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Cross-strait Investment

Chinese Wolves at Taiwan's Door


Chinese Wolves at Taiwan's Door


Chinese investors have invaded Taiwan's shores with amazing speed and stealth, raising the stakes, and changing the game rules. How do Taiwanese companies plan on dancing with these wolves?



Chinese Wolves at Taiwan's Door

By Sherry Lee, David Huang, Shu-ren Koo
From CommonWealth Magazine (vol. 469 )

They resemble a pack of vigorous, highly intelligent canines, quietly making their way into Taiwan before anyone notices.

Taipei 101 was their first prey.

Occupying Taiwan's Tallest Building

Over the past six months, Taipei 101 has taken on a distinctively "Chinese flavor," catering not only to wave after wave of tourists from China, but also mysterious Chinese companies. Entering the skyscraper from Xinyi Road, visitors immediately lay eyes on the directory of corporate tenants. Among those names printed in officious black against the white backboard, a surprising number originate across the Taiwan Strait.

Lenovo Group on the 19th floor, Sinochem Group on the 29th, Hanvon Technology on the 37th, Bank of Communications on the 46th, Sinosteel Taiwan Co. on the 61st. Jing Tai Development Ltd., a subsidiary of Beijing Holdings Limited (Hong Kong), moved in at the end of last year, renting a space of 826 square meters at NT$13,200 per square meter on the 70th floor.

To occupy space in Taipei's towering landmark symbolizes status and power.

Every few days, delegations of representatives from Chinese public and private companies visit Taipei 101, with many asking spokesman Michael Liu, "Is the building for sale?" in a tone suggesting that price is not an issue.

In the eyes of many Taiwanese, Chinese investors are a fire brigade, arriving to save Taiwan from its steady decline in net fixed investment, which by 2010 had fallen to 70 percent of its value in 2004.

With foreign investors flocking to China at Taiwan's expense and the government's finances getting progressively worse, local governments are trying desperately to attract investment from China.

Kinmen County Commissioner Li Wo-shi says frankly, "We hoped the central government would allocate funds to localities, but that has proved fruitless, so we've had to vie for investment on our own. Construction has already begun on a bridge connecting Kinmen's Big Island and Little Island, but Chinese investment is not allowed. That increases construction costs a lot." The benefits and temptations of China's deep pockets are not lost on Li.

Over the past 10 years, both domestic and foreign investment in Taiwan have been limited. In this mature market, market leaders have sat on their harvests like Mongolian gazelle, untroubled by foreign competitors seeking to share the spoils and leaving uneaten grass behind. But suddenly, packs of wolves have arrived, and are likely to bring major changes to Taiwan's businesses, regions, urban development, and workers' careers.

Investor Numbers Greater than They Appear

A CommonWealth Magazine team investigated areas along Taiwan's entire No. 1 North-South Highway and found Chinese-invested businesses already entrenched in the northern and central part of the country.

They have penetrated the computer and electronics, optoelectronics, banking and property markets, adding a new variable to Taiwan's competitive environment and quietly entering the lives of Taiwan's people. The online games children play, the houses and hotels we live in, our neighbors, the media we are exposed to and even our jobs – could all be under the shadow of Chinese ownership.

Since Chinese investment in Taiwan was liberalized in July 2009, the Ministry of Economic Affairs' Investment Commission has approved 120 Chinese investment projects with pledged investment of US$140 million as of the end of February.

The US$12.2 billion invested by Taiwanese businesses in China last year was nearly 100 times that amount (and cumulative Taiwanese investment there is nearly 1,000 times the amount). The numbers appear lopsided, but China's investment in Taiwan is actually far greater than the nominal figures would suggest. Through their use of a global network of subsidiaries and affiliates, Chinese enterprises have grabbed stakes in Taiwan in many different sectors, including those that have yet to be legally opened to Chinese investment.

A number of big Chinese corporate names have entered Taiwan through affiliates in third countries (taking stakes of less than 30 percent). Many made plays of this nature even before investment permit regulations for Chinese investors were issued in 2009. Lenovo invested through the PC department of IBM Netherlands. Alibaba established a presence through its Singapore subsidiary, and telecom services provider Huawei Technologies Co. set up a Taiwanese branch office through its Hong Kong subsidiary.

In addition, 35 Chinese enterprises that set up offices in Taiwan and have registered with the Department of Commerce – including Bank of Communications, Bank of China, China Merchants Bank and China Construction Bank – do not show up on the Investment Commission's list of Chinese investors in the country, even though they could soon be major players. Once they begin operations, their investments will expand significantly (the minimum operating capital for a bank branch in Taiwan is NT$250 million).

