Economics Taiwan: a closer look at the Southbound opportunities

Transcription

1 Economics Taiwan: a closer look at the Southbound opportunities DBS Group Research 19 September 017 Taiwan s trade and investment ties with ASEAN continued to expand this year There is plenty of room for Taiwan to further diversify from China to Southeast Asia, and from Singapore & Vietnam to other ASEAN markets Taiwan has comparative advantages over ASEAN in a broad range of manufacturing and services sectors Companies should consider multiple factors when assessing the opportunities and risks in ASEAN market scale, growth prospects, labour resources, macroeconomic stability, ease of doing business, and politics We issued a report last year [1] about Taiwanese companies looking for trade and investment opportunities in Southeast Asia. These companies need to maintain their earnings performance in the face of Taiwan s weak GDP growth and deteriorating demographics. They also need to redefine business strategy and move into other Asian markets to counter China s slowdown, economic rebalancing and wage cost increases. To facilitate this, the Taiwanese government launched the New Southbound Policy last year to promote ties with Southeast/South Asia. Efforts here included organizing trade shows and investment seminars, increasing the overseas loans and insurance supports, relaxing visa rules for tourists and students from SE Asia, among others. In this follow-up report, we will first look at the latest developments in Taiwan- ASEAN trade and investment ties. Next, we will attempt to identify the future opportunities for Taiwanese companies in the ASEAN market, from a geographical and industry perspective. Lastly, an analysis framework is provided for companies to assess the opportunities and risks in ASEAN market. Trade and investment ties continue to expand Taiwan-ASEAN trade and investment ties continued to expand this year. Taiwan s outward direct investment (ODI) in the ASEAN- countries totalled USD 1.bn in the 1H 017, a 55% rise compared to the same period of last year (Chart 1, next page). Exports to the ASEAN- countries grew 15% (YoY) in 1H17 which outpaced total exports growth of 13%. Likewise, imports from ASEAN- increased by 3%, above overall imports growth of 17% for the comparable periods (Chart, next page). In addition, the number of visitors from Southeast Asia surged as much as 0% in 1H17. Based on such strong growth pace, Southeast Asia is likely to overtake Japan as Taiwan s second largest source of overseas visitors this year. Ma Tieying (5) matieying@dbs.com Refer to important disclosures at the end of this report. 1

2 Chart 1: Taiwan's total ODI in ASEAN- countries Annual flows, USD bn 5 Chart : Taiwan's trade with ASEAN- USD bn 0 Exports Imports H H H17 Geographical perspective: plenty of room to diversify From a geographical perspective, there is plenty of room for Taiwan to further diversify trade and investment portfolios from China to SE Asia. While ASEAN is Taiwan s second largest ODI destination and second largest trade partner, its share has remained small compared to China. Based on the cumulative data in , ASEAN- accounted for only 13% of Taiwan s total ODI, well below China s share of % (Chart 3). ASEAN- also accounted for 15% of Taiwan s total trade (01), or only half of the share held by China and Hong Kong (Chart ). Within SE Asia, there is also sufficient room for Taiwan to diversify. At present, Taiwan s connectivity with ASEAN is largely concentrated in Singapore which absorbed % of ODI and 31% of the region s trade from Taiwan (also Chart -5). Anecdotal evidences suggest that the direct ties with Singapore are close. Taiwan s UMC, MediaTek, Chang Chun Group, Evergreen Group, for instance, all have sizable investment in Singapore, including in the electronics, petrochemical and shipping industries. Taking advantage of Singapore s position as a regional trade and financial centre, some of the investment and trade conducted with the republic have been redirected to other parts of ASEAN. Besides Singapore, Taiwan s next strongest tie in ASEAN is with Vietnam which accounted for 37% of ODI and 1% of trade that the country has with the region. Taiwanese firms are known for their active investment in Vietnam s manufacturing industry, including textile, footwear, food processing, plastics & rubbers, steel & cement, machinery and other traditional sectors. Chart 3: TW: total ODI, by market Stock, Chart : TW: total trade, by market 01 China % Middle & South America ASEAN 13% US Europe Japan Others PH % 37% China & HK 31% Japan Middle East Europe Others ASEAN 15% US 18% 31% PH 1%

3 Taiwan s investments in other ASEAN countries remained very small. Malaysia, Thailand, the Philippines, and Indonesia each accounted for only -% of Taiwan s total ODI in ASEAN. Even so, trade with Malaysia (18%) and the Philippines (1%) is significant because of their high participation in the global electronics supply chains. Industry perspective: leveraging the comparative advantage From an industry perspective, Taiwan has comparative advantages over ASEAN in a broad range of manufacturing and services sectors. Taiwanese companies could leverage these advantages to enhance their performance in the ASEAN market. Regarding manufacturing, Taiwan enjoys trade surplus with ASEAN in a number of segments, including minerals, chemicals, plastics, textiles, metals, electronics, machinery and vehicles (Chart 5). In particular, electronics components contribute about half of Taiwan s trade surplus with ASEAN. Textiles are the second largest contributor at 13%. This reflects Taiwan s distinct competitiveness in these areas. The services sector in Taiwan is also relatively developed. Services account for about two-thirds of Taiwan s GDP, higher than the 5-55% share in Vietnam, Indonesia, Malaysia and Thailand. Taiwanese firms have a growing presence in the finance & insurance, wholesale & retail trade, and transport & storage sectors in SE Asia nowadays. For example, Taiwanese banks have, as of June this year, established a total 188 branches and other subsidiaries in ASEAN countries. Opportunities and risks analysis The SE Asia market is large and diverse. Companies should consider multiple factors when assessing the potential opportunities and risks: market scale, growth prospects, labour resources, macroeconomic stability, ease of doing business, and politics. 1) Market scale and growth prospects: For companies pursuing a broader customer base and stronger earnings performance, they should trade with or invest in countries that have large populations and high growth rates. Indonesia, the Philippines and Vietnam are attractive here. Indonesia has the largest population in SE Asia 0mn. The Philippines and Vietnam also have population of about 100mn. These three countries have the fastest growth rates among the ASEAN-. The Philippines and Vietnam are currently growing at a pace of %, with Indonesia at a moderately slower 5% pace (Chart ). TW: trade balance with ASEAN, by product USD bn,

