Thursday, May 16, 2019

Just when the outside world expected the U.S.-China trade war to come to a temporary armistice, a sudden deterioration of the trade friction between the two countries occurred. This not only affects Chinese companies but also many foreign investors investing in Mainland China, including those in the manufacturing and service industries. The "hot money" investing in financial markets can flow out easily, though the same cannot be said for "cold money" that is usually used for greenfield investments. However, when the outflow of such "cold money" finally happens, there will be huge impact on China's overall industrial chain.

The Taiwanese periodical Business Weekly has recently reported on the plans of many Taiwan-funded enterprises after the raise of tariffs by the United States. Although Taiwan's economic development has not been as rapid as Mainland China in recent years, Taiwan-funded enterprises still occupy a very large weightage in the current makeup of foreign investment structure. In addition to the well-known Foxconn, the food industry leader Want Want Group, as well as other groups like Taiwan Semiconductor Manufacturing Company (TSMC), and Asustek Computer all have a place in foreign investment in the Mainland. Statistics show that among the 35,662 foreign-invested enterprises in the Mainland in 2017, Taiwan-funded enterprises accounted for 3,464, second only to 18,066 enterprises from Hong Kong, far higher than the 1,346 American enterprises and 590 Japanese enterprises. In some cities in Mainland China, such as Dongguan, Kunshan, and Xiamen, Taiwan-funded enterprises consist a huge percentage of the business presence. Therefore, observing the transformation of Taiwan-funded companies' investment behavior and their investment strategies in the Mainland will allow us to analyze the impact of the withdrawal of foreign-funded enterprises from the Mainland.

At present, there are three main types of Taiwan-funded enterprises investing in the Mainland, namely hand tool, electronic technology and textile industries. For the hand tool industry, which has an average profit of only 10%, the 25% tariff makes doing business unbearable. An inquiry by the Business Weekly's revealed that a hand tool company with an annual income of several billion Taiwan dollars said that the most direct impact is that the falling of the RMB exchange rate is the changes in income prices. In addition, industry analysts say that about 70% of the world's hand tools are made China, with a profit margin of about 20%. When the tariff rate is about 10%, it could still be tolerated, but if the tariff rises 25%, many companies will be unable to cope and collapse, which will lead to a major reshuffle in the industry. While relocating to Southeast Asia is a possible strategy, it brings about huge construction and equipment investment costs with it. Furthermore, in relocating to Southeast Asia, manufacturers must face difficulties in transferring talent, technology and production capacity to their new locations. In addition to that, they have to make sure there would be no mistakes in the transfer of customers' orders. Some Taiwan-funded enterprises stated that many companies are considering if they should spend the money they earned in the past decade to invest in Southeast Asia and start everything all over again. Most foreign-funded enterprises are still cautious in this respect.

Compared with the cautious attitude of the hand tool manufacturing industry, the electronic technology industry is much bolder in making moves to relocate from Mainland China. Analysis reveals that the electronics industry has the highest dependence on China's exports to the United States, reaching levels of up to 9.77%. The data also shows that the gross profit margin of most Taiwanese-owned electronics companies in the Mainland is between 15% and 20%. Sercomm Corporation, a company mainly focusing on telecom equipment products, said that the first wave of tariffs has caused their EPS to fall by nearly 40% last year. The company is currently considering relocating its factory back to Taiwan. In addition, according to Taiwan's Institute for Information Industry, among the companies seriously affected in China, Foxconn is also currently planning to set up a new factory in Kaohsiung, Taiwan. Pegatron, a Fortune 500 company, plans to increase production capacity in the Czech Republic, Mexico and Taiwan in the short term, and open new plants in Vietnam and India in the long run. Accton Technology, which has an annual revenue of more than NT$ 40 billion, will transfer its Mainland production capacity, which accounts for 35% of its revenue, back to Taiwan. Meanwhile, Wistron NeWeb Corporation has also invested more than RMB 400 million in Taiwan and Vietnam. For the electronics industry, this trade conflict provides them a window of opportunity for them to carry out a long-term transfer of their factories.

Compared with the previous two industries, the textile industry already has a pretty scattered production base. Hence, the impact of the U.S.-China trade war will be in a form that is different from what the other two industries are experiencing. It is no news that the textile industry too has been subject to high tariffs. For the average business owners, the concern is about seeking opportunities in the U.S.-China trade war. Taiwanese companies generally predict that companies with a gross margin of 10% will buckle under the pressures of a high tariff of 25%. However, according to Business Weekly's survey of Taiwanese textile companies in the Mainland, apparels are a form of daily necessity. American ready-to-wear apparel requires an international division of labor; hence it is impossible for the industry to be independent of the international supply chain. An entrepreneur interviewed believe that the U.S.-China trade war is not a zero-sum game that will transfer production capacity from China to Southeast Asia. Instead, under the changing situation, the production areas will complement each other. The entrepreneur also pointed out that China's huge domestic demand market can substitute for the loss of products sold to the United States, and the production from other countries can work to meet the needs of the U.S. market instead, thereby bringing a maximization of benefits for the companies. The textile industry, which has already been decentralized in its production, through strategic adjustment, can cope with the impact of trade tariffs even without relocating from China.

Judging from the coping strategies of various industries, some enterprises are uncertain about their transfer costs. This has little impact on Mainland Chinese enterprises. Compared with Southeast Asian countries, the Mainland has accumulated manufacturing advantages and customer resources. Even with higher tariffs imposed by the United States, such enterprises have the option of not relocating. However, in the long run, if the cost of relocation is reduced, then a structural transfer is still inevitable. That being said, the electronics manufacturing industry has a stronger will to transfer to other countries. Within the short term, this will definitely impact the supply chain, and to a certain extent it will even cause some damage to enterprises. Therefore, it is necessary for Mainland Chinese enterprises to quickly formulate coping strategies and seek for alternatives upstream or downstream. In addition, solving the issue of having redundant manpower after the factory decommissions is also a matter of concern. Some industries will continue to maintain their existing structure but direct their products to China's domestic market. For Chinese enterprises, foreign products entering the market will undoubtedly intensify the competition within China. Hence, they should improve the quality of their products in preparation of such a challenge.

Final Analysis Conclusion:
From the case analysis of Taiwan-funded enterprises, we can see that there are three types of coping strategies adopted by foreign-funded enterprises in dealing with the impact of trade conflicts: remaining in their original position, accelerating the transfer process and transferring exports to products in the domestic market. These three ways have their different effects on the Chinese industrial chain. In the case of accelerating transfer of foreign capital, Chinese enterprises should seek alternative manufacturers as soon as possible. If the target market of foreign capital turns to Mainland China, Chinese enterprises must strengthen the competitiveness of their products in order to cope with a series of aftershocks caused by the increase of U.S. tariffs.

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