In order to counter the strong magnetic power of Mainland China on local investors and prevent Taiwan's economic overreliance on the mainland market, the ROC government is strongly encouraging manufacturers to invest in Southeast Asia by means of its so-called Go South Investment Policy. The policy received a major boost following a trip by President Lee Teng-hui (李登輝) to three Southeast Asian nations during the Chinese Lunar New Year.
Embarking on his eight-day trip on February 9, Lee first made a brief stop at Subic Bay in the Philippines, where he met with President Fidel Ramos. He then flew to Bali for a six-day vacation and meetings with President Suharto and other Indonesian officials, including Research and Technology Minister B.J. Habibie. The final stop of the trip involved a two-day stay in Phuket, Thailand. Although a meeting with Thai Premier Chuan Leekpai was canceled because of pressure from Beijing, Lee did meet with King Bhumibol Adulyadej before returning to Taipei.
Lee, wearing casual clothing and accompanied by ranking ROC government officials, played golf and toured the resort areas where he stayed. His extensive exchanges with government leaders of the host countries focused mainly on economic cooperation. The president's "vacation diplomacy" followed a similar trip to Singapore and Malaysia by Premier Lien Chan (連戰) during the Western New Year holiday. Both trips greatly strengthened ties between Taiwan and ASEAN (the Association of Southeast Asian Nations), representing a significant countermove to Beijing's attempts to isolate Taiwan in the international arena.
The trips were made possible in large part by Taiwan's strong economic presence in Southeast Asia. The island is now among the top sources of foreign investment in the region. Malaysia, the area's largest recipient of investment capital from Taiwan, has absorbed a total of US$5.9 billion, followed by Thailand with US$4.5 billion and Indonesia with US$4 billion. Vietnam is catching up fast. Taiwan, already its largest supplier of foreign investment, has committed more than US$1.5 billion.
This heavy investment has inevitably stimulated growing trade activity. Trade between Taiwan and the five original members of ASEAN (Thailand, Malaysia, Singapore, Indonesia, and the Philippines) topped US$16.7 billion last year, with a US$2.3 billion surplus in Taiwan's favor. Taiwan enterprises have also established close ties with the political and business sectors of these countries and played an essential role in arranging the trips for the president and premier. The visits were also facilitated by the strong desire of Southeast Asian governments to attract more money from Taiwan, especially since investment had started to decline in recent years, mainly because of soaring local enthusiasm for investing in Mainland China.
Thanks to its recent "socialist free market" policy, Mainland China has become the world's largest recipient of international capital. Total foreign investment commitments to the mainland increased 200 percent last year to US$33 billion, while Taiwan commitments skyrocketed 600 percent to US$6 billion. This made Taiwan the second-largest source of foreign capital for the mainland after Hong Kong; the colony's commitments jumped 73 percent to US$13 billion during the year.
By the middle of last year, Taiwan investment commitment in the mainland had already reached US$14.2 billion, within striking distance of the island's US$16.7 billion worth of investment in all of Southeast Asia.
The mainland investment fever has chilled the interest of Taiwan investors in the rest of the region. In 1993, the island's investment in Malaysia amounted to only US$300 million, down sharply from US$2 billion in 1990. Investment in Thaiand last year reached only US$209 million, compared with a record US$892 million in 1989. And Taiwan investment in Indonesia last year managed to reach only one-tenth the 1990 figure. Vietnam, which is regarded as virgin territory for Taiwan investors, was the only exception to the downturn, absorbing an impressive US$436 million in capital from Taiwan in 1993. Local investment in Vietnam is expected to intensify further because of the lifting of the U.S. trade embargo against Vietnam in February.
ROC government officials fear that excessive reliance on the mainland market will leave the island vulnerable to manipulation by the Communist government and susceptible to economic fluctuations on the other side of the Taiwan Straits. Hence the Go South Investment Policy. This encourages enterprises to invest in Southeast Asia by providing incentives and assistance to potential investors in overcoming the problems they may face in the region. ROC officials are also trying to secure the cooperation of Southeast Asian governments in working toward this goal.
