In China, welcome mat fades for Taiwan businesses

BEIJING — Taiwan businessman David Shen could not believe his eyes on a recent weekend drive down Huanghe Road in Kunshan, about an hour from Shanghai. Once a hotbed of nightlife for thousands of Taiwanese who called the city home, many of the restaurants, karaoke bars and night clubs that once kept the road humming until midnight and beyond were either quiet or closed.

“Ten years ago when Kunshan officials would hold their annual Chinese New Year party, Taiwanese businessmen made up 99 per cent of the crowd,” said Mr Shen, who has run a component-making plant in Kunshan for more than a decade.

“These past two years there are fewer and fewer Taiwanese. Last year we probably only made up half the people at the annual party.”

As home to the single largest concentration of Taiwan-invested companies in China, Kunshan is a microcosm of the slow exodus of Taiwanese businesses from the mainland in the past few years. More than 4,600 Taiwanese firms have set up plants in the city over the years, engaged in everything from moulding to electronics and semiconductor manufacturing, with total investment of more than US$56.3 billion (S$76.5 billion).

But doing business in the mainland is getting tougher — not only for Taiwanese but for many foreigners in the past few years — due to rising costs, weakening demand, stricter tax enforcement and increasingly stiff competition from mainland rivals backed by local governments, said Mr Shen.

No official numbers are available on the exodus from Kunshan, but Mr Shen, a former head of the local Taiwanese business association, estimated the number has shrunk by about 20 per cent during the past two years.

Kunshan is not alone in the Taiwan exodus. In Dongguan, another popular spot for exporters due to its proximity to Hong Kong, the number of Taiwanese companies has declined by over 25 per cent from the peak, according to the local Taiwan business association. Taiwan-funded manufacturers in Dongguan now number about 4,000, from 6,000 two years ago.

Cities such as Kunshan and Dongguan were once magnets for Taiwan in the 1990s and early 2000s, attractive for their low costs and preferential tax policies compared with a more mature Taiwanese market.

Kunshan began offering lucrative tax rates and other preferential policies in the early 1990s, luring such Taiwanese names as bicycle maker Giant, food conglomerate Uni-President Enterprises, and electronics maker Foxconn Technology.

According to Taiwanese business magazine CommonWealth, more than 70 of Taiwan’s top 100 manufacturers have set up plants in Kunshan over the years. As of June 30, more than 97,000 such companies had been approved by mainland regulators, involving total investment of US$63.9 billion, or nearly 4 per cent of the total foreign investment in China, according to the Ministry of Commerce.

DEJA VU

For many Taiwanese, the situation they now face in China is reminiscent of conditions more than a decade ago when they first relocated to the mainland, as ties between the sides were rapidly thawing.

“Taiwan’s economy at that time was very similar to the mainland today,” said Mr Liu Shi-Wei, representative of Taiwan Trade Centre in Shanghai. “After 20 years of fast growth, companies were facing rising costs and tighter taxation rules at home and had to move some older manufacturing technology elsewhere.”

But many of the advantages China offered in the early days have slowly disappeared. The onset of tougher times dates back nearly a decade to 2008, when exports that are the life blood of many companies fell sharply during the global financial crisis.

According to the Kunshan government, 22 out of the 37 companies that went bankrupt in the city in 2008 were Taiwanese, mostly contract manufacturers that make products for big global brands.

As the Chinese economy has shifted gears in the past few years, local governments have come under pressure to switch from traditional manufacturing to higher value-added service industries. That means many Taiwanese companies that focused on manufacturing began losing their special treatment from local officials.

“Tax reduction was terminated, while labour and tax rules were tightened, adding pressure to Taiwanese companies,” said Mr Shen, adding that the changes have eroded profits for firms by as much as 50 per cent. At the same time, local governments cracked down on some tax-avoidance measures that were previously tolerated, with the result that many companies have been punished for tax evasion, said an executive of a mobile phone component maker in Kunshan.

“We understand the change as (Taiwan businesses) can’t rely on preferential policies forever,” said Mr Shen.

MAINLAND COMPETITORS

Meanwhile, competition from mainland rivals has heated up, especially in the semiconductor industry that has been a staple of Taiwan’s high-tech manufacturing machine for decades. A 2014 Beijing policy designed to boost the domestic sector has benefited mainland companies by providing generous financial support for mergers and technology upgrades. At the same time, Beijing’s support is also trickling down to local governments, who want to build up their own hometown rivals to compete with Taiwanese counterparts.

That combination of factors is helping mainland producers quickly catch up to their older Taiwanese rivals. Data from the China Semiconductor Industry Association showed that in the second quarter of this year, sales of high-tech chips and other integrated circuits from mainland companies reached 40 billion yuan (S$8 billion), exceeding Taiwanese makers’ 36 billion yuan.

In the face of shrinking profits in more affluent coastal areas such as Kunshan, some Taiwanese companies are moving to less wealthy interior regions, where costs are lower and government incentives are still fairly generous. One high-profile example is Foxconn, which has transferred major parts of its production from Kunshan and southern Guangdong province to the interior cities of Zhengzhou and Chengdu. Foxconn has also moved some production to India, part of a trend that has seen some Taiwanese companies leave the mainland completely for cheaper destinations such as South-east Asia, said Professor Li Fei, a cross-strait business expert at Xiamen University.

CHANGING IDENTITY

In a somewhat ironic twist, some companies that are trying to survive without moving are changing their official headquarters and identity to access more recent preferential policies that are only available for mainland-based companies.

For example, Beijing requires electronic manufacturers to purchase a certain proportion of their components from domestic suppliers and offers various subsidies to mainland companies, said one Taiwanese executive at a Shanghai-based mobile phone components maker. To take advantage of those policies, he added, his company is in talks to get such status by merging with another local Shanghai company.

While traditional manufacturers struggle, analysts expect a young generation of Taiwanese entrepreneurs to explore newer more value-added areas that have yet to be discovered by mainlanders, such as design, technology and other innovative sectors.

Mr Walter Yeh, vice-president of Taiwan External Trade Development Council, said he expects to see more Taiwanese start-ups engaged in technological innovative sectors, backed by the island’s strong manufacturing capacity.

While Taiwan has advanced technology research capacity and talent teams, the mainland can provide a massive market for Taiwan businesses to commercialise their new technologies, said Mr Zhu Bo, CEO of Innovation Valley, a Guangzhou-based start-up incubator. “It is a promising path,” said Mr Zhu. CAIXIN ONLINE