Taiwanese businesses have long been a major force in China’s economy. Since the late 1980s, Taiwan has been one of the largest sources of foreign direct investment into China, with an estimated cumulative value of nearly US$200 billion by 2020. Taiwanese firms have played a significant role in China’s economic development, particularly in manufacturing, electronics, and service sectors.

In recent years, however, there has been a noticeable trend of Taiwanese businesses leaving or diversifying their operations away from China, due to various factors such as rising costs, trade war, and political tensions. Simultaneously, some Taiwanese businesses still opt to stay or even expand in China, mainly due to the pull of the Chinese market, consumer demand, and policy initiatives.

Leaving China and diversifying operations and markets are not only in the businesses’ commercial interests, but also in the interests of Taiwan as a whole to maintain its national security, autonomy, and reduce its economic dependence and risk of economic coercion from China.

Push factors: trade war, rising costs, and political tensions

A primary reason behind the exodus of Taiwanese businesses from China is the escalating trade and tech competition between the United States and China. High tariffs have been imposed on many products made in China and disrupted global supply chains. Many Taiwanese companies, especially in the electronics sector, are suppliers or subcontractors of major US firms such as Apple, Dell, HP, and Microsoft, leaving them exposed to the effects of this trade war.

US-China technological competition has complicated the stay-or-go dilemma for Taiwanese firms. The US, Taiwan’s most important security ally, has taken actions to counter China’s rise and influence, most notably the CHIPS and Science Act – a US$52 billion industrial policy aiming to bolster supply chain resilience and revitalise American semiconductor production. 

The CHIPS Act is partly motivated by American anxiety over China’s technological development and ambitions, with Taiwanese firms caught in the middle. The policy introduces export controls preventing China from accessing certain US technologies from both American and non-American companies. Semiconductor firms like TSMC and UMC, with global clients, are trapped.

According to a survey conducted by the Center for Strategic and International Studies Trustee Chair in Chinese Business and Economics, over a quarter of surveyed Taiwanese firms with operations in China had already moved some of their production or sourcing out of China, while another third were considering doing so in the near-term. 

Foxconn, the world’s largest contract electronics manufacturer and major assembler of Apple iPhones, has shifted some production to India, with the New Delhi’s share of iPhone production forecasted to reach 19% by the end of 2023. The company recently announced its plans to invest almost US$1.6 billion into India to “meet its operational needs,” in line with its ‘China Plus One’ strategy.

This strategy focuses on avoiding over-investment in China and diversifying production capacity to other countries. Foxconn is likely to transform its new Indian production facility into a iPhone production base similar to the existing hubs in Zhengzhou and Shenzhen in China. While China will remain Foxconn’s core production location, iPhone assembly in China is declining.

Another factor pushing Taiwanese businesses to leave China are the rising costs of production, especially in labour and land. China’s economic development has led to higher wages, stricter environmental regulations, and more competition for raw materials, making it less attractive for low-cost manufacturing.

Reports on Statista by economics researcher Einar Dyvik found that manufacturing labour cost per hour in China rose over 30% in just four years, from US$4.99 in 2016 to US$6.50 in 2020 while costs in more attractive nations like Vietnam are US$2.99 in 2020. It is predictable for many Taiwanese companies, particularly those in labour-intensive and low-margin sectors like textiles, footwear, and furniture, to move to Southeast Asian countries like Vietnam, Indonesia, and Cambodia.

Political risk and uncertainty, especially considering deteriorating cross-strait relations, have also contributed to the push factors leading Taiwanese firms to exit China. Beijing has also tightened its control and scrutiny of Taiwanese businesses in China, imposing more regulations, inspections, and restrictions, and in some instances even targeting or harassing them on political grounds.

Most notable includes China’s now-lifted ban on Taiwanese products in 2019, including Kinmen Kaoliang Liquor and wax apples. Chinese authorities cited food safety and quarantine issues, but many saw this as a political move to retaliate against warming ties between Taipei and Washington. 

In 2021, Chinese authorities levied a 474 million yuan fine on subsidiaries of the Taiwanese-owned Far Eastern Group for violation of environmental protection rules in Chinese factories. This came as a shock to the Taiwanese business community in China, better known as “Taishang”, as Far Eastern Group has consistently projected its anti-Taiwanese-independence stance. Its chairman, Douglas Hsu, wrote in a letter to United Daily News, “I have always been opposed to the independence of Taiwan…like most Taiwanese, I hope cross-strait relations can be maintained at the status quo.” 

