In a move to protect its electrical-machinery industry, mainland China removed tariff exemptions on imported machinery and related equipment in the fourth quarter of 2002, making it harder for foreigners to compete in the emerging market there. The mainland authorities also ruled that large companies in the mainland will get a refund for 17% of the added-value taxes paid when buying domestically-made machinery and production equipment, giving further incentive for firms to buy locally.

The new regulations will greatly dampen the competitiveness of foreign machinery makers in mainland China. In the past, mainland producers were allowed to import foreign-made machinery free from customs duties.

To overcome the negative effects of the changed mainland policy, some Taiwanese producers of machinery are rushing to set up assembly plants in the mainland to continue to be able to secure business opportunities there.


Incentives to Locally Produce


Although the mainland government is trying to discourage the import of foreign-made machinery, it has eased the criteria for what defines domestically-made machinery. For instance, computerized numerically controlled (CNC) machining centers are considered domestically-made if they have a local content rate of 30%, down from the originally required 50%. "This means Taiwan's machinery makers can still retain their mainland customers if they set up assembly plants there and procure 30% of the components in the mainland," says Kuan Yung-chang, president of Awea. "So I believe the new measure will encourage domestic machinery makers to set up assembly plants in the mainland."

At the beginning of 2001, Awea inaugurated a US$1 million machine-tool assembly facility in Shanghai. A few months later, the company opened another US$1 million plant, also in Shanghai, to produce components and accessories for its assembly plant.



Recently, Awea invested US$1.2 million to establish an affiliate in Suzhou, Jiangsu Province to sell components and parts for machine tools, install machinery and production equipment, and handle international trading operations.

Shieh Yih recently decided to invest US$3.55 million to set up an affiliate and factory in Kunshan, near Shanghai. The new plant, occupying an area of 864,000 square feet, will be constructed in three stages, the first of which will be completed in the second quarter of 2003. The plant will produce double-column pressing machines and C-type presses.

Tong-Tai, a manufacturer of production equipment for 3C (computer, communications and consumer electronics) parts and automobile parts, is studying the feasibility of opening an assembly plant in the mainland in response to the new import rules. The company fears the mainland authorities will impose even stricter regulations on imported machinery.


In the Mainland, By the Sea


Many of Taiwan's machine-tool makers have located their mainland assembly plants and distribution channels in coastal cities. Rexon Industrial., Fair Friend Ent., Kent Industrial, and Ching Hung Machinery & Electric Ind. Have set up assembly plants in Xiaoshan, near Hangzhou in Zhejiang Province; Chin Fong Machine Industrial has set up a plant in Ningbo and deployed marketing and maintenance centers in Shanghai, Shenzhen, Hong Kong, Wuhan, and Shenyang; and both Yeong Chin Machinery Ind. And Leadwell CNC Mfg. Have set up plants in Shanghai. Most of the above-mentioned began making profits on their mainland operations in 2002.

Victor Taichung Machinery Works and Falcon Machine Tools have recently decided to beef up their production and assembly capability in the mainland to expand sales there. Victor Taichung has established assembly plants in Tianjin and Guangzhou, and opened an after-sales service center in Shanghai.

"Our plant in Guangzhou specializes in the production of plastic-injection molding machines," says Hsu Wen-chih, vice president of Victor Taichung. "The plant is currently capable of rolling out 10 machines per month and our capacity will double to 20 units in 2003. We believe the plant will start to turn a profit in 2003." Falcon says it will transfer part of its casting work to Shanghai after the expansion is completed, to consolidate its mainland operations.

The company's Tianjin plant can also turn out about 10 machine tools a month. Both mainland parts have remained in the red as a result, primarily, of their limited production capacity.

Falcon, a professional grinding-machine maker, has set up two plants in Shanghai and Haikou, Hainan Province. The Shanghai plant is designed to have an annual output of 500 CNC machine tools plus 1,000 conventional grinding machines, says Hsu Chao-kuei, vice president of Falcon, though capacity will be expanded in the middle of 2003 with the addition of new lines. The expansion will raise the annual production value of the plant to NT$500 million (US$14.4 million at US$1:NT$34.8) from NT$200 million (US$5.7 million) now.

To more effectively explore the mainland market, Falcon recently set up representative offices in Beijing and several southern coastal cities. The company says the Beijing office will handle the tapping of the northern and northeastern markets.