Download Taiwan: diversifying into Southeast Asia

Taiwan: diversifying into Southeast Asia
21 October 2016
Economics
Taiwan: diversifying into Southeast Asia
DBS Group Research
21 October 2016
• Taiwan’s direct investment in the ASEAN-6 has doubled over the past
five years and has plenty of room to grow further
• China’s slowdown, rebalancing and rising wages are prompting Taiwanese firms to adjust overseas investment strategies
• ASEAN markets are attractive, thanks to strong growth, low-cost labor, and ongoing reforms and economic integration
• Taiwanese firms are already motivated to invest overseas. This is
bolstered by the government’s “New Southbound Policy” aimed at
strengthening ties with South/Southeast Asia
• Singapore and Vietnam are the most favorite markets for Taiwanese
investors so far. Indonesia and the Philippines have the potential to
attract more Taiwanese investors longer-term
Taiwanese firms are diversifying investment into Southeast Asia. Outward direct investment (ODI) in ASEAN-6 countries rose to USD 2.7bn per year in 201115, more than double the USD 1.2bn invested annually in 2006-10 (Chart 1).
Fifteen percent of all Taiwanese ODI now goes to the ASEAN-6, up from 6%
in 2006-10. By contrast, the share of mainland China in Taiwan’s ODI appears
to have peaked. It has fallen persistently over the past five years, from 84% in
2010 to 51% in 2015 (Chart 2).
The China factor
The changes in China’s macroeconomic environment in the past few years help
explain why Taiwanese firms have adjusted their ODI portfolios.
Chart 1: Taiwan's ODI in ASEAN-6
Chart 2: Taiwan's total ODI, by market
Annual flows, USD bn
100%
China
6
ASEAN-6
80%
5
4
Middle &
South
America
US
60%
3
40%
Europe
2
Japan
20%
1
0
1980
1985
1990
1995
2000
2005
2010
2015
0%
2006
Others
2008
2010
2012
2014
Ma Tieying • (65) 6878-2408 • [email protected]
Refer to important disclosures at the end of this report.
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Taiwan: diversifying into Southeast Asia
21 October 2016
Chart 4: China: GDP by industry
Chart 3: Asia: GDP growth
% share
% YoY
16
CN
MY
TH
14
ID
PH
VN
12
52
48
44
10
8
40
6
36
4
Manufacturing
2
32
0
Services
28
-2
2006
2008
2010
2012
2014
2016F
2000
2005
2010
2015
1) China’s growth is slowing. In addition to the short-term cyclical headwinds
from deleveraging, long-term structural factors such as population aging and
slowing productivity are also weighing on China’s growth outlook. GDP growth
in China has fallen to the 7% level since 2012 and is expected to slide further
to 6.5% this and next year, converging with that in Vietnam and Philippines
(Chart 3). From the perspective of economic growth/investment returns, the
attraction of China has declined and that of SE Asian countries has increased
on the relative basis.
2) China’s economic rebalancing. The Chinese authorities have been striving to
cut the overcapacity in the traditional manufacturing industry, and on the other hand, foster the growth of the services sectors to develop the so-called “new
economy”. Manufacturing as a percentage of China’s GDP has fallen to 34% in
2015 from 40% in 2010, while services have risen to 50% from 44% (Chart 4).
In order to adapt to these structural changes, Taiwanese firms need to redefine
their investment strategy in the Chinese market – focusing more on the services
sectors and on the other hand, reducing the capital-intensive manufacturing
investment (diverting it to other parts of the region).
3) Labor costs in China continue to rise. Due to the still-strong economic expansion and the shortage of workforce supply, labor costs in China have continued
to rise rapidly. As a proxy for average wages, per capita income in China is
now approximately US$ 8,000, 2-4 times of that of Vietnam, Philippines and
Indonesia (US$ 2,000-3,500). Even in China’s less-developed inland provinces
like Sichuan and Henan, per capita incomes have risen to about US$ 6000, well
above those in most SE Asian countries (Chart 5, next page). The Taiwanese
firms targeting at domestic sales in the Chinese market could pass on the costs
as higher wages also mean stronger purchasing power of Chinese consumers.
But the exports-oriented Taiwanese firms based on the mainland are suffering
from the cost pressures. They would like to explore lower-cost production bases
elsewhere in the region.
The Southeast Asia factor
As a result of the structural developments in the Chinese economy, the advantages of SE Asia in terms of GDP growth, wage costs and demographics have
become relatively more attractive. Meanwhile, SE Asian countries have made
advances of their own:
1) The investment environment in SE Asia continues to improve. Poor infrastructures, weak regulatory/legal frameworks and political uncertainty have long
been important barriers hindering foreign investment in this region. The situation is improving, albeit slowly. Indonesia, for instance, has received upgrades
in the World Bank’s ease of doing business survey in recent years thanks to
2
Taiwan: diversifying into Southeast Asia
21 October 2016
Chart 5: Asia: Per capita GDP
USD
9,000
CN
ID
VN
CN: Henan
8,000
7,000
TH
PH
CN: Sichuan
6,000
5,000
4,000
3,000
2,000
1,000
0
2006
2008
2010
2012
2014
regulatory reforms in the areas of starting businesses, taxation and obtaining
credit (Chart 6). The FDI-to-GDP ratio in Indonesia has also been rising (Chart
7). A friendlier investment environment and a rising number of successful FDI
examples could provide more confidence for Taiwanese firms to enter the SE
Asian market.
