US embassy cable - 04TAIPEI3930

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003930 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 12/03/2014 
TAGS: EINV, ECON, ETRD, TW, CH, Cross Strait Economics 
SUBJECT: CROSS-STRAIT INVESTMENT KEEPS GROWING 
 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.5 D 
 
Summary 
------- 
 
1.  Taiwan investment in the PRC approved by Taiwan's 
Ministry of Economic Affairs during the first six months of 
2004 was 68 percent higher than the same period last year. 
PRC data also shows a substantial increase in contracted 
investment but a modest drop in realized investment. 
High-tech firms lead the trend, but firms in heavy 
industries, including steel and cement, are also investing in 
the PRC.  Taiwan investment is concentrated in the Pearl and 
Yangtze River Deltas areas, with investment in the Yangtze 
Delta region growing faster.  Nevertheless, Taiwan's 
restrictions on certain categories of investment continue to 
hold back Taiwan firms in the high-tech industries where 
Taiwan's advantage is strongest.  End Summary. 
 
Taiwan's Mainland Investment Continues to Grow 
--------------------------------------------- - 
 
2. (U) Recent statistics released by Taiwan's Ministry of 
Economic Affairs (MOEA) show that Taiwan's investment in the 
PRC continued to grow during the first half of 2004 at a 
remarkable pace.  MOEA approved USD 3.39 billion worth of 
investment during the period.  This represents a 68 percent 
increase over the same period in 2003.  Investment in 
Mainland China accounted for at least 70 percent of Taiwan's 
total foreign investment during the first half of the year. 
Some officials estimate that up to 75 percent of Taiwan's 
investment goes to the Mainland if money funneled through 
offshore financial centers such as the Cayman Islands is 
included.  According to MOEA, Taiwan's cumulative investment 
in the PRC increased 9.9 percent during the period to USD 
37.7 billion.  Most observers believe that a large portion of 
Taiwan's investment in the Mainland evades MOEA approval. 
Unofficial estimates of Taiwan's cumulative investment in the 
PRC range as high as USD 190 billion. 
 
3. (C) The PRC Ministry of Commerce's data for the first half 
of the year as re-released by Taiwan's MOEA show a somewhat 
different story.  The PRC provides data on contracted and 
realized investment.  The total value of contracted 
investment for the first six months of 2004 increased 31.6 
percent to USD 4.66 billion.  However, the value of realized 
investment )- dollars actually spent -- declined 10 percent 
compared to the same period in 2003 to USD 1.89 billion. 
Taiwan MOEA's Investment Commission Executive Secretary Huang 
Chin-tan speculated to AIT/T that the decline in realized 
investment during the period was probably due to the PRC's 
political pressure on "pro-green" investors who support Chen 
Shui-bian's Democratic Progressive Party and the PRC's 
macroeconomic control measures aimed at slowing China's 
growth.  Huang expects realized investment figures to show 
growth again in 2005. 
 
High Tech Industries Lead the Trend 
----------------------------------- 
 
4. (U) High tech firms continued to dominate Mainland 
investment during the first half of the year.  According to 
MOEA, electronics and electrical appliance manufacturing 
accounted for just over 50 percent of Taiwan's investment in 
the PRC.  Several large-scale high tech investments made up a 
particularly large portion of Mainland investment approved by 
MOEA during the period.  Taiwan Semiconductor Manufacturing 
Company's (TSMC) plan to invest USD 371 million in an 
eight-inch semiconductor foundry near Shanghai was approved. 
In addition, MOEA authorized Hon Hai Precision, manufacturer 
of a range of IT equipment and components, and TFT-LCD 
producer AU Optronics to invest USD 57.4 million and USD 100 
million respectively. 
 
