Taiwan has capitalized on the U.S.-China trade dispute and superb pandemic control to revitalize its position as a technology hub.
In less than three years’ time, Taiwan has rejuvenated its position in global supply chains. The exodus of manufacturers to China is ancient history. Instead, many of them have been choosing to come home, first to circumvent stiff U.S. tariffs on China-made products, then to mitigate the fallout from the COVID-19 pandemic that began in Wuhan. Taiwan has contained the capricious pathogen better than almost any country in the world.
The Tsai Ing-wen administration has incentivized manufacturers to repatriate from China with perks like preferential loan terms, land concessions, and tax breaks. Dubbed the “Action Plan for Welcoming Overseas Taiwanese Businesses to Return to Invest in Taiwan,” the policy covers financing, taxation, water, electricity, and manpower in a single service window. To qualify, companies must have invested in China for at least two years and been affected by the trade dispute. They must also commit to incorporating smart technologies into their new or expanded production lines in Taiwan.
Two other incentive programs exist for local manufacturers that have never invested in China – one for large corporations and another for small- and medium-sized enterprises (SMEs).
Together, the three programs have generated NT$1.18 trillion (US$42 billion) in investment from 783 companies since their launch in 2019, according to data compiled by the Ministry of Economic Affairs (MOEA). More than two-thirds of that total (NT$792.5 billion) is attributed to Taiwanese firms returning from China.
A survey of 157 manufacturers by the Taipei-based Chinese National Federation of Industries (CNFI) published in October 2020 found that COVID-19 had caused many Taiwanese firms to reconsider their reliance on China. Some 80% of respondents (mostly SMEs) said the pandemic had hurt their bottom lines. When the survey was conducted last summer, manufacturing capacity had recovered to above 70% for less than half of respondents. Of the firms surveyed, 44% said they planned to diversify production, while 60% said that tax credits might encourage their repatriation.
“It is important for Taiwanese companies to diversify their production bases now that China’s business environment is riskier,” says Emile Chang, CEO of InvesTaiwan, an office under the MOEA that supervises the three incentive programs. “They’re adapting to meet the requirements of their U.S. and European customers.”
“The Tsai government is doing a strong job of attracting capital back to Taiwan, a process known as ‘reshoring,’” says Rupert Hammond-Chambers, managing director at consultancy BowerGroupAsia. He adds that the new investments are boosting “prospects for R&D, production, employment, and revenue for local and national government.”
Among industries relocating to Taiwan, high-end servers, networking communications, and 5G-related products are “leading the way in terms of investment amount and production capacity expansion,” observes Stephen Su, a vice president at the semi-governmental Industrial Technology and Research Institute (ITRI).
One of the most prominent Taiwanese firms to reshore is Quanta Computer, the assembler of MacBooks and Apple Watches and a supplier of data center servers to Facebook and Google. Quanta is investing NT$15 billion to build a new factory in Taoyuan that will take over some of the company’s China production. Amid escalating tensions between the U.S. and China on technology, telecommunications equipment free of Chinese components is a must for some U.S. companies.
Wistron NeWeb, a network and communications solutions provider, said last June that it would invest NT$5.5 billion to build a third-phase plant in the Southern Taiwan Science Park. The company invested NT$2.7 billion the previous year to set up production facilities in the Tainan industrial park. Its top clients include AT&T and HP.
“The pandemic’s effect on global work habits has had a huge [positive] impact on Taiwanese companies that produce much of the gear people use for remote working,” says BowerGroupAsia’s Hammond-Chambers, who also serves as president of the U.S.-Taiwan Business Council.
Demand for ICT components used for remote work helped Taiwan’s exports grow 4.9% to a record US$345 billion in 2020, despite daunting global economic conditions. Taiwan’s export growth outstripped that of its fellow Asian tigers Singapore, South Korea, and Hong Kong.
Further, Taiwan was likely the only Asian tiger economy to record positive growth last year. “Taiwan’s three economic engines of consumption, exports, and investment all performed better than most of its neighbors,” says Darson Chiu, an economist at the Taiwan Institute of Economic Research (TIER), a think tank. “Consumption was not seriously impacted by COVID-19, since the virus was contained domestically.”
