Improved relations to benefit Taiwan and China
13 October 2008
In contrast to the so-called cross-straits tensions that have existed between China and Taiwan for nearly 50 years, recent diplomacy between the two influential countries seem to have resulted in an altogether more optimistic outlook for the region.
With Ma Ying-Jeou sweeping to power in Taiwan’s presidential elections, the highly publicised key policy of closer economic integration with mainland China advocated by his KMT party is tipped to have implications for the electronics industry, both regionally and beyond.
In reality, the two economies have been largely integrated for quite some time.
Commercially, Taiwan’s relations with China are already excellent, and despite the rule of the so-called ‘anti-Chinese’ DPP party since 2000, these relations have improved substantially during their term in office. Today, China is Taiwan’s leading export market, with 39% of its exports, up from 22% in 2000. Most large Taiwanese companies have substantial operations in China, using Taiwanese technological excellence and relatively cheap Chinese labour to manufacture sophisticated products for the world market.
In 2001, the Taiwanese government permitted companies to invest in China’s high-tech industries such as laptop computers and semiconductor manufacturing. Notably, around 90% of Taiwanese brand laptop computers are produced in China, while Taiwanese electronics manufacturing service providers and OEMs are the major drivers of China’s export trade. To illustrate the point, Taiwan-owned electronics giant Foxconn exported US$18.26 billion worth of goods out of China in 2006, up 26.2% from 2005’s US$14.47 billion.
Impressively, Taiwan is home to some of the world's largest chip makers. Taiwan Semiconductor Manufacturing (TSMC) is the biggest contract chip maker, while Advanced Semiconductor Engineering (ASE) is the largest chip packaging and testing company. The companies are among the pillars of the island's economy, but they currently face a number of restrictions when it comes to investing in mainland China.
With closer economic ties becoming part of the official political agenda, Taiwan has been encouraged to consider revision of these restrictions. The restrictions were originally put in place to protect against the loss of jobs, taxes, intellectual property and business from Taiwan to mainland China, where wages are considerably lower.
Under existing investment rules, large Taiwan-based business groups are restricted to a 20% investment limit in China, with small to medium-size enterprises limited to 30-40%. With an anticipated easing of restrictions, electronics manufacturing service providers and original equipment manufacturers with plants in China are likely to increase such investment. Electronics and semiconductor firms are expected to follow suit.
On the technology side, Taiwan has, to date, granted permission for just three 8-inch chip plants to be built in China by its semiconductor companies and has totally banned the construction of fabs that use the more advanced 12-inch silicon wafers.
This is likely to change under wide-ranging new revisions. Taiwan is already home to almost twenty 12-inch fabs, with several currently under construction and around another 15 planned, so placing restrictions on the older technology doesn't seem to make sense anymore.
Additionally, there is a lot of talk on both sides of the straits on further strengthening economic cooperation between China and Taiwan through the introduction of official measures such as of a Closer Economic Partnership Arrangement or Free Trade Agreement. This will accelerate the mooted formation of a grand Chinese economic community incorporating mainland China, Hong Kong and Taiwan. Looking at this prospective Chinese economic community macroscopically, China would become a manufacturing site for industrial goods, Hong Kong would be a base for finance and logistics, and Taiwan would serve as an R&D base for core components, new products, and new technologies. A ‘broadbrush’ viewpoint perhaps, as the community would almost certainly feature lesser or greater degrees of cross-fertilisation, since all three countries have experience in all three areas historically.
In this region, political initiatives can be quickly instigated and can lead to far- reaching economic outcomes. All signs seem to indicate that the improved cross-straits relations between Taiwan and China will result in the powerful electronics manufacturing service providers and original equipment manufacturers in both countries becoming even more competitive.
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