2010Vol.40No.7

THE AMERIC AN CHAMBER OF COMMERCE IN TAIPEI

July 2010

|

Vo l u m e 4 0 N u m b e r 7

|

w w w. a m c h a m . c o m . t w

TAIWAN BUSINESS TOPICS

Coming to Taiwan’s Defense

July 2010 • VOLUME 40 NUMBER 7

強化台灣國防力量

中華郵政北台字第 號執照登記為雜誌交寄 5000 7_2010_Cover.indd 1

NT$150 COVER SPONSOR

2010/7/29 7:35:14 PM

Releasing the White Paper

C

oming just a day after Taiwan’s signing of the Economic Cooperation Framework Agreement (ECFA) with China, AmCham Taipei’s release of its 2010 Taiwan White Paper garnered even more than the usual amount of attention. The luncheon event at the Sherwood Hotel marking the official issuance of the White Paper was well attended by Chamber members and guests, including such representatives from the Taiwan government as Minister Christina Liu of the Council for Economic Planning and Development (CEPD), Vice Chairman Wu TangChieh of the Financial Supervisory Commission, and Vice Minister of Economic Affairs Lin Sheng-Chung.

After presentations by AmCham President Andrea Wu and Chairman Alan T. Eusden introducing the contents of this year’s White Paper, a copy of the document was officially presented to Minister Liu. Each year, the CEPD coordinates with the various government agencies in soliciting and compiling their response to the issues raised by AmCham committees in their White Paper position papers. In brief remarks and during a question-and-answer period, Minister Liu – who took office in April – expressed her encouragement and support for the White Paper theme calling for intensified government efforts to improve the investment climate.

The luncheon was followed by a press conference, which generated extensive reporting in both the print and broadcast media, as well as online.

AmCham will now begin a round of calls on both high-level and working-level government officials to discuss the White Paper issues in more detail

july 2010 • taiwan business topics

WP release.indd 3

3

2010/7/30 3:08:35 PM

CONTENTS

NEWS AND VIEWS

6 Editorial Targeting the Investment Climate july 2010

VOlum E 40, NumbE r 7

Andrea Wu

New Idea for an Old Problem; Growing Risks from Smuggled Pesticides; WTO Rules in Taiwan’s Favor

對症下藥改善投資環境

7 Taiwan briefs

九十九年七月號

Publisher

11 Issues

By Jane Rickards

發行人

吳王小珍

解決老問題的新點子；偽劣農藥的問題

總編輯

越趨嚴重；WTO裁定台灣勝訴

Editor-in-Chief

Don Shapiro Art Director/

沙蕩

COVEr SECTION

美術主任 /

Production Coordinator

Katia Chen Staff Writer

Jane Rickards

後製統籌

request to purchase advanced F-16C/D jet fighters is receiving increasing attention. But regardless of the F-16 decision, which many informed observers believe will not be made until next year, the U.S. government is continuing to move forward to supply Taiwan with a wide variety of other weaponry. It answers Beijing’s objections by saying it is China’s massive arms build-up that makes it necessary for Taiwan to strengthen its defenses, and that the United States is committed under the Taiwan Relations Act to ensuring that Taiwan has the means to defend itself.

陳國梅 採訪編輯

李可珍

Manager, Publications Sales & Marketing 廣告行銷經理

Irene Tsao

曹玉佳

Translation

Zep Hu

翻譯

胡立宗

American Chamber of Commerce in Taipei 129 MinSheng East Road, Section 3, 7F, Suite 706, Taipei 10596, Taiwan P.O. Box 17-277, Taipei, 10419 Taiwan Tel: 2718-8226 Fax: 2718-8182 e-mail: amcham@amcham.com.tw website: http://www.amcham.com.tw 名稱：台北市美國商會工商雜誌 發行所：台北市美國商會 臺北市10596民生東路三段129號七樓706室 電話：2718-8226 傳真：2718-8182 TOPICS is a publication of the American Chamber of Commerce in Taipei, ROC. Contents are independent of and do not necessarily reflect the views of the Officers, Board of Governors, Supervisors or members. © Copyright 2010 by the American Chamber of Commerce in Taipei, ROC. All rights reserved. Permission to reprint original material must be requested in writing from AmCham. Production done in-house, Printing by Farn Mei Printing Co., Ltd. 登記字號：台誌第一零九六九號 印刷所：帆美印刷股份有限公司 經銷商：台灣英文雜誌社 台北市105敦化北路222巷19之1號1樓 發行日期：中華民國九十九年七月

15 Coming to Taiwan’s Defense

強化台灣國防力量 Amid mounting Chinese pressure on the United States regarding arms sales to Taiwan, the question of whether Washington will agree to Taiwan’s

By Jane Rickards 撰文／李可珍

19 Can a “brave Wind” Hit China?

By Jane Rickards

24 A New Direction for Offset

By Jane Rickards

中華郵政北台字第5000號執照登記為雜誌交寄 ISSN 1818-1961

OFFICERS: Chairman/ Alan Eusden Vice Chairmen/ William E. Bryson / George Chao Treasurer: Carl Wegner Secretary/ Stephen Y. Tan 2009-2010 Governors: William E. Bryson, George Chao, Cindy Shueh Lin, Corning Painter, Gordon Stewart, Carl Wegner, Li Shin Wang.

2010-2011 Governors: Alan Eusden, Douglas R. Klein, Eunice Kuo, Lyndon Chao, David Pacey, Wei-Li Shao, Stephen Y. Tan, Lee Wood.

2010 Supervisors: Steven Lee, Dana McCarty, Charles H. McElroy, Bill Wiseman, Derek Yung.

COMMITTEES: Agro-Chemical/ Mong Yang Tan; Asset Management/ Christine Jih, Derek Yung; Banking/ Morris Li; Capital Markets/ William Bryson, Jane Hwang, Jimin Kao; Chemical Manufacturers/ Art Yen; CSR/ Lume Liao, Fupei Wang; Education & Training/ Robert Lin, William Zyzo; Greater China Business/ Helen Chou, Stephen Tan; Human Resources/ Richard Lin, Seraphim Mar; Infrastructure/ L.C. Chen, Paul Lee; Insurance/ Mark OÆDell, Dan Ting, Lee Wood; Intellectual Property & Licensing/ Jason Chen, Jeffrey Harris, Douglas Weinstein; Manufacturing/ George Chao, Albert Li; Marketing & Distribution/ Christopher Fay, Wei Hsiang, Gordon Stewart; Medical Devices/ Li Shin Wang; Pharmaceutical/ David Lin, Jaime Robledo Cadavid, Wei-Li Shao; Real Estate/ Peter Crowhurst, Kristy Hwang; Retail/ Angela Chang, Prudence Jang, Douglas Klein; Sustainable Development/ Eng Leong Goh, Kenny Jeng; Tax/ Eunice Kuo, May Lee, Josephine Peng; Technology/ Revital Golan, R.C. Liang, Jeanne Wang, Deborah Yen; Telecommunications & Media/ Ben Way, June Su, Jason Wang; Transportation/ Gary Wu; Travel & Tourism/ Pauline Leung, David Pacey.

4

TAIWAN buSINESS

26 Chunghwa Post Diversifies Operations With its traditional core business of mail delivery in decline, the governmentowned company is focusing more on offering financial and logistical services.

By Philip Liu

30 make Profits in China, Invest in Taiwan

An increasing number of Taiwanese-owned enterprises on the mainland are seeking to take advantage of investment opportunities back in Taiwan.

By Philip Liu

c ov er ph o to s : ap/ wally s antana, w w w.tai wan a irp o we r. o rg

taiwan business topics • july 2010

7_2010 Contents.indd 4

2010/7/30 4:47:32 PM

j uly 2010 • Volume 40 n umbe r 7

lIVING IN TAIWAN

34 Guiding Taiwan’s Internationalization

COVEr SPONSOr

lockheed martin and Taiwan

A government task force is trying to elevate the level of English-speaking competence to benefit foreign visitors and residents, and to raise Taiwan’s competitiveness.

By Jane Rickards

INDUSTRY F

CUS

Varying Perceptions A report on the life Insurance Industry

By Don Shapiro

38 Half Empty or Half Full?

Assessing Taiwan’s life insurance industry means weighing both positives and negatives.

41 The japanese Experience: lessons to be learned?

Further ahead on the development curve, Taiwan’s large neighbor to the east is often a source of reference.

43 Foreign Players in retreat Some major international companies have left or are preparing to leave the market.

45 Shifting the Stress to Investment-link Policies Some major international companies have left or are preparing to leave the market.

AmCHAm EVENTS

3 releasing the White Paper 48 Happy birthday, America

lockheed Martin is a premier systems integrator and global security company with growth markets in Defense, homeland security, and systems/government information technology. lockheed Martin delivers innovative technologies that help customers address complex challenges of strategic and national importance. lockheed Martin employs 136,000 people worldwide and is led by robert J. stevens, chairman and chief executive officer. the corporation reported 2009 sales of Us$45.2 billion. lockheed Martin’s operating units are organized into four broad business areas with diverse lines of business: • Electronic Systems: missiles and fire control, mission systems/sensors, platform integration, simulation/training, and energy programs.

• Aeronautics: combat aircraft, air mobility, special mission and reconnaissance aircraft, advanced development programs, and sustainment operations/services.

• Space Systems: launch services, satellites, and strategic/defensive missile systems.

• Information Systems & Global Services: Information Systems, Global Services, and Mission solutions. governments worldwide are involved in meeting vital strategic goals to defend the peace, make their borders and homeland secure, or manage large information technology infrastructure projects. lockheed Martin has more than 300 alliances, joint ventures, and other partnerships in 75 countries.

For the past 30 years, the republic of china air Force (rocaF) has defended their skies with lockheed Martin products starting with the world’s largest fleet of F-104 starfighters through 1998 and continuing today with the F-16 Fighting Falcon. the F-16s also use lockheed Martin’s sharpshooter targeting pods to pinpoint targets from standoff range, day or night and in bad weather, as well as pathfinder navigation pods to fly in total darkness and reduced visibility. the nation’s tactical airlift missions employ lockheed Martin c-130 hercules aircraft for air landing and airdropping military troops and equipment within the nation and to offshore islands. other critical elements of taiwan’s air defense rely on various types of lockheed Martin radars and system integration skills such as the Fps-117 fixed and tps-117 mobile early warning radars to track all air activity. in 2003, the rocaF selected lockheed Martin to upgrade their central command and control center and deliver similar remote operational command centers. that same year, the U.s. navy selected lockheed Martin to provide taiwan with a c4isr (command, control, communications, computer, intelligence, surveillance, and reconnaissance) capability that provides commanders with real-time situational awareness. complementing these sensor and command capabilities, taiwan’s military employs a wide range of lockheed Martin missile and fire control products. taiwan’s patriot air defense missile batteries use the lockheed Martin built pac-2 missiles and launchers.

july 2010 • taiwan business topics

7_2010 Contents.indd 5

5

2010/7/29 10:30:15 PM

E d i t o r i a l 對症下藥改善投資環境

台

北市美國商會六月卅日發布2010 年《台灣白皮書》；前一天，兩岸 正式簽訂《經濟合作架構協議」

（E C F A）。時機上的巧合，讓商會發布 《白皮書》的同時，可以凸顯提及ECFA的 幾項關鍵內容。 最重要的一點是，ECFA將使跨國企業更 為關注台灣市場，積極開發後ECFA時期的 潛在商機。但《白皮書》也指出，台灣如果 要大幅提升吸引力，不可能單靠ECFA，還 必須積極簡化行政程序、優化政府效能。 讓商會會員感到欣慰的是，當天代表政 府出席《白皮書》發表午餐會的行政院經濟 建設委員會主委劉憶如，也認同行政效能必 須持續改善的觀點。劉憶如雖然才剛上任六 週，但她在演講及問答過程中，已經展現對 議題的充分瞭解，以及推動改革的決心。 更值得慶幸的是，行政院七月初匯整各 界看法，標示出招商的四大投資障礙；閣揆 吳敦義並責成相關部會擬定對策。四大投資 障礙內容為：

• 放寬勞動彈性與人員流動：包括簡化中 國商務人士來台手續、檢討外國人薪資 所得稅制，以及放寬外籍專業人士來台 工作經驗的門檻。

• 鬆綁產業之管制：包括鬆綁電信價格管 制、健全金融法規架構、檢討國產化產 品政策和避免產品重複認證。

• 便利公共工程之參與：強化公共工程爭 端解決機制和明定公共工程賠償責任上 限。

• 落實智財權之保障：有效防範專利、商 標侵權、改善專利審查時效、防範平行 輸入，以及延長資料專屬權年限。 上述清單乍看之下非常接近商會《白皮 書》的建議。事實上，政院在匯整資料時， 的確仔細瞭解過四大商會的建言，包括台北 市美國商會、台北市歐洲商務協會、台北市 日本工商會，以及中華民國全國工業總會。 後ECFA時期，台灣更需要國際投資，以 確保對外經貿關係的平衡發展。商會樂見每 年花費大量心力編製的白皮書，能成為政府 改善投資環境的重要參考依據。商會更期待 的是，政府能以具體作為逐一解決上述問 題。

6

TargeTing The invesTmenT ClimaTe

B

y coincidence, release of AmCham Taipei’s 2010 Taiwan White Paper on June 30 took place just one day after the signing of the cross-Strait Economic Cooperation Framework Agreement. The timing was advantageous, enabling the Chamber to underscore some of the key points covered in the White Paper as they relate to ECFA. Foremost among those themes is that ECFA presents Taiwan with a chance to catch the attention of members of the international business community, who will be curious to see what opportunities it may open for them. But at the same time, the paper said, ECFA in itself will not be sufficient to dramatically boost Taiwan’s attractiveness to investors. To accomplish that, it must be accompanied by a vigorous drive to streamline regulatory procedures and raise government efficiency.

AmCham members were therefore gratified to hear virtually the same sentiments echoed by the chief government guest at the White Paper kick-off luncheon – Christina Liu, Minister of the Council for Economic Planning and Development. Although she had only been in office for six weeks at the time, her brief remarks and answers to questions showed a thorough command of the issues and a solid determination to promote reform.

Even more encouraging was the news in early July that the Cabinet had identified four main obstacles to attracting foreign investment and that Premier Wu Den-yih had instructed the various ministries to find solutions. The four areas are: • Rigid labor regulations and lack of talent mobility. This category includes issues regarding procedures for Chinese business professionals to visit Taiwan, the taxation of foreign residents, and the minimum work experience requirement for hiring foreign personnel.

• Onerous regulations governing certain industries, including those related to telecom pricing, financial sector operations, the setting of product standards, and processes for product certification and approval.

• Barriers to foreign participation in public construction projects. Among these are problems concerning dispute resolution, unlimited liability, and bidding procedures.

• The need to strengthen IPR protection by intensifying enforcement against violators, speeding up the patent evaluation process, cracking down on parallel imports, and extending the period of data exclusivity for pharmaceutical products.

If reading the above list seems like a summary of much of AmCham’s White Paper, that is hardly accidental. We have learned that in preparing these objectives, the government relied heavily on the past recommendations of four major business organizations: AmCham, the European Chamber of Commerce Taipei, the Japanese Chamber of Commerce & Industry, and the local Chinese National Federation of Industries.

Following the signing of ECFA, it will be more important than ever for Taiwan to receive substantial investment from other parts of the world as a way of assuring the balanced development of Taiwan’s economic relations. AmCham is pleased that the hard work that goes into preparation of the White Paper each year has provided useful reference for the government in mapping out what needs to be done to attract that investment.

We will be even more pleased, however, when we begin hearing announcements that these problems have been solved one after another.

taiwan business topics • july 2010

7_2010_Editorial.indd 6

2010/7/29 10:17:08 PM

BY Ja n e R i cka R d s

MACROECONOMICS

GOOD TIMES ARE ROLLING – ON PAPER AT LEAST Following Taiwan’s worst recession in decades, prospects for the island’s economy – on paper at least – look splendid. In late May, the Directorate General of Budget, Accounting and Statistics upped Taiwan’s economic growth-rate forecast for 2010 from the 4.72% made late last year to 6.14%. It cited evidence of continued global economic recovery, albeit at different speeds in different regions. “As a result, Taiwan’s exports are expected to increase strongly,” the statistics agency said in a statement.

“This also helps boost the fixed investments of the private sector.” The agency said that growth in the first quarter of this year was a powerful 13.27% over a year earlier, with exports growing by 42.17% and the domestic sector by 12.93%.

Citibank was even more positive, predicting 7% GDP growth for this year. The bank added that if worries about a European credit crisis causing a global slowdown in coming months proved unfounded, the growth could be as high as 8%. Meanwhile, a Taiwanbased think thank, the Taiwan Research Institute, forecast GDP growth for

this year of 5.88%, while Cathay Financial Holdings put it at higher than 8%. In other positive signs, unemployment in June fell to its lowest level in 18 months.

The seasonally adjusted rate dropped to 5.2% last month from 5.22% in May (without seasonal adjustments, it stood at 5.16%, up 0.02% from May). Analysts said the recovery in exports was prompting manufacturers to hire. Ministry of Finance figures show that in June total exports at US$22.73 billion were up 34.1% over the same month of last year, while imports at US$21.32 billion were up 40.4%. Export orders in June were also up by 22.48%. Anecdotally speaking, though, it appears as if the recovery still needs some time to trickle down to the grassroots of society, amid the appearance of new forms of structural unemployment.

Confounding the expectations of nearly every economist in town, the Central Bank of the Republic of China (Taiwan) raised rates at the end of June to 1.375% from a record low of 1.25% that had been in place since March 2009.

The move follows several consecutive cuts in interest rates made to help the nation weather the financial crisis. The Central Bank cited Taiwan’s

economic rebound as a reason for the rise. “Bank credit and market interest rates have increased, along with rising property and consumer prices,” it said in a statement.

“Against this backdrop the board believes the policy rate increase will gradually guide market rates back to normal.” The Bank also expressed concern about rising property prices, amid sharp gains in inner Taipei areas. It told lenders to cap home loans on a second mortgage at 70% of the property value to buyers who already have a mortgage in that area, with the aim of helping to ensure that borrowers are able to make repayments.

The decision also came five days after China, Taiwan’s largest trading partner, pledged to end its currency peg to the dollar in late June. But analysts

are still questioning how far China’s new currency flexibility will go, and how fast and how far Beijing will permit the yuan to move. Since the June 19 decision, it has since let the yuan appreciate 0.70%, Reuters reported. When announcing the de-pegging, the Chinese central bank made it clear that the yuan would still be tightly controlled, with limited room for a rise, and that the currency could move in either direction, not just appreciate against the dollar. The central bank has since backed its words with deeds, using transactions by state-owned banks to adjust supply and demand for dollars on the Chinese foreign exchange market, giving it virtual control over the pace of yuan appreciation.

Steven Yang, an economist with the Taiwan

Taiwan sTock exchange index & value

THE BLUE LINE SHOWS CHANGES IN TURNOVER AND THE SHADED AREA CHANGES IN THE TAIEX INDEX.

8250

130

8000

120

7750

110

7500

100

7250

90

7000

80

6750

70

6500

60

6250

50

6000

40

June chart soUrce: tw se

Unit: ntD billion

july 2010 • taiwan business topics

7_2010_Briefs.indd 7

7

2010/7/29 10:33:13 PM

Institute of Economic Research, nevertheless says the decision to de-peg the yuan may eventually force some of the hundreds of thousands of Taiwanese who have set up manufacturing operations to relocate to other countries as production costs become more expensive.

“Some firms may increase their production share in Southeast Asia, for example Indonesia or Vietnam.”

He said this would apply mainly to firms that use China as a production base and who are not interested in its domestic market, noting that a prominent textiles firm based in the south of Taiwan told him after the announcement that it would scrap plans to move production to China’s hinterland and instead move overseas. Besides the yuan appreciation, other factors behind this trend include wage hikes and labor issues in China.

Currencies elsewhere in the region, such as the New Taiwan dollar, are likely to appreciate in tandem with the yuan, he said. The signing of the Economic Cooperation Framework Agreement (ECFA) with China on June 29 could put additional pressure on the currency to appreciate, he added, and the New Taiwan dollar could rise more than its neighbors. Yang said it was likely that Taiwan’s

Central Bank is worried that such NT appreciation would hurt exports, but in his opinion that development could help spur Taiwan to adopt muchneeded structural reforms to develop its domestic market and reduce its dependence on exports.

CROSS-STRAIT

ECFA FINALLY SIGNED The long-anticipated ECFA pact, signed in Chongqing, outlines the steps that Taiwan and China will take to liberalize trade over the next several years, and seems to herald the biggest change in crossStrait relations since 1949.

President Ma Ying-jeou says he hopes that the pact will help Taiwan overcome its difficulty in entering into bilateral and regional free trade agreements (FTAs), especially with other countries within the

Asian region, by inducing China to drop its objections.

The political opposition, however, charges that China will leverage ECFA to lock Taiwan’s economy into the mainland’s. In remarks indicating that Beijing may be willing to halt the diplomatic pressure it normally exerts on countries interested in signing FTAs with Taiwan, Wang Yi, director of the Taiwan Affairs Office under Beijing’s State Council, told reporters after the ECFA signing that Beijing would “reasonably, practically and adequately” deal with Taiwan’s wish to conclude other FTAs. The ECFA agreement was signed by the two sides’ semi-official negotiating agencies, Taiwan’s Straits Exchange Foundation and China’s Association for Relations Across the Taiwan Strait. It will be reported to the World Trade Organization.

