Taiwan has been a major beneficiary of global circumstances in 2020. It must now take steps to maintain economic momentum as a new year approaches.
Despite a devastating pandemic that the International Monetary Fund predicts will shrink the world economy by 4.4% this year, Taiwan proved itself to be a global economic star. It was one of just around a dozen countries that has managed to achieve positive growth.
Among the forecasts for Taiwan’s GDP growth for 2020, the most optimistic – 2.54% – has come from Taiwan’s Directorate General of Budget, Accounting and Statistics (DGBAS). Of the six economists interviewed for this report, Ma Tieying of Singapore-based DBS bank made the lowest prediction of 1.8%.
Particularly impressive was Taiwan’s third-quarter GDP growth of 3.92% year-on-year, according to a preliminary estimate from the DGBAS in late November, which would constitute the fastest pace in over two years. Liang Kuo-yuan, president of the Yuanta-Polaris Research Institute, says it could be one of the highest third-quarter results in the world for this year.
The fourth quarter is also looking positive, says Liang. He notes that various newly released manufacturing data, such as the Purchasing Managers’ Index (PMI), which in November had its largest month-on-month expansion since February 2017, “are all moving in a positive direction.”
So, what created this stellar performance? Economists point to three main factors.
First, Taiwan’s successful management of the pandemic meant that the nation did not need to impose any large-scale lockdowns. Manufacturing plants and offices were able to continue running smoothly, and Taiwan was still able to steadily supply the world with needed merchandise.
“The production lines in Taiwan since the middle of the year have been running at a normal level, whereas production lines in heavily affected countries have not been able to run normally,” Liang says. He calculates that last year Taiwan’s share of exports in the world economy stood at 1.75%. By May 2020, the figure had leapt to 2.41%.
Darson Chiu, an economist with the Taiwan Institute of Economic Research (TIER), says that technology companies and other firms were alarmed by a big disruption in production lines in China in the first few months of this year.
China’s supply chain problems “woke up the world to the hardship of having a shortage of key parts, components, and products that are deemed essential for most economies,” says Tony Phoo, an economist with Standard Chartered Bank. The experience provoked an interest across the world in diversifying supply chains, he says.
Phoo notes that Taiwan’s technology scene is very similar to that of the mainland, although some of its industries, such as semiconductors, are more advanced. Amid these early fears about Chinese production shutdowns, Taiwan was a natural choice for diversifying trade flows, both for Taiwanese and foreign companies.
The second factor underpinning Taiwan’s good economic performance was the gargantuan demand in advanced countries for electronics products involved in long distance learning and telework. These ranged from laptops, personal computers, and tablets for individuals to work or study from home to advanced servers for companies that needed to accommodate the large number of employees working remotely.
There was also increased demand for electronic leisure devices, for components connected to the recently launched iPhone 12, and for more digital connectivity due to the need for video streaming and conferencing, e-commerce, and online entertainment. The upcoming holiday shopping season and the transition to 5G technologies further intensified this demand.
All of this involved products or components that Taiwan excels in producing. In particular, semiconductors, where Taiwan has a leading edge, are used in all these categories across the board. One of the biggest beneficiaries of the increased demand has been the Taiwan Semiconductor Manufacturing Co. (TSMC), Taiwan’s top chipmaker.
The third reason for Taiwan’s outstanding showing this year is its advantageous position amid U.S.-China trade tensions and American concerns over the security of Chinese-made products.
Taiwanese companies who flocked to China during the previous two decades to enjoy cheap manufacturing and assembly of electronics goods have shifted some of their operations back to Taiwan in order to avoid American tariffs on Chinese goods.
In 2019, the Taiwanese government implemented the “Action Plan for Welcoming Overseas Businesses to Return to Invest in Taiwan,” which offered benefits such as attractive loans and rent concessions to Taiwanese manufacturers willing to relocate some or all of their operations back to the island.
According to the InvesTaiwan Service Center operated by the Ministry of Economic Affairs, 733 returning companies have received approval to move or expand their operations in Taiwan and to date have pledged NT$1.15 trillion in investment.
Quanta Computer began moving production of servers for sale to the U.S. back to Taiwan starting last year. The servers are now produced in a building opposite Quanta’s headquarters in Taoyuan. The company reportedly is also investing about NT$15 billion to build a massive new factory in the same area to boost production of goods that the company used to make in China.
