Taiwan's Changing Business Environment
Taiwan's Changing Business Environment
Taiwan has made great strides over the past ten years to open its domestic economy to international competition. For both commercial and strategic reasons, Taiwan has sought a role for itself as a regional hub and an alternative centre to Hong Kong and Shanghai from which to develop the China market. Lack of direct transportation links with the Chinese mainland have hampered efforts so far in this direction but progress has been rapid in other areas that are not dependent on direct links with the PRC.
Although not yet succeeding as a regional centre - Singapore and Hong Kong remain the favourites of international business - Taiwan is an important market in its own right although not one for the feint hearted. Taiwan's industry is becoming increasingly dependent on high value-added products and is a major purchaser of industrial plant and equipment. Major infrastructure projects underway in the telecommunications, energy and transportation sectors provide major opportunities for foreign engineering and technology-based companies. An affluent population of 22 million, fashion conscious and with a high propensity to spend provides a consumer market ready to try new trends and fashions. The new DPP led government is expected to place less emphasis in the future on the broad regional centre approach to one that is more focused on building Taiwan as a high-tech manufacturing hub.
Doing business successfully in Taiwan takes time. There are few, if any, short cuts. Obtaining a through understanding of the market, taking the time to build and nurture the necessary relationships - at all levels - and providing proper support both for local agents and for end-users are all essential foundations for business success.
With further market liberalisation underway as Taiwan prepares to enter the World Trade Organisation companies and organisations that have laid the proper groundwork will reap substantial benefit.
Taiwan's economy continues to be one of the most resilient in Asia, thanks largely to the strength of its public and private financial reserves. Undoubtedly the crisis of 1997 - 98 that swept through much of the region took some of the gloss off of economic performance but Taiwan was not nearly so badly affected as many other countries. Taiwan's rate of economic growth for 1999 came in at around 5.5% (down slightly from earlier estimates due to economic losses suffered in the disastrous September 1999) earthquake and is set to climb above 6% for the year 2000.
The New Taiwan dollar which is loosely tied to a basket of currencies, depreciated around 20% during the Asian meltdown - much less than most others in Asia - but has since regained some of its lost ground. It weakened in the latter part of 2000 against the background of political uncertainties that had affected Taiwan's stock market.
The strong performance of Taiwan's general stock index (TAIEX) throughout 1999 and into early 2000 reflected the mood of confidence at that time. The TAIEX had been on an upward climb since February 1999, regaining much of the value lost the previous year when confidence tumbled around the region. Aided both by a strong performance of the electronics sector and (according to many) an undetermined level of manipulation by the business arm of the Kuomintang, anxious to create a good environment for the March 2000 Presidential election, the Taiex at the start of the new Millennium was trading at its highest levels in more than two years. The situation changed markedly with the advent of the new DPP led government. Political uncertainties, especially local nervousness over cross-straits ties and the failure of the CHEN administration to articulate a clear policy towards mainland China, have been a major contributing factor as has the crackdown that has occured (and as foreshadowed) on insider trading and market manipulation. But also it appears many KMT backed companies have been deliberately withdrawing from the market in order to create problems for the new government even at risk of damaging Taiwan's credibility as a whole.
The Taiwan Stock Index is heavily weighted towards technology stocks - especially electronics - and fears of a global slowdown in demand for the products of Taiwan's high tech sector has played a part in the recent fall as have problems within the financial sector. While little can be done in relation to external factors, a measure of restructuring and rationalization - especially within Taiwan's troubled banking industry has been long overdue and will eventually lead to more sustainable long term growth. Overall and with a more liberal climate for foreign investors, many local stocks represent sound long term investments for those willing to hold them.
Trade regains its momentum
Having dropped slightly in 1998 due to the effects of the Asian economic crisis, Taiwan's total two-way trade rebounded in 1999. Exports once again crossed the US$120 billion threshold although overall, imports - while greater than in the previous year did not quite match the previous 1997 high though this will probably be surpassed in Year 2000.
