US embassy cable - 05TAIPEI4071

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004071 
 
SIPDIS 
 
DEPT FOR EAP/TC 
COMMERCE FOR ITA/MAC/ASIA/MBMORGAN 
DEPT PASS AIT/W 
 
E.O. 12958: DECL: 10/03/2015 
TAGS: ECON, EINV, EFIN, TW 
SUBJECT: TAIWAN'S SCIENCE PARKS - REACHING THE LIMITS OF 
EXPANSION 
 
REF: A. TAIPEI 2653 
 
     B. TAIPEI 2869 
     C. TAIPEI 3931 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.4 d 
 
Summary 
------- 
 
1. (C) With the continuing success of Taiwan's Hsinchu 
Science Park (HSP) and lack of available real estate for 
its further expansion, the Taiwan government's National 
Science Council, which oversees HSP, has built two 
completely new science parks and ten satellite campuses. 
The new science parks in Tainan and Taichung have attracted 
large amounts high-tech investment, but have not duplicated 
HSP's success at fostering new research and development. 
This is due to lack of support from research institutions 
in the newer parks as well as external factors that may 
have been unique to HSP's experience.  The satellite 
campuses have been less successful at attracting tenants. 
Instead of attempting to duplicate the HSP model, Taiwan's 
investment environment would be better served if the Taiwan 
government accelerated the liberalization of cross-Strait 
economic policies and more effectively addressed labor 
shortages in high-tech industries.  End summary. 
 
Hsinchu Miracle 
--------------- 
 
2. (U) Taiwan's Hsinchu Science Park (HSP) played an 
essential role in Taiwan's rapid economic growth during the 
1980s and 1990s.  Since it began operations in 1980, this 
single cluster of high-tech manufacturing firms has been 
almost entirely responsible for Taiwan's emergence as a 
world power in the information technology and semiconductor 
industries.  Today, more than 100,000 people work in the 
park.  Total annual sales for the firms in HSP top NT$ 1 
trillion (about USD 30 billion).  The HSP companies also 
obtain thousands of patents each year. 
 
3. (U) HSP firms continue to display strong growth.  Total 
sales for HSP firms in 2004 were more than 30 percent 
higher than the previous year.  Investment by HSP firms 
exceeded NT$ 1 trillion for the first time in 2004 (more 
than USD 30 billion), more than twice 1998 investment 
levels and four times 1996 levels.  Many firms would like 
to expand their operations in HSP.  There is also a long 
waiting list of firms that wish to lease space in the park 
for the first time.  However, all of the available space 
has been filled and there is no vacant real estate 
surrounding the current campus available for expansion of 
the park. 
 
4. (U) As a result, the Taiwan government's National 
Science Council, which oversees HSP, has moved to expand 
with other parks.  The Southern Taiwan Science and 
Industrial Park (STSIP) in Tainan was established in 1996, 
and the Central Taiwan Science Park (CTSP) in Taichung 
started operations in 2003.  In addition, the National 
Science Council has created several satellite campuses for 
HSP as well as the newer parks.  These expansion efforts 
have met with varying degrees of success. 
 
STSIP and CTSP - Many Tenants but No Cluster Effect 
--------------------------------------------- ------ 
 
5. (U) The STSIP and CTSP have been very successful in 
attracting high-tech industry tenants and high levels of 
investment.  STSIP is the largest of the three main parks 
in terms of space with just over 500 hectares of industrial 
space on the main campus, and has attracted tenants to fill 
all but 3 percent of the available space.  CTSP is more 
comparable in size to HSP with 172 hectares and 237 
hectares of industrial space, respectively.  Although CTSP 
is the newest park, it too has managed to fill most of the 
available space and now has a vacancy rate of only 6 
percent. 
 
6. (C) However, the new parks have not duplicated HSP's 
success in research and innovation.  As former HSP Director 
and Vice Minister of Economic Affairs Yang Shih-chien 
commented to AIT/T, the STSIP and CTSP are really just 
industrial parks, not science parks.  Yang, who is now a 
venture capitalist, noted that the two newer parks have 
good facilities for factories and provide useful 
administrative services to tenants, but lack the strong 
research support that HSP has.  As a result, they have 
attracted established high-tech manufacturers to build 
large-scale manufacturing facilities, but they have not 
been as successful at encouraging start-up companies. 
National Science Council Science Park Coordination Division 
Associate Researcher Chou Hsien-jen echoed Yang's comments, 
expressing disappointment with relatively low levels of 
research and development expenditures at the STSIP.  In 
particular, STSIP and CTSP have lacked support from the 
government's Industrial Technology Research Institute 
(ITRI), which has been instrumental in Hsinchu's 
establishment of an environment that fosters small high- 
tech ventures.  A relatively new ITRI facility in STSIP may 
help to change this situation.  The first researchers moved 
into the facility in April 2004. 
 
