TAIWAN INVESTMENT IN PRC - NOT JUST FOR EXPORT

UNCLAS SECTION 01 OF 02 TAIPEI 001216

SIPDIS

SENSITIVE

DEPT FOR EAP/TC
DEPT PLEASE PASS AIT/W

E.O. 12958: N/A
TAGS: EINV ECON EFIN TW CH
SUBJECT: TAIWAN INVESTMENT IN PRC - NOT JUST FOR EXPORT

Summary
--------------


1. (U) A survey of Taiwan enterprises in the PRC shows that
55 percent of their total output by value was sold within the
PRC. More than half of those surveyed cited the expanding
PRC domestic market as a primary reason for investing. In
addition, the survey showed that 50 percent of inputs were
purchased from Mainland sources, only 39 percent from Taiwan,
and PRC financial institutions provided 34 percent of
operational financing. This data undermines the assumption
that the PRC is simply a cheap labor base for Taiwan
companies. This more complex pattern of interaction means
that the Taiwan and PRC economies are becoming far more
integrated that previously thought. End summary.


Background on Survey
--------------


2. (U) To provide further information about Taiwan's
investment in the PRC, the Ministry of Economic Affairs
(MOEA),Investment Commission last year surveyed the Mainland
enterprises of Taiwan firms regarding their activities in

2003. MOEA released the results in February 2005. MOEA
surveyed 2,548 enterprises and received 817 usable responses.
Survey questions covered a wide variety of topics, including
investment motivation, sales destinations, input sources, and
concerns about the investment environment. The survey
provides useful information on Taiwan's investment, but the
limited scope of the survey makes it more difficult to
generalize about all of Taiwan's Mainland investment.

55 Percent of Sales to PRC
--------------


3. (U) Many analysts have observed that much of Taiwan's
investment in the PRC is aimed at producing exports for
markets in the U.S., Japan and Europe. The survey results
reveal that many Taiwan investors are more interested in the
domestic PRC market. Survey respondents reported that 55
percent of their sales went to the domestic Mainland market.
Of the 45 percent exported, almost half went to Taiwan. In
some industries, the PRC market accounted for almost all
sales. In chemical products manufacturing, Taiwan
enterprises sold 94 percent of their products within the PRC.
In plastic products manufacturing the figure was 98 percent.
Nevertheless, in electronics and electrical equipment
manufacturing, the Mainland accounted for only a small
portion of sales, some 15 percent. Exports to Taiwan
consumed 53 percent of output for the industry, compared to
32 percent exported to other regions.


4. (U) Other data also indicated heavy interest in the
domestic PRC market. Fifty-three percent of enterprises
surveyed said that the expansion of domestic PRC demand was
one of the main reasons they chose to invest in the Mainland
-- the second most popular reason behind low labor costs at
83 percent. In comparison, a similar survey of firms with
foreign investments in other regions showed that only 36
percent said that expansion of the local market was one of
the main reasons they chose to invest. In addition, when
enterprises that had seen higher profits during the survey
year were asked why profit went up, 43 percent cited
increases in local demand, the most frequently cited response.

PRC Important Source for Inputs and Finance
--------------


5. (U) According to the survey, the PRC is the largest source
of inputs for Taiwan enterprises in the Mainland. Overall
the survey showed that 50 percent of equipment, raw materials
and parts was purchased from Mainland sources. In
comparison, only 39 percent came from Taiwan. However,
nearly half of the inputs purchased from Mainland sources,
came from other Taiwan enterprises. Some key industries,
including plastic products and electronics and electrical
equipment manufacturing still rely more heavily on Taiwan
sources, accounting for 50 percent and 46 percent of inputs
respectively. Not surprisingly, imports from outside greater
China, especially oil imports, were the most important source
of inputs for Taiwan-owned enterprises in chemicals
manufacturing, making up 90 percent of total inputs.

6. (U) The PRC financial system is also an important source
of financing for Taiwan enterprises in the Mainland. The
survey indicated that PRC financial institutions were the
source for 34 percent of operational financing, second only
to the mother company in Taiwan at 37 percent. Taiwan
financial institutions accounted for only 3 percent. In many
industries, including basic metals, plastic products and
chemicals manufacturing, PRC financial institutions were the
largest source.

Comment - More Profound Integration
--------------

7. (SBU) These results cast new light on the nature of
Taiwan's investment in the PRC. Many analysts have
emphasized that much of Taiwan's investment is just export
assembly, importing large quantities of parts from Taiwan for
assembly in the PRC and sale to U.S., Japanese and European
consumers. This pattern of investment would minimize Taiwan
firms' interaction with the domestic PRC economy except as a
source for cheap labor. The new data show that this is not
the only story. While electronics manufacturing appears to
fit this old model, Taiwan firms in other industries are
increasingly selling to PRC consumers. They are also growing
more dependent on Mainland sources for inputs and financing.
Over time, this more profound integration may have an
increasing impact on political cross-Strait relations.
Taiwan will have more motivation to engage in a dialogue and
regularize cross-Strait economic relations. End comment.

PAAL