Taiwanese Investment in China: Now and the Future

Over the years Taiwan corporations have continued to remain competitive by moving manufacturing operations to low cost countries like China, Vietnam, Thailand, and Cambodia etc. However a large bulk of these investments have been into China.

Between 1991 and 2007, Taiwan approved US$65 billion worth of investments in China and probably much more in unreported investments. Last year alone investments from Taiwan into China amounted to US$10 billion. In December alone investments had a 22.6% year on year increase to US$1.52 billion. (Source: Reuters)

Many of the hi-tech companies have invested in manufacturing plants since this is their strength. The whole chain of sourcing raw materials, product design, marketing, manufacturing and supply chain management is highly integrated in the Taiwan market, and Taiwanese companies do it well. However, with many of these companies moving their manufacturing operations overseas, much of their expertise has been transferred. These movements, and the dependency on China as the low cost manufacturing base, has long concerned the Taiwan government, who would prefer these corporations diversify their investment strategies by sharing the investments among the other countries.

This level of investment has also led to a loss of manufacturing jobs and a decline in manufacturing in Taiwan. Last year (or the year before, cannot remember) I read in the Taipei Review that over the past decade the structure of Taiwan’s economy has changed significantly. The service industry is a growing sector and contributing more and more to the economic well being of the island. Some local restaurants and bookstores were even expanding internationally.

However, the loss of jobs is a concern. To help stimulate reinvestment into Taiwan, the government recently increased the investment cap for companies investing in China. The cap can be raised if the company is willing to invest more in Taiwan. The government has also decided to reduce the fines on renegade companies that invested in China without first seeking permission. They are hoping lower fines motivate these prodigal companies to return and invest in Taiwan. (Source: China Post)

It was also good to see that a major player in the memory industry, Transcend, is investing in a plant in Taiwan (Neihu). This move bucks the trend described above. Digitimes reports Transcend Chairman, Peter Su, said this plant reflects their optimism in Taiwan’s future. The new plant will be located in Neihu and is expected to be operational in Q3, 2009. (Source: DigiTimes)

The same Digitimes article refers to recent changes in labor laws in China and a reduction in the tax incentives. This will increase cost of production and, may in the future, see more Taiwanese companies staying and investing in Taiwan. It will be interesting to see how these additional costs affect Taiwan’s direct investment in China next year and whether investments will increase, as they have over the past, or if there will be any measurable effect at all.

I do however believe that in the short term, investments will continue to rise. Eventually the investments will peak but I somehow doubt that point has arrived.