Taiwan's export orders seen to surge a measly 1.5%

Structural drags still linger.

According to DBS, Taiwan's October export orders (due today) are expected to grow 1.5% YoY, barely changed from 2.0% in the preceding month.

Given the high base caused by exceptionally strong electronics demand during last year’s festive season, the year-on-year growth in export orders is likely to remain weak throughout the Oct-Dec period.

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That said, in the sequential terms, export orders have increased for two consecutive months. PMI has also held above 50 for three months. The orders and PMI data so far support our view that a modest export recovery is underway.

While the cyclical outlook improves, the structural drags remain. Labor shortage and wage hikes in China have been squeezing the profit margins of the Taiwanese firms with operations on the mainland.

Although the Chinese government recently has announced to relax the one-child policy as part of reforms, it will take about two decades for the impact to be reflected in the labor market.

Meanwhile, the technology gap between Taiwanese electronics firms and the Chinese counterparts has been narrowing, which resulted in competition and substitute effects. For example, Chinese firms have boosted production capacity for the high generation flat panels this year, which helped explain why China’s flat panel imports from Taiwan have fallen sharply.

China will continue to push for industrial upgrade in the coming years through constructing free trade zones and introducing more FDI.

There would be growing competition, unless Taiwan can accelerate technology advancement and successfully move up the value chain.