new china policy: a turning point for taiwan's economy (reming yu)

8/7/2019 New China Policy: A Turning Point For Taiwan's Economy (Reming Yu)

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NEW CHINA POLICYNEW CHINA POLICY

A Turning Point ForTAIWANs ECONOMY


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IN THE LAST DECADE. . .

Emerging China

Chinas low production costs

disadvantaged Taiwan production

Large amount ofinvestments and

employment had moved from

Taiwan to China

Unstable Cross-strait Relationship

No direct flight Taiwan lost

geographical advantages

Prohibiting capital inflow from China

created an economic disequilibrium

between Taiwan and China

Taiwan lost much of its

economic/strategic advantages

Consumption decreasedand

Taiwans economy weakenedDepreciation of financial assets

+Economic Turmoil = EmergingChina Unstable Cross-straightRelationship

- Page 1 -


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Unemployment Rate Rises After 2000

After 2000, China replaced Taiwan production due to Chinas

lower production costs, which impacted Taiwans labor market

Data Source : Directorate-General of Budget, Accounting and Statistics

- Page 2 -

%

Year


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Private consumption accounted for 60.39% of GDP in 2000 and

shrankto 54.5% in 2008

GDP Breakdown (2000 vs. 2008)


Change in Taiwans GDP Structure

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Higher Degree of Trade Dependence

The degree of Taiwans dependence on trade increased from 100% in 1981to 144% in 2008


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Higher degree of trade dependence

Higher risks when global economies are negatively affected

Year


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Taiwans Real Trade Surplus to GDP ratio achieved a high level of17%

Trade surplus helped accumulate a large FX reserve

Taiwan was rankedTop 5 worldwide in FX Reserve Size

FX Reserve Accumulated Rapidly


Ranking Source : Bloomberg, Sept 09 - Page 5 -


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Taiwans economic growth shows more volatilityin comparison to the World

Taiwans Susceptibility to Changes in World

Economy

Data Source : IMF

- Page 6 -

%GDPGrowthRate


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The Four Asian tigers, who are export-oriented economies, showed rapid economic growthfrom 1980-2000

Taiwan lost its economic/strategic advantages as its relations with China weakened

Taiwans Average GDP growth fell to last place during 2000 - 2008.

Taiwanese investments in China were restricted to 40% of a company's asset value

Data Source : IMF

Proactive Management Policy in 2000-2008

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%G

DPGrowthRate


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2000 2007 Shows Astonishing Cash Outflow

From 2000-2007, financial account showed 40.8Bn/USD net capital outflow

After deducting approximately114.7 Bn/USD in foreign capital inflow

Taiwans total capital outflow is estimated to be 156.25Bn/USD

Capital outflow from Taiwan to China is estimated to be 125Bn/USD(80%)

Data Source: Central Bank, 2009/8

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USDMillion


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ECFA cooperation is expected to be sign in the first half of 2010

TAIWAN2008/7 - Permitting Chinese tourists to Taiwan

- Raised max level of investments to

China for Listed Company

- Opened the exchange of RMB/TWD

2008/9 - Three small links normalization

2008/12 - Three linkages

2009/4 - Opening QDII

2009/5 - Chartered Flight to Regular Flight

2009/6 - Opening 192 items for China capital

CHINA2009/5 - Development of western economy zone

2009/5/29 - China Trade Mission 1 to Taiwan

2009/6/1 - Color TV purchasing Group

2009/6/8 - LED purchasing Group



2008 Presidential ElectionParty Platform Change Opening-Up Policy

MOU for finance cooperation is expected to be signed at the end of 2009

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Members ofASEAN+3 FTA will be exempt from tariffs

on most merchandises in 2010 and ECFA will help

enhance competitiveness

Item ContentMerchandiseTrade

Bilateral exempt of tariffs Increase in import items

Service Trade Agreement of service trade

Investment Investment liberalization Opening-up bilateral investment

Other Protection of intellectual property rights Cooperation of customs

Avoidance of double-taxation agreement

The Content of ECFA

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What We Have Seen So Far

STRONG GROWTH SUPPORTfrom China

RETURN OF CAPITAL from overseas

OUTPERFORMANCEofequity market

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Strong Growth Support From China [1]

Strong orders from China have offset the decrease in demand from

developed countries

Export orders from China have turned to positive annual growth

Taiwan Export Orders come from (YoY)

Source: Bloomberg

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Year


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Strong Growth Support From China [2]

Tourists and direct investments from China should help boost TWs private

demand

Assuming tourists from China reach 3000 limit daily . . .

0.6% - 0.7% GDP growth per year could be generated

Retail sales show positive annual growth since July

Data Source: TEJ

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Year

#ofChineseTourists


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Return of Capital From Overseas

Capital from overseas expected to return due to reduction in inheritance

taxfrom 50% 10% Such capital inflow should provide sufficient liquidity for capital market

USD/MnUSD/Mn

Data Source: Central Bank of Republic of China

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TAIEX Outperformance Vs. Major Indices

Continual improvements in cross-straight relations and capital inflow

RESULT?

