Taiwan's new leader seeks to diversify economy

Taiwan’s overreliance on exporting hardware components amid slumping global demand leaves its new government looking for ways to diversify the economy.
Landslide: Tsai Ing-wen
Landslide: Tsai Ing-wen

A new chapter is starting for Taiwan, not just politically but also economically.

The domestic political dust has now mostly settled, following the opposition Democratic Progressive Party’s landslide victory in January and the election of the country’s first female president, Tsai Ing-wen. The new government’s challenge is now to help remould the island’s industrial landscape.

Taiwan is an important link in the global information and communications technology supply chain, but it is struggling. The island is too dependent upon selling electronic equipment like integrated circuits and computer peripherals. These make up 40% of its outbound sales, which declined for a 12th consecutive month in January.

Trade is slowing partly because the global market is shrinking for the sort of hardware that Taiwan’s industrialists are so good at producing. But they are also being undermined by mainland China’s so-called red supply chain, a fast-growing cluster of Beijing-backed firms set on exerting greater influence on the global technology industry.

Taipei’s need is clear: generate competitive advantages in things other than microchips and electronic hardware.

“Over the coming years diversification will be the key to our industrial development plans,” Lien Yu-ping, director-general of the department of investment services under the Ministry of Economic Affairs (MoEA), told FinanceAsia in an exclusive interview. “Our exports are too limited and our competitive edge will become blunted if we cannot seize the opportunity to upgrade our product offerings.”

Some of the groundwork has already been laid.

The biotechnology and pharmaceutical sector has flourished in recent years, aided by a government decision in 2006 to classify biotech as one of six major emerging industries, alongside green energy, high-end agriculture, tourism and travel, medical care, and culture.

These industries were meant to drive the island’s long-term economic future. But the plan didn’t get off to an inspiring start, because Taiwan lacks the know-how, research and development capabilities in these specialised areas that can match global standards. These qualities had to be imported.

“Taiwan identified foreign investment as an indispensible element for [the] development [of] the biotech and pharmaceutical industries, and foreign investors have been playing a vital role since then,” Lien said. Total value of approved foreign investment projects amounted to $5.8 billion in 2014, up from $3.8 billion in 2010, according to MoEA data.

To attract foreign capital into the sector, Taiwan established biotechnology parks and developed industrial clusters to offer R&D support to overseas biotech and pharmaceutical companies. It also streamlined the industry-facing public sector to cut down on bureaucracy, bringing the National Health Insurance Administration and Food and Drug Administration under the aegis of a newly expanded Ministry of Health and Welfare in 2013.

Switzerland’s Novartis International, the world’s largest drugmaker by revenue, was one of the earliest foreign pharmaceutical companies to invest in Taiwan. It has set up two clinical trial centres in Taiwan and a venture fund that invests in promising new biotech companies.

“We are particularly interested in biomedical companies which are able to leverage on the highly developed information technology industry in Taiwan,” Reinhard Ambros, global head of Novartis Venture Funds, said.

Other foreign pharmaceutical companies have followed in the wake of Novartis, including US drugmaker Alvogen, which acquired a majority stake in Taiwanese oral and vaccine medication manufacturer Lotus Pharmaceutical for $230 million in 2014. It is the largest single investment by a foreign company to date in the Taiwanese pharmaceutical sector.

Novartis and Alvogen have pledged to continue their investment in Taiwan and expand their production capacity going forward in response to government initiatives to develop the biotech industry. Alvogen plans to inject an additional NT$1 billion ($33 million) to expand its R&D facilities following the merger with Lotus, while Novartis signed a letter of intent with the MoEA last year, pledging to collaborate with the government in terms of drug development, clinical trials as well as training and development of local biotech talents.

Winds of change

Another potential bright spot is the promotion of renewable energy, particularly offshore wind power generation. That aligns with government plans to reduce energy imports, which currently account for over 95% of Taiwanese energy consumption, according to data from the Bureau of Energy.

Due to limited land space, Taiwan’s onshore wind farm sector is close to saturation. However, it is far from making good use of its offshore wind energy resources.

Offshore wind turbines

According to British consultancy firm 4C Offshore, Taiwan has the best offshore wind resources in the world due to its unique coastal terrain. The island’s central mountain range and the Wuyi mountains in China’s Fujian province act like a funnel, channelling strong winds into the Taiwan Strait.