FOCUS OF ATTENTION — The signing of ECFA, heralding closer trade relations between the two sides of the Taiwan Strait, was the biggest news of the past month for the Taiwan media.

ECFA’S ASSYMETRY Beijing’s motives for signing ECFA are clearly mainly political, expecting that closer economic integration will help bring the two sides closer to unification. ECFA’s asymmetrical nature in offering particularly sweet terms for Taiwan reflects these intentions. After ECFA takes effect, which is scheduled to happen next year, 539 categories of Taiwanese goods will benefit from a gradual elimination of tariffs over two years. The annual value of the exports to China in those categories amounts to US$13.83 billion, representing 16.1% of Taiwan’s cross-Strait export trade. Among the major sectors covered are textiles, auto parts, machinery, and petrochemicals (though not including PVC and polyethylene, to Taiwan’s disappointment).

But in a bid to appeal to the politically sensitive farming sector, 18 of the 539 categories are Taiwanese agricultural and fishery products, even though Beijing's World Trade Organization commitment does not require it to include such items. Chinese negotiators have promised that they will not pressure Taiwan to offer reciprocal concessions for the mainland’s agricultural/fishery products in the future.

In contrast to the broad

photo : ap/ wally santana

8

taiwan business topics • july 2010

7_2010_Briefs.indd 8

2010/7/30 4:48:16 PM

DOWN WITH ECFA — Protestors mobilized by the opposition Democratic Progressive Party voiced fears that China would gain leverage over the Taiwanese economy with the aim of promoting political unification. photo : ap/ wally santana

range of Taiwanese exports covered by the pact, Taipei will lift tariffs for only 267 categories of Chinese goods valued at US$2.86 billion, or 10.5% of China’s exports to Taiwan.

In the service sector, Beijing pledged to open up 11 categories, including banking and insurance.

In a provision similar to the agreement China signed with Hong Kong in 2003, Taiwanese banks are to receive better treatment than foreign banks, including the ability to do renminbi business sooner. For its part, Taiwan will open nine service industries to Chinese participants. In addition, the two sides signed an intellectual property rights protection agreement, which should be significant

for Taiwan’s innovationoriented industries.

DOMESTIC

TENS OF THOUSANDS PROTEST ECFA SIGNING Chanting their opposition to unification with China and blasting air horns, tens of thousands of Taiwanese crowded outside the Presidential Office Building on June 26, protesting the upcoming signing of ECFA. The opposition Democratic Progressive Party (DPP), which sponsored the demonstration, accuses China of using the pact to covertly push for unification and also fears that it will lead to enormous job losses in Taiwan. The DPP said 100,000 demonstrators took part, but police put the figure at a more

modest 32,000, adding that these numbers thinned out considerably after a thunderstorm broke out.

Standing in torrential rain and dressed in a farmer’s straw hat on a makeshift platform, DPP Chairwoman Tsai Ing-wen told the crowd that the pact would benefit large conglomerates while victimizing small businesses and widening the gap between rich and poor.

“Our relatives, friends, even the next generation will be its victims,” she said.

Another noted participant was 87-year-old former President Lee Teng-hui.

The crowd cheered ecstatically when he appeared in the downpour under an enormous black umbrella held by his aides. “Get rid of Ma to protect Taiwan,” he said in Taiwanese. The

pro-independence Taiwan Solidarity Union on June 30 also submitted a new ECFA referendum petition to the Central Election Commission – its third attempt to launch such an initiative.

The more than 100,000 supporting signatures were well over the legal threshold for initiating referendums.

The two previous attempts from the DPP and TSU also had the required number of signatures in support, but were quashed by a Cabinet committee on technical grounds.

CHEN SHUI-BIAN GETS REDUCED SENTENCE Former President Chen Shui-bian, who served two terms in office between 2000 and 2008, won a reduction in his sentence on graft charges – from life to 20 years’ imprisonment – in an appeal heard by the High Court. Chen also had the NT$200 million fine handed down by a Taipei district court reduced to NT$170 million, according to the ruling in June. Both prosecutors and an imprisoned Chen are appealing the verdit. The former president’s wife, Wu Shu-chen, who was also jailed for life, had her sentence reduced to 20 years as well. She was separately sentenced to a one-year term in September for perjury. Chen and his wife resigned from the DPP in August 2008. july 2010 • taiwan business topics

7_2010_Briefs.indd 9

9

2010/7/29 10:33:16 PM

TSMC INVESTS IN U.S. SOLAR PANEL COMPANY Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chip maker, in June announced plans to invest US$$50 million to

economic indicaTors Unit: US$ Billion Current Account Balance (2010 QI) Foreign Trade Balance (Jan.- Jun.) New Export Orders (May) New Export Orders (Jan.-May) Foreign Exchange Reserves (end Jun.)

9.93 12.1 33.73 159.86 362.38

Year Earlier 7.47 15.7 25.16 112.02 317.56

Unemployment (May) Overnight Interest Rate (Jun. 30) Economic Growth Rate (2010 QI) Change in Industrial Output y-on-y (May) Change in Industrial Output y-on-y (Jan.-May) Change in Consumer Price Index y-on-y (Jun.) Change in Consumer Price Index y-on-y (Jan.-Mar.)p

5.14% 0.192 13.27% 30.67% 39.99% 1.18% 1.19%

5.82% 0.1 -9.06% -18.13% -8.08% -1.98% -0.87%

note:

10

p: preliminary

soU rces: Moea, DGbas, cbc, boFt

19.78

2009 Imports

Exports

take a 21% stake in U.S.based solar start-up, Stion Corp. Stion, which makes thin-film solar modules, will license and transfer its technology to TSMC, which in turn will provide modules to Stion. Under the deal, the companies will also jointly develop technology.

The deal follows an agreement in May by Taiwan’s AU Optronics Corp. to set up a US$700 million jointventure with U.S.-based SunPower Corp. in a similar solar-energy operation.

3D DRAM DEVELOPMENT AGREEMENT SIGNED Japan’s Elpida Memory, the world’s third-largest maker of dynamic random access memory chips (DRAMs), signed an agreement with Taiwan’s Powertech Technology and United Microelectronics Corp. (UMC) to jointly develop cutting-edge chip

12.32 13.72

8.22 9.91

2009

2010

2010

119.88 131.98

2010

Europe

11.85 14.43

11.03

U.S.

2009

72.79 88.48

2010

13.42

2009

TOTAL

8.24 12.71

6.59

2010

8.57

15.34

35.05

2009

ASEAN

25.15

56.75

Japan

17.17

The Washington-based Carlyle Group has agreed to sell Kbro, Taiwan's largest cable TV operator, to the Tsai family of the Fubon Financial group for about US$1.25 billion, sources with direct knowledge of the situation told Reuters in late July. Carlyle declined to comment. The move is apparently intended to circumvent regulatory restrictions that prevented an earlier deal from going ahead. Taiwan Mobile, which is controlled by brothers Daniel and Richard Tsai, originally had agreed to buy Kbro in September 2009, but the deadline lapsed in June, as the deal was hit by a Taiwan law banning any state ownership of media entities. The Taipei city government holds an indirect interest in Taiwan Mobile through

HK/China

7.57

NEW WRINKLE IN CARLYLE-KBRO DEAL

Taiwan's JanuarY-June Trade Figures (Year on Year comParison)

10.64

BUSINESS

a stake in the parent Fubon Financial Holdings obtained when a city-owned bank merged with Fubon’s commercial bank.

In a restructuring of that deal, the Tsai family would pay about US$1.25 billion and assume Kbro's debt of more than NT$20 billion, the sources said. As TOPICS went to press, it was not clear whether the Tsais would set up a new company for the purposes of buying Kbro. The acquisition of Kbro, with 1.7 million subscribers, would allow Taiwan Mobile to become the largest operator in Taiwan, where more than 80% of homes subscribe to cable TV.

2009

2010

Unit: US$BN Source: BOFT

technologies that can massively increase data transfer rates and reduce power consumption.

Their partnership will focus on developing 3D integrated circuit packages.

A 3D chip package takes up less space than other chips as it has two or more integrated circuits stacked vertically to occupy less space in popular electronic devices, such as mobile phones. Such technologies “can massively increase the data transfer rate and reduce power consumption, making possible completely new kinds of high-performance devices,” said Takao Adachi, Director and Chief Technology Office of Elpida Memory. The deal leverages Elpida’s DRAM technology, Powertech’s chip assembly, and UMC’s logic chip foundry technologies. The companies declined to reveal the financial terms.

taiwan business topics • july 2010

7_2010_Briefs.indd 10

2010/7/29 10:33:17 PM

Issue s

New Idea for an Old Problem The chemical industry requests government help in setting up Community Advisory Panels to improve communication with neighboring residents.

T

he question of “community payments” by chemical plants to neighboring towns and villages has been one of the issues raised by AmCham’s Chemical Manufacturers Committee in the annual Taiwan White Paper since 2002. As that first appearance of the issue explained, the payment of compensation to nearby communities – after several environmental-impact incidents – caused some people to expect that chemical plants should make regular payments simply based on their presence in the area, regardless of whether any environmental problems occurred. The industry regarded these community demands as little more than extortion, but many companies paid the amount in an effort to maintain good relations with their neighbors.

The issue could still be found in the 2010 edition of the Taiwan White Paper released last month, under the heading “Establish a transparent communication mechanism for better interaction between chemical companies and neighboring communities.” As this year’s position paper reported, the situation has improved somewhat over the years. For example, although plants in several chemical industrial zones continue to make community payments as a legacy of past practice, manufacturers have successfully resisted expanding the custom to new locations. In addition, there is now more transparency in the process. Earlier, the money was often simply handed over to individual local officials without any formal paperwork; now the transfer is properly registered and the use of the funds is monitored.

But the system still has its flaws, as companies never know when community representatives may come to them with spur-of-themoment requests for contributions to fund a given event or another special purpose.

The 2010 Taiwan White Paper contained a new suggestion for how to resolve the community payments problem. It recommended adopting a model used in the United States and other countries, where Community Advisory Panels – known as CAPs for short – have been established. CAPs members usually consist of a cross-section of community residents, including civic leaders, business leaders, homemakers, retirees, hourly workers, emergency

解決老問題的新點子 化工業企盼政府協助建立社區諮詢委員 會制度，以利業者與居民的良性互動。

化

工業者支付「地方回饋金」給工廠週邊 鄰里已行之有年。台北市美國商會化學 製造商委員會首度提及回饋金相關爭 議，是在2002年的《台灣白皮書》。委員會當 年在「產業優先議題」中指出，回饋金的原意是 協助環境污染案件的善後處理，但部分居民誤以 為，不管有沒有事故，只要工廠還在，就必須持 續發放。業界雖然認為回饋金已成變相的「保護 費」，但許多業者為了維持良好的鄰里關係仍會 按時支付。 在2010年《白皮書》中，化學製造商委員會 的優先議題再度納入回饋金問題，呼籲政府協助 建立透明的溝通機制，以利企業與社區的良性互 動。委員會認為，回饋金問題大致已有改善。首 先，雖然部分化學工業區的廠商仍依慣例提供回 饋金，但新廠區已經不需再遵循這個作法；其 次，回饋金的使用的透明度已經大幅提昇 — 過 去回饋金都直接上繳給地方政府官員，連基本的 簽收核銷機制都沒有；現在，回饋金不但需要登 記簽收，經費運用也得接受監督。 不過，回饋金制度仍難稱完美，因為少數鄰里 代表仍不時藉著舉辦活動或社區的特別需求，向 廠商要求贊助金。 為解決地方回饋金問題，化學製造商委員會 在今年的優先議題中提出一項新的建議：引進美 國及其他國家行之有年的制度–「社區諮詢委員 會」（Community Advisory Panel，CAP）。委員 會成員通常廣納各方人士，如地方耆老、商界代

july 2010 • taiwan business topics

7_2010_Issues.indd 11

11

2010/7/29 10:36:38 PM

Issues responders, clergy, educators, environmental groups, and healthcare providers. They make a commitment to meet with the management of the local chemical plant on a regular basis to discuss issues of mutual interest.

As a bridge between the community and the chemical company, the panel helps to facilitate dialogue and build mutual trust. If an environmental issue arises, they can help to resolve the matter in a rational atmosphere free of rancor. With regard to community payments, they can provide lines of communication enabling companies to fulfill their Corporate Social Responsibility without feeling that they are doing so under duress. That communication can also help avoid ad hoc requests for sponsorship, enabling companies to incorporate community needs into their annual business plans in an orderly way.

In the position paper, the manufacturers stressed that government assistance would undoubtedly be needed to establish an effective CAP system. The Committee is awaiting the government’s reaction to this suggestion when the authorities present their response to the White Paper recommendations over the coming months.

表、家庭主婦、退休人士、臨時雇員、救難人 員、宗教與教育界代表、環保團體，以及醫護人 員；委員會成員與當地化工業者定期會面，以商 討雙方關切的議題。 身為鄰里與業者的溝通橋樑，委員會能促進溝 通、建立互信。一旦發生環保爭議，委員會也能 協助雙方以理性態度解決問題。就回饋金制度而 言，委員會則能提供溝通管道，合理敦促業者落 實企業社會責任，同時避免業者誤認地方無理要 脅。這種溝通方式也能讓廠商將地方需求納入年 度經營計畫，以避免社區臨時提出贊助要求造成 廠商的困擾。 化學製造商委員會認為，成功有效的社區諮 詢委員會制度需要政府的參與和協助。委員會期 待，政府在對白皮書建議事項提出正式回應時， 能正面回應此一提案。

— 撰文／沙蕩

— By Don Shapiro

Growing Risks from Smuggled Pesticides Despite 10 years of being cited in the Taiwan White Paper, the problem of illegal agro-chemicals is actually worsening.

O

ne of the few issues to have appeared in the Taiwan White Paper even longer than the above-mentioned “community payments” problem is the threat to market order and public health posed by the influx of smuggled pesticides. AmCham’s Agro-Chemical Committee has been citing this problem in its position paper annually since 2001.

Alarmingly, in the case of this issue the situation appears to be worsening rather than improving. Factories in China, collaborating with unscrupulous distributors in Taiwan, appear to be getting better and better at penetrating the market with products of low cost but unproven quality. Customs and law-enforcement agencies have so far been unable to seriously disrupt the pipeline, leading the Ag-Chem Committee this year to describe the use of illegal pesticides – virtually all of it smuggled in from China – as “rampant.”

12

偽劣農藥的問題越趨 嚴重 《台灣白皮書》已連續十年呼籲政府正 視偽劣農藥的問題，但情況仍持續惡 化。

上

一篇文章提到，地方回饋金爭議是《台 灣白皮書》中一個長期懸而未決的議 題，另一個比地方回饋金更歷史悠久的 議題則是偽劣農藥問題。台北市美國商會的農化 委員會自2001年開始，每年都在《台灣白皮書》 的「產業優先議題」中呼籲政府，正視偽劣農藥 問題，因為走私進口的農藥不但破壞市場秩序、 更威脅民眾健康。

taiwan business topics • july 2010

7_2010_Issues.indd 12

2010/7/29 10:36:40 PM

Issue s

The large volume of untaxed, untested product on the market presents unfair competition to legitimate manufacturers and distributors who abide by all the regulations, and discourages those companies from investing further in their businesses and from launching innovative products based in new scientific discoveries in Taiwan. But far more serious than the business loss is the potential risk to human health – both to vegetable farmers unwittingly utilizing sub-standard pesticides and to consumers if these substances enter the food chain.

According to market sources, since late last year large quantities of what is purportedly a duplicate of a new active ingredient called chlorantraniliprole have been clandestinely brought into Taiwan and widely used in vegetable plantings. As the smuggled product never went through proper testing and registration, its safety has not been verified – in fact, even whether it actually contains the claimed active ingredient cannot be known for certain.

Considering the many channels – from mail parcels to fishing boats – by which goods may be smuggled onto this island, finding ways to intercept them is clearly a major challenge. “Just because it is undoubtedly such a challenge, and because the prevalence of illegal pesticides raises questions of public health and food safety, we hope that when high-level officials this year look over AmCham’s White Paper, they will pay special attention to this issue,” says Chamber President Andrea Wu. “It is troubling that the issue is still in the White Paper after 10 years, and even more troubling that conditions are getting worse.”

令人擔憂的是，偽劣農藥不但沒減少，反而更 為氾濫。在中國的製造商與不肖的台灣經銷商聯 手之下，台灣市場的低價、劣質農藥越來越多。 海關與執法單位至今仍無法徹底斷絕這些絕大多 數來自中國的走私偽劣農藥，農化委員會在今年 的《白皮書》中甚至以「猖獗」形容現況。 不必繳稅、未經檢驗的農化產品充斥台灣市 場，不但傷害守法製造商及經銷商的權益，更會 影響廠商擴大投資與引進創新產品的意願；更嚴 重的影響是對公眾健康的威脅：偽劣農藥不但對 不知情的農民造成健康的傷害，更可能因為進入 了食物鏈中、而影響消費者健康。 市 場 消 息 指 出 ， 新 農 藥 「 剋 安 勃 （Chlorantraniliprole）」才剛完成登記，但去年底 至今，已有大量仿冒品流入台灣，並廣泛用於蔬 果種植上。由於走私農藥未經周嚴的查驗登記， 安全性沒有保障，更遑論這些產品是否真的含有 所宣稱的有效成份。 由於偽劣農藥走私管道實在太多，小到郵包、 大到漁船，徹底攔阻的困難度的確很高。但商會 執行長吳王小珍強調，「偽劣農藥的查緝的確不 易，但這個問題嚴重威脅公共健康及食品安全， 因此商會特別希望，政府在檢視今年度白皮書議 題時，能特別重視此一問題。」她並表示，「偽 劣農藥的問題連續十年出現在《白皮書》中，實 在令人難以致信；然而，此狀況的持續惡化，更 是令人瞠目結舌。」

— 撰文／沙蕩 — By Don Shapiro

WTO Rules in Taiwan’s Favor Complaint against the EU dealt with tariffs imposed on LCD panels.

T

aiwan in June was victorious in a two-year-long painstaking trade dispute with the European Union. A World Trade Organization dispute panel backed its claim that the EU was unfairly imposing 14% tariffs on certain kinds of Taiwanese liquid crystal display (LCD) panel imports in violation of the trade body’s Information Technology Agreement (ITA).

Support for Taiwan’s filing to the WTO has been included for the past two years in the AmCham Technology Committee position paper in the annual Taiwan White Paper.

july 2010 • taiwan business topics

7_2010_Issues.indd 13

13

2010/7/29 10:36:40 PM

Issues

Countries joining the ITA commit to eliminating customs duties on IT products ranging from personal computers to semiconductors and telecommunications apparatus. The ITA currently has 70 participants representing 97% of global trade in the high-tech sector. By promoting international trade, the agreement has helped propel Taiwan to become one of the leading global centers for high-tech manufacturing.

Since the agreement came into force in 1997, more sophisticated ITA products have entered the marketplace. The EU had interpreted that some technologically advanced ITA products should be regarded as outside the agreement, and subjected them to duty rates as high as 14% based on the argument that these products should be defined as consumer goods. In May 2008, the United States and Japan formally requested bilateral consultations with the EU and its member states with respect to its tariff treatment of their own electronics products, and Taiwan joined them a month later after its LCD panel manufacturers complained that the 14% levies were improper.

After formal consultations failed to resolve the matter, the three nations in September 2008 jointly requested that the WTO establish a dispute panel. An interim report issued by the panel on June 11 supported the three complainants and said the EU should not impose these tariffs. The ruling will take effect by December 25 this year, unless the EU should appeal it, in which case the matter will need to be resolved by March next year.

This case marked the first time since Taiwan’s accession to the WTO in 2002 that it had independently filed a trade complaint that was ruled on by a dispute resolution panel. Taiwan was a complainant in trade disputes twice before. In 2002, it joined eight WTO members to jointly dispute U.S. safeguard measures for steel products, and in 2004 it requested bilateral consultations with India over its anti-dumping measures on Taiwanese products, settling the matter before it got to the dispute-panel stage. Kristy Hsu, an associate research fellow with the Taiwan WTO Center at the Chung-hua Institution for Economic Research, says no country has ever brought formal charges against Taiwan at the WTO that reached the dispute-panel stage.

If implemented, the LCD ruling would eliminate an estimated US$611.5 million in tariffs annually, Taiwan’s Central News Agency reported. According to CNA, the total value of the IT exports affected by the dispute comes to around US$4.36 billion.

