Financial Tsunami Deepens Predicament of Taiwanese Firms in China

Beset by China's changing investment environment and the impact of the global financial tsunami, Taiwanese firms in China, especially labor-intensive companies in the Pearl River Delta, are striving to keep their heads above water by transplanting operations, tapping China's domestic market, and transforming their operations.

The Taiwanese Chamber of Commerce in Dongguan, Guangdong Province, reports that one-tenth of the more than 10,000 Taiwanese enterprises in the Pearl River Delta area have closed down or transplanted their operations elsewhere in response to a 25-35% increase in operating costs, caused by an array of measures adopted by the Chinese government. The measures include the slashing of export tax rebates, a sharp appreciation of the renmimbi, an increase in the business income tax, and the implementation of the Labor Contract Law.

These measures have been adopted in response to mounting pressure from China's trading partners, especially the United States, to check the enormous trade imbalance in China's favor, which topped US$260 billion in 2007. The eruption of the global financial crisis was the last straw which broke the back of many Taiwanese enterprises.

To cite one example, Lacquer Craft, a leading Taiwanese-invested enterprise, has decided to cope with the changing situation by stepping up efforts to tap China's domestic market, while shelving its original plan to move the high-value-added part of its industrial chain to Taiwan and to set up an R&D center on the island.

For the low-value-added part of its operation, the company has developed a series of furniture products featuring simple designs and sizes tailored to the tastes of middle-class Chinese customers.

Agio Furniture, another Taiwanese-invested enterprise, has developed a series of leisure furniture products aimed at the Chinese market.

Some Taiwanese firms are transplanting their operations to northern and northeastern China, notably the Bohai coastal economic zone, where the Chinese authorities have been promoting investment in recent years.

One company that is doing this is the Shenzhen Global Union Industrial Corp., the largest faucet maker in Asia, which is setting up plants in an export processing zone on the coast at Qingdao, Shandong Province. Shenzhen Global Union has been attracted there by a tax holiday, cheaper land, low labor turnover, and complete infrastructure. The firm's products are targeted at not only the U.S. and Europe, but also at China's domestic market.

The company has also constructed plant buildings for four satellite factories nearby, in the hope of eventually replicating its complete industrial chain in Shenzhen—a chain that consists of 100 supporting factories providing electroplating, machining, polishing, and assembly services. The Qingdao operation is scheduled to kick off by the end of this year. Shenzhen Global Union has even set up a training center at the Qingdao Technical College to cultivate the manpower it needs.

The Chinese government, meanwhile, is offering a number of assistance measures for Taiwanese firms, including increased tax rebates for some 3,000 items, preferential loans, and assistance in upgrading or transforming operations—expansion, for instance, into the service sector.

Taiwanese enterprises appear to be facing their most severe test since they began to move into mainland China two decades ago as a means of coping with the changing business environment that then obtained in Taiwan. Finding a way out of their present predicament will put their flexibility and fortitude to another severe test.