In recognition of Vietnam's handsome market potential, the ROC government has for several years been fostering economic cooperation. In mid-1991, the Executive Yuan set up a special panel to promote economic relations between the two countries. The first official ROC-Vietnam economic and trade consultation meeting was held that September, and several industrial cooperation agreements were signed. The semiofficial China External Trade Development Council (CETRA) has already set up an office in Ho Chi Minh City, and official ROC economic and cultural offices have been established there and in Hanoi.
In the last two years, the ROC government has signed bilateral investment protection agreements with the Vietnamese government and with the governments of Malaysia, Singapore, Indonesia, and the Philippines. Under the auspices of the Go South Investment Policy, the government has also set up task forces to promote ROC-Philippines joint development of industrial zones, ROC-Singapore joint investment in third countries, ROC-Vietnam investment cooperation, and ROC-Indonesia joint development of Batam Island.
In the wake of President Lee's February trip, the Council for Economic Planning and Development (CEPD) of the Executive Yuan has worked out four major measures to promote the Go South Investment Policy. These include establishing an overseas investment insurance system, helping set up Chinese-language schools in Southeast Asia for the children of Taiwan investors, encouraging financial institutions to set up branches in the region, and signing investment protections and agreements to avoid double taxation.
These measures are included in the official guidelines for intensifying trade and economic activities in Southeast Asia that have been formulated by the Ministry of Economic Affairs (MOEA) and approved by CEPD. The guidelines, effective for a three-year period starting January 1, 1994, also call for measures that will encourage local banks to offer the financial support needed by Taiwan investors. They also call for government agencies to intensify collection of economic, financial, and energy information on the region for investors. In addition, the guidelines stress the need for identifying investment and trade barriers and soliciting the cooperation of Southeast Asian governments in removing them.
The MOEA's most powerful tool in implementing the Go South Investment Policy is its International Economic Cooperation Development Fund (IECDF). Thus far, the IECDF has committed US$55 million in loans to Vietnam for highway construction, industrial zone development, and financial support for medium and small enterprises. In Indonesia, it has pledged loans of US$30 million for rural development projects and the development of Batam Island. Another US$23.6 million has been committed to the Philippines for the Subic Bay Industrial Park.
The Subic Bay project is typical of how the fund operates. The loan will finance the first-phase construction of the 325-hectare industrial park, to be developed by a joint venture between the Subic Bay Metropolitan Authority and two Taiwan companies—the China Development Corp. and Century Development Corp., both run by the Kuomintang (KMT), the ROC's ruling political party. Groundbreaking for the first phase of construction, covering 125 hectares, took place on March 20, and actual construction will start in June. The park is to be completed in three years.
For the first six months after the groundbreaking, investment in the park is reserved on a fifty-fifty basis for Taiwan and Philippine investors. After that, it will be opened to other countries. Land rental costs will be kept low—only NT$45 to NT$65 (US$1.70 to US$2.45) per square meter per year—to attract investors. Besides complete harbor facilities, the Subic Bay area has an airport, reliable electric power, and its own water supply. It also has a large pool of technical manpower: the forty-two thousand experienced workers who were formerly employed by the U.S. Navy. Wages amount to about NT$135 (US$5) per day. Strikes, which are a major irritant for foreign investors in the Philippines, will be banned in the Subic Bay area.
The site is also attractive because of its status as a free port. Equipment and materials imported into the area by manufacturers can enter duty-free and without customs inspection. Manufacturers there will pay only a 5 percent business income tax on gross profits and can remit out their earnings freely. Investors will be required to export at least 70 percent of their output; the remaining 30 percent, after payment of tariffs, may be sold domestically. Another strong attraction for Taiwan investors is that Subic Bay is only an eighty-minute flight from Kaohsiung, in southern Taiwan.
