Taipei Economic Brief for August 2007

UNCLAS SECTION 01 OF 03 TAIPEI 002011 SIPDIS SIPDIS STATE PLEASE PASS USTR STATE FOR EAP/RSP/TC, EAP/EP USTR FOR ALTBACH AND STRATFORD USDOC FOR 3132/USFCS/OIO/EAP TREASURY FOR OASIA/TTYANG TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS, SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB MARI BOLIS E.O. 12958: N/A TAGS: EINV EFIN ECON PINR TW SUBJECT: Taipei Economic Brief for August 2007 REF: TAIPEI 1733 ¶1. This cable summarizes selected August 2007 economic events in Taiwan: --Taiwan's Economy Outperforms Expectations --Prices Drop Unexpectedly, But Inflation Still a Risk --Effects of U.S. Sub-prime Mess --Worldwide Interoperability for Microwave Access (WiMax) --Subsidies for Animation and Gaming Industry --Customs Clearance Streamlining Efforts Pay Off --Foreign Investment in Generic Medicines Plant --Semiconductor Equipment Outsourced to Taiwan --U.S.-Taiwan JV to Make Solar Photovoltaics --DHL to Establish Gateway in Southern Taiwan Taiwan's Economy Outperforms Expectations -------------- ¶2. In July, Taiwan's economy performed far better than expectations. Industrial production in July grew at a y-o-y rate of 13%, an 18-month high. Electronics, the backbone of Taiwan's industrial sector, reported a 30% production growth. Semiconductor and flat panel plants were expanding their capacity, contributing to a double-digit growth in private investment. July export growth of 8% outpaced the forecasts of private and official think tanks. Export growth should accelerate over the next three to six months as export orders in July posted a 14-month high of 23.5%. ¶3. Consequently, in Late August, the Directorate General of Budget, Accounting and Statistics raised its estimate for Taiwan's 2007 economic growth rate to 4.6% from the 4.4% it projected in May. The office predicts that private consumption will expand as both stock and real estate markets have been booming. Private investment growth in 2007 will set a three-year high. Manufacturing firms expecting better performance over the next three-six months were more than those predicting worse performance, according to private and official think thanks. Prices Drop Unexpectedly, But Inflation Still a Risk -------------- -------------- ¶4. Although recent media focus on rising energy and food prices (reftel),July inflation figures announced August 6 surprised onlookers by revealing a 0.34% year-on-year decline. The July drop was paced by steep falls in vegetable and fruit prices. Inflationary figures are expected to build in the second half of the year, however, as the advent of the tropical storm season crimps agricultural production and drives up food prices. Inflation in the second half (H2) of this year is predicted to reach 2.5%, up from 0.6% in H1. Effects of U.S. Sub-prime Mess -------------- ¶5. Problems with U.S. sub-prime mortgages have impacted Taiwan's stock markets. Prices here have largely followed the recent fluctuations in New York and other major markets since late July. The Taiwan financial sector's exposure to U.S. sub-prime mortgage risk, however, has been limited and manageable. According to Financial Supervisory Commission, the sector's portfolio investment directly and indirectly involving U.S. sub-prime mortgages totaled NT$70 billion (US$2.1 billion),which represents only about 0.5% of total portfolio investment. Likely losses, as disclosed to the FSC by the financial institutions themselves, were estimated at NT$2.3 billion (US$70 million),including losses of about US$36 million for Taiwan banks, US$13.6 million for insurance companies, and US$19 TAIPEI 00002011 002 OF 003 million for securities firms. Sub-prime mortgage based products are also held by 27 mutual funds sold in Taiwan, but the total value of these products totaled US$1.95 million, which is less than 1% of their portfolio investment positions. Worldwide Interoperability for Microwave Access (WiMax) -------------- -------------- ¶6. In an open bid, six companies defeated Chunghwa Telecom and Taiwan Cell Phone, the two largest telecom firms in Taiwan, to win six regional WiMax operation licenses - three for northern Taiwan and the other three for southern Taiwan. According to press reports, Chunghwa Telecom and Taiwan Cell Phone lost the bids because they were less interested in regional WiMax than in island-wide WiMax, whose operation licenses will be open for bidding in 2009. The six regional WiMax license winners include WiMax (Taiwan),Tatung Telecom, Far Eastone, First International Telecom, Venture Capital I, Wei Da Telecom. ¶7. WiMax equipment manufacturing is a rapidly growing industry here. According to the Institute for Information Industry (a government-funded research and industrial promotion center), customer premise equipment (CPE) turned out by Taiwan's producers will shoot up from NT$750 million (US$22.7 million) in 2006 to NT$121.6 billion (US$3.68 billion) in 2012. Taiwan is the