— By Jane Rickards

WTO裁定台灣勝訴 銷往歐盟的大尺寸LCD面板可望免稅

台

灣在2008年向世界貿易組織（WTO）爭 端解決機制控告歐盟對大尺寸LCD面板不 當課稅，長達兩年的訴訟案在今年六月 獲判勝訴。WTO審議小組認定歐盟對台灣大尺寸 LCD面板課徵14%關稅確有不當，已違反《資訊科 技協定」（I T A）。台北市美國商會科技委員會 過去兩年持續在《台灣白皮書》的產業優先議題 中，對台灣向WTO提告表達支持之意。 加入I T A的簽署國承諾免除資訊產品的關稅， 包括個人電腦、半導體及電信設備。I T A目前 有七十個簽署國，佔全球高科技產品貿易額的 97%。ITA降低關稅壁壘，促進國際貿易，也造就 台灣成為全球高科技製造業的重鎮之一。 I T A自1997年生效以來，更多精密的I T A產品 陸續問市。近來，歐盟將部分技術先進的I T A產 品視為消費性商品，排除在I T A規範之外，並課 以高達14%的關稅。美國與日本在2008年五月正 式向歐盟以及其會員國要求雙邊諮商，要求歐盟 確實遵行協定，以爭取特定電子產品的免關稅待 遇；台灣在一個月後決定加入美國與日本的行 列，因為國內LCD面板業者抱怨14%的關稅並不合 理。 由於諮商破裂，美日台三國於2008年九月聯合 要求WTO成立爭端審議小組。審議小組今年六月 十一日提交期中報告，同意美日台的主張，認定 歐盟不應課徵關稅。如果歐盟放棄上訴，訴訟將 在今年十二月廿五日定案；如果歐盟上訴，估算 明年三月也可定案。 此案是台灣2002年加入W T O後，首度在W T O 的貿易爭端解決機制中提出告訴。台灣之前曾兩 度參與貿易糾紛調解：一次是在2002年加入其他 八個會員國，質疑美國對鋼鐵產品的保護措施； 另一次是在2004年，針對印度對台灣產品進行 反傾銷調查程序，要求與印度進行雙邊諮商化解 爭議，以避免進入爭端審議小組執行階段。中華 經濟研究院台灣WTO中心副研究員徐遵慈指出， WTO會員之前對台灣所提的貿易糾紛調解，都未 曾進入審議小組階段。 根據中央社報導，台灣銷往歐盟的科技產 品總值約四十三點六億美元。若訴訟定案免除 關稅後，台灣大尺寸面板廠商每年可望省下 六億一千一百五十萬美元的關稅支出。

— 撰文／李可珍

14

taiwan business topics • july 2010

7_2010_Issues.indd 14

2010/7/30 4:48:54 PM

COVER STORY

photo : ap/ wally santana

photo : ap/ wally santana

Coming to Taiwan’s Defense 強化台灣國防力量

A

mid mounting Chinese pressure on the United States regarding arms sales to Taiwan, the question of whether Washington will agree to Taiwan’s request to purchase advanced F-16C/D jet fighters is receiving increasing attention. But regardless of the F-16 decision, which many informed observers believe will not be made until next year, the U.S. government is continuing to move forward to supply Taiwan with a wide variety of other weaponry. It answers Beijing’s objections by saying it is China’s massive arms build-up that makes it necessary for Taiwan to strengthen its defenses, and that the United States is committed under the Taiwan Relations Act to ensuring that Taiwan has the means to defend itself.

C/D型戰機也越來 中國反對美國出售武器給台灣的壓力越來越大，美國是否會同意出售F-16 越受到關注。許多消息靈通的專家認為，F-16 C/D案最快要到明年才會有結果。但在 F-16之外，美國政府事實上仍持續提供其他多項軍事裝備。美國對中國施壓的回應是：中國快速發 展軍備，才是台灣必須強化國防的原因，而美國仍將遵守《台灣關係法》確保台灣自我防衛能力。

BY JANE RICKARDS

撰文／李可珍

photo : www.taiwanairpower.org

July 2010 • taiwan business topics

7_10_CoverStory.indd 15

15

2010/7/30 4:49:23 PM

Cover Story

N

egotiation of the Economic Cooperation Framework Agreement (ECFA) may have brought cross-Strait tensions to an all-time low, but with more than a thousand Chinese missiles aimed its way, Taiwan continues to be wary of Beijing’s intentions. Taipei’s efforts to maintain its defense capabilities currently focus chiefly on getting U.S. approval for it to purchase F-16C/ D fighter jets, as President Ma Ying-jeou in early June reminded visiting American Institute in Taiwan (AIT) chairman Raymond Burghardt.

But a question mark now hovers over the likelihood of the United States agreeing to this and certain other requests for weaponry. America, virtually the only nation that diplomatically isolated Taiwan can look to as a source of arms, is reportedly facing an intense lobbying campaign from Beijing to cease providing major military equipment to Taipei. China has always objected to those sales, but many analysts see its leverage in Washington growing due to its increasingly powerful economy and global influence. On a wide variety of issues – including climate change, nuclear proliferation, trade imbalances, and policy toward Iran and North Korea, to mention just a few – Washington very much needs Beijing’s cooperation.

Although U.S. officials have not confirmed it, sources such as Defense News as well as Rupert HammondChambers, president of the Washing-

《經

ton-based U.S-Taiwan Business Council (UTBC), report that a freeze on arms sales to Taiwan is currently in place while the U.S. government sorts out its policy. Hammond-Chambers says his information is that no new deals will be announced by the State Department until next spring at the earliest.

Meanwhile, the relative strength of Taiwan's air power is undoubtedly diminishing. The 66 F-16C/D fighter jets that Taiwan hopes to purchase for an estimated US$4.7 billion are intended to replace around 60 F-5E/F jets that were sold to Taiwan during the Reagan administration in 1982. Nearly three decades later, the F-5s are now so old that they are considered a danger for Taiwanese pilots; five of them have mysteriously crashed over the past six years, most recently in July last year during a training exercise in Penghu, killing two crewmen. The UTBC, which publishes frequent reports on Taiwan’s security and runs an annual U.S.-Taiwan Defense Industry Conference, says many of the F-5s are too unreliable to be used for anything but training.

The current R.O.C. Air Force fleet of 390 jets also includes 56 French-built Mirage 2000 fighters that are highly expensive to maintain because of a shortage of spare parts. They are scheduled to be retired within the coming 10 years – perhaps sooner rather than later, for budgetary reasons.

China in recent years appears to have gained air superiority in the Taiwan

濟合作架構協議》（ECFA）大 幅改善兩岸關係，但中國仍有 千餘枚導彈對準台灣，背後動 機難免啟人疑竇。台灣維持國防力量的努力方 面之一，是爭取美國出售F-16 C/D型戰機–馬 英九總統六月初接見美國在台協會（AIT）主席 薄瑞光時，即重申F-16的必要性。 但美國是否願意出售F-16或其他武器，現 在卻已浮現變數。外交孤立的台灣，重要軍事 裝備幾乎全靠美國；但報導指出，中國正強力 遊說美國暫停對台軍售。中國向來反對對台軍 售，但許多分析家認為，中國越來越強的經濟 實力及全球影響力，已經使美國越來越難說 不。廣泛議題包括氣候變遷、核武擴散、貿易 失衡，以及伊朗與北韓問題，在在都讓美國不 得不爭取中國配合。

16

Strait for the first time. A 2009 report to Congress by the Pentagon said that the People’s Liberation Army (PLA) deploys 490 aircraft that could engage in combat over Taiwan without refueling, with a few hundred more understood to be within operational range of the island if refueled. Among the Chinese aircraft are modern Russian-made jets that could take on Taipei’s most advanced fighters. A Defense Intelligence Agency assessment released to Congress early this year pointed out the growing weaknesses in Taiwan’s air-defense capability, and the UTBC warns that if nothing is done, within four years Taiwan will have 90 fewer fighter jets, giving China a numerical advantage of two to one.

Taiwan has been seeking the F-16C/ Ds, its top arms-procurement priority, since 2006, but the U.S. government – first under the administration of George W. Bush and now of Barack Obama – has so far been unwilling to accept Taiwan’s formal Letter of Request.

Burghardt said in early June that the State Department had not yet made a decision, while Hammond-Chambers says the Obama administration is waiting for a new assessment of Taiwan’s air defense needs, expected to be completed next month, from the Office of the Secretary of Defense.

The decision on the F-16C/Ds is shaping up to be one of the most politically charged in the history of Sino-U.S. relations. According to some analysts, Beijing

儘管美國官員不願證實，但《國防新聞》與 美台商業協會（美台商會）會長韓儒伯指出， 在美國重新擬定方針前，對台軍售仍將處於凍 結狀態。 韓儒伯說，他得到的訊息是，美國國 務院最快也要明年春季才會宣布新的軍售。 然而，台灣空軍戰力卻不斷減弱。軍方 計畫購買六十六架F-16 C/D型戰機，總價約 四十七億美元，以替代雷根政府1982年售台的 六十架F-5 E/F。F-5機齡已屆卅年，繼續服役將 威脅飛行員生命安全：過去六年有五架因不明 原因墜機，最近一次是去年六月，兩名飛官在 訓練任務中於澎湖墜海。長期關注台灣國防、 定期舉辦「美台國防工業會議」的美台商會指 出，F-5型戰機的狀況糟到只能用於訓練。 台灣現有三百九十架戰機中，還包括購自法 國的五十六架幻象2000戰機。因零件取得不

taiwan business topics • july 2010

7_10_CoverStory.indd 16

2010/7/30 4:50:39 PM

defense

has told the United States that the F-16C/ D sale constitutes its proverbial line in the sand, although it is not clear what it would actually do if the sale goes through. Political considerations aside, in addition, some U.S. experts argue that Taiwan's limited defense dollars would be better spent in other ways.

According to some accounts, Taiwan is under some time pressure, as the F-16C/D production line at Lockheed Martin is due to start to shut down next summer, in line with a shift in demand to the cutting-edge F-35. A decision on the F-16C/Ds needs to be made before then, stresses Hammond-Chambers. But Burghardt told the Taiwan press during his June visit that the anticipated halt in F-16 manufacturing is not a factor. “If we want to do it, we will find a way to do it,” he said.

photo : www.taiwanairpower.org

The F-16A/B, above, and at left a Mirage 2000 during a training exercise on emergency take-off and landing on a stretch of highway.

Upgrading existing planes Another sizeable upcoming arms deal that is considered fairly certain to be approved, probably next year, would entail upgrading 145 F-16A/B aircraft that were sold to Taiwan in 1992, as well as 126 domestically built Indigenous Defense Fighters. The package, believed to have a price tag running into the billions of U.S. dollars, would include upgrading the engines on the existing F-16s, with Pratt & Whitney and General Electric named in a Congressional report as the likely contractors. Also involved

photo : ap/ wally S antana

would be upgrades to avionics, flights controls, and munitions. Defense News reported that Raytheon is expected to be one of the vendors, offering systems such as Advanced Combat Radar.

Another Taiwanese request to the U.S. government calls for initial studies – estimated to cost US$360 million – toward the building of diesel electric submarines, but the project’s prospects

易，幻象2000的維修費用一直難以壓低。空軍計畫十 年內讓幻象2000除役 －基於預算考量，時間還可能 提前。 中國近年似乎已經首度取得台海空優。美國國防部 2009年提交國會的報告指出，人民解放軍全部作戰飛 機中，四百九十架可以不經空中加油執行對台作戰， 另外數百架經空中加油後亦可投入台海戰場。同時， 解放軍俄製先進戰機的作戰能力足以匹敵台灣性能最 佳的機種。美國國防情報局（DIA）今年初提交國會 的評估認為，台灣空軍戰力持續衰退；美台商會則警 告，如果台灣不繼續強化空軍戰力，取得新型戰機， 四年之內，戰機數量將減少到只剩九十架，使中國在 戰機數量上將取得二比一的優勢。 台灣2006年以來積極爭取F-16 C/D型戰機，但小布 希與歐巴馬兩任政府都不願意接受台灣的採購需求申 請。薄瑞光六月初表示國務院尚未定案；韓儒伯則

Taiwan Strait Military Balance, Air Forces Aircraft

Total

Fighters 1,655 Bombers/Attack 645 Transport 450

China Taiwan Within Range of Total Taiwan 330 390 160 0 40 40

Source: u.S. Department of DefenS e

說，歐巴馬政府仍在等台灣空軍戰力的最新報告出 爐，國防部最快下個月就會完成此一報告。 F-16 C/D型戰機的軍售案，應該會成為美中關係史 上最具政治難度的決定之一。部分專家指出，北京當 局已經表明F-16 C/D軍售是「紅線」之一，但目前還 無法判斷，若F-16 C/D軍售案通過後，中國的反彈會 有多強烈。其他一些美國專家則建議，台灣或許該先 放下政治考量，思考如何更有效運用有限的國防預 算。 部分消息來源指出，F-16 C/D型戰機軍售還必須考 慮時間因素，因為洛克希德．馬丁公司明年夏季將 開始縮減F-16 C/D戰機生產線，以因應F-35戰機的需 求。韓儒伯強調，美國必須儘早決定F-16 C/D軍售。 但薄瑞光六月訪台時告訴媒體，F-16生產線關閉影響 不大，「真有需要，一定有辦法解決」。

july 2010 • taiwan business topics

7_10_CoverStory.indd 17

17

2010/7/30 4:50:59 PM

Cover StoRY appear uncertain at best. Eight diesel-electric submarines were part of a package offered to Taiwan by the Bush administration in 2001; the original idea was for the United States, which no longer manufactures conventional subs, to obtain the design from a foreign company. But after Taiwan balked at the price (a total of US$12.3 billion) and demanded that local shipyards take part, it was decided to divide the project into phases, starting with the preparation of design plans. The U.S Navy in 2008 then accepted Taiwan’s Letter of Request for the plans, though the White House never followed through with a notification to Congress. While President Ma has voiced his support for the project, some defense analysts question whether Taiwan actually has the capability to build its own submarines. In any case, the weapons systems to be fitted on the vessel would need to be supplied by the United States.

Possession of the diesel-electric subs would not be enough to ensure that Taiwan holds the balance of naval power in the Taiwan Strait, analysts say.

Rather, their value would be to complicate a Chinese naval blockade or invasion, buying critical time for international intervention. Alexander Huang, a professor at Tamkang University’s Graduate Institute of International Affairs and Strategic Studies, says merely ordering the plans would send a message to China that the submarine program is alive, even if Taiwan does not end up building them.

“We can’t predict whether five or seven years down the road we’ll actually build or buy” the subs, but it would be good to have a three- to five-year grace period to keep the Chinese off-balance regarding Taiwan’s intentions, he says.

In many ways these procurement issues are nothing new. Ever since the United States switched diplomatic recognition from Taiwan to China in late 1978, the island has always asked for more weaponry than Washington has been willing to provide. “It has never been U.S. policy to assure a balance of power,” says Arthur Ding, a research fellow at National Chengchi University’s Institute of International Relations.

“What the U.S. attempts to do is give Taiwan [sufficient defense capability] to make China think twice about the costs and consequences of an invasion.”

In the months following “derecognition” when the U.S Congress was considering passage of the Taiwan Relations Act (which as eventually enacted in 1979 commits America to “provide Taiwan with arms of a defensive character”), there were squabbles between the State Department and the more pro-Taiwan Congress over the kind of arms-sales policy that should be adopted.

Thirty-one years later, the factors involved in weighing U.S. military sales to Taiwan remain highly complicated.

China, with whom Washington maintains formal diplomatic relations, views Taiwan as its own territory. It obviously

現有戰機的性能提升 美國明年可望批准的軍售應該是台灣現有戰機的性 能提升案，包括1992年出售的一百四十五架F-16 A/B 型戰機，及一百廿六架台灣自行研發的經國號戰機。 數十億美元的性能提升案可能包括F-16戰機的引擎、 航電、戰管與彈藥系統；國會報告顯示，普拉特‧惠 特尼與奇異是最可能的引擎承包商。《國防新聞》周 刊指出，雷神也可能加入競爭，提供先進作戰雷達等 系統。 台灣對美國的另一項採購申請是柴電潛艦－總額約 三點六億美元－初期研究雖在進行之中，但整體計畫 仍充滿變數。小布希政府2001年同意出售八艘柴電潛 艦，但因美國已不再生產傳統動力潛艦，因此原先計 畫是向廠商取得設計，再由美國提供給台灣。然而， 一百廿三億美元的總價引發台灣國內質疑，並要求由

18

opposes the idea of any foreign power supplying weapons to what it regards as a renegade province to be retaken by military force if necessary. At the same time, American friendship and support for Taiwan stretches back to the early 1950s and the two societies maintain extremely close economic and cultural relations.

The Taiwan Relations Act also states the intention “to make clear that the U.S. decision to establish diplomatic relations with the People's Republic of China rests upon the expectation that the future of Taiwan will be determined by peaceful means.” Continued arms sales were seen as necessary to discourage any non-peaceful action by Beijing, but also to give Taipei the confidence to engage in efforts to improve cross-Strait relations.

Declining share of GDP According to the U.S. Congressional Research Service (CSR), the value of U.S. defense articles and services delivered to Taiwan in the period between 2005 and 2008 – a total of US$3.9 billion – was the fourth largest in the world, behind the Middle Eastern countries of Israel, Egypt, and Saudi Arabia.

In relative terms, however, Taiwan’s defense spending has been shrinking. In the 1990s, it came to more than 3% of GDP on the average, but during the past decade the figures declined to a level of above 2%. Although President Ma has stated his wish to see a return to more

國內造船工業參與建造組裝，潛艦計畫被迫切成數階 段進行，第一階段即為設計準備。美國海軍2008年接 受台灣對潛艦設計的採購申請，不過美國白宮一直沒 有通知國會。儘管馬英九總統支持潛艦計畫，但部分 國防專家質疑台灣是否真有能力自製潛艦，而且就算 自行組裝，武器設備還是必須向美國購買。 專家指出，就算取得柴電潛艦，台灣仍不足以平衡 兩岸制海戰力。潛艦的價值在於突破中國的海上封鎖 或進逼，爭取時間等待國際介入。淡江大學國際事務 與戰略研究所教授黃介正表示，就算最後可能放棄發 展潛艦，但台灣決定購買設計，還是能讓中國知道潛 艦計畫並未完全消失。他說，「現在無法預期五年或 七年之後，台灣是不是真的能建造或購買潛艦，但潛 艦計畫的存在，至少能爭取三至五年的緩衝期」。 美台軍售問題早就不是新聞。自從美國1978年與 台斷交、與中建交後，台灣希望買的武器就一直遠多

taiwan business topics • July 2010

7_10_CoverStory.indd 18

2010/7/29 10:41:31 PM

defense

Can a “Brave Wind” Hit China?

N

ext magazine reported in June that Taiwan’s military is planning to testfire surface-to-surface cruise missiles that have a maximum range of 2,000 kilometers, enough to reach targets deep inside China, such as Beijing or the Three Gorges Dam. Although Taiwan’s Ministry of National Defense denied the report of the test-firing and there has been no official confirmation of the range, the existence of the missiles, known as the Hsiung Feng (“Brave Wind”) 2E, has been discussed publicly, including in open testimony before the Legislative Yuan.

Among Taiwan’s efforts to produce its own indigenous weaponry, development of the Hsiung Feng 2E by the military’s Chungshan Institute of Science and Technology has been the most controversial. The development program began during the presidential administration of the Democratic Progressive Party’s Chen Shui-bian, with the rationale that it would be a far cheaper deterrent for Taiwan to have the capability of lobbing a missile at the mainland than to have to buy countless batteries of costly PAC-3 antimissile missiles. The Hsiung Feng could also attack enemy radar stations, command-andcontrol centers, and naval bases, forcing China to “divert resources to enhance or improve its offensive measures, such as a missile defense system,” says Arthur Ding, a defense specialist at National Chengchi University’s Institute for International Relations.

Open debate in Taiwan about the program while Chen was in office alarmed the United States. Viewing these missiles as offensive weapons, Washington placed a ban on the export of equipment that could be used in their production, says Rupert HammondChambers, president of the U.S.-Taiwan Business Council. The system was also short of navigation, positioning, and guidance systems, says Parris Chang, a deputy secretary-general of the National Security Council under Chen.

“It was a bootstrap operation,” he confesses.

“We were trying to see if we could reach Shanghai.”

Amid lingering doubts about their precision, the missiles were the subject of debate within DPP circles as to whether they should be aimed only at military targets or be used to threaten China’s cities and economic assets.

After Ma Ying-jeou assumed the presidency,

there was no further public discussion of the missiles, but the development program is believed to have continued. HammondChambers says the although the United States recently started restricting the export of certain raw materials in addition to equipment, missiles with a range of around 600 kilometers are already ready for production.

Some Western military analysts disagree with the U.S. government position that the Hsiung Feng 2E is an offensive weapon. “If you are being attacked, you cannot just sit there and take it,” Hammond-Chambers says. “You need to hit airfields, critical infrastructure.” York Chen, a former advisor to Chen’s National Security Council, says the DPP administration sought to gain the ability to hit faraway inland airfields, whereas the Ma government is believed to have halted the development of missiles with ranges of 1,000 kilometers and over, instead focusing on the somewhat less sensitive 600-to-800-kilometer range that would include bases along China’s east coast.

Considering Taiwan’s small size and need for outside support, Ding suggests that it would be better to stop the program and take the moral high ground in order to get the support of the international community.

A PAC-3 anti-missile missile.