In some instances, the migration of technology companies back to Taiwan relates not only to tariffs, but also to American security sensitivities about Chinese-made hardware products that could be used for spying. Products made purely in Taiwan are deemed more trustworthy, and recent trends have given Taiwan more independent and controllable supply chains. Liang cites data processing equipment, particularly servers, as a case where Taiwan has benefited from such concerns.
Other reported returnees include Compal, a computer manufacturer, and printed circuit board supplier Unimicron Technology, which is expanding its Taiwan plant. TIER’s Chiu reports that Acer and ASUSTEK Computer have also moved production of laptops back to Taiwan.
Liu Meng-chun, a division head at the Chung-hua Institution for Economic Research (CIER), notes that the repatriation of production has resulted in increased land prices, especially in industrial or technology parks in Taoyuan. Given Taiwan’s frequently cited “five shortages” – land, water, electric power, talent, and labor – analysts are unsure whether the migration of companies back to Taiwan will prove to be sustainable in the long run (see the accompanying story in this section).
“I think at this moment, Taiwan can still cope with the first wave of movement coming back,” says Liang. “But eventually, resources will be exhausted.”
Winners and losers
Ironically, U.S.-China trade tensions have actually resulted in an increase in cross-Strait trade compared with previous years. Taiwanese chip firms, for example, benefited from aggressive stockpiling by Chinese telecommunications giant Huawei in preparation for a U.S. edict restricting shipments of products using U.S. technology to the company in mid-September.
TSMC’s world leadership in the semiconductor foundry business has resulted in heavy Chinese reliance on the company, says the CIER’s Liu. China is still buying large volumes of chips from the company, as well as from other Taiwanese chipmakers.
Angela Hsieh, an economist with Barclays Bank Singapore, notes that TSMC – the only company besides Samsung to produce 7-nanometer chips – held a 51.1% global market share in the second quarter of 2020. Huawei’s purchases amounted to a substantial 14% of TSMC’s revenues, she says.
Nevertheless, Hsieh says that TSMC could potentially shift to other customers to compensate for its loss of business with Huawei. For example, TSMC still sells chips to smart phone makers Xiaomi and Vivo.
Hsieh cites trade figures released by Taiwan’s Ministry of Finance (MOF) for October 2020. While new Taiwanese investment in China has been declining since 2016, Taiwan’s share of exports to China and Hong Kong actually rose sharply in 2020 from around 40.1% in 2019 to 43.6% for the first 10 months of this year. Over the same period, exports to the U.S. accounted for 14.7% of the total.
According to the MOF data, exports of electronic components – amounting to 39.3% of all overseas sales – grew by a remarkable 20.4% between January and October this year. The semiconductor sub-category grew by 22.3%, and that of information, communication, and audiovisual products by 14.8%.
Export orders, a leading indicator, increased by 9.1% year-on-year to reach a record high US$51.6 billion in October. DBS’ Ma attributes this surge in part to the Chinese rush-order effect, as well as to new product launches and the commercialization of 5G telecommunication applications.
Meanwhile, the DGBAS says, real private fixed capital formation is forecast to grow 1.47% this year, supported by continuing investment from the semiconductor industry and 5G network construction. Next year, the statistics agency predicts, it will grow by 3.68%, assisted in part by the reshoring of Taiwanese companies from overseas, as well as by offshore wind development and urban renewal projects.
However, not all Taiwanese are gaining financially from Taiwan’s stellar economic performance. Liang of Yuanta-Polaris describes Taiwan’s recovery as “K” shaped, with the ICT sector coming out strong and traditional industries at the lower end. According to the MOF, October exports of base metals and related products, plastic and rubber articles, and machinery fell by 10.7%, 9.6%, and 9.3%, respectively.
Standard Chartered’s Phoo notes that non-tech sectors such as petrochemicals, textiles, steel and iron, machinery equipment, and rubber and plastics are seeing weak performance. Unfortunately, more Taiwanese work in these poorly performing industries than in the tech sector.
Ma of DBS notes that the service sector has also been struggling, largely because of the pandemic, particularly the hospitality and food and beverage segments.
The seasonally adjusted unemployment rate in October was a mere 3.77%, but that number doesn’t tell the whole story. Many workers, especially in traditional manufacturing sectors and the service sector, have been put on unpaid leave. According to Barclays’ Hsieh, the number of furloughed employees spiked at 31,186 in June before dropping to 11,317 in November.
Ma notes that even though unemployment appeared higher in May at 4.2%, a decline in the labor participation rate occurred from May to September, suggesting that many unemployed people had given up searching and exited the job market.
