May 2015 Taiwan Business TOPICS by AmCham Taipei

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CONTENTS NEWS AND VIEWS M ay 2 0 1 5

vO luME 4 5, N uMbEr 5 一○四年五月號

Publisher

發行人

Andrea Wu

吳王小珍

Editor-in-Chief

TPP Grows Closer to Reality

沙蕩

Associate Editor

副主編

Tim Ferry

法緹姆

By Timothy Ferry

11 Issues

Reviewing the U.S.-Taiwan Trade Agenda; Improving Government Contracts for IT Services; Setting the Wrong Standard

美術主任 / 後製統籌

Katia Chen

陳國梅

Manager, Publications Sales & Marketing 廣告行銷經理

Caroline Lee

李佳紋

Translation

跨太平洋夥伴協定(TPP)指日可待

7 Taiwan Briefs

總編輯

Don Shapiro

Art Director/ Production Coordinator

6 Editorial

檢視美台貿易議；提升政府資訊服務採購程序；制定錯誤標準 By Don Shapiro

翻譯

Jay Chen, Yichun Chen, Agnes Chiu, Charlize Hung 陳正杰, 陳宜君, 邱意豪, 洪兆怡

COVER SECTION

15 Maintaining Deterrence

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 Taiwan Business 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 2015 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

維持嚇阻實力 Despite improved cross-Strait relations, China is continuing massive spending to build up its military capability, with Taiwan remaining prominently in the PLA’s crosshairs. Can advanced weapons procurement and the implementation of “asymmetrical strategies” enable Taiwan to meet the challenge of providing sufficient defensive strength? By Timothy Ferry

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108台北市萬華區長沙街二段66號發行日期：中華民國一○四年五月中華郵政北台字第5000號執照登記為雜誌交寄 ISSN 1818-1961

Chairman/ Thomas Fann Vice Chairmen/ Scott Meikle / Dan Silver Treasurer: Cosmas Lu Secretary: Fupei Wang 2014-2015 Governors: William E. Bryson Jr., Sean Chao, Rodney Van Dooren, Cosmas Lu, Scott Meikle, Dan Silver, Gordon Stewart, Ken Wu. 2015-2016 Governors: Margaret Driscoll, Thomas Fann, Ajit Nayak, Vincent Shih, Stephen Tan, Fupei Wang, Lee Wood. 2015 Supervisors: Arthur Cozad, Kai Speth, Neal Stovicek, Wern-Yuen Tan, Neil Waters. COMMITTEES: Agro-Chemical/ Melody Wang; Asset Management/ Christine Jih, Derek Yung; Banking/ Victor Kuan; Capital Markets/ C.P. Liu, Shirley Tsai; Chemical Manufacturers/ Michael Wong; CSR/ Lume Liao, Fupei Wang; Customs & International Trade/ Stephen Tan; Education & Training/ Robert Lin, William Zyzo; Greater China Business/ Helen Chou, Cosmas Lu; Human Resources/ Richard Lin, Seraphim Mar, Vickie Chen; Infrastructure/ L.C. Chen, Paul Lee; Insurance/ Arthur Cozad, Joseph Day, Dan Ting; Intellectual Property & Licensing/ Jason Chen, Peter Dernbach, Jeffrey Harris, Vincent Shih; Marketing & Distribution/ Wei Hsiang, Gordon Stewart; Medical Devices/ Cyndi Chang, Tse-Mau Ng, Dan Silver; Pharmaceutical/ Margaret E. Driscoll, David Lin, Jun Hong Park; Private Equity/ William Bryson; Public Health/ Jeffrey Chen, Dennis Lin; Real Estate/ Tony Chao; Retail/ Prudence Jang, Ajit Nayak, Wern-Yuen Tan; Sustainable Development/ Kenny Jeng, Kernel Wang; Tax/ Stella Lai/ Cheli Liaw, Josephine Peng; Technology/ Revital Golan, Scott Meikle, Jeanne Wang; Telecommunications & Media/ Thomas Ee, Joanne Tsai, Ken Wu; Transportation/ Michael Chu; Travel & Tourism/ Anita Chen, Pauline Leung, Achim v. Hake.

23 Fighters, Submarines, and Railguns

With constrained budgets and few allies, Taiwan struggles to acquire the weapons it wants and needs for selfdefense.

25 Volunteer Army Shift Called into Question

BEHIND THE NEWS

INTERVIEW

28 Taiwan Pursuing AIIB Participation

44 Observations on the Retail Sector

Rebuffed in its bid to be among the bank’s founders, Taiwan is expected to apply for regular membership.

By Philip Liu

BACKGROUNDER

30 Genetically Modified Foods: Savior or Destroyer? Proponents see an answer to world hunger; critics fear risk to human health and the environment.

Beverage industry executive Doug Klein shares insights based on long experience in the Taiwan market.

As told to Don Shapiro

FEATURE

47 The World Vegetable Center is in Tainan The institute, the only Taiwanbased international organization, contributes to the global fight against malnutrition and poverty.

By Steven Crook

By Timothy Ferry

c ov er p h o to : ap/ wal ly s an tana 4

taiwan business topics • may 2015

COv Er SpONSOr

may 2015 • Volume 45 n umbe r 5

iNDuSTrY

CITI: OFFERING WORLD-CLASS BANKING TO TAIWAN

CuS

A Report on the Financial Services Sector Opening New Opportunities

Citi, the leading global bank, has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions.

By Matt Fulco

34 Smoother Sailing for Taiwan’s Banks Offshore

Citi is proud to have had a strong presence in Taiwan since 1965. Being the leader in Taiwan’s banking industry, Citibank Taiwan Limited (CTL) has been recognized as the Best Foreign Commercial Bank in Taiwan for the past 18 consecutive years by FinanceAsia and as the Most Admired Bank in Taiwan for 20 consecutive years by CommonWealth Magazine.

The sector netted record profits in 2014 on the back of burgeoning offshore business, especially in China.

CTL's Institutional Clients Group provides top-tier corporations with a full range of value-added local and cross-border products and services.

37 The Formosa Bond Market Ignites

Leveraging Citi’s world-class banking platform, CTL acts as clients’ partner to support and grow their businesses to the next level by delivering cost effective solutions with a flexibility that is unmatched by Citi’s competitors.

Taiwan’s offshore RMB bond market is growing rapidly after investment was opened to domestic insurers.

39 Promoting the Onshore Mutual Fund Business

CTL’s Consumer Banking leads the market by pioneering Wealth Management banking service, providing wealth advisory service, local and multicurrency deposits to premium accounts, OBU products and services and a variety of mutual funds, bonds, HK and U.S. stocks. By providing customers with value-added services, CTL’s Cards business enjoys high customer satisfaction and strong brand recognition in the market.

Regulators are tightening the screws on offshore fund managers in an effort to strengthen the asset-management sector at home.

41 Taiwan’s Payment Plan

Citi aims to become the world’s digital bank. In addition to introducing smart banking branches in 2010 and launching advanced mobile banking services in 2011 that include location-based offers and premium search, Citi possesses the innovative culture that positions it to lead the digital trend and deliver more effective, dynamic, and convenient approaches to better serve clients.

The introduction of mobile and third-party payment platforms is expected to bolster the nation’s burgeoning e-commerce market.

AMCHAM EVENTS

Citi believes strongly in its responsibility to both Taiwan and the global community. Since 1995, CTL has been actively involved in educating the next generation, community care, financial education, and environmental protection in Taiwan. Over the past 20 years, the Citi-United Way Fundraising Campaign has benefited more than one million disadvantaged people in Taiwan.

51 The 47th annual Hsieh Nien Fan banquet

taiwan business topics • may 2015

TPP Grows Closer to Reality

s regular readers of this publication are well aware, the American Chamber of Commerce in Taipei is convinced that Taiwan’s participation in the emerging regional trade grouping known as the Trans-Pacific Partnership (TPP) will be absolutely essential for the future well-being of this economy. Exclusion from the TPP in the years ahead will diminish the competitiveness of Taiwan-made products in many important markets, decrease Taiwan’s attractiveness as a destination for investment, and induce many export-oriented domestic manufacturers who still produce on the island to shift operations to offshore locations covered by the TPP in order to enjoy tariff breaks and other benefits. Until fairly recently, AmCham was growing concerned that Taiwan was not moving rapidly enough to prepare its candidacy for inclusion in a second round of TPP negotiations. To gain necessary support for their bid from the 12 current negotiating parties, would-be new candidates will need to take concrete steps to show that they are fully committed to broadbased liberalization of their economies. For that case to be convincing, moreover, they will also need to demonstrate that they have mobilized wide support from influential domestic constituencies, providing assurance that particular interest groups will not be able to shut down the accession process. Lately there have been positive signs that the government is starting to take appropriate action. A recent forum sponsored by the Ministry of Economic Affairs with help from the Chung-Hwa Institution for Economic Research, for example, provided members of the business community and other interested parties with valuable information on the importance

of TPP membership for members of both the manufacturing and service sectors. Many more such events are planned. The National Development Council has also been continuing its efforts to bring regulatory activity throughout government in line with international standards and practices. These initiatives are coming at a crucial time. Just a few months ago, given the sharp political differences in the United States on trade policy and the many remaining points for the 12 negotiating teams to reach agreement on, there was still some reason for skepticism about the chances for the TPP to actually come to fruition. But the situation has now changed significantly. Bills are moving forward in both houses of Congress to provide President Obama with Trade Promotion Authority (TPA) – the fasttrack channel considered vital for TPP to win ultimate approval by U.S. legislators. While passage of TPA is still by no means assured, its proponents have been increasingly optimistic that it will take place within the coming several weeks. Enactment of TPA would then change the entire environment for the TPP negotiations. Countries that have been reluctant to show their hand until the end-game is in sight would suddenly become more flexible and willing to compromise in the interest of bringing about a final agreement. And once that agreement has been concluded, the 12 current players will be able to start thinking about who else deserves to join the group. The likely timetable is beginning to take shape; 2016 – which now seems just around the corner – could be the make or break year for Taiwan’s TPP participation. Will this country be ready?

跨太平洋夥伴協定(TPP)指日可待

正

如定期收看本刊的讀者所知，台北美國商會相信，

力，讓政府的法規管制活動能夠更符合國際標準與實務。

臺灣能否加入作為新興區域貿易協定之跨太平洋夥

這些行動來的正是時候，因為就在幾個月前，針對貿易政

伴協定(TPP)，對臺灣未來經濟的健全至關重要。

策及其他目前12個協商成員國尚未達成共識的事項，美國

若未來幾年臺灣被排除在TPP之外，將會導致臺灣製品在許

國內政治意見仍嚴重分歧，因此大家對於TPP是否真能開花

多重要市場的競爭力下滑、減低臺灣作為目標投資地的吸引

結果仍持保留態度。

力、並導致許多製造地仍根留台灣且以出口為導向的國內製

不過，這個情況目前已經大大改變了。法案目前在美國參

造商，為了享受相同的關稅減免及其他優惠，將臺灣的營運

眾兩議院都有所進展，這樣一來就可以提供貿易促進授權法

據點外移到其他有參與TPP的國家。

案(TPA)的支持給美國總統歐巴馬；貿易促進授權法案又被

近期，美國商會更因臺灣對爭取成為第二輪TPP談判的候

稱作貿易授權的重要快車道，且被認為是TPP能否得到美國

選國不夠積極而日漸憂心。為了要得到現行參與談判的12

國會最終同意的重要關鍵。雖然現在仍不確定貿易促進授權

國的支持，所有可能成為新候選國的國家必須採取具體行

法案一定會通過，但支持者目前愈來愈樂觀，相信該法案在

動，以展現他們致力將該國經濟全面自由化的誠意。此外，

未來幾個星期內就可過關。

為了取信於外界，他們也必須證明他們已經獲得國內各方有

貿易促進授權法案的制定將會改變整個TPP的談判環境。

力人士的支持，且確保上述支持不致遭特定利益團體的阻

屆時，在結果明朗化之前原本不願攤牌表明立場的國家，預

擋。

料將會突然變得更願意談條件，且願意為了達成最終協議而

近來，有正面跡象顯示政府已開始採取適當行動。最近一場由經濟部出資舉辦、中華經濟研究院協辦的論壇，即針對

有所妥協；而一旦協議達成，目前的12個成員國就能開始思考哪些其他國家有資格加入他們。

取得TPP會員資格對於製造業及服務業的重要性，提供珍貴

大致的時程表已經有點眉目，而即將到來的2016，亦有

資訊給企業界人士及其他有興趣的團體，而未來有關單位也

可能是臺灣能否加入TPP的成敗關鍵年。到時候臺灣是否會

會持續規畫更多類似活動。此外，國家發展委員會也持續努

準備好了呢?

taiwan business topics • may 2015

— by TI M O TH y f e rry —

Economic indicators (YEar EarliEr)

MACROECONOMIC DesPite eXPOrt DrOP, GrOwtH stiLL steaDY Taiwan saw declines in March in everything from housing sales to inflation to unemployment and exports. One thing that didn’t decline, however, was the economic growth forecast. The ChungHua Institution for Economic Research (CIER) raised its forecast for GDP growth in 2015 from 3.5% to 3.56%, based on rising private consumption and investment. CIER sees private consumption rising this year by 3.02% (up from its earlier forecast of 2.78%) and private investment by 4.37% (compared to the earlier 3.27%) because of low fuel costs and low inflation. The price of oil has declined 26.5% from last year, leading to the third straight month of yearon-year declines in the Consumer Price Index. The CPI fell by 0.8% in March. CIER emphasized that Taiwan doesn’t face a deflationary situation as consumer markets are robust. Removing the price of fuel from the calculation reveals a 0.96% rise in consumer prices, with food prices alone up more than 3%. Exports in March plummeted by 8.9% from a year earlier to amount to US$25.27 billion, for a total in the first quarter of US$70.24 billion, a 4.2% decline. That drop was mitigated by an even steeper decline in imports, which fell by a precipitous 17.8% in March to US$21.2 billion. At US$56.82 billion, imports were down 15% for the quarter, giving Taiwan a US$13 billion trade surplus. The decline in exports is attributed to continuing lackluster growth in China, as well as a pause in the expansion of the U.S. economy. While Taiwan’s exports to the United States were flat, they fell by 8.8% to China, 11.6% to Japan, and 13.6% to Europe. Global trade has also been impacted by the ongoing conflict in Ukraine and a weakening euro. Since oil prices remain

Current Account Balance (Q4 2014)p

19.18

Foreign Trade Balance (Jan.-Mar.)

13.42

6.48

New Export Orders (Mar.)

38.43

37.94

414.69

420

Foreign Exchange Reserves (end Mar.) Unemployment (Feb.)

16.33

3.69%

4.09%

1.875%

Economic Growth Rate Q4 2014p

3.35%

3.40%

Annual Change in Industrial Output (Feb.)p

3.32%

7.36%

Annual Change in Industrial Output (Jan.-Feb.)

5.59%

Annual Change in Consumer Price Index (Feb.)

-0.19%

Annual Change in Consumer Price Index (Jan.-Feb.)

