Previous aspirations of developing Taiwan as a regional operations center foundered due to the lack of convenient aviation links with China. Now that regular cross-Strait flights are in place, can that dream be revised? Most experts consider that Taiwan’s best bet to make it as a regional hub will be for companies in the technology sector, leveraging its existing manufacturing strengths by adding on such services as training, industrial design, branding, and logistics. Besides technology expertise, Taiwan is also more attractive than mainland locations in terms of living conditions, IPR protection, employee loyalty – and surprisingly even for many costs. But it still needs to reduce government red tape in order to be competitive.

BY JANE RICKARDS

During the 1990s, Taiwan made much of its ambitions to turn itself into an Asia-Pacific Regional Operations Center for a variety of industries. But the “APROC Plan” never made much headway, foundering on the lack of direct flights across the Taiwan Strait. Few businesses were seriously willing to consider Taiwan as an Asia-Pacific “center” when it took nearly a full day of travel time to get to major cities in China, the largest and fastest-growing market in the region.

With the opening of regular cross-Strait flights over the past year, however, the transportation bottleneck has been largely removed. Is it now possible for Taiwan to play the role of regional hub as it had formerly envisioned? Or is it already too late to make up for the years of lost time?

To many experts, the answer depends on the type of hub one is talking about it. “Taiwan won’t be an overall hub, as the market is too small and the perception is that the level of spoken English is not good enough,” says Cathy Loose, the Tokyo-based Principal and Asia Pacific Regional Global Mobility Leader for Mercer, the human resources consulting company. In certain specific industry sectors, in addition, Taiwan is also unlikely to be competitive. In financial services, for example, competing with Hong Kong – with its long history in the field and large concentration of highly trained professionals – would be a difficult undertaking. Even Shanghai has not been able to displace the former British colony’s position as greater China’s banking center. “Hong Kong has easy access to capital markets, the infrastructure for the finance industry is better, and the manpower is there,” notes Lim Tay Her, an analyst with CLSA Asia Pacific Markets. Nor would Taiwan be suitable as a regional hub for industries requiring a large market for product testing.

Instead, numerous analysts say, Taiwan’s best bet would be to leverage its existing strengths in high-tech manufacturing to position itself as a regional hub for technology-intensive industries, such as ICT and biotech (though they caution that Taiwan has a window of about 10 years to accomplish this before cities in China start catching up). Many Taiwan-based ICT companies are already playing important regional and even global roles. Taiwan Semiconductor Manufacturing Co. (TSMC), for instance, is the world’s largest contract chip maker, and companies with head offices in Taiwan account for 80% of the world’s notebook computer production. “In Taiwan, you have ready access to the electronic manufacturing chain and also access to distribution channels in China,” says Peter Kurz, head of Taiwan country research for Citi Investment Research. “It’ll be the tech companies that draw foreign companies in here, whether Japanese or Western.”

Tristan Liu, an economist with the Taiwan Institute of Economic Research, says that TIER has reached the same conclusion about Taiwan’s prospects for serving as a regional center. He views such a hub as encompassing tech-related downstream activity, such as chip packaging, venture capital firms and other financial services aimed specifically at technology companies, and such other services as recruiting and training.

Taiwan provides an unusually positive environment for the tech sector to thrive, says Liu, because local investors feel comfortable with it and are open to opportunities to put money into the development of new technologies. As a result, it should be possible to attract multinational technology companies to list on the Taiwan stock market. “That is our comparative advantage compared to Hong Kong,” says Liu. “Hong Kong investors are more familiar with real estate, banking and finance, and traditional industries.” He notes plans on the drawing boards in Taiwan to develop a whole new generation of tech industries, many of which integrate manufacturing and services. As an example of this trend, he points to Taoyuan County’s project to build a ubiquitous- or U-city, in which information systems are all linked through such technologies as wireless networking and RFID tags.

Liu adds that despite Taiwan’s much smaller market, some industries – such as those emphasizing R&D or branding – may prefer to locate their regional hub on the island rather than in China. The rationale might be Taiwan’s superior intellectual property rights (IPR) protection or the need for highly educated, high-quality manpower in operations that are not very labor-intensive.

The CLSA’s Lim says the first companies to take advantage of Taiwan’s assets as a hub are likely to be Taiwanese tech companies currently based in China. As cost differentials narrow, they will be motivated to move more operations back to Taiwan, where most of their management team would prefer to live if given a choice. He sees international companies as following suit only after the volume of business activity has reached a critical mass. So far, only a few Taiwanese companies, such as food and beverage maker Want Want, have made a secondary listing on the Taiwan Stock Exchange (TWSE) in addition to their Hong Kong listing. But the Taiwan government is trying to persuade around 20 successful unlisted China-based Taiwanese companies to list in Taiwan instead of Hong Kong, and TWSE Chairman Schive Chi was quoted by Reuters as saying that he expects eight more Taiwan Depositary Receipt (TDR) applications this year.

