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Taiwanese firms still upbeat on mainland in long term
By Ma Tieying |
00:00 UTC+8 April 4, 2013
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PRODUCTION costs in Chinese mainland have risen significantly in recent years on the back of higher wages, yuan appreciation and inflation more broadly. But we don't see an exodus of Taiwanese firms from the mainland. On the contrary, Taiwan's direct investment headed for the mainland remains on its longer-term growth trajectory.
Taiwan's outward investment to the mainland peaked in 2010 and slipped in 2011 and 2012. The decline isn't significant from a long term perspective. On a five-year horizon (2007-2012), Taiwan's investment in the mainland continues to grow at a 5.1 percent trend rate.
Geographically, the recent fall of Taiwanese investment occurred mainly in the mainland's coastal areas. Investment in Guangdong and Jiangsu provinces declined from US10.1 billion in 2010 to US$7 billion in 2012.
In inland provinces of the mainland, however, Taiwanese investment rose by US$1.2 billion during the same period to reach an all-time high of US$5.8 billion. Investment expansion was particularly strong in Sichuan province and in the northeast region, by US$500 million and US$300 million, respectively.
Compared to the coastal areas, the inner provinces in the mainland offer affordable wages. Moving from Guangdong and Jiangsu to the west (e.g., Sichuan) and the northeast (e.g., Liaoning) can lower wage costs by 15 percent. In the central part of the mainland, like Hubei, Hunan, Hebei, Henan and Jiangxi provinces where Taiwanese firms have not yet explored sufficiently, wage costs are 20 to 25 percent lower than in Guangdong and Jiangsu.
Mainland market
Investing in inner provinces helps Taiwanese firms to continue penetrating the mainland market. The central, west and northeast regions account for more than 60 percent of the mainland's total population. Meanwhile, thanks to the rapid development of transport infrastructures, inter-regional trade within the mainland has become much easier than before.
Measured by the length of roads and railways as a percentage of land area, the transport system in Henan and Chongqing is now as mature as in Jiangsu; and transport in Hubei, Hunan and Anhui compares well with Guangdong.
Boosting exposure to the mainland market and reducing reliance on exports is a wise strategy for China-based overseas companies to employ. Domestic-oriented firms are in a better position than exporters to pass on rising production costs, thanks to strong wage and income growth amongst Chinese consumers. Selling to the domestic market, moreover, avoids the problem of yuan appreciation.
Chinese mainland market is also attractive to Taiwan's service sector firms. Outward investment into the mainland's service sector has continued to grow strongly in recent years. While manufacturing investment dropped US$3.3 billion from the peak of US$10.8 billion in 2010 to US$7.5 billion in 2012, services investment rose US$1.7 billion to a new high of US$5.1 billion. Investment in financial services, wholesale and retail trade and real estate was especially strong.
The rise of per-capita incomes and progress in urbanization are changing the life styles and spending behavior of Chinese mainland consumers, leading to the upgrade of consumption structure toward services. In light of the non-tradable nature of services, investment into the mainland is really the only way to capitalize on the mainland's services demand.
ASEAN region
Official data do not show Taiwan firms redirecting outbound investment toward Southeast Asia (ostensibly to reduce costs). Taiwan's outward foreign direct investment to the ASEAN region (Malaysia, Thailand, Indonesia, Philippines and Vietnam) grew only by US$200 million in the past two years and was far outstripped by the rise in Taiwan's investment toward the mainland inner provinces .
Taiwanese firms' investment expansion in ASEAN was almost entirely concentrated in Vietnam, where they already had some exposure. In spite of cheap wage costs in ASEAN, poor infrastructure, a relatively low degree of policy predictability and large cultural differences remain barriers for Taiwanese firms.
Against the backdrop of uncertain investment environment on the mainland, Taiwanese authorities also offered the olive branch to offshore Taiwanese firms. Various incentives have been provided to encourage them to come back and invest. The repatriated capital increased a small US$300 million between 2010 and 2011. Since November when Taiwan launched a special program to promote the repatriation progress, the applied investment cases have grown to US$5.9 billion (as of February 13), a big jump from US$1.6 billion in the first 10 months of 2012.
It remains unclear how much of the committed investment will be realized in the near term. Manufacturers in labor intensive sectors would face even higher cost pressures if they moved back to Taiwan. The wage gap between Taiwan and the mainland currently remains large at about two times. Labor force growth is slowing in Taiwan and the supply of skilled workers is slowing rapidly, as a result of aging population and an education system tilted toward higher education. Offshore firms that returned to Taiwan are facing a shortage of skilled workers, thus calling for the regulator to relax regulations regarding employment of foreign workers.
In the non-labor intensive sectors, it is more feasible for offshore Taiwanese firms to return home to invest. The reduction in cross-strait transaction costs in recent years has enabled an easier flow of goods, capital and personnel between Taiwan and the mainland. As such, producing in Taiwan and exporting to the mainland have become economically efficient for certain firms in certain industries. This doesn't contradict with the strategy of targeting the mainland market.