In terms of total two-way trade volumes (measured in US dollar terms), the United States remains Taiwan's single most important trading partner followed by Japan, Hong Kong, Korea and Germany. Britain was Taiwan's 10th ranking trade partner in 1999.
Taiwan's major export items include machinery and electrical products, textiles and chemicals.
Taiwan's list of import items is dominated by industrial raw materials. Principal imports included machinery and electrical equipment, basic metals and plastics.
Trade Performance by Region
In recent years and especially since the opening of indirect trade with the Chinese mainland, Asia has become the most important of Taiwan's regional markets. Although Japan remains the dominant trading partner within Asia, this regional trade is relatively diverse with 10 counties each accounting for a trade value with Taiwan exceeding US$1 billion. In 1996, prior to the crisis, exports to the Asian region amounted to 52% of Taiwan's total exports while imports from Asia accounted for almost 48%. Exports to the region dropped by almost 10% in the crisis years and by 1998 were down to 45.3%. In 1999 however, the value again increased - to 48.7% - in 1999.
By contrast, imports from the Asian Region have shown a steady growth over the past four years despite the crisis - from 47.7% in 1996 to 54.7% in 1999. Of the top 10 Asian trading partners, Taiwan maintains a trade deficit with seven of them.
Taiwan runs its largest trade deficit with Japan. In 1999 this deficit amounted to more than US$18 billion. Imports from Japan that year amounted to a total of US$31 billion much of it in raw materials, machinery and equipment for local industry upgrading. This was almost as much as Taiwan imports in total from the United States and Europe. Both geographical and cultural proximity work in favour of Japanese suppliers who are more adept at working the local market and in nurturing relationships than many of their western counterparts. This is discussed later in this chapter. Nevertheless the numbers are sufficiently striking to indicate the size of the market that is there to be tapped in the right circumstances.
Taiwan's total trade with North America has shown remarkable consistency in terms of share - 23.5% in 1996 and 23.7% in 1999. The United States is, by far, the single most important export destination for Taiwan's manufactured goods which increasingly are dominated by high technology items including products for the IT industry. Two-way trade with the United States exceeded US$50 billion in 1999; trade with Canada amounted to US$2.9 billion and with Mexico US$1.4 billion. In a number of areas the United States has received preferential trade treatment in the past, especially in relation to Taiwan's agricultural imports. This is set to change with any new access quotas being global in nature and in accordance with WTO rules rather than country specific quotas. Nevertheless, through this preferential access American producers will be at an initial advantage in having been able to familiarise themselves with the local market.
Central & South America
Aided by a foreign policy which seeks to provide aid for those Central American economies that maintain diplomatic ties to Taipei, Trade with Central America has increased in recent years, albeit from a small base. The regions of Central & South America combined account for a mere 2% of Taiwan's international trade. The Government has sought to encourage private sector investment into Central America both as a means for providing economic aid and in order to further tap the North American market from offshore manufacturing plant.
As a result of this policy, exports to Central America increased by 50% between 1996 and 1997 but have since flattened off. Imports from the region remain very low.
Trade with South America has actually declined in recent years. Brazil is Taiwan's principal trading partner within the region followed by Chile and Argentina. All three have slipped in their overall trade ranking with Taiwan during 1999 as compared to 1998. Brazil has fallen from 23rd place to 29, Chile from 31 to 32 and Argentina from 34 to 48th position. Nevertheless all three remain ahead of their Central American neighbours.
Taiwan's exports to Europe have shown a steady increase over the past four years and exceeded US$20 billion in 1999. Ninety five percent of these exports were to the countries of the European Union.
By contrast, sales from Europe to Taiwan have slipped recently. In 1998, some 19.7% of all imports were from Europe as compared with only 15.9% in 1999. Europe does well in the sale of fashion goods and consumer items to Taiwan but has been unable to match the Japanese in many industrial items.
Germany is Taiwan's largest trading partner in Europe followed by the Netherlands and the United Kingdom.
Trade with the countries of Australasia and the Pacific has shown little sign of growth over the past four years and remains at around 2.5% of total two-way trade.
