Taiwanese firms feel pinch of rising costs in China

ST Feb 20, 2008

Some are returning home while others are moving to lower-cost countries like Vietnam

TAIPEI - CHEAP labour, readily available land and generous tax breaks made China the dream factory for Taiwanese businessmen who were among the first to set up shop in the mainland in the 1980s.

But two decades later, a small but growing number of Taiwanese companies - deterred by rising business costs in China - are heading home or casting their sight on new investment destinations such as Vietnam.

In the past 16 months, Taiwan's Ministry of Economic Affairs (MOEA) received a record 102 investment applications from Taiwanese companies based overseas.

Of these cases, 60 were filed by mainland-based Taiwanese firms with a total estimated investment value of NT$8.5 billion (S$380 million). Some 50 applications were R&D related, said reports.

The phenomenon underscores the challenges faced by Taiwanese and foreign firms amid China's changing business environment.

The mainland has put in place new measures which will hike up business costs - especially for labour-intensive and low-value-add industries.

The new Labour Contract Law, which took effect this year, mandated companies to give open-ended contracts to employees who have worked for 10 years or have completed two fixed-term contracts.

These contracts include terms such as higher company contributions to pension and severance pay.

Taiwanese economic officials estimated that the new regulation could push up labour costs by between 10 and 40 per cent - especially for Taiwanese firms in the low-cost manufacturing centre in the Pearl River Delta.

Some analysts predict that about 10 to 20 per cent of Taiwanese manufacturers in the delta could close down this year.

Dealing another blow to Taiwanese firms, China will from this year gradually phase out the preferential tax rates enjoyed by many foreign companies.

These firms, which previously paid 15 per cent in corporate tax, will now be taxed 25 per cent like their Chinese counterparts.

The changes were the last straw for some Taiwanese firms which were already struggling with rising wages, a stronger yuan, the scrapping of export tariff rebates and stricter pollution-control requirements.

But observers say a mass withdrawal of investments is unlikely for Taiwanese businessmen, who are among the largest investors in the mainland.

There are an estimated one million Taiwanese businessmen and their dependants in China.

Analysts point out that the capital repatriated to the island is only a trickle compared to the flood of Taiwanese investments bound for China.

In the past 17 years, Taiwanese firms have poured US$63 billion (S$89 billion) into the mainland - about 60 per cent of Taiwan's outbound investments. In 2005, the ratio even hit a record high of 71.5 per cent.

'It is more a case of Taiwanese firms diversifying their investments than pulling out completely from China. Some have termed it the 'China-plus-one' strategy,' said Mr Hong Tsai-lung of the Taiwan Institute of Economic Research.

Despite rising business costs, China is still a magnet for investments because of its infrastructure, large base of suppliers and relatively skilled yet affordable labour, Mr Hong told The Straits Times. His views were echoed by others.

'For labour-intensive businesses like the textile industry, moving back to Taiwan would not solve their problem because the labour cost is still higher compared to China,' said Mr Andrew Yeh, chairman of the Taiwan Merchant Association in the southern Chinese city of Dongguan.

For firms like Unitech, a leading Taiwanese printing circuit board manufacturer, Taiwan's technological know-how is a big pull factor. The company has invested in a new solar cell plant in Ilan county.

'Our operations are fully automated, so labour cost is not a major concern,' Unitech president C.H. Hsu told The Straits Times.

'But the labour-intensive businesses like textile firms are unlikely to return to Taiwan. They left in the first place because they could not survive here.'

For Taiwanese firms sourcing for new investment targets, Vietnam has emerged as a popular choice. In fact, Taiwan is already the largest investor in the South-east Asian state.

But some mainland-based Taiwanese businessmen say it is still too early to pack their bags.

Said Mr Yeh: 'I will give it six months to a year. I am running a factory, not some roadside stall which I can just fold up any time and leave.'