The article was based on a research report issued on March 27. The opinions are her own.
Taiwan's outward investment to the mainland peaked in 2010 and slipped in 2011 and 2012. The decline isn't significant from a long term perspective. On a five-year horizon (2007-2012), Taiwan's investment in the mainland continues to grow at a 5.1 percent trend rate.
Geographically, the recent fall of Taiwanese investment occurred mainly in the mainland's coastal areas. Investment in Guangdong and Jiangsu provinces declined from US10.1 billion in 2010 to US$7 billion in 2012.
In inland provinces of the mainland, however, Taiwanese investment rose by US$1.2 billion during the same period to reach an all-time high of US$5.8 billion. Investment expansion was particularly strong in Sichuan province and in the northeast region, by US$500 million and US$300 million, respectively.
Compared to the coastal areas, the inner provinces in the mainland offer affordable wages. Moving from Guangdong and Jiangsu to the west (e.g., Sichuan) and the northeast (e.g., Liaoning) can lower wage costs by 15 percent. In the central part of the mainland, like Hubei, Hunan, Hebei, Henan and Jiangxi provinces where Taiwanese firms have not yet explored sufficiently, wage costs are 20 to 25 percent lower than in Guangdong and Jiangsu.
Mainland market
Investing in inner provinces helps Taiwanese firms to continue penetrating the mainland market. The central, west and northeast regions account for more than 60 percent of the mainland's total population. Meanwhile, thanks to the rapid development of transport infrastructures, inter-regional trade within the mainland has become much easier than before.
Measured by the length of roads and railways as a percentage of land area, the transport system in Henan and Chongqing is now as mature as in Jiangsu; and transport in Hubei, Hunan and Anhui compares well with Guangdong.
Boosting exposure to the mainland market and reducing reliance on exports is a wise strategy for China-based overseas companies to employ. Domestic-oriented firms are in a better position than exporters to pass on rising production costs, thanks to strong wage and income growth amongst Chinese consumers. Selling to the domestic market, moreover, avoids the problem of yuan appreciation.
Chinese mainland market is also attractive to Taiwan's service sector firms. Outward investment into the mainland's service sector has continued to grow strongly in recent years. While manufacturing investment dropped US$3.3 billion from the peak of US$10.8 billion in 2010 to US$7.5 billion in 2012, services investment rose US$1.7 billion to a new high of US$5.1 billion. Investment in financial services, wholesale and retail trade and real estate was especially strong.
The rise of per-capita incomes and progress in urbanization are changing the life styles and spending behavior of Chinese mainland consumers, leading to the upgrade of consumption structure toward services. In light of the non-tradable nature of services, investment into the mainland is really the only way to capitalize on the mainland's services demand.
ASEAN region
Official data do not show Taiwan firms redirecting outbound investment toward Southeast Asia (ostensibly to reduce costs). Taiwan's outward foreign direct investment to the ASEAN region (Malaysia, Thailand, Indonesia, Philippines and Vietnam) grew only by US$200 million in the past two years and was far outstripped by the rise in Taiwan's investment toward the mainland inner provinces .
Taiwanese firms' investment expansion in ASEAN was almost entirely concentrated in Vietnam, where they already had some exposure. In spite of cheap wage costs in ASEAN, poor infrastructure, a relatively low degree of policy predictability and large cultural differences remain barriers for Taiwanese firms.
Against the backdrop of uncertain investment environment on the mainland, Taiwanese authorities also offered the olive branch to offshore Taiwanese firms. Various incentives have been provided to encourage them to come back and invest. The repatriated capital increased a small US$300 million between 2010 and 2011. Since November when Taiwan launched a special program to promote the repatriation progress, the applied investment cases have grown to US$5.9 billion (as of February 13), a big jump from US$1.6 billion in the first 10 months of 2012.
It remains unclear how much of the committed investment will be realized in the near term. Manufacturers in labor intensive sectors would face even higher cost pressures if they moved back to Taiwan. The wage gap between Taiwan and the mainland currently remains large at about two times. Labor force growth is slowing in Taiwan and the supply of skilled workers is slowing rapidly, as a result of aging population and an education system tilted toward higher education. Offshore firms that returned to Taiwan are facing a shortage of skilled workers, thus calling for the regulator to relax regulations regarding employment of foreign workers.
In the non-labor intensive sectors, it is more feasible for offshore Taiwanese firms to return home to invest. The reduction in cross-strait transaction costs in recent years has enabled an easier flow of goods, capital and personnel between Taiwan and the mainland. As such, producing in Taiwan and exporting to the mainland have become economically efficient for certain firms in certain industries. This doesn't contradict with the strategy of targeting the mainland market.
The article was based on a research report issued on March 27. The opinions are her own.
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