ASEAN Free-trade Zone Turning Vietnam Into Major Factory Base for Taiwan

Hoping to tap the mutually-beneficial advantages available from the eventual formation of ASEAN (the Association of Southeast Asian Nations) into a free-trade zone, Taiwan-based manufacturers are flocking to set up plants in Vietnam, which has been often reported as quickly developing into their second-largest overseas production base, trailing China.

The latest wave of Vietnam-bound investment has been driven by the titans in upstream manufacturing of industrial-materials and hi-tech items, including widely-known names as Hon Hai Precision, Formosa Plastics Group (FPG), China Steel, Compal Group, and Acer Group, a trend that differs from the previous ones which consisted mainly of small and medium enterprises (SMEs) in traditional lines.

These industrial heavyweights plan to launch off Vietnam to tap the potentially huge ASEAN market. With some 6 billion consumers, ASEAN and its 10-member nations aim to form a free-trade zone by 2015 to offer its members freely-moving trade, services, capital, and labor, according to a resolution tabled at the 13th ASEAN Summit in November 2007 in Singapore. In addition, ASEAN is negotiating with China, Japan, and South Korea to enable lower tariffs via forming an even larger economic bloc.

Without ASEAN-based manufacturing, suppliers from Taiwan are likely to be marginalized from such promising market, which bought US$37 billion of exports from Taiwan in 2007, making it the third-largest overseas market, trailing China and Hong Kong. ASEAN was even more important than the U.S., which bought US$32 billion of Taiwan-made exports in 2007, for fourth place.

Hon Hai Precision Leads

Living up to its bold reputation as an aggressive enterprise, Hon Hai Precision, the world's largest EMS (electronic manufacturing service) provider, is leading the way among its peers, investing US$5 billion to set up a sprawling industrial zone covering 1,000 hectares in Vinh Phu Province, where not only electronics-components factories but also company-town projects have broken ground. Some factories in fact have already come online in August 2007.

Formosa Plastics Group, perhaps the first, biggest industrial conglomerate in Taiwan, has decided to invest US$8 billion to establish a mega steel plant in Ha Tinh Province of Vietnam, scheduled to come online in 2011 with initial capacity of 7.5 million metric tons, rising to 15 million eventually, exceeding even the state-run China Steel in Taiwan. It will also be the larges blast furnace in ASEAN.

FPG is the second Taiwan-based investor in steel making, following E-United Group which has joined hands with Tycoons Steel to invest US$1.6 billion to establish such facilities with annual capacity of 3 million metric tons, scheduled to come online by 2010 as the first blast furnace in ASEAN.

China Steel aims to spend US$1.15 billion to set up a cold-rolled steel plant with annual capacity of 1.6 million metric tons, a joint venture with Sumitomo Metal Industries of Japan, with the mill scheduled for inauguration by 2011.

IT Brands Move In

Compal Group, a major notebook PC maker, is another leading IT manufacturer venturing into Vietnam. Initially investing US$30 million to build a 326-hectare industrial zone, Compal will house in the zone not only its own factories but also ones of some 10 supporting manufacturers. Other major IT manufacturers which have or will establish Vietnam-based factories include Acer, Wistron, and Chi Mei Optoelectronics.

Taiwan-based enterprises already in Vietnam are also being pulled by the latest investment tide-Sanyang Industry, a pioneering investor in the country, has decided to expand its operations by spending US$15 million to establish a motorcycle R&D center and a test-driving center for its VMEP, its motorcycle-making subsidiary. The proposed R&D center is to mainly create local capacity for producing key components, such as carburetor. Such move is critical to evade the impact from the eventual formation of the ASEAN free-trade zone, which would render uncompetitive importing key components from Taiwan, as practiced by VMEP currently, according to a Sanyang executive.

Diversifying Into Auto-making

Moreover, VMEP plans to diversify production-by branching into auto production by investing in the set-up of SMV, which will roll out by June 2008 the SMV T880, a small pickup displacing 1,300 c.c. Making the engine in-house, SMV will be the first 100% foreign-owned automaker in the country, as well as Taiwan's first own-brand automaker abroad.

Feng Tay Enterprise, a major footwear maker, plans to double its investment in Vietnam from the original US$30 million, thereby boosting the capacity of its Vietnam-based plants to 800,000 pairs monthly, over half of its global capacity, compared with 30% of its China-based plants.

Third-biggest Investor

Taiwan is now Vietnam's third-largest source of foreign capital, trailing South Korea and Singapore, an understated position as many Taiwan-based businesses invest in the country via a holding firm in tax havens.

Inevitably pulling closer trade ties between Taiwan and Vietnam, such heavy investments have pushed up Taiwan's exports to Vietnam by 40% to US$6.9 billion in 2007, making Vietnam Taiwan's seventh largest overseas market.

Mineral fuel and oil are the largest exports from Taiwan to Vietnam, whose value jumped 63% to US$2 billion, followed by machinery and mechanical appliances totaling US$590 million, up 24%; iron and steel, soaring 124% to US$570 million; and plastics products, rising 45% to US$529 million.

SMEs Joining Move

In addition to leading industrial giants, numerous Taiwan-based SMEs are also relocating from China to Vietnam to weather the harsher business climate, as the Chinese authorities implement the Employment Contract Law, reducing income-tax and export incentives amid steep appreciation of renminbi and soaring labor costs.