— By Jane Rickards

photo : courtesy of lockheeD m artin

於美國願意賣的。國立政治大學國際關係研究中心研 究員丁樹範表示，「美國從來沒有承諾要維持台海戰 力均衡，美國只希望台灣有足夠自衛能力，使中國三 思攻台的成本與風險」。 美台斷交後，美國國會開始思考制定《台灣關係 法》，但國務院與多數支持台灣的美國國會之間，對 軍售項目與用途並無共識。《台灣關係法》最後在 1979年通過時，只規定美國必須提供台灣防衛性武 器。 卅一年之後，美國對台軍售仍然受高度複雜的因 素影響。與美國有正式外交關係的中國，認定台灣是 其領土，因此反對其他國家出售武器。但美國早自 1950年代就與台灣關係友好並提供協助，雙邊經貿 文化關係也依然緊密。《台灣關係法》的含意也在於 「就算美國決定與中國建立正式外交關係，但台灣的 未來仍必須透過和平方式決定」。持續對台軍售不僅

避免中國採取非和平手段，也強化台灣改善兩岸關係 時的自信。

國防預算捉襟見肘 美國國會研究處的統計，2005年至2008年，美國 對台提供的武器及服務總值為卅九億美元，僅次於以 色列、埃及與沙烏地阿拉伯。 但與以往相較，台灣的國防預算卻是逐年減少。 台灣1990年代的國防預算一般都在國內生產總額 （GDP）的3%以上，2000年以後預算已經降到GDP 的2%左右。馬英九總統雖承諾恢復到3%以上，但去 年的預算仍只有GDP的2.7%，美國國會研究處認為今 年還將下滑到2.2%（約九十三億美元）。相對的， 1989年至今年，中國對外公開的國防開支每年皆呈 現兩位數成長，今年成長雖可能降到7.5%，但總額仍

July 2010 • taiwan business topics

7_10_CoverStory.indd 19

19

2010/7/29 10:41:32 PM

Cover StoRY Aircraft Deployment and Command & Control Infrastructure

Hengshan Taipei Hsinchu AFB Chanchushan

Air Force Base

Loshan Ching Chuan Kang (CCK) AFB

C2 Infrastructure

Chiashan

Hualien AFB Chiashan AFB

Chiayi AFB

Makung Air Field

Tainan AFB Taitung AFB

Kangshan Pingtung AFB Kaohsiung

source: us-taiwan Business council

than 3% of GDP, the defense budget last year stood at 2.7% and the CRS report says that this year it will fall to 2.2% (around US$9.3 billion). In contrast, the PRC’s announced military spending was experiencing double-digit growth from 1989 until this year, when the pace is expected to slow to 7.5%, bringing the total to around US$78 billion. China’s

actual spending, in addition, is believed to exceed its stated figures.

As the drama of the F-16C/D purchase unfolds, Taiwan not only has China’s increased influence in the world to contend with, but also the shadow of Taipei’s strained relations with the United States during the 2000-2008 rule of the Democratic Progressive Party. Then-Pres-

達七百八十億美元。同時，不容忽視的是，中國的國 防開支咸信高於對外宣稱的數字。 F-16 C/D型戰機的採購案，台灣不僅必須面對中國 日增的國際影響力，也需處理台美關係在民進黨執政 八年期間的惡化–前總統陳水扁被美國認定為過度挑 釁中國；而立法院居多數的國民黨不斷阻擋民進黨政 策，連小布希政府2001年同意的重大軍售，其預算 也一直拖到2007年才折衷通過。 同一時間，美國政府對台灣內部政爭越來越不耐 煩，更因北韓與伊朗核武問題必須尋求中國配合。 小布希政府有將近一年的時間暫停對台軍售，直到 2008年十月才宣布六十五億美元的軍售，提供愛國 者三型飛彈與阿帕契攻擊直升機等裝備。 歐巴馬上台後，直到今年一月才宣布新一波的 六十四億美元軍售，項目包括黑鷹直升機與愛國者三 型飛彈系統。黃介正認為，這次軍售會拖這麼久應該

20

ident Chen Shui-bian was seen by Washington as being unnecessarily provocative toward China. At the same time, as part of their efforts to block any initiative proposed by the Chen administration, the Kuomintang majority in the Legislative Yuan repeatedly blocked the DPP’s attempts to pass a special budget to pay for an unprecedentedly large weapons package offered by the Bush administration in 2001. It wasn’t until 2007 that lawmakers reached a compromise to come up with the funds.

In the meantime, the U.S. government had grown irritated by the political wrangling in Taiwan, and it also considered the timing inopportune as it was seeking China’s help with such issues as North Korea’s nuclear program and Iran. The Bush administration at that point imposed a freeze on arms sales to Taiwan for around a year, before notifying Congress in October 2008 of a US$6.5 billion package that included Raytheon’s Patriot Advanced Capability (PAC)-3 anti-missile systems and Apache attack helicopters from Boeing, among other items.

After Obama’s election, another freeze took place until January this year when the administration announced a US$6.4 billion package that included Blackhawk helicopters manufactured by Sikorsky, and more PAC-3 interceptor missile batteries. Alexander Huang considers the latest freeze as virtually all due to Beijing’s pressure. “We cleared our name in Washington two years ago,” he says,

與中國施壓有關。他說，「台灣花了兩年時間才扭轉 美國的想法」，化解美國對陳水扁時期的反感。 美國長期以來都是逐項宣布對台軍售，但近年來 卻改成整批出售。例如2008年的軍售，共有六大項 目；今年一月廿九日－時間點剛好落在農曆過年前－ 宣布包括五項裝備的軍售案。 韓儒伯表示，已經完成低階行政作業的對台軍售 案，目前正由國務院刻意管制，以便在美中關係較為 平穩時再對外宣布。此外，美國各部會都有自己與中 國合作的時程安排，因而常常要求暫緩對台軍售。 他說，美國現在是以「微觀管控」處理台灣問題， 「以往由科長簽字蓋章的東西，現在得由副國務卿同 意」。 韓儒伯說，美國政府壓住三項已經完成行政作業 的對台軍售（但他不願說明具體項目，只強調不包括 F-16 A/B性能提升案）。

taiwan business topics • July 2010

7_10_CoverStory.indd 20

2010/7/29 10:41:33 PM

defense

referring to the U.S. frustrations toward Taiwan of the Chen Shui-bian era.

For decades, U.S. arms sales to Taiwan were announced one by one throughout the year in the form of Congressional notifications, but recently they have instead been handled as packages. In the 2008 deal, for example, six programs were announced simultaneously, and on January 29 this year – just before Chinese New Year, normally a quiet period in China – a group of five items was announced.

According to Hammond-Chambers, the State Department is now purposely holding up weapons deals already completed at lower levels of the U.S. bureaucracy in order to be able to time the announcement of a package during a relatively quiet period in U.S.-China relations. In addition, he says, U.S. government agencies with their own agendas requiring cooperation from Beijing will frequently intervene to ask that arms sales to Taiwan be postponed. “There is micro-management of the Taiwan account,” he notes. “Things that desk officers should be stamping and signing are going all the way up to the Deputy Secretary of State.”

Hammond-Chambers says the administration is currently sitting on notifications to Congress of three completed Taiwanese arms sales (he would not identify the contents, except to say they do not include the F-16A/B upgrade program).

Cross-Strait thaw Although President Ma has emphasized that his landmark policies of increasing contact and reducing tensions with China still need to be matched by a strong defense posture, the cross-Strait thaw has caused some influential American commentators to conclude that since the two sides are moving closer together, there is no longer a good reason to continue the U.S. security commitment to Taiwan.

While many of the Kuomintang’s friendly overtures toward China drive independence supporters crazy, both Hammond-Chambers and local analysts such as Ding say that Ma appears no less determined to buy U.S. weaponry than previous presidents. Seeking closer economic ties with China while maintaining defense capabilities against possible future contingencies is not, in fact, a very unusual posture to adopt. Other countries in the Asian region are doing the same, as is the United States.

At the same time, Taiwan undertook a pronounced change in the mission of its armed forces after deadly Typhoon Morakot last year – a shift towards more emphasis on disaster relief, which is influencing both budgetary decisions and training. Recently, Ma proposed that 15 of the 60 Blackhawk helicopters purchased this year should go to the Interior Ministry instead of the military.

For its part, China for at least the time being appears to have its hands

兩岸融冰 馬政府推動兩岸和平之際，仍強調國防的必要性， 但兩岸關係大幅升溫，讓部分重量級美國專家認為， 既然兩岸越走越近，美國已不再需要負擔對台安全的 承諾。 儘管國民黨對中國示好的舉動，讓支持獨立的民眾 非常反感，但韓儒伯和國內學者如丁樹範卻認為，馬 英九對軍售的堅持並不亞於歷任總統。事實上，經濟 靠攏中國，但同時強化國防以備未來之需，並不是太 出人意料的政策選擇。其他亞洲國家，甚至是美國， 都在走同樣的路。 對國軍預算及訓練影響更大的轉變是，台灣在去年 莫拉克颱風災後，決定讓國軍負擔更多救災責任。馬 英九之前曾經表示，新購買的六十架黑鷹直升機，其 中十五架應將交由內政部用於災害防救。

full concentrating on its own economic development, and since 2005 President Hu Jintao has shifted the mid-term crossStrait strategy from promoting unification to merely preventing Taiwan independence so as to pursue unification in the long run. In any case, the 2009 Pentagon report says China still does not have the capability to invade and conquer Taiwan, especially when confronted with the prospect of U.S. intervention. A war, in addition, would severely retard China’s economic development, especially when Taiwan is its largest source of foreign direct investment (if Hong Kong is excluded) to the tune of at least US$150 billion Still, China is continuing its rapid military build-up and now points a total of 1,400 ballistic missiles at Taiwan, adding at least another 100 each year.

But because it would not wish to alienate the Taiwanese population it hopes to bring back to the fold of the motherland or to destroy the island’s economic infrastructure, Beijing is regarded as unlikely to contemplate launching an all-out invasion. “They don’t want to turn Taiwan into a deserted island or junkyard,” notes Huang, and so would be more likely to opt for a limited military operation, such as a blockade, followed by heavy political coercion. “Most likely they will try to get Taiwan in a situation where it has to surrender without a serious fight,” says Wendell Minnick, the Defense News Asian bureau chief.

至於中國，就現階段而言，經濟發展顯然優於一 切。國家主席胡錦濤2005年曾經指出，兩岸的中期目 標將從促統轉為防獨，統一將留待以後解決。美國國 防部2009年的報告則指出，以中國現階段戰力，仍 難以取得台灣，特別是在美國可能介入的狀況下。此 外，兩岸發生戰爭將嚴重衝擊中國國內經濟，特別是 台灣為中國最大的外國直接投資來源國（如果不包括 香港），投資金額已超過一千五百億美元。 儘管如此，中國仍快速發展軍備。其中，針對台 灣的彈道飛彈已達一千四百枚，且以每年一百枚的速 度增加。考慮到爭取台灣民心、避免破壞台灣經濟基 礎，北京當局似乎不太可能發動全面戰爭。黃介正指 出，「中國並不希望台灣變成廢墟」，因此比較可能 採取局部性軍事行動，例如先海上封鎖，繼之以政治 恫嚇。美國《國防新聞》駐亞洲辦事處主任顏文德指 出，「中國希望可以在不需大動干戈的狀況下，便迫

July 2010 • taiwan business topics

7_10_CoverStory.indd 21

21

2010/7/29 10:41:33 PM

Cover StoRY Currently, Beijing appears to be conducting an orchestrated campaign of lobbying and threats aimed at the U.S. government and defense contractors, while at the same extending concessions to Taiwan – such as ECFA – in the economic sphere. After Washington announced the US$6.4 billion package this January, China angrily cut off military exchanges with the United States and threatened to withdraw from such other bilateral initiatives as cooperation on Iran sanctions. For the first time, it also threatened retribution against the American contractors involved in the January package (who happened to be Boeing, General Electric Aircraft, Lockheed Martin, Raytheon, and Sikorsky). So far it has not made good on these threats, though aside from Boeing, none of them have extensive commercial interests in China. Boeing has already felt the heat of Chinese pressure, and in 2006 closed its Taipei offices and moved them to Singapore.

In June, referring to the Taiwan arms sales as the reason, China also took the unusual step of rejecting U.S. Defense Secretary Robert Gates’ proposal to

make a fence-mending visit to China. The Chinese move was widely interpreted as aimed at preventing the sale of F-16C/Ds to Taiwan.

Parris Chang, a deputy secretarygeneral of the National Security Council in the previous DPP administration, sees China as following the doctrine of the ancient Chinese military theorist Sun Tzu, who advocated “trying to defeat an enemy without firing a shot,” by chipping away at the Taiwan-U.S. security relationship. Wooing Taiwan commercially, for example, may convince Americans that cross-Strait tensions have been sufficiently reduced that the United States no longer needs to provide Taiwan with weaponry, particularly when those sales upset relations with China. Chang and other analysts say that Beijing in the long term seeks to force the United States to live up to its pledge in a 1982 Reaganera joint communique to gradually reduce arms sales to Taiwan (whenever China refers to this promise, the U.S government responds that it was premised on China’s peaceful resolution of differences with Taiwan).

taiwan’s Defense Budget Fiscal Year 1995 2000 2005 2010

Military Budget (NT$ Bill.)

252.3 402.9 258.5 297.4

Military Budget (NT$ Bill.)

9.5 12.9 8 9.3

% of GDP 3.5 2.9 2.3 2.2

% of Total Government Spending 24.5 17.4 16.1 17.3

source: u.s. c ongressional research s ervice

使台灣投降」。 目前而言，北京當局似乎選擇兩面手法，一方面 遊說並威脅美國政府及民間包商，另一方面給予台灣 《經濟合作架構協議》（ECFA）等經濟利益。美國 今年初宣布六十四億對台軍售後，中國不僅暫停與美 國的雙邊軍事交流，更威脅退出制裁伊朗等的雙邊計 畫；同時，中國首度威脅抵制承包對台軍售的美國國 防企業（波音、奇異、洛克希德．馬丁、雷神及塞考 斯基）。不過，除了波音以外，此類威脅抵制尚未對 其他企業造成太大損失，因為他們在中國的營運規模 不大；不過波音長期承受中國壓力，2006年已結束 在台營運，並將據點移往新加坡。 中國在六月再度以對台軍售為由，拒絕美國國防部 長蓋茨的回訪。一般認為，此舉意在為F-16 C/D蓋棺 封釘。 前國安會副秘書長張旭成認為，中國的策略就是

22

The smiling face that China has turned toward Taiwan since the Kuomintang’s return to power has not been confined to the economic sphere. Huang reports that China recently invited a group of retired Taiwan generals to play golf in Nanjing with their PLA counterparts, while a report by the Stimson Center, a U.S think tank, mentions another group of retired senior Taiwan generals led by the former chief of political warfare that visited Beijing this spring, meeting with top Communist officials. “I don’t think they know any secrets now, but the image or message they send to Washington is that these guys are not fighting the Communists any more,” says Huang. “They are wining and dining and golfing instead.”

Showdown on the F-16 C/Ds The upcoming U.S. decision on the F-16 C/D fighters is crucial, says Hammond-Chambers, because if Washington opts not to sell the aircraft, the Chinese will then draw a new red line against sales of other, less powerful weaponry. “If the Chinese can spook the administration into not selling the fighters, it will lower the bar,” he argues. He also maintains that imposing a temporary freeze on arms sales just gives China more leverage over the situation.

During a Congressional hearing following her recent trip to China, Senator Dianne Feinstein, chair of the Senate

《孫子兵法》中的「不戰而屈人之兵」，削弱美國對 台安全承諾以迫使台灣屈服。中國以經濟利益拉攏台 灣，或許能說服美國，兩岸不再具有危機，因此美國 不必再提供武器給台灣，特別是會影響美中關係的軍 售裝備。中國的終極目標是說服美國落實1982年的 《八一七公報」，逐步降低對台軍售的質與量（中國 以往訴諸《八一七公報》時，美方總是回應，中國必 須先承諾以和平方式處理台灣問題）。 中國在國民黨上台後對台灣採取的拉攏作為並不僅 限於經濟領域。黃介正指出，中國最近邀了一批台灣 退役將領訪問南京，與解放軍退役將領球敘；美國華 府智庫史汀生中心則指出，政戰系統高階退役將領率 領下，一批退役將領今年春季訪問北京，並會晤中方 重要官員。黃介正說，「我不認為這些退休將領還握 有什麼國家機密，但他們在北京飲酒作樂的畫面，卻 等於向美國傳遞一個訊息：軍方已不再反共」。

taiwan business topics • July 2010

7_10_CoverStory.indd 22

2010/7/29 10:41:33 PM

defense

Intelligence Committee, advised Defense Secretary Gates not to hurt ties with Beijing by engaging in further arms sales to Taiwan. She referred to a previous offer from Beijing to redeploy its missiles targeting Taiwan if the United States would stop equipping the Taiwan military. Describing Beijing as engaging in “information warfare,” HammondChambers says the message passed through Feinstein was a smokescreen designed to confuse and complicate the policy-making process in Washington.

Exacerbating the situation, analysts say, is that the United States, which has been tied down with wars in Iraq and Afghanistan and domestic economic woes, is giving far less attention to Asia than it did up until the late 1990s. “Capitol Hill is losing sight of Asia,” says Huang.

“There are only three issues for them in East Asia: North Korea, Okinawa, and the Chinese currency issue.”

Hammond-Chambers says he cannot remember a time when the U.S-Taiwan relationship has been so empty. “You have absolutely nothing going on in that relationship, but the U.S. says it is great and Ma says it has never been better,” he says. On the same theme, Huang stresses the importance of scheduling bilateral talks under the Trade and Investment Framework Agreement (TIFA). Those negotiations, previously held yearly, have not taken place since 2007 due to a dispute over Taiwan’s closing the market for imports of certain U.S. beef products,

presumably on health grounds.

Looking beyond the F-16C/Ds, another major defense deal that may be discussed after a few years is Lockheed Martin’s sophisticated Aegis Combat System, which was previously considered by the George W. Bush administration for sale to Taiwan. That decision was deferred in 2002, and instead the United States agreed to supply Taiwan with four Kidd-class destroyers – which were delivered in 2006 – as platforms for the Taiwan Navy to gain the necessary operational experience before later acquiring Aegis.

Stryker armored wheeled vehicles, made by General Dynamics, are also a possibility, since the research unit of the Ministry of National Defense, the Chungshan Institute of Science and Technology (CSIST), has reportedly not had much success in its efforts to develop a similar product. Sikorsky’s CH-53X minesweeping helicopters are another likely future purchase, Hammond-Chambers says, as is Raytheon’s anti-ship missile defense system, Phalanx CIWS (though that may be three or four years away).

Items mentioned in the CRS report as potential future acquisitions include armored security vehicles made by Textron and Sikorsky HH-60 Pave Hawk helicopters. Also looking ahead, Defense News reports that Lockheed Martin and Raytheon will be competing for contracts to upgrade various naval vessels, including Lafayette-class frigates and Sea

Dragon submarines. Unmanned Aerial Vehicles may also be a possible area for cooperation, as CSIST is developing good indigenous technology, Hammond-Chambers says, and may seek collaboration with U.S. manufacturers.

The short-take off and vertical landing variant of Lockheed Martin’s F-35 fighter jet that is under development would be highly suited to Taiwan, analysts say, given the possibility that runways may be destroyed by missiles. But even if procurement of this aircraft is politically feasible, it would not be available for Taiwan until 2020.

The Taiwan military also faces challenges due to its plans to move from conscription to an all-volunteer force, downsizing personnel levels from 275,000 to around 210,500 by 2014.

This transformation will be expensive, and Hammond-Chambers estimates that since it would push defense spending to 4% of GDP, the deadline will probably get pushed back. In the meantime, Taiwan’s preparation for the shift has entailed studying the U.S experience of several decades ago in converting to an all-volunteer force, including ways of making the military appear to be an attractive career option and equipping recruits with appropriate skill sets.

Hammond-Chambers says that military officers from Taiwan have been invited to tour U.S. bases to observe the infrastructure and services, such as healthcare management and housing programs,

F-16 C/D的關鍵抉擇 韓儒伯表示，美國對F-16 C/D型戰機的決定非常關 鍵，因為一旦美國放棄出售F-16 C/D，中國勢必再把 紅線往前劃，反對其他威力更低的武器。他說，「中 國能迫使美國不賣F-16 C/D，當然會想把門檻再降 低」，而暫停對台軍售同樣只會助長中國聲勢。 美國聯邦參議院情報委員會主席范士丹，訪問中 國之後在聽證會上向國防部長蓋茨建議，美國應該停 止對台軍售以免傷害美中關係。她表示，中國之前曾 經提議，如果美國終止對台軍售，願重新部署對台飛 彈。韓儒伯認為，中國是在搞「情報戰」，透過范士 丹傳遞的訊息只是幌子，意在擾亂美國的決策過程。 專家認為，情勢更為複雜的變數在於，美國受制於 伊拉克與阿富汗戰爭，以及國內經濟惡化，對於亞洲 的關心程度已遠低於1990年代後期。黃介正認為，

LOOKING TO UPGRADE — Taiwan’s current main priority for military procurement is to obtain F-16C/D fighters from the United States. photo : wikipeDia

July 2010 • taiwan business topics

7_10_CoverStory.indd 23

23

2010/7/29 10:41:35 PM

Cover StoRY considered necessary to attract and retain volunteer recruits.

