US trade war prompts Taiwan firms in China to look elsewhere

December 27, 2018 08:30
Manufacturers must be flexible in their production chains and be able rebuild them in different places, Foxconn’s Terry Gou has said amid growing worries of a prolonged Sino-US trade war. Photo: Reuters

The worsening Sino-US trade war is driving Taiwan firms out of mainland China. Fear of losing access to their most important export market, on top of already existing problems like soaring Chinese labor costs and tougher environmental controls, is forcing companies to move to Vietnam, Cambodia and other countries.

In the first 10 months of this year, Taiwan investment in China was US$6.94 billion and the figure for the whole year will be the lowest for more than seven years, about half the record US$14 billion of 2011.

The biggest Taiwan investor in China is Foxconn, which employs 1.3 million people there and is one of the country’s largest exporters. Its chairman Terry Gou said this month that the Sino-US trade war would be prolonged and would last for five-ten years. “Manufacturers must be flexible in their production chains and rebuild them in different places,” he said.

Taiwan companies are trapped in the middle of this war, because the largest export market for their factories in China is the United States. So goods made in China face the risk of rising tariffs during the period of the Trump administration, which could last a further six years.

The mainland is the largest destination for Taiwan overseas investment. There are 100,000 Taiwan companies there. A total of 405,000 Taiwan people worked in the mainland in 2017, according to official figures published last week. That was more than half of the total 736,000 Taiwanese working overseas. Unofficial estimates put the number of Taiwanese living in the mainland at more than one million.

The Chung Hua Institute for Economic Research said last Wednesday that 45.8 percent of Taiwan firms in China were considering relocating their investments, with the main destinations being ASEAN countries, Taiwan and the US.

Of the firms surveyed, 76 percent said that the Sino-US trade dispute was their top operational concern, ahead of foreign exchange fluctuations (56.3 percent), and raw material prices (51 percent).

The institute forecast Taiwan economic growth in 2019 at 2.18 percent, down from the expected 2.62 percent in 2018, in part because of the Sino-US dispute.

The first choice outside China for Taiwan firms is Vietnam. In 2019, a free-trade agreement between Vietnam and the European Union will come into effect, eliminating tariffs on 99 percent of goods traded between the two sides. Exports from Vietnam to Japan and the US face an average tariff of below four percent.

One firm which has already moved is Solen Electric, Asia’s largest producer of electromagnetic valves. It used to have a plant in Zhongshan, Guangdong. But, when major customer Canon moved to Vietnam in 2014, it closed the Zhongshan plant and set up in Vietnam. It also has factories in Taoyuan and Kaohsiung, in Taiwan.

The company said that, since the start of the trade war, its three plants had an increase in orders of 20 percent. To enter the US market, its Vietnam-made valves face a tariff of two percent and those made in Taiwan a tariff of four percent.

According to figures from the Vietnam government, total Taiwan investment in the country has reached US$30.9 billion, ranking fourth behind South Korea, Japan and Singapore. The two most important sites are the Pingyang Industrial Park in Ho Chi Minh City, with 1,763 Taiwan investors, and Hanoi, with about 300.

The Vietnamese government said that foreign investment in the first eight months of 2018 was US$11.3 billion, up nine percent year-on-year. Foxconn's Gou has said that “Vietnam is the greatest winner from the Sino-US trade war.” Samsung has made Hanoi its biggest production base for mobile phones, accounting for half of its global output of this item.

At the start of December, a delegation of Taiwan companies from Dongguan visited the Pingyang Park. The 2,600 firms in Dongguan make up one of the largest group of Taiwan companies in China. For most, the US is the most important market; but a tariff of 25 percent wipes out their profit margin.

Wu Sheng-feng, one of the delegation members, said: “We cannot put our eggs all into one basket. With this Sino-US trade war, we have to set up factories in Vietnam or other countries.”

– Contact us at [email protected]


A Hong Kong-based writer, teacher and speaker.