Taiwan: Still Open For Business

Taiwan effectively contained Covid-19, clearing the path for intermediate-term economic growth.

When the news of a novel coronavirus arrived, Taiwan acted swiftly. In January, it halted flights from hot spots such as China, Hong Kong and Macau; and by mid-March, the island was closed to tourists. It suffered fewer than 500 total Covid-19 cases as of mid-August, many of which had been imported when people flew home from abroad.

Consequently, at present malls remain open, restaurants seat full capacity, night markets attract visitors by the thousands and Chinese Professional Baseball League games welcome fans in phases. There have been hurdles, but the economy appears well positioned going forward.

“In this Covid-19 world—where the world economy is going down, foreseeably—I’m not sure whether Taiwan will be impacted a lot,” says Yueh-Ping Yang, assistant professor at National Taiwan University, College of Law.

Taiwan’s strong emphasis on high tech provides a cushion. Supply and demand in the markets for electronics such as semiconductors is relatively stable, Yang says, concluding, “Taiwan’s economy has a solid base.”

Globally, more people are working, studying, socializing, shopping, streaming and gaming from home, increasing the demand for computers, tablets, gaming systems and stereo equipment. Taiwanese suppliers manufacture information and communications technology (ICT) and other electronic components including chips, servers, sensors and network devices. Electronics and audiovisual products accounted for more than half of Taiwan’s exports in the first five months of this year, those categories’ highest share ever. To meet rising demand, many of Taiwan’s semiconductor and ICT firms have increased capacity—a fortunate move, since Intel announced in July that it was experiencing manufacturing delays and may outsource chip production to third parties.

In the longer term, the Covid-19 crisis could spur demand for products and services connected to artificial intelligence, the Internet of Things, digitization, automation, cloud services and 5G. Robots can deliver food, drones can disinfect tables and automatic checkout counters can process retail purchases.

Sam Shen, senior director at the Market Intelligence & Consulting Institute in Taipei, expects continued growth. “There will be a very big opportunity for new technology, new products and new platforms, from telecommunications to computing to all kinds of applications,” he says.

Concentrated Demand

There are, of course, risks. Combined, mainland China, Hong Kong and the US make up more than half of Taiwan’s exports. Continued tensions between the world’s two largest economies could reduce demand, particularly in the short term, as supply chains are disrupted. In the longer term, countries are reviewing their dependence on mainland-China supply chains. In June, a bipartisan group of US lawmakers proposed the Creating Helpful Incentives to Produce Semiconductors for America Act (Chips for America Act), which offers $22.8 billion in tax incentives, grants for construction, and funding for research and development, to support US chip manufacturing.

Onshoring trends could reduce demand from Taiwan, but also presents opportunities. In May, Taiwan Semiconductor Manufacturing Company announced plans to invest $12 billion in a plant to build 5-nanometer chips in Arizona. Following the news, multiple Taiwanese equipment and chemical producers made their own announcements. Exporting production limits the strain on Taiwan’s finite supplies of land, energy and water.

“Producing hardware is our specialty,” says Chien-Fu Lin, Chief Economist of CTBC Financial Holding Co. “Our education in Taiwan produces a lot of engineers, and they are quite good at manufacturing.” In semiconductor R&D alone, Taiwan has approximately 40,000 engineers.

Taiwanese manufacturers are scouring Southeast Asia and Eastern Europe for opportunities. “These countries all need some sort of manufacturing,” says Shen. “They all need research and development, and Taiwan can play this role.” In July, Foxconn announced a $1 billion plan to expand an existing smartphone factory in India, the world’s second-largest smartphone market.

Meanwhile, Taiwanese companies are trying to get better at understanding customer needs. “Taiwanese IT companies are very good at selling products, but they are not good at selling solutions,” Shen says. “Few people have this background.” The government is providing support. Taiwanese officials now survey their Vietnamese and Thai counterparts to gauge demand for smart transportation, parking and energy management systems. If there’s a need, they introduce the appropriate Taiwanese producers.

Economic Obstacles

While closed borders are hurting airlines, hotels, travel agencies, and food and beverage vendors, tourism accounted for about 5% of Taiwan’s GDP in 2018; and the government has instituted a consumer stimulus plan to boost private consumption. Automobile and e-commerce demand remain strong. If necessary, Taiwan’s relatively low government debt-to-GDP ratio of about 31% gives public officials additional flexibility to apply stimulus going forward.

The unemployment rate is below 4%, and GDP per capita was $25,893 at the end of 2019, but wages are low for many nontech jobs. “For general employees, they will see a huge problem if they want to buy a house, especially in or near Taipei City,” Yang says. “That could create social instability.” Taipei’s house price-to-income ratio is a sky-high 15.5, exceeding even notoriously high-priced New York City (5.7) and London (8.5).

Aging is another concern. By 2026, more than one-fifth of Taiwanese will be over 65 years old; and national health insurance expenditures are burdensome, Yang notes. The Labor Insurance Fund, a $340 billion liability, is on the verge of bankruptcy. “The government is trying very hard to deal with that problem; but sooner or later, they have to face this choice,” he says.

While high tech has been a bulwark, Taiwan is also attempting to diversify its economy, pushing into such areas as smart machinery, clean energy, defense and aerospace, biomedicine and agricultural technology. Following the Covid-19 lockdowns, Merida Industry and Giant Manufacturing have seen a spike in demand internationally for their bicycles. Like chip producers, bike suppliers are increasing capacity to meet demand. And in July, electric scooter manufacturer Gogoro launched its first electric bicycle, which carries a $4,000 price tag and will be sold in Europe and the US.

Even with opportunities such as these, Taiwan’s high savings rate makes it difficult for banks to find suitable outlets. “There are not many interesting investments now,” says Yang, “so banks have the excess-deposit problem.” Regulatory crackdowns in the Caribbean have further stimulated onshore flows. “We see more and more Taiwanese entrepreneurs bringing their funds back to Taiwan,” Yang says. On the retail side, equities, low-cost exchange-traded funds and investment-linked insurance products are popular investment solutions.

Taiwan’s eight state-operated banks still account for 45% to 50% of market share, says Yang, who argues that privatization and consolidation would strengthen the sector and increase efficiency.

“There is a huge overcompetition problem in Taiwan’s financial sector,” he says. “Taiwan’s banking sector is racing to the bottom. They cut prices too much, so it hurts profit margins. They can’t go big, can’t go international, which is very difficult but very important for sustainable development.”

Traditional institutions need to speed up fintech development. This year, three web-only banks are expected to launch; and CTBC Financial Holding Co.’s Lin envisages further fintech innovation, given Taiwan’s high-tech capacity. “This can create a new wave for young people,” he says. “Taiwanese people are very diligent and ambitious to do business. For economic progress, that should be no problem.” Regulators, however, are conservative; and he adds that loosening regulations would boost development.

While Taiwan’s economy tends to progress in a methodical way, government officials forecast 1.67% year-on-year expansion for 2020; and in July, the TAIEX, Taiwan’s capitalization-weighted stock index, hit a 30-year high—going even higher in August. Prudent governance could presage further economic growth.