-0.56%

Discount Rate (Apr.)

p=preliminary

low, however, analysts expect demand from both the United States and Europe to recover in the second quarter. With exports down across the board, even Taiwan’s IT sector has seen declines. The value of shipments overseas in the Machinery and Electrical Equipment category of Taiwan’s trade ledger, at US$12.69 billion, was down by 1.7% for the month, although the sector rose by 4% for the quarter to reach US$35.52 billion. Even Taiwan’s vital semiconductor industry may be looking at a lackluster year, with analytics firm Gartner Inc. cutting its 2015 growth forecast for semiconductor shipments from 5.4% to 4% due to growing inventory and changes in exchange rates. Gartner sees depreciating currency values relative to the US dollar, as well as excess inventories in the semiconductor and electronic supply chains electronic supply chains, as impacting revenues. Nevertheless, the Taiwan Semiconductor Manufacturing Co. (TSMC) in March reported a 44.7% increase in sales from the same month last year to NT$72.27 billion (US$2.31 billion). TSMC said it will be reducing its capital expenditure budget this year by US$1 billion, to US$11 billion, as a result of lower demand for smartphone chips and increases in capital efficiency. The official purchasing manag-

0.04%

sources: moea, DGbas, cbc, boFt

ers index (PMI) recovered in March, jumping to 59.1 from 47.8 in February, reflecting rising export orders and industrial production. Export orders rose by an unremarkable 1.3% year-onyear to US$38.43 billion in March, with analysts pointing to the sluggish demand for smartphones. Government finances are improving due to increased taxes on earnings by financial firms, which the Ministry of Finance says it expects will help boost tax revenues this year by 3.8% over 2014. As a result, Taiwan’s budget deficit this year is expected to come to NT$158 billion (US$5.1 billion), a steep drop from last year’s NT$209 billion.

I N T E R N AT I O N A L U.s. fiGHter Jets LanD in tainan While en route to Singapore to participate in a military exercise, two Okinawa-based F/A-18 fighter jets with the U.S. Marines Fighter Attack Squadron made an emergency landing at Taiwan’s Tainan Air Force Base on April 1 due to a mechanical problem experienced by one of the planes. Guided to the base by jets from the ROC Air Force’s 443 Tactical Fighter Wing, the F/A-18s were the first American fighter planes to land in Taiwan

taiwan business topics • may 2015

since the United States and Taiwan ended formal diplomatic relations in 1979. The planes departed two days later after repair work was completed by U.S. maintenance personnel. China’s foreign ministry lodged “solemn representations” of complaint with the United States over the episode, while political observers in both Taiwan and the United States pointed to it as an example of the warm relations between the two countries despite the absence of formal ties.

CROSS-STRAIT PartY LeaDers Meet at fOrUM in beiJinG Eric Chu, chairman of the Kuomintang (KMT), met with China’s President Xi Jinping in Xi’s capacity as leader of the Chinese Communist Party (CCP) on May 4 at Beijing’s Great Hall of the People. Chu was in China as leader of his party’s delegation to a KMT-CCP forum held in Shanghai. The two party heads agreed to maintain economic cooperation under the “1992 Consensus,” the term for an understanding that there is only one China but that the two sides may have different interpretations of what that one China entails. During the meeting, Chu expressed the hope that within the framework of the 1992 Consensus, Taiwan can broaden its international participation, for example by gaining entry into the proposed Asian Infrastructure Investment Bank (AIIB), as well as the Regional Comprehensive Economic Partnership (RCEP), two organizations for which China is a major architect. Xi said China would welcome Taiwan’s bid to join the AIIB as well as to invest in China’s “One Belt, One Road” initiative, which seeks to create rail and sea links toward central Asia and ultimately the Middle East. Reportedly, Xi said the KMT and CCP should continue to expand exchanges across the Taiwan Strait and explore new visions to benefit the people on both sides. He was quoted

taiwan business topics • may 2015

HISTORIC HANDSHAKE — KMT Chairman Eric Chu, left, and Chinese Communist Party leader Xi Jinping, meet in Beijing. photo :cna

as saying “the two sides can consult each other on an equal basis under the principle of ‘one China’ and reach a reasonable arrangement.” The opposition Democratic Progressive Party (DPP) rejects the “1992 Consensus” as a convenient fiction invented to smooth over relations across the Taiwan Strait. The director of the DPP’s department of Chinese affairs, Chao Tien-lin, condemned Chu’s visit to the mainland as compromising Taiwan’s sovereignty.

DOMESTIC taiPei DOMe PrOJeCt UnDer HeaVY fire Taipei Deputy Mayor Charles Lin said that either the Taipei Dome or the shopping mall being constructed beside it will need to be torn down in light of safety evaluations revealing that the site could not be evacuated within the necessary 15 minutes. The project – a multiuse stadium complex that includes a shopping mall, movie theater, hotel, and office space – is being built at a site near Taipei’s Sun Yat-Sen Memorial Hall on the corner of GuangFu North and ZhongXiao East Roads. Safety analy-

ses conducted by the city showed that the expansion of the shopping mall at the site means that in the event of an emergency, more than an hour would be needed to complete an evacuation. According to the city, the complex could safely hold a maximum of only 60,000 people, less than half the 140,000 capacity it is being built to accommodate, and fire trucks would have insufficient space to access the site. General Manager Tang Chia-feng of the Farglory Construction Co., builder of the Taipei Dome, responded that “we have received full marks in safety simulations, so there’s absolutely no reason to tear down a single wall.” The construction work has also been blamed for cracks in structures at the nearby Songshan Cultural and Creative Park, a historical site. The Taipei Dome has been controversial from the date of its proposal nearly a decade ago. Critics have raised concerns that it will cause severe traffic congestion and damage the environment, and the project experienced several delays in construction related to its Environmental Impact Assessment. Despite its US$500 million price tag, many citizens are calling for the dome to be torn down.

DPP’s tsai aCCePts 2016 nOMinatiOn Saying she is determined to “turn tears to laughter” for her supporters after her failed 2012 bid, DPP chairperson Tsai Ing-wen on April 15 formally accepted her party’s nomination for the 2016 presidential elections. Tsai announced her candidacy in February and ran for the party nomination unopposed. Although the KMT has not yet chosen a candidate, she currently is leading in polls against expected challengers. KMT Chairman Eric Chu, who is also mayor of New Taipei City, has repeatedly confirmed that he will not be contesting the presidential election. The KMT has no clear frontrunner, but deputy legislative speaker Hung Hsiu-

chu threw her hat into the ring, seeking the party’s nod in primary elections. Legislative speaker Wang Jin-pyng is being urged by many to enter the race, but so far has demurred. Other candidates are expected to announce soon for the primary, which will take place May 17 and 18.

6.3 eartHQUaKe rOCKs tHe isLanD An earthquake registering at 6.3 on the Richter scale shook northern Taiwan on the morning of April 20, followed shortly afterward by a 5.0-magnitude aftershock and that evening by a number of smaller tremors. The Central Weather Bureau said the earthquake epicenter was off the coast of Hualien, and categorized it as a shallow earthquake with a hypocenter 17.5 kilometers below the surface. The explosion of an electricity transformer box damaged during the quake killed an 84-year-old man in New Taipei City. Minor damage was also reported, including 11 cars that fell from a parking tower in Taipei, flooding that resulted from a water-main break in New Taipei City’s Shulin District, and structural damage at some schools.

traGeDY striKes taiCHUnG Mrt Four people were killed and four others injured in Taichung when a massive steel girder suspended over an MRT construction site fell the height of three stories, crushing a car and killing its driver and three construction workers. The four injured were also construction workers. Witnesses said that no traffic control was in place at the time the girder was being moved, and that the 43-meter-long, 209-ton girder appeared to be unbalanced before the accident, raining debris onto the street below. The accident happened on the site of the Green Line, the first of three proposed MRT lines in Taichung. A preliminary report issued by the Taipei Department of Rapid Transit Systems

(DORTS), which is responsible for the Green Line construction, cited human error by supervisors and workers at the site as the cause of the accident. Prosecutors are investigating further.

water ratiOninG Gets a rePrieVe Following heavy rains in northern Taiwan in early May, phase-three water rationing in Taoyuan and parts of New Taipei City and Hsinchu County has been suspended until at least mid-May. Since early April, water supply to households in the affected areas has been cut off two days per week on a rotational basis. This year northern Taiwan has received its lowest rainfall levels since 1947 and reservoirs are at record lows. But the recent rains reportedly added 12 million cubic meters of water to the Shimen Reservoir, which serves much of the area that was under rationing; that volume equals 11 days of water supply. Besides this year’s low precipitation, other factors contributing to the water shortage are reservoir silting, leaky infrastructure, and cheap water prices.

CLOUD Gate DanCe trOUPe in new HOMe The Cloud Gate Dance Troupe,

considered among the world’s top contemporary dance troupes, inaugurated a new theater on April 19, nearly seven years after a fire destroyed its original home. The new site, located in the Tamsui District of New Taipei City, will not only showcase Cloud Gate productions but also works by young artists, said Lin Hwai-min, Cloud Gate founder and artistic director. The complex consists of a 450-seat theater, two studios, offices, and an outdoor theater with the capacity to seat 1,500 people. The location – in between a historic fort and a golf course – will enable the public to simultaneously “enjoy the trees, ocean, and performances,” said Lin.

BUSINESS tea anD JaPanese fOOD in tHe news Food safety issues emerged once again last month with the revelation that potentially radioactive food has been imported into Taiwan. Taiwan’s Food and Drug Administration (TFDA) announced on April 16 that it will tighten rules on food imports from Japan after it was revealed that bogus labels on certain products misidentified the origin of the products. In the wake of the

CLOUD GATE’S NEW THEATRE — Under a BOT contract with the New Taipei City government, the famed dance troupe received 40-year operating rights to public land if it could raise its own construction funds. It received 4,155 donations, including US$5 million from the Alphawood Foundation Chicago. p hoto : cna

taiwan business topics • may 2015

CatHaY Life bUYs trOUbLeD insUrers Cathay Life Insurance won the reverse auction to acquire troubled firms Global Life Insurance Co. and Singfor Life Insurance Co., with a bid

taiWan stock ExchanGE PErFormancE

THE RED LINE SHOWS CHANGES IN TRADE VALUE AND THE SHADED AREA CHANGES IN THE TAIEX INDEX.

10,000

135

9750

120

9500

105

9250

9000

8750

8500

8250

8000

7750

March Data source: twse

Unit: nt$ billion

taiwan business topics • may 2015

taiWan's JanUarY - march 2015 tradE FiGUrEs (YEar- on-YEar comParison)

7 7.66

Europe

2015

2014

2015

2014

Exports

70.25

2014

6.28 6.89

U.s.a

2015

56.83

2014

14.1

2015

7.8

2014

totaL

12.65 7.38

2015

asEan

73.3 66.8

Japan

4.78 10.1

hk/china

4.79 9.7

March 2011 Fukushima nuclear reactor disaster, Taiwan banned the import of food manufactured or grown in several Japanese prefectures, including Fukushima, over concerns of radiation poisoning. TFDA will now require all food items imported from Japan to carry an official document certifying the prefecture of origin. The new rules will also require radiation tests for certain higher-risk areas. In related food safety news, high concentrations of pesticide residues, including long banned DDT, were found in teas offered in central Taiwan by chain store Stornaway. Pesticide residues were also found in teas sold by the 50 Lan and A Tea chains. The authorities ordered the cessation of sales of the products pending the results of further testing. A series of food-related scandals in recent years has involved cooking oils made from waste oil, illegal colorants, and the use of feed-grade ingredients used in making food products.

7.76 6.6

28.68 10.91

8.3 5.95

27.42 11.1

imports

of NT$30.3 billion (about US$1 billion) – meaning that is the amount it will receive from the government to take over the two companies. Both of the acquired firms were taken into receivership last year by the government’s Taiwan Insurance Guaranty Fund, due to their mismanagement and insolvency. Global Life had accumulated NT$25.2 billion in losses and Singfor NT$23.9 billion. Financial Supervisory Commission Chairman William Ming-chung Tseng called the bid a “milestone in the insurance industry” and thanked Cathay Life for helping reduce the government’s expense. The government had been expected to incur some NT$60 billion in costs to bail out the troubled firms, but the strong bid by Cathay is expected to reduce the amount to NT$22.3 billion.

taieX Hits 15-Year reCOrD: 10,000 POints On April 28, the TAIEX benchmark index briefly touched 10,002.58 points – the first time it had surpassed the 10,000-point mark in 15 years – mainly due to stock purchases by foreign investors. While the index retreated later in the morning to close at 9,973.12, it was the highest close since April 11, 2000. Daily turnover came to NT$130.16 billion (US$4.22 billion), and foreign investors are reported to have bought

2015

2014

Unit: US$ billion SoURCE: boFt/MoEA

local shares worth a net total of NT$21.57 billion. The New Taiwan dollar also strengthened that same day, reaching NT$30.551 against the greenback, its highest level in five months. Analysts expect the index to regain the 10,000 point peak later this year, backed by a government stimulus plan and strong liquidity.

HtC COntinUes tO see faLLinG saLes H T C C h a i r w o m a n C h e r Wa n g faced some disappointing news as she closed her first month concurrently serving as CEO of the local smartphone maker, which she co-founded in 1997. For April, HTC reported a steep 39% year-on-year drop in sales and a 2% drop in share price. April income came to NT$13.5 billion (US$440 million), which represented a 33% monthly decline. Once among the world’s top three makers of smartphones, HTC has been confronted by keen competition at the high end of the market from Samsung and Apple, and at the low end from Chinese upstarts Xiaomi and Huawei. HTC recently introduced the Re camera and is entering the market for wearable devices. But in light of the monthly declines, analysts aren’t expecting a quick turnaround for the struggling tech company.