Australia is the dominant trading partner in the region occupying 11th position overall. The trade is dominated by Taiwan's demand for raw materials and, as a consequence, declined slightly between 1997 and 1998 in the light of reduced overall demand. This trade appears to have recovered slightly in 1999.
Trade Performance by Commodity
Increasingly, Taiwan is becoming an importer of machinery and equipment required for its program of industrial upgrading. Encouraging local manufacturing enterprises to obtain ISO9002 certification in anticipation of Taiwan's WTO entry is an important component of government industry policy.
Machinery and electrical equipment was by far the dominant import category accounting for 46% of total imports in 1999. In value terms imports under this item increased from US$43 billion in 1998 to US$50.6 billion in 1999.
Machinery and electrical equipment was also the dominant export category with exports increasing to US$64 billion in value in 1999. Within this envelope electronics, IT and telecommunications items were in strong demand in both the USA and Europe.
Textile products while declining in value remained the second most important export item followed by chemicals and metal products.
Recent Trade Liberalisation Measures
Taiwan enters the new millennium having substantially completed its preparations for membership of the World Trade Organisation. Taiwan first applied to join the old GATTin 1990 and industrial restructuring aimed at trade liberalisation has been pursued for the past ten years. Bilateral negotiations have now been concluded with all WTO member countries that requested consultation and agreements have been signed with all such members with the exception of Hong Kong. Hong Kong, acting as a proxy for China, has procrastinated in order to ensure that Taiwan does not enter WTO ahead of the PRC. When membership eventuates, Taiwan will enter as "Chinese Taipei".
Over the coming years, the local market will be opened increasingly to global competition as a result of trade liberalisation measures in a number of areas.
Tariff Reduction Measures
Currently the average nominal tariff rate in Taiwan is 8.26% and this will be reduced to 7.65% upon Taiwan entering WTO. Thereafter it will be reduced progressively with the objective of achieving a nominal tariff of 5.69% at the end of the implementation period (four years after accession). This represents a real reduction of 29% in the average applicable tariff for industrial goods and 35% for agricultural products. According to local estimates the full implementation of tariff reductions will generate over US$1 billion of new imports of which 95% will be for manufactured goods.
Removal of Non Tariff Barriers
Taiwan is steadily reducing its list of import restrictions and reducing domestic subsidies. Subsidies to the agricultural sector will be reduced by 20% in year 2000. The opening of Taiwan's agricultural market is expected to generate a further US$1.7 billion in market opportunities with meat and meat products expected to make up over half of this total. Trade restrictions on grains and fruit will also be lifted.
Elimination of local content requirements for automotive goods will generate a new market for foreign parts and auto components with market share of imports in this sector alone expected to double from 30% to 60% of the total market - to an estimated value of US$1.25 billion.
Trade in Services
Trade in services has been steadily liberalised over the past decade. Under U.S. pressure further concessions have been made in the areas of financial services, telecommunications and transportation. The fixed line telecom market is to be liberalised in 2001 following the privatisation of the current monopoly carrier, ChungHua Telecom and the ceiling on foreign investment for Type I service providers (Taiwan uses the Japanese model) raised from 20% to 60% of which up to 60% can be via direct investment.
Taiwan welcomes foreign investment. Investment restrictions are rapidly being lifted in many areas.
Cumulative inwards private investment during the period to end 1998 totalled US$42.7 billion on which 89% is accounted for by foreign investors and the remainder by overseas Chinese (towards which slightly different rules apply - see below). Official records date from 1952 and include only those funds approved under the various statutes and laws governing foreign investment. Not included in official totals are those funds - the bulk of which would probably be from overseas Chinese - brought into the country for small scale domestic enterprises that do not attract specific incentives from government.
Large-scale inward investment is a relatively recent phenomenon. More than 80% of all inwards investment has occurred in the last ten years. Indeed, the level of inward investment in 1997 (US$4.3 billion) was on a par with the total received between 1952 and 1983. Overseas Chinese investment has always been a small part of the total and has been declining in recent years. Eighty-nine percent has been approved under the Statute for Investment by Foreign Nationals (see below)
Japan and the USA are the major foreign investors in Taiwan. The USA alone accounts for 27.6% of all direct overseas investment while Japan accounts for a further 26.4%. Hong Kong accounts for 10.6% and Singapore almost 6%.
