Snow Deepens Plight of Taiwanese Enterprises in China

The severe snowstorms that struck China in January have left many Taiwanese enterprises in the southern part of that country struggling more desperately than ever to dig their way out of problems resulting from China's changing business environment in recent years. Labor problems, especially, have become acute following the implementation of China's new Labor Contract Law.

Right now, though, labor is overshadowed by power shortages, as southern China's power grid has yet to recover from the storm damage and factories are striving to resume full operation following the Chinese New Year.

When the peak load in Dongguan, Guangdong Province hit 5.5 million kilowatts on Feb. 13-18, for instance, the shortage rose to 2 million kilowatts. This prompted the local authorities to lengthen their power suspension for industrial users from two to three days a week, effective Feb. 19.

As a result, some Taiwanese and Hong Kong manufacturers there have been forced to downsize their operations or to stop taking new orders. Some are even opting to shut down entirely; and, according to some businessmen in Hong Kong, the plant closures may become more prevalent in April and May.

For manufacturers with their own power generators, the high cost of fuel is a problem as the price of diesel has topped US$100 per ton in Guangdong. Environmental protection rules also pose difficulties for such manufacturers.

Another difficulty is a shortage of raw materials caused by the disruption of transportation by the recent storms. This has forced many enterprises to delay their deliveries by a month.

Authorities estimate that the direct economic losses caused by the storms amount to a total of 151.6 billion yuan. This is even more than the losses caused by the SARS (severe acute respiratory syndrome) epidemic in 2003 (127.9 billion).

Piling Up Problems

The snowstorms have added to the problems caused by changes that have been afflicting China's investment environment in recent years, adding to already weakened investment willingness among foreigners.

One striking manifestation of the fall in investment willingness is a growing number of abrupt and illegal shutdowns by Korean enterprises operating in China. For example, in Qingdao, Shandong Province (where many Korean businesses are concentrated), the number of abrupt closures of Korean enterprises hit 87 last year, up from just 21 in 2003. In Jiaozhouwan (also in Shandong), the number of such shutdowns reached 103 in 2007.

In many cases the departing Koreans have left problems behind, including debts to associated businesses, back pay, and unpaid taxes. Yan Yi-xiong, chairman of the Taiwanese Chamber of Commerce in Qingdao, says that the Koreans are leaving because of the impact of the Labor Contract Law, which has added rising labor costs to the problems of soaring raw materials prices and the appreciation of China's renminbi currency.

Yan points out that unlike Taiwanese enterprises, most of which own the land on which their factories are located, Korean enterprises there generally lease the land they use. This makes it easier for them to call it quits abruptly.

Korean investment in China has been on a steady decline in recent years. In 2007 it fell 7.89% from the previous year, to US$3.678 billion.

Xie Qing-yuan, vice chairman of the Taiwanese Chamber of Commerce in Dongguan, notes that there have been few abrupt closures among Taiwanese businesses so far, but that shutdowns may accelerate as the effects of the new law and a new business income tax on Taiwanese enterprises emerge in the second half of the year. (PL, Feb. 2008)