Who's afraid of the big bad World Trade Organization? Taiwan's local automobile industry, that's who. After the agricultural sector gets whipped and sent to the field for more arduous labor, the WTO moves on to victim number 2: local car manufacturers.
By Cristina Chuang
Domestic carmakers are poised to take a beating when Taiwan enters the World Trade Organization. Faced with decreasing import tariffs and increasing import quotas, plus the disappearance of local content requirements, the island's manufacturers will likely see their market share drop from the current level of 80 percent down to 60 percent after accession to the WTO.
The result will mean the junkyard for some carmakers. "The volume base and profitability [of the industry] cannot be sustained with 12 [local manufacturers]. There will have to be a deduction in the number of manufacturers," says John Parker, president of Ford Lio Ho.The Framework
Under WTO regulations, automobile import tariffs are expected to be slashed by around 1.5 percent per year through 2007, dropping from the current average of 30 percent down to 17.5 percent. This will allow selling prices to drop in tandem, placing imported cars more on par with locally made cars for the first time in Taiwan's history.
There is little good news for domestic makers. Tariffs on automobile parts used to make domestic models will also be reduced, but only to 9 percent from the current level of 14 percent.
Making matters worse, over the same eight-year period, Taiwan's auto import quotas will increase steadily by roughly 20 percent yearly. While Taiwan also will enjoy similar increases in its export quotas to other WTO countries, these levels will only increase by 4 percent yearly. Then again, Taiwan only exported 1,695 cars of the 372,613 cars produced here last year. Lastly, local carmakers will lose a protectionist law stipulating that half of the vehicle components used in Taiwan-made cars be made locally in order for the car to be considered local.
Among importers, the benefits under WTO will not be evenly spread. The new terms of trade will be of more benefit to larger imports than smaller ones. WTO accession will see the current three-tiered commodity tax on imports based on engine size shifted to a two-tiered system. At present, engines smaller than 2 liters face a 25 percent commodity tax: engines from 2 to 3.6 liters are taxed 35 percent and anything bigger is slapped with a 60 percent tax. Once Taiwan enters WTO, automobiles with engines above 2 liters will only face a 30 percent commodity tax while smaller engine cars maintain a 25 percent tax. This means that Japanese and Korean models, which generally use small- to mid-sized engines, will not benefit from the new regulations, while U.S. and European makers will. James Zemke, president of Chrysler Taiwan Co. calls the coming tariff reductions "great news" for his company, especially for Chrysler's higher-priced Jeep models, which use engines larger than 3.5 liters.
As the auto industry adjusts to the coming shakeup, related sectors will also feel the aftershocks. Downstream industries such as steel, plastic, and glass may see their earnings plunge. Of key importance to the Taiwan government, these industries each provide large numbers of jobs for Taiwanese. Officials and analysts believe anywhere from 20,000 to 100,000 jobs will be lost after WTO, many of these from the auto and auto-related sectors.
Another WTO change promises to rattle the car industry. Imports of used cars had long been banned in Taiwan, however, in January 2001, in preparation for WTO entry, Taiwan's government lifted the restrictions. This will strike another blow to local carmakers, as well as to new auto importers, by introducing a vast new source of low-priced cars. Reception among local makers has been decidedly cool, including strong lobbying from the Taiwan Transportation Manufacturer's Association against the move.
"I don't think it's to anyone's benefit. It is not to the consumers, the auto manufacturers', or the [auto-parts makers'] benefit," says Parker. "In my opinion, they're taking someone's cast off, second-hand products and selling them cheap." Parker warns that unless the government carefully monitors the new used car market, the new opening may "create some opportunities for unscrupulous people to manipulate the system."
Some in the industry even believe the market in Taiwan has already been saturated, leaving no room for newcomers to break in. "Just about everybody is represented in the market, either as the local manufacturers or as an importer. So there's nobody else to come in," says Parker. Also, Taiwan's 22 million people already own 4.74 million cars, in addition to 11.4 million motorcycles, so the market may be nearing saturation.Shifting Gears
There are methods local carmakers can use to better weather WTO accession. All Taiwanese car manufacturers collaborate with a major foreign company to produce foreign-branded models. Yulon Motor Co., one of Taiwan's most successful automobile manufacturers, for example, has a partnership with Nissan Motor Co. of Japan. Joseph Liu, managing director of GM Motors Taiwan, assures that foreign partners will help shield domestic auto companies from the blows of WTO. Ford also plans to "rebalance" its Taiwan business equation, selling more imports and fewer locally made cars, and considering cutting back on the current range of models made in Taiwan.
Another bit of good news is that because reductions in tariffs will be slow and gradual, the auto parts industry will have time to adapt. Flexibility is the number one strength of Taiwan manufacturers, and carmakers are no exception. One of the most promising possibilities is to split car production between Taiwan and China and to be able to import finished products from either side of the Taiwan Strait. Ford, for one, is hoping that product development expertise developed in Taiwan will transfer into China.
Overall, the mood among Taiwan's auto industry is grim acceptance of the coming WTO storm. Some, however, wish for the Taiwan government to take a more active role in monitoring and guiding the transition in the post- WTO marketplace. The current "laissez-faire" attitude says Ford's Parker, is not the smartest way to enter the WTO. "While it's the fairest way, it's also the most cutthroat way," he says. "There ought to be an automotive policy which obviously allows some degree of competition... but also manages the auto industry in the process so there isn't bloodshed everywhere in the industry. I don't see enough energy on the part of the government to address that... It seems like a sleeping issue rather than a burning issue."