdong province, for both domestic sales and export.

But these days, a different color is on the mind of Evergreen founding chairman Chang Yung-fa, Asia's top transportation magnate: the red of China's flag. As soon as Beijing and Taipei give the go-signal - not anytime soon - Chang wants his airline to begin direct flights to and from mainland China. EVA executives are planning as if the flights could happen any day now. The 12-year-old carrier says it may expand its fleet of 35 jumbo jets and freighters. It is negotiating with Boeing Co. and Airbus Industries to buy up to a dozen more planes worth $1.2 billion.

"If direct links were established, we would be able very quickly to offer service to major destinations in China," says Derek Chen Hsien-hung, EVA's executive vice president in charge of marketing. Adds Nieh Kuo-wei, another executive vice president and the airline's spokesman: "Direct cross-strait transport links are something people on both sides want, and the sooner the better. This will happen eventually. It's just a matter of time."

Many other big Taiwan corporations share EVA's mainland aspirations. Most haven't aggressively pushed into China, long held back by a frowning Kuomintang (KMT) government urging "no haste." But the bulk of Taiwan's companies - mostly small and medium-sized manufacturers - have already relocated across the strait to stay cost-competitive. Today, some 30,000 Taiwan firms have invested more than $30 billion in China, where they assemble up to 60% of the island's manufactured exports. Indeed, Taiwan's largest enterprises must continue investing on the mainland to thrive. And how successful the Evergreen group is in leaping across the strait will show the way for other Taiwan conglomerates.

Despite his pro-independence political roots, most of incoming President Chen Shui-bian's coterie of business advisers have mainland investments to safeguard and expand (see box). They helped Chen sign up Defense Minister and former airforce general Tang Fei as premier. Now the most important task is to improve cross-straits relations. Key to that effort are foreign minister-designate Tien Hung-mao, who heads the Institute for National Policy Research, a think-tank funded in its early years by Chang's family; and Chang himself, who is the president's senior international policy adviser for cross-strait issues.

EVA executives are confident that they have the connections on both sides of the strait to make their dream a reality. Chen used to fly the carrier whenever he traveled abroad as mayor of Taipei from 1994 to 1998. In fact, he and Chang have been friends for years; Chen began his law career representing Evergreen Marine in the 1970s. Chang is also close to outgoing president Lee Teng-hui.

The picture across the strait is fuzzier, however. According to recent reports, Chang heads a list of Taiwan business chiefs Beijing may punish for supporting Chen. Though EVA executives deny this, it is well known that Chang's early endorsement helped the Democratic Progressive Party (DPP) candidate win the March presidential election. In fact, the first person Chen visited on the Monday following his Saturday victory was Chang at Evergreen headquarters. Chang's coziness with Lee is another black mark in China's book. Another report says mainland officials had second thoughts about giving chief representative status to EVA's Beijing office. The airline has long maintained liaison offices in Beijing and Shanghai.

EVA's Nieh says the Beijing office got formal representative status last July; he denies that the group's China ties are suffering. "We have never received any notification from China that we will have problems," he says. "In fact, one mainland official has stated, 'All is normal with Evergreen.' Let me reiterate: We do not support Taiwan independence or have ever pushed for Taiwan independence."

Other events seem to bear Nieh out. Last December, EVA was able to purchase 5% of Air Macau, which is 51%-owned by Beijing's China National Aviation Corp. The deal was done just as the former Portuguese-run territory was being returned to China. EVA's affiliate Evergreen Aviation Technologies Corp., which maintains planes, has been licensed by the Civil Aviation Administration of China to fix engine parts, which mainland airlines now send to Taiwan for repair. For its part, Evergreen Marine has eight offices in China and a substantial container-handling venture with mainland shipping giant COSCO.

If EVA does get to fly across the strait, it would be a formidable competitor. Founded in 1989, the ariline has come a long way for an offspring of a conservatively run shipping empire. At first, EVA had problems recruiting enough Taiwan pilots to fly its original fleet of 26 jets, and nearly ran out of money in its early years. But EVA has built a global reputation as a well-managed, virtually accident-free carrier, despite a core team of 20 founding executives with no airline experience. The former Evergreen managers quickly fixed their knowledge deficit by hiring foreign aviation consultants and many expatriate pilots. "EVA started out a bit green, but they have learned quickly," says Jim Eckes, a Hong Kong-based aviation management consultant. "As in shipping, they've made Taiwan a strong base."

