TAOYUAN FTZ - UNREALISTIC CLAIMS OF PENDING DIRECT

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 003095

SIPDIS

STATE FOR EAP/TC AND EB/TRA
STATE PLEASE PASS AIT/W

E.O. 12958: DECL: 10/05/2014
TAGS: EAIR EWWT ECON PREL TW CH
SUBJECT: TAOYUAN FTZ - UNREALISTIC CLAIMS OF PENDING DIRECT
AIR LINKS

REF: AIT TAIPEI 2997

Classified By: AIT TAIPEI DIRECTOR DOUGLAS H. PAAL, REASONS 1.4 (B/D)

Summary
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1. (C) The Taoyuan Free Trade Zone near Taipei,s Chiang
Kai-shek airport is a key component of Taiwan,s Global
Logistics Development Plan (reftel). The Far Glory Group
will build the FTZ under a build-operate-transfer (BOT)
contract. Far Glory plans to invest NT$ 21.3 billion (USD
636 million) in the project. However, unrealistic claims
about cross-Strait links, vague explanations of the special
benefits of the FTZ, and unwillingness to build to tenants'
specifications suggest the project may face difficulties
finding customers.

Far Glory's Big Plans for Taoyuan FTZ
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2. (U) The Taiwan government is implementing its Global
Logistics Development Plan. In addition to free trade zones
in Taiwan's two largest ports (reported reftel),a third key
element in the plan is a free trade zone near Taipei's Chiang
Kai-Shek Airport in Taoyuan. Taiwan's Far Glory Group is
developing the Taoyuan FTZ under a build-operate-transfer
(BOT) contract with the Taiwan government.


3. (C) Far Glory is a diversified conglomerate with
interests in real estate development, construction, tourism
and insurance. It also currently operates the Far Glory Air
Cargo Terminal near Chiang Kai-Shek Airport. The Taiwan
Civil Aeronautics Administration (CAA) announced the tender
for construction of the Taoyuan project in May 2002. At that
time it was known as the &Taoyuan Air Cargo Park.8 CAA
officials tell AIT that about 30 firms placed bids on the
project. Far Glory's experience in developing the Far Glory
Air Cargo Terminal helped it win the project. However, other
observers have pointed out that Far Glory's executives have
close ties to the Chen Administration. One source told us
Far Glory's Chairman Chao Teng-hsiung was a member of
President Chen's party on his last trip to Latin America.


4. (U) According to the BOT contract, Far Glory will build
and manage the FTZ for 50 years, after which Far Glory will
turn the FTZ over to the Taiwan government. Far Glory plans
to invest a total of NT$ 21.3 billion (USD 636 million) in
the project and has already spent NT$ 1 billion (USD 30
million) in the first phase. A consortium of 10 banks headed
by Taiwan's Chao Tung Bank has invested another NT$ 3
billion. Far Glory executives say that the FTZ will target
the needs of high-tech companies to rapidly produce and
customize products in response to customer orders.

Shift in Focus, Unrealistic Claims
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5. (C) Far Glory executives marketing the Taoyuan FTZ have
made unrealistic claims about what kind of cross-Strait
access the FTZ will be able to provide. They have expressed
confidence that the FTZ will be able to service direct
aviation links with the Mainland. In addition, they told AIT
that Mainland Chinese will be able to stay in the FTZ for up
to 72 hours without visas or entry permits. According to MAC
Department of Economic Affairs Director Fu Don-cheng, the
Taoyuan FTZ was originally conceived as a zone whose primary
purpose would be to facilitate cross-Strait links. It was
subsequently reformulated as a free trade zone. This helps
explain why Far Glory makes these unlikely claims about
cross-Strait travel and transportation to the FTZ.


6. (C) Fu and other officials have told AIT that after the
December Legislative Yuan elections, the Chen Administration
is likely to move actively toward opening a dialogue with the
Mainland on direct aviation links. Even assuming that such
an opening occurs, it is still optimistic to predict direct
flights by the projected opening of the Taoyuan FTZ in
November 2005. Fu also says that the only travel benefit for
Mainland Chinese going to the FTZ will be reduced visa
processing time. He says that they should be able to acquire
their visas in less than 10 days compared to the current
procedures that can take up to a month. This is very similar
to proposals under consideration that would be applied to all
PRC travelers to Taiwan.


7. (C) Direct links are even more important to the success
of the Taoyuan FTZ than to the Keelung and Kaohsiung free
ports. The additional time and expense of passing through
Hong Kong or Japan are proportionally smaller for sea
freight. In fact, one source tells us that some ships find
ways to obtain the necessary documentation without actually
stopping in a third port, for example by having Japanese
customs officials meet the ship at sea to provide the
documentation. For air cargo the extra hours and expense
imposed by a transit stop are considerable. In addition,
Keelung and Kaohsiung Harbors have newly-established offshore
transshipment centers that allow cargo coming directly from
the Mainland to be offloaded and loaded in the transshipment
centers as long as it is then shipped to a third location
without passing through Taiwan customs.
Marketing Problems
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8. (C) Although Far Glory has claimed that firms such as IT
manufacturers Quanta, Asustek and Hewlett-Packard are
interested in occupying space in the FTZ, the firms
themselves have yet to publicly express interest. Quanta
Group Deputy Spokesman Jason Lin told econoff that Quanta's
interest is not high. He noted that Quanta's manufacturing
facilities in Taiwan already enjoy many of the benefits of
the FTZ, including exemption of customs duties on imported
components that are re-exported and expedited customs
clearance.


9. (C) DHL Taiwan Director of Operations Nick Chen pointed
out that in addition to making unrealistic claims about the
certainty of cross-Strait access for the FTZ, Far Glory has
also been vague about other benefits that will be available
to firms in the FTZ. Far Glory has not been able to explain
in detail to potential tenants the customs clearance
procedures or tax exemptions for the FTZ. Chen also noted
that many high-tech firms, including tenants of the Hsinchu
Science and Technology Park already enjoy similar benefits.
DHL's plan is to wait and see how many other firms move into
the FTZ. If there is enough interest by potential DHL
customers, DHL will consider establishing a facility.


10. (C) Another potential problem for the Taoyuan FTZ is
that Far Glory plans to build most of the FTZ facilities
first and them fill them with tenants, as opposed to a
build-to-suit approach of identifying tenants and then
building the facilities they need. Sharon Hann, marketing
director for commercial real estate consulting firm NAI
Taiwan, who has worked with Far Glory on other projects,
points out that this may be especially problematic for
high-tech firms, which often have unique specifications for
manufacturing facilities. Taiwan Association of Logistics
Management Secretary General James Cheng explained that this
type of development approach was one of the mistakes that
contributed to the failure of the Taisugar Logistics Park
(reftel).

Comment ) Warning Bells
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11. (C) Unrealistic claims about cross-Strait links, vague
explanations of the special benefits of the FTZ, and
unwillingness to build to tenants' specifications are all
troubling signs that Far Glory will not be able to make the
Taoyuan Free Trade Zone a success. With projected investment
of over USD 600 million, the potential losses are high.
Under the BOT contract, the financial risk borne by the
Taiwan government may be low, but the prospects for the
Global Logistics Development are not good.
PAAL