1. 1 Taiwan Investment in China Facts, Issues, and Prospects Presented at Presented at USC Asia Conference Seoul, Korea October 28-30, 2004 Dr. C. Y. Lin USC Professor Emeritus Chairman A Fubon Financial Company

2. 2 Straight line is the shortest distance between two points. Is it correct? Correct mathematically. But, it does not apply to Taiwan/China situation

3. 3 I.Taiwan v.s. China ChinaTaiwan NameP.R.C.R.O.C. Taiwan Chinese Taipei Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei) Population1,298 million22.7 million Area9,573,952KM36,181 KM 2 2 Table 1. Basic facts about China and Taiwan

4. 4 Shanghai Hong Kong Figure 1. Maps of China and Taiwan 台北 Taipei

5. 5 II.Cross-Strait Trade 1.The trade amount has increased rapidly from US$15.1 billion in 1993 to US$46.3 billion in 2003. 2.The cross-strait trade as a percentage of Taiwan total trade has increased from 9.3 ﹪ in 1993 to 17.1 ﹪ in 2003, nearly doubled. 3.During this period, China’s trade has increased from US$195.7 billion to US$851.5 billion. The cross-strait trade as a percentage of China’s trade remains stable, 6-8 ﹪.

6. 6 Figure 2. Cross-Strait Trade Source: Cross-Strait Economic Statistics Monthly US$ Hundred MillionRatio Total Cross-Straits Trade Cross-Straits Trade as share of China Total Foreign Trade Cross-Straits Trade as share of Taiwan Total Foreign Trade

7. 7 III.Taiwan Investment in China 1.It is difficult to figure the actual amount of Taiwan investment in China because many investments go unreported to the government. 2.Official record shows a total investment of US$34.3 billion between 1991 and 2003, while unofficial estimates range from US$ 100 billion to US$150 billion.

8. 8 IV.Changes in Investment Behavior 1.Steady increase in number of investment and scale of investment  Optimistic about investment in China  Medium and large scale companies have invested in China

9. 9 Table 2. Taiwan Investment in China Source: Cross-Strait Economic Statistics Monthly Taiwan Direct Foreign Investment (FDI) (including China) Taiwan Investment in China Taiwan Investment in China as share of Total Taiwan FDI ﹪ Taiwan Investment in China as share of China Contracted FDI ﹪ 1993 4.833.1765.618.13 19942.580.9637.312.23 19952.451.0944.612.27 19963.391.2336.212.24 19977.234.3359.966.73 19985.332.0338.173.47 19994.521.2527.712.38 20007.682.6133.934.39 20017.182.7838.805.61 200210.096.7266.6112.22 200311.677.7065.9913.71 20044.813.3970.42- Unit: US$ Billion (1-6)

10. 10 Table 3. Average Scale of Taiwan Investment in China # of Applications Amount (US$ Billion) (2) Average investment Scale (US$ Thousand) 1991 2370.174734.8 1992 2640.247935.6 1993 (a) 1,2621.14903.3 (b) 8,0672.028-- 1994 9340.9621,030.2 1995 4901.0932,230 1996 3831.2293,209.5 1997 (a) 7281.6152,217.8 (b) 7,9972.72-- 1998 (a) 6411.5192,369.7 (b) 6430.515-- 1999 48812.532,567.2 2000 8402.6073,103.6 2001 1,1862.7842,347.4 2002 (a) 1,4903.8592,589.9 (b) 3,9502.864-- 2003 (a) 1,8374.5952,500.8 (b) 8,2683.104- 2004 (1-6) 1,0743.3903,156 (a): New Application, (b): Retroactive Source: Ministry of Economic Affairs, R.O.C.

11. 11 2.Diversification of Industries Invested  Expanding from traditional manufacturing to service industries, including insurance, tourism, and business service Share of service industry Prior to 1995 5.26 ﹪Prior to 1995 5.26 ﹪ 1995-1999 7.96 ﹪1995-1999 7.96 ﹪ 2000-2003 8.23 ﹪2000-2003 8.23 ﹪  Shifting from labor intensive to capital and technology intensive industries

12. 12 3.Extending from investment in coastal areas to interior, such as Beijing, Sichuan and Northeastern region

13. 13 4.Changes in Business Strategies  Adopting strategic alliance and joint ventures  Developing related industries into satellite systems or clustering in a region  Creating own brands in addition to OEM/ODM

14. 14 4.Changes in Business Strategies  Moving operation headquarters to China  Developing chain-stores, particularly in food, IT, and communication industries  Changing competitive advantage from cost reduction to human resource development, e.g. recruiting graduates from top-rank universities

15. 15 5.Localization of Business Operations  Hiring local management staff  Extending business functions from production to R&D and marketing  Residing in China instead of commuting cross-strait

16. 16 V.Risks faced by Taiwan Investors in China 1.Market risks  Changes in governmental policies and economic environment due to entering WTO. According to a survey, 65%of Taiwan investors in China fear this kind of risk.  Severe competition from local private business companies that are improving, growing, and expanding 80% of Taiwan investors are concerned with this competition 80% of Taiwan investors are concerned with this competition.  Piracy and lack of intellectual property protection

17. 17 2.Financial Risks  Banking systems not easy to fully access  Lack of integrity, poor credit system, unreliable financial statements  Foreign exchange control  Appreciation of RMB

18. 18 3.Operational Risks  Logistic problems  Tax problems  Legal problems  Shortage of electricity, water

19. 19 4.Physical Risks Increasing number of incidents occurred during the last ten years. Incidents include physical harm, missing persons, and deaths. Increasing number of incidents occurred during the last ten years. Incidents include physical harm, missing persons, and deaths. 1994 30 deaths1994 30 deaths 1998 64 deaths1998 64 deaths 2002 91 deaths2002 91 deaths 5.Political Risks

20. 20 VI.Conclusion In short, Taiwan and China have a very strange relationship. Politically, they are at odds. Economically, people in Taiwan and China work closely to trade and invest actively. Taiwan investors in China are facing various risks and difficulties. Some of them are common to investors from all countries, others are unique to Taiwan investors. Hopefully, the risks and difficulties will be lessened in the future as China amends its policies and improves its administration.

21. 21 VI.Conclusion Taiwan investment in China has been increasing steadily in the last decade. We believe this trend will continue because more and more Taiwan investors see the comparative advantage and market potential in China.

22. 22 Thank You