TAIWAN FIRMS REVEAL DIVERGING CROSS-STRAIT

C O N F I D E N T I A L AIT TAIPEI 000157


STATE FOR EAP/TC
STATE PASS USTR FOR STRATFORD AND ALTBACH, TREASURY FOR
OASIA/WINSHIP AND JEWELL, NSC FOR LOI, COMMERCE FOR
4431/ITA/MAC/AP/OPB/TAIWAN

E.O. 12958: DECL: 02/09/2020
TAGS: ECON ETRD EINV EFIN TW CH
SUBJECT: TAIWAN FIRMS REVEAL DIVERGING CROSS-STRAIT
PRIORITIES

REF: TAIPEI 109 AND PREVIOUS


Classified By: Deputy Director Eric Madison for reasons 1.4 (b)
and (d).



1. (C) SUMMARY: Plans for a cross-Strait Economic Cooperation
Framework Agreement (ECFA; reftel) have dominated Taiwan
trade policy with the PRC. At least initially, an ECFA would
include only petrochemical, textile, machine tool, auto/auto
parts, and flat panel display "early harvest" sectors.
Domestic debate over ECFA has focused on the pact's
implications for Taiwan's economic sovereignty. Recent
conversations with domestic and foreign firms in Taiwan's
Taoyuan County industrial heartland, however, show a
divergent range of cross-Strait business priorities. A
nascent free trade zone (FTZ) already relies heavily on trade
with the PRC, and hopes for rapid expansion of cross-Strait
ties. Local Toyota and Goodyear affiliates produce primarily
for the domestic market; Toyota hopes ECFA will expand
cross-Strait export opportunities, while Goodyear notes that
Taiwan consumers remain unwilling to accept PRC-manufactured
tires. For Taiwan's IT sector, which dominates exports and
GDP growth, cross-Strait integration is already a fact of
life. Most manufacturers have long since moved manufacturing
operations to the PRC, while keeping sensitive research and
development centers in Taiwan. Although IT firms told us
they hope for the continued relaxation of Taiwan's
restrictions on cross-Strait investment and high-technology
transfer, none identified ECFA as a top priority. END SUMMARY.

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Airport FTZ Thrives on Cross-Strait Trade
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2. (SBU) Located next to the Taipei area's Taoyuan
International Airport, the Farglory Free Trade Zone (FTZ)
will eventually include an air cargo terminal, a freight
forwarding complex, a "value added" industrial park, and
international logistics and business operations centers.
Operated by Taiwan's Farglory Group on a 50-year
build-operate-transfer (BOT) contract, the FTZ opened its
first stage in 2006. According to Chairman Yeh Chun-yao, the
FTZ now employs 3,000 people, half of whom are employed by
the 38 firms in the industrial park. These companies include
a mixture of local Taiwan, foreign (i.e., FedEx and UPS),and
subsidiaries of Taiwan-owned firms in the PRC. Yeh explained
that Taiwan firms operating in the PRC can ship semi-finished
products to the FTZ, where the manufacturing process is
completed and the products are able to receive Taiwan
"country of origin" status.


3. (SBU) According to Yeh, no PRC firms have invested in the
FTZ, but he expects such investment in the future. In 2009,
the FTZ handled 280,000 metric tons (MT) of cargo. Of this
total, Yeh estimated that 60% involved cross-Strait trade.
After suffering during the recent global economic slowdown,
Yeh said the FTZ's business has rebounded sharply since last
October, with export volumes doubling, and import levels
increasing by 50%. Yeh was enthusiastic about plans for an
Economic Cooperation Framework Agreement (ECFA) with the PRC,
a prospect he believed would strengthen Taiwan's economic
competitiveness.

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Toyota Affiliate Hopes to Expand Exports
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4. (C) The Taiwan affiliate of Japan's Toyota, Kuozi Motor's
2,700 employees manufacture Toyota sedans and other vehicles.
Almost all of the company's production is sold in Taiwan,
where Toyota enjoys a 34% market share of the island's
roughly 300,000 vehicle/year vehicle market. In the analysis
of Kuozi Manager Kao Min-yuan, Toyota's global business
policy is not matched by a global operations policy. Kuozi
produces almost exclusively for the Taiwan market, and uses
primarily locally-produced parts and components. Given
Taiwan's saturated auto market, Kuozi has recently started
exporting to the Middle East. In the long run, noted Kao,
Kuozi plans to export 30-40,000 vehicles per annum. In Kao's
view, an ECFA would help Taiwan's auto exports to the PRC,
where the quality of Kuozi's vehicles would make them
competitive with PRC-produced cars. Kao did not believe the
PRC was especially interested in exporting vehicles to
Taiwan's relatively small market, and predicted that Chinese
cars would become increasingly competitive with global
counterparts over the next five-to-ten years.

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Taiwan Consumers Not Ready for PRC Tires
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5. (SBU) Iain McDaniels, a Vice President for Goodyear Tire
and Rubber's regional operations, told his us that his
company has roughly 260 employees at its Taoyuan factory.
Built in the late 1970s, the factory's production is sold
primarily in the island's replacement tire market. According
to McDaniels, given the critical role of tires in a vehicle's
safety, Taiwan consumers are largely unwilling to accept
PRC-manufactured tires, which are seen as of relatively low
quality. Although Goodyear's PRC operations in fact produce
high-quality tires, McDaniels explained, there is virtually
no market for them in Taiwan. McDaniels predicted that
PRC-manufactured may gain local market acceptance if Taiwan
consumers eventually embrace Chinese cars.

