Morris Chang Wants Consistent FX Policy

Morris Chang is asking the Taiwan Government to develop a consistent fx policy as the strengthening of the NTD against the USD is leading to decreased profits for Taiwanese companies. Since Taiwanese companies are largely export oriented and receive payments in USD, any appreciation in the NTD against the USD will severely affed the bottom line of many export oriented companies in Taiwan. Chang explains

Taiwan Firms Warned About Vietnam

Early in the year we blogged about the exodus of Taiwanese firms from South China to Vietnam. Rising rents, increased minimum wages and the dropping of tax incentives made investing in China increasingly expensive. Many companies, including some tech companies, decided to move to Vietnam where the property and wages are both cheaper.

Recently, the Taiwan government warned against investing in Vietnam because of the devaluation in the Dong, the Vietnamese currency. China Economic News (CENS) reports:

Due to the sharp depreciation of Vietnamese dong, Taiwan firms in that nation are warned to be cautious, said P.C. Chiu, director of the Industrial Development and Investment Center of the Ministry of Economic Affairs.

The MOEA worries that the sharp depreciation of the Vietnamese currency might drive Taiwan firms to shut down as the devaluation could spark an Asian financial crisis like that in 1997.

C.Y. Chen, director of the Taipei Economic and Cultural Office in Ho Chi Minh City, said the Vietnamese government recently chose to raise interest rates and devalue its currency to check its overheated economy, which has sparked serious inflation. The Vietnamese consumer price index grew over 20% in May. Chen said, however, he believes Vietnamese economy would soon get back to the normal track.

MOEA statistics show that Taiwan is Vietnam`s second-largest foreign investor, only behind South Korea, with the number of Taiwan firms in Vietnam totaling 1,800 and overall investments reaching US$10.3 billion.

Digitimes reported however that both Compal and Mitac will remain in Vietnam. The report says:

Despite the sharp drop of the Vietnam economy recently and exchange rate fluctuations, Taiwan-based notebook makers Compal Electronics and Mitac Technology have both said they will continue their investment in the country, according to a Chinese-language Economic Daily News (EDN) report.

Compal pointed out that although the value of Vietnam's currency has dropped, from a investor's perspective, this means costs will be lower, noted the paper.

Mitac stated that since its plants in Vietnam will mostly produce products for export it will not see any major impact due to exchange rate fluctuations, added the paper.

Article 1: MOEA Warns Taiwan Firms in Vietnam Due to Devaluing Dong
Article 2: Compal and Mitac continue investment in Vietnam despite falling economy, says paper

Forex Effect on Taiwan Companies

More on foeign exchange. Digitimes reports that Motech Industries, a solar cell manufacturer, have suffered an erorosion in their Q1 profits due to a strengthening NT dollar. Digitimes reports:

Motech Industries reported unaudited net profits of NT$239 million (US$7.88 million) in the first quarter of 2008, an amount that was severely eroded by exchange rate losses.

Motech posted gross operating profits of NT$819 million (US$27 million) and non-consolidated income of NT$666 million in the first quarter of 2008. Net profits for the first quarter was NT$239 million. The company's gross margin shrank from 17% to 16.7% due to expenses from employee bonuses. Earnings per share (EPS) was NT$1.16.

Industry watchers noted that Motech is still having consistent sales growth, as evident in its quarterly sales of NT$4.9 billion. However, the rapid appreciation in the New Taiwan (NT) dollar against the US dollar, as well as an inefficient currency hedge policy, led to a booked exchange loss of NT$400 million. The exchange loss stemmed from unused global depository receipts (GDRs), as well as deposits for material procurement, the company explained.

The China Economic News (CENS) also notes that strong appreciation of the RMB in China will force many China-based Taiwan enterprises to close. CENS reports:

Sharp appreciation of renminbi is expected to trigger a major shakeout among Taiwanese-invested enterprises in China, possibly forcing one third of Taiwanese firms in traditional lines to close shop, while allowing those with solid strength to land even more orders in two years later after experiencing the ordeal this and next year, said Lin Chin-chang, chairman of the Humen branch of the Taiwanese Chamber of Commerce in Dongguan, Guangdong Province, yesterday (April 10).

CENS continues,

As a result, Taiwanese firms in Dongguan area may fold at a rate of 20-30 per month, up from 2-3 last year, according to Lin. Xie Qingyuan, vice chairman of Taiwanese Chamber of Commerce in Donggouan, noted that Taiwanese makers won`t be able to take any order should renminbi`s exchange rate climb to US$1=6.5 yuan.

Hopefully some of these companies will survive. Especially hard hit will be the textile industries. Maybe they can hold firm in this economic shake-up.

Article 1: Motech net profits eroded by exchange losses in 1Q08
Article 2: Numerous Taiwanese Firms in China Likely to Fold on Sharp Revaluation of Renminbi

Foreign Exchange Exposure Costing Taiwan Billions

This is slightly off topic but still interesting.

Yesterday I read in the China Economic News (CENS) that the strengthing of the NTD against the USD has cost Taiwanese insurance billions of NTD. According to CENS:

"The NT dollar has revalued around 7% against the U.S. dollar, far exceeding the scale of other currencies, so far this year, inflicting some NT$40 billion of foreign exchange-related loss or cost so far this year on life insurance firms from their overseas assets, which top NT$2.2 trillion in value."

According to CENS, the main reason for the loss is that only 50% of the NTD2.2 trillion overseas funds had a complete 100% hedge. CENS reports:

"Of the NT$2.2 trillion overseas assets, life insurance firms have resorted to traditional 100% direct-hedge method for NT$1 trillion, while employing the proxy hedge method, or one basket of foreign currencies which tend to move in the same direction with the NT dollar, for the remainder, which is useless due to the exceptional strength of NT dollar this year."

Today I also read that Chunghwa Telecom is also feeling the pain. Taipei Times reports:

"Chunghwa Telecom projected losses from the contract would amount NT$1.5 billion (US$49.9 million) based on the assumption that the New Taiwan dollar would rise to an average of NT$30 in the next 10 years. The firm said the losses were still within the acceptable range."

According to the article, the company is not concerned at the moment saying that there would be a realignment over time and that these losses are unrealized. If it continues to rise against the USD then these companies will have greater losses. The Taipei Times says:

"If the NT dollar appreciated to NT$28 against the US dollar, the losses would widen to NT$3.5 billion from NT$1.5 billion estimated previously."

Of course the problem for many companies was that the NT dollar hit a 10-year high on Wednesday and traded at NT$30.01 to the dollar.

For Taiwan's hi-tech companies that trade in dollars this is a significant problem. Consider a tech company in Taiwan doing business in South Africa where the rand is depreciating against the dollar. Selling products into that market will be increasingly difficult. Also since most Taiwanese Tech companies quote in USD and since for many of these companies the US is their largest market, their equivalent NTD revenues are going to decline if they retain the same USD prices.

Thats it for now. Ciao.