That cooperation has been facilitated by the efforts following the Taiwan Strait crisis of 1996 to quietly upgrade contacts and communications between U.S. forces and Taiwan’s. As the CRS report notes, for example, since 2002 a small number of active-duty U.S. military personnel have been stationed in Taiwan for the first time in over two decades. Attached to AIT, they serve in training and advisory roles.

The two militaries also maintain operational communications, and there is also cooperation in officer exchanges, security conferences, and training programs. The United States has also been helping Taiwan develop its C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) capabilities to ensure that all services and units can share data and communicate with one another under a modern joint command and control system. The January arms deal involved US$340 million in upgrades to the program (which Taiwan calls Po-Sheng), including the installation of jam-resistant electronic information distribution systems.

Po-sheng, which is expected to be further upgraded over time, will also enable closer communication between the U.S. and Taiwan militaries in the event of any crisis. It demonstrates that the U.S. security umbrella covering Taiwan is more than a matter of what specific hardware systems are supplied.

A New Direction for offset

I

n a sign that Taiwan’s military is strapped for cash, the Ministry of National Defense (MND) has recently adopted a policy of using “offset” requirements – the arrangement under which international vendors selling defense systems to Taiwan are expected to provide economic benefits worth 40% or more of the contract value – to cover logistical support, repair, and maintenance. Besides saving money it would otherwise have to spend in obtaining those services from the equipment vendors or others, another aim is to increase Taiwan’s defense selfsufficiency by building a domestic repair and logistics support capability with the help of know-how from the American contractors.

But U.S. defense industry executives have complained of inefficiency and poor management in the way the new policy has been implemented. “The biggest issue we’re facing right now is a lack of personnel in the military that know how to run the programs,” said one company official speaking on condition of anonymity.

A shortage of experienced and skilled technicians to perform maintenance has also complicated the challenge for Taiwan in keeping its weapon systems serviceable amid a cash shortfall. Many of those

taiwan Strait Military Balance, Naval Forces Aircraft Destroyers Frigates tank Landing Ships/ Amphibious transport Dock Medium Landing Ships Diesel Attack Submarines Nuclear Attack Submarines Coastal Patrol (Missile)

taiwan Total

27 48 27

China East and South Sea Fleets 17 39 25

28 54 6 70

23 32 1 55

4 4 0 59

Total

source: u.s. Department of Defense

24

4 22 12

trained during previous foreign military sales programs have retired or moved on, and Taiwan has not operated its own training facilities. Neither has it run its own repair depots, according to industry executives, instead sending fighter jets and other major equipment offshore for repairs. Under the new plan, domestic companies or organizations would be helped to develop the capability to provide maintenance and repair services and to supply spare parts. Among the potential beneficiaries are believed to be the MND’s Chungshan Institute of Science and Technology, the Aerospace Industrial Development Corp. in Taichung, and the Air Asia facility in Tainan.

Taiwan’s offset programs are managed by the Industrial Cooperation Program run by the Industrial Development Bureau under the Ministry of Economic Affairs (MOEA). When signing a sales contract with Taiwan, U.S. defense suppliers typically commit to providing goods or services equal to at least 40% of the contract value, and in some cases as much as 70%.

With the arms package of October 2008 valued at US$6.5 billion and the one this January adding another US$6.4 billion, it would appear in theory that the contractors would need to spend or invest at least

「除了北韓核武、沖繩基地、以及人民幣匯率這三項 議題之外，其他亞洲議題都無法引起國會注意」。 韓儒伯說，美台關係從來沒有像現在一樣找不到 施力點，「雙邊關係沒有一點進展，但美國說關係緊 密，馬政府也說關係遠優於以往」。黃介正則說，台 美亟需恢復《貿易暨投資架構協定》（TIFA）下的定 期談判，原本每年召開的會議，因台灣以健康風險為 由禁止美國牛肉特定品項進口後，自2007年已經三年 沒有舉行了。 繼F-16 C/D之後，台灣希望爭取的武器裝備是洛克 希德．馬丁的神盾戰鬥系統（ACS）。小布希政府一 度考慮對台出售神盾艦，但在2002年時改為提供四艘 紀德級驅逐艦。2006年運交的紀德級驅逐艦，目的在 讓台灣海軍取得神盾艦前，能先熟悉先進作戰系統。 另外，通用動力生產的史崔克八輪裝甲運兵車也有 可能，主因是國防部中山科學研究院的裝甲車研發計 畫進展有限。韓儒伯認為，其他可能選項包括，塞考 斯基CH-53X掃雷直升機，以及雷神反制對艦飛彈的方

taiwan business topics • July 2010

7_10_CoverStory.indd 24

2010/7/29 10:41:39 PM

defense

US$5.24 billion in Taiwan.

In practice, however, the real dollar value of the transfer may not be that high, executives said. Depending on how Taiwan views the economic benefits of the transfer, the amount may be subject to “multipliers” that enlarge the value of the credits. For example, Taiwan encourages technology transfers, domestic R&D projects, and local investment – particularly in defense-related projects undertaken with domestic partners – by according them high multipliers.

Although many countries tie their defense purchases to offset programs, these requirements are never popular with the vendors, who view them as a constant administrative headache. Many defense companies find they need to employ a team of specialists to manage the programs, including number crunchers who fly all over the world calculating credit multipliers. In some developing countries, offset programs have also been associated with corruption, such as steering business to the relatives of government officials, though no such cases have been reported in Taiwan.

Typically, half the money in the program in Taiwan goes for “direct offset,” meaning defense products and services directly related to the sales agreement, while the remaining “indirect” portion can cover altogether different types of industrial activities.

Until recently, offset requirements were often attached to non-military procurement contracts as well. But after Taiwan’s accession

to the World Trade Organization’s Government Procurement Agreement in 2009, it has had to abide by GPA provisions barring offset programs relating to commercial procurement.

That development caused the MOEA to slash its budget for supporting the program, and over the past six months the MND has become more involved, creating the previously mentioned plans for local companies to team up with American defense contractors in “direct” offset ventures to provide needed logistics support, repair, and maintenance.

The changes are being guided by an Industrial Cooperation Steering Committee co-chaired by vice ministers from MND and MOEA. The steering committee held its first meeting in March this year, and agreed that the new strategy would guide future policies, according to an MOEA statement. The statement also said the plan would generate an estimated NT$2 billion for the local economy this year.

But U.S. defense companies have found that since being transferred from the MOEA to the military, the coordination and support of the offset programs have not gone as smoothly as before. The three staffers assigned to the task from the MND’s armaments bureau are said to be inexperienced and are filling the role part-time in addition to other duties. Starting in 2011, the armaments bureau will also be providing the budget for the offset programs operations, one executive said.

In the area of “indirect offsets,” the steering

陣近迫武器系統（不過可能要到三、四年之後）。 美國國會研究處報告列出的選項包括，德克通的裝 甲維安車與塞考斯基HH-60鋪路鷹直升機。《國防新 聞》的報導指出，洛克希德．馬丁與雷神都將爭取包 括拉法葉艦及海龍級潛艦在內的艦艇性能提升計畫。 韓儒伯指出，由於中科院已經發展出不錯的無人飛機 （UAV）技術，台美也有機會合作。 專家認為，洛克希德．馬丁所研發的F-35戰機， 其短場起降機型應該非常適合台灣，因為戰事一旦爆 發，機場勢必遭受飛彈攻擊。但購買F-35的政治困難 度非常高，就算真能排除，台灣也要到2020年以後 才能取得。 台灣軍方內部，則有轉型化的挑戰，必須在2014 年前由半徵兵制改為全募兵制，並將總員額由廿十七 萬五千人減到廿一萬五百人。韓儒伯認為，高昂的轉 換開支可能使國防預算拉高到GDP的4%，而且無法在 期限前完成。台灣的準備工作包括引進美國數十年前 轉換成全募兵制的經驗，除了要使從軍成為吸引人的

committee has decided to give priority to such sectors as CO2 reduction technology and green energy, including solar and wind-turbine power; fully electric vehicles; and cloud computing.

An executive committee reviews projects proposed by the armed services and private sector, and then recommends the most promising ones for the steering committee’s approval.

The foreign suppliers can also submit their own offset-project proposals.

One executive said U.S. defense companies prefer to get involved in purely commercial ventures such as cloud computing, as there is less hassle and red tape than with military projects. If the offset program relates to transfers of military technology, for example, the U.S. State Department must first give its consent. The final contract can only be signed if the offset programs are already in place, a process that requires extensive negotiations.

Since the cost of providing the offset benefits must be factored into the prices quoted for the weaponry, some manufacturers wonder whether the programs bring any real economic advantage to Taiwan, especially considering the expenses involved in administering the program. They note that Japan is one of the few countries in the market that never set up an offset program, and it certainly did not appear to hurt Japan’s industrial development. “If Taiwan were to get rid of offset programs, we would all have a big party,” an executive at one company commented.

— By Jane Rickards

生涯選項，另外必須提供必要、足夠的軍事訓練。韓 儒伯表示台灣軍方人員已應邀參觀美國基地，觀察基 礎設施、醫療保健管理、住宅政策等服務，以吸引和 挽留志願役士兵。 值得慶幸的是，台美軍事交流自1996台海危機後 已經悄悄升級。美國國會研究處的報告指出，美國 自斷交後即不再派遣現役軍人常駐台灣，但禁令已 在2002年取消，AIT的訓練與顧問任務可由現役軍人 負責。 美台軍方一直維持實務交流，人員交流、國安會 議、訓練計畫等合作也一直存在。美國也協助台灣建 立次世代的指管通資情監偵系統（C4ISR）系統，確 保各軍種與部隊之間的戰時通聯。今年一月的軍售 案中，即包括三點四億美元的博勝C4ISR系統提升計 畫，出售抗電戰干擾的通訊系統等元件。 性能不斷提升的博勝系統，同時也是美台戰時通聯 的重要平台。博勝系統也顯示，美國對台灣的安全承 諾，不僅僅只是特定硬體軍售項目的提供而已。

July 2010 • taiwan business topics

7_10_CoverStory.indd 25

25

2010/7/29 10:41:39 PM

taiwan busines s

taiwan busines s

Chunghwa Post Diversifies Operations With its traditional core business of mail delivery in decline, the government-owned company is focusing more on offering financial and logistical services.

BY PHILIP LIU p ho t o s : co urt es y o f chun ghwa p o s t

I

n many countries, the national postal service has been going through tough times, given the fast-changing business environment in which more and more communication is routed through such alternative channels as the Internet and couriers. But in Taiwan, the stateowned Chunghwa Post Co. has continued to thrive, thanks to the rapid expansion of cross-Strait postal volume, plus a diversified business portfolio that also includes various financial services.

As part of the implementation of the “Three Links” at the end of 2008, mail now moves across the Strait directly instead of passing through Hong Kong.

Elimination of the intermediary has brought greater efficiency and lower cost, cutting the delivery time by one to two days and the postal charges by 10-30%. The direct channel has also made it possible to introduce crossStrait parcel delivery and express mail service. A Taiwanese sender who brings a piece of express mail to a major post office when it opens at 8 a.m. can be assured that a recipient in Beijing or Shanghai will get it before the close of

26

business the same day.

From the inception of the direct cross-Strait postal service through the end of the first quarter of this year, a total of 4.5 million letters were handled, as well as 516,000 pieces of registered mail, 238,000 pieces of express mail, and 81,000 parcels.

Chunghwa Post is also doing a brisk business in direct cross-Strait fund transfers – either mail or telegraphic transfers – a service that was inaugurated in February 2009. The service, available at over 20,000 post offices in China and 111 major post offices in Taiwan, enables clients to complete fund transfers efficiently, conveniently, and safely. The amount per

transfer from Taiwan to China is capped at US$30,000, and the fee is NT$500 (US$15.60) for telegraphic transfers and NT$400 (US$12.50) for mail transfers. The limit on transfers from China to Taiwan is US$10,000. Through the end of the first quarter of this year, the company had handled NT$3 billion (US$93.8 million) in such cross-Strait transfers, including NT$2.2 billion (US$688 million) in outward remittances and NT$800 million (US$25 million) in inward remittances.

Besides making it more convenient for Taiwanese to send money to relatives on the China mainland or to remit business profits back to Taiwan, the direct fund transfer service has also enabled domestic e-commerce operators to extend their reach to the huge Chinese market by helping them solve the thorny problem of payment collection. In fact, Chunghwa Post has been engaged in talks with the mainland’s China Post Group for cooperation to further facilitate cross-Strait e-commerce.

One proposal under discussion would enable Chunghwa to set up a

taiwan business topics • july 2010

7_10_CHP.indd 26

2010/7/29 10:43:51 PM

taiwan busines s

section on the China Post’s e-commerce website to sell Taiwanese goods, in exchange for a similar Chinese section on Chunghwa’s e-commerce website.

Another form of cooperation would involve Collect on Delivery (C.O.D.) service on cross-Strait parcels, to facilitate small transactions.

On the domestic front, Chunghwa Post is promoting its parcel-delivery service, which currently generates annual revenue of around NT$1.6 billion (US$50 million) from the delivery of some 1.5 million-1.7 million parcels a year. The company is seeking to grow that service by capitalizing on the rapidly rising demand created by the booming e-commerce market. A key strategy for driving the business is the provision of standard parcel boxes or bags. Repeat use of the containers qualifies the sender for preferential delivery rates. In addition, postmen can be authorized to collect C.O.D. payment – a great boon for e-commerce operators.

The more than 1,000 locations around the island where senders can deliver their parcels include not only postal offices but also other designated sites, including some gas station chains where the service is available around the clock. The volume for parcel delivery has been growing at a doubledigit rate for the past four years.

Chunghwa Post now hopes to further boost the parcel business by leveraging the increasing popularity of international e-commerce. In December last year, it inked a strategic alliance with the Taiwan External Trade Development Council (TAITRA), a semi-official foreign-trade promotion body, calling for the company to offer customized international logistics service to the member exporters of TAITRA’s “Taiwantrade” website, which is being transformed from a trade-intelligence to an e-commerce platform. Postmen collect these export parcels from the sender’s office or factory, and they are then packed in Chunghwa Post’s standard boxes or bags and delivered through the EMS (Express Mail Service) postal networks in 103 countries. Chunghwa Post Chairman Yiu Fang-lai says he expects the program to contribute at least

NT$150 million (US$4.7 million) to the company’s revenue per year.

Cooperation with FedEx On May 5, Chunghwa Post also signed a strategic alliance agreement with Federal Express, adding post offices as collection points for outgoing FedEx parcels. The service began with 54 major post offices, and after this month will be expanded to cover 800 to 1,000 stations. Senders using those collection points will be able to enjoy a 10% discount on the shipping fees.

Chunghwa stresses that the service will not affect its own international parcel business, which features longer delivery time at lower cost. Yiu estimates that this new business will account for another NT$200 million-$300 million (US$6.25 million-$9.4 million) in annual revenue.

In addition to running its own e-commerce website, the company is also bringing in additional income by selling miscellaneous merchandise at its post offices. The biggest-selling item in 2008 was facial masks – which netted NT$60 million (US$1.9 million) – followed by rice and edible oil.

At the same time, the company has been actively developing a logistics business, offering warehousing, packaging, and delivery services to such clients as mail-order firms, e-commerce operators, publishing firms, and wholesalers. It operates four large warehouses

in the greater Taipei area.

Chunghwa Post has also continued to register handsome growth in its life insurance business (following the breakup and privatization of Japan Post in 2007, it may now be the only national postal company involved in the insurance sector). The service, with maximum coverage set at only NT$4 million (US$125,000), has been very popular among local people, especially those in lower income brackets, thanks to its simplicity – no physical exam is required – plus the high actuarial-assumption interest rate and short duration (mostly six years). It is actually a kind of savings plan, as the insured can take back the bulk of the paid-in premiums upon the maturity of the policy.

The product was viewed as particularly attractive following the outbreak of the global financial tsunami, when many people became more conservative in their money management. In 2009, the company took in premiums for conventional life insurance policies totaling NT$1.03 trillion (US$32.2 billion), for a market share in the domestic lifeinsurance industry of 14.35%, ranking it in second place, behind only Cathay Life Insurance. First-year premiums topped NT$326.2 billion (US$10.2 billion) for a 6.45% market share, ranking it fifth. As the end of 2009, the company had 2.8 million insurance policies in force, also the second highest figure.

The challenge to diversify the scope of business has intensified in recent

DIVERSIFYING — Chunghwa Post is seeking to develop a logistics business, utilizing its spacious warehouses such as the one shown above.

july 2010 • taiwan business topics

7_10_CHP.indd 27

27

2010/7/29 10:43:52 PM

taiwan busines s of March 31, the amount of this investcourage deposit-taking with miniscule years as the Internet era has brought the ment came to NT$506 billion (US$15.8 interest rates amid a flood of idle increasing use of messages in electronic billion), accounting for 9.4% of the funds. Companies and wealthy indiform, such as email, EDM (electronic postal fund, and included NT$112.7 viduals responded by pouring money direct marketing), and e-invoices, dampbillion (US$3.5 billion) in the domestic into postal accounts. In January 2009, ening the company’s traditional postal market and NT$393.2 billion (US$12.3 for instance, the amount of deposits in business. In 2009, the volume of mail billion) overseas. In its investment postal accounts surged past NT$100 handled decreased by 20 million pieces, policy, Chunghwa Post is invarior 0.76%, continuing a long-term ably quite conservative, putting trend that has also affected most safety and liquidity before other industrial nations. profits.

In addition, deregulation has In line with this policy, govended the company’s monopoly ernment bonds, despite their in offering mail service. It now low interest rates, have become faces competition from prithe company’s favorite investvate providers, who have mainly ment tool. It is the largest focused on the lucrative urban buyer of government bonds markets while Chunghwa has to in Taiwan, earning the nickcontinue servicing remote areas name in the bond market of the at higher cost. Furthermore, the “green giant” after the color of company has been required to the company’s signage, trucks, pay business income tax starting In pursuit of additional revenue, the company has set and uniforms. As of March 31, from January 1, 2008, following up counters to sell merchandise at many of its post the Chunghwa held NT$1.4 the expiration of a five-year grace offices. trillion (US$43.8 billion) worth period after its transformation in of government bonds, 20.5% 2003 from a government agency of the outstanding total, almost double into a company limited by shares. billion (US$3.1 billion), triple the the level in mid-2008. The massive Among the biggest challenges faced average monthly level in the past. holdings by the company and by other by the company are the restrictions on As a result, in March 2009 the commajor financial institutions leave only how the huge amount of postal savpany instituted a policy of declining a meager amount of government bonds ings funds may be utilized. Chunghwa to accept deposits from profitavailable for other buyers, handicapis undoubtedly the largest depositmaking enterprises. It also lowered ping the development of the Taiwan taking institution in Taiwan, as many the interest rate for accounts with bond market. consumers appreciate the convenience deposits exceeding NT$10 million To better utilize its funds, Chunghwa afforded by its extensive network (US$312,500), emulating the pracwould like to see its organizational law of 1,300 post offices covering every tice long embraced by domestic banks. revised to permit it to extend loans, corner of the island. In a country of 23 The rate now stands at only 0.11% per including mortgages. At present, the million people, some 32 million postal annum for one-month time deposits, company is allowed to tap its insursavings accounts have been opened, well below the 0.42% paid for smaller ance fund to extend housing loans, but with the total amount of deposits deposits. (Depositors can circumvent the the amount is capped at NT$8 million reaching NT$4.5 trillion (US$140.6 punitive rate, however, by dividing their (US$250,000) per case. The Financial billion). Adding another NT$500 deposits among multiple accounts.)

Supervisory Commission (FSC), howbillion (US$15.6 billion) from its insurA major outlet for Chunghwa’s huge ever, opposes the request. Before his ance fund, Chunghwa has NT$5 holdings is re-deposits with the Cenrecent appointment as Vice Premier, trillion (US$156.3 billion) at its distral Bank of China and domestic banks. then FSC chairman Sean Chen suggested posal to invest.

As of March 31 this year, the amount that the company transform its depositof such re-deposits had reached NT$2.4 taking department into a postal bank, trillion (US$75 billion), representing Deposits but no loans similar to those in many European 44% of the total postal fund. In addicountries. The change would enable it tion, the government is able to utilize But generating sufficient return to to undertake banking business but also the fund to help finance infrastructure pay interest on such a sizeable amount make it liable to banking regulations. projects or for other policy purposes, of funds is actually a heavy burden for Chunghwa Post president Hu Yunsuch as lending to the stock market staChunghwa since, as it is not a finanhsieh discounts the feasibility of the bilization fund and providing long-term cial institution, it is not permitted to proposal, citing the company’s policy funds for the high-speed rail project. extend loans. The burden grew folmission in providing financial supChunghwa Post also places a portion lowing the recent financial tsunami, port for the government’s medium- and of the money in the stock market. As when domestic banks sought to dis-

28

taiwan business topics • july 2010

7_10_CHP.indd 28

2010/7/29 10:43:53 PM

taiwan busines s

long-term investment projects. Instead of creating a postal bank, which would involve a major overhaul in the company’s organization and practices, he would prefer to see the Postal Deposits and Remittance Law revised to permit it to undertake certain lines of banking business, such as the extension of mortgages and medium- and long-term loans.

