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Private-Sector Investment

Taiwan's Service Sector Surge


Taiwan's Service Sector Surge

Source:Chieh-Ying Chiu

In the wake of the financial meltdown, Europe and America are still in the doldrums, but Taiwan's private-sector investment surged 32 percent in 2010, marking a 45-year high, the second highest in history in terms of absolute value. Will 2011 be just as good?



Taiwan's Service Sector Surge

By Jerry Lai
From CommonWealth Magazine (vol. 463 )

Last year, CommonWealth Magazine accurately forecast that Taiwanese investment in 2010 would reach levels not seen in nearly 10 years, with the manufacturing sector leading the way, as well as massive investments from government and a fully recovered service industry. Following a wild year in which private-sector investment surged NT$560 billion over the previous year, a 32 percent rise, the Directorate General of Budget, Accounting and Statistics (DGBAS) predicts that private sector investment will take something of a breather in 2011, to post a slight decline of 2.8 percent from 2010.

Although the spread between the actual numbers for the two years is not so great, in substance the difference is enormous. In 2011 private-sector investment in the manufacturing and service industries will resemble two cars on a Ferris Wheel, following one after the other: Investment in the manufacturing sector, having peaked last year, is now in decline, while and service sector investment, following behind, is approaching its peak.

Unraveling the private-sector investment numbers from the past year, the NT$2.2 trillion total was divided between small-scale private-sector investments and major investment projects under the supervision of the Ministry of Economic Affairs (MOEA) – each accounting for roughly half the total.

SinoPac Securities lead economist Huang Yin-chi admits that the development of 2010 which surprised him the most was the rapid growth in private-sector investment. Previously, economists formulating Taiwan investment forecasts figured they needed only add up capital outlays by Taiwan Semiconductor Manufacturing Corp., AU Optronics Corp. and other major Taiwanese concerns to arrive at a rough estimate, but times have changed.

For 2011 the MOEA has on hand just NT$420 billion in major investment project proposals (see Table) , accounting for less than 20 percent of the total DGBAS private-sector investment forecast. In other words, small-scale investments, those restaurants, boutiques and workshops scattered along the periphery of our lives, are set to get a greater share of the financial resources, get better and better and ultimately prop up half the economy.

The mood has already infected the captains of the retail chain and franchising sector.

In attendance at this past year's annual meeting of the Association of Service Industries, Taiwan, were not only the requisite industry bigwigs, but also a number of low-key players, including Barings Asset Management, BNP Paribas, Nomura Securities and about a dozen other venture capital and privately offered funds.

85oC Spurs Imitators across the Industry

They're now taking a broad look around at whoever is willing to accept their financing for joint expansion and an eventual foray into China. Among them, Barings alone has some US$4.5 billion in capital that could be pumped into Taiwan at a minimum threshold of US$50 million per investment project.

When they see how well 85oC Cafes have fared after expanding their Taiwanese operations, developing outlets in China and raising funds by listing on the stock market, more than a few retail chain entrepreneurs have privately expressed regret that their past expansion plans were insufficiently aggressive.

As Association of Service Industries, Taiwan secretary general Lee Pei-fen observes, numerous Taiwanese retail chains had previously refused overtures from foreign investors on the grounds that their present situations had been good, they were not lacking funds and were in no hurry to expand.

Prodded by the success of 85oC, their attitudes have now changed tremendously.

For instance, number-three Taiwanese tea beverage retailer COCO was the quickest off the mark and into China and now operates more than 300 outlets across China, surpassing its 200-plus outlet Taiwanese operation. The top two, Ching Shin and Ya-Lan, have resolved not to be left behind and are set for full-bore cross-strait market development to win back market share.

For 2011, Barings Asian investment consultant Wang Gui-ching will be seeking out opportunities in Taiwan's service and agricultural sectors. For example, Wang has been making numerous trips to aquaculture operations in Pingdong County to check out investments in the high-end niche of grouper husbandry, purchasing Taiwanese immunization technology in hopes of using international capital and Taiwanese management skills and technology to break into the Chinese market.

In Wang's estimation, the core personnel for this wave of service industry investment will still be recruited in Taiwan, particularly sales and financial personnel, which will drive up the going rate for Taiwanese talent.

