Taiwan tech firms set to join exodus from China amid trade war, says Citibank research

Xie Yu

A 25 per cent tariff will largely wipe out cost advantages of Taiwanese tech firms on the mainland, accelerating their exodus from China and lead to as many three million job losses, a Citibank study predicted on Thursday.

“Taiwan firms’ exports account for at least 10 per cent of total Chinese exports, and 37 Taiwanese firms operating in China are in the top 100 exporters’ list to US,” the report said, adding that because of rapidly rising wages and other costs, labour intensive industries have already moved out of China.

Citibank was recently judged by FinanceAsia as the best international bank in Taiwan.

The Trump administration has imposed 25 per cent tariffs on US$250 billion of Chinese exports since the trade war started more than a year ago.

Foxconn has said that it could move electronics production bound for the US market out of the mainland. Photo: Bloomberg

According to a research report by China International Capital Corp (CICC), mainland-listed companies that make computers and electronics products will be the second most affected by the additional 15 per cent tariffs that were imposed in May.

The tariffs on their exports to the US will account for 18.7 per cent of their total profit in 2018, CICC said.

According to Citibank analysts’ estimates, based on disclosures from China’s Ministry of Commerce from September 2017, Taiwanese firms employ some 10 million people on the mainland, with 60 per cent of them in the information and communication technology (ICT) industry, and their cumulative investment stands at more than US$66 billion.

An outbound investment survey by Taiwan’s Ministry of Economic Affairs found that 95 per cent of the employees hired by Taiwanese companies in China were in the manufacturing industry, with the share of ICT – electronic components, devices, optical products and personal computers – at 59 per cent.

“Assuming 30 to 50 per cent of them leave China, we estimate 1.77 million to 2.95 million job losses could take place over a couple of years,” the Citibank report said.

Citibank’s estimates matched a poll conducted by accounting firm PwC in March. The study showed that about 40 per cent of Taiwanese firms planned to adjust their supply chain.

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The year-long US-China trade war has hastened the relocation of firms from not only Taiwan, but also Europe, South Korea and the US to countries in Southeast Asia. If they have not already moved, they are seriously considering diversifying their production base.

In mid-June, Foxconn, which assembles iPhones in China, said the company could move electronics production for the US market out of the mainland at short notice. Reports said that the assembly of iPhones could start in India within this year.

Richard Hsieh, a Taiwanese entrepreneur running a software firm in east China’s Jiangsu province, said that as the advantages of cheap labour, land and electricity evens out in China, it makes economic sense for Taiwanese ICT firms to shift production elsewhere.

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“Many hi-tech OEMs [original equipment manufacturer) were targeted in the recent rounds of tariffs. They are the ones who were hit most heavily by the trade war,” Hsieh said, adding that a supply chain reshuffle cannot happen overnight.

Jason Chan, another Taiwanese businessman who runs an artificial intelligence firm in Beijing, however said he did not feel the need to shake up his supply chain.

“Trump can target anyone. Imagine you have just moved your factory to Vietnam and the next day Trump says he was going to impose tariffs on Vietnam,” he said. “So I think compared to relocation, making good use of re-exports is more practical.”

Citibank analysts observed that the Chinese government, noting the exit of Taiwanese firms from the mainland, has offered them a slew of incentives, which will help to stabilise exports, employment and the economy.

Taiwanese firms can take part in “Made in China 2025”, enjoy favourable tax policy, and have the same rights as domestic firms participating in major national research and development projects, infrastructure projects and government backed procurement schemes.

“These efforts could potentially slow Taiwan firms’ exodus from China, but we believe these measures may not be sufficient enough to offset the impact of tariff war,” the report said.

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