Besides the policy mission, Chunghwa is a major contributor to the national treasury, which took in NT$11 billion (US$343.8 million) from the company in 2009, including NT$8 billion (US$250 million) from its earnings and NT$3 billion (US$94 million) for business income tax. The company recorded after-tax net profits of NT$1.06 billion (US$33 million) last year, up 4.8% from 2008, on revenue of NT$287.7 billion (US$9 billion), which was down 35% due to the recession.

With its NT$40 billion (US$1.3 billion) in paid-in capital, Chunghwa Post’s book value hit NT$101.2 billion (US$3.2 billion) at the end of 2009, surging 75% over a year earlier, as the upturn in the stock market enabled it to recover most of the lost ground caused by the global financial tsunami. The company’s book value had plunged to NT$28.6 billion (US$893 million) at the end of 2008, from NT$115.4 billion (US$3.6 billion) a year earlier, due to heavy investment losses, including a loss of NT$20.5 billion (US$641 million) from investing in derivatives.

The company is 100% owned by the Ministry of Transportation and Communications (MOTC). In 2007 its name was changed to “Taiwan Post” by the Democratic Progressive Party (DPP) government under former President Chen Shui-bian, as part of a drive to “Taiwanize” the names of state-run enterprises. Legalization of the name change was thwarted, however, by the Kuomintang-dominated Legislative Yuan, which blocked the DPP’s efforts to amend the company’s organizational statute. The name was changed back in August 2008 after the KMT returned to power. But altering the name twice on signs and documents involved a total expenditure of NT$20 million (US$625 million).

Museum Offers Glimpse into Taiwan’s Postal Past

T

he Postal Museum, a 10-story building on Chongqing South Road near Nanhai Road, contains a bonanza of information for stamp collectors and those interested in learning about the 110-year history Taiwan’s postal service.

An English-language audio guide to the exhibits is available for foreign visitors.

Start with the second floor (the ground floor is a lobby and business office), with its displays on the evolution of the postal service from ancient China to modern Taiwan. Were you aware of the postal network spanning Asia and Europe that existed during the Mongols’ Yuan Dynasty (1260-13680? Or the express delivery of fresh lychee via horse relay from southern China to Beijing that a Tang Dynasty emperor established so he could please his beloved consort, Yang Guifei? The floor also exhibits the postal system and postal stamps in Taiwan under the rule of the famous governor, Liu Min-chuan, during the Qing Dynasty.

The third floor introduces the modern postal service established in late Qing Dynasty, and the major changes made following the founding of the Republic of China. Included are samples of post-office equipment and devices from various eras.

The postal amusement park on the fourth floor gives children a grasp of postal operations through role playing, interactive teaching, and interactive games. In addition, four short films are shown: “A Hundred Years of the Postal Services,” “Postal Office Touches Your Heart,” “Green Clothed Messengers,” and “I Love Stamp Collecting.” Visitors can also pose beside the Postal Toy Figures to have their picture taken or produce their own personalized stickers. The fourth floor also houses some now-obsolete postal devices, such as the first automated letter-sorting machine, which was decommissioned in October 1984 after 14 years of service.

A philately gallery is situated on the fifth floor, exhibiting various precious stamps, both domestic and foreign. The exhibition contains three major themes: “Stamps and Postal Service,” “Taiwanese Stamps,” and “Foreign Stamps.” It also features a 3-D stamp album.

The sixth floor is for special exhibitions on the occasion of important national events or the issuance of new stamps. Outside organizations and philatelists are also frequently invited to stage exhibitions there. Some 10-15 events take place each year.

On the seventh floor is a postal library with a reading room and a collection of 25,000 books (including 11,000 on postal history and stamp collecting), as well as 100 periodicals. Its open-shelf service is available to all visitors.

The museum is open from 9 a.m. to 5 p.m. six days a week, but is closed on Mondays. The admission charge is NT$5 for a regular ticket or NT$3 for servicemen, policemen, students, and visitors in groups of 20 or more people.

The address is 45 Chongqing South Road, Sec. 2, Taipei. Tel.: (02) 2394-5185, 2394-5186, 2394-5187.

— By Philip Liu july 2010 • taiwan business topics

7_10_CHP.indd 29

29

2010/7/29 10:43:56 PM

taiwan busines s

taiwan busines s

Make Profits in China, Invest in Taiwan An increasing number of Taiwanese-owned enterprises on the mainland are seeking to take advantage of investment opportunities back in Taiwan.

BY PHILIP LIU

D

ue to less-favorable conditions in the investment climate in China, a growing number of Taiwanese-owned enterprises on the mainland are turning back to Taiwan to look for new investment opportunities – a trend that is expected to help revitalize the island’s economy in the coming several years.

From September 2006 through the end of June this year, Taiwanese businesses based offshore initiated 392 investment projects in Taiwan involving investment capital estimated at NT$100 billion (US$3.1 billion) and leading to the creation of 5,300 jobs, according to the Department of Investment Services of the Ministry of Economic Affairs (MOEA). Taiwanese-invested businesses in China accounted for around 90% of the total in terms of both the number of projects and investment value.

Investment by returning Taiwanese businesses amounted to NT$36.2 billion (US$1.1 billion) in 2009, compared with NT$20.4 billion (US$638 million) in 2008 and NT$14.1 billion (US$441 million) in 2007. The figure was NT$26 billion (US$813 million) for the first half this year and is expected to reach NT$38 billion (US$1.2 billion) for the year as a whole, according to the MOEA. The upsurge is attributed mainly

30

to the less favorable investment conditions in China due to higher labor costs and tougher laws and regulations regarding employment, the environment, and other aspects. In an effort to attract these offshore investors to carry out projects in Taiwan, the DOIS in July 2007 established an Office to Serve Returning Taiwanese Investors.

The office briefs potential investors on industrial trends and investment opportunities, and it offers them customized one-stop service to help with such matters as acquiring land or factories in industrial zones at discounted rates, carrying out market surveys and field inspections, obtaining investment incentives and financing, and gaining technological assistance. MOEA has also commissioned the Industrial Technology Research Institute (ITRI) and other semi-official industrial technology research bodies to help returning investors formulate R&D projects and apply for government subsidies for those projects.

The government has also assisted Taiwanese-invested enterprises in China to raise funds from the domestic market for their investment projects, chiefly through the issuance of Taiwan Depository Receipts (TDR). In 2009 alone, there were 10 such issuances by Taiwanese enterprises. The

total amount of funds raised came to NT$30 billion (US$938 million), including US$100 million (NT$3.2 billion) by the Want Want Group and NT$17 billion (US$531 million) by Master Kong, both leading food manufacturers in China.

The inauguration of direct crossStrait transport links in 2008 has accelerated the pace of investment in Taiwan by China-based Taiwanese businesses. Encouraged by the convenient air connections, for instance, growing numbers of such firms have set up operations inside Taiwan’s six free-trade zones (FTZs) – located near the five major harbors and Taoyuan Airport.

The purpose is to carry out further processing, assembly, and packaging of semi-finished products shipped from their mainland Chinese factories, before exporting finished products that bear a made-in-Taiwan label, adding significantly to their market value.

Enterprises inside the FTZs are entitled to a number of privi leges, including tariff-bonded status, exemption from value-added tax and commodity tax, free entry and exit of goods, simplified customs-clearance procedures, and greater freedom in employing foreign labor.

The slashing of the inheritance tax rate from 50% to 10% in 2009 fur-

taiwan business topics • july 2010

7_10_Mainland.indd 30

2010/7/29 10:49:22 PM

taiwan busines s

ther boosted the willingness of offshore Taiwanese entrepreneurs to invest in Taiwan. An additional tax incentive came from the reduction in the maximum business income tax from 25% to 17%, effective January 1 this year. The rate is now among the lowest in Asia, compared with 16.5% in Hong Kong, 17% in Singapore, 22% in Korea, and 25% in China.

Taiwanese businesses in China continue to show a strong interest in opportunities in Taiwan, as evidenced by their active participation in the annual “Summit for Taiwanese Businesses Investing in Taiwan,” organized by the MOEA. The 2010 event, held on June 15, attracted executives from over 100 China-based Taiwanese enterprises.

Among the companies with new investment projects is Ginko International, which has decided to shift part of the production lines of its Chinese subsidiary, Hydron Co., back to Taiwan to manufacture cosmetic materials, health foods, and medical devices. Hydron is the leading contacteyeglasses brand in China, while the group’s Taiwanese subsidiary, Formosa Optical, is Taiwan’s largest eyeglasses b r a n d . Ts a i K u o - c h o u , t h e g r o u p chairman, cites the improved investment climate in Taiwan as a major reason for the investment decision, adding that MIT (made-in-Taiwan) products command prices at least 15% higher than those of MIC (made-inChina) products. Another reason, says Tsai, is the existence in Taiwan of internationally accredited laboratories for the certification of biotech and medical products.

Ho Hsin-yu, the group’s deputy chief executive, further attributes the decision to the thawing cross-Strait relationship as well as the incentives that the Taiwan government is offering for projects in the biotech industry. He reports that Taiwan will become the group’s base for the R&D and certification of innovative products.

Another example is Luang & Lee International, which is preparing to set up production lines for waterproof and breathable films used in manufacturing such products as medical

garments. The plant will utilize technology developed by the company with the assistance of the semi-official Taiwan Textile Research Institute, and expects to capitalize on Taiwan’s stable manpower and the availability of a complete set of peripheral industries, such as dyeing plants.

For its part, the Great Fountain Yarn Covering Rubber Thread Co. will be setting up a plant on a leased plot of land in Changhua County, 10 years after transplanting the company’s production to Guangdong Province. The facility will produce functional textiles under the company’s own brand, including anti-germ sweat-repellant and odor-free socks, medical protective wear, bandage, gloves, and underwear.

It will be using technology developed in collaboration with ITRI, with the output shipped to China and other overseas markets, and will be developed into a “tourism plant” with tours of the production facilities open to visitors. Chairman Liu Hsin-you says he concluded that returning to Taiwan is essential for the company’s long-term development. When investment conditions in China deteriorated, he rejected the idea of shifting production to a third place, such as Vietnam, for fear of turning the company into a “nomad.”

Returning Taiwanese enterprises are also investing in sectors of the economy

other than manufacturing. Examples are the NT$3.7 billion (US$116 million) deal that enabled the Ting Hsin International Group, the parent firm of Master Kong, to acquire a 37% stake in the Taipei Financial Center (Taipei 101), and the takeover of the China Times by the Want Want Group, which is also investing heavily in the hotel business to meet the expanding demand of Chinese tourists visiting Taiwan.

In addition, Natural Beauty, which owns an extensive chain of beauty-care salons in China, is building a leisure resort that will specialize in health and beauty-care services. The 34,000 square-meter site is located near the Dongshan River in Yilan County.

Upgrading the business “Returning Taiwanese businesses usually invest in fields that represent a transformation of their existing operations,” says DOIS Director-general C.Y. Ling, “The business plans are often centered around the use of automated production, the adoption of a technology-intensive orientation, R&D activity, or a branching out from manufacturing to the service sector, with the technology and R&D aspects benefiting from the better protection of intellectual properties in Taiwan.” Lin cites the typical example of Shanghai-

Ting Hsin International has taken a 37% stake in the Taipei Financial Center Corp. operating Taipei 101.

photo : courtesy of taiwan tourism bureau

july 2010 • taiwan business topics

7_10_Mainland.indd 31

31

2010/7/29 10:49:23 PM

taiwan busines s

based Long Fong Group, a frozen dumpling maker, which has invested in a solar-cell thin film plant inside an industrial park in the southern Taiwan county of Pingtung.

The cross-Taiwan Strait Economic Cooperation Framework Agreement (ECFA), scheduled to take effect next January, may prompt even more Taiwanese businesses to return to Taiwan. If their products are on ECFA’s Early Harvest list of priority items for tariff cuts or marketing opening, they would be able to ship high value-added Taiwanmade goods to China duty-free. Of the 800-some items on the list, 539 are Taiwanese products for which the value of export to China last year came to US$13.84 billion, while 267 are Chinese products whose export value to Taiwan amounted to US$2.9 billion in 2009.

The Taiwanese items are mainly in the fields of agriculture, petrochemical, machinery, auto parts, textile, electronics, light industry, metallurgical industry, medical equipment, instrument and gauges.

The return of Taiwanese businesses coincides with some adverse changes in the investment climate on the mainland, as manifested by the hefty pay hikes in June at Foxconn Technology, the Chinese subsidiary of the Hon Hai Group, Taiwan’s largest industrial company.

Most notably, workers at its Shenzhen facility were given an extraordinary boost in pay of up to 122% in the wake of a series of worker suicides that received worldwide media attention.

At a Hon Hai shareholders’ meeting o n J u n e 8 , C h a i r m a n Te r r y G u o remarked that Chinese enterprises in both the manufacturing and service sectors are experiencing across-the-board pay hikes. He described it as an irreversible trend, sweeping China “at a speed and power beyond our imagination,” that reflects a broad-based transformation in Chinese society.

Although some major Taiwaneseinvested firms may try to resist the trend, eventually they will find it impossible to do so, he said. The phenomenon poses a major challenge to the many Taiwanese enterprises in China for which cheap labor cost constitutes a

32

The 2010 “Summit for Taiwanese Businesses Investing in Taiwan” attracted 100 Chinabased Taiwanese entrepreneurs in June. photo : courtesy of moea

major component of their competitiveness on the global market.

In view of the much higher cost of labor in Taiwan, the Taiwan government’s strategy is to encourage returning enterprises to engage in comparatively technology-intensive industries, notably the Six Emerging Industries of high-value agriculture, green energy, medical care, biotech, cultural innovation, and tourism. In so doing, they can take advantage of the 15% tax credit for R&D outlays authorized under the Statute for Industrial Innovation enacted in April this year. Moreover, the government plans to invest some NT$200 billion (US$6.3 billion) in the next four to five years to stimulate the development of those industries.

The government will also help returning Taiwanese enterprises solve the problems of foreign-labor employment and land acquisition, their two major concerns. A five-tier system for foreign-labor employment, for instance, will go into effect in late August or early September, allowing foreign laborers to account for 10%, 15%, 20%, 25%, or 35% of an enterprise’s total workforce, depending on the nature of the industry. Currently there are three tiers of 5%, 18%, and 20%.

The adjustment is seen as allowing a more rational allocation of foreign laborers without changing the total

national quota.

Meanwhile, the Council of Labor Affairs (CLA) is preparing to permit the direct hiring of foreign laborers by employers, eliminating the need to pay brokerage fees, and allowing employers to reduce costs by charging more for r o o m a n d b o a r d . A t p r e s e n t , f o reign laborers must receive at least the legal minimum wage of NT$17,280 (US$540) a month, but employers can deduct brokerage fees and room-andboard expenses from the amount.

Tu Tzu-chun, director-general of the MOEA’s Industrial Development Bureau (IDB), says the IDB will help returning businesses obtain land in industrial zones, science parks, free-trade zones, or export processing zones. The Changhua Coastal Industrial Zone and Tainan Science and Technology Park now have substantial vacant space of over 200 hectares and 100 hectares, respectively.

C.Y. Ling of DOIS expresses confidence that thanks to improved conditions in Taiwan, Taiwaneseinvested businesses will flock back at an even faster pace in the years ahead.

“After having achieved remarkable success in China, numerous Taiwanese businessmen have told me of their intention to return to the island, partly to escape the difficulties in the living environment in China, such as the medical care service and the harassment by taxmen and policemen.”

taiwan business topics • july 2010

7_10_Mainland.indd 32

2010/7/29 10:49:24 PM

living in taiwan

living in taiwan

Guiding Taiwan’s Internationalization A government task force is trying to elevate the level of English-speaking competence to benefit foreign visitors and residents, and to raise Taiwan’s competitiveness.

BY JANE RICKARDS phot os : cou rt es y o f t he res earch develo p men t an d evaluat i o n co mmi s s i o n

T

lishment was the government’s aiwan long had the recognition that cultivating an reputation of being a international outlook among challenging place to live Taiwanese will be critical for for foreigners who do not speak the nation’s economic survival Chinese. But lately many longin an era of globalization, says term foreign residents have been Nancy Juang, deputy director of noticing that change is in the air.

RDEC’s Department of Regional Although the island’s living enviAffairs. Especially at the localronment is still not as bilingual government level, the task force as Hong Kong or Singapore, considers that the standard of useful English signage can now English in Taiwan is still far be found in critical facilities from good enough to create an such as hospitals, and nearly international environment. all government web sites offer Another aim is to proEnglish pages. Even a few more vide more services to meet the hawkers in Taipei’s raucous needs of the increasing number night markets can speak English.

The establishment of Foreigner Assistance Centers such as of foreigners living in Taiwan, What is less well-known, this one in Tainan is one of the main achievements of the internationalization task force. including the many spouses though, is that much of this is from Southeast Asian coundue to the efforts of an intertries. Foreign residents now ministerial taskforce charged number 417,385 – one-third more than (RDEC) had already been put in place, with the responsibility of spurring a decade ago – equivalent to 1.81% of inspired by the findings of a landmark Taiwan’s internationalization. The Taiwan’s population.

2006 conference that looked at ways 20-member taskforce headed by MinJuang says the program has two to assure Taiwan’s future sustainable ister Without Portfolio Ovid Tzeng main elements: developing a more development. The task force was set up came into being in the middle of English-friendly environment and after it was found that these programs 2008. At that time, several governenhancing the English-language ability – and the issue of Taiwan’s internationment programs for improving Taiwan’s of ROC citizens. alization itself – had become too broad international environment, backed by Bearing the cumbersome official to be handled by a single ministry. the Executive Yuan’s Research, Develtitle of “The Cabinet Task Force for One reason for the group’s estabopment and Evaluation Commission

34

taiwan business topics • july 2010

7_10_Foreigners.indd 34

2010/7/29 10:50:33 PM

living in taiwan Young Taiwanese with foreign-language skills are now able to help with translation duties as a substitute for military service.

Promoting the Creation of an International Living Environment,” the group coordinates the activities of various government agencies, researches ways to improve the nation’s overall English proficiency, and evaluates the performance of individual ministries in contributing to building an international environment. RDEC Minister Chu Chin-peng serves as the deputy convener and the members include vice ministers from such government agencies such as the Ministry of Foreign Affairs and Ministry of Economic Affairs.

Much of the task force’s work relates to the RDEC’s “Plan for Enhancing National English Proficiency” that started this year and will run through 2012. This program, with an overall estimated budget of NT$520 million (US$16.5 million) – of which NT$110 million has been approved for this year – forms a small part of the massive “i-Taiwan” infrastructure projects that the government hopes will further modernize Taiwan.

The task force primarily concerns itself with five major aspects of internationalization: Romanization (how Chinese names are rendered in the Latin alphabet), residential services, tourism services, investment and employment services, and strategic policy planning.

Each topic is overseen by a subcommittee reporting to a different Cabinet ministry. The Romanization subcommittee, for example, comes under the Ministry of Education, even though signage may involve various agencies including the Ministry of Transportation and Communications (MOTC) and the National Immigration Agency.

MOTC, the parent ministry of the Tourism Bureau, looks after the tourism subcommittee.

Meetings of the full task force take place anywhere from once every few months to twice a year. “Whenever there is a need, we call a meeting,” notes RDEC Vice Minister Wei Kuoyen. But the subcommittees tend to meet more frequently.

Perhaps the task force’s most significant achievement to date has been the establishment of several foreigners’ assistance centers run by local governments outside the Taipei area. The first was inaugurated at the end of 2008 in Hsinchu City offering consultancy services relating to investment, medical care, cultural activities, and so on.

The RDEC provided both financial and manpower support, but local university students and other volunteers also make up part of the center’s staff. A similar facility was opened in Tainan in September 2009, and the task force has been assisting other town and county governments in expanding the services provided for foreigners.

Watch the signs The task force also regards English signage as a matter of high priority. It has already helped 11 county and town governments to improve or replace 3,263 road signs. In addition, it is doing its best to implement the central government’s decision in 2008 to adopt the Hanyu Pinyin Romanization system, but progress has been complicated because its use is not mandatory, and local governments run by the opposition Democratic Progressive Party prefer to use another system called Tongyong Pinyin that it considers superior for rendering the Hoklo and Hakka languages. As a result of the lack of a uniform nationwide policy, the same place name may be spelled differently

on signage from one locality to another, making it extremely confusing for foreign travelers.

The task force also spurred the launch of a travel-card system introduced at the beginning of 2009 to encourage more foreigners to take part in professional activities in Taiwan.

Using the Academic and Business Travel Card, qualified foreign professionals may enter Taiwan as many times as they like for three years, receive expedited entry service at the airport, and take part in business and professional activities without a work permit. The Plum Blossom Permanent Residency Card grants permanent residency to foreigners who either have specific skills needed in Taiwan or have invested specified amounts in this economy.

In addition, the task force has enhanced various programs already in place for improving English-language proficiency in government and the private sector. For example, it promotes a program begun in 2005 that enables young graduates who were foreign-language majors or otherwise developed foreign-language skills to help local governments provide international services as a substitute for military service.

