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New Investment Wave

Japanese Companies Catch Taiwan Fever

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Japanese investment in Taiwan soared 67 percent last year to US$400 million, and more companies have plans to jump in. What is it that’s drawing them to Taiwan?

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Japanese Companies Catch Taiwan Fever

By Monique Hou, Jerry Lai
From CommonWealth Magazine (vol. 467 )

On Feb. 26, Japan’s leading newspaper Yomiuri Shimbun gave prominent play to a story about Japanese companies aggressively seeking Taiwanese partners. In the past year alone, cooperative ventures have been launched in the electrical machinery, publishing, logistics, and food sectors, and memory chip maker Elpida Memory Inc. has listed on the Taiwan stock exchange. What was driving this new wave? Japanese companies that venture into China have a survival rate of 60 percent when they go in on their own and 70 percent when they invest with Taiwanese partners, the report said.

Liu Ren-jye, a professor in Tunghai University’s Department of Industrial Engineering and Enterprise Information, saw the trend first hand recently when he attended a dinner at Tainan Tan-Tsu-Mien Seafood Restaurant in Taichung given in honor of Japanese business owners. To Liu’s surprise, not one but two different Japanese business delegations were being feted at the same restaurant.

"You just knew the extent to which there was Taiwan fever. This is not a trend you can perceive through numbers. By the time it shows up in the numbers, it’s already been happening for quite a while," Liu says.

In another example of Taiwan fever, leading Japanese publisher Kodansha Ltd. represented more than 30 publishers in signing a memorandum of understanding with Taiwanese companies last month.

"What’s special recently is that they want to join with Taiwanese to make inroads into China’s market or even the entire Southeast Asian market. Beginning this year, you’ll see some major investment projects in these areas. Investments such as these have not been seen in recent years and the amounts invested won’t be small," reveals John C. Chang, managing director of Nomura Research Institute Taipei, recently returned from a trip to Japan with Taiwan’s deputy economics minister Lin Sheng-chung.

Why Now?

Prior to the global financial crisis that struck in late 2008, Japanese investment in Taiwan had been growing, setting records in 2006 for investment value and in 2007 for total number of investment projects. That momentum reappeared in 2010, when Japanese investment in Taiwan rose 67 percent from a year earlier to US$400 million, and involved 338 projects, 27 percent more than the 266 launched in 2009. The 338 projects were the second most undertaken in a single year by the Japanese in Taiwan, and the most of any foreign country in 2010. There were so many that the Ministry of Economic Affairs ended up announcing a new group of Japanese investment projects on practically a monthly basis, and they featured such names as Sumitomo Electric Industries, Toyota and Marubeni, and machine tool makers Taiwan Takisawa, Kuraki, and O-M Ltd.

Many companies are still waiting in line, and Industrial Development Bureau director-general Woody Duh expects more of Japan’s benchmark corporate names to join the wave.

Takeo Kobayashi, the chairman and president of Marubeni Taiwan Co. and the head of the Japanese Chamber of Commerce & Industry in Taipei, explains why.

"The Japanese yen is appreciating, and Japan is choosing to make many of its export products offshore. Relations between Taiwan and Japan are stable, and there is familiarity and mutual trust between the two peoples," Kobayashi said. But he also stressed that Taiwan was just one of Japan’s options, as Japanese investment in Thailand and Malaysia has been growing at an even faster pace.

One of Taiwan’s advantages is that its ability to commercialize products is stronger than Japan’s. "In Taiwan, money is not much of a problem, and its commercialization capabilities are very strong. On the other hand, it is weak in upstream technology innovation. Then there is the China market, where Taiwan has better opportunities than Japan," Duh observes.

One government initiative to harness the trend is the "East Asia Innovation Corridor" project directed by Minister without Portfolio Yiin Chii-ming and backed by the Institute for Information Industry and the Industrial Technology Research Institute. The project targets medium-sized Japanese companies and promises help in exploiting their technologies. In just over a year, many cooperative ventures have been set up, but most of these deals have not been made public.

"If the Japanese company wants to publicly announce a project, we will announce it the same day they do. But if it is not willing to say anything, then we will absolutely not disclose it," Duh says.

One of the main factors accelerating the exodus of Japanese companies offshore is Japan’s shrinking domestic demand. Though manufacturers were the first to relocate, the more noteworthy trend in the past two years is the willingness of service businesses to go abroad. The arrival of casual wear retailer Uniqlo in Taipei to great fanfare last October was just one such example.

"There will be more companies in the service sector coming, including some restaurant chains. Take Ootoya. It already has a system in place in Japan, and it has skillfully adapted it in Taiwan. Taiwanese consumers already have a high level of acceptance of Japanese goods, and the population of 23 million is about the same as Kyushu. Such sizable domestic demand is very attractive to Japanese companies," says Nomura Research’s John Chang.

"The biggest factor attracting Japan right now is that its original model for success can’t continue," Tunghai University’s Liu Ren-jye avers. The success strategy among Japanese businesses was originally to expand market share, especially in Japan. But in the last two decades, the domestic market has been in decline. "For the big corporations, this isn’t a problem. They already have bases overseas. But it’s really hurting small- and medium-sized enterprises."

Joining with Taiwan to Expand Abroad

In expanding abroad, Japanese companies have traditionally looked to the United States and Europe. But as those markets have matured over the past 10 years, Japan has had to shift its focus to emerging markets.

"The main emerging market is still mainland China, but (Japan) grew panicky because it has not done well there. Then it realized it could enlist Taiwan’s support in entering the Chinese market," says Kung Ming-hsin, vice president of the Taiwan Institute of Economic Research.