Issues

Reviewing the U.S.-Taiwan Trade Agenda The latest annual USTR report provides an item-by-item update on the status of trade issues.

ach year at the end of March, the Office of the U.S. Trade Representative (USTR) issues a National Trade Estimate Report on Foreign Trade Barriers, assessing the state of market access for American goods and services in countries around the world. The nine-page Taiwan section in the just-released 2015 report identifies areas in which meaningful progress has been made, as well as providing insight into continuing irritants in the bilateral economic relationship – issues likely to be raised in the annual high-level TIFA (Trade and Investment Framework Agreement) negotiations. Among the topics cited as examples of positive developments: Banking. After previously insisting that foreign banks holding both branch and subsidiary licenses would have to relinquish the branch license, the Financial Supervisory Commission in 2013 indicated that banks would be allowed to keep both operations as long as the primary business scope of the branches is limited to areas, such as corporate finance and derivate services for large companies, that do not overlap with those of the subsidiaries. In May 2014, the FSC also lifted previous requirements that both local and foreign banks maintain stand-alone onshore data centers. Foreign Direct Investment. An amendment proposed by the government to the Statute for Investment by Foreign Nationals would eliminate the need for pre-investment approval for cases worth less than US$1 million, while an amendment to the Business Mergers and Acquisitions Act would clarify criteria and review procedures affecting foreign investment in domestic companies. Both measures are currently pending approval by the Legislative Yuan. Intellectual Property Rights. Following revisions to the Trade Secrets Law in 2013 to increase penalties to help deter misappropriation of trade secrets, the Legislative Yuan last year passed additional legislation to provide law-enforcement agencies with enhanced enforcement tools to deal with trade secret theft and to oblige defendants in trade-secrets lawsuits to submit a substantive defense. Another bill, still awaiting legislative action, would extend coverage under the Witness Protection Act to witnesses in trade secrets cases. USTR also noted positive steps in 2014 to enhance patent and test-data protection for pharmaceutical products. The Taiwan government has committed to establish a patent linkage system for pharmaceuticals and to study expansion of the scope of regulatory data protection for innovative drugs, including biologics. At the same time, the report cited areas of continued IPR concern, including infringement of copyrighted material on the Internet, end-user software piracy, cable TV signal theft, and illegal textbook copying. It noted that Taiwan has yet to effectively imple-

檢視美台貿易議題美國貿易代表署的最新年度報告逐項檢視貿易議題的最新進展。

美

國貿易代表署（U S T R）每年三月底都會發表《外國貿易障礙評估報告（N a t i o n a l Trade Estimate Report on Foreign Trade Barriers）》，評估各國市場對美國商品與服務的開放程度。甫公布的2015年報告中，台灣部分占 9頁篇幅，除列出已達成重要進展的領域，還深入探討雙邊經濟關係中持續存在的問題。這些議題可能會在美台高層的年度貿易暨投資架構協定（TIFA）談判中提出討論。報告認為出現正面進展的領域包括：銀行：台灣金管會過去堅持，外國銀行若同時擁有分行和子行營業執照，就須放棄分行執照，不過2013年改變規定，只要分行的主要業務範圍限於針對大型企業的企業金融、衍生性商品等領域，未和子行業務重疊，就可同時保有兩類執照。此外金管會在2014年5月解除過去要求本國和外國銀行都須設置獨立境內資料中心的規定。外來直接投資：台灣政府的外國人投資條例修正草案中，刪除金額低於100萬美元投資案須事先申請批准的規定。企業併購法修正草案則明確規定外資投資本國企業的準則和審查程序。這兩項草案目前都在立法院等候審議。智慧財產權：立法院在2013年修訂營業秘密法，加重罰則，以助嚇阻竊取營業秘密，接著去年又通過相關立法，強化執法機構處置竊取營業秘密者的執法工具，並迫使營業秘密訴訟案被告負起具體答辯的義務。另一項仍待立院通過的法案將把證人保護法的適用範圍擴及營業秘密案件。美國貿易代表署還指出，台灣在2014年採取

taiwan business topics • may 2015

Issues ment 2009 amendments to the Copyright Act to require Internet service providers (ISPs) to undertake notice-and-takedown action against online infringers as a condition for avoiding liability for such infringement. A number of other problems were listed in the report under the heading “Technical Barriers to Trade.” Among them: Agricultural issues. USTR reminds Taiwan that largely because of controls legislated in 2010 without regard to scientific evidence and risk analysis, Taiwan has not met its commitment under a 2009 protocol with the United States to provide fuller market access to U.S. beef products. Pork is also an issue, because of Taiwan’s failure to adopt a Maximum Residue Level for the feed additive ractopamine in pork despite having notified the World Trade Organization in 2007 of its intent to do so. Mandatory biotechnology labeling. This category refers to the regulation of genetically modified (GM) food products. According to USTR, “Taiwan’s current practices and contemplated stricter policies on biotech labeling do not appear to be based on science, impose significant burdens on U.S. stakeholders, and may serve to increase costs and cause concern among consumers.” Toys. The United States has raised concerns that new inspection requirements in Taiwan for formamide in foam toys and phthalates in children’s products do not correspond to international practice The USTR report notes that requiring testing “for formamide in toys where it is likely not present is an onerous and costly task for manufacturers.” In several other categories, USTR appeared to be adopting a stance of continued monitoring and observation of the situation: Cosmetics. Proposed amendments to the Cosmetic Hygiene Control Act have prompted industry concerns about requirements governing the product approval process, product claims and advertising, and the treatment of medicated cosmetic products, including toothpaste, breath fresheners, and sunscreen. Chemicals. Both the Environmental Protection Administration and the Ministry of Labor have recently adopted new registration systems for chemical substances. The report said the U.S. government has raised questions about the scope of coverage of the regulations and the protection afforded confidential business information, and in addition will continue to engage with the Taiwan agencies to urge harmonization of the two regulatory systems “to the extent possible.” Medical devices. According to the report, “U.S. stakeholders and trade officials have encouraged Taiwan to adopt a flexible mechanism that would 1) reduce the stringency regarding which products may enter the market as self-pay or balance-billing devices, 2) provide Taiwan consumers a greater choice of advanced medical devices, and 3) provide clear self-payment guidelines to allow earlier access to new devices prior to the establishment of a reimbursement price.” Dates have not yet been set for the 2015 TIFA Council meeting, which is slated to take place in Taipei. — By Don Shapiro

正面作法，強化對製藥產品的專利和檢測資料保護。台灣政府承諾會建立藥品專利連結制度，並研究讓資料保護規定適用範圍擴及創新藥品，包括生物製劑在內。報告還提到一直令人關切的智慧財產權問題，包括網路侵權、終端用戶使用盜版軟體、盜接有線電視訊號，以及非法影印教科書等。報告指出，台灣在2009年通過著作權法修正案，要求網路服務供應商（ISP）負起通報和打擊網路侵權的責任，作為交換民事免責的條件，但至今仍未貫徹實施。報告還特地在「技術性貿易障礙（T e c h n i c a l Barriers to Trade）」章節中，列出許多其它問題，包括：農業議題：美國貿易代表署特別點出，台灣在 2010年無視於科學證據和風險分析，針對美牛通過管控規定，卻未履行2009年和美國簽署議定書時同意對美牛產品擴大開放市場的承諾。美豬也是貿易障礙，儘管世界貿易組織（W T O）已在 2007年表示有意訂定豬肉中的飼料添加物萊克多巴胺最大殘留安全容許量（MRL），台灣並未因而採納。生技成分強制標示：這部分是針對基改食品的規定。據美國貿易代表署指出：「台灣現行的生技成分標示作法和考慮採取的較嚴格政策，似乎並非以科學為基礎，對美國相關業者構成龐大負擔，且可能因此造成成本上升，引發消費者關切。」玩具：台灣針對泡綿玩具的甲醯胺含量和兒童用品的鄰苯二甲酸酯含量採取新檢驗規定，引發美國關切，認為並不符合國際慣例。美國貿易代表署報告指出，要求檢驗「玩具中可能並不存在的甲醯胺，對製造商而言是既麻煩又所費不貲的任務」。美國貿易代表署對下列其它數項議題採取繼續監控與觀察事態發展的立場。化妝品：台灣化粧品衛生管理條例修正草案中有關產品批准程序、產品宣稱和廣告，以及牙膏、口腔芳香劑、防曬乳等含藥化妝品效能的規定，引發業界關切。化學製品：台灣環保署和勞動部最近採行新的化學物質登錄系統。美國貿易代表署報告指出，美國政府對於法規適用範圍和商業機密保護都有所疑慮，此外也將繼續和台灣相關機關交涉，促使前述兩套監管系統能「盡可能」協調一致。醫療器材：美國貿易代表署報告指出：「美國相關業者和貿易官員都鼓勵台灣採行彈性機制，以達成下列目標：一、放寬產品以自費或差額負擔器材上市的限制；二、提供台灣消費者使用先進醫療器材的多種選擇；三、制定清楚易懂的自費指南，讓病患能在健保給付價格確定前就先使用新器材。」美台2015年貿易暨投資架構協定聯席委員會（TIFA Council）會議預定在台北舉行，但召開時間仍未定。

— 撰文／沙蕩 12

taiwan business topics • may 2015

Issues

Improving Government Contracts for IT Services

n its Taiwan White Paper submissions in recent years, AmCham Taipei’s Technology Committee has called on the government to better define the scope and limitation of damages and service-level penalties in its model contract for IT services, as well as to determine the copyright ownership of vendor proposals based on the nature of the project. After numerous discussions, the government has now agreed to revise the clauses in the model contract related to limitation of liability within one year. The Committee’s proposal for amending the model contract has been to stipulate that damages should not exceed the total contract amount and that the IT service vendor’s liability should not include derivative losses of the contractor. But so far the government has not indicated that copyright ownership of vendor proposals will also be reconsidered. The current model contract clearly defines that the copyright ownership of vendor proposals should belong to the government, once the bid has been granted. But some proposals originate from vendors’ existing knowhow and copyrights. When that is the case, it is reasonable that ownership of the copyright should be retained by the vendor. The Committee has pointed out that lack of flexibility on this point has held back the Taiwan public sector’s ability to adopt new IT technologies.

提升政府資訊服務採購程序

台

北市美國商會科技委員會在近幾年的白皮書當中，呼籲政府適切在資訊服務採購契約裡定義廠商損害賠償與服務績效違約金的範圍及限制，並且依廠商建議書個案的性質決定其著作權歸屬。經多次討論，政府已同意在一年之內修訂資訊服務採購契約範本有關賠償責任的條文。委員會對於修訂採購契約範本的建議，在於規定損害賠償不應超過契約總金額，而且廠商的責任不應包含其他衍生性損失之賠償。但到目前為止，政府尚未表明將一併重新考量廠商建議書的著作權歸屬問題。現行契約範本明確規定，一旦廠商的建議書經機關核定，建議書的著作權應屬政府所有。但有些建議書來自於廠商原有的技術與著作權，在這種情況下，由廠商保有著作權是合理的做法。委員會指出，在這方面欠缺彈性，已使得台灣公部門採納新的資訊科技的能力受到限制。

— 撰文/沙蕩

— By Don Shapiro

Setting the Wrong Standard The proposed approach to regulating meal replacement foods would create some serious problems.

eal replacement formula foods and beverages are used most commonly by dieters looking to shed some weight. The product is intended to be only a partial replacement for conventional meals – not the sole contributor to one’s daily intake. Since the purpose is to substitute for only one or two meals a day, partial meal replacement foods are not formulated to provide 100% of all essential nutrients needed in the diet. Used as directed, such products have been clinically demonstrated in many countries as a safe and effective strategy for losing weight and for weight management. This approach helps to ensure an adequate supply of essential nutrients while limiting caloric intake. In Taiwan, Meal Replacement Formula Food (abbreviated as MR) has been classified under the Food Act as a “Special Nutrient Food.” Under the law, any food product with the claim of “Meal Replacement” must be registered with the Taiwan Food and Drug Administration (TFDA), and before being imported and sold in Taiwan must undergo human clinical trials to confirm their safety and efficacy, and then obtain TFDA pre-market approval.

制定錯誤標準規範代餐食品標準的草案可能造成嚴重問題。

代

餐配方食品和飲料是節食者最常用來減重的方法，代餐的用意都是作為替代常規膳食的一部分，而非作為個人每日攝食的單一來源。既然其目的是替代一日膳食的一到兩餐，部分取代餐食品配方就不會提供每日膳食所需的百分百營養素。只要依照產品指示食用，這類產品在許多國家經臨床上證實，已可作為減重和體重管理安全有效的策略。使用取代餐的方法有助於確保充分供應必需營養素，同時限制熱量攝取。

taiwan business topics • may 2015

Issues TFDA is now preparing to establish a Taiwan Meal Replacement Standard. But to the dismay of multinational companies marketing MR products in Taiwan, the standard as currently drafted sets highly complicated regulatory requirements, seemingly based on the assumption that the formula food would be the consumer’s sole source of nutrients over a long period of use. For example, each serving would have to provide one-third of all the nutrients in the Taiwan Daily Reference Intake Table, as well as a large amount of dietary fiber (which is not found in any other MR standard in the world). Under the proposed MR Standard, in addition, the formula itself would have to provide all the required nutrients, whereas in most countries it can be mixed with milk or other foods to meet the requirement. Multinational companies cannot be expected to reformulate their products simply to fulfill the regulations of a relatively small market such as Taiwan’s. Consequently, implementation of the Taiwan MR Standard as drafted would inevitably mean that international meal replacement foods will be pushed out from the Taiwan marketplace. Besides the inconvenience to consumers of losing access to known brands with well-established track records, the TFDA’s policy – by in effect discriminating against foreign products – arguably could also constitute a technical barrier to trade subject to dispute in the World Trade Organization. The draft standard also appears to be totally out of sync with the government’s recent efforts to burnish Taiwan’s qualifications for inclusion in the Trans-Pacific Partnership free-trade grouping by bringing domestic regulations into greater conformity with international standards and practices. — By Don Shapiro

在台灣，代餐配方食品（簡稱代餐）已被規範於食品法的「特殊營養食品」之下。根據法律規定，任何宣稱為「代餐」的食品必須向台灣衛生福利部食品藥物管理署（TFDA）辦理查驗登記，並在食品進口到台灣及販售之前，通過人體臨床試驗，以確定其安全性及效果，最後取得台灣衛生福利部食品藥物管理署上市前核准。台灣衛生福利部食品藥物管理署目前正著手建立台灣取代餐標準。但令在台行銷代餐配方產品的跨國企業氣餒的是，依照目前所擬定的草案要求，高度複雜的規範，似乎把配方食品當成消費者長期食用的唯一營養來源。例如，每一份代餐必須提供台灣每日建議攝取量1/3的營養素，並提供大量膳食纖維（這部分在世界各國取代餐配方食品標準都未見）。此外，根據草案所提的代餐標準，配方本身必須提供所有必需營養素，但多數國家的做法是，取代餐可以與牛奶或其他食物混合食用以達到這部分要求。訂定一套只適用於台灣單一市場的奇特規範，有關單位不應指望跨國企業為滿足像台灣這類相對較小的市而重新訂定產品配方。因此，若推行目前已草擬的台灣代餐標準，將意味著國際代餐食品會被逼退出台灣市場。除了讓消費者失去具備完善追溯追蹤系統知名品牌的不便之外，食品藥物管理局實際上歧視外國產品的政策，也可能構成貿易技術性壁壘，在世界貿易組織引起爭議。該草案標準似乎也與政府近來努力使國內法規更符合國際標準慣例，讓台灣被列入跨太平洋夥伴關係的自由貿易分組資格完全不同調。 — 撰文／沙蕩

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Cover story Defense

Maintaining Deterrence 維持嚇阻實力 BY timothY ferrY

photo : ap/wally santana

撰文 / 法緹姆

taiwan business topics • may 2015

Cover story Defense

Despite improved cross-Strait relations, China is continuing massive spending to build up its military capability, with taiwan remaining prominently in the PLA’s crosshairs. Can advanced weapons procurement and the implementation of “asymmetrical strategies” enable taiwan to meet the challenge of providing sufficient defensive strength?