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R&D Stays Home, but PRC Still Attracts Investment
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6. (SBU) Taoyuan-based Advanced Semiconductor Engineering
(ASE) is a world leader in electronics packaging and testing.
The firm's global operations include 18,000 employees in
Taiwan and four operations centers in the PRC employing an
additional 6-7,000. According to Finance Department Manager
Allen Kan, many of the company's high-technology businesses
are still subject to Taiwan's restrictions on investment in
the PRC. These restrictions are not a pressing problem,
however, because the bulk of the PRC's integrated circuit
(IC) manufacturing is relatively low-tech, and not subject to
investment limits. In the future, Kan predicted, the PRC
will have an increasingly large number of 65- and
40-nanometer semiconductor producers, and ASE will try to
provide testing and packaging services to meet expected
demand. As a result, Kan advocated for eased restrictions on
Taiwan technology firms' ability to invest in the PRC.


7. (SBU) Also headquartered in Taoyuan, Chroma Ate is an
electronics testing and measuring firm with 1,100 employees
around the world. Of that total, 41% are involved in
research and development (R&D),primarily in Taiwan.
Although 60% of the company's sales come from the PRC,
explained Chairman Leo Huang, the company keeps all of its
production facilities in Taiwan due to weak IPR protection on
the Mainland. Huang noted that some of his firm's former PRC
staff have illegally copied Chroma's low-end equipment.
Although IPR piracy remains a major problem in the PRC, he
said, authorities there have recently shown a stronger
inclination to address the problem. Huang was skeptical that
the proposed ECFA would benefit Taiwan, and was unclear about
what the pact would actually contain. An ECFA would have
little impact on Chroma, he observed, since most of the
firm's exports already enjoy duty-free entry into the PRC.
Huang predicted that the PRC would make increasing use of
local-content requirements to entice Taiwan firms across the
Strait. To develop its alternative energy sector, he
maintained, the PRC has already promised to buy Metal Organic
Vapor Phase Epitaxy (MOVPE) equipment for Taiwan LED firms
who agree to set up operations on the Mainland.


8. (SBU) Depending on measuring methodology, Taiwan's Quanta
Computer is the world's largest or second-largest OEM
producer of notebook computers, with clients including HP and
other leading brands. Almost all of Quanta's production has
moved to the PRC, where the firm employs 50,000 in Shanghai,
Chongqing, and other locations. Quanta's research and
development (R&D) operation is headquartered in Taoyuan,
however, and the company has a total of roughly 5,000
employees in Taiwan. According to Vice President Tim Li,
although R&D is normally co-located with manufacturing, the
PRC's inadequate IPR protection regime is a major reason
Quanta has opted to keep R&D in Taiwan.


9. (C) Li noted that North America remains Quanta's largest
market, and absorbs about 35% of total sales. Europe
accounts for an additional 20%, followed by 15% for Japan and
10% for the PRC, he added. The size of the PRC market is
growing more quickly than other regions, however. Li said
Quanta's cross-Strait business policy priorities include
relaxation of Taiwan's cap on PRC investments, as well as an
easing of Taiwan's restrictions on foreign exchange
transactions with the PRC. After a lackluster 2009 in which
Quanta's global sales increased by only 5%, Li predicted that
2010 revenues would grow by 40%. He noted that Quanta is now
emphasizing development of cloud computing technology, and is
collaborating with Boston municipal authorities to include
cloud applications on that city's web site by 2011.


10. (SBU) A spin-off from Taiwan's BenQ corporation, Qisda
designs and manufactures electronics and IT products for a
wide array of international brands. In addition to its
Taoyaun headquarters, the firm has operations in Suzhou,
China, Mexico, and the Czech Republic. The company's 2,100
Taiwan employees concentrate mainly on R&D, explained CEO
Hsiung Hui, while its 5,000 PRC staff members focus on
manufacturing. Hsiung explained that Qisda keeps most of its
R&D capacity in Taiwan due to strong IPR protection and
better availability of qualified engineers. Although the PRC
remains an attractive manufacturing base, he noted,
production costs are increasing quickly, and business
operations are hampered by an inadequate legal base and weak
law enforcement. Taiwan, in turn, suffers from
politically-motivated restrictions on cross-Strait
investment. Following a difficult 2009, Hsiung predicted
that his firm would enjoy stronger performance this year, but
cited labor shortages in the PRC and equipment shortages in
Europe as obstacles to growth.


11. (C) COMMENT: Whether as a market or a manufacturing base,
the PRC's relative economic weight is growing. While the
proposed ECFA may have taken on outsized symbolic importance
here, in trade terms the pact remains driven by Taiwan
business interests in a relatively small range of sectors
affected by the recent advent of the PRC's "ASEAN-plus-one"
deal. For some Taiwan firms, especially in the vital IT
sector, an ECFA is of relatively limited interest versus the
long-term trend of de facto cross-Strait economic
integration. END COMMENT.


STANTON