New Southbound Policy: A Ray of Light Amid Economic Doldrums

The policy, which aims to increase economic exchange with South and Southeast Asia, has produced positive results and is expected to generate more business opportunities next year.

Amid global recessionary fears and U.S.-China trade tensions, President Tsai Ing-wen’s signature policy for the broader Asian region, the New Southbound Policy (NSP), is one of Taiwan’s bright spots for business.

The policy coincides with Taiwanese companies’ independent decisions to diversify their operations away from China to escape its relatively higher labor costs, Covid-related city lockdowns, and political risks caused by fraught cross-Strait relations. These factors have helped bilateral trade with the 18 NSP countries grow by 55% – from US$96.3 billion to US$149 billion – since President Tsai first launched the policy in 2016.

Investment in these countries totaled US$5.8 billion last year, says C.C. Chen, Taiwan’s Deputy Minister of Economic Affairs, representing 144% growth from the US$2.4 billion level in 2016. The figures for this year have been even more spectacular. President Tsai told the Yushan Forum that from January to July, investments in the NSP region surpassed US$2.2 billion, constituting 43.9% of Taiwan’s total investment abroad.

While economists interviewed say the portion of annual investment to NSP countries has yet to top that of China, it appears to be heading in that direction. President Tsai reported that for the first quarter of the year, profits from investments in NSP countries by listed Taiwanese companies exceeded the share from China for the first time.

The New Southbound Policy was first introduced by President Tsai’s administration in 2016.

“This is an indication that Taiwanese companies’ redirection of their investments to New Southbound Policy countries is now a consistent trend,” President Tsai said.

In that regard, Sana Hashmi, a postdoctoral fellow with the Taiwan-Asia Exchange Foundation, a private organization with links to the Taiwanese government that helps manage the New Southbound Policy, notes that China has recently banned the import of some Taiwanese agricultural goods.

Many Taiwanese industries – from textiles and furniture to cutting-edge smart manufacturing – have flourished in NSP countries. However, Taiwan has had markedly more success in some countries than others. Nepal and Pakistan, for example, have seen little economic activity.

Singapore at US$8.9 billion has the most accumulated Taiwanese investment, thanks to its semiconductor sector, where companies such as United Microelectronics Corp. (UMC) have set up shop, says Chen. Vietnam comes in second highest at US$5.2 billion, and Thailand follows at US$1.7 billion. Chen notes that Vietnam has seen the most significant surge in investment in the last two years.

Although Taiwanese investments in India total only about US$911 million, there is a lot of excitement in Taiwanese government circles about business prospects there.

Observers say that companies’ diversification activities away from China have stepped up greatly since the outbreak of the U.S.-China trade dispute in 2018. “The change was largely driven by electronics manufacturers,” wrote Ma Tieying, a senior economist with the Development Bank of Singapore (DBS) Group Research, in a report.

She notes that Hon Hai Precision Co. (also known as Foxconn) in 2020 invested US$270 million in Vietnam to produce tablets and laptops and further expanded its investment by US$80 million in 2021. The company also invested US$350 million in its Indian subsidiary last year to produce iPhones. Meanwhile, iPhone maker Pegatron invested US$150 million in Vietnam in 2020 to establish a subsidiary and manufacture consumer electronics products.

 “To hedge risks, Taiwanese firms will likely further diversify supply chains towards Southeast/South Asia,” Ma says.

In the wake of massive Chinese military drills to protest a visit from U.S. House Speaker Nancy Pelosi, “there’s a growing realization that doing business in China is risky,” Hashmi says.

Deputy Minister Chen notes that electronics and ICT companies are shifting significant parts of their overall production to Southeast Asia, with northern Vietnam as the most popular destination. But he adds that very few Taiwanese companies have moved their entire manufacturing capacities away from China.

Tan Ching-yu, a research division director at the Taiwan Institute of Economic Research (TIER), points out that Taiwan already had flourishing business connections with Vietnam and Thailand before President Tsai took office. Major Taiwanese companies had already established bases in both countries before 2016.

Rather than initiating relocation to Vietnam and Thailand, the NSP has helped accelerate existing relocation plans, which is one reason the policy has seen so much success in the two countries. For example, Cathay United Bank, which has three outlets in Vietnam, has been there since 2005 and offers loans and financing to Taiwanese businesspeople.

Tan and other economists have noted that more companies are setting up factories in target consumer markets to avoid supply chain disruptions. Taiwanese companies are also attracted by the cheap labor in South and Southeast Asia, notes Peng Su-ling, director of the Center for Economic Forecasting at the Chung-Hua Institution for Economic Research (CIER).

Additionally, many companies have looked to Southeast Asia to avoid restrictions placed on Taiwan by the Regional Comprehensive Economic Partnership (RCEP), which includes many economies in the Asia-Pacific region but excludes Taiwan. The RCEP restrictions are less relevant for much of the electronics trade, since most major products are exempt from tariffs under the World Trade Organization’s Information Technology Agreement (ITA).

“In the past, when talking about the New Southbound Policy, it was about selling products to the U.S.” from these nations, says Tan of TIER. But Taiwanese companies are now also showing more interest in Southeast Asia’s large consumer markets. Major Southeast Asian companies have reciprocally expressed their interest in working with research institutes and companies from Taiwan, he adds.

India and Taiwan have introduced several initiatives with the aim of increasing economic exchange.

 Looking south

Taiwanese tech companies are also looking to India, which offers plenty of business opportunities with its vast population and status as the world’s fifth-largest economy. Chen says companies prefer the Chennai-Bengaluru tech corridor that starts in the southern state of Tamil Nadu and ends in the state of Karnataka.

Most recently, Pegatron in early November started assembly of iPhone 14 products in India’s Tamil Nadu, adding to its existing manufacturing of earlier iPhone models. Pegatron thus joined Foxconn and Wistron in ramping up iPhone assembly in India as Apple seeks to diversify its production network to mitigate China-related risks.

Taiwan is looking to have high-level official dialogues with India and is showing more willingness to invest in India, says Hashmi. “Meetings have been happening at a higher level, and that hasn’t happened before.” 

This year marked the first Taiwan-India CEO Roundtable Briefing, an event co-organized by Taiwanese and Indian interest groups, where CEOs from various Taiwanese companies were invited to visit India to learn about opportunities. Meanwhile, the annual India-Taiwan Industrial Collaboration Summit was held for the sixth consecutive year in 2022. Taiwanese companies are at the forefront of these forums, says Chen, and the government offers them backing.

“Major Taiwanese ICT producers are in India,” along with chemical and base metal companies, Chen says.

Tan notes that Taiwanese generally find India more challenging compared with their earlier experiences in China during its boom days. One concern is language, as many Taiwanese don’t speak fluent English. Another is the difference in laws and regulations from one Indian state to another.

Chen of the Ministry of Economic Affairs (MOEA) also notes that Chinese workers are generally willing to leave their hometowns and live in a dormitory, which makes it relatively easy to rustle up 100,000 employees when a Taiwanese company needs more personnel. India, he says, does not have as many migrant workers, and most people prefer to stay in their hometowns.

Asked what aspects of the NSP could be improved, Chen expresses hope that Taiwan can enter into more formal and binding agreements to cement ties. Among NSP partner countries, only New Zealand and Singapore have free trade agreements with Taiwan. However, success in expanding the number of agreements seems unlikely due to China’s diplomatic pressure and influence.

Less sensitive are bilateral investment agreements. In the last few years, Taiwan has renewed bilateral investment agreements with Vietnam, India, and the Philippines and is in talks to renew one with Thailand.