Taiwanese companies returning to Taiwan are “going to be the trend for the next year or so, which is why Want Want is doing a TDR in Taiwan,” Lim says. Wang Jiann-chyuan, an economist with the Chung-Hwa Institution for Economic Research (CIER), estimates that 5% to 10% of Taiwanese companies based overseas intend to relocate more operations here because of the improvement in cross-Strait ties and the new, more stringent labor regulations that have been adopted in China. Lim notes that if 30% of the more than 1 million Taiwanese working in China should return, the added consumption of those 300,000 people would have a dramatic impact on the economy since most of them are relatively highly paid professionals. 

Besides the tech sector, Lim and Kurz say that Taiwanese companies focused on retailing and other aspects of the consumer market in China could take advantage of the relative sophistication and creativity in Taiwan by maintaining their headquarters and branding operations on the island. As a glamorous twist on that theme, Lim also sees Taiwan – with its democratic and relatively free environment – as having the potential to act as China’s “Hollywood,” the spawning ground for a wide range of entertainment products for consumption across the Strait. [See the Industry Focus section in this issue for more details about Taiwan’s efforts to develop its cultural and creative industries]. In this sector, Taiwan clearly enjoys a special edge in the Chinese market by virtue of having the Mandarin language in common. CLSA puts China’s total annual spending on various kinds of media at close to US$27 billion, currently about 0.8% of its GDP and expected to continue growing.

Local pop stars like Ah-Mei and Jolin Tsai have become hugely popular in China, and Taiwan has become the top Chinese-language film and television market in the Asia-Pacific region. According to a CLSA report, Taiwan produces 47% of the region’s Chinese-language film and television content, double the share from China.

Weighing the advantages

Analysts overwhelming cite Taiwan’s IPR regime, combined with its people’s creative and technological prowess, as being among its greatest assets as a regional hub, especially when compared to the mainland. In January, Taiwan was removed from the Special 301 Watch List, a U.S. government roster of nations regarded as having unsatisfactory records in safeguarding intellectual property rights. Kurz notes that while Taiwan does not have the best IPR regime in the world, it is far superior to China’s. He says Taiwan could be a good place for companies to store their final designs or moulds for products that are exported to China and elsewhere. 

But surprisingly, Taiwan’s cost advantages vis-à-vis Shanghai, Hong Kong, and Singapore are becoming a more and more significant factor. “We’ve found that the cost of running a business in Taiwan is actually slightly better than running the same business in other (Asian) locations – including things like the cost of living, the cost of expatriate rent, office costs, and manufacturing costs,” says Alan T. Eusden, president of Corning Display Technologies, a leading maker of glass substrate for liquid crystal display panels. Corning operates plants in both the Central and Southern Science Parks.

Generally salaries for Taiwanese professionals are slightly higher than those of their Chinese counterparts, but when characteristics such as talent and employee loyalty are factored in, workers in Taiwan are considered to be better value for the money. “People might cost more here than in China, but the perception is you get a much better performance – a much better bang for your buck,” says Julian Buckeridge, the Strategic Executive Search Group’s managing director for greater China. Lim points out that 28% of the members of Taiwan’s workforce have at least one university degree, one of the highest rates in the entire region; the equivalent figures for Hong Kong and Singapore are below 20%. It does not take a huge workforce to support a regional hub, Lim notes – just one that is highly educated and not overly expensive.

Employers frequently complain about the high turnover among professionals in China, where talented workers often quit a company after a short stay, lured away by pay raises of 5% to 10%. “The lack of loyalty in Chinese workers is a very big incentive for both Western and Taiwanese companies to set up shop here,” says Lim. Companies that rely on relatively well-paid workers, such as R&D-oriented industries that need to make a significant investment in training, find it particularly troubling when employees take those newly acquired skills and move on.

Considering that China did not start opening up to the world until the 1990s, mainland-based multinationals also frequently encounter a lack of experienced local senior managers with an international outlook in the 35-45 age group. Generally, says Buckeridge, these companies solve the problem by hiring overseas Chinese and Taiwanese, but must then bear the burden of such expatriate-package costs as luxury housing, school tuition for the children, and tax equalization. If the operation were located in Taiwan, qualified senior executives with degrees from top-notch Western universities could be hired without all these extra costs, as they already live here anyway. Buckeridge says he recently worked with a U.S. company that looked at plans for setting up its regional headquarters either in Shanghai and Taipei, and eventually chose Taipei. By employing five local managers in Taiwan rather than paying expatriate packages in Shanghai, the company was able to save US$800,000 a year – US$250,000 on housing costs alone, he says.