TAIEX outperforms - from beginning of 2009

M arket Index(2009/9/30) YTDTSE 7 ,509 63 .56%Dow Jones 9,712 10.66%NASDAQ 2,122 34.58%S&P 500 1,057 17.03%Shanghai A-Share 2,916 52.57%Hang Seng 20,955 45.65%Nikkei 225 10,133 14.38%KOSPI 1,673 48.79%DAX 5,675 17.98%FTSE 5,133 15.78%

Data Source: TEJ

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What We Expect for Taiwans Future . . .

Consumption to increase

Rerating of equity market

New milestones for Taiwans property market

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ECFA Helps International Trade

Exports to China accounted for 44% of Taiwan exports

There are 230 FTAs in the world and if membership is achieved,Taiwans trade ability will be at an advantage

CIER estimates that Taiwans GDP will increase 1.65%

Weights of TW Export - 2009/8Weights of TW Export - 2000

Data Source : TEJ

CIER: Chung-hua Institute for Economic Research, Taipei - Page 18 -


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ECFA Will Boost Taiwans Domestic Consumption

CEPA was signed on06/2003 and formallyimplemented in 2004

HK shows strong

private consumptiongrowth after CEPA

Taking HKs experience

We expectTW privateconsumption toincrease after ECFA

CEPA

Data Source : Bloomberg

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Re-rating of TAIEX

During 1994 & 2000

PBR of TAIEX traded between 2.5X - 4.0X

Post internet bubble and cross-strait tension

PBR of TAIEX traded between 1.2X - 2.0X

Due to improvements in cross-strait relations

We expect the PBR ratio to trade higher up to 3.0X.

Data Source: TEJ

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Money Supply Benefits Property Demand

-15

-10

-5

0

5

10

15

20

25

30

0

100

200

300

400

500

600

700

800

900

1991

1991

1993

1995

1996

1998

1998

2000

2002

2003

2005

2007

2007

2009

TSE Construction Subindex M1b YOY%

The increase in growth rate ofTaiwans money supply M1B is

beneficial to property stock

Record low interest rates drive money into the property market

Source: Central bank of Republic of China (Taiwan)

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Index

M1BGrowthRate


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New Regulations for Chinese Investment:

Taiwans Property Market

The holding period on residential property investments should be

no less than three years

Taiwan-registered Chinese corporations can own commercial

property for purposes restricted to own-use only (no reselling)

Initial investments are expected to flow into the commercial

property market

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The Hong Kong Experience [1]

Regional

HeadquartersRegional office Local office Total New add.

2001 70 172 160 402

2002 96 170 290 556 154

2003 84 148 307 539 -17

2004 106 156 373 635 962005 107 160 443 710 75

2006 112 156 449 717 7

2007 93 152 480 725 8

2008 95 128 499 722 -3

~2009/9 96 127 527 750 28

Mainland China Companies in Hong Kong

Source: Hong Kong Census Statistics Department

Chinese companies that applied for branches in HK showed peaked growth in 2005

HKs commercial property demand has increased

Initial positive change in capital inflow helped boost domestic confidence

Since CEPA

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Housing Investment as Percentage of GDP

Residentialand non-residential property investment

3.7% of GDP since 2000

Taipei office rental rates are among the lowest in Asia

US$/m2/annum

Tokyo 1698.5

Hong Kong 1400.9

Mumbai 941.6

Singapore 936.8

Ho Chi Minh City 687.6

Shanghai(Pudong) 428.7

Beijing 335

Taipei 275.5

Seoul 258.7

Bangkok 250.2

Manila 249.5

Bangalore 228.7

Jakarta 95.8

Taipei Office Rental Rates

Taiwan

Source: GGBAS ,CLSA ASIA-Pacific Markets

Taiwan Property is Lagging in Asia

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Can ALL of This LAST?

Geographical advantages Near the world productioncenter & biggest market: China

Taiwans industrial competitive advantage

High quality human resources

Intellectual property management and protection measures

Excellent R&D environment and output

Freedom of speech and information

To be the center of research and development

Taiwans STRENGTHS

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Taiwan: Geographical Advantages

Located at the heart of the Asia-Pacific region

Links NE Asia & SE Asia from its position off the SE cost of China

which it shares both language and cultural ties

Direct cross-straight flights have been extended to 7 days a week

Compared to HK , Shanghai, and Singapore:

Taiwan enjoys the shortest average sailing times to 5 major Asia-

Pacific harbors Shortest average flying time to 7 major cities in Western Pacific

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Taiwan has the freest media environment in East Asia due to its:

Open legal environment

Economic freedom

Highly competitive media market

FREEDOM of Speech | Media | Information

SOURCE: Freedom House

- Page 28 -

Map of Freedom 2009

Establishing R&D CENTERS in Taiwan


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Company Name Project NameHewlett-Packard International Pte. Ltd. Taiwan Branch HP product Development Center

Sony Taiwan Limited SONY Design & Engineering Center Taiwan

Sony Taiwan Limited System in Module Center Taiwan

Becker Electronic Taiwan Ltd. (Becker Avionics) Avionics Certification Skill & Key Technology Development Center