European investors have contributed around 12% of the total of which the U.K. and the Netherlands are the two largest sources of European investment funds. The pattern of investment, in terms of its origin, has been remarkably consistent over the years.
Foreign investment is generally governed by the Statute for Investment by Foreign Nationals (or in the case of Overseas Chinese, the Statute for Investment by Overseas Chinese). These are discussed in n the following section which deals with government incentives for overseas investment into the Taiwan economy.
The Ministry of Economic Affairs is the central government agency that administers Taiwan's macro-economic policy and monitors overall growth targets. Within the Ministry are a number of specialised agencies charged with specific responsibilities for the various aspects of economic planning and implementation.
The Industrial Development Bureau is responsible for the overall co-ordination of economic development of the major industry sectors including the operation of industrial estates other than the science parks and the export processing zones (which are under separate administrations). The Investment Commission of the MOEA is responsible for administering the Statute for investment by Foreign Nationals and the corresponding statute governing overseas Chinese investment and reviews and approvals all applications for inward investment into the ROC under these statutes.
The Industrial Development and Investment Center and the Technology Transfer Service Center are two organisations also under the MOEA which provide general and introductory consultancy services to foreign companies seeking to invest in Taiwan or who wish to transfer technology to Taiwan.
The government has recently announced it intends to set up a new office under the Industrial Development Bureau to provide streamlined processing for investment proposals by large-scale corporations that entail a capital commitment of more than US$7 million. In order to stimulate the small and medium business sector, the same facilities will be accorded to smaller firms with investment proposals exceeding US$700,000. This proposal was announced in October 1997 and was introduced the following year.
Foreign invested approved companies (FIA) established under the SIFN have the same access to local incentives and privileges provided to domestic companies under other statutes and additionally enjoy a number of privileges not accorded to companies without such status:
- Generally, a right of up to 100% foreign ownership (although this is restricted in some industries, generally the trend has been towards liberalisation of the restrictions on foreign investment and ownership);
- A waiver of the requirement that the Chairman, vice-chairman and half the shareholders be Taiwan citizens;
- Full convertibility and the right to remit all profits or interest payments from the local investment;
- The right to repatriate up to 100% of the approved investment capital should ownership of the company be transferred or sold or upon dissolution of the company;
- A government guarantee against requisition or appropriation by the R.O.C. government within 20 years provided 45% or more of the shares in the business are held by foreign or overseas Chinese investors. If the foreign investment component is less than 45% of the total, the statute provides for "reasonable compensation" should appropriation become necessary.
- In addition to the specific incentives and protection accorded under the various Statutes for Investment, an FIA company is also accorded preferential status under other acts and statutes including the tax law of the ROC.
Foreign investments in Taiwan are protected from appropriation by government. The Statutes provide for appropriation only in case of national defence needs and after compensation has been paid. In fact, no cases of appropriation have ever been recorded and the risk of such appropriation in the future is considered highly unlikely.
Passage of a new Government Procurement Law in early 1999 is designed to simplify the government tendering process and provide greater transparency in the tendering and procurement process. Government procurement procedures are now said to be fully compatible with WTO standards. This is discussed further below.
Construction & Government Procurement
Taiwan's new law on government procurement came into effect in mid-1999. While the new procurement rules are generally considered to be a vast improvement on the previous process for government tendering, foreign companies seeking contracts in Taiwan should bear in mind that in many areas both government and the private sector are still coming to grips with the new procedures. This is especially true in the area of "Build, Operate, Transfer" (BOT) - a concept which Taiwan first introduced in 1993 but with which, largely because of lack of experience, there continues to be problems with many of the practical implications of the concept, especially that of project financing.
