Economics Taiwan: diversifying into Southeast Asia DBS Group Research October 6 Taiwan s direct investment in the ASEAN-6 has doubled over the past five years and has plenty of room to grow further China s slowdown, rebalancing and rising wages are prompting Taiwanese firms to adjust overseas investment strategies ASEAN markets are attractive, thanks to strong growth, low-cost labor, and ongoing reforms and economic integration Taiwanese firms are already motivated to invest overseas. This is bolstered by the government s New Southbound Policy aimed at strengthening ties with South/Southeast Asia Singapore and Vietnam are the most favorite markets for Taiwanese investors so far. Indonesia and the Philippines have the potential to attract more Taiwanese investors longer-term Taiwanese firms are diversifying investment into Southeast Asia. Outward direct investment (ODI) in ASEAN-6 countries rose to USD.7bn per year in - 5, more than double the USD.bn invested annually in 6- (Chart ). Fifteen percent of all Taiwanese ODI now goes to the ASEAN-6, up from 6% in 6-. By contrast, the share of mainland China in Taiwan s ODI appears to have peaked. It has fallen persistently over the past five years, from 8% in to 5% in 5 (Chart ). The China factor The changes in China s macroeconomic environment in the past few years help explain why Taiwanese firms have adjusted their ODI portfolios. Chart : Taiwan's ODI in ASEAN-6 Annual flows, USD bn 6 5 98 985 99 995 5 5 Chart : Taiwan's total ODI, by market % 8% 6% % % % 6 8 China ASEAN-6 Middle & South America US Europe Japan Others Ma Tieying (65) 6878-8 matieying@dbs.com Refer to important disclosures at the end of this report.
Chart : Asia: GDP growth % YoY 6 CN MY TH Chart : China: GDP by industry % share 5 8 6 ID PH VN 8 6 Manufacturing Services - 6 8 6F 8 5 5 ) China s growth is slowing. In addition to the short-term cyclical headwinds from deleveraging, long-term structural factors such as population aging and slowing productivity are also weighing on China s growth outlook. GDP growth in China has fallen to the 7% level since and is expected to slide further to 6.5% this and next year, converging with that in Vietnam and Philippines (Chart ). From the perspective of economic growth/investment returns, the attraction of China has declined and that of SE Asian countries has increased on the relative basis. ) China s economic rebalancing. The Chinese authorities have been striving to cut the overcapacity in the traditional manufacturing industry, and on the other hand, foster the growth of the services sectors to develop the so-called new economy. Manufacturing as a percentage of China s GDP has fallen to % in 5 from % in, while services have risen to 5% from % (Chart ). In order to adapt to these structural changes, Taiwanese firms need to redefine their investment strategy in the Chinese market focusing more on the services sectors and on the other hand, reducing the capital-intensive manufacturing investment (diverting it to other parts of the region). ) Labor costs in China continue to rise. Due to the still-strong economic expansion and the shortage of workforce supply, labor costs in China have continued to rise rapidly. As a proxy for average wages, per capita income in China is now approximately US$ 8,, - times of that of Vietnam, Philippines and Indonesia (US$,-,5). Even in China s less-developed inland provinces like Sichuan and Henan, per capita incomes have risen to about US$ 6, well above those in most SE Asian countries (Chart 5, next page). The Taiwanese firms targeting at domestic sales in the Chinese market could pass on the costs as higher wages also mean stronger purchasing power of Chinese consumers. But the exports-oriented Taiwanese firms based on the mainland are suffering from the cost pressures. They would like to explore lower-cost production bases elsewhere in the region. The Southeast Asia factor As a result of the structural developments in the Chinese economy, the advantages of SE Asia in terms of GDP growth, wage costs and demographics have become relatively more attractive. Meanwhile, SE Asian countries have made advances of their own: ) The investment environment in SE Asia continues to improve. Poor infrastructures, weak regulatory/legal frameworks and political uncertainty have long been important barriers hindering foreign investment in this region. The situation is improving, albeit slowly. Indonesia, for instance, has received upgrades in the World Bank s ease of doing business survey in recent years thanks to
Chart 5: Asia: Per capita GDP USD 9, 8, 7, 6, 5,,,,, CN ID VN CN: Henan TH PH CN: Sichuan 6 8 regulatory reforms in the areas of starting businesses, taxation and obtaining credit (Chart 6). The FDI-to-GDP ratio in Indonesia has also been rising (Chart 7). A friendlier investment environment and a rising number of successful FDI examples could provide more confidence for Taiwanese firms to enter the SE Asian market. ) Economic integration is proceeding in SE Asia. The market size of SE Asia remains small compared to that of China. ASEAN GDP stood at USD.6trn in 5, only / that of China s. The total population in ASEAN, at 6mn, is about half of China s. That said, regional economic integration could allow foreign firms invested in ASEAN to tap a deeper and broader market. The ASEAN Economic Community has been established late last year. Aiming to transform the region into a single market, the AEC will promote free movement of goods, services, investment and skilled labor across the member countries. The free trade connections between ASEAN and other major economies are also expanding. The ASEAN so far has forged FTAs / quasi-ftas with Japan, Korea, China, India, Australia and New Zealand. Countries including Singapore, Malaysia, Vietnam and Brunei have also joined the Trans-Pacific Partnership. Chart 6: Ease of doing business in Asia Global rank 6 8 Chart 7: Indonesia: FDI to GDP ratio % SG MY TH CN 6 5 VN PH ID 5 9