That wind power allows turbines on Taiwan’s west coast to average about 2,500 full-load hours, the number of hours per year in which wind turbines can work at full capacity. By comparison European wind farms are considered “reasonably good” if they can reach 2,200 full-load hours, according to 4C Offshore.

The Taiwan government’s long-term target as set out in 2012 is to develop offshore wind farms with total capacity of 4,000 megawatts by 2030. That compares with 15 megawatts at the end of last year.

The ultimate goal is for installed wind power capacity – both onshore and offshore – to account more than one-third of Taiwan’s total renewable power capacity. 

Foreign investors including German engineering giant Siemens AG and Norwegian wind power technical consultancy DNVGL have already started in into Taiwan’s offshore wind power sector, according to the Ministry of Economic Affairs’s Lien.

Last September, Siemens signed an agreement to supply two wind turbines to a planned wind farm located six kilometres off the west coast of Miaoli district in the Taiwan Strait. Meanwhile, DNVGL has supported Taiwan wind power projects through providing technical assistance and training to local engineers.

SOLID BASE

The good news for Taiwan is that much of the infrastructure is already in place. Companies that set up in Taiwan can take advantage of the country’s existing manufacturing base and prototyping capabilities to speed up the development process, Lien told FinanceAsia.

“For example, biotech research companies will need to procure relevant medical equipment before developing new drugs. In Taiwan they can leverage on our manufacturing expertise so that they can commercialise their products much faster,” Lien said. The same is also true for firms in other cutting-edge sectors including renewable energy and high-end agriculture, she added. Companies in these sectors have not been able to develop their business probably in the past because the government was very much inclined to develop tech manufacturing as the backbone of the economy.

Taiwan is reliant on tech

Foreign investors will also be encouraged by Taiwan’s improved political picture.

The DPP easily outscored the incumbent Kuomintang in January, winning 68 out of 113 seats in the country’s parliament, while its leader, president-elect Tsai, won in 18 of 22 cities and counties, securing 56% of the total votes. After a period of political infighting, the clear election result should make it easier to implement policy and pass legislation.

“Such [an] outcome is favourable to Taiwan’s industrial development as a whole because it will minimise the political struggle in the legislature as well as between the central and local governments,” said Wang Jiann-Chyuan, vice president of Chunghua Institute for Economic Research. “It will allow [a] smoother execution of industrial reform plans.”

This will be a welcome change for business, given the partisan divide that has stymied action in the Legislative Yuan since 2012, when the Kuomintang party eked out a majority and lost control of several local governments.

The DPP now enjoy enough support to pass the laws it wants, but this will only go so far unless the government also becomes more efficient.

“Under the new government we will try to streamline the process by promoting collaboration between government departments when it comes to reviewing foreign investment plans,” Lien pledged.

Drawbacks

However, investing in Taiwan is not without its snags.

The biggest drawback comes from the fact that it is excluded from many free trade agreements between Asian nations and is increasingly reliant on exports to China, which is experiencing a substantial slowdown in economic growth.

One pressing concern is the conclusion of a China-Korea FTA as both Korea and Taiwan are export-dependent nations that rely heavily on sales of electronic products overseas.

Korea as of January had FTAs with China, Singapore, India, and the Asean nations. Taiwan, as yet, has none within the region, exposing its companies to higher tariffs and reducing their competitiveness in the global marketplace.

Cross-strait relations with China are another variable.

While the new DPP-led government is expected to take a less pro-China approach, it remains to be seen to what extent Taiwan can shrug off the economic reliance on China.

“It is estimated that for every 1% decline in China’s GDP, Taiwan’s economy will shrink by about 0.5% to 1%,” Wang said. “Taiwan has established too strong a tie with China under Ma Ying-Jeou’s leadership and it is not easy to overturn that.”

He is also concerned that the environmental impact assessment act implemented in 2011 will continue to be a drawback for industrial development. According to local reports, it will take at least 18 months to assess an investment proposal due to rising local opposition in recent years, as industrial development started expanding outside of urban areas and threaten the livelihood of people living in rural areas.

“Until the new Taiwanese government resolved all these issues we are unlikely to see a breakthrough in foreign investment into Taiwan,” Wang told FinanceAsia

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