In 2008 and 2009, it also organized 14 English-language training camps across Taiwan for public servants and members of the private sector. A total of 726 people took part in the program, which aimed to help cultivate talent to work in a globalized environment.

The group is also responsible for

july 2010 • taiwan business topics

7_10_Foreigners.indd 35

35

2010/7/29 10:50:34 PM

living in taiwan island. Wei cites an ongoing various publications, such project in the historic town of as the Taiwan What’s Up Lugang in Changhua County, e-Newsletter and The Handy once an important trading Guide for Foreigners in port in the 18th and 19th cenTaiwan, and has overseen turies and now a picturesque the deregulation of tax and tourist attraction. Part of the employment laws relating to project is to create all-Engforeigners. It also coordinates lish speaking environments the development of Engby mustering college students lish-language portals (such who are proficient in English as www.taiwan.gov.tw) that to provide English-language offer information about medtourist-information services ical services, employment, on the streets of Lugang. They and taxation, and it works also engage in role-playing with the Information for Fortourism-related scenarios with A group of Rotarians from Iowa and Nebraska pay a visit to the eigners hot line (0800-024Foreigner Assistance Center in Hsinchu. one another. Noting that this 111). Launched in English project has raised Lukang’s in July 2005, with Japanesecompetitiveness as a tourism language services added in destination, Wei says he hopes the volunteers with English skills.

2008, the hot line had dealt with a total idea can be extended to other areas in The focus of the RDEC’s internationof 110,371 cases by the end of last year.

Taiwan. alization programs has been undergoing This year one of the task force’s Asked about obstacles to the intera shift. The initial programs, such as the projects is to try to develop standard nationalization of Taiwan’s living two-year “Plan for Creating an Intertranslations for various Chinese-lanenvironment, Wei says the main chalnational Living Environment” that ran guage terms that currently receive lenge is ensuring that place names in from January 2008 to December 2009, inconsistent treatment in Taiwan’s Engsignage are consistently rendered in the purely focused on ways to internationlish-language newspapers, government Hanyu Pinyin Romanization system, alize Taiwan’s environment to suit the documents, and on Internet web sites. which entails persuading DPP-run local needs of foreigners. But through these Vice Minister Wei cites the example of governments to drop Tongyong Pinyin. activities, the task force discovered the position of xianzhang (縣長), the I n a d d i t i o n , We i s a y s t h e m a i n that to make this happen, there was an elected official in charge of a county lesson the task force learned from the equally pressing need to improve Enggovernment. This post is variously renLugang project is that the Taiwanese, lish-language abilities and foster an dered as county magistrate, county while studious when it comes to grapinternational outlook in the Taiwan governor, county commissioner, county pling with English vocabulary and public. The program now targets both chief, and county head. As with the grammar in the classroom, are still these areas. “On the one hand, our inconsistent usage of Romanization sysafraid of speaking it to foreigners. Wei object is foreigners; on the other hand, it tems, foreigners are often left perplexed. considers this the biggest obstacle to is ourselves,” Wei points out.

“We want to standardize the translabe overcome if Taiwan is to become Under the guidance of the task force, tions, and then produce a booklet giving more international. “People have a psythe Ministry of Economic Affairs is the correct names of different governchological complex” about foreign collaborating with designated local ment agencies and titles,” Wei says. languages, he says. “They learn a lot, governments to carry out various Nancy Juang notes that since many but they don’t want to speak out and Information and Communications civil servants need to participate in reveal how good or bad they are.”

Technology ventures involving tourism. international conferences, the task force Wei was dismayed to discover, once The task force has also set up an Engwishes to design more business-EngLugang’s students and residents taking lish-services emblem system for grading lish classes for them so that they may part in the project overcame their fears local shops. “We evaluate the sercontribute to those conferences more and began speaking, how critical they vice overall and how well they provide effectively. It is approaching local govcould be of other people’s usage and English-language services, and if they ernments’ Civil Affairs Bureaus in hopes pronunciation, saying “That’s not are qualified, we give them recogniof utilizing their training centers to hold right!’ or ‘Your accent is wrong!” He tion in the form of either gold or silver those classes. One component of the urges Taiwanese to take a more relaxed emblems,” Wei says. course may be email etiquette, to help attitude toward speaking English. “We Also in coordination with various when writing to foreign governments. just want everyone to enjoy expressing levels of government, the task force is In addition, the task force hopes to set themselves in English, even though their seeking to promote projects that “interup data banks listing qualified transEnglish is not perfect.” nationalize” particular localities on the lators across the island and available

36

taiwan business topics • july 2010

7_10_Foreigners.indd 36

2010/7/29 10:50:35 PM

Varying Perceptions

BY don ShAPIRo

INDUSTRY F

7_2010_IF.indd 37

april 2006 • taiwan business topics

CUS

37

A Report on the Insurance Sector 2010/7/29 10:54:18 PM

INDUSTRY F

CUS

A Report on the Insurance Sector

Half Empty or Half Full?

Assessing Taiwan’s life insurance industry means weighing both positives and negatives.

H in this survey • Half Empty or Half Full? p.38

• The Japanese Experience: Lessons to be Learned? p.41

• Half Empty or Half Full? p.43 • Shifting the Stress to Investment-Link Policies p.45

38

ow one views the viability of Taiwan’s life industry Taiwan may be a kind of Rorschach test. Just as people looking at an inkblot may see different images depending on their own background and psychology, assessments of the country’s life insurance sector are likely to be influenced by one’s particular perspectives.

Do you adopt a long-term view or a short or even medium-term one? Do you emphasize the generally profitable new business being written or the legacy of older policies with attractive guaranteed returns that are now a heavy burden in a period of extremely low interest rates? Do you apply existing local accounting practices and solvency standards or the more stringent international ones that Taiwan has committed itself to adopt in the future?

If your company has a lot of the high-guarantee legacy business on its books – and is either a foreign entity with those international accounting and solvency standards to comply with or a relatively small domestic player with capitalization constraints – the situation may appear rather bleak. But if you’re either relatively new to the market or are one of the well-financed giants of the industry, the prospects for the industry’s development may look considerably more promising.

The difference in perspective goes a long way in explaining not only why some international players are forsaking the Taiwan market (see the accompa-

nying story), but at the same time why there are domestic companies happy to buy out their operations. “Both sides talk about the transactions in highly positive terms,” noted Steve Miles, former CFO of New York Life in Taiwan, in an article last year for the Society of Actuaries in Australia. The foreign companies “claim they are adding value to their operations and releasing significant capital by transferring guarantees to local companies,” he wrote. “For their part, the local companies refer to the opportunity to gain economies of scale and add value by undertaking a more realistic investment strategy.”

Those accentuating the positive take heart, for example, from Taiwan’s high savings rate and the substantial amount of wealth in this society. They draw further encouragement from the local industry’s past record of achievement. As Jennifer L. Wang, chair of Department of Risk Management and Insurance at National Chengchi University, pointed out at a recent presentation to AmCham’s Insurance Committee, Taiwan ranks number one in the world in its life insurance penetration ratio (total premium volume as a proportion of GDP) and 19th in life insurance density (total premiums per capita for the insurable-age population). “For this relatively small island to have this kind of record is quite impressive,” she concluded.

Much of her presentation focused on the future business potential for life insurers as Taiwan expands its pension

taiwan business topics • july 2010

7_2010_IF.indd 38

2010/7/29 10:54:20 PM

A Report on the Insurance Sector

INDUSTRY F

CUS

Insurance density & Penetration Insurance density (nT$) Year

Total

non-Life Insurance

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

32,058 36,585 43,991 54,949 62,760 69,225 73,340 86,579 87,971 91,195

3,943 4,054 4,504 4,843 5,089 5,204 4,988 4,904 4,677 4,406

Source: Taiwan inSurance inSTiTuTe

system. Wang, who is also vice president of the Taiwan Pension Funds Association, predicted that the terms of the existing Labor Pension plan would be liberalized in the next few years to encourage life insurers to take part by offering annuities (so far the life insurance companies have shown no interest because of the requirement for a guaranteed return, which makes the business unattractive in this low-interest rate environment). She further reported that plans are already firmed up for the introduction of definedcontribution (DC) pension schemes for private university teachers within two years and government employees within three years, with a choice of guaranteed or non-guaranteed platforms.

Wang also noted that demand in Taiwan for individual annuities and investment-link (also known as unitlink) life insurance products has been increasing substantially, providing new and more profitable sales opportunities. Moreover, the recent signing of the cross-Strait Economic Cooperation Framework Agreement (ECFA) and the earlier financial services Memorandum of Understanding are seen as creating the possibility for Taiwan’s life insurers to take advantage of investment opportunities in the China market.

While acknowledging the serious challenges continuing to face the industry, Wang said “I believe the worst time is past.”

To many others, however, a realistic assessment of the difficulties facing the

Insurance Penetration (%) Life Insurance 28,115 32,531 39,487 50,106 57,671 64,021 68,353 81,675 83,294 86,790

Total 7.12 8.31 9.52 11.61 12.53 13.43 13.7 15.4 15.96 16.83

non-Life Insurance 0.88 0.92 0.97 1.02 1.02 1.01 0.93 0.87 0.85 0.81

Life Insurance 6.24 7.39 8.54 10.59 11.51 12.42 12.77 14.52 15.11 16.02

noTeS: 1. DenSiT y=average inSurance expenDiTure per capiTa 2. p eneT raTion=raT io of inSurance premium T o gDp

industry presents a far more worrying picture. They note the under-capitalization of many of the local companies, which has been exacerbated by the “negative spread” issue – the continuing gap between the cost of funding and companies’ investment yields during a prolonged period of low interest rates. The problem is particularly severe for the above-mentioned legacy business of whole-life policies. Written when interest rates were high, they commit the insurers to paying highly attractive levels of guaranteed benefits as long as the policies are in force.

In seeking to narrow the gap, the more pessimistic scenario continues, many life insurers have resorted to selling policies with virtually no profit margin in an effort to grow their volume. The amount of money being lost may be the same, but the financial statement will look better since the percentage of loss has declined.

Some companies have reportedly also shifted to investing in riskier assets, particularly given the chronic shortage in the Taiwan market of long-term government bonds, traditionally the favored investment vehicle for life insurers. More life-insurance industry investment, for example, lately has been going into real estate (at least until recent government moves to cool down the property market in northern Taiwan for fear of a growing bubble), into equities, and into overseas investments that entail foreign exchange risk. “As long as interest rates remain low, insurers selling guaranteed prod-

ucts will have a choice between offering low returns to customers or taking bigger risks,” says Chris James, president and CEO of Allianz Taiwan Life.

Troubled companies As of December 2009, five domestic life insurers fell short of the level of Risk Based Capital the Financial Supervisory Commission’s Insurance Bureau requires them to maintain (RBC sets the capital requirement according to the amount and type of risk). These companies technically should even be considered insolvent, as their net worth after allowing for regulatory capital is negative. But the situation has generated little public nervousness, as consumers appear to be confident that the government will look out for their interests.

Dealing with the problem is certain to be a headache for the authorities, however. So far they are concentrating on Kuo Hua Life, by far the largest of the five companies. In August 2009 the government took the company into receivership and placed it under the administration of the Insurance Stabilization Fund, the first time that has been done in the history of Taiwan’s life insurance industry. After injecting NT$6 billion in additional capital, the government has been seeking a buyer – so far unsuccessfully. Considering that Kuo Hua had a negative value of some NT$60 billion (nearly US$2 billion), industry observers are universally skeptical that

july 2010 • taiwan business topics

7_2010_IF.indd 39

39

2010/7/29 10:54:20 PM

INDUSTRY F

A Report on the Insurance Sector

CUS

number of Insurance Companies and Branches non-Life Insurance Industry Year/Month

Total

Reinsurance Headquarters (including cooperative)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010/03

62 58 56 55 57 57 57 59 61 58 58

1 1 1 1 2 2 2 4 4 4 3

18 18 17 17 17 16 17 17 17 17 17

Life Insurance Industry

Local Insurance Foreign Insurance Branch Offshore Office in PRC Branch in Liaison Office Headquarters in Taiwan Branch Taiwan

Local Insurance Foreign Insurance Branch Offshore Office in PRC Branch in Liaison Office Branch Taiwan in Taiwan

150 163 161 164 174 174 183 175 176 168 168

123 124 132 137 135 135 136 136 139 129 129

20 20 19 18 18 19 19 20 22 20 20

1 3 5 5 8 10 10 10 9 9

11 9 8 8 9 9 8 7 8 6 6

20 15 12 11 11 11 9 10 9 9 9

16 18 20 21 21 21 22 22 23 22 23

6 5 6 6 6 6 6 11 12 12 12

2 2 2 5 8 8 7 7 7 7

16 12 10 8 8 9 8 9 9 9 9

3 2 1 1 2 2 2 4 4 4 4

Source: inSurance Bureau

a buyer can be found unless the government offers super incentives. The exodus of international players, they note, means that anyone interested in acquiring a lifeinsurance company will probably have much more attractive options than taking over Kuo Hua. What happens if no prospective buyer appears? “That’s a political, not a professional issue,” replied Jennifer Wang when the question was raised at the AmCham luncheon.

In a written reply to questions from TOPICS, the Insurance Bureau said: “Currently Kuo Hua is still in the process of seeking to attract additional capital. Although the final result is not yet clear, in the meantime the company is still operating normally and policyholders’ interests have not been affected.

Whoever takes over the management at the next stage will still need to actively carry out measures to improve the company’s finances.”

Regarding the other companies with poor financial conditions, the Bureau said that “the FSC – besides imposing restrictions on their business operations or scope of use of assets based on risk management considerations – is urging them to speedily carry out increases in capitalization and will continue to track the implementation of their capital-increase efforts and the degree of improvement in the companies’ financial and business conditions.”

Even if some companies may now lack the capability to cover all the liabilities on

40

their books, it does not necessarily pose any immediate crisis as long as they are continuing to take in enough premiums to meet current obligations. “Local companies tend to think in terms of the next 30 years – interest rates are not going to be maintained at such a low level forever,” says one local executive.

The timeframe would look a bit different, however, if the government proceeds with its currently announced intention of adopting Phase IV of the International Financial Reporting Standards (IFRS) in 2013. The Generally Accepted Accounting Principles (GAAP) now in use in Taiwan permit the insurer to continue to keep its books based on the original investing assumptions made when interest rates were high. IFRS4, which is already in effect in Europe and will be adopted by the United States, requires assets to be marked to current market conditions and liabilities to be adequate enough to pay future promised benefits.

That step would expose the discrepancy between the estimated value of the returns and what the company will eventually need to pay its policyholders. In a seminar sponsored by Deloitte Touche Tohmatsu in the spring of 2009, it was projected that the amount of capital required to meet the new IFRS standards would be approximately seven times the amount needed to meet Taiwan’s current 200% minimum RBC level. Given that the current industry-wide statutory surplus in Taiwan was approximately NT$500 billion at the end of 2007, this

would mean that an additional NT$3 trillion of capital would have to be raised.

As a result, many in the industry doubt that the 2013 target date will be met. “In my personal view, the Taiwan insurance industry can afford to merge with international accounting standards, but maybe over 10 years’ time or even longer,” says Kenneth Shih, vice chairman of Fubon Life Insurance. In the meantime, he suggests that the tougher standards be imposed first on all new business. As companies’ financial positions improve, the profits can be used to gradually strengthen the old block of business.

Similar recommendations have been made by the foreign chambers’ insurance committees. “To use an old metaphor, if you’re standing in a hole, then the first thing you ought to do is stop digging,” says Chris James. “That’s why we say new business should meet IFRS4 and Solvency II standards now. Essentially this means the liabilities you commit to in your policies should match the assets you use to back them up.”

Once the industry and the government face up to the challenges, “there’s a viable and attractive business opportunity in Taiwan,” notes James. “The Taiwanese people are well-educated and hard-working, the economy has emerged strong from the recent crisis, and the prospects look good, especially after ECFA. At the same time, people in Taiwan know that the population is aging fast, and this means they need to make early provision for their retirement.”

taiwan business topics • july 2010

7_2010_IF.indd 40

2010/7/29 10:54:25 PM

A Report on the Insurance Sector

INDUSTRY F

CUS

The Japanese Experience: Lessons to be Learned?

Further ahead on the development curve, Taiwan’s large neighbor to the east is often a source of reference.

I

n the late 1990s, Japan insurance companies began to tumble under the weight of negative investments spreads and an eroding capital base.

Thus, after Taiwan last year encountered its first case in 40 years of a failed life-insurance company – Kuo Hua Life, which the government has taken into receivership, continuing to operate it while seeking a buyer – it was natural for many people in the industry to examine how neighboring Japan handled its own life-insurance crisis a decade or so ago.

“With five companies reporting official year-end Risk Based Capital [RBC] ratios below the minimum regulator-required 200%, this may be just the tip of the iceberg,” said one insurance executive. “It would be instructive to review how other countries handled this kind of problem.”

Between 1997 and 2001, due mainly to the same kind of negative-spread issue that now confronts Taiwan, seven Japanese life-insurance companies either became insolvent or entered a rehabilitation program in recognition of their worsening financial positions. According to a later analysis by Osaka University researchers, “the failure of Nissan Life Insurance in April 1997 collapsed the myth that life insurance companies never go bankrupt.”

A 2001 report, “Why Some Japanese Insurers are Failing” by Michael Freeman and Masahiko Fujiki, outlined the Japanese response to that crisis. Initially the Life Insurance Association of Japan took over administration of Nissan Mutual,

and then half a year later transferred the policies held by Nissan Mutual to a new company, Aoba Life, which “restructured policyholder benefits.” While Japan – like Taiwan – has a “policyholder protection fund” and it injected ¥200 billion (US$1.7 billion) into the company, this was not adequate to fully protect Nissan Mutual policyholder assets. In what is known in industry jargon as giving policyholders a “haircut,” the guaranteed benefits previously offered by Nissan Mutual were reduced to the prevailing pricing interest rate and new surrender penalties were set in place.

As in Taiwan, many Japanese consumers view insurance as a major portion of their savings and retirement plans. But some Nissan Mutual policyholders found themselves with revised guarantees as low as 15% of the original amounts.

Four more insolvencies occurred between June 1999 and August 2000, and their resolution also involved “haircuts” (reductions) of both policy reserves and the future guaranteed interest rate for policyholders, as well as the injection of funds from the Policyholders’ Protection Corp. (a reorganized version of the previous Fund) – or in the case of Daichi

Sean Chen (center), then Chairman of the Financial Supervisory Commission and now Deputy Premier, explaining last year that the government was taking Kuo Hua Life into receivership to protect policyholder interests. photo : cna

july 2010 • taiwan business topics

7_2010_IF.indd 41

41

2010/7/30 4:53:17 PM

INDUSTRY F

CUS

A Report on the Insurance Sector

Insurance Company Failures in Japan Company

Date Failed Date Acquired

Assets* (¥ Billions)

Policyholders' Protection (¥ Billions)

Policy Reserve Cut (%)

Post-Acquisition Guaranteed Interest Rate (%)

Nissan Mutual

6-1997

11-1999

2,061

200

0

2.75

Toho Mutual

6-1999

3-2000

3,001

381

10

1.5

Daihyaku Mutual

5-2000

3-2001

2,467

145

10

1.0

Dai-Ichi F&M Mutual

8-2000

4-2001

1,146

40

10

0.3-1.3

8-2000

4-2001

204

26

10

1.0

Chiyoda Mutual

Taisho Life

10-2000

4-2001

3,502

0

10

1.5

Kyoei Life

10-2000

4-2001

4,610

0

8

1.75

3-2001

10-2001

1,095

0

0

2.6

18,086

792

Tokyo Mutual Total

Source: "why Some JapaneSe inSurerS are failing" By m ichael freeman anD maSahiko fuJiki

Fire & Marine, from a separate NonLife Insurance Policyholders’ Protection Corp. Through those funds, the insurance industry overall contributed more than ¥790 billion (US$6.6 billion) to the insolvent companies.

In mid-2000, relate Freeman and Fujiki, new legislation permitted insurers to voluntarily enter rehabilitation.

Three companies – Chiyoda Mutual, Kyoei Life, and Tokyo Mutual – took up that option. Under that process, say the authors, an administrator selects a sponsoring company to take over the business after evaluating the interest parties’ proposals for the restructuring of policy benefits.

The extent of benefit restructuring by the eight companies, the authors explain, “depended on the magnitude of the shortfall between assets and liabilities and the goodwill value placed on the restructured business by its acquirer or sponsor.”

They note that “cuts in policy reserves ranged up to 10%, while future guaranteed rates dropped to between 0.3% and 2.75%,” and “moratorium surrender charges ranged from an additional 20%, declining over 10 years, to 15%, declining over seven years.” In almost all cases, it is the policyholder that suffered.

One of the most important lessoned learned from Japan may involve the

42

* r eporTeD aSSeT value aT Balance SheeT DaT e prior To inSolvency

amount of disclosure prior to these companies’ restructuring. In a situation that allowed potential capital to exit the companies, worsening the subsequent losses to policyholders, “most of the insolvent insurers were reporting profits and declaring policyholder/shareholder dividends in the period prior to their insolvency or rehabilitation,” the authors report. “This occurred because the basis of accounting for assets and liabilities applicable to Japanese insurers does not indicate a company’s true financial position.”