Data center hub
While Taiwan has focused on reshoring manufacturing, U.S. tech giants such as Microsoft and Google are also boosting investment on the island. Geopolitical disruptions beyond the U.S.-China trade dispute have affected their calculations.
Hong Kong historically served as a hub for data centers in Northeast Asia, but the imposition of a draconian national security law last year raised troubling questions about data security in the former British colony. Following passage of the legislation, Google said it would end direct cooperation with the Hong Kong government on data requests. Google told Hong Kong police that it would instead direct officials to pursue data requests through a Mutual Legal Assistance Treaty with the U.S.
“As geopolitical complications begin to intensify and cause extensive repercussions in Hong Kong, cloud-service providers (CSPs) are now investigating other suitable APAC locations for data center build-out outside of Hong Kong,” says Mark Liu, a senior industry analyst at Taipei-based research firm TrendForce.
Liu notes that the Taiwanese government has in recent years gradually eased restrictions on cloud applications for certain industries, such as finance. The government itself is also storing more data in the cloud. These trends “give yet another incentive for CSPs to establish data centers in Taiwan,” he says.
In September 2020, Google unveiled plans for its third Taiwan data center on a 200,000-square-meter plot in Douliu in central Taiwan’s Yunlin County. The investment is reportedly worth NT$20 billion. At a media briefing, Google’s regional general manager Tina Lin cited Taiwan’s “geographic advantages” as a reason for building the data center here. Multiple undersea communication cables connecting the U.S. and Asia pass through Taiwan.
That’s not all. The U.S. Justice Department opposed a plan involving Google and Facebook that would have connected the U.S. to Hong Kong via underwater cable. The Justice Department warned in a statement published by Politico that the cable had “the potential to establish Hong Kong as the center of gravity for U.S. data connectivity in Asia, offering unprecedented opportunities for collection by the Chinese intelligence services.”
In contrast, the U.S. has supported the construction of undersea cables connecting the U.S. and Taiwan. “Taiwan is considered politically stable compared to Hong Kong and has a relatively large cost advantage compared to Singapore,” says Pan Chien-kuang, a senior industry analyst at the Taipei-based Market Intelligence & Consulting Institute.
In another project, in October 2020 Microsoft announced it would build its first Azure data center in Taiwan as part of its largest investment yet there. Azure is a set of cloud services covering computing, networking, databases, analytics, artificial intelligence, and the Internet of Things (IoT). The investment, which will also include expansion of the Azure hardware systems and infrastructure team, is expected to generate more than NT$300 billion in value and 30,000 jobs for the industry.
“Building a world-class, enterprise-grade cloud marks an important step toward the digitalization of Taiwan’s key industries,” Ken Sun, general manager of Microsoft Taiwan, said in a press release. At a press conference, he lauded Taiwan’s complete information technology supply chain and mentioned the possibility of collaborating with the semiconductor, telecommunications, and medical sectors.
“This investment is important as it will help Taiwan build a holistic industrial ecosystem around data centers, thereby triggering an industrial transformation in Taiwan,” Pan says.
At the same time, Microsoft’s huge investment signals confidence in Taiwan at a time of widespread economic uncertainty. “Microsoft’s investment is key for us to enhance our collaboration with the international community and with the U.S.,” President Tsai said at the press conference.
The establishment of large data centers in Taiwan is not without its critics. A common complaint among detractors is that these facilities require a substantial amount of energy to operate. Given that energy supply sufficiency remains a major concern among businesses in Taiwan, whether to continue providing space and resources for data centers is a consideration that weighs heavily on both government officials and industry professionals.
However, speaking at a recent AmCham Taiwan luncheon event, Deputy Minister of Economic Affairs Chen Chern-chyi (C.C. Chen) dispelled those concerns, saying that the investments in data centers made by companies like Google, Microsoft, and Amazon Web Services are crucial to helping Taiwanese companies complete their digital transformation processes. Furthermore, he said, the decision of these companies to invest in Taiwan is testament to its focus on cybersecurity, protection of intellectual property, and adherence to the rule of law.
Supply chain resilience
With no end in sight for the U.S.-China trade dispute, many firms are working to make their supply chains more resilient. Moving production back to Taiwan is part of the process, but most companies are not pulling out of China completely.
