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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. 1 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 4 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. 5 Taiwan: diversifying into Southeast Asia 21 October 2016 Recent Research CN: cyclical bottom 19 Oct 16 JP: will the helicopters fly? 20 Jul 16 IN: assessing current account improvement 18 Oct 16 ID rates: steepening risk 18 Jul 16 IN: more consumption-led growth 13 Jul 16 PHgov bonds: expensive (still) 11 Oct 16 SGD: sticking to neutral 7 Oct 16 EZ: not taper time yet 7 Oct 16 CN: avoiding the Minsky moment 6 Oct 16 IN: monetary policy committee lowers rates 4 Oct 16 Qtrly: Economics-Markets-Strategy 4Q16 FX: revisions to GBP & JPY 8 Jul 16 TW & KR: how low can rates go? 7 Jul 16 US: a risky mantra 4 Jul 16 PH: Duterte’s game plan 4 Jul 16 EZ: dealing with post-Brexit blues 30 Jun 16 SG: Brexit impact limited for now 28 Jun 16 Britain’s Great Leap Backward 27 Jun 16 Brexit – first impact 24 Jun 16 15 Sep 16 CNH: SDR inclusion - right time, right place 8 Sep 16 IN: savings rate in need of a boost 2 Sep 16 IDR: towards further resilience 1 Sep 16 30 Aug 16 IN: maturing FCNR (B) deposits a molehill, not a mountain 10 Jun16 SGS: on Fed watch Global growth: redefining strength 26 Aug 16 Qtrly: Economics-Markets-Strategy 3Q16 9 Jun 16 TW: 5 things you need to know about the aging population 18 Aug 16 HK: cautious outlook 27 May 16 IN: monitoring external fault lines 25 May 16 SG: risks beneath the GDP figures 18 Aug 16 TH: manufacturing gone cold 25 May 16 CN: the risk of keeping status quo 17 Aug 16 SGS: bracing for the Fed 24 May 16 CN: why falling private investment growth is a worry 12 Aug 16 Global: Where lies north? 16 May 16 ID: tax revenues slipping 11 Aug 16 CN: outbound investments intact 5 May 16 SG: labour market pain 10 Aug 16 JP: perception gap widens 5 May 16 IN: monetary policy in transition 8 Aug 16 FX: USD down but not out 3 May 16 FX: DM vs EM - a more balanced story 1 Aug 16 Rates: Global rates roundup / chart-pack 28 Apr 16 Rates: Global rates roundup / chart-pack 1 Aug 16 SG: national vs domestic growth 28 Apr 16 IN: Hopes high for GST 26 Jul 16 IN: investment cycle slows 20 Apr 16 Disclaimer: The information herein is published by DBS Bank Ltd (the “Company”). 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