TAIWAN BUSINESS TELLS AIT FOCUS IS ON CHINA MARKET

UNCLAS SECTION 01 OF 02 TAIPEI 001370

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR, STATE FOR EAP/TC,USTR FOR STRATFORD AND
ALTBACH, TREASURY FOR OASIA/LMOGHTADER

E.O. 12958: N/A
TAGS: ECIN ECON ENIV ETRD PREL TW
SUBJECT: TAIWAN BUSINESS TELLS AIT FOCUS IS ON CHINA MARKET


1. (SBU) Summary: AIT Director Young hosted AIT Chairman
Burghardt and USTR del to lunch on June 14 with Taiwan
business representatives. As in the past, the businesses
emphasized their need to be active in the China market in
order to be globally competitive. They are concerned about
the prospects for creating jobs in Taiwan and a growing
wealth gap. They urged the authorities to pay more attention
to developing strong services industries. The hi-tech
businesses do not anticipate any impact on them from the
U.S.-Korean FTA. The businessmen all complained about
Chinese companies unilaterally altering the terms of existing
contracts. End Summary.


2. (U) AIT Director Young hosted a lunch in honor of AIT
Chairman Raymond Burghardt on June 14. The visiting USTR
delegation consisting of Timothy Stratford, Assistant USTR
and Eric Altbach, Deputy Assistant USTR also attended. The
Taiwan guest list of prominent businessmen consisted of
Morris Chang, Chairman of Taiwan Semiconductor Manufacturing
(TSMC); Nelson Chang, Vice Chairman, Chia Hsin Cement &
Chairman of International Community Radio Taipei (ICRT);
Arthur Chiao, Chairman, Winbond Electronics & Chairman,
Taiwan Electrical and Electronics Manufacturers Association
(TEEMA); Frank Huang, Chairman, Powerchip Semiconductor Group
& Chairman, Taiwan Semiconductor Industry Association (TSIA);
Jason Lin, Chief Executive Officer of Uni-President Group;
and Daniel Tsai; Chairman and Co-CEO, Fubon Financial Holding
Co. Also attending on the AIT side were Daniel Moore, Chief,
Economic Section; and Greg Wong; Chief, Commercial Section.

Taiwan Firms Focused on China
--------------


3. (SBU) All of the Taiwan firms represented at the lunch
have a large and growing interest in the China market.
Morris Chang said China's growth rate is very attractive and
is what makes it necessary for his company to serve the
market from a small manufacturing presence within China
rather than strictly from offshore platforms. He reiterated
his previous public calls for Taiwan to open up to business
with China. Chang noted that his investment in China is
small relative to TSMC's overall assets, but it isn't a
market that can be ignored. Frank Huang of Powerchip, also a
semiconductor manufacturer like TSMC, observed that though he
has a license to set up a semiconductor wafer fab in China,
he is not moving ahead with that just yet. However, he is
making certain optical devices in China. Chang, Huang and
Winbond's Arthur Chiao (Winbond is also involved in
semiconductor manufacturing) all noted that Taiwan
restrictions on technology transfers to China sharply limit
what they can do in China.


4. (SBU) Chang noted that outside of his hi-tech business and
Daniel Tsai's banking business, other Taiwan industries had
little in the way of restrictions on relocating to China. He
suggested that Taiwan industries interested in relocating to
Mainland China had already done so. Fubon Chairman Tsai
confirmed that his banking business is completely shut out of
China due to Taiwan regulations and acknowledged that this
restriction is a major impediment to growing his banking
business and developing regional expertise and capability.
(Note: Fubon bought a Hong Kong Bank several years ago and
uses it both to train its staff in international banking
operations and to provide some banking services in China.
End Note.)


5. (SBU) Jason Lin said that Uni-President, the
second-largest seller of instant noodles in China, along with
a variety of other food products, views China as a very large
and diverse market. It must be viewed as at least six
separate markets, he said, because of the wide-ranging
differences in tastes in different areas. For example, the
people in Chongqing have very different preferences for their
noodles than do the people in Shanghai. He emphasized that
the China market is not "one-size fits all." (Note:
Uni-President's business faces little in the way of

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restrictions on the Mainland, other than the 40% investment
cap imposed by Taiwan. End Note.)


6. (SBU) Winbond's Chiao noted that in addition to
semiconductors, he also runs a steel plant, making mostly
stainless and other specialty steel, and a cable and wire
manufacturing businesses. He said that currently the
semiconductor business is doing fine, but that the steel side
of his interests is really growing very rapidly. He
attributed most of this rapid growth to demand in China for
infrastructure projects. He said he is supplying a great
deal of cable for bridge construction and wire for
electricity lines.

Don't Like Some Chinese Practices
--------------


7. (SBU) There was a general discussion on the topic that
Chinese companies unilaterally alter the terms of contracts.
AUSTR Stratford noted the issue is of concern to U.S. firms
and the entire table recounted their own version of the
issue. Huang suggested that this kind of practice by Chinese
firms was a factor in his reluctance to put a wafer-fab
facility in China. Another example cited was a U.S. marketer
of television sets having completely shifted production away
from joint ventures and Chinese firms to using Taiwan firms
that completely manage the entire manufacturing and
distribution process. The U.S. firm had gotten fed up with
inconsistent quality, delivery and lack of responsiveness by
Chinese firms.

Economic Problems in Taiwan
--------------


8. (SBU) Looking to Taiwan's future prosperity, Morris Chang
said he was most concerned about the need for job creation
and the growing wealth gap. He said for his hi-tech
business, conditions are very good, but that for many in
Taiwan their prospects are declining, as evidenced by the
growing wealth gap between the top and bottom earners in the
economy. Nelson Chang agreed with this assessment as did
Frank Huang. Nelson emphasized the need for creating
good-quality jobs in Taiwan while Frank Huang observed that
conditions in southern Taiwan are declining. He said that
areas south of Taichung, formerly home to many of the
industries which have shifted to the Mainland, are
increasingly difficult places to do business. When asked
about operating in the Southern Taiwan Science Park, Huang
replied that he didn't even want to establish plants there.
Daniel Tsai suggested Taiwan should pay more attention to
development of service-sector jobs, noting a government
effort started in 2004 by the Council for Economic Planning
and Development (CEPD) had shown little in the way of
results. Tsai added that Taiwan should not only focus on
developing financial services, but also boost development of
other services industries.

KORUS-FTA
--------------


9. (SBU) When asked about the potential impact on Taiwan
firms of the Korean-US Free Trade Agreement, the hi-tech
representatives immediately said there would be no impact at
all on them. There seemed to be general agreement there
would be little or no impact around the table with the
notable exception of Jason Lin. He said of course Taiwan
should be concerned about the potential impact, though he did
not specify any direct impact on his own firm's operations.
COMMENT - These last comments contrast sharply with the
Taiwan government's strong emphasis in the negative impact of
KORUS. Although this is admittedly a small sample, it leads
to some suspicion that the government's emphasis is more of
roundabout way to push for their political goal of an FTA
here, rather than reflecting a strong sentiment within the
business community.
YOUNG