US embassy cable - 04TAIPEI3095

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 003095 
 
SIPDIS 
 
STATE FOR EAP/TC AND EB/TRA 
STATE PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 10/05/2014 
TAGS: EAIR, EWWT, ECON, PREL, TW, CH, Cross Strait Economics, Cross Strait Politics 
SUBJECT: TAOYUAN FTZ - UNREALISTIC CLAIMS OF PENDING DIRECT 
AIR LINKS 
 
REF: AIT TAIPEI 2997 
 
Classified By: AIT TAIPEI DIRECTOR DOUGLAS H. PAAL, REASONS 1.4 (B/D) 
 
Summary 
------- 
 
1.  (C) The Taoyuan Free Trade Zone near Taipei,s Chiang 
Kai-shek airport is a key component of Taiwan,s Global 
Logistics Development Plan (reftel).  The Far Glory Group 
will build the FTZ under a build-operate-transfer (BOT) 
contract.  Far Glory plans to invest NT$ 21.3 billion (USD 
636 million) in the project.  However, unrealistic claims 
about cross-Strait links, vague explanations of the special 
benefits of the FTZ, and unwillingness to build to tenants' 
specifications suggest the project may face difficulties 
finding customers. 
 
Far Glory's Big Plans for Taoyuan FTZ 
-------------------------------------- 
 
2.  (U) The Taiwan government is implementing its Global 
Logistics Development Plan.  In addition to free trade zones 
in Taiwan's two largest ports (reported reftel), a third key 
element in the plan is a free trade zone near Taipei's Chiang 
Kai-Shek Airport in Taoyuan.  Taiwan's Far Glory Group is 
developing the Taoyuan FTZ under a build-operate-transfer 
(BOT) contract with the Taiwan government. 
 
3.  (C) Far Glory is a diversified conglomerate with 
interests in real estate development, construction, tourism 
and insurance.  It also currently operates the Far Glory Air 
Cargo Terminal near Chiang Kai-Shek Airport.  The Taiwan 
Civil Aeronautics Administration (CAA) announced the tender 
for construction of the Taoyuan project in May 2002.  At that 
time it was known as the &Taoyuan Air Cargo Park.8  CAA 
officials tell AIT that about 30 firms placed bids on the 
project.  Far Glory's experience in developing the Far Glory 
Air Cargo Terminal helped it win the project.  However, other 
observers have pointed out that Far Glory's executives have 
close ties to the Chen Administration.  One source told us 
Far Glory's Chairman Chao Teng-hsiung was a member of 
President Chen's party on his last trip to Latin America. 
 
4.  (U) According to the BOT contract, Far Glory will build 
and manage the FTZ for 50 years, after which Far Glory will 
turn the FTZ over to the Taiwan government.  Far Glory plans 
to invest a total of NT$ 21.3 billion (USD 636 million) in 
the project and has already spent NT$ 1 billion (USD 30 
million) in the first phase.  A consortium of 10 banks headed 
by Taiwan's Chao Tung Bank has invested another NT$ 3 
billion.  Far Glory executives say that the FTZ will target 
the needs of high-tech companies to rapidly produce and 
customize products in response to customer orders. 
 
Shift in Focus, Unrealistic Claims 
---------------------------------- 
 
5.  (C) Far Glory executives marketing the Taoyuan FTZ have 
made unrealistic claims about what kind of cross-Strait 
access the FTZ will be able to provide.  They have expressed 
confidence that the FTZ will be able to service direct 
aviation links with the Mainland.  In addition, they told AIT 
that Mainland Chinese will be able to stay in the FTZ for up 
to 72 hours without visas or entry permits.  According to MAC 
Department of Economic Affairs Director Fu Don-cheng, the 
Taoyuan FTZ was originally conceived as a zone whose primary 
purpose would be to facilitate cross-Strait links.  It was 
subsequently reformulated as a free trade zone.  This helps 
explain why Far Glory makes these unlikely claims about 
cross-Strait travel and transportation to the FTZ. 
 