ECFA Drives Investments

Council for Economic Planning and Development chairperson Christina Liu continually emphasizes that for the coming year, "Taiwan has changed." The biggest difference is the implementation of the Economic Cooperation Framework Agreement (ECFA) with China.

If cross-strait negotiations proceed smoothly, the world's top two automakers, Germany's Volkswagen and Japan's Toyota, may set up plants in Taiwan in 2011. In particular, Toyota, under pressure from the appreciation of the Japanese yen, plans to relocate one-third of production capacity offshore. If Taiwan can negotiate zero import tariffs on finished autos, it would mark a return of manufacturing to the island.

With zero import duties taking effect for 50 automotive components beginning January 1, Straits Exchange Foundation chairman P.K. Chiang has seen at least one Taiwanese business move its inspection plant from Shanghai to Keelung, where the company's goods will be repackaged. Taiwanese businesses calculate that by repackaging with the "Made in Taiwan" label, they can raise their wholesale prices by up to 20 percent.

There's a chance that the reflux of manufacturing back into Taiwan may gain steam in the coming year. Far Eastern Group subsidiaries Oriental Petrochemical (Shanghai) Corp. and Far Eastern New Century have both made major purchases of land and plant facilities on the island.

ECFA is also bringing Chinese investment capital into Taiwan. As of last November, Chinese investment capital funded 101 investment projects in Taiwan valued at NT$4 billion. In the coming year, even bigger players, in the banking, restaurant and other sectors, are poised to move in.

High-tech industries, the major driver of Taiwan's past economic growth, are likely to have a rougher go of it in the coming year.

"The manufacturing sector is still expanding but has now slowed," says Chen Miao, director of the Survey and Statistics Center at the Taiwan Institute for Economic Research (TIER), elucidating that Taiwan's era of rapid manufacturing sector growth is nearing an end. According to TIER's own indicators for industry vitality, electronic components and display screens will lead that decline.

The primary reason export industries will be unable to sustain major expansion in production is that global demand has not yet returned to 2008 levels, and can only be expected to do so later in 2011 at the earliest. Therefore, too much expansion at the present time would be ill-advised, says Yang Jia-yan, director of TIER's Research Division Six.

The most worrisome matter in this area is with DRAM makers.

Wang Zhe-hong, lead Taiwanese memory chip industry analyst for Gartner Inc., estimates that global memory chip production value will decline 15 percent in 2011 – a minor downturn in the overall industry cycle.

But for Taiwanese manufacturers with their lower market share, it constitutes a serious injury. Wang estimates that total revenue at Taiwanese memory chipmakers will decline by 20 percent, and market prices will lag behind production costs. Taiwanese chipmakers' technology trails that of South Korean competitors, and their production costs are higher, yet market prices for their goods are lower. Consequently, 2011 will be an uphill battle for them. Even relatively healthier Taiwanese chipmakers like Rexchip Electronics Corp. have announced a halt to production expansion.

Global demand, however, has shifted from PCs to communications and that means demand for products from contract makers of silicon wafers will not weaken.

At the end of 2010 as the exchange rate for the Taiwan dollar reached a 13-year high, Taiwan Semiconductor Manufacturing Corp. shares surged to an eight-year high. Gartner forecasts that TSMC capital outlays for the coming year will be US$5.9 billion, about the same as in 2010. But under the threat of pursuing competitors, TSMC chief Morris Chang has revealed that company investments over the next year will by no means lag behind those of 2010.

As for investment in the flat panel display sector, AU Optronics recently sealed a syndicated loan arrangement for NT$59.5 billion. But much of those funds have been earmarked for investment in a G7.5 fab in Kunshan, China. AUO's second G8.5 production line in the Central Taiwan Science Park at Houli will begin mass production later this year.

TIER vice president Kung Ming-hsin expects that Chimei, despite its recent 300 million euro fine levied by the European Union, will next year submit plans for a G8.5 fab project in Taiwan to ensure that approval for Terry Gou's plans for the company in China goes smoothly during review by the MOEA Investment Commission.

But Kung predicts that the expansion within the display industry this year will mask a ticking time bomb of excess supply. Overall, TIER's Yang Chia-yan predicts, "There will be casualties," amid a big year of mergers and acquisitions in the manufacturing sector. The kind of business failures and mergers that would have likely taken place without emergency intervention during the financial crisis may yet explode in the coming year.

Translated from the Chinese by Brian Kennedy