Aixtron Taiwan Co., Ltd. Manufacturing Oriented Research Lab

IBM Taiwan Corporation Mobile e-Business R&D Center

Pericom Taiwan Limited PERICOM Advanced Mixed-Signal IC R&D Center

Dell Computer (Taiwan) B.V., Taiwan Branch Dell Taiwan Design Center

IBM Taiwan Corporation Life Sciences Center of Excellence

Establishing R&D CENTERS in Taiwan CURRENT IMPLEMENTATION

TAIWAN Ideal location for multinationals to establish bases for innovative R&D activities

Leading multinationals (HP, Sony, Dell, IBM, Intel etc.) have already established 40R&D centers in Taiwan by September, 2009

TWs industrial environment & infrastructure exceeded expectations Some even

expanded the scale of their R&D centers

Introduction of key technology by these R&D centers will help mold Taiwan into avalued partner to the worlds multinational corporations in the area of technology

This will furtheradvance the development of Taiwanese industries

Approved projects of the Multinational Innovative R&D centers in Taiwan Program

Cont.

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Microsoft Taiwan Co. Microsoft Technology Center


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Dow Chemical Taiwan Limited Dow Chemical Taiwan Plastics Application Development Center

Fujitsu Taiwan Ltd. Fujitsu Taiwan Development Center

ULVAC Research Center Taiwan, Inc. ULVAC Advanced Technology Center

IBM Taiwan Corporation IBM Taiwan Systems and Technology Laboratory

ASML Taiwan Ltd. ASML Worldwide Center of Excellence

Mycom International Inc., Taiwan Branch Mycom strategic R&D center

Synopsys Taiwan Limited. Advanced Process EDA R&D Center

Taiwan International Standard Electronics Ltd. (Alcatel-Lucent)

WiMAX Application Development and IOT Center

Microsoft Taiwan Co. Microsoft Innovation Center

Telcordia Applied Research Center Taiwan Company Telcordia Telematics Taiwan R&D Center

DuPont Taiwan Ltd. DuPont Taiwan Display Materials Technical Center

Sony Computer Entertainment Taiwan Ltd. Digital Content Creation Center

Underwriters Laboratories Taiwan Co., Ltd. Advanced Energy Safety R&D Center

DuPont Taiwan Ltd. DuPont Taiwan Photovoltaic Materials Technical Center

Intel Innovation Technologies Ltd. Intel Innovation Center

Ericsson Taiwan Ltd. ERICSSON Innovation Center

Broadcom Taiwan Co. Network SoC R&D Center

Motorola Electronics Taiwan Limited Motorola Taiwan Product Development Center

DuPont Taiwan Ltd. DuPont Taiwan Technical Center

Taiwan International Standard Electronics Ltd. (Alcatel) Alcatel ICT Application Research Center

GlaxoSmithKline Far East B. V. Taiwan Branch GSK Taiwan R&D Operation Center

IBM Taiwan Corporation IBM xSeries Taiwan Development CenterNEC Taiwan Ltd. NEC Innovative Product Joint Development Center for Engineering

Synopsys Taiwan Limited. VDSM EDA R&D CENTER

AKT America, Inc. AKT Asia Research & Development Center

Festo Co., Ltd. Festo CEC R&D Center Taiwan

Atotech Taiwan Ltd. Atotech Technology R&D Center

Telcordia Technologies, Inc. Taiwan Telcordia R&D Center

General Instrument of Taiwan, Ltd. Motorola Connected Home Solutions Taiwan Technology Center

Underwriters Laboratories Taiwan Co., Ltd.Green Electronic Materials and Energy Device Safety Testing and

Inspection Technology Research and Development Center

Source:Depart

mentofIndustrialTechnologyMinistryofEconomic

Affairs- Page 30 -

Establishing R&D CENTERS in Taiwan


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Tax deduction and exemption

Tax credit up to 30% of amount invested in R&D against business income tax

payable

Human resource support

Companies may recruit overseas

Subsidy for operating capital

Salaries of local R&D personnel, consultant fees, remunerations of overseas

R&D personnel, travel expenses, rent, overseas training expenses and more

Priority in administrative procedure

Simplified administrative procedure, assistance for multinationals in

negotiation with government agencies

Establishing R&D CENTERS in Taiwan INCENTIVES

Source: Department of Industrial TechnologyMinistry of Economic Affairs - Page 31 -

World Competitiveness Ranking TAIWAN


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World Competitiveness Ranking TAIWAN[2009 2010]

Number of utility patent (i.e., patents for invention) [1st]

Availability of scientists and engineers [7th]

Government procurement of advanced tech products [7th]

State of cluster development [6th]

Venture capital availability [8th]

Financing through local equity market [5th]

Pay and productivity [3rd]

Flexibility of wage determination [10th]

Source: World Economics Forum http://gcr.weforum.org/ - Page 32 -

Taiwan known for its high-tech industry

Taiwan gets fully rewarded for outstanding capacity to innovate [6th]

Di l i


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new china policy: a turning point for taiwan's economy (reming yu)

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