Editor’s note: Read our latest stories on the COVID-19 global pandemic

Reshuffled supply chains. Collapsing commerce. Digital transformation opportunities bubbling to the surface. These are the new realities, at least in the near term, of a global economy being redefined by the new coronavirus disease (COVID-19) sweeping across the globe.

With the first quarter having just come to an end, how is Taiwan resetting its vision for 2020? What does it need to do to survive the new coronavirus pandemic? CommonWealth Magazine interviewed leaders in several major industries to see how they are coping and adjusting their strategies.

Petrochemicals: Upended Plans, Focus on the Future  

The leader of Taiwan’s old economic sector, the Formosa Plastics Group, has done a complete U-turn after the plans crafted by its four major companies for 2020 were fully derailed. 

On February 10, Formosa Petrochemical President Tsao Minh (曹明) told CommonWealth how his company would deal with China sealing off several cities and halting work. “Formosa Petrochemical’s strategy is to first build up inventories, and if the crack spread [the difference in price between a refined product and crude oil] falls below US$2, we will cut production.”

Now, global crude prices may be depressed, but the Group’s sixth naphtha cracker complex in central Taiwan has not only not reduced its output, it is pumping out products at full throttle, determined to sell as much of it as it can at any price. Even if it loses as much as it charges for a liter of gasoline, the Formosa Plastics Group is working hard to refine crude oil into gasoline or diesel or turn it into plastic raw materials – anything to sell product.

Source: Getty Images

Why this produce-at-all-costs approach? Taiwanese law requires the sixth naphtha cracker complex to maintain crude oil reserves equal to Taiwan’s needs for 60 days. The oil currently in inventory was bought for over US$50 per barrel, and if the Group does not dump it, it cannot procure cheaper oil and lower its costs. 

In addition, China has begun to consume oil products again and is buying raw materials, providing a glimmer of hope for the Asia-Pacific market. If the Group’s painful inventory dump succeeds, it could lay the groundwork for a quick return to profitability.

For many companies like the Formosa Plastics Group fighting to overcome the global coronavirus pandemic, they must plan ahead and compete aggressively in the marketplace, but they may also have to moderate investment and the pace of expansion because the European and American economies are falling into the abyss.     

ICT: Digital Technology a Future Bright Spot

As the global economy crumbles, the good news for Taiwan’s manufacturing sector is that support may be found at home from domestic demand.

“To fight the epidemic, many countries are doubling down on economic stimulus policies, and the impact of those efforts will gradually emerge. Taiwan also has trillion- Taiwan- dollar public investments, such as the ‘Forward-looking Infrastructure Plan’ and wind power,” said China Steel Chairman Weng Chao-tung. 

“Domestic demand for manufacturing will not disappear. It may just be deferred.”  

Source: Getty Images

There is another area of demand that will remain inelastic in the future, unaffected by the whims of the virus. 

“AI and digital transformation were seen in the past as too expensive and too inflexible, and unable to be used on a large scale,” said Evans S.W. Tu, president of the Synnex Group. 

“Now, however, the big data era has arrived, and if companies can make the jump, they can be competitive in the future. This is an opportunity that won’t go away simply because of the epidemic.”

Stephen Su, general director of the Industrial Economics and Knowledge Center at the Industrial Technology Research Institute, is also a proponent of 5G. He said no major country wants to lag behind in the field, meaning that 5G investment will continue unimpeded this year.   

Shifting Orders: Opportunity for Taiwan 

Another source of potential hope for Taiwanese companies has been the disruption of supply chains by the global pandemic. 

Eric Y.T. Chuo, CEO of the motion control product specialist Hiwin Technologies Corporation, said his company now has a backlog of emergency orders, not only from China but also northern Europe. 

The same phenomenon is being seen in the fastener cluster in Kaohsiung’s Gangshan District. Andy Lin, general manager of Gangshan-based screw manufacturer Sheh Kai Precision, said demand has risen for products such as bi-metal screws, which are used in construction, as the U.S. prints money and pushes basic infrastructure development.

In addition, Lin said, companies in the West are worried about being unable to get goods in the second half of the year or because of lockdowns to contain the virus, and have placed rush orders to build inventories. And as fastener competitors in Europe suspend production due to the virus, the orders that would have gone to them are shifting to Asia, with Sheh Kai a potential beneficiary.

In fact, the global coronavirus crisis could reshuffle supply chains for the long haul. Su believes the impact could be similar to that seen after Japan’s massive earthquake and tsunami on March 11, 2011. The natural disaster dealt the heaviest blow to northeastern Japan, the hub of Japan’s electronics component production, creating sudden shortages in the global semiconductor, consumer electronics and car industries. Orders to these suppliers were diverted overseas, including to Taiwan, and the companies receiving those orders gained entry to what was previously a relatively closed global supply chain.

Source: CW

Today, Taiwan’s biomedical and auto parts industries and some electronics components sectors, such as passive components, could similarly benefit. Because of shortages in the biomedical and auto parts sectors resulting from shutdowns in factories in China and the West, Taiwan could open new doors and gain a foothold in previously inaccessible supply chains.