儘管台海兩岸關係改善，中國仍繼續投入巨額國防經費，提升軍力，解放軍也依然以台灣為建軍的重要目標。採購先進武器與採行「非對稱戰略」，能否讓台灣克服提供足夠防衛力量的挑戰？

n the face of it, Taiwan’s chances of prevailing in an outright military conflict with China would not seem very promising. China’s economic might, with a GDP of US$10.36 trillion – US$17.63 trillion in Purchasing Power Parity (PPP) terms, according to the CIA – enables it to afford a defense budget that is now the second largest in the world, behind only the United States. Beijing’s announced defense budget will rise by 10% in 2015, to about US$145 billion, the fifth straight year of double-digit increases. The true expenditure is likely far higher, and China has launched modernization programs throughout its forces in order to “fight and win short-duration, high-intensity, regional contingencies,” according to the 2014 China Report of the U.S. Department of Defense, which states that China’s weapons buildup includes fifth-generation fighter aircraft, advanced missile technology, and even the launch of an aircraft carrier. In line with the longstanding aim of the People’s Republic of China (PRC) to bring Taiwan under its rule, the report adds that “preparing for potential conflict in the Taiwan Strait, which includes deterring or defeating thirdparty intervention,” – that is, the United

表面上看來，如果與中國發生全面的軍事衝突，台灣要占上風的機會似乎不是很大。根據美國中央情報局的資料，中國國內生產毛額達到10.36兆美元（以購買力平價估算是17.63兆美元），以這樣的經濟實力，中國在國防方面所能投下的預算在全球居第二位，僅次於美國。北京公布的 2015年國防預算達到1,450億美元，比去年增加 10%，這是中國國防預算連續第五年出現兩位數的成長。中國實際的國防經費可能比這個數字高出許多，而且據美國國防部發布的2014年中國軍力報告，中國在全軍推動現代化，以便能「在短時間、高強度的區域事端中作戰，並且取得勝利」。這份報告說，中國拓展軍力的作為包括發展第五代戰機、先進飛彈科技，甚至將有航空母艦下水。中華人民共和國長期的目標是要將台灣收歸北京統治，美國國防部的報告說，依據這個目標，「為台灣海峽可能的衝突預做準備，包括嚇阻或擊敗第三方（也就是美國）的干預作為，依

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taiwan business topics • may 2015

States – “remains the focus and primary driver of China’s military investment.” In stark contrast, Taiwan’s defense budget stands at a mere NT$319.3 billion (US$10.7 billion), according to Taiwan’s Ministry of National Defense (MND). Taiwan struggles to keep its aging air force airborne, with nearly a quarter of the fleet comprised of Vietnam War-era F-5 fighter jets or hardto-maintain French-built Mirage 2000s, while two of the nation’s four submarines date back to World War II and the other two are not much newer. At one time Taiwan could offset its smaller size with advanced weaponry, but China has closed the technological gap in many regards and now employs many weapons systems that are newer, more sophisticated, and more numerous than what Taiwan has available. Military analysts in Taiwan say a Chinese invasion could be staved off for weeks or a month, providing time for the United States to come to the rescue. But many pundits question whether the United States would have the stomach for an armed conflict with China. They say that China’s advances in ballistic missile technology would now enable it to hit U.S. air bases in Okinawa and even Guam, along with aircraft carriers and other naval vessels. In 2009, defense research organiza-

然是中國軍事投資的焦點及主要的驅動因素」。根據台灣國防部的數據，台灣的國防預算僅新台幣3,193億元（107億美元），與中國相形見絀。台灣空軍戰機的妥善率僅能勉強維持，機隊當中有將近1/4是越戰時期的F-5或者是難以維修的法國製幻象2000型戰機。台灣有四艘潛艇，其中兩艘建於二次大戰期間，另外兩艘的年份也差不多。台灣軍力規模較小，這點過去曾因武器相對先進獲得彌補，但在許多方面，台灣在軍事科技領先的差距已經被中國趕上。中國如今有許多更新、更精密的武器，數量也比台灣更多。台灣的軍事分析家說，台灣可能抵擋中國的攻勢達幾個星期或一個月，讓美國有時間可以馳援台灣。但許多評論員懷疑美國會願意與中國發生軍事衝突。他們並且指出，中國在彈道飛彈科技取得的進展，如今讓他們可以攻擊琉球甚至關島的美軍基地，還有美國的航空母艦與其他海軍艦艇。美國國防研究機構蘭德公司在2009年做成結論說，中國憑藉俄製蘇愷27型戰機和國產的殲10多功能戰機，加上霹靂12型空對空飛彈與

Defense tion RAND Corporation concluded that with its Russian-made Su-27 and domestically produced J-10 multi-role fighter jets, along with PL-12 air-to-air missiles and short-range ballistic missiles (SRBM), China could prevail against even the latest in U.S. technology, the F-22 stealth tactical fighter jet. RAND estimates that despite higher kill ratios for U.S. fighters (as high as 27:1 for the F-22), China would be able to launch 3.7 times more sorties and win the war of attrition. Since that report was issued, the threat from China’s People’s Liberation Army (PLA) Air Force and Second Artillery, the unit in charge of the missile arsenal, has only increased as even more advanced weapons have come online. “The stark reality is that these days, there is not much the U.S. can realistically do to help Taipei stand up to serious pressure from Beijing,” argues Hugh White, professor of strategic studies at the Australian National University in Canberra, in a widely circulated op-ed piece in the South China Morning Post.“China is simply too important economically, and too powerful militarily, for anyone to confront it on Taiwan's behalf.” The above is the bleak assessment of Taiwan’s defense situation given by many experts in military and international affairs. But are Taiwan’s chances in a military confrontation really so hopeless?

短程彈道飛彈，可能可以戰勝美國最新的F-22匿蹤戰術戰鬥機。蘭德公司估計，美國戰機擊落敵機的比率雖然比較高（F-22達到27比1），但中國可以出動的架次是美國的3.7倍，可藉此贏得消耗戰。這份報告發布之後，中國解放軍空軍與二砲部隊（即飛彈部隊）的威脅有增無減，因為有更多的先進武器已經部署。坎培拉澳洲國立大學略研究教授懷特在南華早報發表的一篇文章，被廣為流傳。他在文章中說：「明顯的事實在於，當前美國沒有什麼實際的辦法，能幫台北抗拒來自北京的嚴重壓力。」他說：「中國經濟地位太重要，軍力太強，沒有人會因為台灣不惜跟中國對抗。」以上是多位軍事與國際事務專家針對台灣國防形勢所做的悲觀評估。但如果發生軍事對峙的局面，台灣是否真的如此沒有希望？有好幾個理由可以不必悲觀。事實上，雖然中國針對台灣部署眾多武器，但近代歷史顯示，在一方的力量遠大於對方的「非對稱性戰爭」中，較弱的一方往往可能獲得勝利。中國軍事理論家楊少華在《中國國際政治》期刊發表一篇標題為「弱國如何取勝」的論文。他在文章中說，

inFoGRapH ic by James cHaRD

有好幾個因素可以讓較弱的一方獲勝。較弱的國家如果有較強的動機，而且很願意為了保衛本身的自治而受苦，就是獲勝的關鍵因素，此外還有較強的一方缺乏決心或承擔對峙成本的意願，如果這較強的一方如果是個民主國家，就更容易出現這種情況。如果較弱的一方有更有力的友邦出面協助，也會是個因素。但楊少華指出，最關鍵的因素是較弱的一方所採取的戰略。他寫道：「在非對稱的衝突中，較弱的一方選擇何種戰略，對最後的結果具有關鍵的決定性。如果較弱的一方採取非對稱戰略，則獲勝的比率達到91.7%。」「非對稱戰略」常用來指游擊戰或恐怖行動，但其實可以指許多不同的做法。2008年，美國海軍戰爭學院教授莫瑞發表論文，題目是「重新探討台灣的國防戰略」，文章在軍事圈引發諸多討論。他在文章中說，台灣不應該為了直接因應中國的空襲，投資購買高能見度的武器，而應該以更多經費購買能讓台灣在海岸附近擊退進犯敵軍的武器系統。他舉中國的潛艦能力與進步的飛彈為例說：「中國近來的軍事現代化已根本改變台灣的安全選項。」他並寫道，中國已有能力以海軍包圍台灣，並且以彈道及巡弋

taiwan business topics • may 2015

cover story Defense There are several reasons to think not. In fact, despite the massive arsenal poised against Taiwan, recent history suggests that in an “asymmetrical war,” in which one power is far stronger than the other, the weaker power is often likely to come out on top. C h i n e s e m i l i t a r y t h e o r i s t Ya n g Shaohua, in a paper for the Chinese Journal of International Politics entitled “How Can Weaker Powers Win,” observes several factors that can contribute to success for the weaker side. Higher motivation and great willingness to suffer

on the part of weaker powers in defense of their autonomy are critical factors, as is the lack of resolve or willingness to bear the costs of a confrontation on the part of the strong state, particularly if the strong state is a democracy. Help for the weak actor from more powerful friends is also a factor. But Yang notes that the most critical element is the strategy employed by the weak power. “The type of strategy the weaker power selects is critical to determining the final outcome of an asymmetric conflict,” Yang writes. “When the

The PRC’s China Aerospace Science and Technology Corp. showed off its newly developed CX-1 supersonic anti-ship cruise missile (shown here) and M20 ground-to-ground missile weapon system at last December’s Zhuhai Air Show.

weak power opts for an asymmetric strategy, its ratio of victory reaches 91.7%.” Though the term “asymmetric strategy” is often used to refer to guerilla warfare or terrorism, it can actually mean a number of different kinds of approaches. In 2008, William Murray, a professor at the U.S. Naval War College, published a paper entitled “Revisiting Taiwan’s Defense Strategy” that shook up the defense world by saying that rather than invest in high-profile weaponry aimed at countering a Chinese aerial bombardment head-on, Taiwan should invest more in weapon systems aimed at repelling an invasion near Taiwan’s shores. “China’s recent military modernization has fundamentally altered Taiwan’s security options,” he wrote, citing China’s submarine capabilities and advanced missiles. He added that China’s ability to encircle the island with its navy and hit targets accurately with ballistic and cruise missiles have deprived the island of the advantage of geographic distance from China. Murray therefore suggests that Taiwan can no longer counter these threats in a “symmetrical manner” with anti-missile defense systems, submarines, warships, fighter jets, and P-3 maritime patrol aircraft. Instead, he wrote, Taiwan must “rethink

photo : cna

飛彈精準打擊目標，使台灣失去地理距離的優勢。他因此認為，台灣不能再以反飛彈系統、潛艇、軍艦、戰機和P-3海面巡邏機等「對稱方式」因應這些威脅。他寫道，台灣必須「重新思考並規劃它的國防戰略，強調防守方的非對稱優勢，設法不讓中國達成它的戰略目標，而不是企圖摧毀對方的武器系統。」他主張，這樣的「刺蝟戰略」可讓台灣以低廉許多的代價，獲得較高的安全性。但這個觀念並未被廣泛接受，例如美國國防智庫2049計畫研究所的研究員伊斯頓以電子郵件告訴Taiwan Business TOPICS 說，「刺蝟戰略是要給最後會打敗仗的國家。」他寫道：「這個概念比較適合北韓和伊朗，因此台灣沒有接受這個概念，也不會接受。」但另一方面，國防專家費學禮表示，許多分析家認為莫瑞的建議是「常識」，而且台灣在美國國防部的鼓勵之下，已經採納莫瑞的多項建議，例如採購小型攻擊快艇與快速修補跑道的設備、強化機棚與指揮管制中心等關鍵設施，以及自主研發非對稱性武器。費學禮等多位分析家認為，有關高科技或低科技的辯論，「對台灣來說是個不存在的問題」。他在電子郵件中表示：「台灣肯定需要實力足以擊退進犯敵軍的陸軍與民兵，但也需要對抗飛彈與敵機攻擊 18

taiwan business topics • may 2015

的能力，並且要能夠在敵軍從空中和海上到達台灣之前予以反擊。刺蝟戰略的目標是要讓北京相信進犯台灣肯定會失敗，藉以達到嚇阻的效果，但如果沒有高科技的長程武器系統，北京領導階層有可能因為台灣高科技防禦能力降低，而加速他們進犯台灣的計畫。」

有效嚇阻中華民國國軍的戰略構想是「防衛固守，有效嚇阻」。台灣與美國許多熟悉情況的評論員認為，台灣其實有良好的軍備，可以針對中國的攻擊展開堅強的防禦。伊斯頓去年在為2049計畫研究所撰寫的文章中說：「外界說法與事實相反，台灣有能力不讓中國取得空中優勢，而且可能在未來很長時間維持這個能力。台灣讓中國無法完全掌握空優，就可以提高中國對台灣進行海上封鎖或兩棲進犯的代價，使得中國不敢有這些企圖。」伊斯頓這篇文章的題目是《神射手：精準打擊時代的台灣防衛策略》。據伊斯頓說，台灣在美國協助下，正在建立「可能是全球最堅強的防空及飛彈防禦網路」，包括早期預警雷達、情報偵察與蒐集設備、飛彈防禦系統、戰機升級、強化空軍基地防禦與韌性的措施，甚至無人飛機等。台

Defense and redesign its defense strategy, emphasizing the asymmetrical advantage of being the defender, seeking to deny the People’s Republic its strategic objectives rather than attempting to destroy its weapons systems.” Murray contends that such a “porcupine strategy” would provide Taiwan with greater security at a far lower price tag. But the concept has hardly been universally accepted. Ian Easton, for example, research fellow at the Project 2049 Institute, a U.S.-based defense t h i n k - t a n k , t o l d Ta i w a n B u s i n e s s TOPICS by email that “porcupine strategies are for countries that will lose in a war.” Wrote Easton: “It’s an idea better fit for North Korea and Iran.” On the other hand, defense specialist Richard Fisher says that many analysts c o n s i d e r M u r r a y ’s p r o p o s a l s t o b e “common sense,” and that Taiwan – with the encouragement of the U.S. Department of Defense – has undertaken many of Murray’s recommendations such as the procurement of small, fast attack boats and Rapid Runway Repair kits, the hardening of critical facilities such as airbase hangars and Command and Control (2C) centers, and the development of indigenous asymmetric weapons. Fisher, along with many analysts, considers the debate between high- and low-tech “a false

choice for Taiwan.” “To be sure, Taiwan requires an Army and Militia powerful enough to repel an invader but it also requires the ability to repel missile and air attacks and counter air and seaborne invasion forces before they reach the island,” he noted in an email. “The goal of Porcupine is to achieve deterrence by convincing Beijing that an invasion will surely fail, but by removing high-tech long-range combat systems, there is a danger that Beijing’s leadership will regard any reductions in high-tech defenses as an invitation to accelerate their invasion plans.”

