China Crackdown on Taiwan Inc. Pressures Firms to Look Elsewhere
China’s Crackdown on Taiwan Inc. Risks Accelerating Decoupling
(Bloomberg) -- Taiwanese companies, which led the charge into China decades ago when the mainland opened to overseas capital, have been scaling back for years because of higher labor costs and more local competition. Beijing’s move last month to punish one of the island’s firms for its political connections threatens to accelerate that.
Far Eastern Group was fined $14 million in November for what officials said were environmental, land-use, health and safety violations. Chinese officials and state-backed media, however, made it clear the fines were connected to Far Eastern’s role as one of the biggest donors to the party of Taiwan’s President Tsai Ing-wen.
“Looking at what happened to the Far Eastern Group, companies will start to worry that the risk of getting picked on by the Chinese government will increase,” said Yang Shu-fei, an economist at the Taipei-based Chung-Hua Institution for Economic Research.
Taiwanese companies that operate in China have long complained that the business environment on the other side of the strait isn’t what it used to be. Once lured by mainland government-backed land deals, tax incentives and abundant cheap labor, Taiwanese companies are facing increasing competition and rising labor costs.
“Taiwanese businesses are cautious about investing in mainland China due to changes in its business environment, its conflicts with the U.S., and ongoing technology war,” Taiwan’s Economic Ministry said in a statement Monday.
In addition, the Far Eastern incident has triggered a wave of Taiwanese businesses looking to return home, Taiwan’s Economic Minister Wang Mei-hua said in late November, according to the Economic Daily News.
Some of the money from the island’s firms is coming home: Taiwan’s companies have promised to invest over $54 billion on the island in the last three years, attracted by government subsidies and support.
And some is going overseas: Approved investments by firms such as Taiwan Semiconductor Manufacturing Co. into Japan the U.S. and elsewhere were $12.3 billion so far in 2021, the sixth straight year that’s topped investment to China.
The government was already offering preferential loans to local companies that expanded their manufacturing capacity or staff in Taiwan. Those programs, which had been due to expire at the end of this year, will be extended for three more years, Wang said last week.
The shifting in investment flows doesn’t indicate an immediate decoupling of all trade is on the horizon. Taiwanese firms such as Hon Hai Precision Industry Co., which makes the iPhone, are heavily invested in the mainland and any change will happen slowly.
Companies won’t exit China immediately, but will maintain a lower profile and increasingly take into account non-economic factors when making business decisions, according to Yang. “Taiwanese companies have gradually learned the importance of hedging risks and will transfer to other regions like Southeast Asia and India.”
China is still the number one export destination for goods from Taiwan, although that hasn’t grown as fast as exports to the U.S., Europe or elsewhere, and many of the goods sent to China are assembled into products for re-export to other parts of the world.
That shift can be seen in rise of export orders from the U.S., whose companies are the biggest source of final demand, or the increase in orders from the nations of Southeast Asia, where an increasing number of Taiwanese firms are moving factories.
While the pandemic may have slowed these shifts, the combination of U.S. tariffs on Chinese goods, rising cross-strait tensions, and government encouragement to come home or at least invest in places other than China, will mean that the trend of a gradual decoupling from China is likely to continue.
©2021 Bloomberg L.P.