However, China remains Taiwan's major overseas market for now. Taiwan's exports to China (including Hong Kong) advanced 12.6% to US$100.4 billion in 2007, of which US$62.4 billion went to China and US$38 billion to Hong Kong, for 40.7% of the total, creating a huge surplus of US$70 billion for Taiwan.

Electrical machinery was the largest export category, whose value grew 11.4% to US$38.7 billion, followed by optical products, up 22% to US$16 billion; plastics products, up 15.8% toUS$9 billion; and machinery products, down 2.9% to US$8.2 billion.

More Exports to Emerging Nations

In 2007, Taiwan shipped significantly more exports to emerging markets, offsetting sluggish sales to developed countries, hence maintaining adequate growth in overall export. Taiwan's exports to the U.S. dipped 0.9% to US$32 billion in 2007, when its exports to the 15 original members of the EU (European Union) inched up 7.3 % to US$23.8 billion and dropped 2.3 % to US$15.9 billion to Japan.

Taiwan also fared well exporting to BRIC nations other than China, with exports to India surging 59% to US$2.3 billion, of which exports of machinery jumped 35.8% to US$420 million, the largest category, followed by electrical machinery and equipment at US$358 million, up 76.7%; plastics products at US$355.9 million, up 54.4%; and mineral fuel and oil at US$325 million, soaring 269%.

Auto Parts Looking Up in India

One Taiwan-made product category poised to do well in India is auto parts due to growing auto ownership there, while the segment should also be stimulated by, for example, the launch of the Tata Nano, billed as the world's cheapest car at US$2,500 that has been rolled out by Tata Motors in January 2008. Seeing the rising demand for cars in India, China Motor signed an agreement with Premier auto group of India, licensing the latter to locally assemble the 2,000 c.c. diesel Verica pickup, with key components to be supplied by China Motor. China Motor expects to ship 3,000 key components annually worth some US$7 million to Premier via the partnership.

Taiwan also exported some US$1.7 billion of goods to Brazil in 2007, up 30%, of which electrical machinery totaled US$552 million, down 8.5%, the largest category, followed by machinery at US$285.5 million, up 38.5%; mineral fuel and oil at US$233.7 million, skyrocketing 271%; and plastics products at US$152.5 million, up 40%.

Many Taiwan-based exporters are keen to tap the Brazilian market after seeing such considerable performance in recent years, driven by both the influx of foreign capital topping US$50 billion in 2007 and the strong purchasing power of the expanding middle class, which have helped the largest South American nation to overcome its chronic economic woes: staggering foreign debt and sharp currency devaluation.

Russia Another Big Buyer

Russia imported US$807 million worth of goods from Taiwan in 2007, up 33.6%, with machinery equipment being the largest category, which advanced 18.6% to US$233.6 million, followed by electrical machinery at US$155.5 million, up 29%; plastics products at US$88 million, up 26%; and iron and steel at US$63 million, soaring 103%.

Attracted by Russia's expanding market, Hon Hai Precision is investing US$50 million to set up a PC and LCD monitor plant that is scheduled to come online in the second half of 2008.

Mexico a Sizable Market

Taiwan-based exporters also did well in Mexico-shipping there some US$1.5 billion worth of goods, up 40%, of which electrical machinery totaled US$704 million, up 94%, the largest category, followed by machinery equipment at US$138 million, down 8%; auto parts at US$73 million, up 9%; and plastics products at US$67.8 million, down 3%.

In addition, Taiwan made major inroads into the East European market, which imported US$4.2 billion worth of goods from the island, up 24.4%. Hungary was a major buyer, procuring some US$805 million worth of exports from Tawian, up 41.4%, of which electrical machinery skyrocketed 131% to US$670 million, the largest category, followed by optical products at US$56.8 million, down 72.8%; machinery equipment at US$46.5 million, up 12.6%; and auto parts at US$9.6 million, up 12.6%.

Poland was another major buyer who imported US$769 million worth of Taiwan-made goods, up 36%, of which the largest category was electrical machinery, amounting to US$314 million, up 47.9%, followed by optical products at US$114 million, up 36%; machinery equipment at US$105 million, down 1.5%; and auto parts at US$47 million, up 56%.

Mid-East-bound Exports Simmering

Meanwhile, Taiwan's exports to the Middle East and Near East advanced 24.7% to US$5.6 billion. Turkey was a major outlet, absorbing US$1.5 billion worth of shipment, up 22.2%, of which machinery equipment rose 15% to US$404 million, the largest category, followed by electrical machinery at US$348.8 million, up 16.4%; plastics products at US$222.8 million, soaring 115%, and iron and steel at US$147 million, up 93.6%.

Taiwan shipped US$1.5 billion worth of goods to the United Arab Emirates, up 31.9%, with the largest category being machinery equipment that inched up 1.7% to US$278 million, followed by electrical machinery at US$272 million, down 5.6%; plastics products at US$195 million, leaping 70%; iron and steel at US$181 million, soaring 149%; and mineral fuel and oil at US$136 million, surging 442%.

Saudi Arabia was another major buyer of Taiwan-made exports, totaling US$733 million and up 38.4%, with iron and steel as the largest category that soared 99.7% to US$211.9 million, followed by plastics products at US$124 million, up 90%; machinery equipment at US$87.3 million, up 10%; and electrical machinery at US$53 million, up 10%.