Credible deterrent The ROC armed forces operate under the doctrine of “resolute defense, credible deterrent,” and many knowledgeable commentators in Taiwan and the United States consider that Taiwan in fact is well-equipped to mount a staunch defense against a PRC attack. “Contrary to reports, Taiwan has the capacity to deny air superiority to China, and it is likely to maintain this capability well into the future,” Easton wrote last year in a paper for Project 2049 entitled Able Archers: Taiwan Defense Strategy in an Age of Precision Strikes. “By denying China uncontested control over the air

灣也計劃採購下一代匿蹤戰機，而且似乎決心自行建造潛艦。他指出：「增強空防與飛彈防禦，對於抵消中國對台灣可能發動的攻擊來說極為重要。」但台灣需要更加努力。雖然中國的威脅十分明顯，但台灣2009到2014年的國防支出卻平均每年減少1.6%，國防部所提的2015年預算也只增加2.6%。台灣的國內生產毛額為5,050億美元（以購買力平價計算是1.02兆美元），與中國相比是小巫見大巫，因此無法趕上中國在軍事方面的支出，但基於好幾個理由，台灣國防支出相對下滑的現象，讓國際軍事專家感到憂心。亞洲海事透明計畫與戰略暨國際研究中心去年聯合發表一篇文章，題目是《台灣國防支出：先經濟、後國防對安全的後果」。文章主旨在於說明台灣國防經費減少，會「使台灣較難維持有效嚇阻攻擊的能力」，因此可能「對北京提供迫使台灣統一的誘因」。國防支出減少也會「讓人質疑台灣自衛的決心」。這篇文章說，如果有這樣的質疑，有可能「影響」美國在台灣遭到攻擊時採取因應措施的意願。台灣在面對中國強大的威脅時，是否過於安逸？經過民主進步黨籍陳水扁總統2000到2008年任期的風風雨雨，馬英九總統的中國國民黨政府努力緩和台海兩岸之間的關係。台灣與中國的經濟與社會關係在過去

domain, Taiwan can raise the costs of a maritime blockade or amphibious invasion attempt to a prohibitive level.” According to Easton, Taiwan, with help from the United States, is building “what may be the world’s most robust air and missile defense network,” including early-warning radar, intelligence surveillance and reconnaissance (ISR) assets, missile defense systems, fighter jet upgrades, airbase hardening and resiliency, and even UAVs (unmanned aerial vehicles). Taiwan also plans to acquire next-generation stealth combat aircraft and seems intent on building its own submarines. “Improved air and missile defense is crucial to undermining potential PRC aggression,” Easton notes. More needs to be done, though. Despite the clear threat presented by C h i n a , Ta i w a n ’s d e f e n s e s p e n d i n g between 2009 and 2014 declined by an average of 1.6% annually, while the 2015 defense budget submitted by MND calls for a modest 2.6% increase. With a GDP of US$505 billion (US$1.02 trillion PPP), a small fraction of the PRC’s, Taiwan cannot afford to bridge the gap in defense spending. Still, the relative declines in Taiwan’s military spending worry international defense experts for several reasons. T h e A s i a M a r i t i m e Tr a n s p a r ency Initiative and the Center for Stra-

7年更趨密切，兩岸開始直航和簽署經濟合作架構協議可為例證。中國如今是台灣的最主要貿易夥伴，台灣外來觀光客也以中國民眾占最大宗。中國在南海主張主權的動作越來越大，而美國與菲律賓進行聯合演習以展示武力做為回應，相較之下，台海做為潛在衝突點的嚴重性，近來已經有所降低。要因應中國的威脅，似乎是非常嚴竣的挑戰，而毫無疑問，這是另一個會影響台灣民眾態度的重大因素。據說中國以1,100枚短程彈道飛彈和200到500枚攻擊地面巡弋飛彈對準台灣，此外還有少數中程彈道飛彈也以台灣為目標。中國也在部署配備武器的無人飛機，並且大幅提升反艦巡弋飛彈能力，其中有許多飛彈可以從潛艇發射。伊斯頓說，中國的武裝無人飛機可能當成誘餌，目的是在台灣的防禦系統製造空隙。中國可以利用飛彈對台灣的空軍基地、軍港和指揮管制中心展開第一回合攻擊，造成嚴重的破壞。中國沿岸部署的短程飛彈射程達300公里，幾乎涵蓋台灣每個角落，可以在6分鐘以內打到目標。中國攻擊台灣最可能採取的方式，是先以飛彈對軍港和空軍基地發動閃電攻勢。有鑑於此，台灣在最近幾年對空軍基地進行強化，做法是在山腳下挖鑿停機棚，或在機棚上覆蓋鋼筋混凝土。台灣有460架戰機，包括64

taiwan business topics • may 2015

cover story Defense

Taiwan’s National Chung-Shan Institute of Science and Technology last December gave the media a look at its “Skybow” missile defense system and Hsiung Feng anti-ship missiles. photo : cna

tegic and International Studies last year jointly published a paper entitled, “Taiwan’s Defense Spending: Security Consequences of Choosing Butter over Guns.” The theme is that reduced defense spending could “provide incentives for Beijing to pressure Taiwan” for unification by “diminishing Taiwan’s ability to maintain a credible deterrent against an attack.” Low defense spending also “raises questions about Taiwan’s commitment to its own defense,” which

the paper suggests could have “implications” for U.S. willingness to respond to an attack upon Taiwan. Has Taiwan become too complacent in the face of such a powerful threat? After the tumultuous presidency of the Democratic Progressive Party’s Chen Shui-bian from 2000 to 2008, the Kuomintang administration of Ma Ying-jeou has striven for détente across the Strait. The opening of direct aviation links and signing of an Economic Cooperation

架幻象2000型戰機、160架F-16和123架台灣自行建造的IDF經國號戰機，它們可能可以在第一波飛彈攻擊之後存活，但如果機場跑道受損，戰機將無法起飛，或者如果戰機已經升空，將會無法降落。繼飛彈攻擊之後，中國的多層飽和式攻擊可能包括以戰機和轟炸機進行空襲，最後派兵登陸。其實台灣已經採取重要步驟，以因應這些潛在威脅。第一個步驟是情報作為，包括信號情報、電子情報、雷達系統、網際網路偵察以及情報人員網路。2012年，台灣在早期預警系統中增加了新的超高頻雷達。它位在台灣西北部山區的一個戰略位置，據說是美國「鋪路爪」彈道飛彈防禦雷達的改裝版。伊斯頓說，這可能是「史上最強大的地面雷達系統」。台灣也投入大筆經費建構彈道飛彈防禦系統，包括地對空飛彈，特別是美製愛國者3型高性能飛彈防禦系統。台灣北部目前已經部署3套愛國者3型飛彈，不久之後將為中部和南部添購6套。台灣也有自製的天弓地對空飛彈系統。立法院最近並同意撥款新台幣748億元將天弓系統提升到被認為可以媲美愛國者飛彈的第三代。台灣還有其他反飛彈武器，包括配備在驅逐艦、巡防艦、直升機與部署在地面上的飛彈。中國對台灣發射的飛彈當中，至少會有一些將擊中台 20

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Framework Agreement (ECFA) exemplify the increased economic and social ties of the past seven years. China is now Taiwan’s largest trade partner and also sends the biggest contingent of tourists to the island, surely signs of continuing good relations. With American and Philippine forces engaged in war games described as a show of force against China’s increasingly aggressive assertion of maritime claims in the South China Sea, the Taiwan Strait has drifted into the background as a potential flashpoint of late. Another significant factor in shaping public attitudes in Taiwan is undoubtedly the seemingly huge scale of the challenge. China reportedly has 1,100 short-range ballistic missiles (SRBM) and 200-500 land attack cruise missiles (LACM) aimed at Taiwan, along with a small number of medium-range ballistic missiles (MRBM). The PRC is also deploying armed Unmanned Aerial Vehicles (UAV), which Easton theorizes might be used as decoys to create gaps in Taiwan’s defense network, and has dramatically increased its anti-ship cruise missile (ASCM) capabilities, many of which are launched from submarine platforms. China’s missile arsenal provides it with the ability to launch a devastating first-round attack against Taiwan’s airbases, naval ports, and command-and-

灣的目標機場，為了因應這種無法避免的情況，台灣已投入可觀經費購買美國研發的跑道快速修補裝備，台灣的部隊已接受美國廠商的訓練，到時可以有效使用這些裝備。

威脅評估每當有跟台灣的國防有關的新聞報導出現時，部落格評論與報導的讀者回應往往是以一項假設為出發點，那就是台灣對美國外交政策的戰略重要性不高，而且中國的軍力強到無法超越。連真正的軍事專家，也強調美軍馳援台灣必須付出的代價，而且許多人懷疑美國民眾是否會支持介入。美國空軍少校麥卡錫曾為美國海軍戰爭學院寫過一篇文章，題目是《反介入／區域阻絕：現代戰爭的演進》。他在文中指出，雖然中國的國防預算與戰力不如美國，但它已建立的防衛傘 -- 包括從地面與利用潛艦發射的飛彈，射程遠達關島等西太平洋目標 -- 代表中國「具有在戰爭史上從來沒有其他國家面對過的防禦能力，包括美國在內」。麥卡錫的結論是，雖然有可能在與中國交戰時取得上風，「要想在這個戰區部署並取得空中及海上優勢，可

Defense control centers. SRBMs launched from coastal China, with a 300-kilometer range that includes nearly all of Taiwan, could reach their targets within less than six minutes. The most likely scenario for an attack on Taiwan involves a lightning missile strike on naval ports and airfields. In view of that threat, Taiwan in recent years has hardened its airbases by burying hangars under mountains or tons of reinforced concrete. Taiwan’s fleet of 380 aircraft – including 64 Mirage-2000 fighters, 160 F-16s, and 123 locally made IDFs – might survive the bombardment, but if runways are unavailable they could not take off, or if already in the air, would have nowhere to land. The multi-layered saturation bombing would likely be followed by further aerial bombardment from fighter jets and bombers, and then ultimately the landing of Chinese troops. Taiwan has in fact taken major steps to counter these potential threats. The first step is intelligence, including signal intelligence (SIGINT), electronic intelligence (ELINT), radar systems, cyber reconnaissance, and human intelligence networks. In 2012 Taiwan introduced a new ultra-high frequency (UHF) radar into its early warning system. Strategically situated in a mountain in northwest Taiwan, this radar system reportedly is a

modified version of the U.S. “Pave Paws” ballistic missile defense radar. Easton observes that it may be “the most powerful ground-based radar system ever built.”

Missile defense systems Taiwan is also investing heavily in its ballistic-missile defense systems, including SAMs (surface-to-air missiles) and especially Patriot Advanced Capability-3 (PAC-3) missile defense systems from the United States. Three of these units have already been deployed in northern Taiwan, and six more will soon be acquired for the central and southern parts of the island. Taiwan also has its own indigenously produced Tien Kung (Skybow) SAM systems. The Legislative Yuan recently appropriated NT$74.8 billion (US$2.5 billion) for upgrading to the third-generation Tien Kung (TK-3), which is considered comparable to the PAC system. Other antimissile weaponry in the Taiwan arsenal include missiles mounted on destroyers and frigates, on helicopters, and on the ground. To counter the inevitable prospect of at least some SRBM warheads reaching their targeted airfields, Taiwan has further invested heavily in U.S.-developed Rapid Runway Repair kits, and Taiwanese troops have been trained by

能得付出二次大戰以來最高的人命與物質代價」。軍事分析家稱這個防禦傘戰略為「反介入／區域阻絕」，它的起源是中國對美國在1990到1991年對伊拉克展開「沙漠風暴」行動的觀察。當時美軍充分掌握空中與海上優勢，地面的作戰行動毫不費力。麥卡錫寫道：「（中國）軍方領導人相信，一旦與美國開戰，必須阻斷或消除美軍的部署行動，並且要研發和部署能夠達成這項任務的能力。」他說，中國在部署這些戰略資源的作為相當成功，「就像1940年德軍的閃電攻勢使戰爭改觀，反介入／區域阻絕的技術和戰略也為現代戰爭的性質提供了新的定義」。根據分析家對非對稱戰爭本質的看法，如果衝突的戰略價值存有疑義，美國這樣的民主國家就很難承擔戰爭的代價。捍衛亞洲民主的動機，可能沒有強到足以讓美國持續對中國作戰。但支持台灣的分析家指出，台灣其實依然是美國的核心戰略利益所在，如果放任台灣遭中國侵略，不但不會讓實力逐漸竄升的中國感到滿足，反而會助長中國的侵略野心，使整個區域陷入不穩的情勢。國防專家寇謐將最近在《國家利益》雜誌發表文章，題為《別讓中國吞下台灣》。他警告說：「放棄台灣可能會激勵中國的擴張野心，同時讓它有更多工具可以進

American contractors on how to use them effectively. The numerous armchair defense analysts pervading the blogosphere and the comment section of any online news story on Taiwan’s defense often start from the assumption that Taiwan is not strategically significant to U.S. foreign policy concerns and that China’s military power is insurmountable. Even genuine military experts stress the cost that the United States would have to bear in coming to Taiwan’s rescue, and many wonder whether the American public would support the effort. In a paper for the U.S. Naval War College entitled “Anti-Access/ Area Denial: The Evolution of Modern Warfare,” U.S. Air Force Major Christopher J. McCarthy notes that while China’s defense budget and fighting capabilities trail those of the United States, the defense umbrella it has built up – comprised of surface- and submarinelaunched missiles that can reach as far into the Western Pacific as Guam – represents “a level of defensive capability not experienced by any military in the history of warfare, including the U.S.” McCarthy concludes that while it is possible to successfully engage China, “attempts to deploy into the theater and gain air and maritime superiority likely

行擴張。」他說：「台灣是世界第19大經濟體，如果遭到中國併吞，中國的國力將進一步提升，並且將在廣闊的西太平洋取得一艘『不沈的航空母艦』。」寇謐將是民進黨主席蔡英文旗下小英教育基金會的一位高層主管，他認為，如果台灣被中國併吞，「中國將會有一個新的陣線，可以對付日本和菲律賓，遑論美國在區域內部署的軍力」。費學禮認為，放棄台灣會是使東亞情勢出現不穩的重大事件，對美國的安全將會有直接影響。他以電子郵件向TOPICS指出：「摧毀台灣的民主之後，中國可能開始決定在全球與民主對抗。」他並說：「中國已經在與全球多數的獨裁政權結為盟友。」更重要的是，台灣如果遭到併吞，可能使這個區域陷入新的核武競賽。費學禮說：「中國如果拿下台灣，將把它變成核武基地，以及向全球投射武力的基地。」因此，「日本和南韓將會發展他們自己的核武，澳洲、越南將會跟進，此外可能還會有其他國家。中國到時將加強打造核武實力，並且認為它可以在核戰中取勝，導致核武衝突的可能性大為升高。」他說，到時美國必須決定「是要幫盟友發展核武，或者放棄盟友」；「美國的領導者從1945年以來，始終讓亞洲不致出現戰略混亂的狀態」，但如果台灣被中國

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Cover story Defense will result in loss of life and material to levels not experienced since World War II.” This defensive shield strategy, dubbed “Anti-Access/Area Denial” (A2/D2) by military analysts, was born of China’s observation of the ease with which the United States invaded Iraq during Desert Storm in 1990-91, due to the full control U.S. forces exercised over the air and maritime space. “Military leaders concluded that in the event of a war with the United States, the U.S. military deployment process must be disrupted or neutralized, and have successfully developed and fielded military capabilities designed to fulfill this need,” writes McCarthy. China has been so successful in deploying these strategic resources that “just as Blitzkrieg changed combat in 1940, anti-access/area denial technologies and strategies have re-defined the character of modern warfare,” he argues. In line with analysts’ observations of the nature of asymmetrical warfare, a democratic power such as the United States would have great difficulty sustaining such losses from a conflict whose strategic value was questionable. Defending democracy in Asia might not be enough motivation to continue such operations. Pro-Taiwan analysts, however, note that in fact Taiwan remains a core stra-

tegic asset for the United States and that abandoning Taiwan to Chinese aggression, rather than serving to appease the rising superpower, would in fact fuel its appetite for further expansionism, destabilizing the region. “Abandoning Taiwan would likely encourage Chinese expansionism while giving it more tools to do so,” warns defense expert J. Michael Cole in the recent article, “Don’t Let China Swallow Taiwan,” for The National Interest. “The annexation of Taiwan would further contribute to China’s might by adding the world’s 19th largest economy to its national power while providing Beijing with an ‘unsinkable carrier’ facing an open Western Pacific.” Cole, a senior officer of the Thinking Taiwan Foundation led by DPP Chairperson Tsai Ing-wen, views this eventuality as providing “China with a new front from which to confront Japan and the Philippines, not to mention U.S. forces deployed in the region.” Richard Fisher sees abandoning Taiwan as a significant destabilizing event in East Asia that would have direct implications for the security of the United States. “Destroying Taiwan’s democracy could mark the beginning of the Chinese Communist Party’s decision to counter democracy globally,” he noted in an