Pull factors: market size, policy incentives, and consumer demand

Despite push factors leading many Taiwanese firms to leave China, many remain on the mainland primarily due to its size and the Chinese market’s economic potential. Despite recent economic downturns, China remains the world’s second-largest economy, offering diverse demand for various products and services. 

China has been Taiwan’s top trading partner since 2005 when it consisted of 17% of Taiwan’s trade-flows. In 2022, this rose to 25% of Taiwan’s exports and 20% of its imports. Despite cross-strait tensions, China’s share in Taiwan’s trade remained stable, justified by CC Chen, Taiwan’s deputy minister for economic affairs: “From day one, when President Tsai took office, China has been our largest trading partner. We don’t want to rock the boat. We want to make it stable.”

Facilitating this trade stability are various cross-strait agreements and Chinese policy incentives aimed at attracting Taiwanese business to invest and stay in China. The Economic Cooperation Framework (ECFA) signed in 2010 between Beijing and Taipei reduced tariffs and barriers for goods and services. Chinese authorities also introduced the “26 Measures” initiative in 2019 to open its markets up to Taiwanese firms to invest and participate in a myriad of projects, ranging from 5G development to civil aviation. The initiative also allowed these companies to issue bonds and raise capital in China.

The Chinese government unveiled yet another policy attracting Taiwanese economic engagement in 2023, streamlining legal procedures for Taiwanese individuals travelling to and working in Fujian province. 10 new measures will take effect from January 2024, including granting work and travel permits to Taiwanese to stay and work in China for five years.

Broadly, these measures are intended to enhance Taiwan’s economic integration into China, and to win the hearts and minds of Taiwanese people. The various initiatives are part of Beijing’s reunification strategy, forming the “carrot” in China’s “carrot-and-stick” approach.

But Taiwan’s government, instead of pushing for decoupling from China, has pursued diversification, particularly to Southeast Asia through the New Southbound Policy that promotes trade and investment with the region. However, many Taiwanese companies continue to invest in China and deepen their market presence. TSMC, the world’s largest contract chipmaker and supplier for Apple, Huawei, and Qualcomm, has a 12-inch wafer fab in Nanjing and plans to contract another in Shanghai to meet Chinese consumer demand and maintain technological competitive advantage. Further, MediaTek, a leading Taiwanese chip designer and rival of Qualcomm, has seen its revenue and market share in China surge in recent years thanks to partnerships with Chinese smartphone makers like Xiaomi, Oppo, and Vivo.

While these Taiwanese firms deepen operations and investments in China, they also expose themselves to more risk and uncertainties, especially considering the above push factors. The political tensions, the trade and tech wars, and rising costs may undermine their profitability, competitiveness, and security in the Chinese market, and make them more vulnerable to pressure and interference by Chinese authorities or consumers.

Moreover, their reliance and exposure to the Chinese market may go against Taiwan’s national interests as it weakens Taiwan’s economic autonomy and resilience, and increases the possibility of China using economic coercion or inducement to influence Taiwan’s political choices and behaviour. Taiwanese businesses should be cautious and prudent in their decisions to stay or expand in China, and weigh costs and benefits, not only for themselves, but for Taiwan as a whole.

Moving ahead

The exodus of Taiwanese enterprises from China is likely to continue in the foreseeable future. The US-China trade war, rising costs in China, and political tensions have made the mainland a less attractive and more risky destination for Taiwanese investment. While China still offers a huge and ever-lucrative market, and has implemented various incentives to woo Taiwanese firms, these are insufficient to offset the push factors. Moreover, many Taiwanese people are wary of China’s economic integration strategy which they see as a threat to their sovereignty and identity.

It is likely that more Taiwanese companies will follow the macro-trend of diversifying their operations and or relocating from China. Taiwanese firms must adapt to the changing environment: the diversification from China is necessary and beneficial for continued commercial success and strengthening of Taiwan’s national security. 

(This piece reflects the author's opinion, and does not represent the opinion of CommonWealth Magazine.)

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About the author:

Samuel Ng, who holds a Bachelor of Laws (Hons) and Bachelor of International Business from Queensland University of Technology, is a Westpac Asian Scholar for Taiwan. He also studied Taiwanese international relations, diplomacy and political history at National Chengchi University. His research interests include cross-strait relations and East Asian politics.

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