TAIWAN'S SCIENCE PARKS - REACHING THE LIMITS OF

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004071 SIPDIS DEPT FOR EAP/TC COMMERCE FOR ITA/MAC/ASIA/MBMORGAN DEPT PASS AIT/W E.O. 12958: DECL: 10/03/2015 TAGS: ECON EINV EFIN TW SUBJECT: TAIWAN'S SCIENCE PARKS - REACHING THE LIMITS OF EXPANSION REF: A. TAIPEI 2653 ¶B. TAIPEI 2869 ¶C. TAIPEI 3931 Classified By: AIT Director Douglas H. Paal, Reason 1.4 d Summary -------------- ¶1. (C) With the continuing success of Taiwan's Hsinchu Science Park (HSP) and lack of available real estate for its further expansion, the Taiwan government's National Science Council, which oversees HSP, has built two completely new science parks and ten satellite campuses. The new science parks in Tainan and Taichung have attracted large amounts high-tech investment, but have not duplicated HSP's success at fostering new research and development. This is due to lack of support from research institutions in the newer parks as well as external factors that may have been unique to HSP's experience. The satellite campuses have been less successful at attracting tenants. Instead of attempting to duplicate the HSP model, Taiwan's investment environment would be better served if the Taiwan government accelerated the liberalization of cross-Strait economic policies and more effectively addressed labor shortages in high-tech industries. End summary. Hsinchu Miracle -------------- ¶2. (U) Taiwan's Hsinchu Science Park (HSP) played an essential role in Taiwan's rapid economic growth during the 1980s and 1990s. Since it began operations in 1980, this single cluster of high-tech manufacturing firms has been almost entirely responsible for Taiwan's emergence as a world power in the information technology and semiconductor industries. Today, more than 100,000 people work in the park. Total annual sales for the firms in HSP top NT$ 1 trillion (about USD 30 billion). The HSP companies also obtain thousands of patents each year. ¶3. (U) HSP firms continue to display strong growth. Total sales for HSP firms in 2004 were more than 30 percent higher than the previous year. Investment by HSP firms exceeded NT$ 1 trillion for the first time in 2004 (more than USD 30 billion),more than twice 1998 investment levels and four times 1996 levels. Many firms would like to expand their operations in HSP. There is also a long waiting list of firms that wish to lease space in the park for the first time. However, all of the available space has been filled and there is no vacant real estate surrounding the current campus available for expansion of the park. ¶4. (U) As a result, the Taiwan government's National Science Council, which oversees HSP, has moved to expand with other parks. The Southern Taiwan Science and Industrial Park (STSIP) in Tainan was established in 1996, and the Central Taiwan Science Park (CTSP) in Taichung started operations in 2003. In addition, the National Science Council has created several satellite campuses for HSP as well as the newer parks. These expansion efforts have met with varying degrees of success. STSIP and CTSP - Many Tenants but No Cluster Effect -------------- -------------- ¶5. (U) The STSIP and CTSP have been very successful in attracting high-tech industry tenants and high levels of investment. STSIP is the largest of the three main parks in terms of space with just over 500 hectares of industrial space on the main campus, and has attracted tenants to fill all but 3 percent of the available space. CTSP is more comparable in size to HSP with 172 hectares and 237 hectares of industrial space, respectively. Although CTSP is the newest park, it too has managed to fill most of the available space and now has a vacancy rate of only 6 percent. ¶6. (C) However, the new parks have not duplicated HSP's success in research and innovation. As former HSP Director and Vice Minister of Economic Affairs Yang Shih-chien commented to AIT/T, the STSIP and CTSP are really just industrial parks, not science parks. Yang, who is now a venture capitalist, noted that the two newer parks have good facilities for factories and provide useful administrative services to tenants, but lack the strong research support that HSP has. As a result, they have attracted established high-tech manufacturers to build large-scale manufacturing facilities, but they have not been as successful at encouraging start-up companies. National Science Council Science Park Coordination Division Associate Researcher Chou Hsien-jen echoed Yang's comments, expressing disappointment with relatively low levels of research and development expenditures at the STSIP. In particular, STSIP and CTSP have lacked support from the government's Industrial Technology Research Institute (ITRI),which has been instrumental in Hsinchu's establishment of an environment that fosters small high- tech ventures. A relatively new ITRI facility in STSIP may help to change this situation. The first researchers moved into the facility in April 2004. ¶7. (C) Comment: