US embassy cable - 05TAIPEI4779

UNCLAS SECTION 01 OF 04 TAIPEI 004779 
 
SIPDIS 
 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, PINR, TW, Finance, Trade, Cross Strait Economics, Transportation, IPR, ESTH 
SUBJECT:  Economic Briefing for November 2005 
 
REF: (A) Taipei 4764; (B) Taipei 3572 
 
1.  This cable summarizes selected economic events in Taiwan 
in November 2005: 
 
--New accounting system for national income statistics 
 
--Alternate Minimum Tax Bill 
 
--Foreign investor acquires local bank 
 
--Compulsory licensing for Tamiflu 
 
--National Communication Commission 
 
--Hong Kong-Taipei flights proposed 
 
--Cross-Strait government co-investment 
 
--Taiwan TFT-LCD panels 
 
--Taiwan offshore production dominates IT 
 
Taiwan adopts UN National Accounts System 
---------------------------------------- 
 
2.  In November, Taiwan replaced the 1968 version of the 
U.N. System of National Accounts with an accounting system 
based mainly on the 1993 U.N. System of National Accounts 
(93SNA) in its compilation of national income statistics. 
The 93SNA includes in gross domestic product (GDP) four 
categories of expenses excluded from the 68SNA GDP.  These 
four categories are 1) mining exploration expenditure, 2) 
computer software expenses (now treated as capital 
formation), 3) banking services for government and 
households, and 4) depreciation of public infrastructure 
(now classified as final consumption).  Consequently real 
GDP growth in 2004 was changed from 6.06% to 6.07% and the 
2004 per capita GDP increased by 5% from US$13,595 to 
US$14,271.  Based on the 93SNA, the Taiwan government 
estimates the island's economic growth will rise from 3.80% 
in 2005 to 4.08% in 2006.  The 93SNA changes the components 
of 2004 GDP to 72.73% for the service sector (up from 68.79% 
based on the 68SNA), 1.68% for agriculture (down from 
1.74%), and 25.58% for industries (down from 29.54%). 
 
Taiwan Legislature's First Reading of AMT 
----------------------------------------- 
 
3.  In late November the Legislative Yuan (LY) finished its 
first reading of the Alternate Minimum Tax Bill.  Under the 
current version of the Bill, individuals with over NT$6 
million (about US$180,000) income will be subject to a 20% 
AMT.  Three years after the new tax law is adopted, the AMT 
will be expanded to include overseas income.  The AMT 
corporate tax rate will be 10-12% on income above NT$8 
million (about US$240,000).  About 15,000 people will be 
required to pay the AMT according to an estimate by the 
Ministry of Finance.  The AMT is expected to cut listed 
companies' profit margins by 3% to 5% and may affect 
semiconductor, TFT, and other high-tech industries exempt 
from most tax, more than other sectors.  A recent Gallup 
poll for CLSA showed broad support for the AMT. 
 
First Foreign Acquisition of Local Bank 
--------------------------------------- 
 
4.  On November 28, Nassau Inn Investments Limited acquired 
61% equity in Business Bank of Hualien (BBH) for a cost of 
NT$1,000 million (US$30 million). This will be the first 
foreign acquisition of majority ownership of a local bank 
(most of the funds are reportedly from European and American 
investors).  The acquisition will help Taiwan resolve 
problems at one of the eight banks designated by the 
Financial Supervisory Commission (FSC) as targets for the 
(now-defunct) Financial Reconstruction Fund.  In September 
2005, BBH failed to meet FSC requirements with a non- 
performing loan (NPL) ratio of 10% and a capital adequacy 
ratio of 1.4%.  Nassau Inn is expected to improve and sell 
BHH rather to hold and manage it. 
 
Compulsory Licensing for Tamiflu Production 
------------------------------------------- 
 
5.  Taiwan's Intellectual Property Office (IPO) issued a 
compulsory license for Tamiflu production to Taiwan's 
Department of Health (DOH) on November 25 (ref A).  The 
authorization will be valid from November 25 to December 31, 
2007.  Tamiflu produced under the compulsory authorization 
will be limited to use when products made by the 
rightsholder Roche are insufficient to meet demand.  DOH is 
required to pay as yet undetermined royalties to Roche.  At 
present, Taiwan intends to buy from Roche only enough 
Tamiflu to stockpile for 10% of the population. 
 
National Communication Commission (NCC) 
--------------------------------------- 
 
6.  In late November 2005, the ruling party nominated ten 
NCC commissioner candidates and the opposition parties 
proposed eight. The 18 candidates include National Chengchi 
University (NCU) Mass Media College Dean Wong Shiu-chi 
(nominated by the ruling DPP party), NCU Law Professor Su 
Yung-ching (nominated by the opposition KMT Party), and 
former KMT-owned China Broadcasting Company President Liu 
Chu-yuan (nominated by the opposition PFP Party).  The NCC 
Commissioner Review Committee will select 13 out of the 18 
candidates to constitute the NCC in the next few weeks. 
 
