A less favorable Chinese business environment is prompting many Taiwanese companies to look elsewhere for growth opportunities.

The Straits Exchange Foundation (SEF), the semi-official Taiwanese government entity that oversees Taiwan’s civil and business relations with the People’s Republic of China (PRC), recently revealed a startling statistic: China’s share of Taiwan’s outbound investment portfolio has tumbled from 83.8% in mid-2010 to 2.7% in the first quarter of 2025.

Long Taiwan’s top single-country export destination, China was overtaken in that position by the United States in April 2024 for the first time since 2003. Around 70% of Taiwanese companies with investments in China posted lower annual profits in 2024, according to data compiled by the SEF.

Many of the forces behind the shift are economic. China’s economy has slowed dramatically after reaching a zenith of 14.2% annual GDP growth in 2007. It is now growing at about one third of that rate. Moreover, labor costs have soared.

At the same time, Chinese manufacturers — boosted by the ruling Chinese Communist Party’s (CCP) aggressive industrial policy — have become formidable, in some cases world leading.

“Taiwan companies once had advantages such as manufacturing know-how, research and development capabilities, and export customers developed over many decades starting from when Taiwan joined the other three ‘little Asian dragons’ [Hong Kong, Singapore, and South Korea] as a manufacturing and exporting success,” says Ross Darrell Feingold, a Taipei-based lawyer and political risk analyst. “In manufacturing, whether for traditional industry products or increasingly for technology products, Chinese companies have caught up.”

The shift away from China is not harming Taiwan’s economy. On the contrary, the AI boom driven by demand from U.S. tech giants has boosted Taiwan’s exports to new highs. In the first nine months of this year, Taiwan’s export orders totaled US$524.37 billion, up 22.3% from a year earlier, according to data from the Ministry of Economic Affairs (MOEA). The United States placed US$25.29 billion in orders with Taiwanese suppliers in September, up 40.2% from a year earlier and well ahead of the amount of orders with the ASEAN bloc (US$14.74 billion) and China and Hong Kong (US$12.23 billion).

Since U.S. President Donald Trump’s first term, Washington has regarded China as its main technology rival, a stance that continued under the Biden administration and is persisting in Trump’s second term, notes Edward Lin, a director at Taiwan’s semigovernmental Market Intelligence & Consulting Institute (MIC).

Through measures such as tariffs and export controls, the U.S. government has sought to reduce global industrial reliance on China. For many Chinese imports, combined most-favored-nation duties, existing Section 301 tariffs, and new surcharges now bring the effective tariff rate to around 50% to 55%, according to trade analysts. Trump has also threatened additional hikes on specific categories, including tariffs of up to 100% on some high-tech products, though details remain fluid.

“Facing such geopolitical risks, high-tech companies are accelerating their efforts to relocate production out of China to avoid the impact of high tariffs, which could raise costs and erode price competitiveness,” says Lin.

As the largest foreign investor in China and top iPhone assembler, Taiwanese contract electronics manufacturing giant Foxconn (Hon Hai Precision Industry Co.) has been both a bellwether for diversification to other markets and an example of how cross-Strait technology supply chains remain intertwined. “It is arguably the Taiwanese tech company with the most diversified global footprint, allowing it to flexibly allocate production capacity across regions in response to the U.S.-China tech rivalry,” Lin says.

He notes that under Foxconn’s business model, the company’s production site decisions are closely aligned with client preferences and strategies. Apple, in particular, wields significant bargaining power over its suppliers and maintains tight control over component sourcing and assembly processes. This explains why China remains the primary production hub for iPhones (80% are still made in China), a decision that reflects Apple’s cost-efficiency considerations, given China’s advantages in skilled labor and a well-established supply chain, Lin observes.

“However, mounting U.S. government pressure for Apple to reduce its reliance on China has already led to Foxconn’s ongoing investment in new iPhone production facilities in India,” he adds.

In August, Apple’s chief executive Tim Cook met with President Trump to outline the company’s expanded US$600 billion U.S. investment commitment, including new initiatives under Apple’s American Manufacturing Program. Two months later, Apple began shipping advanced servers from a factory in Houston. The company’s Chief Operating Officer, Sabih Khan, told reporters that Apple expects to further increase output at the site next year.

Financial considerations

While Taiwan’s technology sector has been gradually diversifying away from China for years, its financial industry has been reducing its exposure to the world’s second-largest economy at a rapid pace. The Financial Supervisory Commission (FSC), Taiwan’s banking, securities and insurance regulator, announced in July that the exposure of those three segments of the financial industry fell to a nadir of NT$828.39 billion in the end of May, down 20% year-over-year (YoY).

Exposure in China by Taiwan’s banks, which at 92% account for the lion’s share of the financial sector’s total exposure, fell 18.67% to NT$768.45 billion, the FSC said. Chang Chia-kuei, chief secretary of the FSC’s Banking Bureau, said banks’ exposure to China consisted of lending, interbank loans, and investments, with interbank loans declining 35% on an annual basis. The decline is a sign that Taiwanese banks have become more cautious about China’s economic growth prospects and the risks posed by the Chinese property market, Chang said.

In an October research note, S&P Global said that “China’s property market is still searching for a bottom.” The market intelligence firm estimates that China’s nationwide primary property sales will fall 8% in 2025 and between 6% and 7% in 2026. “A meaningful overshoot in land acquisitions combined with weaker sales in 2025-2026 than we now expect could present risk to some developers’ credit profiles,” S&P noted.