second largest WiMax investor in the world, after the United States. Taiwan's cumulative investment in the WiMax industry totals US$664 million. Subsidies for Animation and Gaming Industries -------------- ¶8. The Executive Yuan has approved the "Program to Strengthen Computer and Other Digital Games" submitted by the Ministry of Economic Affairs. The program will encourage development of animation and computer games by subsidizing local firms. The National Development Fund (NDF) will allot NT$20 billion (US$606 million) to fund the program. Two animation production firms, currently in cooperation with U.S. companies, are expected to receive NT$100 million (US$3 million) each in funding. Over the next five years, the program will invest NT$1.36 billion (US$41 million) in 60 animated programs and another NT$4.12 billion (US$126 million) in animation and game R&D. According to projections from the Ministry of Economic Affairs, the program will create some 2,000 new jobs, and production value of the industry will reach NT$600 billion (US$18 billion) by 2011. Customs Clearance Streamlining Efforts Pay Off -------------- - ¶9. The Council for Economic Planning and Development (CEPD) announced in early August that its five-year "obstacle-free customs clearance program" has expedited the customs process and substantially reduced paperwork for trading companies in Taiwan. The program whose cost over the past five years totaled NT$780 million (US$23.6 million) has cut the customs clearance administrative expenditure by NT$5.05 billion (US$153 million) and reduced the customs clearance processing time by 14.57 million hours. Foreign Investment in Generic Medicines Plant -------------- ¶10. US-based Impax Laboratories, specializing in generic pharmaceuticals, announced it will build a generic medicines factory in Taiwan's Hsinchu Science Park. Initial investment is NT$200 million (US$6.1 million). The factory, Impax's first production TAIPEI 00002011 003 OF 003 base overseas, will be 100% owned by Impax. Construction will begin in October this year, and commercial operation is scheduled for ¶2009. Medicines made by the factory will be sold in the United States, Canada, and Europe. Semiconductor Equipment Outsourced to Taiwan -------------- ¶11. Taiwan, the world leader in semiconductor production, has now started to get orders to produce the high cost equipment used in semiconductor production. Media reports indicate that Taiwan's Marketech International Corporation received NT$1 billion (US$30.3 million) in orders for semiconductor exposure equipment from ASML of the Netherlands, a leading provider of lithography systems for the semiconductor industry. ASML's seeking a partner in Taiwan marks an opportunity for Taiwan to develop its own production capability for semiconductor manufacturing equipment. Taiwan's semiconductor industry is world-renowned for chip fabricating, packaging and IC design, but it still relies heavily on foreign suppliers for semiconductor equipment. Factory start up costs for a 12-inch wafer fab usually exceed NT$100 billion (US$3.03 billion),with 90% of the costs going towards equipment. Taiwan already has 10 factories producing 12-inch wafers and is building another 12, whose total start up costs amount to NT$1.2 trillion (US$36.4 billion),more than the semiconductor industry's annual output. U.S.-Taiwan JV to Make Solar Photovoltaics -------------- ¶12. Gloria Solar, a subsidiary of Taiwan's E-ton Solar Company, which specializes in manufacturing solar modules, will enter into a joint venture arrangement with US-based Spire Corporation, the world's largest solar power module equipment supplier. The new venture - Gloria Spire Solar - is designed to take on the photovoltaic (PV) systems market. The new company, which will be based in Bedford, Massachusetts, represents E-ton Solar's efforts to integrate its supply chain. E-ton Solar recently acquired 100% of Adema, a US silicon chip company. With Gloria Spire, E-ton Solar will have direct access to resources from upstream (silicon chips) to midstream (solar cells) and downstream (solar modules and systems). After Gloria Spire is formed, Gloria Solar will have production capacity of 95 MW by the second quarter next year, nearly three times its current capacity. It will continue to expand with an additional 75 MW of module manufacturing equipment from Spire and become a leading PV player in the world. DHL to Establish Gateway in Southern Taiwan -------------- ¶13. DHL (Taiwan) will establish a service gateway at Kaohsiung International Airport prior to the end of the year. Due to drastic cuts in domestic flights to and from Taipei after the opening of the high-speed rail, DHL needs this new service gateway to serve companies in central and southern Taiwan. DHL currently operates a service gateway at the Taoyuan International Airport and 10 service locations across the island, including Taipei, Hsinchu, Taoyuan, and Chiayi. WANG