In an effort to make Taiwan even more attractive as a regional center, the government is considering a revision in policy that would allow far greater numbers of foreign laborers to work in Taiwan and to exempt at least part of them from the minimum monthly wage of NT$17,280, which currently applies to both domestic and foreign workers. York Liao, secretary general of the government’s Council for Economic Planning and Development, notes that the current regulations have discouraged some overseas Taiwanese companies from returning to the island, but they would be interested in repatriating if they could import foreign labor without a quota and pay them below the Taiwan minimum wage. If this policy is implemented, says Liao, foreign-invested companies would also be able to utilize cheap foreign labor, though at first this would most likely be limited to operations in free trade zones.

In terms of the cost of living for expatriates compared with Singapore, Beijing, and Shanghai, Mercer’s Cathy Loose regards Taipei as a definite bargain. Residents of Shanghai and Beijing are faced with high expenses for utilities, transportation, and especially for rent, she says. For its part, “Hong Kong has one of the highest costs in the region, even surpassing Japan,” she notes. In contrast, living accommodations in Taiwan are both cheaper and much more widely available. At the moderately priced level, for example, Mercer has found the typical cost of renting a two-bedroom unfurnished apartment in Taipei to come to about US$1,023 a month, whereas similar accommodations in Shanghai would be around US$3,000 and in Hong Kong US$4,500. In the luxury category, a two-bedroom apartment in Taipei rents for only around US$2,400, compared with Shanghai’s US$5,000 and Hong Kong’s US$7,700.

Office rents in Taiwan are also relatively inexpensive, Lim notes. The CLSA analyst estimates that they are 30% to 40% less than in Shanghai and around 20% cheaper than Beijing. “Even Tianjin is more expensive than Taipei right now,” he says. The cost of utilities such as water and electricity are also extremely low here.

With the availability of prime office space in Taipei currently standing at around 15%, Taiwan Country Head Tony Chao of Jones, Lang and LaSalle, the real estate services firm, describes the current property market as flat or even a bit depressed due to the global financial crisis. He says average office rents may fall by 10% to 15% this year, but he sees a likely boom in demand in a few years as Chinese investment begins to come into the market under the newly liberalized regulations. “In the long run, the market will go upside, but it will take some time,” says Chao.
Another part of the equation in selecting a location is expatriate schooling, and in that respect waiting lists in Taiwan are considerably shorter than in competing cities and in some cases the cost of tuition and fees is significantly lower. Both the Taipei American School and Taipei European School enjoy excellent reputations.

With regard to the tax regime, another major consideration for investors, Taiwan offers a mixed picture. The current corporate tax rate of 25% – the same as in Shanghai, but well above the 16.5% in Hong Kong and 17% in Singapore – is generally regarded as too high for Taiwan to be attractive as a regional hub. Although the Taiwan government last year considered lowering the rate to 17.5% to spur competitiveness, in the end it settled on a reduction to 20%, due to go into effect next year. As AmCham’s Tax Committee stated in last year’s Taiwan White Paper: “Reducing the tax rate is not the only factor that needs to be considered. Besides their low corporate tax rates, Hong Kong and Singapore are rated favorably by foreign investors because of the simplicity and transparency of both their tax regulations and their tax administration. Those are models that Taiwan should also follow.”

Lim of CLSA refers to next year’s 20% corporate tax rate as “not so far away from Hong Kong and Singapore anymore,” while noting that any benefit from low taxes in Hong Kong is offset by the exorbitant rents there. Further, the tax breaks available for investments in Taiwan’s various free trade zones lower the effective corporate tax rate to 15% in these areas, he points out. But Lim urges the government to eliminate double taxation on earnings in China – a proposal that recently was blocked in the legislature due to vociferous opposition from the Democratic Progressive Party. “Once this is changed, from a tax point of view, Taiwan will be quite competitive,” he maintains.

Taiwan’s level of internationalization also receives mixed reviews. The friendliness of the people and their acceptance of Westerners draw very high praise. The level of English proficiency among the general public is also improving markedly, and more government web sites are available in English. Still, Lim considers that Taiwan is not yet Westerner-friendly enough to be an international hub, which is why he thinks the Taiwanese corporations will move here first, with Western companies following later. Mercer’s Loose adds that Taiwan is still too “insulated in many ways” and needs greater awareness of international business practices. One way to improve the situation, she suggests, would be to further internationalize Taiwan’s educational system, for example permitting foreign universities to set up satellite campuses. “The education system needs to be more business focused,” Loose says. “Taiwan needs to promote more international cultural exchanges and encourage expats to come here and share information.”