2) Economic integration is proceeding in SE Asia. The market size of SE Asia
remains small compared to that of China. ASEAN GDP stood at USD 2.6trn in
2015, only 1/4 that of China’s. The total population in ASEAN, at 640mn, is
about half of China’s.
That said, regional economic integration could allow foreign firms invested in
ASEAN to tap a deeper and broader market. The ASEAN Economic Community
has been established late last year. Aiming to transform the region into a single
market, the AEC will promote free movement of goods, services, investment
and skilled labor across the member countries.
The free trade connections between ASEAN and other major economies are
also expanding. The ASEAN so far has forged FTAs / quasi-FTAs with Japan,
Korea, China, India, Australia and New Zealand. Countries including Singapore,
Malaysia, Vietnam and Brunei have also joined the Trans-Pacific Partnership.
Chart 6: Ease of doing business in Asia
Chart 7: Indonesia: FDI to GDP ratio
Global rank
%
0
20
40
60
80
100
120
4
SG
MY
2016
3
2015
TH
2
CN
VN
1
PH
ID
0
2001
2005
2009
2013
3
Taiwan: diversifying into Southeast Asia
21 October 2016
Extensive FTA networks could allow foreign investors based in ASEAN to access
greater opportunities. This should be especially attractive to Taiwanese firms,
given that Taiwan doesn’t have FTAs with most countries in the world.
Taiwan’s domestic factors
Domestically, there are also push factors at play, encouraging Taiwanese firms
to explore investment opportunties abroad.
1) Demographics. Taiwan’s working age population will start contracting from
this year. Domestic growth is likely to slow and labor costs/disputes may increase. Against such a backdrop, it is reasonable for Taiwanese firms to expand
investment in overseas emerging markets so as to maintain earnings and control costs [1]. Total ODI as a percentage of Taiwan’s GDP has been rising as a
trend over the past decades (Chart 8). This trend is expected to remain steady
in the coming years.
2) Government policies are supportive. President Tsai Ing-wen has introduced
a “New Southbound Policy”, which aims to strengthen links with Southeast/
South Asia and reduce reliance on China. A national trade and investment company will be created to help smaller firms bid on investment projects in overseas markets.
Taiwan can also draw on experience from Japan and other developed countries
that already have significant presence in SE Asia. For instance, it may provide
more information and consulting services to help companies understand the
economic/political trends in SE Asian markets. The government may also offer
financial support in the form of low-interest loans, guarantees and insurance
[2].
Formulating rules with the investment destination countries on market access
and investor protection is important too. Korea’s investment in SE Asia took off
only after the Korea-ASEAN FTA was signed in 2006. In this regard, Taiwan’s
government has pledged to seal more FTAs with regional partners including
ASEAN.
The outlook ahead
Considering the low base, there is much scope for Taiwan to increase direct
investment in SE Asia. On current trends, Taiwan’s ODI in the ASEAN-6 will average about USD 6bn per year during the 2016-2020 period. ASEAN’s share in
Taiwan’s total ODI will rise further to 24%.
Chart 8: Taiwan: ODI to GDP ratio
Chart 9: Taiwan's ODI in ASEAN, by market
%
USD bn
4.5
5
4.0
3.5
4
SG
MY
TH
ID
PH
VN
3.0
3
2.5
2.0
2
1.5
1.0
1
0.5
0.0
0
1990
1995
2000
2005
2010
2015
2000
2005
2010
2015
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Taiwan: diversifying into Southeast Asia
21 October 2016
Singapore and Vietnam are the most favorite markets for Taiwanese investors
so far (Chart 9). Singapore is often seen as a gateway to the entire ASEAN
market, thanks to its comprehensive FTA networks, pivotal geographic location
and easy environment for doing business. Singapore is also the only country in
this region that has signed a bilateral FTA with Taiwan. If history is any guide,
Taiwanese firms investing in ASEAN markets are likely to choose Singapore to
locate regional hubs and headquarters.
Vietnam is attractive in terms of its strong growth and cheap labor costs. Taiwan has been among the top 5 FDI investors in Vietnam. The establishment of
supply chains, especially in the sophisticated electronics sector, should create
the synergy effects and encourage more Taiwanese firms to invest in Vietnam.
Indonesia and Philippines also have strong economic growth and low-cost labor force. Their markets / populations are larger than Vietnam’s, which should
be attractive to Taiwan’s consumer goods and services producers. But the business environment there is different and could prove to be a barrier to Taiwanese firms that don’t yet have SE Asian experience. For these companies, government assistance will be needed to smooth entry and to build lasting businesses
beneficial to both sides of the investment equation.
Notes:
[1] Taiwan: 5 things you need to know about the aging population, August 2016
[2] Japan’s “go global” experience (2), July 2015
Japan: rising direct investment in Southeast Asia, March 2016
Sources:
All data are sourced from CEIC, Bloomberg, World Bank, National Bureau of Statistics (China), National Development Council (Taiwan); Transformations and forecasts
are DBS Group Research.
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Taiwan: diversifying into Southeast Asia
21 October 2016
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