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Taiwan welcomes Chinese investment with some reservations

Chinese investors have poured into Taiwan with amazing speed and magnitude. They have been likened to a pack of vigorous, highly intelligent and combative wolves. How will Taiwanese companies cope as they begin to entangle themselves with these ravenous wolves? This is the topic of a recent edition of the Commonwealth monthly that addressed the many business segments that could be under the shadow of Chinese ownership.

The Chinese investors have already penetrated the computer and electronics, optoelectronics, banking and property markets in Taiwan, adding a new variable to Taiwan’s competitive environment and quietly entering the lives of Taiwanese people. The online games children play, the houses and hotels Taiwanese live in, the media and even jobs are now open to mainland influence.   

Opaqueness of Chinese investments

According to Taiwan’s Economics Ministry, Chinese investments in Taiwan as of February 2011 totaled US$140 million, while the US$12.2 billion invested by Taiwanese businesses in China last year was nearly 100 times that amount (and cumulative Taiwanese investment there is nearly 1,000 times the amount). The numbers appear lopsided, but China’s investment in Taiwan is actually far greater than the figures would suggest. Through their use of a global network of subsidiaries and affiliates, Chinese enterprises have grabbed stakes in Taiwan in many different sectors, including those that are not legally open to Chinese investment yet.

A number of big Chinese corporate names have entered Taiwan through affiliates in third countries (taking stakes of less than 30 percent). This took place before investment permits for Chinese investors were issued in 2009. As an example, Lenovo invested through the PC department of IBM Netherlands. Alibaba established a presence through its Singapore subsidiary, and telecom services provider Huawei Technologies Company set up a Taiwanese branch office through its Hong Kong subsidiary.
In addition, 35 Chinese enterprises have set up offices in Taiwan and registered with Taiwan’s Economics Ministry – including the Bank of Communications, Bank of China, China Merchants Bank and China Construction Bank – and none of these appear on Taiwan’s official list of Chinese investors in the country, even though they could soon be major players. Once they begin operations, their investments could expand significantly since the minimum operating capital for a branch in Taiwan is NT$250 million (about US$8.4 million).

China uses Taiwan to upgrade

The Chinese rush to Taiwan has also been driven by internal pressures to upgrade operations. “Chinese businesses along the coast are urgently trying to upgrade. With the appreciation of the Chinese Yuan (RMB), they have plenty of financial muscle to buy Taiwanese companies. It’s the fastest and easiest way for them to upgrade,” said Yang Chia-yan of Taiwan Institute of Economic Research, speaking to the Commonwealth.

According to Thomas T.M. Chen of Jones Day, an international law firm, their main goal is to gain access to Taiwan’s technology and brainpower. Entering into Taiwan’s market is not their primary interest.

China’s biggest LCD panel maker BOE Technology Group Co., which has an 8.5-generation plant to make large displays, announced in March 2010 that it was acquiring Taiwan’s Jean Co., Ltd., a Tatung Group subsidiary and OEM/ODM manufacturer of visual display products, for RMB300 million. The package included a 100 percent stake in Jean’s China subsidiary and some of its assets in Taiwan, including over 200 employees.

Although Jean is not a leading LCD display assembly plant, it has strong design and OEM capabilities and a complete stable of international clients, all elements that Chinese enterprises lack. BOE Technology then applied and received approval to set up “Taiwan BOE Vision Technology Ltd.,” becoming the Chinese boss of Jean’s production line and its Taiwanese monitor department.

The Commonwealth reported that China is no longer satisfied with raw materials and low-cost manufacturing, but is learning how to command technology, brands and markets.

Accessing a superior testing ground and markets

Aside from directly buying technology and talent in Taiwan, Chinese enterprises also see Taiwan as their cheapest and closest internationalized testing ground. Although they are gaining experience investing abroad, the vision and attitude of Taiwan’s talent, and the R&D capabilities of its wafer, IC design, LED, textile and its cultural and creative sectors remain superior. The gaming industry is just one example.

“In Taiwan, you can compete with international games. Taiwan’s game players have experienced the challenge of games from around the world. There are products from Korea, the United States, Japan and Europe. The level of competition Chinese games face in China is not the same,” says Aaron Hsu, president of the Taiwan-based Game Industry Promotion Alliance.

Taiwan is the world’s fourth largest machine tools exporter, behind Japan, Germany and Italy, with yearly exports totaling US$3 billion. It is a major supplier of equipment for China’s manufacturing sector with nearly 50 percent of those exports going to Hong Kong and China. This year, the machinery industry has a shot at becoming Taiwan’s third trillion-Taiwan-dollar industry (after semiconductors and flat panel display units). There are more than 10,000 companies involved in the upstream and downstream supply chain in the Taichung area alone, making it the world’s most densely concentrated machine tool industry cluster.

