US embassy cable - 05TAIPEI1216

UNCLAS SECTION 01 OF 02 TAIPEI 001216 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, EFIN, TW, CH, Cross Strait Economics 
SUBJECT: TAIWAN INVESTMENT IN PRC - NOT JUST FOR EXPORT 
 
Summary 
------- 
 
1. (U) A survey of Taiwan enterprises in the PRC shows that 
55 percent of their total output by value was sold within the 
PRC.  More than half of those surveyed cited the expanding 
PRC domestic market as a primary reason for investing.  In 
addition, the survey showed that 50 percent of inputs were 
purchased from Mainland sources, only 39 percent from Taiwan, 
and PRC financial institutions provided 34 percent of 
operational financing.  This data undermines the assumption 
that the PRC is simply a cheap labor base for Taiwan 
companies.  This more complex pattern of interaction means 
that the Taiwan and PRC economies are becoming far more 
integrated that previously thought.  End summary. 
 
 
Background on Survey 
-------------------- 
 
2. (U) To provide further information about Taiwan's 
investment in the PRC, the Ministry of Economic Affairs 
(MOEA), Investment Commission last year surveyed the Mainland 
enterprises of Taiwan firms regarding their activities in 
2003.  MOEA released the results in February 2005.  MOEA 
surveyed 2,548 enterprises and received 817 usable responses. 
 Survey questions covered a wide variety of topics, including 
investment motivation, sales destinations, input sources, and 
concerns about the investment environment.  The survey 
provides useful information on Taiwan's investment, but the 
limited scope of the survey makes it more difficult to 
generalize about all of Taiwan's Mainland investment. 
 
55 Percent of Sales to PRC 
-------------------------- 
 
3. (U) Many analysts have observed that much of Taiwan's 
investment in the PRC is aimed at producing exports for 
markets in the U.S., Japan and Europe.  The survey results 
reveal that many Taiwan investors are more interested in the 
domestic PRC market.  Survey respondents reported that 55 
percent of their sales went to the domestic Mainland market. 
Of the 45 percent exported, almost half went to Taiwan.  In 
some industries, the PRC market accounted for almost all 
sales.  In chemical products manufacturing, Taiwan 
enterprises sold 94 percent of their products within the PRC. 
 In plastic products manufacturing the figure was 98 percent. 
 Nevertheless, in electronics and electrical equipment 
manufacturing, the Mainland accounted for only a small 
portion of sales, some 15 percent.  Exports to Taiwan 
consumed 53 percent of output for the industry, compared to 
32 percent exported to other regions. 
 
4. (U) Other data also indicated heavy interest in the 
domestic PRC market.  Fifty-three percent of enterprises 
surveyed said that the expansion of domestic PRC demand was 
one of the main reasons they chose to invest in the Mainland 
-- the second most popular reason behind low labor costs at 
83 percent.  In comparison, a similar survey of firms with 
foreign investments in other regions showed that only 36 
percent said that expansion of the local market was one of 
the main reasons they chose to invest.  In addition, when 
enterprises that had seen higher profits during the survey 
year were asked why profit went up, 43 percent cited 
increases in local demand, the most frequently cited response. 
 
PRC Important Source for Inputs and Finance 
------------------------------------------- 
 
5. (U) According to the survey, the PRC is the largest source 
of inputs for Taiwan enterprises in the Mainland.  Overall 
the survey showed that 50 percent of equipment, raw materials 
and parts was purchased from Mainland sources.  In 
comparison, only 39 percent came from Taiwan.  However, 
nearly half of the inputs purchased from Mainland sources, 
came from other Taiwan enterprises.  Some key industries, 
including plastic products and electronics and electrical 
equipment manufacturing still rely more heavily on Taiwan 
sources, accounting for 50 percent and 46 percent of inputs 
respectively.  Not surprisingly, imports from outside greater 
China, especially oil imports, were the most important source 
of inputs for Taiwan-owned enterprises in chemicals 
manufacturing, making up 90 percent of total inputs. 
6. (U) The PRC financial system is also an important source 
of financing for Taiwan enterprises in the Mainland.  The 
survey indicated that PRC financial institutions were the 
source for 34 percent of operational financing, second only 
to the mother company in Taiwan at 37 percent.  Taiwan 
financial institutions accounted for only 3 percent.  In many 
industries, including basic metals, plastic products and 
chemicals manufacturing, PRC financial institutions were the 
largest source. 
 
Comment - More Profound Integration 
----------------------------------- 
7. (SBU) These results cast new light on the nature of 
Taiwan's investment in the PRC.  Many analysts have 
emphasized that much of Taiwan's investment is just export 
assembly, importing large quantities of parts from Taiwan for 
assembly in the PRC and sale to U.S., Japanese and European 
consumers.  This pattern of investment would minimize Taiwan 
firms' interaction with the domestic PRC economy except as a 
source for cheap labor.  The new data show that this is not 
the only story.  While electronics manufacturing appears to 
fit this old model, Taiwan firms in other industries are 
increasingly selling to PRC consumers.  They are also growing 
more dependent on Mainland sources for inputs and financing. 
Over time, this more profound integration may have an 
increasing impact on political cross-Strait relations. 
Taiwan will have more motivation to engage in a dialogue and 
regularize cross-Strait economic relations.  End comment. 
 
PAAL