併吞，美國將必須面對如何在這種狀態中捍衛美國利益的挑戰。中國實力竄升讓世界各國留下深刻印象，但許多支持台灣的人士表示，中國的宣傳攻勢讓外界高估解放軍的作戰能力，也降低了對中華民國國軍的期待。寇謐將在專為小英基金會撰寫的報告中說，「北京對台灣進行持續的宣傳與政治作戰攻勢」，目的在「打擊台灣軍隊的士氣，破壞國軍在國內與海外的名聲，並且讓台灣的民眾和台灣的盟友認為抵擋中國將徒勞無功」。他這份報告的題目是《台灣軍事改革與人民解放軍的政治作戰》。伊斯頓在他的電子郵件中也說，中國企圖表現出的自信度，遠遠超過他們實際的信心。他說：「你必須深入一些，才能真正瞭解解放軍對台灣的看法。你看得深入，就會知道解放軍怕中華民國的軍隊，也怕太平洋美軍司令部。」無論中國是以弱國的角色打非對稱戰爭，例如跟美國較量，或者是以強國的地位跟台灣作戰，評論員往往預期中國可以打贏，可能的原因在於他們高估了中國的作戰能力。美國做為民主國家，對於死傷的敏感度肯定遠超過中國當局，但中國是否就可以不用面對民眾的反彈？特別是在一胎化政策的背景下，一旦與台灣發生衝突，當微博和其他社群媒體平台開始流傳屍袋從中國軍 22

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email, observing that China “is already allying itself with most of the world’s dictatorships.” Even more significantly, Taiwan’s fall could thrust the region into a new nuclear arms race. “After taking Taiwan, China will then turn it into a nuclear weapons base and a base for global power projection,” he wrote. Conseq u e n t l y, “ J a p a n a n d S o u t h K o r e a would build their own nuclear weapons, followed by Australia, Vietnam, and perhaps others. China will then redouble its nuclear weapon building, thinking it could win a nuclear exchange, making such conflicts far more possible.” At that point, the United States would have to decide “whether to help its allies to nuclearize or to abandon them,” Fisher continued. It would be faced with the challenge of how to defend American interests “in a period of strategic chaos in Asia which its leadership had prevented since 1945.” China’s rising power has made a strong impression on the world, but many in the pro-Taiwan camp say that Chinese propaganda has led to a major over-estimation of its war-fighting capacity, and consequently diminished expectations regarding the ROC military. “Sustained propaganda/political

艦上搬下碼頭的畫面，中國彼此緊密連結而且中產階級性質越來越強化的社會將會有何反應？最終的問題不在於中國受到的限制，而是在於中國的長程戰略目標。台北淡江大學戰略研究教授黃介正說，中國外表看起來很強大，但其實尚未達到超級強國的地位，中國領導階層對此心知肚明。他以中國各地區發展程度的重大差異為例說，中國經濟尚未完全起飛。他說：「中國瞭解，要維持一黨專政，並且確保民眾『喜歡』獨裁，就必須要有持續的經濟成長。軍事衝突將會扼殺外來直接投資和商機。」他說，在此同時，北京也希望向世界顯示，中國不再是個弱國。他指出：「中國想要展現它的軍力，但不希望它的軍力受到測試。」黃介正說，中國需要進一步發展，因此台灣還有一些時間，但威脅並未消失。台灣要如何運用剩餘的時間，以緩和未來來自於中國的威脅？他提出兩個建議和一項警告。他說，台灣應該「採取大膽的步驟，把台灣的經濟提升到另一個層次」，並且「透過募兵制度把軍隊改革成為真正能夠打仗的武力」。他的警告是，在做這些努力的時候，「台灣在美國與中國之間必須有巧妙的拿捏，確保我們在與其中一方打交道的時候，不致激怒另一方，或使美國與中國的關係受到不利影響」。

Defense warfare campaigns unleashed by Beijing” toward Taiwan are intended to “undermine morale in the troops, destroy the reputation of the military at home and abroad, and convince the Taiwanese population, as well as Taiwan’s allies, that resistance is futile,” Cole wrote in a special report for Thinking Taiwan, “Taiwanese Military Reform and PLA Political Warfare.” Easton added in email correspondence that China is actually far less confident than it seeks to appear. “To really know how the PLA sees Taiwan, you have to dig deeper,” he advised. “When you do, you find that the PLA is scared of the ROC military, and they are scared of the U.S. Pacific Command.” An overestimation of China’s warfighting capability might explain why commentators tend to expect China to emerge victorious, both in asymmetrical war scenarios in which China is the weaker power, as in a conflict with the United States, or when it is the stron-

ger power, as in a conflict with Taiwan. Certainly a democratic United States would be far more sensitive to losses than authoritarian China, but is China immune from public reaction? How would China’s hyper-connected, increasingly middle-class society react when images of body bags offloaded from Chinese naval vessels start circulating on Weibo and other social media platforms during a conflict with Taiwan, particularly in light of the one-child policy? Ultimately, the question comes down not to China’s restraint but to its longterm strategic goals. Alexander Huang, a professor of strategic studies at Taipei’s Tamkang University, says that despite appearances, China has not reached authentic superpower status, and its leadership knows it. He points to extreme disparities in regional development as indicative of China’s incomplete economic rise. “China understands that to maintain one-party rule and make sure people ‘enjoy’ a dictatorship, you need to bring

continual economic growth,” he observes. “Military conflict will kill foreign direct investment and business opportunities.” At the same time, Huang says, Beijing wants to show the world that it is no longer a weak power. “China wants to posture its military might, but not test its military might,” he notes. China’s need for further development buys Taiwan some time, but doesn’t eliminate the threat, Huang concludes. How can Taiwan best use that time to mitigate the future threat from China? He offers two suggestions and one caution. Taiwan should “make bold moves to increase or upgrade Taiwan’s economy to another level,” he says, and it should “reform the military through a volunteer system to make it into a real fighting force.” In so doing, he warns, “Taiwan needs to walk a very fine line between the U.S. and China – and make sure that when we engage with one party we don’t antagonize the other or make the U.S.-China relationship suffer.”

FiGHteRs, submaRines, anD RaiLGuns

ith constrained budgets and few allies, Taiwan struggles to acquire the weapons it wants and needs for self-defense. Matching – or even coming close to matching – China in defense spending is clearly not an option for Taiwan. But as noted in the paper “Taiwan’s Defense Spending: The Security Consequences of Choosing Butter Over Guns,” published jointly by the Asia Maritime Transparency Initiative and the Center for Strategic and International Studies, simply maintaining a strong defense capability “can raise the cost and risk to the PRC of an attack, which would likely reduce the possibility that Beijing will opt to use military force to achieve its goals.” Critics, however, question whether Taiwan is doing enough to strengthen its armed forces to raise the deterrence level. Taiwan devotes slightly more than 2% of total GDP to the military; defense analysts urge that the level be brought closer to 3%. Building Taiwan’s arsenal is not simply a matter of spending more money, however. Taiwan’s unique diplomatic circumstances mean that the only country that will sell it weapons is the United States. Under the Taiwan Relations Act, the United States is obligated to provide defensive weapons to Taiwan. But while the island is among the top five markets for U.S. weapons, the United States is generally cautious about such sales so as not to aggravate China, as evidenced by the usual time lag of more

Fighter jets practice highway takeoffs and landings in the event of a bombardment that destroys runways during the annual "Han Kuang" war games in Taiwan last September, 2014. pHoto : ap/waLLy santana

than a decade between the first request for a particular weapons system and the final contract. Wendell Minnick, Asia bureau chief of Defense News, notes that by the time weapons are actually delivered, they are “normally 10 to 15 years too late.” But he says that despite the lag, the weapons systems procurements are still significant as a signal of U.S. support for Taiwan. taiwan business topics • may 2015

Cover story Defense The F-16 saga is a case in point. Taiwan’s Ministry of National Defense (MND) first requested new F-16 C/Ds to augment its fleet of fighters in 2007. Taiwan already has some 380 fighter jets, including 145 F-16 A/Bs acquired from the United States in the late 1990s, and the MND hoped that the more advanced version of the aircraft would give it fourth-generation capabilities to take on China’s growing fleet of advanced fighters. In addition, Taiwan’s air force hopes to retire its fleet of 60 costly Mirage 2000s and outdated F5s by the mid-2020s. The United States deferred the decision on sales of the C/ Ds for years. As a compromise, the United States has undertaken to upgrade the F-16 A/Bs that Taiwan already owns to a level known as the F-16S variant, with performance and weapons systems equal to or exceeding the F-16 C/D. Unfortunately, these upgrades don’t address the issue of insufficient total numbers of fighters. Nevertheless, Taiwan and the United States have managed to complete a number of defense deals over recent years. According to the U.S. Department of Defense, more than US$12 billion in arms sales to Taiwan have taken place since 2010. Many of the acquisitions reflect the influence of William Murray of the U.S. Naval War College, who has advocated a more localized defensive strategy. The MND, for example, has procured Rapid Runway Repair kits, along with the associated training, in an effort to keep planes operational even after airfields are bombarded by Chinese ballistic missiles. Last year the army took final delivery of 31 Boeing Apache AH-64 attack helicopters, the most advanced version of the Apache, costing some US$26 million each. Taiwan also began taking delivery of 60 UH-60M Blackhawk utility helicopters, the all-weather workhorse of militaries around the world. In line with President Ma Ying-jeou’s decision to expand the role of the military into disaster response in the wake of Typhoon Morakot in 2009, 15 of these Blackhawks will be diverted to the Ministry of Interior to be used purely for search and rescue. Taiwan has also made significant upgrades to its radar systems, including PAC-3 radar, has procured Stinger missiles, and taken delivery of the first three of an eventual 12 P-3C Orion antisubmarine surveillance aircraft. These acquisitions will go a long way in bolstering Taiwan’s defense against an invasion, but many analysts say they need to be supplemented by other weapons systems, particularly submarines. A deal originally proposed by the Bush administration in 2001 fell through, and today Taiwan still has only four subs, basically obsolete relics of the Cold War and even World War II eras. Recently MND announced that Taiwan will proceed with its own program to build submarines. In support of the plan, President Ma was quoted in the media as saying “the submarine is the most significant weapon for a country in building its naval defense capabilities. The military absolutely needs to acquire (new) submarines,” Skeptics question whether Taiwan actually has the technological capability to build its own submarine fleet. Although the island has one major shipbuilder – CSBC Corp., formerly the state-owned China Shipbuilding Corp. – and several yacht makers, building a submarine requires very specific technical capabilities. Australia’s problems building its Collins-class subs in the 1980s shows that even advanced nations struggle to success24

taiwan business topics • may 2015

fully build submarines. As one defense specialist observed, a submarine fleet would provide Taiwan with an excellent deterrent for Taiwan – but a sub that sinks, killing all on board on its maiden voyage, would have the exact opposite effect. On the other hand, many technologically backward nations have succeeded in building submarines, even Colombian drug lords. “Those who say it’s infeasible for Taiwan to develop indigenous submarines grossly underestimate the island’s engineering talent,” notes one Washington-based defense expert. Taiwan has produced a number of its own weapon systems, mostly through MND’s National Chung-Shan Institute of Science and Technology, including the highly rated Tien Kung “Skybow” missile defense systems, Hsiung Feng-II anti-ship missiles, and BVR Tien Chien-II (Sky Sword-II) missiles. Some of the indigenous weapons systems were developed in close collaboration with U.S. defense contractors. Creation of the Indigenous Defense Fighter (IDF) fighter jet was the result of cooperation with General Dynamics and Westinghouse, for example, and the submarine program will also need the help of numerous contractors. Among other priorities for Taiwan’s defense, military specialist Richard Fisher recommends advanced ISR (information, reconnaissance, and surveillance) capabilities. He sees Taiwan’s new UHF radar systems as a good start, but considers that this capability would be safer offshore. He also recommends “theater strike and theater combat” weapon systems that would give Taiwan the ability to destroy a gathering invasion force, and further suggests investing in railguns. Railguns use electromagnetic energy rather than explosives to hurl projectiles as fast as seven times the speed of sound. The concept of railguns actually dates back nearly a century, but recent technological developments have allowed this concept to become a reality. The latest version of a railgun, unveiled by the U.S. Navy this past February, reportedly can fire a projectile every six seconds at a range of up to 350 kilometers. “With rail guns, it becomes feasible to consider that Taiwan could take out half of China’s incoming missiles,” says Fisher. “Such a capability by Taiwan could extend realistic military deterrence for a considerable period.” He adds that Taiwan still needs greater “strategic depth” by expanding international military exchanges “via informal military cooperative arrangements,” and by “giving high firepower to police and militia forces” for a potential last-ditch effort to resist an actual invasion – the last stage of the “porcupine defense strategy.” Rupert Hammond-Chambers, president of the Washington-based U.S.-Taiwan Business Council, adds THAAD missile defense systems to the list. THAAD stands for “terminal (formerly theatre) high-altitude area defense” and has the advantage of being able to knock out ballistic missiles at a range of 200 kilometers and altitude of up to 150 kilometers, 20 to 100 times higher than a PAC-3. Hammond-Chambers, a frequent commentator on Taiwan-related defense issues, says that THAAD “would broaden the U.S., Japan, and Korea umbrella presently being created” and is “the final main piece of Taiwantheater missile defense infrastructure.” — By Timothy Ferry

Defense

VoLunteeR aRmy sHiFt CALLED INTO QUESTION

aiwan is attempting to shift from a conscript military to a volunteer, professional military in a very short time frame. Can the army recruit enough personnel to maintain a credible defense? In 1973, when United States began its transition from a conscript army to an all-volunteer force, no one was sure whether the move would succeed. Forty years on, the U.S. Army is considered the most agile, advanced, and lethal in the world, and has earned a high degree of regard and trust from U.S. citizens. Now as Taiwan tries to make this same transition with Chinese missiles staring down on it from across the Taiwan Strait, it doesn’t have the luxury of time. Instead, it would need to complete the project in as little as three or four years. Taiwan’s complex relationship with China and volatile domestic political environment, as well as the numerous scandals that have affected the military, only increase the complexity of recruiting and fielding a modern and effective armed forces. Volunteer armies are also costlier than conscript armies, as it takes better benefits and higher salaries to recruit soldiers. Taiwan has raised both benefits and pay, but is still lagging in recruitment – and with so few recruits, the army risks becoming top-heavy with officers. As explained by defense expert J. Michael Cole in a recent story for The Diplomat, originally the Ministry of National Defense (MND) set a goal of some 28,000 recruits annually, but in 2013, the first year of its recruitment drive, it only reached about one-third of that number. As a result, MND lowered its target to 10,000 soldiers in 2014 and actually managed to recruit 15,000. This year’s goal is 14,000, and as of April a third of the target had already been achieved. The low recruitment numbers have forced the MND to postpone conclusion of the transition from the original date of 2015 to 2017. Also, the planned total number of military personnel has been reduced. In 2012, Taiwan had 270,000 personnel in its armed forces, and the initial proposal called for an eventual force of 215,000. The revised target is 170,000 to 180,000. These reduced numbers have prompted some to question the wisdom of the transition. A survey released in April conducted by Academia Sinica reveals that a majority of Taiwanese in all age brackets want to return to the conscript-based system to “enhance (Taiwan’s) military strength.” “Now the military has the problem of too many commanding officers and too few soldiers,” said Democratic Progressive Party Legislator Hsiao Bi-khim in widely reported press comments. “According to the government’s current fiscal constraints and staff planning, it is not possible to convert to an all-volunteer military.” The MND responded by saying the process was irreversible, and Tsai Ing-wen, the DPP party chair and presidential candidate, later qualified that she supports the transition but thinks it