It should also be noted that many aspects of interpretation of the new law remain unclear and subject to test. Furthermore the only official explanations are all in Chinese and not readily available to foreign companies or their legal experts. The only exception to this is the Process Handbook for Disputes and Mediation copies of which may be obtained from the Public Construction Commission. A number of the larger law firms maintain specialists in the field of procurement and government contracts and with the necessary government connections needed for resolution of problems - actual and potential. As is the case in much of Asia, recourse to personal relationships and trust built up over many years are often more important in the resolution of problems between parties than recourse to legal contracts.
The term procurement as used in the Government Procurement Law (GPL) refers to "the contracting of construction work, the purchase or lease of property, the retention or employment of services, etc". In Taiwan, the law pertains to any government agency, public school or government owned enterprise.
The new GPL was promulgated on 27th May 1998, and became effective one year after this date. The law was drafted in an effort to increase transparency to the procurement system, and in order to comply with the requirements of WTO membership.
Procurement in Taiwan is overseen by the Public Construction Commission (PCC), a section of Taiwan's Executive Yuan, or inner cabinet. Under the PCC, the Executive Yuan established several boards to manage procurement and construction within Taiwan, the first of which was the Public Construction Supervisory Board (PCSB). This board was established in October 1990.
The PCSB's official role is the "co-ordination, technical review, performance evaluation, and progress control for major public construction programs". Should major difficulties arise in the execution of construction programs, the PCSB is authorised "to conduct analysis, propose possible resolutions, or co-ordinate with various parties involved to facilitate construction progress".
On July 10, 1995 the Organisational Statute of the Public Construction Commission (PCC) finally came into force. This statute established a ministerial-level commission with direct access to the legislature. Through this commission, ultimately a Ministry of Public Construction is to be formed. However no date has so far been set for creation of a full ministry.
In 1998 and in response to representations from a number of Taiwan's trading partners during WTO consultative meetings regarding market access, Taiwan began to merge selected areas of the Central Government's procurement agencies in order to make the procurement process more transparent. This involved a merger of the Public Construction Commission, the Construction and Planning Administration of the Ministry of the Interior, and the Urban and Housing Planning Department of the Council for Economic Planning and Development. The objective of the merger was to centralise and consolidate government policy making in the area of procurement in order to increase efficiency and transparency.
Currently the following entities have the policy-setting power for procurement on behalf of the Government:
- The Public Construction Commission has formal responsibility for interpretation and implementation of the Government Procurement Law as well as the power to overview the planning and implementation of major public construction projects;
- The Ministry of Interior has responsibility for issuing guidelines for procurement of construction works;
- The Industrial Development Bureau, (IDB) of the Ministry of Economic Affairs which has launched a "Buy Domestic Policy" as well as an "Industrial Co-operation Program" in order to assist domestic suppliers to acquire government procurement contracts as the prime contractor or as a subcontractor. In the procurement of machinery, electronic and electric equipment with the value not less than US$600,000, the IDB may require that the procurement be limited to qualified bidders and invite domestic suppliers to participate;
- The Ministry of Audit, an Agency, independent from the general administrative system, has the authority to inspect and audit the procurement of goods and constructive works by government entities.
The Central Trust of China (CTC) which previously was the only authorised agency for handling government procurement remains authorised as an agent for the Government in the procurement process. CTC's importance is however declining, and will continue to do so after its merger with the Bank of Taiwan and the Land Bank of Taiwan. The primary reason for the decline is that Government departments are now able and generally prefer to deal direct with potential suppliers as opposed to going through a third party. This is also advantageous to tendering parties as they can deal directly with the government as opposed to going via an agent.
There are three (3) types of possible tendering allowed for in the procurement process:
Open tendering procedure is used when the value of a proposed procurement for goods and construction works is estimated to equal or exceed the threshold NT$50 million (US$1.6 million). However, the open tendering process may be waived and replaced by the selective or limited tendering if it is approved by the audit authority under certain conditions prescribed by the law.
Either of the open tendering or selective tendering process may be chosen and applied by a procuring entity under certain legal criteria in the case where the value of a proposed procurement falls between NT$50 million and NT$ 5 million (US$160,000).
When the selective tendering process is chosen, the procuring entity will select two or more responsible suppliers for quotations.