In the machine tool sector, the most representative for small- and medium-sized manufacturers, Japan’s domestic output has fallen by 60 percent since the global financial crisis. Domestic demand for cars is contracting by 200,000 vehicles per year. Those harsh realities in Japan have helped Taiwan-based Kuozui Motors’s dream of exporting vehicles finally become a reality, after exporting 30,000 Toyota brand cars in 2010. It is hoping to ship another 50,000 to overseas markets this year.

"To Taiwan’s supply chain, 50,000 cars is a lot," Duh said with optimism. Since Tobayashi took over as the head of the Japanese Chamber of Commerce & Industry last year, nearly every month he has had to welcome large visiting delegations of senior executives from Japanese companies and Japanese government officials.

"This shows that the Japanese are in a hurry," says Tunghai University’s Liu. In the past, when a Japanese company evaluated the possibility of investing in Taiwan, it would first have lower-level executives conduct a preliminary assessment that would take six months. Only in the second phase would senior executives appear, and they would visit Taiwan at least three or four times before making a decision.

"But during this wave," Liu says, "the groups I’ve met in Taiwan for the initial assessment are all made up of top decision makers. It shows they mean business. The name cards I picked up that night at Tainan Tan-Tsu-Mien were all from executives in decision-making positions."

Chang sees this almost as a natural evolution, because every phase in Taiwan’s industrial development, from export processing and industrial upgrading, to the nurturing of two trillion-Taiwan-dollar industries (semiconductors and video display units), has in some way been tied to Japan. "Taiwan is finally being recognized for something other than being a cog in a supply chain. Taiwan’s strongest suit is not technology but its ability to gain a foothold in the world’s supply chain. That’s something that Japan’s SMEs, who have the technology, are drooling over," Chang says.

When Liu now delivers speeches in Japan, he often finds very receptive and inquisitive audiences.

"Many people ask me what advantages Taiwan still has. I answer them by asking them why Canon has bucked the trend and actually increased production in Taiwan. The lenses Taiwan Canon makes are identical to those made in Japan. But there are some things Taiwan makes especially well – tools and dies for example. So Canon has started exploiting Taiwan’s advantages, and moved its tooling center to Taiwan," Liu says.

"Japan is also studying how Taiwan makes its molds so quickly. Finishing them a week early may mean a 10-percent higher profit. So the focus is on creating value, not on lowering costs. The key is being able to do what others can’t."

The strategy of allying with Taiwan to enter China has already become evident, as some Japanese companies have established footholds there through Taiwanese subsidiaries. Yuan-huang Chen, a senior manager in the Administration Division at AGC Display Glass Taiwan – the Taiwanese subsidiary of Japan’s Asahi Glass Company (AGC) – now has to make frequent trips to China, because the Japanese parent company tasked AGC Taiwan with setting up its new plant in Kunshan, China, which is scheduled to open in the third quarter of this year.

But because of concerns over the stability of the water and electrical supply in Kunshan, AGC decided not to put a kiln in Kunshan. Instead, because "cast glass sheets" were included on the "early harvest" list of items given preferential duties by China under the Economic Cooperation Framework Agreement (ECFA), AGC will produce its energy-intensive raw glass plates in Taiwan and export them to China for processing. If demand in China is strong, the plant in Taiwan will have to expand.

ECFA Effect Not Yet Evident

Despite AGC’s interest in the ECFA, it remains unclear how many Japanese companies have really considered it in their investment strategies.

"The Japanese Chamber has just recently started to ask us our opinion of the ECFA. To be honest, most people still don’t really understand it," says AGC Display Glass Taiwan chairman and president Hiroyuki Ishikawa.

Tobayashi, the Japanese Chamber head, says Taiwan’s Ministry of Economic Affairs is still working to explain the trade pact’s content to Japanese companies, and that the chamber is surveying its members on whether they plan to expand their investment in Taiwan because of it.

"For some time we’ve been telling the Japanese that when they go to China, Taiwan is the shortest route," TIER’s Kung says. "This is the concept everybody has, and it will become more evident now that the ECFA is in effect. They’ve discovered that it’s easier to go to China using the name of a Taiwanese subsidiary. The big Japanese companies may not need Taiwan, but the SMEs only have technology. Their marketing skills are inadequate, and they don’t understand China."

Minister without Portfolio Yiin went to Japan recently to brief 11 Japanese companies on Taiwan’s investment environment. One of them was TDK Corp., a producer of electronic materials and components.

"After I talked with them on a Friday, the company’s president immediately called his employees into work on Saturday to study the material we talked about. He even gave them a tongue-lashing, saying, ‘The information you gave me didn’t include this,’" Yiin recalls.

"They may have only heard of one thing, the ECFA, but the changes in Taiwan also include nonstop flights to China, direct flights between Songshan and Haneda airports, tax incentives and other things. They weren’t very clear about any of this. After they heard about them, there was a major change in their strategic outlook."

Wave after wave of Japanese companies are coming to Taiwan to invest, from large manufacturers to service businesses and SMEs. The newest development is that small regional companies are now looking to Taiwan for a new direction. About three weeks ago, the Japanese chamber took a group of small companies from Hokkaido around Taiwan in search of opportunities. Right before that it was a delegation of SMEs, and before that, groups from Osaka prefecture, Fukui prefecture, and Nagoya, and before that...

Translated from the Chinese by Luke Sabatier

Keywords:

好友人數