Taiwanese manufacturers head home as problems in mainland China mount

Island investors are leaving mainland China due to mounting risks - and homegrown incentives

PUBLISHED : Sunday, 16 November, 2014, 6:56am
UPDATED : Sunday, 16 November, 2014, 6:56am

Taiwan's Jeff Wu ran an Asustek Computer sales office for 12 years in Shanghai, but this year he decided to close shop.

His sales office of 100 people once prospered because Wu knew the ins and outs of the Taiwanese-branded PC gear. He also retained customers by being extra polite, eschewing what he considers typical mainland Chinese brusqueness. He sank one million yuan (HK$1.3 million) into rent and remodelled. But it didn't stop mainland Chinese vendors from learning his techniques. In time, PC sales migrated to e-commerce, as Shanghai's rents grew too expensive.

Wu, 50, says he will take his profits back to Taiwan and start a new venture, although he's still looking around for the right one. "I'm part of a group of people who has been eliminated," he said, referring to offline sales of Taiwanese hi-tech gear by Taiwanese citizens. "We are not useful for any kind of work involving sales."

Wu is part of a homecoming movement of sorts, to hear the government in Taiwan tell it.

Taiwanese entrepreneurs with operations in mainland China, a multibillion-dollar force, are investing in their home market again. They want to escape mounting business risks. Some investors hope to reap advantages, including government incentives, that are harder to find in the People's Republic.

Since 2006, Taiwanese companies have launched projects either by leaving the mainland or using capital once intended for mainland expansion, the island's government says.

That transfer has brought NT$53.5 billion (HK$13.5 billion), back to Taiwan, including NT$52 billion last year. The government forecasts another NT$53.5 billion this year.

Taiwan officials have been trying to woo capital from the mainland since 2006, with a bigger push since November 2012, to shore up the macro economy through more investment, productivity and tax revenues.

Taiwan's economic growth slowed to 2.09 per cent last year from a 52-year average of 7.15 per cent, a development blamed on slack export demand in major markets such as Europe and the United States.

One result? Taiwan has added more than 89,000 jobs since 2006.

"Taiwanese investors want to come back and they will continue to come back," Heinz Chien, senior executive officer with the Economic Affairs Ministry's department of investor services, said.

"The question is whether the flow will be big or small."

The transfer of capital from mainland China is one of several government tactics to stoke Taiwan's slow-growing, half-trillion US dollar economy.

Many Taiwanese businesspeople moved factories or direct investment capital to mainland China in the 1980s, when Taiwan's labour and land prices shot up. About 101,000 Taiwanese entrepreneurs with US$140 billion in projects remain there, the Investor Services Department estimates.

"Taiwan is better for maintaining a set level of technical quality," said Chung Chin-chin, chairwoman of Kao Fong Machinery. The Taiwanese developer of building materials chose to build a new, 16,525-square-metre factory at home over mainland China in 2011 to focus on precision work. Chung said the plant - which produces 80,000 tonnes of building materials each month - was ideal for its 55 Taiwanese and 10 migrant workers. "We're still growing and still changing," she said. "Now we sell to mainland China."

Mainland China remains a cheaper place to operate than Taiwan, despite rising wages and certain provincial rules that can add to costs. (Guangdong province, for instance, requires employers to pay retroactive insurance for employees stretching back a decade, Chien said.)

Mainland workers earn a minimum US$2,472 per year compared to US$8,481 for workers in Taiwan.

Taiwan officials said they helped investors by steering them to property that was fairly priced for industrial development. Two government-funded hi-tech incubators and several more that develop traditional industries such as shoe manufacturing have helped companies use their repatriated capital to upgrade or add product lines.

One of the more popular incentives began in 2012 when the government allowed returning investors to hire low-paid Southeast Asian migrant workers for up to 40 per cent of their staff.

Taiwan lowered the corporate tax rate from 20 to 17 per cent in 2010, and Chien says that that drop still lures investment back from mainland China.

To lure more capital back, Taiwan's parliament is considering a bill to create special zones that would cut taxes for companies based around six ports and the main international airport.

Companies that move a project back to Taiwan or use Taiwan to expand their business often cite a crush of problems in mainland China. Some Taiwanese factory owners said they worried that governments would demand, once their leases expired, that they must move or face closure. Zoning laws change, particularly those targeting air polluters, pushing some Taiwanese-owned factories from prime east coast locations to rural areas. Such a disruption usually brings added costs to a business owner.

"They don't want to move," Chien said. "They've done well in a place but they're being asked to leave. But your workers and engineers are nearby. Then you make them go to the countryside."

About 55 per cent of projects launched in Taiwan since 2006 are manufacturing concerns, with 40 per cent in services.

Most returning companies keep part of their business in mainland China, in some cases using a new base in Taiwan to expand, upgrade or diversify, Chien said. The brand cachet of 'made in Taiwan' beats that of 'made in China', he says, and the island's skilled workers earn less than peers in other developed Asian economies.

It's not just manufacturing that is growing back home in Taiwan. One mainland China-based businessman sent capital back to Taiwan last year to start a NT$1.09 billion hotel and shopping mall on the island's sparsely populated east coast, hoping to take advantage of a tourism boom, according to Economic Affairs Ministry data.

Investors often turned back to Taiwan for its "friendly" workforce, says Shih Hsiao-chi, macroeconomist with SinoPac Securities in Taipei. Workers in mainland China, though paid less than in Taiwan, had a reputation for quitting, sometimes to set up rival companies using techniques acquired at their previous job. "People here are cheaper and pretty qualified," Shih said, comparing Taiwan to other developed parts of Asia. "And Taiwanese people's attitude towards work has a great reputation. That should attract some enterprises back."

But more could still be done. Taiwan should cut "administrative fees" for investors, but let cities, counties and the free market decide which repatriated investment projects to accept, said Wu Hui-ling, research fellow with the think tank Chung-Hua Institution for Economic Research in Taipei. "The government doesn't need to encourage investors left and right," he said.