More Taiwanese firms in China heading home

More Taiwanese firms in China heading home

A growing wave of Taiwanese companies that rode the tide of cheap manufacturing in China are returning home. But they play it safe by relocating partially as costs rise in China. -ST
Lee Seok Hwai
Wed, Jul 10, 2013
The Straits Times

TAIPEI – A growing wave of Taiwanese companies that rode the tide of cheap manufacturing in China over the last three decades are returning home as costs on the mainland creep up. But they are hedging their bets by keeping most of their existing operations in China and relocating only partially or investing in new facilities – focused on research and development (R&D) or more sophisticated manufacturing – back in Taiwan, where wages have remained stagnant for the past decade because of an underperforming economy.This way, say company executives and analysts, the Taiwanese businesses or Taishang can shift towards higher-end manufacturing and exports. At the same time, they remain entrenched in a vast market where consumption is slowly rising.

Among the “returnees” is Hotron Precision Electronic Industrial, which makes wires and cables for computers and other consumer electronic products. It hires around 1,500 workers at its two plants on China’s east coast – one in Suzhou, Jiangsu province, and the other in Fuzhou, Fujian province – and registered NT$2 billion (S$85 million) in turnover last year.

The firm, which was founded in 1991 and moved to China just a few years later, plans to relocate the front-end, automated part of its operations to central or southern Taiwan. It proposes to build a plant worth some NT$600 million and hire about 250 workers.

“We’ve been thinking about this for the past two or three years,” the company’s president, Mr Lu I-hsuan, told The Straits Times. “Costs in China’s coastal provinces have been rising too fast and will keep going up in the foreseeable future.”

Mr Lu reckoned that basic pay has been going up by 20 per cent per year since 2008. Moving to China’s less-developed west – as some Taiwanese manufacturers like Foxconn have done – would incur higher transport costs.

“Overall, the costs wouldn’t be much lower than if we move back to Taiwan,” said Mr Lu, adding that the firm also dismissed other options like Brazil and South-east Asia, wary of political instability and that workers there would not be as hardworking as Taiwanese.

Between 2007 and last year, overseasbased Taiwanese companies like Hotron pledged a total investment of NT$210.3 billion in Taiwan, rising from NT$14 billion in 2007 to NT$51.9 billion last year. More than 70 per cent of this was from mainland- based firms, according to the Ministry of Economic Affairs and analysts.

And an eight-month-old government scheme offering higher foreign labour quota, special loans and assistance to lure large-scale Taishang home has netted promised investments of NT$182.6 billion and about 28,000 jobs.

The figures do not include smaller investments that the government does not track or those by firms listed on Taiwan’s bourse but make their wares in China.

Dr Liu Meng-chun, director of the centre for economic forecasting at the Chung-hua Institute for Economic Research in Taipei, said mainland-based Taishang, besides wrangling with higher production costs, have to contend with a rising yuan which makes their exports more expensive.

Moving home will help them build cross-strait supply chains and reduce their exposure to rising costs. Having part of their operations in Taiwan will also improve the quality and image of their products for exports both internationally and to China.

But Dr Liu noted: “The growth of consumption in China is an opportunity for Taishang.”

He added, however, that they need to evolve.

“By partially returning to Taiwan, they can add as much as 10 per cent to the value of their exports through better quality, packaging and so on. That amount is a big deal for industries like electronics, where the profit margin is only 3 per cent,” he said.

“That would help them open up higher- end overseas markets and increase their appeal to mainland consumers as well.”

That is the main advantage of moving back to the island for badminton racketmaker Flex Pro. It plans to bring its R&D and some contract-manufacturing operations back to Taiwan after having been away for 20 years.

Manager Chen Feng-hsing said the main advantage of moving home is the better quality and image of “Made in Taiwan” products, which command a 20 per cent price premium over “Made in China” ones for Flex Pro.

Flex Pro – the eponymous brand that the company bought from a British firm – is the No. 3 badminton brand in China, with its rackets selling for as much as NT$6,000 or more. It also exports to Malaysia, South Korea, Vietnam and Singapore.

The company opened a flagship store in the central Taiwanese city of Taichung in January and hopes to have 30 shops eventually. It plans to increase its staff strength in Taiwan from six to 100.

If Taishang did not come back, they could be “doomed”, said Dr Liu. That would be bad news to China too, as it would mean massive layoffs.

Indeed, that is what has happened to many Taishang in the traditional manufacturing industry, making shoes and textiles in factories they built in southern China in the era of cheap labour and land.

About one-third of these factories have closed down, while another 30 per cent are struggling, according to a report by Taiwan’s National Security Bureau last year, three decades after Taishang began heading to the mainland in search of a pot of gold.