An honor guard performs during a recruitment program held last year in the square in front of the New Taipei City Government building. pHoto : cna

may need more time to be carried out. The obvious success of the U.S. military in creating a volunteer army provides some encouragement for Taiwan. But with only half of one percent of Americans having served during the previous 10 years of continuous conflict, the Pew Research Center in 2011 warned of a growing disconnect between the U.S. citizenry and their military. A conscript army is often seen as building national identity through the universally shared experience of helping defend the country. Considering that the endgame of an “asymmetric strategy” is a local militia engaged in guerrilla warfare, can a population distanced from its military engage in armed resistance to an invader? In apparent acknowledgement of this potential weakness, Taiwan actually is not eliminating conscription entirely. Instead, draftees will undergo a four-month training program to at least become familiar with firearms and gain some combat training. Alexander Huang, a specialist in military strategy, says the instilling of patriotism is not simply a matter of whether the military is conscript-based or volunteer, but of how those recruits are trained. “If you have a training program with commanders who know what their troops need and give them the right kind of education, then the young men and women will feel honored to wear that uniform,” he says. “But if you are wearing that uniform but are treated like a house helper, that will actually undermine patriotism.” Huang is a strong proponent of the transition to a volunteer army, citing the needs of modern warfare for extensive training in advanced weapons systems. Professional soldiers would serve longer terms, perhaps even whole careers, providing the time needed to develop weapons systems proficiency. Military education likewise needs deep reform. — By Timothy Ferry taiwan business topics • may 2015

advertorial From Jti

Preventing Unintended Consequences from Tobacco Tax Increases

ith the aim of further reducing the incidence of smoking in Taiwan, bills currently being considered in the Legislative Yuan would raise the tax on cigarettes by NT$25 per pack, a 79% increase. The health objective is laudable, however the experience of other markets clearly shows that the suggested approach will not achieve the desired purpose – and more likely will even be counterproductive. Whenever steep increases in tobacco taxes are put into effect, leading to higher prices for tobacco products (and often even earlier in anticipation of such price boosts), illegal traders rush in to increase their share of the market by offering non tax paid cigarettes at much lower prices. “Consumption is reduced, but mainly of legal cigarettes, and they are replaced by the illegal products, so limited decline occurs in the overall smoking rates,” says Marchant Kuys, general manager of JT Tobacco International Taiwan Corp. (JTI). He notes that Brunei increased its tobacco tax by 339% in 2010, and in 2013 the illegal trade accounted for 97.6% of the market. In the same year, Malaysia raised its tax by 15% and in 2013, 35.6% of the trade was illegal and remains significantly high today. A large chunk of the illegal trade consists of brands that are manufactured legitimately in one country but are smuggled into another country to provide consumers with a cheaper alternative to the highly taxed prod-

taiwan business topics • may 2015

ucts otherwise available. For a market such as Taiwan – an island with scores of small fishing ports, and with huge volumes of goods passing through Customs every day – preventing smuggled products is a massive challenge. And when income levels are fairly stagnant, as has been the case in Taiwan in recent years given limited economic growth, consumers are likely to respond to hefty price increases by accepting less-costly options. “The resulting erosion of the legitimate market brings some very serious unintended consequences that policymakers often don’t think about when planning tax increases,” says Kuys. One is the loss of fiscal revenue for the government, as illegal traders manage to avoid paying import duties, tobacco taxes, as well as other taxes. According to a report by the International Tax and Investment Center and Oxford Economics, Taiwan lost NT$4.8 billion in 2012 and NT$5.5 billion in 2013 in tobacco tax revenue as a result of the negative impact of illegal trade. This at a time when the Taiwan government is already under financial strain as demand for social services rises. A second frequently overlooked consideration is the broader impact of the illegal trade in tobacco products on criminal activity, tobacco smuggling serves to finance international criminal organizations involved other unwelcome undertakings such as the drug and weapons trade and human trafficking. A third

important factor is that the situation severely damages the investment environment for legitimate businesses, who find it difficult to remain competitive. The illegal trade undermines the investments in R&D made by legitimate tobacco manufacturers and suppliers, with negative effect on the market’s overall reputation in international business circles. JTI has consistently supported a policy of moderate, reasonable, and predictable increases in the tobacco excise tax and health surtax. Such an approach would avoid any radical tax “shocks” that are likely to spur the illegal trade, and would enable the government to achieve its public health and revenue-collection objectives without causing any of the unintended consequences mentioned above. The goal should be to bolster market stability, while at the same time clamping down on the illegal trade in tobacco products. In the fight against illegal trade, JTI is committed to cooperating fully with government regulators and law-enforcement agencies. JTI’s initiatives in that effort include providing law-enforcement agencies with information derived from professional investigations, training in the identification of counterfeit products, and forensic examinations of seized or suspect products, along with programs to raise public awareness on the negative implications of the illegal trade in tobacco products.

advertorial From Jti

政府考慮調漲菸品稅捐時，應避免造成非預期的後果

為

了使國人的吸菸率持續下降，目前立法院正在研議相關修正草案，預計將每包菸品的稅捐調漲新台幣25元，漲幅高達79%。此政策之制訂係基於健康因素的考量，看似值得嘉許；然而從其他市場的經驗可清楚地顯示，增稅措施並不能達成預期之目的，甚至很可能還會帶來反效果。每當菸品稅捐大幅增加，菸品價格通常亦會隨之上揚（甚至常因預期心理，使菸品在菸品稅捐調漲前就預先漲價）；非法貿易商則因不須依法繳納任何稅捐，藉由銷售價格低廉的菸品，擴大非法菸品的市占率。傑太日煙國際股份有限公司（下稱傑太日煙）總經理柯邁謙指出，「菸品的消費量主要只有合法菸品的部分減少，合法菸品的市場被非法菸品所取代，因此整體吸菸率下降的幅度很有限。」他指出，汶萊在2010年調漲菸稅，其幅度高達339%；到了2013年，汶萊的非法菸品市占率已增加至97.6%。同時，在2010年，馬來西亞將菸稅調漲15%，到了2013年，馬來西亞的菸品市場有35.6%是非法菸品，且至今非法菸品交易量仍居高不下。非法菸品的來源主要是來自某國合法生產的菸品，卻被走私至菸稅極高、菸品價格昂貴的他國，以提供該國消費者低價菸品的選擇。以台灣市場而言，這樣一個擁有許多小型漁港，且每天都有大量貨品要通過海關的島嶼，要避免走私商品流入實為一巨大的挑戰。尤其近年來，台灣經濟成長有限、國民薪資水平相對停滯不前，面對菸品價格飆漲，消費者很可能傾向於價格便宜的選項。柯邁謙指出，「合法菸品市場的破壞，會造成一些非預期的嚴重後果，而這些往往是決策者在規劃增稅時所沒有想到的。」其中之一

A shipment of contraband cigarettes intercepted at the port of Kaohsiung. 高雄港走私菸品查緝現場 photo provided by Finance b ureau oF Kaohsiung c ity government

照片由高雄市財政局提供

即是政府財政收入的損失，因為非法菸品貿易商總能想方設法規避關稅、菸品稅捐和其他稅捐。根據國際租稅及投資中心與牛津經濟學院的報告指出，由於非法菸品貿易的負面衝擊，台灣政府所損失的菸品稅捐收入在2012年高達新台幣48億元、在2013年更高達新台幣55億元，而此正值台灣政府因社會福利需求增加、國家財政面臨極大壓力的時期。另一個常被輕忽的因素，乃菸品的非法交易對犯罪活動所產生的巨大影響。因為非法菸品走私所獲利益往往是國際犯罪組織的資金來源，而這些組織與其他不法行為牽連緊密，包括毒品交易、武器交易和人口販運等。第三個重要的因素，則是非法菸品猖獗會嚴重破壞合法企業的投資環境，合法企業將更難維持其市場競爭力。此外，非法菸品交易將嚴重削減合法菸品製

造商及供應商對於研發所挹注的投資效益，同時對台灣市場在國際產業界的聲望產生負面影響。傑太日煙一直以來，都支持「合理、漸進、可預期」的菸稅及菸捐調漲。「合理、漸進、可預期」的稅捐調整手段可以避免菸品稅捐飆升所帶來的衝擊以及其所可能引發的非法菸品貿易，並且能讓政府在達成公共衛生及稅收目標的同時，亦不會引發任何上述非預期的後果。政府的目標應著重於提升市場的穩定性，並同時打擊非法菸品的貿易。在這場對抗非法菸品貿易的戰役中，傑太日煙承諾會與政府當局及執法單位密切合作。傑太日煙所做的努力包括：提供透過專業調查所得到的資訊給執法單位參考，提供執法單位辨別仿冒商品、鑑識檢驗所查緝扣押商品或疑似走私商品的教育訓練課程，並讓大眾更了解非法菸品貿易所產生的負面影響。

taiwan business topics • may 2015

B E H I N D

T H E

N E W S

TAIWAN PURSUING AIIB PARTICIPATION Rebuffed in its bid to be among the bank’s founders, Taiwan is expected to apply for regular membership

BY PHILIP LIU

everal hours before the midnight deadline on the evening of March 31, Minister of Finance Chang Shengford sent a fax to the preparatory office for the Asian Infrastructure Investment Bank (AIIB) in Beijing expressing Taiwan’s desire to join the proposed institution as a founding member. Taiwan made the last-minute overture after sensing that the U.S. government had relaxed its opposition to the China-led initiative in the wake of Britain’s announcement on March 12 that it would join the project, prompting other major U.S. allies – including Germany, France, and Italy – to follow suit. Relevant government units had already conducted an evaluation as early as last November, concluding that AIIB participation as a founding member would be to Taiwan’s advantage. Just two weeks after the application was submitted, however, word came back from Beijing that Taiwan’s bid had been rejected. Responding to queries from legislators, Mainland Affairs Council Minister Andrew Hsia explained that the obstacle was Beijing’s stipulation that founding AIIB members must be sovereign states. China certainly does not include Taiwan in that category. At the same time, Beijing held out hope that Taiwan could reapply later for ordinary membership “under an appropriate name.” Taipei is likely to do so, following the same logic that led to the decision to seek charter membership. In addition to the business potential that involvement in the bank could bring to Taiwanese companies, the government generally welcomes any opportunity for Taiwan to enjoy greater participation and visibility in the international arena. As of mid-April, 57 countries had enlisted as prospective founding members (PFMs) of the AIIB. Among them are four G7 members (the U.K., Germany, France, and Italy), five ASEAN members (Indonesia, Malaysia, Singapore, Vietnam, and Thailand), Australia, India, South Korea, Russia, Pakistan, and Saudi Arabia. With projected initial registered capital of US$100 billion, the AIIB is slated to begin opera28

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tions in 2016, mainly as a funding source for China’s “Belt and Road” project. The ambitious plan calls for building transportation links – one terrestrial and the other maritime – to facilitate close economic ties among nations along the routes. It has been attracting increasing attention internationally since being introduced by Chinese leader Xi Jinping during overseas visits in September and October 2013. The “Belt” portion of the project, also known as the “Silk Road Economic Belt,” will follow the path of the traditional Silk Road, starting from Xinjiang and other western regions of China and passing through central Asia and Russia before reaching Europe. The “Road” part – also called the “21st Century Maritime Silk Road” – envisions a shipping route originating from China’s coastal provinces (notably Fujian and Guangdong) and passing by Southeast and South Asia, the Middle East, and North Africa before hitting the shores of Europe on the Mediterranean. The “Belt and Road” project has entered the implementation stage. During the annual meetings of the People’s National Congress and Chinese People’s Political Consultative Conference in March this year, various provinces put forth “Belt and Road”-related projects totaling more than one trillion yuan in value. The Beijing-based, Chinese-language China Times reports that hundreds of “Belt and Road”related projects will be signed or break ground in the next several years – mainly in the fields of rail, highways, energy, information technology, and industrial parks – in China, Central Asia, and South Asia. The investment value in 2015 is estimated at 300-400 billion yuan. During the 2105 Boao Forum for Asia, held in China’s Hainan Province in late March, Xi Jinping reported that more than 60 countries and international bodies had expressed a desire to take part in the project. Among the infrastructure projects to be included under the aegis of the “Belt and Road” plan are a 1,000 kilometer-railway in eastern Africa, highspeed rail project in Thailand, Sino-Myanmar railway, harbor project in Sri Lanka’s Colombo, and Pakistan-Iran gas pipeline.

BEHIND THE NEWS

To fund this enormous undertaking, China came up with the AIIB concept, which is designed as a multilateral intergovernment development institution. The plan was unveiled by Xi Jinping during a meeting with General Susilo Bambang Yudhoyono, then the Indonesian president, in Jakarta in October 2013. The AIIB will come on the heels of the US$40 billion Silk Road Fund, which was established on December 29 last year, and the founding of the Silk Road Fund Corp. with initial capital of US$10 billion. Both the AIIB and Silk Road Fund are backed by China’s forex reserves, which currently exceed US$3.8 trillion.