Gaining Big Shareholdings, Decision-making Power

Chinese enterprises' large capital reserves have put competitive pressure on Taiwan, which was built on the back of small- and medium-sized enterprises (SMEs). No longer are they simply issuing TDRs or buying small stakes in Taiwanese companies. Now they want to harness the strength of Taiwan's enterprises by taking them over through the acquisition of major shareholdings and decision-making power.

In carefully examining each of the entries on the Investment Commission's list of Chinese investment projects in Taiwan, CommonWealth Magazine found hidden behind the projects the true face of Chinese enterprises that have established footholds here.

Many Chinese enterprises that have invested in Taiwan are formally registered as "wholesale or retail" businesses. Among them: China Resources Microelectronics, one of China's three biggest semiconductor vendors and a subsidiary of the China Resources Group; Zhejiang Yonglida Tool CNC Machine Tools Co.; Modern Media Co., China's biggest publishing and media group; and Zong Co., the Taiwan subsidiary of China Mobile.

One of the main reasons is that Taiwan has not yet opened the telecommunications, semiconductor, machine tool, or media and publishing sectors to Chinese investment, or has placed severe restrictions on such investment. At the same time, by first registering as being in the wholesale and retail sector, the Chinese companies have given themselves time to explore the market and search for future investment targets.

7,000 Companies Ready to Enter under the Radar

At the beginning of the year, Xiamen Huatian Group president Wu Youhua was in Kinmen to set up a joint venture there called Yanming Development and Construction Ltd. It was part of his plan to invest long-term in the tourism sector of the outlying county, which lies just kilometers from Xiamen off China's southeastern coast. The site he chose for a hotel is Liaoluo Bay, where Taiwan's forces resisted and survived heavy shelling by China's People's Liberation Army 53 years ago on Aug. 23, keeping Kinmen under Taipei's control.

Wu says that China's Ministry of Commerce recently surveyed Chinese enterprises and found that as of last year, 7,000 companies expressed an interest in investing in Taiwan.     

"What is the significance of 7,000? Every company will come to invest, set up an office in Taipei, rent a floor of an office building, and hire two or three Taiwanese employees. Each company will bring in investments on the order of US$200,000. What does the number mean? It's 7,000 times US$200,000, 7,000 times three employees, 7,000 times one car. And then there's accommodation, and dining. It will be a catalyst for the entire market," says Wu, sharing his thoughts on Chinese investment in Taiwan while surrounded by a contingent of Kinmen businessmen and officials.

The Chinese rush into Taiwan has also been driven by internal pressures to upgrade operations.

"Chinese businesses along the coast are urgently trying to upgrade. With the appreciation of the Chinese renminbi, they have plenty of financial muscle to buy Taiwanese companies. It's the fastest and closest way for them to upgrade," says Yang Chia-yan, the director of the Taiwan Institute of Economic Research's Research Division VI.

As Chinese companies look outwards, Taiwan's market is not their primary interest. According to Thomas T.M. Chen of international law firm Jones Day, their main goal is to gain access to Taiwan's technology and brainpower.

For example, last year for the first time, he handled a cross-Taiwan Strait merger of publicly traded companies, following Taiwan's opening to Chinese investment.

China's biggest LCD panel maker BOE Technology Group Co., which has an 8.5-generation plant to make large-size displays, announced in March of 2010 that it was acquiring assets of Taiwan's Jean Co., Ltd., a Tatung Group subsidiary and OEM/ODM manufacturer of visual display products, for 300 million renminbi.

The package included a 100-percent stake in Jean's China subsidiary and some of its assets in Taiwan, including over 200 employees.

Although Jean is not a leading LCD display assembly plant, it has strong design and OEM capabilities and a complete stable of international clients, all elements that Chinese enterprises lack. BOE technology then applied and received approval to set up "Taiwan BOE Vision Technology Ltd.," becoming the Chinese boss of Jean's production line and its Taiwanese monitor department.

After acquiring Jean, BOE Technology gained a global outlet, instantly connecting to a huge international market.

"If it costs 12 dollars for a Chinese enterprise to home-grow something, and it only costs 10 dollars to buy it, then I'll invest in you, to help me get stronger in China's market."

What is happening is similar to the economics concept of forward integration. China is no longer satisfied with raw material and low-cost manufacturing, but is learning how to command technology, brands and markets.

Aside from directly buying technology and talent in Taiwan, Chinese enterprises also see Taiwan as their cheapest and closest internationalization testing ground. Although they are gaining experience investing abroad, the vision and attitude of Taiwan's talent, and the R&D capabilities of its wafer, IC design, LED, textile and cultural and creative sectors remain superior. The gaming industry is just one example.

In 2009, Michael Yufeng Chi, the chairman of China-based Perfect World Co., (recently renamed Gameflier International Corp.), set up "Perfect World Interactive Technology Company" in Taiwan through a Malaysian subsidiary, with Chi the lone shareholder.