As for livability and the environment, Taiwan gets a high rating for the quality of its air compared with its badly polluted neighbors – and in other respects is seen as at least making significant improvements, even if it is still not up to the level of places like Singapore. Loose cites Mercer’s Quality of Living Survey 2009, which ranked Taipei 86th among the 215 cities covered – ahead of such Chinese cities as Shanghai (98th) and Beijing (113th), but behind Singapore (the highest-ranked Asian city at No. 26) as well as Hong Kong and numerous Japanese cities. “In terms of quality of life, Taiwan is improving steadily,” Loose says. She adds that concerns about cross-Strait tensions had affected Taiwan’s ranking in the past, and suggests that the more relaxed relations with China should allow Taipei to score more favorably in future surveys.

Among top executives who have the luxury of being able to choose the location they want to work in, says Buckeridge, a Taiwan posting does not have much appeal, at least for those relatively unfamiliar with the region. It lacks the historic attractions of a place like Beijing, the “buzz” attached to Shanghai, and the sense of being a world-class city like Singapore and Hong Kong. 

But others suggest Taiwan might have more allure for foreigners if its attractions were simply marketed better by the government. Wang of the CIER points out, for example, that Taiwan is much safer than China and its business districts less congested than Hong Kong. Citi’s Kurz says one of Taiwan’s drawing cards should be its natural scenery, such as its “stunning” mountain wilderness.

The two most daunting obstacles seen as standing in the way of Taiwan’s becoming a regional operations hub are its inadequate infrastructure and the proliferation of red tape in dealing with the government. With respect to infrastructure, Corning’s Eusden stresses the need for consistency and stability in the supply of electrical power. “We create and manipulate molten glass in our manufacturing process, so we have to have absolutely perfect temperature control throughout,” he says. “If there even is a brief power blip, that can be an issue.” 

Resident expatriates also tend to be highly critical of the low rate of sewage treatment in Taiwan – nationwide, less than one-fifth is treated before being discharged into the environment. Around 70% of households in Taipei are connected to waste-water treatment systems, but in other parts of Taiwan the connectivity rate can be less than 5%. The government has announced plans to improve this situation, including investment of US$5.2 billion over the next five years as part of its 12 i-Taiwan infrastructure projects to boost the national connectivity rate from the current approximately 20% to 35.8% in 2014.

Another area of infrastructure deficiency relates to building quality. Lim notes that low levels of economic and political confidence have led to long-term under-investment in the property market. As a result, he says, around 75% of the housing stock in Taipei is more than 25 years old, with much of it constructed in very basic, functional style to accommodate the mass immigration then underway from rural areas. With the exception of some landmark structures, office buildings, too, also lack the kind of luxuriousness found in Shanghai and elsewhere. Lim believes the first phase of an economic recovery will bring massive reinvestment and rebuilding.

The Taoyuan International Airport was especially singled out for criticism as an example of infrastructure below the standards that should apply to a regional hub. Compared with Hong Kong’s Chek Lap Kok Airport, says Buckeridge, “the Taoyuan Airport looks like something from the third world.” Kurz adds: “It gives a terrible first impression and then goes on from there.” The airport was faulted both for the drab physical appearance and for inefficient operations that remain in the hands of government bureaucrats instead of being outsourced to private contractors in line with international trends.

The government’s plans to create an Aviation City in Taoyuan, upgrading the airport and surrounding it with other economic activity, should help improve Taiwan’s “gateway.” Once this project is realized and more hotels are built, Lim says, Taiwan should be able to supersede Hong Kong as the prime destination for the MICE business – Meetings, Incentives, Conferences and Exhibitions – in greater China. “MICE is a perfect marriage of tourism, technical services, and manufacturing,” he notes. “Rents are cheap and there are many scenic sites in Taiwan.”

For that vision to materialize, however, current restrictions on travel from China would have to be significantly liberalized. Although the regulations have been eased over the past few years, it is still a hassle for PRC passport-holders to gain permission to come to Taiwan to attend meetings or conferences, receive training, or take up a work assignment. “We have many Corning employees over in China whom we would like to have come here, but it is hard to make that happen,” Eusden says. In addition, so that foreigners can fully enjoy the convenience of the time-saving direct cross-Strait flights, he notes the importance of developing a mechanism for obtaining Chinese visas in Taiwan.

