How do you out-muscle two 700-pound gorillas? That’s the question that Morris Chang, the founder of TSMC, posed in 2012. At the time, he was referring to his semiconductor foundry’s two main rivals, Samsung Electronics and Intel. As we discuss in this week’s Talking Point, more of the chest-thumping in the semiconductor world today is coming from two geopolitical rivals: China and the US.
TSMC seems to have acknowledged that the Americans are still the alpha male. But it’s also the most high-profile example of a Taiwanese company following its own government’s policy on pulling back from mainland China.
When she was inaugurated as president for a second term this Wednesday, Tsai Ing-wen highlighted this pivot as the crowning achievement of her first term. In 2016, she had launched the Go South campaign to encourage Taiwanese firms to relocate their mainland Chinese supply chains to Southeast Asia, South Asia and Australasia. Early last year, the government launched an incentive programme to encourage Taiwanese companies to come home as well. Since then 400 firms have pledged to move their operations back from mainland China and invest NT$1 trillion ($33.55 billion) into Taiwan, equivalent to 5.7% of its 2019 GDP (government ministers say NT$500 billion will be invested by the end of this year).
Taipei-based analysts say companies have adopted a phased approach to making these investments and that the process will take two to three years to complete. One Taiwanese bank estimates that 40% of its China-based clients will move out of the mainland completely and that about half will come back to Taiwan – some of them temporarily, before relocating elsewhere.
Government departments are helping returnees to secure land, labour and the necessary utilities to operate effectively. Incentives make the capex burden easier to bear. The returning firms are also eligible for lower loan rates and some are raising funds at competitive rates in the domestic bond market.
Many of Taiwan’s tech companies have chosen to extend their production lines on the island, particularly PC and notebook manufacturers like AsusTek, which has moved more of its premium product lines back home.
Companies at the highest end of the tech spectrum are more likely to keep production there: one reason why TSMC is still building its next-generation fab facility in Taiwan. The idea is to focus unrelentingly on quality. “Taiwan can assume the position of the commander or the brain of the global supply chain,” claims Chang Chien-yi, president of Taiwan’s Institute of Economic Research.
This heightened activity at home means that for the first time in years, Taiwanese banks have been reporting declining profits on their overseas lending as a percentage of their total loan book. Nonetheless, financial analysts believe that most lower-end manufacturing will continue to migrate to lower-cost ASEAN markets, particularly Vietnam, which is increasingly plugged into US supply chains as well.
Taiwan and Vietnam signed a bilateral deal in December that is supposed to encourage more Taiwanese firms to invest there. iPhone manufacturer, Pegatron, has set up a factory and Inventec, an AirPod assembler, said in March that it would be building a factory alongside other Taiwanese firms in Apple’s supply chain in Vietnam, including Wistron, which has pledged to move half of its production capacity outside mainland China within a year.
It isn’t all one-way traffic out of China. Taiwanese companies hoping to meet Chinese domestic demand in traditional industries such as furniture and textiles continue to invest in the mainland. And a wave of acquisitions and strategic partnerships between companies from Taiwan and Japan is not necessarily about reducing China’s role in the global supply chain. “Japanese corporates actually see Taiwanese companies as a bridgehead into China,” one Taipei-based banker told WiC. “They feel they can help them to understand the culture and that it’s easier to sell a Taiwanese brand than a Japanese one for historical reasons.” An example of this trend was Kioxia’s (formerly Toshiba Memory Corp) $165 million purchase of Lite-On’s solid state drive business last year.
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