Selective tendering can be initiated under Article 20 under four (4) circumstances;
Where there is a recurring demand; or Where the review of tenders takes a long time; or Where the suppliers' cost for preparation of a tender is high; or Where the qualification requirements for suppliers are complicated.
A Single Tendering procedure may be used in cases where the value of a proposed procurement falls below NT$ 5 million. Only one supplier will be selected for quotation. Competitive bidding is not necessary.
It is not however uncommon for the different tendering processes to become intertwined. For example, a 'single' tenderer is sometimes chosen under the 'selective' guidelines.
Ambiguity of laws in any country is frequent. Taiwan is no exception. Procurement in Taiwan is extremely lucrative and fiercely competitive. Much publicity has been directed towards the lack of a 'level playing field' throughout the tender process, with favour directed towards those firms which are either the most well connected or offer significant "incentives". As a result disputes are frequent, with the two most commons forms of disputes being Bid Challenges and Contract Disputes - the latter being by far the most numerous.
Recently, substandard construction was again brought to the centre of public attention as a result of the many construction faults revealed following the earthquake of 21st September 1999. Increased globalisation of all market sectors and foreign participation in major construction works have also served to provide additional and critical comparisons against domestic firms. This has pushed local authorities to open up the procurement market to direct participation by foreign contractors (an alliance with an experienced foreign supplier is considered likely to increase the quality of work being tendered) and to provide a more streamlined tender process. There is however still a long way to go in terms of proper qualification of potential local suppliers and prime contractors. Underworld influence on the local construction industry remains a real problem and pre-qualification documentation as well as engineering and construction licenses are often "rented" for the sole purpose of winning a contract. Taiwan is trying to increase the number of domestic firms which are ISO 9000 series compliant but has yet to stamp out illegal practices within the industry. Foreign suppliers should bear this in mind when seeking alliances with local firms either as joint venture partners or as construction sub-contractors. Participation in a local consortium for purpose of tender bidding
Major Projects On Offer
Under the Governments BOT scheme (Build-Operate-Transfer), major projects commenced since 1997 have totalled approximately NT$403 billion (US$13 billion).
The proposed schedule for enforcing ISO 9000 series are as follows:
All tendering contractors must be ISO 9000 certified beginning from:
- Fiscal year 1999 for project budget over NT$1 billion
- Fiscal year 2000 with project budget over NT$500 million
- Fiscal year 2001 with project budget over NT$200 million
The following chart shows the number of public construction projects by value announced between 1997 and 1999 as well as those awarded to ISO certified tenderers.
From year 2000 onwards, the above amount is forecast to rise to around NT$1,135 billion (US$36.6 billion), and will include:
- Taipei-Kaohsiung High Speed Railway (NT$325.9B - US$10.5B)
- Independent Power Providers (NT$457.2B - US$14.7B)
- Toucheng-Hualien Expressway (NT$178.4B - US$5.8B)
- Industrial and Municipal incinerators (NT$51.4B - US$1.7B)
- Taipei-C.K.S. International Airport Rapid Transit Rail Link (NT$66.0B - US$2.1B)
- Tamshui International Harbour (NT$22.5B - US$0.7B)
- Tanchiang Bridge (NT$14.0B US$0.45B)
- Taipei Financial Center Building (NT$20.7B - US$0.7B).
In addition to these projects which are well advanced, the government has recently announced a series of new urban transportation projects for Hsinchu, Taoyuan, Taichung and Tainan.
Foreign construction and engineering companies seeking to enter the Taiwan market will find many opportunities, however the market is not an easy one and international rules of behaviour while given lip service and honest endeavour at the highest levels have often not permeated to working levels. As the Europeans recently found to their cost in the High Speed Rail Project being invited into a consortium as part of the bidding group does not necessarily transfer automatically into award of the final contract. Nothing can be taken for granted in Taiwan except the need to ensure that the correct relationships are built and nurtured at every level and an environment is created in which officials and contractors are comfortable in building a long-term working relationship. Over reliance on contractual obligations (discussed below) is not a good idea.