Flights from Hong Kong to Downtown Taipei Airport Proposed 
--------------------------------------------- ------------- 
 
7.  In mid November, 116 legislators including DPP, KMT and 
PFP members, proposed opening downtown Taipei's Sungshan 
Airport to flights from Hong Kong and Macao.  Far Eastern 
Air Transport and TransAsia Airways both voiced support for 
the proposal.  The Ministry of Transportation and 
Communications has also expressed its support, and the Civil 
Aviation Administration (CAA) is doing a feasibility 
evaluation.  The CAA has indicated that the proposal will 
require approval by the Mainland Affairs Council (MAC) and 
national security agencies.  On November 16, legislators 
froze the MAC operating budget for 2006 pending approval of 
Hong Kong and Macao flights at Sungshan Airport among other 
conditions. 
 
Cross-Strait Flag Carriers Co-invest 
------------------------------------ 
 
8.  Taiwan's government-controlled China Airlines (CAL) 
announced November 15 plans to acquire a 20-percent 
stake in Hong Kong-based China Aircraft Service Ltd. 
(CAS).  CAS is an aircraft maintenance and cleaning 
service provider with (PRC government-owned) Air China, 
(US) United Airlines and (Hong Kong) Hutchison Whampoa 
Limited as major shareholders.  Air China is the 
largest shareholder with a 53-percent stake.  In 
addition, the Ministry of Economic Affairs approved 
another Mainland investment proposal from CAL and two 
Taiwan shipping companies, Wan Hai Lines and Yangming 
Marine Transport, to purchase a 43 percent stake in the 
PRC government-invested cargo airline, Yangtze River 
Express (ref B). 
 
Taiwan TFT-LCD Manufacturers Investing in PRC 
--------------------------------------------- 
 
9.  On November 14, Taiwan's Chunghwa Picture Tubes Ltd. 
announced plans to purchase a 29-36 percent stake of China's 
Xiamen Overseas Chinese Electronics Co., Ltd. (XOCECO).  The 
PRC firm manufactures televisions and monitors, sold 
internationally under the "Prima" brand.  The board of 
Chunghwa Picture Tubes expects to complete the purchase 
within six months.  The sale would make Chunghwa Picture 
Tube China's second largest LCD TV manufacturer.  On 
November 10, Taiwan's Toppoly Optoelectronics Corp. and 
Royal Philips Electronics announced plans to form a new 
company in China.  Toppoly is a subsidiary of Taiwan's 
Compal Electronics Group.  Toppoly already has a TFT-LCD 
display factory in Nanjing.  Taiwan firms currently are not 
permitted under Taiwan law to invest in TFT-LCD panel 
manufacturing facilities in the PRC.  However, there is no 
prohibition against investment in manufacturing TFT-LCD 
modules from imported panels. 
 
10.  The value of Taiwan-made large-scale TFT-LCD panels 
will increase 31% this year to US$17.6 billion.  Large-scale 
TFT-LCD panel exports will reach 93 million pieces, 
surpassing South Korea's exports of 88 million pieces.  The 
strong demand for LCD TVs, monitors, and laptop PCs, has 
contributed to rapid expansion of Taiwan's TFT-LCD industry. 
Taiwan's seven TFT-LCD producers took 45% of the world 
market in the second quarter this year, and have plans to 
invest an additional NT$120 billion (US$3.58 billion) in 
construction of "7.5G" (the most advanced) plants.  Corning 
Inc. has decided to invest an additional US$450 million to 
expand its glass substrate production facilities in Taiwan. 
Taiwan's TFT-LCD industry has attracted up-stream suppliers 
from Japan and South Korea to invest in Taiwan. 
 
Taiwan IT Leads the World 
------------------------- 
 
11.  Taiwan manufacturing firms are dominating world markets 
through production bases in China, particularly for 
information technology (IT) products.  According the 
Marketing Intelligence Center (MIC) of the Institute for 
Information Industry, Taiwan companies dominated the 
following IT product categories (with estimated 2005 global 
market share in parentheses) : motherboard (98.3%), laptop 
PC (82.4%), large scale LCD (46.9%), WLAN cards (89%), 
wireless access point (59%), VoIP IP phones (77%), customer 
premise equipment (75%), and internal VOIP phone routers 
(83%).  The MIC estimates that Taiwan's IT hardware outputs, 
excluding semiconductors, will increase by 15 percent this 
year to US$80 billion and by 9.5 percent in 2006 to US$87.5 
billion.  Laptops, with an output of US$30.2 billion, are 
the most valuable IT products.  A recent survey conducted by 
the Ministry of Economic Affairs showed that 71.7% of export 
orders for Taiwan IT products were manufactured overseas, 
mainly in China. 
 
PAAL