6.  (C) Fu and other officials have told AIT that after the 
December Legislative Yuan elections, the Chen Administration 
is likely to move actively toward opening a dialogue with the 
Mainland on direct aviation links.  Even assuming that such 
an opening occurs, it is still optimistic to predict direct 
flights by the projected opening of the Taoyuan FTZ in 
November 2005.  Fu also says that the only travel benefit for 
Mainland Chinese going to the FTZ will be reduced visa 
processing time.  He says that they should be able to acquire 
their visas in less than 10 days compared to the current 
procedures that can take up to a month.  This is very similar 
to proposals under consideration that would be applied to all 
PRC travelers to Taiwan. 
 
7.  (C) Direct links are even more important to the success 
of the Taoyuan FTZ than to the Keelung and Kaohsiung free 
ports.  The additional time and expense of passing through 
Hong Kong or Japan are proportionally smaller for sea 
freight.  In fact, one source tells us that some ships find 
ways to obtain the necessary documentation without actually 
stopping in a third port, for example by having Japanese 
customs officials meet the ship at sea to provide the 
documentation.  For air cargo the extra hours and expense 
imposed by a transit stop are considerable.  In addition, 
Keelung and Kaohsiung Harbors have newly-established offshore 
transshipment centers that allow cargo coming directly from 
the Mainland to be offloaded and loaded in the transshipment 
centers as long as it is then shipped to a third location 
without passing through Taiwan customs. 
Marketing Problems 
------------------ 
 
8.  (C) Although Far Glory has claimed that firms such as IT 
manufacturers Quanta, Asustek and Hewlett-Packard are 
interested in occupying space in the FTZ, the firms 
themselves have yet to publicly express interest.  Quanta 
Group Deputy Spokesman Jason Lin told econoff that Quanta's 
interest is not high.  He noted that Quanta's manufacturing 
facilities in Taiwan already enjoy many of the benefits of 
the FTZ, including exemption of customs duties on imported 
components that are re-exported and expedited customs 
clearance. 
 
9.  (C) DHL Taiwan Director of Operations Nick Chen pointed 
out that in addition to making unrealistic claims about the 
certainty of cross-Strait access for the FTZ, Far Glory has 
also been vague about other benefits that will be available 
to firms in the FTZ.  Far Glory has not been able to explain 
in detail to potential tenants the customs clearance 
procedures or tax exemptions for the FTZ.  Chen also noted 
that many high-tech firms, including tenants of the Hsinchu 
Science and Technology Park already enjoy similar benefits. 
DHL's plan is to wait and see how many other firms move into 
the FTZ.  If there is enough interest by potential DHL 
customers, DHL will consider establishing a facility. 
 
10.  (C) Another potential problem for the Taoyuan FTZ is 
that Far Glory plans to build most of the FTZ facilities 
first and them fill them with tenants, as opposed to a 
build-to-suit approach of identifying tenants and then 
building the facilities they need.  Sharon Hann, marketing 
director for commercial real estate consulting firm NAI 
Taiwan, who has worked with Far Glory on other projects, 
points out that this may be especially problematic for 
high-tech firms, which often have unique specifications for 
manufacturing facilities.  Taiwan Association of Logistics 
Management Secretary General James Cheng explained that this 
type of development approach was one of the mistakes that 
contributed to the failure of the Taisugar Logistics Park 
(reftel). 
 
Comment ) Warning Bells 
----------------------- 
 
11.  (C) Unrealistic claims about cross-Strait links, vague 
explanations of the special benefits of the FTZ, and 
unwillingness to build to tenants' specifications are all 
troubling signs that Far Glory will not be able to make the 
Taoyuan Free Trade Zone a success.  With projected investment 
of over USD 600 million, the potential losses are high. 
Under the BOT contract, the financial risk borne by the 
Taiwan government may be low, but the prospects for the 
Global Logistics Development are not good. 
PAAL