The MOEA's Industrial Development and Investment Center (IDIC) reports that Subic Bay is especially suitable for Taiwan investment in such labor-intensive industries as garments, lighting products, footwear, toys, sports equipment, furniture, giftware, clocks and watches, bicycles and machinery parts, and yachts. According to the IDIC, fifty local companies have already indicated their interest in Subic Bay investment projects. One Taiwan-invested footwear firm has already started operations and employs a thousand workers.
The industrial park is a vital part of Manila's plan to develop Subic Bay into a magnet for foreign investment and a locomotive for development of the entire Philippine economy. Richard Gordon, chairman of the Subic Bay Metropolitan Authority, believes that Subic City will become the fastest-growing port city in the South China Sea, perhaps even replacing Hong Kong as an intermediate point for links between Taiwan and mainland China after 1997.
A similar project, on a smaller scale, is the Taiwan-invested Hanoi Industrial Park, for which groundbreaking took place on March 29. Whereas the leading role in the Subic Bay project is being planned by the ROC government, the park in Hanoi is being planned and developed by a group of more than forty Taiwan investors. The ROC government helped, however, by negotiating with the Vietnamese government over the location of the site and by providing a US$10 million soft loan to the Hanoi city government, which will then lend the money to Taiwan investors.
The Hanoi park will cover 40 hectares, a considerable portion of which will be used by the investors for building their own factories. Other investors are being attracted by the low rental fees for land (US$1 per square meter annually), a reliable and adequate power supply, and plenty of high-quality, low-cost labor.
In addition, the Vietnamese government has given top priority to the construction of an external transportation link—Highway No.5—for the Hanoi region. The IECDF has agreed to provide a loan of US$30 million for this project; additional loans will come from the World Bank and the Asian Development Bank.
Many observers believe that industrial parks such as those in Subic Bay and Hanoi will be attractive to Taiwan investors if they offer complete facilities and adequate financial and administrative support from the ROC and host governments, as well as allow Taiwan manufacturers and their suppliers to invest together. "With collective investment, Taiwan investors can use group power to win good conditions from the host government," says Chang Tzu-yuan (張子源), chairman of the state-run Chinese Petroleum Corp. (CPC).
Enterprises run by the government and the KMT will likely become pioneers in the Go South investment movement. The KMT-invested Central Trading & Development Corp. has long been active in Vietnam investment. It began developing the Tan Thuan Export Processing Zone near Ho Chih Minh City in February 1992. The park will cover 300 hectares. Preparation work on the first 80 hectares is already complete. Twenty-nine investors, mostly from Taiwan, have signed up to rent a total of 40 hectares, at US$100 per square meter for a fifty-year term. One Taiwan firm has already started operating.
The Central Trading & Development Corp. is also on the verge of signing a contract with the Ho Chi Minh City government for a 750-hectare, US$240 million commercial and residential development south of the city. The company is building a thermoelectric power plant with a projected capacity of 675,000 kilowatts, mainly to supply the Tan Thuan Export Processing Zone and the projected new town. In addition, the company has undertaken a 60,000-hectare reforestation project as a source for pulpwood.
Liu Tai-ying (劉泰英), chairman of the KMT Business Management Committee, reports that the party has already invested US$1 billion in Vietnam, but it plans to slow down the pace of investment in Vietnam and shift more resources to Indonesia. There the KMT will seek joint ventures in petrochemicals, petroleum, and natural gas.
One Indonesian project under consideration is a specialized petrochemical zone that would be set up by CPC and other large petrochemical companies from Taiwan. In addition, CPC is reportedly studying the feasibility of transferring its second naphtha cracker, shut down in Taiwan following the inauguration of the fifth cracker, to Indonesia. With an annual capacity of 230,000 tons of ethylene, this plant could go far in alleviating the shortage of raw materials needed by Indonesia's rapidly developing plastics industry. Recently, CPC signed a joint agreement with its Vietnamese counterpart, a French company, and a KMT enterprise to study the feasibility of investment in a US$1.2 billion Vietnamese oil refinery.
The state-run Taiwan Sugar Corp., along with two private Taiwan food processors and a Vietnamese partner, will invest US$70 million in a sugar plant in northern Vietnam with an annual capacity of 950,000 tons. The plant is scheduled for completion within two years.
