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Business trends

Taiwan tech companies' China exit fuels $25bn investment drive

Pandemic hasn't stopped Quanta, Innolux and others from building new factories at home

Taipei calling: Taiwan has seen a rush of high-tech investment under a government incentive program.   © Reuters

TAIPEI -- The rumble of construction rings out in the northern Taiwanese city of Taoyuan, a sound that has become more common on the self-ruled island -- and one that heralds change in mainland China.

Dozens of workers in masks scurry across the site as two cranes hoist beams high into the sky. A new factory is being built for Quanta Computer, which ranks third in the world for electronics manufacturing services. The company is investing about 15 billion New Taiwan dollars ($500 million) there to boost production of equipment such as telecommunications devices used in servers.

"We haven't been affected by the coronavirus, so construction is still on schedule," says a worker on site.

Quanta's capacity buildup is not an isolated move. Since January 2019, 189 companies have applied for government incentives to invest over NT$761.4 billion in Taiwan, filings as of May 21 show. Most of the money has gone into the high-tech sector.

Taiwan's tech manufacturers have found themselves at the forefront of the global push to move supply chains out of "the world's factory" as rising tensions between Washington and Beijing fuel demand for servers and chips not made on the mainland.

Quanta Computer is building a new factory in the northern Taiwanese city of Taoyuan. (Photo by Kensaku Ihara)

Quanta supplies data center servers to U.S. technology giants including Facebook and Google. It now assembles parts made in China into products at factories in the U.S. or Mexico. The new Taoyuan plant will take over some of the Chinese production.

"We will accelerate investments in Taiwan based on demand from our customers," Quanta Chairman Barry Lam says.

Lam says more customers in the telecommunications sector want equipment without Chinese-made parts, given the U.S. crackdown on Huawei Technologies and other Chinese manufacturers.

Other leading Taiwanese electronics manufacturers are deploying fresh capital on the island.

Innolux, a display panel maker owned by Apple supplier Hon Hai Precision Industry, or Foxconn, is investing an additional NT$70.1 billion in Taiwan. It now manufactures core parts in Taiwan to be assembled in China, but plans to start producing some products entirely on the island. It is building a new factory in the city of Tainan that will be almost entirely automated.

Printed circuit board supplier Unimicron Technology will spend NT$26.5 billion to expand a Taiwan plant. Although the company has production facilities both on the island and on mainland China, it has allocated 80% of its capital spending for this year to Taiwan.

Taiwanese authorities have played a major role in drawing Taiwanese companies back to the island. President Tsai Ing-wen, eager to reduce Taiwan's economic dependence on the mainland, introduced new investment incentives in January 2019. The package includes eased restrictions on foreign labor and help paying interest on private-sector loans. Companies need only fulfill certain requirements, such as having invested on the mainland for two or more years, or be suffering from trade tensions between the U.S. and China.

About NT$700 billion was committed in 2019, five times as much as was approved for investment in mainland China for the year, although applications tend to cluster in an incentive program's first year.

Meanwhile, Taiwanese investment flows to the mainland halved in 2019. The U.S. had imposed a 10% tariff on Chinese-made servers, communications equipment and other electronics in September 2018, then raised the level to 25% in May 2019. Products made in Taiwan were not subject to the punitive tariff.

Taiwanese manufacturers began shifting production to the mainland in the 1990s, a step ahead of Japanese, U.S. and European rivals, to take advantage of China's lower wages. Contract manufacturers like Foxconn and Quanta were a force behind this trend, which played a major role in turning China into a manufacturing powerhouse. About 70% of their production happens on the mainland. An estimated 700,000 to 1 million Taiwanese entrepreneurs have sought their fortunes on the mainland.

But the cost advantage of producing in mainland China has narrowed. The minimum wage in the city of Dongguan, where many Taiwanese companies have factories, has more than quadrupled in 20 years to 1,720 yuan ($240) a month.

The figure is about a third of the level in Taiwan. But with factory jobs becoming less popular, "we sometimes need to offer two or three times the minimum wage to recruit enough workers," says an executive at one Taiwanese contract manufacturer.

The coronavirus pandemic is only expected to accelerate the shift back to Taiwan. "Distrust in China is rising in the U.S. and Europe, which will push more companies to reevaluate China-dependent supply chains," says Darson Chiu of the Taiwan Institute of Economic Research.

Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker, has decided to build a new plant in the U.S. New restrictions on exports of U.S. chip making technology have raised hurdles to TSMC's ability to serve as a chipmaking partner to Huawei. Taiwanese companies, long caught between their home's political ties with the U.S. and economic links on China, are not immune to the negative impact of the trade war between the world's two biggest economies.

Taiwan's efforts could serve as a test case for global attempts to rethink supply chains in light of the trade war and the coronavirus pandemic.

"We will strive to create cybersecurity systems and an industrial chain that can protect our country and earn the world's trust," Tsai said in her inaugural speech for her second term this month.

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