7. (C) Comment: It may never be possible for Taiwan to 
recreate the remarkable success of HSP.  HSP's success has 
been due in no small measure to several factors completely 
beyond the control of the Taiwan government and industry. 
These factors include the presence abroad at the time of 
its founding, especially in the United States, of large 
numbers of highly trained engineers and scientists from 
Taiwan who were willing to return home to participate in 
Taiwan's economic boom.  In addition, the semiconductor 
industry, which drove Hsinchu's success, has several 
characteristics that other industries identified in Taiwan 
as key economic drivers (TFT-LCD manufacturing and 
biotechnology) simply do not have.  Semiconductors play an 
essential role in a range of technologies that include not 
only most consumer electronics but also numerous 
industrial and military applications.  Furthermore, 
Taiwan's development of the fabless/foundry model of 
semiconductor production where firms specialize in chip 
design and contract manufacturing to chip foundries was an 
important factor in the success of the industry here.  End 
comment. 
 
Satellite Campuses 
------------------ 
 
8. (U) Ten satellite campuses established under the 
administration of the three science parks have not 
attracted tenants as effectively as the main campuses.  The 
satellite campuses are all relatively new, but they 
generally have vacancy rates much higher than CTSP, which 
was established in 2003 and is among the newest.  Only one, 
the Lungtan satellite campus of HSP has been able to fill 
all of its industrial space available for lease.  HSP's 
Chunan campus has managed to lease all but 8 percent of its 
industrial space.  None of the other satellite campuses has 
a comparable vacancy rate.  The Kaohsiung campus, Dushin 
campus and Huwei campus have vacancy rates of 23 percent, 
30 percent and 49 percent respectively.  Two of the 
campuses, Tonglo and Shengyi, have yet to find a single 
tenant for industrial space.  The National Science Council 
has not yet released data for three of the newest satellite 
campuses. 
 
9. (C) Former Vice Minister Yang told us that he doesn't 
know why the National Science Council wants to expand the 
science parks any further.  He said that the new campuses 
offer few advantages that are not available elsewhere 
throughout Taiwan.  He highlighted that the science parks 
no longer offer unique tax advantages.  As an example, he 
noted that Taiwan notebook computer manufacturer Quanta had 
passed by opportunities to set up a factory in one of the 
science parks and instead set up operations near Taipei in 
Linkou.  Yang speculated that one major attraction of the 
science parks is the prestige of the science park address. 
Higher vacancy rates suggest that this level of prestige 
may not extend to the satellite campuses. 
 
10. (C) Taiwan government officials have cited politics as 
an important factor in science park expansion particularly 
for satellite campuses.  National Science Council Science 
Park Coordination Division Director Tsai Ming-chu noted to 
AIT/T that local governments compete to get science park 
campuses, and that their allocation became a tool to 
attract voters in last year's presidential election.  HSP 
Investment Services Division Project Manager May Hsia 
identified the HSP's Ilan campus in particular as a site 
that had been selected primarily for political reasons. 
Comment - Fix the Fundamentals First 
------------------------------------ 
 
11. (C) Despite failing to recreate new technology clusters 
like Hsinchu's in Tainan or Taichung, Taiwan has succeeded 
in using the expansion of the science park model to 
encourage investment in those places.  However, it may be 
reaching the point where further expansion does not yield 
substantial results.  In addition to competing with each 
other, Taiwan's new science parks and satellite campuses 
are also competing with similar parks created by local 
governments such as Taipei's Neihu Technology Park and 
Nankang Software Park.  Taiwan is also trying to encourage 
investment with new free trade zones (reported ref C). 
Instead of further expansion of these special zones, the 
Taiwan government should instead make greater efforts to 
fix other, broader problems that restrain investment in the 
island.  The lack of direct cross-Strait links is one of 
those problems.  As former Vice Minister Yang put it, 
Taiwan must strengthen the arm that connects it to the 
Mainland in order to maintain the arm that connects it to 
the rest of the world.  Another problem is the worsening 
shortage of skilled labor (described in ref B).  The 
American Chamber of Commerce in Taipei identified this as 
one its primary concerns in its 2005 White Paper (reported 
ref A).  Taiwan must take additional steps to increase the 
number of engineers and other skilled workers it produces 
but should also take steps to make it easier for firms to 
bring talented workers from overseas.  Only when these more 
fundamental problems are addressed more effectively will 
special investment zones achieve their full potential.  End 
comment. 
PAAL