It may never be possible for Taiwan to recreate the remarkable success of HSP. HSP's success has been due in no small measure to several factors completely beyond the control of the Taiwan government and industry. These factors include the presence abroad at the time of its founding, especially in the United States, of large numbers of highly trained engineers and scientists from Taiwan who were willing to return home to participate in Taiwan's economic boom. In addition, the semiconductor industry, which drove Hsinchu's success, has several characteristics that other industries identified in Taiwan as key economic drivers (TFT-LCD manufacturing and biotechnology) simply do not have. Semiconductors play an essential role in a range of technologies that include not only most consumer electronics but also numerous industrial and military applications. Furthermore, Taiwan's development of the fabless/foundry model of semiconductor production where firms specialize in chip design and contract manufacturing to chip foundries was an important factor in the success of the industry here. End comment. Satellite Campuses -------------- ¶8. (U) Ten satellite campuses established under the administration of the three science parks have not attracted tenants as effectively as the main campuses. The satellite campuses are all relatively new, but they generally have vacancy rates much higher than CTSP, which was established in 2003 and is among the newest. Only one, the Lungtan satellite campus of HSP has been able to fill all of its industrial space available for lease. HSP's Chunan campus has managed to lease all but 8 percent of its industrial space. None of the other satellite campuses has a comparable vacancy rate. The Kaohsiung campus, Dushin campus and Huwei campus have vacancy rates of 23 percent, 30 percent and 49 percent respectively. Two of the campuses, Tonglo and Shengyi, have yet to find a single tenant for industrial space. The National Science Council has not yet released data for three of the newest satellite campuses. ¶9. (C) Former Vice Minister Yang told us that he doesn't know why the National Science Council wants to expand the science parks any further. He said that the new campuses offer few advantages that are not available elsewhere throughout Taiwan. He highlighted that the science parks no longer offer unique tax advantages. As an example, he noted that Taiwan notebook computer manufacturer Quanta had passed by opportunities to set up a factory in one of the science parks and instead set up operations near Taipei in Linkou. Yang speculated that one major attraction of the science parks is the prestige of the science park address. Higher vacancy rates suggest that this level of prestige may not extend to the satellite campuses. ¶10. (C) Taiwan government officials have cited politics as an important factor in science park expansion particularly for satellite campuses. National Science Council Science Park Coordination Division Director Tsai Ming-chu noted to AIT/T that local governments compete to get science park campuses, and that their allocation became a tool to attract voters in last year's presidential election. HSP Investment Services Division Project Manager May Hsia identified the HSP's Ilan campus in particular as a site that had been selected primarily for political reasons. Comment - Fix the Fundamentals First -------------- ¶11. (C) Despite failing to recreate new technology clusters like Hsinchu's in Tainan or Taichung, Taiwan has succeeded in using the expansion of the science park model to encourage investment in those places. However, it may be reaching the point where further expansion does not yield substantial results. In addition to competing with each other, Taiwan's new science parks and satellite campuses are also competing with similar parks created by local governments such as Taipei's Neihu Technology Park and Nankang Software Park. Taiwan is also trying to encourage investment with new free trade zones (reported ref C). Instead of further expansion of these special zones, the Taiwan government should instead make greater efforts to fix other, broader problems that restrain investment in the island. The lack of direct cross-Strait links is one of those problems. As former Vice Minister Yang put it, Taiwan must strengthen the arm that connects it to the Mainland in order to maintain the arm that connects it to the rest of the world. Another problem is the worsening shortage of skilled labor (described in ref B). The American Chamber of Commerce in Taipei identified this as one its primary concerns in its 2005 White Paper (reported ref A). Taiwan must take additional steps to increase the number of engineers and other skilled workers it produces but should also take steps to make it easier for firms to bring talented workers from overseas. Only when these more fundamental problems are addressed more effectively will special investment zones achieve their full potential. End comment. PAAL