Policy decisions drive Taiwan investors out of China

October 25, 2021 08:23
Since 2019, the Taiwan government has been offering preferential loans, land concession and tax breaks to companies that repatriate from the mainland to Taiwan. Image: InvesTaiwan

On the morning of September 26, Taiwan manufacturers in Suzhou and Kunshan received a notice from the Jiangsu government informing them that power restrictions would begin at noon that day and they must stop production for four days.

The province had taken the decision the previous evening at a meeting that ended at 2300. “We had not expected the government to act in such a drastic way,” said a director of one of the manufacturers. “A few days earlier, there had been rumours of power cuts but not an order to shut down production.”

The cuts affected dozens of Taiwan companies in 10 provinces and sectors including makers of electronics, auto parts, IT and raw materials. They came at the busiest production time of the year, fulfilling orders for Christmas and Chinese New Year.

The cuts came after the closure of the educational cramming sector and the rectification of the property sector. “I do not know what Xi Jinping is thinking.” said one Taiwan investor. “What I do know is that Taiwan investors can no longer survive in China.”

Hundreds of thousands of Taiwan firms are leaving China because of these sudden policy decisions, rising costs and the intensifying trade and investment war between China and the U.S.

Since the 1980s, Taiwan has been one of the largest foreign investors in the mainland, with approved investments of US$191 billion. Among them was Foxconn, which set up its first factory in 1988. Its revenue grew to NT$97.8 billion (US$3.5 billion) in 2001 and NT$5.3 trillion in 2020.

Annual investment from Taiwan to China has been declining every year since its peak in 2010. Driving it out are higher labour costs, stricter environmental requirements, fierce local competition, the need to avoid U.S. tariffs on goods made in China and Washington’s demand to “decouple” its economy from China.

Foxconn is investing US$1 billion to expand a plant in India, to meet the demand of Apple, one of its biggest customers, to move production of iPhones out of China.

Since 2019, the Taiwan government has been offering preferential loans, land concession and tax breaks to companies that repatriate from the mainland to Taiwan. So far, more than 520 firms have done so, investing NT$792.5 billion, according to figures from the Ministry of Economic Affairs (MOEA).

“It is important for Taiwan companies to diversify their production bases now that China’s business environment is riskier,” said Emile Chang, chief executive of InvesTaiwan, part of the MOEA. “They are adapting to meet the requirement of their U.S. and European customers.”

Quanta Computer is investing NT$15 billion in a new factory in Taoyuan to replace some of its China production. It assembles MacBooks and Apple Watches and supplies data centre servers to Facebook and Google.

Covid has been a bonanza for Taiwan since it greatly increased the demand for the equipment used for remote working. Last year exports grew 4.9 per cent to a record US$345 billion. Taiwan has contained the virus at home, so production and consumption were not badly affected.

Another result of the Sino-U.S. Cold War has been a rapid increase in Taiwan investment in the U.S. According to figures from Taiwan’s MOEA, it reached US$4.273 billion in 2020, up from US$2.045 billion in 2018 and US$567 million in 2019.

The largest investments went into electronic components, followed by metals, finance and insurance and retail and wholesale.

The advantages of investing there are that it is politically safe, close to the clients and in line with Washington’s and Taipei’s policy objectives. The disadvantages are the high cost of land and labour, strict regulation and a supply chain that cannot compete with the dense industrial clusters and efficiencies of Guangdong and Jiangsu provinces. So those setting up in the U.S. aim for a high level of automation, to minimise the use of labour.

On September 6, Vice Premier Shen Jong-chin spoke at a seminar on “Creating a Golden Era to Invest in the U.S.” He said: “The U.S. is the second largest trading partner of Taiwan. In the first half of this year, bilateral trade rose 23.63 per cent over the same period in 2020.”
In its policy statements, Washington has said that Taiwan is a key partner in building supply chains and an international friend.

The best strategy for large Taiwan companies is two separate supply chains. One will manufacture for and sell to the enormous mainland market and the other to clients in the rest of the world.

The other cloud over China operations is the possibility of a military conflict or war over the Taiwan Straits. In such an outcome, Taiwan investors and their assets in the mainland risk becoming hostages.

-- Contact us at [email protected]


A Hong Kong-based writer, teacher and speaker.