Extensive FTA networks could allow foreign investors based in ASEAN to access greater opportunities. This should be especially attractive to Taiwanese firms, given that Taiwan doesn t have FTAs with most countries in the world. Taiwan s domestic factors Domestically, there are also push factors at play, encouraging Taiwanese firms to explore investment opportunties abroad. ) Demographics. Taiwan s working age population will start contracting from this year. Domestic growth is likely to slow and labor costs/disputes may increase. Against such a backdrop, it is reasonable for Taiwanese firms to expand investment in overseas emerging markets so as to maintain earnings and control costs []. Total ODI as a percentage of Taiwan s GDP has been rising as a trend over the past decades (Chart 8). This trend is expected to remain steady in the coming years. ) Government policies are supportive. President Tsai Ing-wen has introduced a New Southbound Policy, which aims to strengthen links with Southeast/ South Asia and reduce reliance on China. A national trade and investment company will be created to help smaller firms bid on investment projects in overseas markets. Taiwan can also draw on experience from Japan and other developed countries that already have significant presence in SE Asia. For instance, it may provide more information and consulting services to help companies understand the economic/political trends in SE Asian markets. The government may also offer financial support in the form of low-interest loans, guarantees and insurance []. Formulating rules with the investment destination countries on market access and investor protection is important too. Korea s investment in SE Asia took off only after the Korea-ASEAN FTA was signed in 6. In this regard, Taiwan s government has pledged to seal more FTAs with regional partners including ASEAN. The outlook ahead Considering the low base, there is much scope for Taiwan to increase direct investment in SE Asia. On current trends, Taiwan s ODI in the ASEAN-6 will average about USD 6bn per year during the 6- period. ASEAN s share in Taiwan s total ODI will rise further to %. Chart 8: Taiwan: ODI to GDP ratio %.5..5..5..5..5 Chart 9: Taiwan's ODI in ASEAN, by market USD bn 5 SG MY TH ID PH VN. 99 995 5 5 5 5
Singapore and Vietnam are the most favorite markets for Taiwanese investors so far (Chart 9). Singapore is often seen as a gateway to the entire ASEAN market, thanks to its comprehensive FTA networks, pivotal geographic location and easy environment for doing business. Singapore is also the only country in this region that has signed a bilateral FTA with Taiwan. If history is any guide, Taiwanese firms investing in ASEAN markets are likely to choose Singapore to locate regional hubs and headquarters. Vietnam is attractive in terms of its strong growth and cheap labor costs. Taiwan has been among the top 5 FDI investors in Vietnam. The establishment of supply chains, especially in the sophisticated electronics sector, should create the synergy effects and encourage more Taiwanese firms to invest in Vietnam. Indonesia and Philippines also have strong economic growth and low-cost labor force. Their markets / populations are larger than Vietnam s, which should be attractive to Taiwan s consumer goods and services producers. But the business environment there is different and could prove to be a barrier to Taiwanese firms that don t yet have SE Asian experience. For these companies, government assistance will be needed to smooth entry and to build lasting businesses beneficial to both sides of the investment equation. Notes: [] Taiwan: 5 things you need to know about the aging population, August 6 [] Japan s go global experience (), July 5 Japan: rising direct investment in Southeast Asia, March 6 Sources: All data are sourced from CEIC, Bloomberg, World Bank, National Bureau of Statistics (China), National Development Council (Taiwan); Transformations and forecasts are DBS Group Research. 5
Recent Research CN: cyclical bottom 9 Oct 6 IN: assessing current account 8 Oct 6 improvement PHgov bonds: expensive (still) Oct 6 SGD: sticking to neutral 7 Oct 6 EZ: not taper time yet 7 Oct 6 CN: avoiding the Minsky moment 6 Oct 6 IN: monetary policy committee lowers rates Oct 6 Qtrly: Economics-Markets-Strategy Q6 5 Sep 6 CNH: SDR inclusion - right time, right place 8 Sep 6 IN: savings rate in need of a boost Sep 6 IDR: towards further resilience Sep 6 SGS: on Fed watch Aug 6 Global growth: redefining strength 6 Aug 6 TW: 5 things you need to know about the 8 Aug 6 aging population SG: risks beneath the GDP figures 8 Aug 6 CN: the risk of keeping status quo 7 Aug 6 CN: why falling private investment growth Aug 6 is a worry ID: tax revenues slipping Aug 6 SG: labour market pain Aug 6 IN: monetary policy in transition 8 Aug 6 FX: DM vs EM - a more balanced story Aug 6 Rates: Global rates roundup / chart-pack Aug 6 IN: Hopes high for GST 6 Jul 6 JP: will the helicopters fly? Jul 6 ID rates: steepening risk 8 Jul 6 IN: more consumption-led growth Jul 6 FX: revisions to GBP & JPY 8 Jul 6 TW & KR: how low can rates go? 7 Jul 6 US: a risky mantra Jul 6 PH: Duterte s game plan Jul 6 EZ: dealing with post-brexit blues Jun 6 SG: Brexit impact limited for now 8 Jun 6 Britain s Great Leap Backward 7 Jun 6 Brexit first impact Jun 6 IN: maturing FCNR (B) deposits a molehill, Jun6 not a mountain Qtrly: Economics-Markets-Strategy Q6 9 Jun 6 HK: cautious outlook 7 May 6 IN: monitoring external fault lines 5 May 6 TH: manufacturing gone cold 5 May 6 SGS: bracing for the Fed May 6 Global: Where lies north? 6 May 6 CN: outbound investments intact 5 May 6 JP: perception gap widens 5 May 6 FX: USD down but not out May 6 Rates: Global rates roundup / chart-pack 8 Apr 6 SG: national vs domestic growth 8 Apr 6 IN: investment cycle slows Apr 6 Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts and tables are CEIC and Bloomberg unless otherwise specified. DBS Bank Ltd., Marina Blvd, Marina Bay Financial Center Tower, Singapore 898. Tel: 65-6878-8888. Company Registration No. 9686E. 6