In fact, many of the companies that became insolvent or entered rehabilitation had solvency margin ratios in terms of Risk Based Capital that far exceeded the regulatory minimum 200% RBC ratio, indicating that those ratios were not an adequate guide to their financial condition. For Taiwan, where five companies ended last year below the minimum regulatory standards, this raises even more questions of what needs to be done to assure customers have complete disclosure before entering into a long-term insurance contract.

“The experience of the Japanese life insurance industry,” the paper concludes, “provides a reminder of the importance of risk management, both in product design and in ongoing asset/liability

management.”

Is the Japanese model one that Taiwan might one day have to consider?

On the positive side is that there was no need for a bailout using taxpayer money.

But an outcome in which policyholders lose up to 85% of their promised benefits would never be an easy choice for a government to make in a democratic society in which it has to face elections.

In addition, the current funding of the Insurance Stabilization Fund is a mere NT$16 billion – whereas the deficit in the single case of Kuo Hua is estimated at NT$60 billion.

Members of the insurance industry with broad Asian experience note that the Japanese model is not the only possible solution. In Korea, life insurance companies were allowed to fail and then taken over by the government’s Korea Development Investment Corp., which pumped in reserves and then sold off the companies.

The disadvantage with this approach is that the insurer first has to collapse and that taxpayer money has to be mobilized.

In China, in addition, the government reportedly stepped in to take over the unprofitable old block of business from some life insurers, but in Taiwan that approach would likely require such a huge amount of public money as to be considered out of the question.

taiwan business topics • april 2010

7_2010_IF.indd 42

2010/7/29 10:54:25 PM

A Report on the Insurance Sector

INDUSTRY F

CUS

Foreign Players in Retreat Some major international companies have left or are preparing to leave the market.

B

ack in the 1980s when Taiwan removed its restrictions on outside investment in the domestic life-insurance industry, major international players began entering the market one by one. “The growth of the Taiwan insurance market owes a great debt to these foreign insurance companies” and to the investment strategies and innovative products they introduced, Jennifer L. Wang, chair of National Chengchi University’s Department of Risk Management and Insurance, said in a recent presentation to the AmCham Insurance Committee But now the flow is mainly in reverse.

The last time that Taiwan Business TOPICS took a look at Taiwan’s lifeinsurance industry (in the April 2009 issue), the major news was the decision during the previous few months by four major foreign-invested companies – ING and Aegon from the Netherlands, Prudential Plc of the United Kingdom, and A.I.G. of the United States – to exit the domestic life insurance market. (In the case of Prudential UK’s PCA Life Assurance, the pull-out was only partial, as it sold its agency business but continues to market policies in Taiwan through bancassurance and telemarketing channels).

Since then, the exodus has been continuing. MetLife this spring agreed to

sell its Taiwan operation to the Waterland Financial Holding Co., though the regulator has not yet given its approval and some Waterland board members are opposed to the deal. And just this month, as yet unconfirmed media reports indicated that New York Life is seeking buyers for its units in Taiwan, Hong Kong, and Korea (the company’s Taiwan office told TOPICS that it could not comment on these reports).

The impact of the recent global financial crisis is not necessarily the main impetus behind the foreign companies’ withdrawal from the market – except in the case of A.I.G.’s efforts to sell its Nan Shan Life unit. Heavily in debt, the group – a major recipient of U.S. government bailout assistance – has been looking to sell off many of its assets in Asia.

But A.I.G. has not found it very easy to exit the Taiwan life-insurance market. Last October the U.S. insurer announced that it had agreed to sell its 97.57% stake in Nan Shan for US$2.15 billion to a Hong Kong-based consortium composed of China Strategic Holdings and Primus Financial Holdings. But 10 months later the Ministry of Economic Affairs, which is responsible for approving foreign-investment applications, is still reviewing the matter, and the Financial Supervisory Com-

mission, the Council of Labor Affairs, and a Legislative Yuan committee may also wish to have their say. The authorities have had a number of concerns about the case, including the possibility that mainland Chinese money is behind the investment, as well as the investing group’s lack of experience in the insurance business. In the meantime, the original deadline for completing the deal has passed, but A.I.G. in June agreed to extend the closing date to the end of October.

The Hong Kong consortium was only the second highest bidder in the tender last fall, but A.I.G. explained the decision as based on who would best able to satisfy Nan Shan’s employees, who have held numerous protest demonstrations expressing fears that their jobs and pension rights were at risk. In an odd twist, the highest bidder – Taiwan’s Chinatrust Financial Holding – then entered into a deal with China Strategic to buy a 30% stake in Nan Shan for US$660 million. The memorandum of understanding between the two expired in June without being renewed, and Chinatrust is now reportedly expressing interest in renewing its bid to take over Nan Shan entirely if the Taiwan government’s turns down the Hong Kong group’s application.

Unlike A.I.G.’s situation, the pressure

july 2010 • taiwan business topics

7_2010_IF.indd 43

43

2010/7/29 10:54:25 PM

INDUSTRY F

CUS

A Report on the Insurance Sector

Ratio of Assets of Insurance Industry to Total Assets of Financial Institutions Year

Total Assets of Financial Institutions

Total Assets

Ratio %

Total Assets

Ratio %

Total Assets

Ratio %

2002

28,136,690

3,682,023

13.09

183,621

0.65

3,498,402

12.43

2003

31,376,130

4,764,079

15.18

187,816

0.6

4,576,263

14.59

2004

34,327,360

5,646,628

16.45

195,955

0.57

5,450,673

15.88

2005

37,578,660

6,692,341

17.81

206,935

0.55

6,485,405

17.26

2006

39,907,620

7,937,944

19.89

201,788

0.51

7,736,156

19.39

2007

40,811,355

8,922,359

21.86

209,384

0.51

8,712,975

21.35

2008

43,576,890

9,380,609

21.53

241,663

0.55

9,138,946

20.97

2009

46,916,683

11,037,667

23.53

255,228

0.54

10,782,439

22.98

Source: DirecToraTe general of BuDgeT, accounTing, anD STaTiSTicS; Taiwan inSurance inSTiTuT e

on the other foreign-invested companies looking to leave the Taiwan market has come primarily from the negative-spread problem and the need for European and U.S.-based parent companies to set their reserves according to international accounting practices and solvency standards. For companies operating in Taiwan long enough to have accumulated a large block of “legacy” business sold with high guarantees when interest rates were stronger, the opportunity to unload that burden may be impossible to resist if a potential buyer comes along.

Certainly not all the foreign players will be departing. Some, such as HSBC Life, are still quite new to the market.

Or like Allianz, they view their Taiwan operation as still quite profitable. “The newspapers have continued to speculate that Allianz might be the next company to leave the market,” says Allianz Taiwan president and CEO Chris James.

“This speculation was wrong when it started in 2009 and it's wrong now. Our situation is different from the companies that already left, first because less than 15% of our assets relate to legacy traditional business with the so-called negative spread. Secondly 99% of the business we sell now is unit-link and it’s profitable. That means we have a sustainable business model and a better prospect of an attractive business in the future.”

Among those already-transpired or pending departures:

44

• IN G sold its Taiwan life insurance business to Fubon Financial Holding for the equivalent of US$600 million and a 5% stake in Fubon in a deal announced in October 2008. The arrangement also released a substantial commitment of reserves in the Netherlands against ING Taiwan’s liabilities.

ING originally entered the Taiwan market in 1987 through its Life of Georgia unit and later acquired Aetna’s Taiwan operations.

• Prudential of the United Kingdom in February last year sold the bulk of its PCA Life Assurance unit in Taiwan to China Life Insurance, part of the Koo’s Group of companies, for the nominal sum of NT$1, but in return paid the equivalent of US$62.7 million for a nearly 10% share in the local company.

• Aegon in April last year sold its Taiwan operation for EUR 65 million to the Zhongwei Co., a holding company established by a consortium connected to Meifu Development and Taiwan Glass Industry. Meifu, a leading construction and real estate management company, developed a relationship with Aegon by building the company’s Taipei headquarters, which opened on JianGuo North Road in 2008. Although the principals of Zhongwei had no previous experience in the insurance industry, they

retained virtually the entire Aegon management team, led by Chairmand and CEO James H.C. Liu. The company’s Chinese name is unchanged, and the English name – TransGlobe Life – is a direct translation of the Chinese.

• MetLife made known its plans in October 2009 to divest its Taiwanese unit through an auction, and the announcement of the US$112.5 million sale to Waterland, Taiwan’s smallest financial holding company, came this April.

The holding company currently is not involved in the life-insurance industry, and presumably sees a benefit in diversifying its operations, especially since its main business is the highly cyclical area of bills finance. But the local news media has reported on serious divisions of opinions within the Waterland board about the merits of the acquisition.

Some industry observers have speculated as to whether the departing foreign players, having unloaded the burden of the old-block business and released substantial capital that was tied down in reserves against that portfolio, might wish to return to the Taiwan market in a few years’ time for a fresh start. That proposition might be tempting. The unanswered question is whether the regulators would hold up a “Welcome Back” sign.

taiwan business topics • july 2010

7_2010_IF.indd 44

2010/7/29 10:54:26 PM

A Report on the Insurance Sector

INDUSTRY F

CUS

Shifting the Stress to Investment-Link Policies

T

raditional life insurance products that come with guaranteed benefits, as mentioned earlier in this section, are not a very appealing proposition for either the investor or the insurer when interest rates remain low for an extended period. “The problem with the traditional business is that if you have a proper match of assets and liabilities, the return to the customer on a savings product is so low it will never be attractive,” says Chris James, president and CEO of Allianz Taiwan Life Insurance. “Unless interest rates rise sharply and soon, I believe the unit-link business is the only viable business.”

Under a unit-link policy, part of the premium paid by the customer is invested in a mutual fund as a way of gaining a higher rate of return than would be possible with the traditional product. Normally the policyholder is able to choose from a wide range of funds in the insurer’s portfolio, and can switch from one fund to another without charge a specified number of times per year. Typically unit-link policies are a much more important part of the business for the foreign life insurance companies in Taiwan than for the domestic insurers.

Unit-link policies currently account for an estimated 15% of the new life-insurance business being sold in the Taiwan market, but a few years ago that proportion was more like 62%, insurance executives say. The drop is attributable partially to the impact of the global financial crisis, which caused many Taiwan investors to feel less comfortable about investing in international funds.

Recent changes in the tax regime following the convening of a national Tax Reform Committee are also likely to be a factor. One change that came out of the TRC suggestions was a sharp decrease in the tax rate for estate and gift taxes from 50% to 10%, after it was concluded that the high rate was actually detrimental to the Taiwan economy by encouraging rich individuals to hold more of their wealth offshore. Financial analysts say that unit-link policies were sometimes used as vehi-

cles to accomplish that.

In addition, the Ministry of Finance (MOF) adopted a TRC proposal that income from unit-link policies should be subject to tax, which came into effect from the beginning of this year. The AmCham Insurance Committee had vigorously opposed that decision on the grounds that Republic of China law has consistently treated life-insurance products as tax-exempt in the interest of promoting social security. The MOF ruling in effect took the position that unit-link products do not constitute insurance due to the investment component – despite their being regarded as insurance by the Financial Supervisory Commission (FSC), which regulates the insurance industry, and contrary to the practice in most other markets. Members of the industry have said they would welcome any further initiatives by the FSC to set conditions for the amount of protection unit-link products should provide in order to qualify as insurance.

In the 2010 Taiwan White Paper, the Committee charged that the MOF was changing the law without going through the legislative process, which raises serious legal and constitutional issues. It is considered possible that after payment next year of tax on 2010 income, some policyholders may challenge the validity of the tax in the courts.

In the meantime, imposition of the tax is reportedly having relatively little impact on the more sophisticated investors, who tend to make their investments in foreign-currency funds. They would be subject to taxation in Taiwan only through the Alternative Minimum Tax, which is limited to income above a threshold of NT$6 million a year. But mass-market customers have frequently been influenced by their insurance agents or brokers not to pass up the opportunity of a tax-free return on a traditional savings product, even though the return on a unit link policy may still be better in the long run. The challenge will be for the insurers to get that message through to prospective customers.

july 2010 • taiwan business topics

7_2010_IF.indd 45

45

2010/7/29 10:54:26 PM

The Upcoming Flora Expo Brings a Chance for Taipei to Bloom

F photos: Courtesy of the 2010 taipei int’l flora expo

t o u r i s m B u r e a u , r e p. o f C h i n a

46

or many years, Taiwan has been quietly building a reputation as one of the flower capitals of the world, both for its lush profusion of different blooms and for its thriving flower industry, much of it based on exquisite varieties of orchid that are unique to the island. But Taiwan’s relative anonymity as a global flower power is about to come to an end, as it prepares to host the large-scale Taipei International Flora Expo.

The Flora Expo – considered to be the Olympics of the horticulture industry – will run from November 6, 2010 to April 25, 2011. It is expected to catapult Taiwan to lasting blossom-based fame, and at the same time cement Taipei’s reputation as a city capable of hosting major international events. Fresh from its success as host of the 2009 Deaflympics, Taipei is now preparing to stage an even grander international show.

The expo is sanctioned by the International Association of Horticultural Producers, and about 8 million visitors, including nearly one million from overseas, are expected to attend.

The show will focus on four themes: gardening,

culture and art, environment and technology, and advanced flower technology (which is considered a Taiwan specialty).

The Taipei flower extravaganza will be no ordinary indoor expo taking place in a single large hall. Instead, the show will be held in four Taipei-area parks: Yuanshan Park, Fine Arts Park, Xinsheng Park, and Dajia Riverside Park.

In all, 14 pavilions will cover a total area of more than 90 hectares. A high-tech Pavilion of Dreams, featuring a modern sound-and-light display, is one of the most eagerly anticipated elements of the expo. At the same time, an International Art of Flower Contest, presenting flower-based works of art, is expected to attract participants from at least 50 countries.

Taiwanese pop group S.H.E. will help publicize the event, and the band’s latest single, Shero, has been selected as the theme song of the promotional campaign. Taiwan’s airlines are likewise pitching in to help promote the island’s flowers. The China Airlines fleet includes an aircraft beautifully painted in orchid livery, featuring a Moth Orchid, or phalaenopsis, the delicate purple bloom that is easily the island’s most famous flower.

Meanwhile, EVA Air, one of the official partners of the Expo, has decorated the cabins of four Airbus A330-200s in a new design based on the Flora Expo theme. These brightly decorated aircraft will serve Asian regional routes, advertising the Expo to passengers traveling to Hong Kong, Seoul, Tokyo, Bangkok, and Nanjing.

taiwan business topics • july 2010

7_10_SeeTW.indd 46

2010/7/29 10:55:27 PM

s e e i n g ta i w a n

EVA has also placed Flora Expo images on dozens of airline products, from cup pads and head-rest covers to boarding passes and luggage tags.

Taipei has been preparing for the expo by hosting a number of smaller exhibitions. The first prelude was the Taipei International Gardening and Horticulture Exhibition held in March 2009, which attracted 120,000 visitors and showcased more than 100,000 varieties of flower. A second lead-up event was the 2009 Shilin Presidential Chrysanthemum Exhibition, held from November 28 to December 13, 2009. The chrysanthemum show took place in Yuanshan Park, a 92-hectare field that will be one of the sites of the upcoming Flora Expo. Still another warm-up was the month-long Yangmingshan Flower Festival, held on Yangmingshan in March this year.

Even before the expo, Taiwan’s status as a flower-loving country was firmly established. The weekend flower market under the JianGuo Road overpass, extending northward from the XinYi Road intersection, is extremely popular with both local residents and tourists, and many Taiwanese balconies and backyards are alive with cultivated orchids, azaleas, and other blooms. Flower-based excursions are likewise very popular, as large numbers of people travel around the island to see

cherry blossoms, roses, orchids, lotuses, mountain rhododendrons, and other flowers at times of year when they are in full bloom.

From December to February, tourists flock to see plum blossoms in various locations throughout the west coast, while in April and May, white tung blossoms carpet the roads and fields in Sun Moon Lake, Hsinchu, and other lowland locations, a phenomenon known locally as “April snow.”

The visual feast continues with the April cherry blossom season in the Alishan Forest Recreation Area, where the Japanese planted decorative Yoshino cherry trees almost a century ago.

Tulips, lavender, peach and apple blossoms, and many other flowers also have their enthusiasts, as do the high-mountain rhododendrons and azaleas, which bloom beginning in April and May along the cross-island highways.

Postage stamps with flower motifs are also highly esteemed. In May, Chunghwa Post issued its fourth set of flower stamps, this time featuring Bauhinia variegata, Euphorbia milii, Brunfelsia hopeana, and Plumeria rubra. The Bauhinia is a popular fivepetaled pink-and-white flower closely related to the orchid.

Taiwan’s climate and geological diversity are ideally suited to growing a large number of flower species, and that

advantage, combined with the development of high-tech cultivation methods, has turned the island into a flowerexporting powerhouse. Total annual flower exports, led by the lovely Moth Orchid, exceed US$100 million. Some 24 million orchids and related products – seedlings, mature plants, and growing setups – are exported every year, with most going to Japan, the United States, Hong Kong, and the Netherlands.

Many orchid growers are small- to medium-sized family-run businesses, although the government has pitched in with US$65 million to develop the Taiwan Orchid Plantation, a 200-hectare high-tech park in Tainan that is devoted to orchid development and production. For the past four years, the Taiwan International Orchid Show, one of the top flower fairs of its kind, has been held in the park.

For anyone wishing to learn more about Taiwan’s ongoing love affair with flowers, there won’t be a better opportunity than the International Flora Expo. Tickets are available online at www.ticket.com.tw/dm-en9835.asp, and can also be purchased at Family Mart, Hi Life, and OK Mart convenience stores. Tickets are NT$300 at the door or NT$250 if bought in advance. For further information on the Flora Expo, see www.2010taipeiexpo. tw/welcome/welcome.html.

july 2010 • taiwan business topics

7_10_SeeTW.indd 47

47

2010/7/29 10:55:31 PM

Happy Birthday, America

I

t was a sign of good fortune that with the Fourth of July falling on a Sunday this year, American Independence Day celebrations in Taiwan could be scheduled for the very day of the holiday. As usual, the annual event for the U.S. community in Taipei was co-hosted by the American Chamber of Commerce, the American Club (ACC), and the American Institute in Taiwan (AIT).

The event attracted a sell-out crowd of about 300 people, who gathered around the ACC pool and soaked up the festive atmosphere. It was a family-oriented outing, with kids enjoying a variety of pool games while the adults chatted with friends until it was time to open the barbecue buffet. The Club put out a big spread, giving diners the chance to sample jumbo hot dogs, hamburgers, steaks, lamb, mahi mahi kebabs, salads of all kinds, and some delectable desserts.

Following the playing of the national anthem, there were brief remarks

by ACC Past President Sampson Mar and by AmCham Vice Chairman Bill Bryson, who stressed the significance of the Fourth of July in bringing Americans together, no matter where in the world they are located.

48

taiwan business topics • july 2009

7_10_jul4.indd 48

2010/7/29 10:57:11 PM

july 2010 • taiwan business topics

7_10_jul4.indd 49

49

2010/7/29 10:57:16 PM

Are You Reading a Borrowed Copy?

The cost of a year's subscription to Taiwan Business TOPICS is so economical – NT$1,500, or about what you might pay for a single business lunch – that there's no need to have to rely on your friends or colleagues to see the magazine. As a subscriber, you'll have your own copy mailed directly to your home or office, so you'll be sure not to miss any of the vital information carried in TOPICS.

Subscribe now to be sure of seeing every issue.

TOPICS can be found in the Eslite, Kingstone, Caves and Hess bookstores in Taipei, Taichung and Kaohsiung.

But why wait until we’re on the stands?

Make sure of getting a copy by filling in the subscription form below.

American Chamber of Commerce in Taipei

Tel : 886-2-2718-8226

E-mail: amcham@amcham.com.tw

Fill out this form and post or fax to 886-2-2718-8182 with your payment or receipt. AmCham will begin your subscription upon receipt of payment.

Subscriptions:

Taiwan

q1 year = NT$1,500

q2 years = NT$2,700

HK/PRC

q1 year = US$68

q2 years = US$130

Elsewhere in Asia

q1 year = US$75

q2 years = US$140

USA/Europe

q1 year = US$90

q2 years = US$170

Name: _____________________________________________________

Membership ID#: (if applicable)_____________________

Company: ________________________________________________________________ Telephone: __________________________ Mailing address:___________________________________________________________________________________________ Email Address: ____________________________________________________________________________________________ qBill to Account (members only)

qAMEX

qMaster

qVISA

qCheck

qTelegraphic Transfer

Credit card number: ___________________________________ Cardholder’s name: ________________________________ Expiration date: _______________________________________ Total amount (NT$/US$): ___________________________ Signature: _____________________________________________________

Date: _______________________________________

• Please make checks payable to: American Chamber of Commerce in Taipei • Please direct telegraphic transfers to: American Chamber of Commerce in Taipei • Acct. #: 141-53-80050-0-9-0 Chinatrust Commercial Bank Chungshan Branch (Please fax your transfer receipt to AmCham.)

Fullpage_Subscription_09.indd 50

2010/7/29 10:59:18 PM