In response to criticisms, the government in mid-June announced the easing of several restrictions on mainland visitors. The allowed length of stay for Chinese attending conferences was extended from 14 days to a month, for example. Companies with annual revenues of more than NT$30 million are now able to invite 200 mainland professionals per year, up from 50, and Chinese visitors are now allowed to bring along two family members instead of just one. Multinational companies have been pleased with the changes, but many think the restrictions are still too tight. One U.S. company, complaining about the 200-person ceiling on invitations to mainland visitors, noted that a single regional conference could involve 100 or more Chinese invitees. Government officials replied to the company that special circumstances could be dealt with on a case-by-case basis.

More broadly, regulatory reform is cited as one of the main areas needing improvement – even by the CEPD’s Liao – for Taiwan to be competitive as a hub. “The way to speed up internationalization is to lift out-of-date regulations and build good new ones,” he says. Kurz offers the observation that while it will be economic factors, not good regulations, that encourage regional centers to develop here, bad regulations could discourage their development.

Worrisomely, Taiwan’s ranking in the World Bank’s annual Doing Business report, slipped three places this year to 61st out of 181 countries, while rivals Singapore, Hong Kong, and Korea were all in the top 25. In response to this news, the government has moved to simplify procedures for setting up a business (for example, shortening the time needed to complete administrative procedures to register a new company from a week to three days) and in April abolished the minimum capital requirement for a new business of up to NT$500,000. But companies wishing to obtain work permits for foreigners generally still need capital of at least NT$5 million, and sources complain that it is still far too difficult for international service providers, such as foreign lawyers and accountants, to set up shop here.

Taiwan’s financial sector, says Kurz, continues to be “regulated to death.” The securities industry, he says, is plagued with an “archaic segmentation” with separate licenses for  securities brokers, securities investment consultants, securities investment trusts, and so on. “The list goes on and on,” he says, “and every single license carries with it a whole set of requirements about capitalization, personnel, office space and even the labeling of files in your filing system.” 

In his capacity as chairman of AmCham Taipei, Eusden refers to the numerous recommendations in the Chamber’s Taiwan White Paper for making Taiwan’s investment climate more competitive. Overall, he notes, as long as regulations are clear, their implementation efficient, and improvements are made in the infrastructure, “combined with all the benefits that already exist in Taiwan, I think you end up with a location that can operate as a regional operations hub quite effectively.”

Is the New Atmosphere Here to Stay?

— By Jane Rickards and Don Shapiro

In the new environment of more friendly cross-Strait relations, Mandarin-speaking Taiwan may now have the chance to fulfill its potential of being a springboard into China for Western as well as Taiwanese companies. Given the opening of direct flights to destinations on the mainland, the island has the advantage of a very central geographic location, with an average flying time to most Asian cities of within three hours. In addition, Taiwan recently opened the door to investment from China, and the two governments are considering agreements to permit cooperation in various aspects of financial services.

Before the change in government that brought the Ma Ying-jeou administration to power last year, the mood in Taipei-Beijing relations had long been one of suspicion if not hostility. Given the vagaries of democratic politics, is there reason for concern that the gains of the past year might only be temporary, subject to rollback at some point in the future?

Most analysts discount the likelihood of such a setback. Even if the pro-independence Democratic Progressive Party (DPP) wins a future presidential election, contends Lim Tay Her of CLSA Asia Pacific Markets, it would find it difficult to turn back the clock. For a Taiwan government to undo the policies that have been put into place would prove to be both complex and politically unpopular, as the public has looked positively on the potential economic benefits. And neither is China likely to reverse the recent trend. While it loathed outspoken pro-independence President Chen Shui-bian, that attitude might not extend to a more moderate DPP government, Lim says. Political analyst Andrew Yang, secretary general of the Chinese Council of Advanced Policy Studies, a Taipei think tank, agrees. “I think the chances of rolling back or reversing the direct flights [should the DPP be elected] is very remote,” he says.

In the meantime, a test of how well the two sides have built a foundation of cooperation and good will may soon come in the form of China’s attitude toward Taiwan’s desire to conclude a cross-Strait free trade agreement, known as the Economic Cooperation Framework Agreement (ECFA). As the ASEAN trade bloc expands over the next few years to Taiwan’s exclusion, Taiwan is afraid of losing markets in China and elsewhere in the region for some key industrial products. 

Since Taiwan’s regional economic aspirations depend on removing roadblocks to furthering its integration with other Asian economies, ECFA is a far more pressing objective for Taiwan than for China. The coming months will tell whether Beijing is willing to extend a favor to Taipei for the sake of long-term benefits in tying the two economies more closely together, or whether it will press for short-term political gains such as acceptance by Taiwan of something more akin to Beijing’s definition of the “One China” principle.