CROSS-STRAIT INVESTMENT - TAIWAN STILL HOLDS SOME

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003906

SIPDIS

SIPDIS

STATE PASS USTR
STATE FOR EAP/TC
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
USTR FOR STRATFORD, ALTBACH

E.O. 12958: DECL: 11/20/2016
TAGS: ECON EINV KIPR PREL CH TW
SUBJECT: CROSS-STRAIT INVESTMENT - TAIWAN STILL HOLDS SOME
ADVANTAGES


Classified By: Classified by AIT Economic Section Chief Daniel K. Moore
, Reason 1.4 b/d


1. (C) Summary: Taiwan media often reports Taiwan firms
in Mainland China are returning to invest in Taiwan.
Taiwan encourages this kind of investment. However, many
of these firms maintain and even expand large
manufacturing operations in the Mainland at the same time
they increase investment in Taiwan. These firms
typically keep research, design, management and
manufacturing of more advanced products in Taiwan because
they feel their intellectual property is safer here.
Liberalizing some cross-Strait restrictions might
encourage more Taiwan firms to employ this kind of cross-
Strait division of labor. End summary.

Investment Tide Flows Back to Taiwan?
--------------


2. (U) Taiwan media frequently report about Taiwan firms
that have invested in Mainland China and subsequently
return to invest in Taiwan. Recently, several newspapers
reported a survey by the Ministry of Economic Affairs
(MOEA) of firms interested in returning to invest in
Taiwan. The survey indicated that 400 Taiwan firms in
China were interested in investing in Taiwan again and
cited 50 firms that had concrete plans to do so. Some of
the factors frequently cited for causing Taiwan firms to
return are rising wages and land costs in the PRC, energy
and water shortages, and inadequate legal protections in
the PRC.

The Authorities Hope So
--------------


3. (U) The Taiwan authorities have taken steps to
encourage this kind of investment. This month, the
Ministry of Economic Affairs established a service center
to assist Taiwan firms in the Mainland that want to
invest in Taiwan. The window helps in identifying
finance sources and real estate in special industrial
zones. Another program is the 006688 Program, so named
because it offers firms space in certain industrial parks
rent free for the first two years (00),at 60 percent of
normal rental fees for the third and fourth years (66),
and eighty percent for the fifth and sixth years (88).
According to MOEA's Industrial Development Bureau (IDB),
which administers it, 774 firms have taken advantage of
the program since it started in 2002. IDB officials
claim that sixty-three of those firms had previously
invested in the Mainland or planned to invest there.
Although the program is open to any Taiwan firm, its
primary target is firms that might otherwise choose to
invest in the PRC due to lower real estate prices.

The Results are Mixed
--------------


4. (SBU) As surveys and MOEA reports suggest, some firms
that have invested heavily in Mainland China have
recently increased their investment in Taiwan, many
taking advantages of MOEA's incentives. However, reports
that suggest these firms have moved their China
operations back to Taiwan may be misleading. AIT/T
contacted three medium-sized enterprises that have been
identified in media reports as firms that invested back
in Taiwan. None of them decreased their operations in
the PRC and many continue to expand there. In addition,
the level of new investment in Taiwan varies
significantly.


5. (C) Of the three firms AIT/T contacted, Founder
Company had the largest expansion of investment in Taiwan.
Founder, located in Taichung, is an aluminum casting
company that has operated a sports-equipment plant in
Shanghai since 2000. The plant employs approximately
2000 workers. In 2004, Founder decided to open an
outdoor furniture factory in Taiwan, investing a total of
NT$760 million (about USD23 million). The Taiwan plant
currently employs about 200. According to General
Manager Lin Win-dow, Founder plans to invest another
USD10 million in the plant next year and expand

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employment by about 50. However, Lin said the firm also
plans to continue expanding operations in the Mainland as
well. When asked if Taiwan's incentives had played a
role in Founder's decision to invest back in Taiwan, Lin
said the 006688 Program was useless, pointing out that
real estate was still more expensive in Taiwan than in
the PRC.


6. (C) Taiwan Pressed Flowers (TPF) Company of Tainan
(southern Taiwan) is another firm identified as having
reinvested back in Taiwan. It began investing in the PRC
in 1989, but ran into legal difficulties there in 1994.
In 2002, TPF President Ho Jian-hsiung decided to continue
agricultural production of flowers in the PRC, but to
consolidate all industrial processing in Taiwan.
According to Ho, TPF now has approximately 600 employees
at 3 farms in the Mainland. The firm has only 20
employees in Taiwan engaged in design, marketing and
administration. Manufacturing processes are contracted
to various firms in Taiwan.


7. (C) Okuma Fishing Tackle Co. in Taichung is the
world's third largest fishing tackle manufacturer. It
first invested in the PRC in 1991. According to Manager
Yu Jun-jie, it now owns 10 factories in the Mainland
employing approximately 2,000 employees. Last year, it
invested NT$400 million (about USD12.2 million) to buy an
office building in Taichung. However, it did not
increase employment or expand operations in Taiwan.
Instead, it consolidated its various subsidiary units in
the new office space. Previously, they had been located
in several different locations. The firm employs 130 in
Taiwan.

Taiwan's Attraction - Trust
--------------


8. (C) The three firms all indicated that intellectual
property protection was a primary reason for keeping some
operations in Taiwan. Okuma's Yu noted that fishing
tackle producers in the Mainland have repeatedly copied
Okuma's designs. The firm has kept research, design and
production of advanced components in Taiwan. TPF's Ho
explained that his firm keeps manufacturing processes in
Taiwan to protect the firm's specialized knowledge and
patents from PRC employees. Similarly, Founder's Lin
emphasized that being able to trust employees is the most
important advantage in Taiwan. He explained that the
value of the designs for the outdoor furniture it
produces in Taiwan is much higher than the value of the
designs for the sporting goods products it makes in the
Mainland. He noted that the firm paid NT$14 million in
royalties to European designers last year (about
US$425,000).

Comment - Play to Your Strengths
--------------


9. (C) Our discussions with these businesses suggest that
Taiwan is having some success in attracting investment
that might otherwise go across the Strait. However, we
believe the majority of these firms that have "returned"
to Taiwan, continue even larger operations in the
Mainland. In addition, Taiwan programs to attract
investment back to the island do not appear to be the
deciding factor for these firms. Neither are some of the
other often cited disadvantages of doing business in the
Mainland, specifically rising wages, higher real estate
prices, and shortages of energy, water and other inputs.
Among the firms we talked to, superior intellectual
property protection was the most attractive feature of
Taiwan's investment climate.


10. (C) Two of the firms noted that Taiwan's cross-Strait
economic restrictions have little impact on their
business. Yu pointed out that Taiwan businessmen are
very "flexible" and have found ways to work around them.
However, Taiwan should do more to encourage firms to
pursue the same kind of division of labor that Okuma,
Founder and TPF have employed, keeping research, design,
advanced manufacturing and management functions in Taiwan
while moving labor-intensive manufacturing to the

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Mainland. Liberalizing certain cross-Strait restrictions
could further that goal. Establishing direct
transportation links would be a good place to start.
YOUNG