Taiwan’s Prodigal Companies Come Home as China Labor Costs Rise

Taiwan’s Prodigal Companies Come Home as China Labor Costs Rise

For eight years, the former Taroko Textile Corp. factory in Hsinchu County, Taiwan, has been empty, a victim of the migration of manufacturing to the mainland. Now, as China’s supply of cheap labor wanes, work is returning.

ITEQ Corp. (6213), which makes materials electronics companies need to build circuit boards, is installing equipment as part of a NT$2 billion ($66 million) refurbishment to begin production by the end of 2014, said Eric Liu, head of investor relations. It will be the company’s first new factory in Taiwan since 1998. ITEQ began moving work to Guangdong in southern China in 2002.“People went to China because the costs were lower,” said Liu. “But labor costs there have been rising over the past few years. We’re returning to Taiwan also because of the good supply of skilled workers.”

ITEQ, bicycle maker Giant Manufacturing Co. (9921) and contact-lens maker Ginko International Co. (8406) are among companies tapping Taiwan’s pool of engineering talent as China’s labor supply tightens and rising costs force manufacturers to make more sophisticated products. They are being encouraged by Taiwanese President Ma Ying-jeou, who has introduced tax cuts and other incentives in an effort to boost wages as his popularity slumps.

“The move to make it easier and attractive for overseas Taiwan companies, especially those with higher value added, is a positive step that will ensure the economy stays on a sustainable growth path,” said Tony Phoo, a Taipei-based economist at Standard Chartered Plc. Bringing factories home is “one way to kick-start the economy,” he said.

Investment Rising

Private investment will reach a record NT$2.3 trillion this year, up from NT$1.6 trillion in 2009, even as a global slowdown hurts exports, the Statistics Bureau estimates. Taiwan expects to lure about $5 billion in 2013 from companies moving back. Last year, Taiwanese government-approved investment in China fell to $12.8 billion, from $14.4 billion in 2011.

Ma has simplified investment procedures, pursued trade agreements with the U.S. and Asia and relaxed immigration rules. He has also boosted ties with the mainland by allowing domestic banks to conduct business in yuan and agreeing to lower tariffs on items from auto parts to textiles.

The president is trying to stem a slump in popular support to 14 percent in May, a year into his second and final term. Growth slowed in 2012 to 1.32 percent, while average wages adjusted for inflation fell in the first four months of this year to a four-year low.

Tax Incentive

In the seven months since the president’s tax and labor measures took effect, at least 34 companies including camera-lens maker Largan Precision Co. (2008), and tire producer Kenda Rubber Industrial Co. (2106) have filed proposals to invest NT$182.6 billion on the island. That’s more than triple the amount for 2011, the Economic Affairs Ministry said.

The shift shows how relations between Taiwan and China have changed. During Taiwan’s era of martial law from 1949 to 1987, executives could be tried for treason for investing in China.

The island, once the source of Mattel Inc.’s Barbie dolls and Nike Inc. sports shoes, has been ruled separately since Chiang Kai-shek’s Kuomintang nationalists fled in 1949 after a civil war against Mao Zedong’s Communist Party, which still considers Taiwan a breakaway province.

Since 1991, Taiwanese companies including Foxconn Technology Group and Want Want China Holdings Ltd. built factories on the mainland and hired at least seven million workers there, according to Taiwan’s Investment Commission. Taroko Textile makes synthetic fabric in Shandong province, according to the company’s website.

Changing Times

“Times have changed from 20-30 years ago when manufacturers left Taiwan,” said Wang Wen Yuen, deputy chairman of Taipei-based Chinese National Federation of Industries. “With the worsening global economy, we want the competitive companies to come back.”

ITEQ, Taiwan’s biggest maker of copper-clad laminates for printed circuit boards after Nan Ya Plastics Corp. (1303), plans to double the proportion of capacity in Taiwan to 20 percent with the new plant, said Liu.

Last August, Ginko started up a new factory in Central Taiwan, and will add three more production lines this year. The company entered the mainland in 1995 through acquisitions and built up China’s most popular brand of contact lens, Hydron.

“We’re hoping to sell Taiwan-made products to China,” said spokeswoman Chiaoju Huang.

Taiwan’s real average monthly wage for the services and industrial companies was equivalent to about $1,500 in 2012, 3.4 percent lower than in 2000, according to the Council of Labor Affairs. In China, average wages rose to about $577 a month in 2011, more than four times the level in 2000, data from the country’s National Bureau of Statistics show.

Pay Gap

Taiwan’s wages are too high to compete with countries such as Cambodia and Vietnam for lower-skilled work.

“Many manufacturers are still looking for low-cost production bases to expand in, rather than considering Taiwan as the first destination.” said Raymond Yeung, Hong Kong-based senior economist at Australia & New Zealand Banking Group Ltd.

In Vietnam, the average worker earns about $206 a month, and in Bangladesh about $39, according to government data.

“Our economy is in a bottleneck and hasn’t evolved,” said Wang at the National Federation of Industries. “We’re more interested in the value-added part of the supply chain, the R&D side, for which we can provide skilled labor.”

Ma’s policies may take years to show their full effect as factories are constructed and equipped. Even if successful, they may only boost growth by 0.1 percentage point this year, according to Barclays Plc. Taiwan forecast gross domestic product will expand 2.4 percent in 2013.

The government estimates returning companies will bring back more than 28,000 jobs over three years.

Giant, which began investing in China 20 years ago, is building a new headquarters and research and development center in Taichung, central Taiwan. When it’s completed in three years, the company will increase production of its top-end models at its factory, said Chief Executive Officer Antony Lo.

“It’s not economical any more to make high-end bicycles in Kunshan” in China’s Jiangsu province, Lo said in an interview in Taipei. “Taiwan has talent, artisans with good skills. It’s hard to find people in China.”

To contact the reporters on this story: Yu-Huay Sun in Taipei at ysun7@bloomberg.net; Sharon Chen in Singapore at schen462@bloomberg.net