As US and China battle over trade tariffs, Taiwan’s underdog city waits patiently for its day

  • Taiwanese manufacturers turn away from China and back to Taoyuan
  • Suppliers to electronics giants build capacity to beat tariffs
PUBLISHED : Tuesday, 27 November, 2018, 2:27pm
UPDATED : Tuesday, 27 November, 2018, 8:48pm

One of the biggest beneficiaries of the trade war between the United States and China may turn out to be a gritty Taiwanese town called Taoyuan.

A former Japanese enclave to the west of Taipei, Taoyuan had long suffered as local businesses shifted factories to the mainland to benefit from cheap labour and globalising trade. But as tensions between the world’s two largest economies escalate, Taiwan’s biggest technology firms are moving some production back home and many are turning to the city of 2 million on the northwestern coast.

The trend may have accelerated after US President Donald Trump signalled he is minded to push ahead with increased tariffs against China.

Taoyuan is an hour by road from Taipei and hosts the island’s primary international airport. It is a popular destination as the manufacturing powerhouses behind the world’s electronics industries scour the globe for alternatives. The moves threaten to splinter a decades-old supply chain, in which Taiwanese companies assemble devices in Chinese bases for the likes of HP and Dell to label their own.

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From iPhone assembler Pegatron to laptop maker Compal Electronics, they are now preparing for an end to an arrangement that has served them well since the 1980s.

Along with fellow Apple supplier Inventec, the trio are among those adding capacity in Taoyuan, with announcements coming as Washington and Beijing ramp up the rhetoric over trade and tariffs.

Others, like Quanta Computer, are snapping up or seeking factory space. The city’s population is now the fastest-growing in the country even as US-China tensions dampen the global economy.

“Our operational model will see a major change from the past two decades,” Pegatron chief financial officer Charles Lin said this month. “In the future, production will be spread out in different countries and we will not be able to build mega-plants in other places like those in China.”

Trump said Apple iPhones and laptops could be hit by new tariffs, according to an interview with the Wall Street Journal. The US president said he is prepared to impose tariffs on a final batch of US$267 billion of shipments if he cannot strike a deal with Chinese President Xi Jinping when they meet at the Group of 20 summit which begins on November 30.

Thirty years ago, many companies based in Taoyuan and elsewhere on the island left for China’s lower costs, helping to create the world’s factory floor. While Taiwanese government data shows investments in China peaked around 2010, they remain a formidable presence. Fifteen of the top 20 exporters from the mainland to the US in 2016 originated in Taiwan, according to a Chinese state-run customs data website.

Now, increased tariffs threaten thin margins. Higher wages will make it more expensive to produce in Taiwan, as will losing the efficiency gained by having the supply chain located close together in China.

“With tariffs expected to rise to 25 per cent, it will push Taiwanese companies to expedite their plans to go home or build operations in a new location,” said Angela Hsieh, an economist at Barclays. “Yet there are still a lot of uncertainties surrounding a trade war, so companies tend to first add capacities in their existing facilities in Taiwan instead of spending a lot to build new plants.”

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That is where Taoyuan comes in. While some of Taiwan’s corporations are considering migrating as far afield as Southeast Asia, others prefer to move closer to home. The island’s administration – sensing an opportunity – is cobbling together incentives such as tax holidays to entice their corporate citizens back.

“The fastest way is to add capacity in existing facilities. Looking for new land and building new facilities elsewhere will be too slow,” Elton Yang, chief financial officer of Taoyuan-based Quanta, said.

To be sure, Taoyuan has always been pro-business. Steady lobbying and the proliferation of more than 30 industrial parks helped produce spectacular results: its industrial output was estimated at close to US$100 billion last year, outstripping even Taiwan Semiconductor Manufacturing’s base of Hsinchu to the south.

The moves to Taoyuan defy a historical trend throughout the industrial era, in which manufacturing has gravitate towards the lowest labour costs. The minimum monthly wage in Taiwan is about NT$22,000, which is more than double the 2,410 yuan a worker in Shanghai can expect.

Taoyuan’s courtship of manufacturers has increased this year amid the sabre-rattling. The city has teamed up with real property agents to help companies locate land, which has become progressively pricier. According to property company Savills Taiwan, costs for industrial land in certain locales have gone up as much as 75 per cent from 2014. In the year to September 2018, there were 30 per cent more companies asking for the government’s help in securing land compared with a year earlier, city officials said.

“Taoyuan is now the top choice for Taiwanese companies coming home,” Mayor Cheng Wen-tsan, of Taiwan’s ruling pro-independence Democratic Progressive Party, said at an event to mark an investment there on November 5.

“Out of 10 looking to return, four or five say Taoyuan is their first choice,” said Cheng, who held on to his seat as the KMT wave swept Taiwan at the weekend’s elections.

Taoyuan topped all cities in transactions for industrial land and factories from January to September, according to Taiwanese property company, Sinyi.

Those deals totalled NT$12.65 billion out of NT$29.02 billion transacted by all the island’s listed companies. Companies favour Taoyuan partly because Hsinchu is suffering a bigger land shortage and sets a higher threshold when screening companies, Sinyi manager Michael Wang said.

Even foreign companies have taken notice. San Jose-based Super Micro Computer is expanding server production capacity in Taoyuan, and proceeding with a separate plan to build a facility that will take its investment in the city to NT$9 billion, city officials said.

“It is cheaper than Taipei. With various types of industrial parks, Taoyuan is also easier for companies to build their operations in than Hsinchu,” Wang said.