Average September wages including bonuses and overtime stood at NT$53,047, the DGBAS said, an increase of 2.01% over the same month last year. Ma predicts that wage growth for the year as a whole will slow from 2019’s 2% to 1%, and will remain at that level until the delayed effects of GDP growth are felt.
The Legislative Yuan has passed various relief measures throughout the year with a total value of over NT$400 billion. The most recent special budget of NT$210 billion was passed in October and is to be financed through the issuance of debt. The funds will reportedly be used to provide loans and other assistance to enterprises hard-hit by the pandemic and to cover gaps in funding for the government’s consumer voucher program.
That stimulus program helped boost domestic spending, alleviating some of the severe hits to consumption experienced when Taiwan shut its borders to tourism in March. DGBAS reports that the accommodation and food sector decreased by a slight 0.35% year-on-year in the third quarter, a reprieve from the steep 16.41% decline of the second quarter.
However, the vouchers have not been enough to preserve previous consumption levels. According to DGBAS, overall consumption is expected to contract by 2.52% this year. But the agency is more bullish about next year, predicting 4.04% growth in consumption, “supported by the steady growth of the domestic economy, as well as the effects of a low base.” Barclays’ Hsieh puts the average growth in consumption for 2021 at a more conservative 3.2%.
DGBAS estimates that the consumer price index (CPI) will show a 0.26% decrease for 2020 before rising 1.16% next year. The economists interviewed for this report said this year’s negative figure is partially based on low fuel prices. They all agree that under current conditions, the Central Bank is likely to keep the current discount rate, refinancing rate on secured loans, and temporary accommodation rate unchanged.
Another factor in the economic picture has been the steady appreciation in the New Taiwan Dollar, which traded at 29.91 to the U.S. dollar at the end of 2019 and has recently strengthened to around 28.5 to the dollar. Barclays’ Hsieh describes the trend as a headache for the Central Bank, which will try to rein in the appreciation to protect export competitiveness.
“We expect the Central Bank to keep signaling its preference for Taiwan dollar appreciation to lag behind its peer currencies,” she says. At the same time, Yuanta-Polaris’ Liang notes that the NT appreciation is another sign that the Taiwan economy is performing well globally.
Among the future challenges that Taiwan will be facing are its exclusion from the world’s network of free trade agreements. Although Taiwan enjoys tariff-free treatment for ICT products under the World Trade Organization’s Information Technology Agreement, it has signed free trade agreements with only a handful of countries.
The Regional Comprehensive Partnership or RCEP – a 15-nation pact backed by China – was signed in November. It could become the world’s largest free trade agreement, covering nearly a third of the global population and about 30% of its global GDP, according to Reuters. Once in force, it could also allow China to dominate trade in the region. It is widely believed that China would allow Taiwan to join the pact only if it accepts that it is part of China, a position that the current Democratic Progressive Party government would never agree to. On the other hand, RCEP may not have much of an effect on Taiwan as many of the member countries have already signed free trade deals with each other and Taiwanese companies have absorbed the impact.
The rival Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) presents a China-free alternative to the RCEP. Yet a number of obstacles, such as Taiwan’s nearly decade-long ban on food imports from Japanese areas near the 2011 Fukushima nuclear disaster, remain in the way of it joining the CPTPP.
President Tsai Ing-wen has made clear Taiwan’s hopes of signing a free trade deal with the U.S., but it is not yet clear whether the incoming Biden administration will be interested.
Also confronting Taiwan is the demographic challenge that it will reach the status of being a super-aged society by 2025, meaning that one in five citizens will be aged over 65, with the working population having to bear heavy tax burdens for their care. Hsieh of Barclays notes that in the regional scramble to attract new immigrants, Singapore and Hong Kong, which has its own aging problems, offer more attractive incentives than does Taiwan.
And while Taiwan’s position as a contract manufacturing powerhouse seems secure, it needs to find ways to develop new champion industries. Noting that Taiwan’s main industries are still related to semiconductors and other electronics, Ma of DBS suggests that the government’s successful management of COVID-19 may reduce pressure from business and the public restructure and reform the economy.
She adds that Taiwan needs to strengthen its software capabilities, and that the government could do more to help foster companies specializing in areas such as artificial intelligence.
Liang proposes that advanced medical devices are a promising sector, as they combine medical knowledge and electronics technology, both areas in which Taiwan shines. While Taiwan so far has come through the pandemic and U.S.-China trade tensions in good shape, he expresses worries that once those issues are no longer present, Taiwan’s industry could revert back to its old attitudes and practices.