The phenomenon of countries closing their borders due to the global pandemic could also prompt brands to rethink how they diversify risk across their networks. 

“TSMC might hear from its customers, for example, ‘You have such a big market share, but you’ve bet everything on Taiwan.’ It will feel pressure and have no choice but to consider setting up a factory in the United States,” the IEK’s Su said.

That trend could put small- and medium-sized enterprises, which are not big enough to build global networks, at a big disadvantage, but Su believes that such a disadvantage can be overcome.

They “can form alliances and share orders with partners in their supply chain or in other supply chains, kind of like the code-sharing strategy used by airlines, allowing them to develop a global presence using a minimum of resources,” Su said. 

The COVID-19 epidemic has spawned a sort of economic Darwinism, with cutthroat pricing on the rise. Some structurally unsound companies may go bust, but for those better equipped to survive will have an opportunity to upgrade their product mixes toward higher-end items. 

Services Sector: Losses Hard to Recoup in the Short Term

The services sector, which accounts for about 60 percent of Taiwan’s GDP, faces countless uncertainties, and second half goals can only be set on the fly. 

The tourism and travel sector has been particularly hammered, with travel agencies seeing their revenues nearly evaporating.

“The second half of the year will depend on how the epidemic goes. We aren’t setting goals for now because we’re not sure if we can even survive,” lamented the chairman of a publicly listed travel agency.

Occupancy at city hotels around Taiwan fell by as much as 90 percent in March, leaving them with 10 percent occupancy levels that are simply not sustainable. As a result, many hotel operators are not holding out much hope for the second half of the year. 

In the aviation sector, Taiwan’s two major international airlines – China Airlines and EVA Air – saw their revenues decline 37 percent year-on-year in February, the biggest dip in 10 years. New carrier Starlux Airlines was forced to shut down its flights just 55 days after starting service on January 23, 2020.

At the same time, however, demand for cargo services has risen dramatically, and even as cargo rates have gone up, space is still hard to secure. That bodes well for China Airlines, which has one of the highest ratios of cargo aircraft to its overall fleet of any airline in the world. EVA Air and Starlux have even applied to open passenger cabins in passenger aircraft to carry cargo to boost revenues. 

Electronics: High Uncertainty for Semiconductors

Market intelligence firm IDC issued a report on March 18 saying COVID-19 will have a “significant effect” on the worldwide semiconductor market in 2020. 

“There is nearly an 80 percent chance for significant contraction in worldwide semiconductor revenues in 2020, instead of a previously expected minor overall growth of 2 percent,” the report said.

The most likely outcome, with a 54 percent probability, according to IDC, was a 6 percent year-on-year decline in semiconductor market revenue, a scenario that assumes the supply chain will start to recover and quarantines and travel bans will ease over the summer. 

Such uncertainty has left Taiwan’s semiconductor operators rather perplexed, as their businesses continue to see a relatively stable, if not expanding market.

The president of a major IC packaging and testing provider said the company’s first- quarter results were only slightly below original projections, and the second quarter will likely be better.

“Right now, orders for April and May are very strong,” he said, to the point where his company is adding workers on its production lines to be ready to increase capacity.

The picture painted by the executive seems in stark contrast to stories of the devastating economic freeze in the West that has torpedoed demand. The executive admitted to being surprised that semiconductor orders had not tailed off even after the postponement of the 2020 Tokyo Summer Olympics to 2021, but clients’ forecasts have, in fact, remained upbeat.

What the situation may reflect is the lag in the time it takes for changes at the consumer demand end of the electronics supply chain to reach upstream suppliers.

At present, of the world’s top three smartphone brands, only Huawei has revised its projections lower, and only by 10 percent, while Apple and Samsung have made no adjustments.  

One reason for that is the complexity of the advanced production processes used by the world’s largest contract chipmaker, Taiwan-based TSMC. Three-month lead times are required from the time a wafer enters a TSMC foundry to the time it is completed, and if a brand were to cut its orders, and the epidemic in the United States were to ease in the second half of the year, sparking renewed buying, the brand might get caught short of inventory. Consequently, even if end consumers are currently holding off on electronics purchases, the brands are still willing to see their warehouses bulge. 

Of course, it also means that “the second quarter looks pretty good, but forecasts for the third quarter could suddenly plunge,” the semiconductor executive admitted.

Nomura Securities echoed that sentiment in a research note at the end of March. Nomura analyst Aaron Jeng said that if there is major downside risk for semiconductors, it will appear in the second half of the year rather than in the second quarter.

Synnex’s Tu is advising caution, however. After looking back at past global disasters, he has found that people tend to panic excessively and magnify the threat when a crisis occurs. 

While he believes companies need to be well prepared for the worst, they should avoid panicking and overreacting, and be ready to quickly reverse course when opportunities present themselves. 

Have you read?
♦ Beyond Relief Packages, a Chance for Taiwan to Transform into a Tourism Hub
♦ Demand Will Slow, Not Disappear, Says Evans Tu
♦ How can Taiwan Cope with the Worst Economic Blow Since WWII?

Translated by Luke Sabatier
Edited by TC Lin
Uploaded by Judy Lu