The potential bonanza from direct links is enormous. Taiwan's exports to China via Hong Kong totaled $26 billion in 1999, while imports from China via Hong Kong amounted to $2 billion. Passenger traffic is 52 million a year and growing steadily. "Both sides see each other as the greatest business opportunity possible," says aviation consultant Eckes. "When direct ties happen, the growth will be explosive." Along with EVA Air and China Airlines, says Eckes, mainland carriers most likely to gain are Shanghai's China Eastern, Xiamen Airlines and China Southern of Guangzhou. On the other hand, Hong Kong's Cathay Pacific and Dragon Air may be hurt as most Taiwan travelers would prefer to fly direct, rather than go through Hong Kong.

If direct links are established, EVA and the Evergreen group would be especially well positioned because a significant portion of the cross-strait traffic would be sea and air freighters carrying components for Taiwan-owned plants in China. EVA's air-cargo capacity complements Evergreen's 134 ships - the largest fleet in the world until last year's Maersk-Sea Land merger. EVA currently earns 45% of its revenues from cargo, one of the highest cargo-to-passenger ratios among airlines. It aims to hit 50% next year.

EVA's fleet of 35 jets is much smaller than Asia's largest carriers (Japan Airlines has 137 planes), but its cargo capacity is substantial. EVA's nine MD-11 freighters and 10 Boeing 747-400 combination jets (half passengers, half cargo) can grab a substantial volume of the Taiwan-mainland cargo traffic going through Hong Kong. "Cargo will remain an important part of our growth," says Bruno Chang Fu-kuo, EVA's senior vice president in charge of cargo. "In fact, we expect it to grow faster than our passenger expansion."

Analysts reckon the Evergreen group's five listed companies grossed more than $4 billion in 1999, up from $3.8 billion in 1998. Share prices of all five listed companies in the group suffered because they are considered "old-economy" stocks. But they have risen steadily since Chen's election win. Many business people in Taiwan and elsewhere see Chang's ties to the new government in a positive light. "The Evergreen group will benefit," says Christine Lee, a shipping analyst with Merrill Lynch in Taipei. "Chen is a strong advocate of direct links with China."

He and Chang, however, count themselves among indigenous Taiwanese, whose ancestors have been on the island for four or five generations. That may have been partly behind EVA's marketing campaign in its early years, which carried a distinct Taiwanese flavor, in contrast with China Airlines' focus on mainland Chinese culture and cuisine. EVA flight attendants spoke Taiwanese first, rather than Mandarin. They served primarily ethnic Taiwanese food, similar to delicacies found in Fujian province across the strait, but with a Japanese flavor. The airline also offered Taiwanese songs and movies as in-flight entertainment. All that struck a chord with indigenous Taiwanese, who make up 70% of the island's population.

Even if direct links don't happen anytime soon, Evergreen and EVA look set to stay profitable. Analyst Lee recently re-rated shares in Evergreen Marine from a "neutral" to an "accumulate." She cites several reasons. Container rates and volumes are heading up worldwide, even as fuel prices stabilize. Lee estimates that rates will rise 5% this year and 3% next. That's a boost to Evergreen, which dominates routes between Asia and the Americas and Europe. And if both Taiwan and China enter the World Trade Organization, as is widely anticipated, Evergreen's business will gain additional strength. Another plus: Evergreen and its affiliate Uniglory are merging, with expected gains in economies of scale and market clout.

EVA Air is in a similar happy predicament. Catering primarily to Taiwan manufacturers with operations across Asia, the airline is enjoying bustling passenger and cargo business on its 106 flights a week, including 55 to the key export market of North America. All that will continue even if direct mainland links do not start up soon (unless, of course, war breaks out). "Right now, the cargo sector is doing really well," says Wendy Wong, a regional airlines analyst with Merrill Lynch in Hong Kong. "We have seen rising profits and double-digit growth."

Aware of how vulnerable the transport business is to political swings, the Evergreen group vows neutrality on sensitive issues and confrontations. "We're not willing to get too close to politics or talk about politics," says Nieh. "Chairman Chang has given us a clear instruction. We are not to talk about politics in the office. We maintain a good relationship with everyone - the KMT, DPP or non-partisan groups. These people like us. That's why they often travel on EVA." Amid escalating cross-strait tensions, however, everyone may be forced to eventually take sides. In the longer term, that may determine whether the bottom lines at Evergreen and EVA stay black or turn red.

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