Skirting around Taiwan’s laws

One Taiwanese entrepreneur with sales of NT$10 billion (US$346 million) in Taiwan and China, said that Chinese companies are staking out land and buying everywhere with the voracity of a large conglomerate, bringing turmoil to other people’s markets. “For the whole world, they’re all like wolves,” the entrepreneur says.

Several business people in the gaming industry said Taiwan’s law stipulated that Chinese gaming companies may conduct research and development in Taiwan, but not sales. As a matter of fact, Chinese companies have made money by selling their products through their Taiwanese partners or through Taiwan’s financial system. It is not fair that Taiwanese firms cannot reciprocate by running their gaming businesses in China.

Not too long ago, the British newspaper The Guardian reported that European countries were selling their souls by allowing China to buy a large amount of European bonds, alleging China’s investment in the European economy serves as a Trojan horse.

The Commonwealth concluded it is not right to be over optimistic or pessimistic about Chinese businesses entering Taiwan. It is healthier to recognize and understand that the Chinese bring to the world a new competition level.  

Workers yet to feel economic growth

Taiwan is expected to have achieved an economic growth rate of up to 9.98 percent this year, the highest in nearly twenty years, but most ordinary people are still to feel the positive effects. Scholars believe that the missing component in the equation is an absence of salary increases.

Liang Kuo-yuang, president of the Polaris Research Institute, told the United Daily News, “the speed of income increase for the general public has not matched the economic growth rate,” and thus personal incomes are seen to be out of alignment with the positive economic data.

Kung Ming-hsin, vice president of the Taiwan Institute of Economic Research, agreed that most salaries in Taiwan have fallen, with only a few increases. However, while many international professionals in Taiwan enjoy high salaries, the wages for the majority of ordinary workers have remained frozen, with some seeing a workload that has doubled due to staff streamlining.  

Liang said that this year’s economic growth rate is “not real.” The “beautiful illusion” of 9.98 percent is created in large part by the financial tsunami in 2009 resulting in negative 1.93 percent of GDP – the biggest recession in Taiwan’s history.

After subtracting the unusually high economic growth this year, Liang predicts that if Taiwan’s economy can continue with moderate growth rate for several years, it is possible that people will see their salaries grow eventually.

Kung stressed that there have been major changes in Taiwan’s economic growth pattern, according to the United Daily News. Due to continuous technological progress and efficiency, the traditional labor-intensive manufacturing industries have been unable to absorb the unemployed, and indeed are trimming their staff numbers further. Meanwhile, service industries have not been able to further upgrade and provide the motor to drive the island’s economy forward.

The Economic Daily News said in an editorial that the nature of the recovery is the result of the government’s past economic development and tax policies, which placed the emphasis on export-oriented industries and businesses that enjoyed the benefits of tax credits as a reward for investments. But now the situation has changed with the manufacturing bases relocating overseas. With the low value of research and development in related manufacturing industries, the business model of taking orders in Taiwan and manufacturing in China can no longer distribute the fruits of economic growth across Taiwan society. Thus causing the formation of a structural problem where Taiwan’s GDP has risen far more than salaries.

The Commercial Times suggested in a review that the government should actively attract more Chinese investors, saying that since the government’s opening of Chinese capital to Taiwan in  mid-2009, there have only been around 50 Chinese companies coming to Taiwan with an investment amount worth US$100 million. Such a level of investment is meager in Taiwan’s economic system, so it comes as little surprise the people do not feel any effect. On the other hand, the paper said, if the governments on the two sides of the Taiwan Strait can begin to work together to promote Chinese infusion of capital into Taiwan, it would not be long before Chinese enterprises play an active part in Taiwan’s industrial system and people feel the increasing benefits of bilateral economic and trade relations.

The paper also noted the FTA-like Economic Cooperation Framework Agreement (ECFA) signed between the two sides does indeed favor Taiwan and more so for the owners of Taiwanese businesses in China, although not the general population in Taiwan. In the initial stages of the ECFA’s early harvest list, for example, there is an implicit tendency to encourage Taiwan’s manufacturing businesses to invest in China. For those industries not included in the early harvest list, such as automobiles, LCD panels and major petrochemical products, the agreement encourages the transfer of manufacturing capacity to China, and a reduction of investment in Taiwan.

If this reflects the trend of cross-strait economic and trade liberalization, the employment opportunities for Taiwanese people would further decline with closer cross-strait trade relations. Therefore, follow-up negotiations relating to the ECFA must adhere to the principle of keeping alive Taiwan’s manufacturing activity in order to protect employment opportunities in Taiwan.