Are Taiwanese firms packing up and exiting China?

Taiwanese FDI fell USD3.1bn in the coastal areas.

According to DBS, production costs in China have risen significantly in recent years on the back of higher wages, RMB appreciation and inflation more broadly. 

However, DBS does not see an exodus of Taiwanese firms. On the contrary, Taiwan’s FDI headed for the mainland remains on its longer-term growth trajectory. Investment in China shifting to inner provinces from coastal areas Taiwan’s outward FDI to China peaked in 2010 and slipped in 2011 and 2012. 

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The decline isn’t significant from a long term perspective. On a fiveyear horizon (2007-2012), Taiwan’s investment in China continues to grow at a 5.1% trend rate. 

Geographically, the recent fall of Taiwanese FDI occurred mainly in the coastal areas. Investment in Guangdong and Jiangsu provinces declined USD 3.1bn between 2010 and 2012, from USD 10.1bn to USD 7.0bn.

In inland provinces, however, FDI rose by USD 1.2bn during the same period to reach an all-time high of USD 5.8bn. Investment expansion was particularly strong in Sichuan province (West) and in the Northeast region, by USD 0.5bn and USD 0.3bn respectively. 

Compared to the coastal areas, the inner provinces in China offer affordable wages. Moving from Guangdong and Jiangsu to the west (e.g., Sichuan) and the northeast (e.g., Liaoning) can lower wage costs by 15%.

In the central part of China, like Hubei, Hunan, Hebei, Henan and Jiangxi provinces where Taiwanese firms have not yet explored sufficiently, wage costs are 20-25% lower than in Guangdong and Jiangsu. 

Investing in inner provinces helps Taiwanese firms to continue penetrating China’s domestic market. The Central, West and Northeast regions account for more than 60% of the nation’s total population.

Meanwhile, thanks to the rapid development of transport infrastructures, inter-regional trade within China has become much easier than before.

Measured by the length of roads and railways as a percentage of land area, the transport system in Henan and Chongqing is now as mature as in Jiangsu; and transport in Hubei, Hunan and Anhui compares well with GuangdongBoosting exposure to the local market and reducing reliance on exports is a wise strategy for China-based foreign companies to employ.

Domestic-oriented firms are in a better position than exporters to pass on rising production costs, thanks to strong wage/income growth amongst Chinese consumers. Selling to the domestic market, moreover, avoids the problem of RMB appreciation.