Taipei Economic Brief for September 2006

UNCLAS SECTION 01 OF 03 TAIPEI 003407 SIPDIS SIPDIS STATE PLEASE PASS USTR STATE FOR EAP/RSP/TC, EAP/EP USTR FOR ALTBACH USDOC FOR 3132/USFCS/OIO/EAP/WZARIT TREASURY FOR OASIA/LMOGHTADER TREASURY PLEASE PASS TO OCC/AMCMAHON TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN E.O. 12958: N/A TAGS: EINV EFIN ECON PINR TW SUBJECT: Taipei Economic Brief for September 2006 ¶1. This cable summarizes selected September 2006 economic events in Taiwan: --Exports sustain Taiwan economic growth; --High-tech manufacturing grows; --Semiconductor counter-complaint; --More Taiwan technology flows to China; --Taiwan pharmaceutical plants; --State ownership in Chunghwa Telecom reduced; --IPR: Kuro to shut down; --New foreign currency bond market --Gasoline prices hike; Exports Sustain Economic Growth -------------- ¶2. Export expansion continued to sustain Taiwan's industrial growth, attract investment, and keep unemployment low. Imports of capital goods grew by double-digits in July-August while approved inbound foreign investment registered a 60% increase. Investment also contributed to increased production of high-tech equipment. However, political squabbles dampened stock market performance, keeping Taiwan's stock price index in a narrow range around 6,500 points. Nevertheless, foreign portfolio investors bought NT$73.6 billion (US$2.3 billion) more stock than they sold in August, the second highest monthly net stock purchases in 2006. ¶3. The Taiwan Institute of Economic Research (TIER) predicts export expansion, together with new investment, will boost Taiwan's economic growth the rest of this year and next year. Export orders in July-August increased nearly 20% over a year ago. Taiwan's real GDP growth in 2006 should be above 4% and unemployment should start to decline from the 4.1% seasonal high it hit in August. (Note: Unemployment rises in summer as new graduates join the labor market. Taiwan's highest annual unemployment rates were 4.57% in 2001 and 5.17% in 2002.) Growth in High-tech Equipment Manufacturing -------------- ¶4. A recent survey conducted by the Industrial Technology Intelligence Services (ITIS) showed that high-tech equipment manufacturing has become the fastest growing sector of the machinery industry. This sector's production value increased 33% to NT$29.3 billion (US$902 million) in 2005 and 48% to NT$22.3 billion (US$686 million) in the first half of 2006. Its production value in 2006 is expected to reach NT$41.7 billion (US$1.3 billion),up 42.3% from a year ago. One factor behind the growth is that Taiwan high-tech companies are switching some manufacturing equipment orders to local suppliers. These high-tech companies include Taiwan Semiconductor Manufacturing Company (one of the world's largest OEM chip makers), Hon Hai Precision (whose subsidiary was rated as the top foreign exchange earner in China),and flat panel display plants (Taiwan is rated as the third largest flat panel display supplier in the world). SIMC Files Counter-complaint against TSMC -------------- ¶5. In a counter-complaint, Semiconductor Manufacturing International Corp. (SMIC) in China is seeking damages from Taiwan Semiconductor Manufacturing Co. (TSMC) for breach of contract and good faith. In August, TSMC, the world's biggest contract chip maker, filed a lawsuit in a California court against SMIC's Shanghai, Beijing, and U.S. operations alleging breach of a 2005 agreement that settled a patent and trade secrets dispute. Shanghai-based SMIC is China's largest chip foundry by capacity. TAIPEI 00003407 002 OF 003 He Jian to Use More Advanced Technology in Mainland -------------- -------------- ¶6. According to media reports, He Jian, the PRC semiconductor foundry closely linked to Taiwan's United Microelectronic Corporation (UMC),is raising funds to build a 12-inch semiconductor wafer fab in the PRC. He Jian already produces chips with 0.15-micron feature size and its chairman reportedly said it was in the process of developing 0.13-micron production technology. This news will complicate UMC's efforts to legalize its relationship with He Jian. UMC has applied to the Taiwan authorities for permission to accept a 15-percent stake in the firm in exchange for non-financial assistance that UMC has already provided the Mainland firm. Taiwan currently permits semiconductor investment in the PRC only in 8-inch fabs using 0.25-micron technology. It may soon agree to permit 0.18-micron technology, but so far the authorities have not indicated that they are considering allowing investment using 0.13-micron technology or 12-inch wafer fabs. Taiwan Returnees Form New Pharmaceutical Firms -------------- - ¶7. A growing number of Taiwan high-tech people have returned from the United States to set up pharmaceutical companies in Taiwan. This trend may help advance Taiwan's pharmaceutical technologies to international standards. Taiwan people who have returned from the U.S. pharmaceutical sector include Allan Chao of the pharmaceutical giant Watson, Chen Chih-ming, founder of Andrx, and Larry Hsu, president of Impax Labs. Watson, which operates a huge distribution network in the United States, now relies on its Taiwan subsidiary ScinoPharm as a major source of pharmaceutical products. Impax Lab, whose 2005 revenue totaled US$200 million, will build two factories in Hsinchu with a total investment of US$123 million. State Ownership in Chunghwa Telecom Reduced -------------- ¶8. On September 28, Taiwan authorities sold 120 million shares in Chunghwa Telecom (CHT) in Taiwan and 505 million shares as American Depository Receipts (ADR) in New York. The sales have reduced state ownership in CHT from 41% to 34% and brought estimated revenue of NT$33 billion (US$1.02 billion) to Taiwan's treasury. The share price for local sales was NT$51, 6.8% lower than the ten-day average prior to September 28. In New York, subscriptions to the ADR exceeded US$1 billion. Taiwan authorities cannot sell any more CHT shares unless the official floor on state-ownership in CHT is reduced below 34%. Kuro Settles with IFPI -------------- ¶9. On September 14, Kuro, an unauthorized Taiwan P2P file-sharing service, reached a settlement with the International Federation of the Phonographic Industry (IFPI) to shut down its P2P operations and pay compensation to IFPI-represented companies. Taiwan's criminal court convicted Kuro of copyright infringement in September 2005. Kuro will be reorganized into a new venture called C-Media Electronics which will operate a legitimate music download website called New Kuro. According to the settlement, Kuro will continue some of its services to its estimated 500,000 subscribers until New Kuro replaces Kuro. IFPI General Counsel and Executive Vice-President Geoff Taylor confirmed the settlement and predicted a bright future for legal online music services in Taiwan. Foreign Currency Bond Market -------------- TAIPEI 00003407 003 OF 003 ¶10. Taiwan has started a foreign currency bond market and expects the first listing in the market in October. Foreign governments, international organizations, and companies may issue foreign currency-denominated bonds in the market. Deutsche Bank reportedly plans to issue US$300-500 million of bonds in October if preparations go smoothly. Several other foreign companies have reportedly expressed an interest in issuing foreign currency bonds. Over 20 underwriters have applied to the Foreign Exchange Department under Taiwan's Central Bank of China for foreign currency bond underwriting licenses. Taiwan authorities hope the total value of bonds listed on the foreign currency market will reach NT$100 billion (US$3.1 billion) by the end of 2009. Gasoline Price Hike -------------- ¶11. The state-owned China Petroleum Corporation (CPC) announced a NT$0.9 per liter reduction in the wholesale price of gasoline and diesel starting September 26. This price cut begins the start of a trial period lasting until the end of the year where gasoline prices will fluctuate with international petroleum prices. This free market approach to gas prices will not necessarily benefit CPC, which has been saddled with financial losses amounting to NT$25.4 billion (US$769.7 million) because of higher petroleum prices. WANG