The exposure of Taiwan’s insurance as well as securities and futures segments has also fallen briskly. Insurance firms’ investments in marketable securities in China fell 30% YoY to NT$49.9 billion as of the end of May, while the securities and future industry’s exposure to China contracted 21% to NT$10.04 billion.

Analysts expect Taiwan’s financial sector to continue reducing its exposure to China. “Taiwanese financial institutions are in a long-term process of moving out of China, focusing instead more on growth markets in Southeast Asia,” says David Stinson, research fellow at the International Affairs Department of the Taiwan Academy of Banking and Finance (TABF), a nonprofit organization advised by Financial Supervisory Commission of Taiwan.

“Some of the reasons for this rebalancing are internal to China,” Stinson adds. “The real estate situation still has not been resolved, and bank lending has been on the decline overall. The [U.S.-China] trade war is also a major consideration for the Taiwanese companies who typically make up their lending client base.”

Notable exception

One Taiwanese company that continues to depend heavily on China for its growth is the fabless semiconductor designer MediaTek. Cynthia Yang, a senior analyst at MIC, says this phenomenon reflects the concentration of MediaTek’s sales markets rather than its investment orientation.

As a fabless company, MediaTek’s business operations center on exports and global sales, with its primary R&D and decision-making centers located in Taiwan. The company has not engaged in large-scale production or established manufacturing facilities in China. Yang notes that more than 60% of Media-Tek’s sales still come from mobile-related products, including smartphone SoCs (system-on-chips), communication chips, and power management integrated circuits (ICs). Even as global smartphone growth slows, China continues to serve as the industry’s central hub for design, assembly, and shipments. Among the world’s top ten smartphone brands, five are Chinese, including Xiaomi, Oppo, Vivo, Honor, and Transsion.

“These brands have long adopted MediaTek’s chip platforms as their primary solutions for mid- to high-end smartphones, making MediaTek’s revenue structure highly correlated with the Chinese market,” Yang says. “This dependence is not a strategic choice, but rather a reflection of the current structure and customer distribution of the global smartphone industry.”

Further, after the United States imposed sanctions on Chinese telecommunications giant Huawei in 2020, MediaTek “filled part of the market gap left by its decline, a key factor behind its strong performance in recent years,” Yang says.

MediaTek’s management is aware that its advantage in China will not last forever, she adds. She notes that the company has been actively expanding into the automotive semiconductor market and the Indian market to diversify risks. “This strategy shows that MediaTek is not blindly dependent on China; rather, it is prudently leveraging its existing market strengths while preparing for geopolitical uncertainties, a pragmatic response to challenges related to origin tracing and technology export controls.”

Focus on Fujian

In response to the departure of Taiwanese capital, China has denied any deterioration in business conditions and sought to use incentives to attract Taiwanese businesses to Fujian province. Among China’s provinces, Fujian is the closest to Taiwan culturally and geographically. Historically, it is also the province that has attracted the most investment from Taiwanese businesses.

In 2023, the CCP’s Central Committee and China’s State Council jointly issued a directive to establish Fujian as a demonstration zone for cross-Strait integrated development. Since then, Fujian has offered perks to Taiwanese, including measures such as rent subsidies for startups, enhanced agricultural loans for farmers, reduced waiting time for visas, and free public transit for people 65 and older.

Wang Huning, the PRC’s fourth-most senior official and a close confidante of Chinese leader Xi Jinping, is leading this Fujian-centric strategy. During a June meeting in Xiamen, Wang called on Fujian “to leverage its unique advantages and pioneering role in cross-Strait relations to achieve more outcomes in integrated development,” according to the Chinese state media China Daily. He further emphasized “the need to advance policy and institutional innovation in the region to attract more Taiwan compatriots and businesses to thrive in the mainland.”

Data compiled by the Fujian government suggest that the eastern Chinese province is bucking the broader trend of reduced Taiwanese business exposure to China. In 2024, trade between Fujian and Taiwan increased 4.2% YoY to RMB 94.4 billion ($13.1 billion), it said. In addition, people-to-people exchanges between Taiwan and Fujian appear to be growing. From January to May, 387,000 Taiwan residents entered the Chinese mainland through ports in Fujian, up 15.5% YoY, the Fujian government said.

The China Daily report included an interview with Chiang Kuo-ming, founder of Xiamen Dulusou Film and Cultural Media Co. According to the report, Chiang in 2024 became the first Taiwan media professional to obtain a license for radio and television program production and operation in Fujian Province. Chiang said the license allows him to produce online dramas for streaming in China without additional regulatory approval. However, Chiang has a local partner — Chen Duo — and it is unclear if Chiang could have obtained the license independently.

Lawyer and political risk analyst Feingold says entrepreneurs from Taiwan will continue to pursue opportunities in China. Even with China’s recent slower economic growth, there is still money to be made in the country whether in manufacturing or services, and some of the factors that resulted in past success in China for Taiwan businesspersons still exist, such as cultural familiarity, he observes.

He expects that the Fujian Demonstration Zone will attract moderate investment from Taiwanese in the near term. He says there will continue to be “manufacturers from Taiwan who will want to be in China whether for the domestic market or to manufacture for export to non-U.S. markets [with lower tariffs for goods made in China] such as Europe, and might find the Fujian Demonstration Zone and the applicable incentives attractive.”

However, “to the extent that Taiwan’s larger companies are avoiding large investments in China whether because of U.S.-China trade tensions or China-Taiwan tensions, the incentives offered in the demonstration zone will not change that situation,” he says.