HONG KONG — In the 1970s, Taiwan was the world’s third-largest film production territory, making 200-300 films a year. Today annual output is less than 30. Moreover, much of that total is arthouse movies that win prizes at festivals around the world but scarcely sell tickets at home.

“For too long we have limited ourselves. People no longer know how to make commercial films,” says Wang Ying-hsiang, who heads producer-distrib Long Shong Pictures and is also prexy of the Chinese Movie & TV Union Federation.

“I have seen the rise and fall of Taiwan’s film industry. I hope the Government Information Office (GIO) can find ways to revive our film industry,” says Ang Lee. The Oscar-winning helmer is treated as Taiwan’s favorite son, but he has become a naturalized U.S. citizen and has not made a film in Taiwan since “Eat Drink Man Woman” in 1994.

Some bizzers blame the likes of arthouse titans Hou Hsiao Hsien and Tsai Ming-liang for setting the wrong example to younger Taiwanese filmmakers. The arthouse emperors are significantly more powerful than most Taiwanese producers. Many have their own companies and production or post-production facilities, which give them a layer of insulation not available to helmers for hire.

Moreover, their films have a loyal following worldwide; therefore, international sales houses are willing to finance their works, or they pick up coin via presales or by striking co-production deals with foreign distribs. Hou’s “Flight of the Red Balloon” was repped by France’s Films Distribution; Tsai’s films are regularly financed by Hong Kong sales outfit Fortissimo Films, which also took Tsai disciple Lee Kang-sheng’s “Help Me Eros” to the Venice and Toronto fests.

However, a small number of filmmakers have decided that they do not want to be subsidy junkies and cannot wait for the GIO to sort out the problems for them.

In that camp are Michelle Yeh and Aileen Lee of indie Three Dots Entertainment and the very much larger China Magnetics Corp. A major disc replicator, CMC has become the biggest player in the Taiwanese industry.

Company first ventured into production with the very-big-budget horror pic “Silk” by Su Chao-pin. Pic unspooled as an official selection in Cannes 2006 but flopped with critics and auds alike. It has now taken to co-investing in high-profile movies with China. Strategy gives it access to mainstream talent and access to the China market. It was a financier on “Blood Brothers,” which preemed in Venice, and is among the finance consortia backing John Woo’s $80 million “Red Cliff” and Chen Kaige’s “Mei Lan-fang.”

Three Dots has found success through selection of much lower-cost films, much closer to the youth zeitgeist in Taiwan and elsewhere in Asia. Company seeks a balance between roles of director and producer and has so far kept to obvious genres such as horror and romantic comedies.

“What will help secure a trend, to help rejuvenate Taiwan cinema, is to have a big breakthrough film, followed by a successive run of small- or medium-budget films to get the audience watching Taiwanese rather than Hollywood films,” says Yeh.

Its first success was “Formula 17,” a gay sex comedy helmed by a woman, DJ Chen, and intended to appeal to a female demo as much as gay men. That was followed by “Heirloom,” a creepy horror pic by Leste Chen. Its third, “The Shoe Fairy,” was co-financed and sold widely when its was boarded by the Focus First Cuts program of low-budget films promoted by Andy Lau and News Corp.’s Fortune Star.

There are also a number of other companies who are active players, including financiers such as Serenity Entertainment and Double Edge. While Serenity works closely with indies such as Three Dots, it also sees itself as a hands-on equity financier and international sales outfit.

On a bigger scale, Double Edge is backed by the world’s No. 3 computer manufacturer BenQ and by Taiwan’s GIO. It has previously financed Diane Keaton and Liv Tyler starrer “Smother” and Paul Walker/Piper Perabo vehicle “The Heaven Project,” which are both repped by Inferno Distribution. Having learned the ropes in the U.S., it is now turning its attention to Taiwan, where it aims to be movie investor, co-producer and local distrib. “When we go in as an investor, we are looking to put up 7.5%-20% of budgets at an early stage in projects and in return earn exec producer fees and take Asia and Japan rights,” says CEO Bobby Sheng.

Another exec with big plans for a new direction is Peggy Chiao, the veteran critic turned producer responsible for arthouse classics “Blue Gate Crossing” and “Betelnut Beauty.” She has sought alliances with Shanghai-based producer Meridian and helped establish the Yunnan Project, a collective of women filmmakers from the Chinese province of Yunnan who are on course to make 10 low-budget features shot digitally. Three are now completed.

“The (Taiwan) market is simply too small to sustain the film industry. We need to focus on Chinese-language communities before we can tap into other Asian and even the global markets,” Chiao says.

While the Chinese and Taiwanese governments have very different political views — China views Taiwan as a renegade province while the Taiwanese government sees itself as running a sovereign state — the new generation of filmmakers is determined to be part of the economic boom and cultural blooming taking place in China. CMC is boarding Chinese projects, while Three Dots and Chiao aim for their projects to land on the fertile ground somewhere between the propaganda output and China Film Group’s slate of big-budget prestige pics. In fact, that ground was prepped last year by surprise success of Fortune Star and Warner China Film HG’s low-budget caper movie “Crazy Stone.”

Three Dots’ latest, “My DNA Says I Love You,” a comedy about cleanliness and genetic compatibility, even enjoyed the privilege of a mainland China release during September’s Golden Week.