5. (C) Taiwan's heavy industry firms are also continuing to 
invest in the Mainland.  Together, investments in basic 
metals and metal products, non-metallic minerals (including 
cement), and chemicals accounted for 18 percent of approved 
investment during the first half of 2004.  Among the largest, 
MOEA approved Formosa Chemicals and Fibre Corp.'s plan to 
invest USD 48.3 million in a petrochemicals plant and Yieh 
United Steel's plan to invest USD 51 million in a stainless 
steel project.  These results seem surprising given the PRC's 
efforts to slow down its economy, in part aimed at the 
construction industry.  Even industries that would be most 
susceptible to these economy-cooling measures have seen large 
new investments.  MOEA approved Taiwan Cement's plan to 
invest USD 50.8 million in the first half of the year. 
Furthermore, in the second half at least three additional 
large-scale investments in the cement industry have also been 
approved.  MOEA's Huang told AIT that his office contacted 
steel and cement industry investors and learned that the PRC 
approved their investments despite efforts to slow the 
economy because the projects would improve energy efficiency 
in the PRC. 
 
Taiwan's Investment in the PRC Moving North 
------------------------------------------- 
 
6. (U) Taiwan's investment in the Mainland is mostly 
clustered in the Pearl and Yangtze River Delta areas. 
However, the latest data from MOEA suggest that investment in 
the Mainland is moving north.  Whereas Guangdong and Fujian 
provinces accounted for about 39 percent of investment 
approved up through 2003, they made up only 25 percent of 
investment approved during the first half of 2004.  Jiangsu 
and Zhejiang provinces together with the municipality of 
Shanghai, on the other hand, accounted for more than 68 
percent in the first six months of the year, compared to only 
47 percent of cumulative investment through 2003.  The 
conventional wisdom is that Taiwan's high tech firms tend to 
invest in the Yangtze River Delta area, while manufacturers 
of other consumer goods, such as textile, toy, and shoe 
manufacturers, tend to concentrate along the Pearl River in 
cities like Shenzhen and Dongguan, Guangdong province. 
MOEA's data bear this out.  Approximately 75 percent of 
Taiwan's approved investment in the electronics and 
electrical appliance category was destined for the Yangtze 
River Delta area during the first half of 2004. 
 
Investment Policy Still Impedes Some Investment 
--------------------------------------------- -- 
 
7. (C) Even as investment in the Mainland rises rapidly, 
Taiwan's regulations continue to prevent some investment. 
Taiwan's government has been considering for sometime lifting 
investment bans for small TFT-LCD panel manufacturing, 
integrated circuit (IC) packaging and testing, and trash 
incineration.  Pre-election politics have delayed approval of 
these categories, but according to MAC officials, these 
categories will be approved for investment around the end of 
the year.  Several firms have expressed interest to MOEA and 
are ready to invest in these categories.  Other categories, 
notably large TFT-LCD panel and advanced semiconductor 
manufacturing, remain prohibited with no sign that the Taiwan 
government will lift restrictions in the near future. 
 
8. (C) Taiwan is moving slowly to liberalize semiconductor 
investment in the Mainland.  It has already decided to allow 
up to three firms to build eight-inch wafer semiconductor 
foundries in the PRC.  So far, only TSMC has been approved. 
In addition, United Microelectronics Corp., Powerchip 
Semiconductor Corp., ProMos Technologies Inc., and Nanya 
Technology Corp. have all expressed interest in building 
foundries in the Mainland.  The Taiwan government still 
prohibits investment in the Mainland in the more advanced 
twelve-inch wafer technology.  However, it has not succeeded 
in keeping this technology out-of-reach for PRC 
manufacturers.  In September, the PRC's Semiconductor 
Manufacturing International Corporation (SMIC) opened its 
first twelve-inch wafer manufacturing facility in Beijing. 
As reported in the media, Taiwan PC manufacturer Acer 
Chairman Stan Shih argues in his new book "Millennium 
Transformation: Change Management for New Acer" that it's too 
late for Taiwan firms to dominate the PRC chip market.  He 
believes that had firms like TSMC been able to invest in the 
Mainland sooner they would have been able to eliminate 
competition from PRC-based firms.  He believes that PRC firms 
have now attained a level of technology that will make them 
strong competitors.  TSMC blames, at least in part, 
industrial espionage for SMIC's success.  TSMC has filed suit 
against SMIC for patent and trade secret infringement with 
the U.S. District Court for the Northern District of 
California and the U.S. International Trade Commission.  If 
Taiwan continues to hold back the industries where its 
competitive advantage is strongest -- like semiconductors -- 
it will face increasing competition from the PRC and other 
countries and risks its own future growth 
PAAL