Why would he want to enter Taiwan, with its small population? Some attribute it to the high per-person contribution rate of Taiwan's game players, but even more important is that Taiwan serves as the best testing ground for going international.

"In Taiwan, you can compete with international games. Taiwan's game players have experienced the challenge of games from around the world. There are products from Korea, the United States, Japan and Europe. The level of competition Chinese games face in China is not the same," says Aaron Hsu, the president of the Taiwan-based Game Industry Promotion Alliance.

Hsu believes that in Taiwan, China's game vendors can train overseas talent (in both R&D and graphics), and get experience operating outside China. Taiwan affords them the opportunity to practice all the skills they need to expand abroad.

"It's a first try, an easy try, and also a budget try. This is a low risk, friendly, Chinese-speaking market, which is extremely significant," says Hsu, who has more than 10 years of experience in the gaming industry and is now CEO of XPEC Entertainment Inc.

Becoming Embedded in Taiwan's Genes

One element of China's invasion that surprises Taiwanese people is that Chinese enterprises have shown a better understanding than their Taiwanese counterparts of how to capitalize on the "Made in Taiwan" brand.

Dalian Zhangzidao Fishery Group Co., which manages 2,000 square kilometers of aquaculture farms in the Yellow Sea off the coast of Liaoning Province, is northern China's biggest cultivator of high-end seafood such as abalone and scallops, and the world's largest supplier of shellfish. In late September 2006, the company went public in Shenzhen, its shares shooting above 100 renminbi to become the hottest stock on the market. Yet it chose to come to Taiwan to give its aquatic products added value.

Located in the damp and cold Linkou basin, Zhangzidao's Taiwan office is in a new town house in a row of well-spaced buildings. Its sign – written in the traditional Chinese characters used in Taiwan, rather than the simplified characters common in China – hangs no higher than those of its neighbors, a beauty product store and a cram school. Of its five employees, three are Taiwanese, one is from Dalian, and the other is general manager Paul Yang from Hong Kong. The office's sales target this year is NT$20 million.

Zhangzidao's strategy is to sell products that are "Made in Taiwan" as a means to promote its brand in China's southeastern coastal area.

They contracted Taoyuan County-based canned goods processor Good Plenty Industrial Co. to cook and can braised abalone at its Yangmei plant using abalone shipped in from Dalian. The canned product is then shipped back to provinces along China's southeast coast.

"This processing plant is on the same level as Ah Yat Abalone. Its technology is better than ours," Yang says, referring to one of Taiwan's most famous abalone restaurants. On the sample cans he has in his office, one can see printed on the labels in simplified Chinese characters: "Made in Taiwan, China."

Yang says products produced in Taiwan carry a lot of weight. Even though they are assessed taxes of 22 percent when sold in China, "Chinese consumers are crazy about Taiwan. The quality is good, and they are not worried if the price is a little higher."

An eight-abalone can of Zhangzidao abalone processed by Good Plenty sells for about NT$2,000 in China, about NT$450 more than similar cans processed in northern China. Yet despite the price disparity, Zhangzidao, a genuine China-based fishery company, has taken on a Taiwanese face, selling fresh, fashionable Taiwan-made products in its home market.

Breaching Taiwan's Home Front

Chinese investors have slowly but precisely entered and exploited Taiwan like a pack of prairie wolves.

Some investors have confidence in Taiwan and believe that Chinese enterprises can give Taiwan a shot in the arm.

Peter Liu, the chairman and co-founder of WI Harper Group, one of the first venture capital franchises to enter China, sees much of the world's investment moving into China and Taiwan's capital markets gradually becoming marginalized as a result. Only by linking up with China, he argues, can Taiwan's businesses be revitalized and job opportunities created.

Yang Chia-yan of the Taiwan Institute of Economic Research goes a step further, contending that Taiwan and China must seamlessly align in order to attract foreign capital investment in Taiwan, thus giving the island access to advanced technology. "This is Taiwan's key to survival," he says.

But if you ask the heads of Taiwanese companies who have done business with Chinese enterprises for a long time, they believe that Taiwan has not yet woken up to the threat posed by the arrival of these wily wolves. One Taiwanese entrepreneur who operates a business with NT$10 billion in sales in Taiwan and China says privately that Chinese companies are staking out land and buying up things everywhere with the avariciousness of a large conglomerate, bringing turmoil to other people's markets.

"For the whole world, they're all like wolves," the entrepreneur says.

Over the past 10 years, Taiwan's businesses have seen China as the battlefield, sending generals to the mainland to fight and then having them return to Taiwan to rest. But now, as China's enterprises enter Taiwan, a new competitive battleground has emerged on Taiwanese doorsteps, obliterating the concept of a home front.

The alarm sirens are already sounding at home. Taiwan's domestic enterprises must become more vigilant, because they will confront greater competitive pressures than ever before.

Translated from the Chinese by Luke Sabatier