4 Chart : ASEAN: population, GDP growth, per capita income GDP growth, % YoY, 01 8 PH Bubble size: Population Chart 7: ASEAN:working age population % of total population Per capita income, US$ 50 PH ) Labour resources: For companies looking for lower-cost overseas manufacturing bases, countries with favourable demographics and cheap labour supply will be ideal for investment. Again, Indonesia, the Philippines and Vietnam match these criteria relatively well. The median age of population in these three countries is 0-30 years. Per capita incomes are in the range of USD , equivalent to 10-15% of Taiwan s. Note that, however, demographic dividends in Vietnam will not stay for long. The percentage of working age population has already peaked and is set to decline in the coming years (Chart 7). The median age population will rise to 37 years in 030 and 0 years in 00. Wage costs may increase as a result of labour shortage, posing challenges for companies in the labour-intensive sectors. 3) Macroeconomic stability: The macroeconomic stability of the destination countries is certainly important, whether from a trade or the investment point of view. The sharp currency depreciation, collapse in asset prices and contraction in economic growth during the 1997 Asian financial crisis, for instance, disrupted trade and foreign investment flows in many ASEAN countries. Today, the macroeconomic profile in ASEAN has improved significantly, thanks to stronger fiscal and external positions. The sovereign credit ratings of Indonesia and the Philippines have been upgraded in recent years. Both countries are rated investment-grade by S&P and Moody s (Table 1). Vietnam is, however, still below investment grade. The relatively large fiscal deficit, high government debt and rapid credit growth in Vietnam s banking sector are still the potential threats to financial stability. Table 1: ASEAN: sovereign credit ratings (foreign currency, long-term) S&P Moody's AAA Aaa A- A3 BBB+ Baa1 PH BB BB+ BBB- BBB Ba3 Ba Ba1 Baa3 Baa BB BB+ BBB- Ba Ba1 Baa3 BB- B1 B B1

5 Chart 8: ASEAN: ease of doing business Global rank PH Table : Ease of doing business in Indonesia Global rank Overall Starting a business Dealing with construction permits Getting electricity 1 9 Registering property Getting credit 70 Protecting minority investors 9 70 Paying taxes Trading across borders Enforcing contracts Resolving insolvency 7 7 ) Ease of doing business: The ease of doing business in destination countries is important for companies engaging in FDI. Poor transport and power infrastructures, for instance, will add to the costs that companies must bear. Weak regulatory and legal systems, meanwhile, could result in delays in obtaining necessary permits, disputes on contracts and other unexpected losses. The business environment in some ASEAN countries has improved in recent years. Noticeably, Indonesia and Vietnam have boosted their rankings in the World Bank s ease of doing business surveys through a set of reforms (Chart 8). For instance, the Indonesian government has encouraged the use of online systems to shorten the time needed to start businesses, introduced online systems for the filing and payments of employees heath contributions, and streamlined the process of obtaining electricity connections (Table ). By and large, infrastructure development prospects in SE Asia now look better, thanks to the regional cooperation initiatives such as the establishment of Asian Infrastructure Investment Bank and China s & Japan s active participation in the high speed railway projects. Meanwhile, there are also expectations for the crossborder trade and investment barriers to be further removed in this region, thanks to the establishment of ASEAN Economic Community and the ongoing negotiation of Regional Comprehensive Economic Partnership. 5) Politics: Last but not the least, the political environment also matters. Political instability could lead to frequent policy changes and sub-optimal policymaking, which creates volatility and undermines economic performance. The political environment in ASEAN has been generally stable in recent years, but the situation varies across countries. For example, in Thailand, coups and recurring government transitions have caused a decline in inward FDI. The short-term outlook for Thailand remains murky because it remains under military rule without a clear roadmap back to democracy. In order to evaluate the aforementioned opportunities and risks, companies should conduct due diligence to well understand the economic/political trends in the destination countries and establish a comprehensive risk control system to monitor the changes. Small companies could consider focusing on the specialized industries, and forming industrial clusters to share information, strengthen negotiation power and minimize costs. Establishing partnership with local companies or the experienced third parties is also a wise strategy, which could help to accelerate the market entry process and avoid detours / mistakes. Taiwanese firms are still at the early stages of exploring the ASEAN market today. A learning process will be needed before they can significantly boost presence in this region and reap the benefits from SE Asia s higher growth. 5

6 Sources: All data are sourced from CEIC, Bloomberg, The World Bank, United Nations Population Division, Standard & Poor s, and Moody s. Transformations and forecasts are from DBS Group Research. Notes: [1] Taiwan: diversifying into Southeast Asia, October 01

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