July 13, 2017 11:13 am JST

Taiwan's Tsai makes limited headway with 'southbound' turn

Island's economic dependence on China little changed

CHENG TING-FANG, Nikkei staff writer, and TAY HAN NEE, Nikkei Asian Review associate editor

Taiwan has been involved in agricultural cooperation with Indonesia for four decades. (Photo courtesy of the Taiwan trade negotiator's office)

TAIPEI/LONDON -- Efforts by Taiwan President Tsai Ing-wen to reduce the island's economic dependence on China by building up links with nations to the south are showing limited success one year on.

Tsai said when she took office in May 2016 that her "New Southbound" strategy would help Taiwan's $519 billion economy grow with a "farewell to our past overreliance on a single market," one she felt no need to mention by name.

The strategy covers wider ground than similar efforts by former presidents Lee Teng-hui and Chen Shui-bian, extending to South as well Southeast Asia, plus Australia and New Zealand. It also encompasses education, tourism, medicine and labor as well as trade and investment. The strategy calls for reaching broad memoranda of understanding to set up investment support offices based on what each country needs and what Taiwan can provide, according to Taiwan trade negotiator Tsai Yun-chung.

The effort to reach official agreements has so far just yielded a renewal of an agriculture pact with Indonesia, but  similar discussions are also being held with India, Vietnam and the Philippines.

"The New Southbound policy is not sufficiently effective due to a lack of diplomatic ties with the 18 destination countries, and the budget to promote the policy is limited at only 4.2 billion New Taiwan Dollars," ($138 million) said Gordon Sun, an economist at Taiwan Institute of Economic Research, an independent think tank. "Taiwan-based businesses want to develop a new investing area ... but our government can do little for them."

The experience in Vietnam of Formosa Plastics Group, the island's biggest industrial conglomerate, highlights the problem. Vietnamese authorities fined a local unit $500 million last year over allegations that a new steel mill dumped wastewater illegally and caused mass fish deaths. Although Taiwan's foreign ministry said it tried to facilitate talks between the company and Hanoi, company officials complain their requests for help were unsuccessful.

Outbid for favor

The biggest obstacle to Tsai's southward push is China and its political and economic influence, which have only expanded multifold since the days of Lee and Chen. Beijing's own Belt and Road Initiative, under which it is improving transport infrastructure between Asia and Europe, covers many of the New Southbound nations and most are also members of the new China-based Asian Infrastructure Investment Bank.

On June 30, armed Nigerian police forced the closure of Taiwan's trade office in Abuja, its national capital, the latest in a string of moves in recent months by nations outside the New South umbrella to curtail official representation. Since Tsai took office, Beijing has ended a diplomatic truce reached under her predecessor, objecting to her refusal to give explicit acknowledgement that Taiwan and the mainland are part of "one China." Two nations, the African island state of Sao Tome and Principe and more recently Panama, have cut diplomatic relations with Taiwan in favor of China.

No Asian state has diplomatic links with Taiwan though Singapore has a free trade agreement with the island, as does New Zealand. Within the New South region, Chinese pressure regarding Taiwan ties has been most evident in Cambodia. Phnom Penh has repeatedly rejected requests to allow the opening of a trade office and in February, Prime Minister Hun Sen said that Taiwanese in the country should not display their national flag even at private gatherings.

While overall trade flows with New Southbound countries rose at an impressive 20% pace in the six months to March 31, they grew at the same rate with China, leaving Taiwan still primarily dependent on the mainland.

La Kaffa cafe chain Chairman Henry Wang sees promise in Southeast Asia’s growing consumer class. (Courtesy La Kaffa)

Approved investments in New Southbound countries by Taiwan's Investment Commission fell 32.5% in value terms to $2.38 billion, though the number of applications approved rose 20% to 125. The value of applications approved for investments in China declined to $9.18 billion, with the number down 21.5% to 252. The figures indicate the average approved China-bound investment was almost double the size of those for New South nations.

"The economic backdrop today is very different from the 1990s," said Ma Tieying, an economist at DBS Bank in Singapore. "Taiwanese companies are facing the pressure to adjust business models on the mainland and to explore alternative investment bases elsewhere in the region."

South shoring

Advantech, the world's largest industrial PC maker, is among those open to the idea as costs rise in China. President Chaney Ho traveled to Vietnam in May. "I saw a country with a great workforce," he said. "We do think President Tsai's approach to promote [the] Southbound policy is strategically correct."

While Hon Hai Precision Industry and other companies have already set up labor-intensive production and assembly centers in Vietnam and Thailand in recent years, some businesspeople say New South countries cannot readily substitute for China as a production platform.

"It's easier to set up a supply chain in mainland China," said C.C. Wang, president of the Taiwan Association of Machinery Industry. He said that of his 2,700 members, about 15% are investing in China while less than 1% are going into South or Southeast Asia.

A few Taiwanese companies are looking to the growing consumer class of New Southbound nations. Some 149 businesspeople have signed up for an official training program on the culture, languages and consumption habits of South and Southeast Asia. Cafe chain La Kaffa has opened about 400 stores in nine Southeast Asian countries since 2011.

"Southeast Asia is one of our more developed markets. People's acceptance rate of tea culture is high and consumption power is always rising," said Henry Wang, chairman of La Kaffa, which also has outlets in Australia, Canada, Dubai, Japan and the U.S.

Taiwanese banks are also turning their attention southward. "Offshore risks are increasingly diversified away from China," said analysts Cherry Huang and Heakyu Chang of Fitch Ratings said in a recent report, adding that the banks' loan exposure to other Asia-Pacific emerging markets "will continue to grow rapidly in line with government's New Southbound policy." They see the banks' overall exposure to offshore markets remaining at around 20%. According to their figures, China exposure declined to 6.3% of assets last year from 6.7% a year before.

Opened doors

Taiwan is making some headway at offsetting an orchestrated fall in tourist arrivals from China with additional visitor traffic from New Southbound nations. Visas have been waived on a trial basis for citizens of Brunei, Thailand and the Philippines. Visas requirements have also been eased for other targeted countries.

Arrivals from New Southbound countries rose 28.6% in the six months to March to 1.1 million from the previous year. Arrivals from mainland China meanwhile fell 41% to 1.3 million, leaving the island's overall visitor count 7% lower, according to Taiwan Tourism Bureau data.

The picture may be even better in terms of reducing Taiwanese schools' dependence on mainland students. The Tsai government plans to spend $32.9 million on educational ties, including financial aid for ASEAN students at Taiwanese universities.

The number of post-secondary students from New Southbound countries in Taiwan rose 10% in the six months to March from a year earlier. While comparable figures for Chinese students are not available, the number of non-degree students from China declined 4% in the current academic year from the previous one while mainland authorities have slashed the number of Chinese students approved to pursue full-time undergraduate degrees this year by 53%. Taipei officials are considering letting in more workers from Indonesia, which is already the biggest source of Taiwan's migrant labor at 145,000 workers.

Despite all the challenges Taiwan faces in the New Southbound region, some analysts are hopeful about its prospects over the long term. "There will be plenty of opportunities down the road, particularly in manufacturing and service sectors," said Ricard Torne, head of economic research with forecasting company FocusEconomics in Spain.

Additional reporting by Nikkei Asian Review deputy editor Zach Coleman in Hong Kong and contributing writer Ralph Jennings in Taipei.

Asia300

Advantech Co., Ltd.

Taiwan

Market(Ticker): TAI(2395)
Sector:
Industry:
Electronic Technology
Computer Processing Hardware
Market cap(USD): 4,892.93M
Shares: 633.30M
Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 67,371.25M
Shares: 17,328.73M

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