China Exodus as Tech Returns to Taiwan

Article By : Junko Yoshida

A boatload of Taiwanese companies who moved their production operations to China decades ago are now sailing home. But the reason for this return voyage isn't what you might think. It's more about Xi Jinping.

TAIPEI – A boatload of Taiwanese companies who moved their production operations to China decades ago are now sailing home. But the reason for this return voyage isn't what you might think.

In the past four months alone, 40 Taiwanese companies with significant operations in China have decided to leave the mainland. The movement, sometimes described in Taiwan as “the salmon run,” hardly amounts to an exodus. Yet, it is a milestone for Taiwan after more than fifteen years of its government trying to lure these firms back from China.

Those who announced their departure from China have pledged to invest more than NT$200 billion (US$6.47 billion) in Taiwan, according to the Ministry of Economic Affairs in Taipei. More firms are expected to follow, the Ministry said. Meanwhile, more companies are suspected to have already returned – without fanfare.

The most common narrative is that the U.S.-China trade war has trigged this phenomenon. Punitive tariffs imposed on Chinese manufactured goods by the U.S. government are forcing companies with factories in China to face revenue losses.

Tariffs, however, are more likely just a handy cover story for firms who were already planning to leave China, revealed several high-level industry executives and government officials in Taipei recently interviewed by EE Times.

Instead of seeking a quick fix for what might be short-term political tension between China and the United States, Taiwan companies in China have long seen the writing on the wall.

They explain that the real forces behind their return are the worsening business environment in China. The issues include rising labor costs, the burden of paying for rapidly increasing social welfare outlays and environmental taxes.

“Unless you are as big as Foxconn, most small and medium-sized Taiwanese companies in China can’t possibly meet China’s ever-growing demands,” Paul Chou, secretary general of Taiwan Telematics Industry Association, told EE Times.

Finally, not the least among Taiwan’s concerns is a growing political and social fear about the mainland. For example, many Taiwanese find China’s social credit system – under which China rates its own citizens, including their online behavior – particularly jarring.

Fueling Taiwan’s angst further is China’s approval last year to remove its two-term limit on the presidency. The new political system allowing Xi Jinping to remain in power for life is another sign – in the eyes of Taiwanese companies – that China is developing an unfriendly business environment, EE Times’ Taipei sources noted.

In other words, this is not so much about Donald Trump, but it's about Xi Jinping.

More complete supply chain in Taiwan

The reversal of the investment flow — from the mainland back to the island – is serving as a huge confidence booster for Taiwan. Taiwanese companies returning home are a bellwether for local industry.

Consider the automotive sector. During the Taipei International Auto Parts & Accessories Show last week, trade association executives and government officials used Taiwanese companies’ homecoming as a talking point.

According to Mei-Hua Wang, Deputy Minister of Economic Affairs, the latest list includes Sonar Autoparts co., a company specializing in tuning automotive lights, and Mobiletron Electronics Co., a battery-management systems maker. “These leading companies’ making investments back in Taiwan will help this region build a lot more comprehensive supply chain” in the automotive industry, she noted.

Mei-Hua Wang

Mei-Hua Wang, Deputy Minister of Economic Affairs at the Opening Ceremony of the Taipei International Auto Parts & Accessories Show (Photo: EE Times)

Last week, Mobiletron’s CEO announced a decision to move production of high-end products back to Taiwan. The company will invest NT$2.5 billion (US$81 million) in factories in Taichung next quarter, with construction expected to be completed in the third quarter of next year and production of electric buses to start the following quarter.

At the opening ceremony of the auto parts & accessary show in Taipei, Winner Yu, Chairman of the Taiwan Autotronics Collaborative Alliance, echoed the homecoming sentiment. He declared, “Taiwan is back at the production center” for connected cars and advanced driver assistance systems.

The cost of doing business in China

It’s important to note, though, that the Ministry of Economic Affairs (MOEA) in Taiwan launched this year a “welcome back” program, with incentives such as free rent for the first two years, favorable bank loans, and access to tax consultation.

According to the MOEA, the 40 Taiwanese firms are expected to create more than 21,200 new jobs for the local market.

The five largest industrial clusters returning from China to Taiwan thus far include the server industry, networking devices, the bicycle industry, car components and vehicle electronics, according to the MOEA. During the second quarter this year, a few more sectors are expected, including precision machinery and the electronics industry.

Taiwanese companies are finding it harder to stay in China, because of growing cost of doing business, over which the government is exerting a much tighter grip.

Chou observed that labor costs in China since 2009 have quadrupled, rendering the wage differences between China and Taiwan negligible. Additionally, the Chinese government is pressuring companies to share social welfare costs, which alone have tripled since 2009, Chou added. Further, China is demanding that corporations pay an environmental tax. Together, all three factors have already made it quite expensive for many companies to do business in China, he said.

It's not just taxes. The Chinese government is imposing increasingly intrusive demands on corporations — asking for a seat on corporate boards, for instance, according to several EE Times interviewees.

For example, Alibaba’s co-founder and executive chairman Jack Ma decided last fall to step down from the Chinese e-commerce giant. Ma’s retirement was announced soon after Beijing and state-owned enterprises began playing a more interventionist role in corporations. Under President Xi Jinping, China’s internet industry has grown and become more important, prompting the government to tighten its leash, China watchers said.

Today, companies operating in China do not see Ma’s sudden retirement as an isolated incident. They are afraid that their business, too, could face intensified political pressure from Beijing.

Power shortage in Taiwan?

There is, however, a problem the Taiwanese government will face, cautioned Chou, if all these Taiwanese companies started to come home en masse. With a vastly larger manufacturing base arriving suddenly, the nation — which is phasing out of nuclear power — could encounter a power shortage, he noted.

Paul Chou

Paul Chou, secretary general of Taiwan Telematics Industry Association (Photo: EE Times)

Over the past few years, Taiwan, under the control of Democratic Progressive Party (DPP), has been moving toward a goal of a nuke-free homeland by 2025. The opposition party, Kuomintang (KMT), which won many county magistrate and city mayor races last November, is proposing a far more gradual reduction in the country's reliance on nuclear power.

The upcoming 2020 presidential election is much on the minds of many in Taiwan. Mainland China asserts that the DPP lost last fall because of President Tsai Ing-wen’s “Cross-Strait” policies fostering confrontation with the mainland and engaging in ‘cultural independence’ for Taiwan. But the reality in Taiwan probably isn’t so simple. The Brookings Institution, after the election, wrote: “To conclude that the electorate has issued a strong mandate for a different cross-Strait policy than what Tsai is pursuing is at least premature.”

For a small economy like Taiwan, bringing native companies back from China is a huge deal. “The movement certainly upgrades Taiwan economically,” said Chou.

Curiously, some companies returning home wish to stay anonymous. Last Friday, the MOEA hinted that a “well-known” electronics maker is investing NT$54.7 billion ($1.77 billion) into Taiwan, the largest amount among the 40 companies who announced their homecoming. The unnamed electronics company will develop artificial intelligence technology, among other things, while adding about 8,000 jobs here, MOEA noted.

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