Taipei-based JC Grand Corp. is a case in point. The industrial fastener and metal hardware maker has three factories in Taiwan and one in China’s Zhejiang Province. The third plant in Taiwan is an empty facility, located in an industrial park north of Kao-hsiung, that the company purchased in the summer of 2020 and plans to equip with production lines. JC Grand will probably apply for government incentives for capital purchases on some of the factory equipment.
Prior to the trade dispute, JC Grand had no imminent plans to add capacity in Taiwan. If anything, the company mulled pulling the plug on its Taiwan factories. “As recently as five or six years ago, we used to wonder how long it would be until we shifted our whole supply chain from Taiwan to China,” says Jon Hodowany, the company’s CEO and general manager.
Rising costs and regulatory travails in China began to change JC Grand’s calculations. When the trade dispute broke out between Washington and Beijing, the company decided to open a new factory in Taiwan from which it could sell to the U.S. market. “We had to do something after our biggest market slapped 25% tariffs on our products,” Hodowany says.
He lauds Taiwan’s industrial clusters. “The network effect of supply chains all being here generates huge efficiencies. Everything you need for metal fasteners is produced in Tainan and Kaohsiung.”
After a rocky start, JC Grand ended up having a banner year in 2020, breaking the US$100 million revenue milestone for the first time. The company has many customers in the construction industry and sells end products to Home Depot. “People were spending a lot of time at home because of the pandemic, and decided to invest in home improvement,” Hodowany says.
Looking ahead, one challenge for Taiwan’s reshoring initiative will be the country’s finite resources. The so-called “five shortages” – land, water, electricity, manpower, and talent – remain an issue affecting companies’ investment decisions.
ITRI’s Su believes that the government can manage most of them in the short term, especially water and electricity, given the importance of attracting investment to Taiwan. “Potential shortage issues have been at the top of the agenda for the government,” he says.
And while land is also a major concern for returning businesses, the government is working to address the overall growing demand for adequate space to build factories and plants. Minister of Economic Affairs Wang Mei-hua announced on January 20 that her ministry would coordinate with the state-run Taiwan Sugar Corp. to offer five pieces of land – a total of 423 hectares – for investment purposes. Wang noted that use of the land, located in Yunlin, Chiayi, Tainan, and Kaohsiung, could result in NT$1.8 billion in production value and lead to the creation of 10,000 jobs.
In the long run, talent could be the trickiest to tackle. There is no easy fix. The birth rate in Taiwan is so low (1.22 children per woman) that the population shrank last year for the first time. Taiwan will be a super-aged society by 2025, with one in five people aged 65 or older. Demographic decline will diminish the country’s base of young science and technology talent, Su says.
“The declining birth rate is a national security challenge for the government that will require myriad approaches,” says BowerGroupAsia’s Hammond-Chambers. One he recommends considering is an immigration point system, similar to those used in Australia and the UK, which selects skilled migrant workers for economic purposes.
Meanwhile, Taiwanese firms with a significant China footprint remain committed to that market. Despite the trade dispute and pandemic, China (counting Hong Kong) still accounts for about 40% of Taiwan’s exports.
Hon Hai Precision Industry Co. (Foxconn), the world’s largest contract electronics manufacturer, broke ground on a new advanced semiconductor packaging and testing plant in Qingdao in northern China’s Shandong Province last year. The New Taipei City-based company will reportedly invest the equivalent of US$8.6 billion in the facility.
Foxconn also recently entered a strategic partnership with the PRC’s China Insurance Investment Co. that will focus on emerging technologies such as electric cars, digital health, and robotics. The two companies will set up a ¥10 billion venture capital fund that they expect will ultimately double in size.
“China will remain a key production base for many Taiwanese companies due to its well-developed supply chains and infrastructure efficiency,” says ITRI’s Su, adding that “it has also evolved into one of the world’s biggest consumer markets.”
Hammond-Chambers expects Taiwanese manufacturers will bifurcate their supply chains, with one focused on the China market and customers willing to buy products made there and a second dedicated to the rest of the world.
While that approach will be costlier for companies and consumers, “the geopolitics of supply chains are unignorable,” he adds.
Overall, though, revitalization of the domestic manufacturing sector will pay dividends. “The trend of reshoring manufacturing bases will make Taiwan’s industrial supply chains more independent and more resilient to external shocks in the future,” says TIER’s Chiu.