Large private enterprises in Taiwan are also beginning to invest in Southeast Asia, especially in the production of commodities targeted for the regional market. Years of economic development have greatly expanded the domestic market capacity of ASEAN members. Their markets are expected to expand even faster following a free trade area agreement signed last year that aims to eliminate all non-tariff barriers between ASEAN members within five years and all tariffs within fifteen years.
Taiwan's private Tuntex Group and Asiaworld Group are both planning ambitious billion-dollar investment projects in such fields as cement and electrical power in the Philippines. The China Trust Group plans to set up a holding company specifically to promote projects in Southeast Asia, including a joint venture with a foreign cement maker in a plant on Indonesia's Batam Island, petrochemical investments in Indonesia, and projects in the Philippines worth a total of US$200 million.
Evergreen Marine Corp. has purchased 34 hectares of land on Batam Island for developing a container dock as well as a hotel and recreation center. Ching Fong Investment Co.—which owns San Yang Industrial Co. and Cathay Investment & Trust Co.—has invested US$360 million in Vietnam for a cement plant, two motorcycle factories, and a Cathay branch office. The latter will be able to give Taiwan investors needed financial support.
Wei-Chuan Foods Corp. has decided to locate its regional headquarters for Southeast Asia in Thailand. The company already has an agricultural products plant there, and will add a beverage production line later this year, mainly to supply the Thai domestic market. The President Group also has great expectations for Southeast Asia. It already operates instant-noodle plants and beverage plants in Thailand and Indonesia, and one of its subsidiaries plans to invest in an agricultural-products plant in Vietnam this year.
Taiwan investors enjoy a major advantage over other investors in Southeast Asia: overseas Chinese communities. Overseas Chinese, especially those who received their college education in Taiwan, often bridge the cultural gap between Taiwan investors and native employees. In addition, with their prominent economic presence in the area, overseas Chinese can help Taiwan investors tap into the regional market.
The Go South Investment Policy will require concentrated effort as major problems have to be overcome in Southeast Asian countries, such as soaring land costs, strained infrastructure facilities, shortages of skilled labor, and inadequate support industries. Investors also need the cooperation of Southeast Asian governments in removing such long-standing investment barriers as bureaucratic red tape, high tax rates, and ceilings on the percentage of foreign shareholding.
It is still difficult for Taiwan financial institutions to obtain permission to establish branches in Southeast Asian nations. Such permission is needed to help Taiwan investors solve the serious difficulties in obtaining financial support from offshore sources. "Without the support of Taiwan-based financial institutions, the Go South Investment Policy is bound to fail," says Chen Fei-lung (陳飛龍), chairman of Namchow Chemical Industrial Co.
Incentives such as preferential tax rates and access to the domestic market will also be necessary to offset the advantages offered by Mainland China, which include cheap and abundant labor and a similar language and cultural background. Otherwise the Go South Investment Policy could be sailing into troubled waters. The Kwang Hwa Industrial Zone on Batam Island is an example. Over the past two years, private investor Lin Ching-fu (林經甫) put NT$600 million into opening up the industrial zone for other Taiwan businesses, but only three Taiwan-invested manufacturers set up operations. As a result, the Batam authorities last year took back 223 hectares of the 340-hectare zone. Lin attributes the reluctance of Taiwan businesses to the attraction of the mainland market. He plans to solicit investors from Singapore and even the mainland.
The Go South Investment Policy is geared to help Taiwan broaden its international economic structure, thereby offsetting the risk of overreliance on mainland China and helping the island's businesses tap into the abundant natural resources and fast-growing markets in the region. It is also expected to provide the capital, management techniques, and production technology needed by Southeast Asian economies. But many obstacles to investment need to be removed. Until then, most Taiwan enterprises will look first to the mainland, instead of Southeast Asia, for offshore investment.
Philip Liu (劉柏登) is editor-in-chief of Business Taiwan, a weekly newspaper published in Taipei by the China Economic News Service.