Alternative financial system The AIIB reflects China’s desire to create an alternative global financial system to supplement the existing International Monetary Fund (IMF) and World Bank, which it has regarded as too dominated by the United States. AIIB aims to raise initial funds of US$50 billion, 70-75% of which would be contributed by Asian members according to the weighting of their GDPs. To ensure the success of that effort, China has pledged to contribute up to 50% of the initial fund, if necessary. At the same time, to overcome the reservations of some prospective members, China has stressed that the AIIB will operate on the basis of consultation and consensus among members, rather than making decisions based on voting rights as is done in the World Bank and IMF. The infrastructure-oriented AIIB is expected to supplement the function of the ADB, which takes the reduction of poverty in Asia as its primary objective. With registered capital of US$165 billion, the 67-member ADB provides some US$13 billion in loans to member nations annually. That is a far cry from the US$776 billion needed in the region for infrastructural investments each year, notably in the fields of power, transportation, and telecommunications, according to the ADB’s own estimate. Members of the AIIB will have opportunities to profit from participating in loan extensions and contracts for various aspects of infrastructure projects, including technology transfer, engineering work, and supply of materials, while reducing risk exposure due to the bank’s presumed greater expertise and stricter procedures in screening loan applications. In case of bad debt, in addition, the loss is shared by all members, rather than a single nation. China is likely to be the biggest beneficiary of the AIIB, generating business opportunities for its companies while lessening the risk involved in overseas projects. In the past, Beijing has had problems with bad debt on overseas loans; for example, Venezuela defaulted on loans from China in the wake of the plunge in global oil prices. “A multilateral institution like AIIB can help China control the risks for overseas loans,” notes Pang Zhong-yin, a professor of international relations at Renmin University of China. The World Bank has also pledged to join hands with the AIIB in combating the world’s poverty problem, as long as

the bank can comply with international standards in terms of environmental protection, labor conditions, and the procurement mechanism, according to Jim Yong Kim, the World Bank president. “We have so much need for infrastructure that we would welcome any new player,” Kim told the audience at a forum in Washington on April 7. So far, the United States and Japan have stayed aloof from the AIIB project, citing concern over its operating mode and the mechanism for screening loan applications. The Kyodo news agency reports that Japan may take part in the AIIB at a later stage, on condition that it wins the understanding of the United States and that the AIIB can assure compliance with international standards in its operations. Observers note that the AIIB represents a major advancement for China in the international arena, enabling it to carve out a leading role outside the U.S.-led global financial system that has been in place since World War II. It could facilitate the formation of an Asian-European economic bloc that would rival, if not eventually eclipse, the U.S.-European bloc that has been the longstanding axis of the global economy. The Taiwanese government’s bid to join the AIIB received considerable support domestically. Yu Chun-yien, chairman of CTCI Corp., a large engineering and construction company, points out that many Taiwanese construction firms have strong management expertise and abundant experience in overseas civil-engineering work, capable of partnering with mainland Chinese firms in tapping the “Belt and Road” market. Lee Jih-chu, chairperson of Taiwan Financial Holdings, adds that AIIB membership could help Taiwanese banks tap the global market by joining international syndicated loans. Roy Chun Lee, deputy director of the Taiwan WTO and RTA Center at the Chung-Hua Institution for Economic Research (CIER), while agreeing that the government should apply for AIIB membership so as to keep all options open, cautions against harboring too high a level of expectations about the potential benefits, citing Taiwan’s experience with the ADB. “Taiwan has been a member of the ADB for 40 years but has hardly obtained any substantial business opportunities from the membership,” he says. “The chances for the Belt and Road project may be even slimmer, in view of the acute competition for infrastructural projects, not only from China’s construction groups but also European firms.” Although Taiwan was a founding member of the ADB under its formal name of the Republic of China, in 1986 it was forced to change the title of its ADB membership to “Taipei, China” following China’s accession to the organization. It has continued to participate in the bank, but has issued a protest against the new title every year ever since. For AIIB membership, the government has vowed to reject any title it deems detrimental to national dignity. The opposition Democratic Progressive Party DPP appears willing to support AIIB membership for Taiwan as long as the title and other conditions for entry are not demeaning.

taiwan business topics • may 2015

B A C K G R O U N D E R

GeneticaLLy moDiFieD FooDs: saVioR oR DestRoyeR? Proponents see an answer to world hunger; critics fear risk to human health and the environment.

BY TIMOTHY FERRY

oncern over the safety of consuming food with genetically modified organisms (GMO) has increased in Taiwan, as it has in much of the world. Taiwan is a major consumer of soy, annually importing an average of 8 million bushels of soybeans, 95% from the United States, the vast majority of which are genetically modified (GM). In all, Taiwan imports around 67 types of GM food products, mostly from the United States. In response to the urging of legislators and consumer groups, the government has tightened up rules on GM labeling to ensure that consumers are well informed about what they are eating. Since last year, food products must be labeled if the GM content represents at least 3% of the total, rather than the previous 5%, thereby increasing the number of products that will bear GM labels. The new rules are more lenient than the 0.9% threshold seen in the EU or the 1% threshold in Australia and New Zealand, but are consistent with Malaysia’s and South Korea’s 3% threshold and are actually tighter than Japan’s 5%. The United States and Canada do not require GM labels. More recently, Taiwan’s Food and 30

taiwan business topics • may 2015

Drug Administration (TFDA) came to a compromise decision regarding the labeling of highly refined foods that may be derived from GM raw materials but do not contain proteins or DNA and so cannot be definitively tested as GM. Originally legislators demanded that any processed food that used highly refined ingredients made from GM materials should be required to bear a GM label. Industry countered that such a rule would be very difficult to implement, as these foods contain no traces of GM DNA, and so verification would require manufacturers to trace back every ingredient to its origin, an arduous if not impossible task. Further, as not even the EU requires labeling for trace GM ingredients in highly refined foods, industry also pointed out the problem of creating Taiwan-unique regulations that would be very difficult and expensive for multinational companies to comply with. The eventual compromise solution calls for labeling to identify first-level highly refined products, such as vegetable oils and soy sauce, made from genetically engineered materials. Second-tier products made from corn syrup or soy oil, including soft drinks or potato chips, would be exempt from the requirement.

The new rule is not scheduled to take effect until December 31 and will need to withstand more comments from industry and civic groups, but the issue seems to have been resolved – for now. With pressure on governments from consumer rights and environmental groups to more tightly regulate or even ban GM foods entirely, however, the broader issue is not likely stay quiet for long. Few technologies raise emotions like GMOs in the food supply. Arguments pro and con regarding genetic engineering in foods range from predictions that the technology will save the world from certain famine, to warnings that GM foods cause disease and could even result in global “ecocide” ending all life on the planet. Conspiracy theories abound, and headlines about GM foods always seem to include the phrase “shocking truth.” “Big Ag” in general and Monsanto in particular have replaced “Big Tobacco” and “Big Oil” as the main villain for environmental and social welfare NGOs and pundits. In Europe, widespread disdain for “Frankenfoods” and strict labeling requirements have resulted in the almost complete absence of GM foods from the market.

backgrounder

At the same time, GM foods have contributed to increasing the global food supply, with the United States leading in both production and consumption of GM foods. Americans on average consume an estimated 200 pounds (90 kilograms) of GM foods annually, according to the advocacy organization Environmental Working Group (EWG). Some 94% of corn, 96% of soybeans, and 95% of sugar beets grown in the United States are now GM, as are significant proportions of apples, coffee, grapefruit, papayas, sugarcane, strawberries, and many more foods. Of the processed food sold in America, 80% contain GM ingredients. Lin Ji-shing, researcher with the Executive Yuan’s Office of Science and Technology, says that GM technology offers clear advantages over conventional crop breeding. With climate change raising the likelihood of drought, for example, scientists will want to create crops that are more heat resistant and use less water, he explains. By inserting the exact gene directly into cells, genetic engineering enables scientists to more precisely develop specific traits in food crops than when done through conventional breeding, which requires multiple generations of cross breeds. “Conventional breeding is very time and resource consuming, very low efficiency,” says Lin. “Genetic engineering is very efficient. This technology is very much needed.” Proponents of GM foods note that the world’s population will exceed nine billion by 2050, some two billion more than today. Yet the amount of arable land available for food production is rapidly being lost to urbanization, salinization, desertification, and overall degradation, and no more virgin arable land exists to be developed. Every day, 2,000 hectares of agricultural land is lost due to saltwater degradation alone, according to the United Nations’ Institute for Water, Environment and Health, and 800 million people in the world currently suffer from malnutrition. The effects of climate change are also likely to result in changing weather patterns and increasing drought. Proponents see GM crops that are able

to withstand higher temperatures and require less water as a key strategy towards maintaining food supplies. GM foods on the consumer market have been certified by various testing organizations including the U.S. Food and Drug Administration, the U.S. Department of Agriculture, and the Environmental Protection Agency as being safe for consumption and for the environment. According to a Pew Research Center study done in conjunction with the American Association for the Advancement of Science, 89% of scientists believe that GM foods are safe, a higher concurrence than those who attribute global climate change to human actions.

Genetic engineering Genes are small segments of DNA that are instructions for building proteins, which in turn build cells and finally organisms. Genetic engineering is the process of manually adding genes to an organism in the hope of including one or more traits, creating a “transgenic” or genetically modified organism. The process begins with determining what traits are to be included in a crop, then searching for an organism that exhibits the desired trait and analyzing the genome of that organism. The gene responsible for the trait is cloned and then transferred into the host via modified bacteria or virus capable of

transferring DNA. Another method employs a “gene gun” that shoots microscopic gold pellets covered with copies of the gene into the recipient. The manipulated gene could come from any living organism, and an animal with the desired trait could supply the gene for a food crop as readily as any other organism. Lin admits that this fact might seem shocking to non-experts, but adds that all living things have DNA and genes, and that many of these genes are shared across species. In fact, humans share 98% of our genes with chimpanzees, 60% with bananas, 44% with fruit flies, and 26% with yeast, according to the European Molecular Biology Laboratory. Scientists note that it is the entirety of the genome that makes each species distinct, not any particular gene. Nevertheless, critics of genetic engineering term the process “interspecies rape,” describing it as a violation of the species barrier that maintains the natural order. Actually, it remains unclear whether animal genes are used in commercially available seed crops. While most transfers of DNA occur within a species through reproduction, the transfer of DNA across species, called horizontal gene transfer, also occurs naturally. Recent studies indicate that a bacterium called agrobacterium is able to naturally incorporate its DNA into plants such as sweet potatoes, for example. Bacterial, fungal, and

taiwan business topics • may 2015

backgrounder

viral DNA can insert themselves into the genomes of plants or animals, and 145 of the 20,000 genes that make up the human genome actually derive from nonhuman species. Through genetic engineering, scientists have created crops that are herbicide resistant (such as Monsanto’s Roundup Ready soybeans), generate their own insecticides, produce their own vitamins to alleviate vitamin deficiency in poor countries, and may produce bigger yields under less favorable climate circumstances. GM corn is able to tolerate herbicides and express a protein that kills certain insects, while GM potatoes have been developed to resist blight. Hawaii’s papaya industry was rescued from devastating ringspot virus through genetic engineering, and Arctic Apples approved this year don’t turn brown when exposed to the air. Critics of GM food counter that the genetic engineering process is inexact, as engineers can’t easily control where the gene is inserted into the genome. And as genes don’t operate independently of each other, but in response and reaction to one another, scientists cannot predict what mutations might emerge. By tampering with the basic building blocks of life, critics say, scientists risk unleashing unseen human health and environmental dangers on the world. Proponents respond that GM crops are tested extensively before being released on the market. “GM foods are the most examined, most scrutinized foods in existence,” says the Executive Yuan’s Lin, noting that unlike conventional foods, GM foods are subject to testing similar to pharmaceuticals. In a written response to a query from Taiwan Business TOPICS, the Taisun Group, a major importer of GM soy for its vegetable oils, notes that “all GM crops in the market were tested in animal studies, proven GRAS (generally regarded as safe) and registered before releasing.” The reply notes that in Taiwan, agencies follow international standards to inspect for DNA or protein fragments, to identify whether certain crops are GM or not. Organizations that have concluded 32

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An assortment of products on the Taiwan market labeled as not including any GM ingredients. photo : cna

that GM foods are safe to human health and the environment include the World Health Organization, U.S. National Academy of Sciences, European Commission, U.K. Royal Society of Medicine, and the French Academy of Sciences. A paper in the journal Critical Reviews in Biotechnology in 2013 evaluated research into the safety of GM foods spanning the decade from 2002 to 2012 – some 1,783 studies in all – and concluded: “the scientific research conducted so far has not detected any significant hazards directly connected with the use of genetically engineered crops.” Many anti-GM foods organizations are not persuaded, with this year’s annual March Against Monsanto claiming that “research studies have shown that Monsanto’s genetically-modified foods can lead to serious health conditions such as the development of cancer tumors, infertility, and birth defects.” Other GM skeptics note that the absence of evidence is not necessarily evidence of absence – in other words, the fact that science has not yet found ev id en c e o f har m fr om GM c r ops doesn’t by itself guarantee that problems won’t one day become evident. According to advocacy group Physi-

cians and Scientists for Responsible Application of Science and Technology (PSRAST), “We can definitely say today that there is no scientific basis for maintaining that harmful substances may not appear or are very unlikely.” Economist Nassim Nicholas Taleb, professor of risk engineering at New York University and author of the book Black Swans that famously predicted the financial collapse of 2008, is co-author of a paper that warns of looming “ecocide” if the genetic engineering of crops is allowed to continue. The paper suggests that GM foods present a “systemic risk” to human health and the environment, since each change to an organism’s genome carries a slight risk of dangerous mutation, with the risk compounded by each genetic modification. “GMOs have the propensity to spread uncontrollably, and thus their risks cannot be localized,” the authors write. Taisun Group chairman Ken Chan sees more prosaic risks posed by GM foods. Genetic engineering has made corn and soybean crops more plentiful, for example, “so the derivatives like starch and flour are also becoming c h e a p e r, m a k i n g p r o c e s s e d f o o d s cheaper and leading to massive overconsumption,” he notes, resulting in the growing global obesity epidemic.

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A Report on the Financial Services Sector

Opening New Opportunities BY MATT FULCO

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SMOOTheR SAILINg FOR TAIwAN’S BANkS OFFShORe The sector netted record profits in 2014 on the back of burgeoning offshore business, especially in China.

IN THIS SURVEY

• Smoother Sailing for Taiwan’s Banks Offshore p34

• The Formosa Bond Market Ignites

p37

• Promoting the Onshore Mutual Fund Business p39

• Taiwan’s Payment Plan

taiwan business topics • May 2015

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he crowded Taiwan banking sector is finding room to breathe at last. Rapid expansion of offshore business amid deregulation and improving asset quality helped banks post a record NT$332.8 billion (US$10.7 billion) in profits in 2014, according to the Financial Supervisory Commission (FSC). Banks’ annual return on equity (ROE) surged from 9.4% in 2013 to 12.6% in the third quarter of 2014, according to Taipei-based Primasia Securities. In 2010, by comparison, ROE came to only 7.5%. Fitch Ratings ascribes the healthy p r o f i t a b i l i t y m a i n l y t o Ta i w a n banks’ growing exposure in China, including yuan deposit placements and foreign-currency loans. Net profits from the China operations of Taiwanese banks rose 88% last year to reach NT$5.2 billion (US$164 million), the FSC said. In addition, analysts say, the credit-card crisis of 2005 taught Taiwanese banks important lessons in risk management; the banks now pay greater attention to asset quality and engage in more prudent lending practices. A t t h e s a m e t i m e , Ta i w a n e s e banks have taken aggressive measures to write off non-performing loans (NPLs) and recover bad debts. The NPL ratio for domestic banks stood

at 0.28% as of the end of February, down from 0.35% a year earlier, while all 39 of Taiwan’s banks had an NPL ratio of 2% or lower, according to the FSC. “Taiwan’s banking sector has become much more productive,” says Tony Phoo, senior economist at Standard Chartered Bank in Taipei, noting that net profit per employee rose from NT$1 million to NT$1.77 million between 2010 and 2014. “But the sector remains hyper-competitive and has difficulty finding revenue drivers,” he adds. Consolidation at home, meanwhile, once thought essential for reinvigorating the saturated sector, still seems unlikely for the foreseeable future. “There remains a great need for consolidation in Taiwan because overbanking still exists in the market,” says an analyst with a local securities house who spoke on condition of anonymity. “But the process has decelerated and it will continue to do so. The authorities are instead encouraging banks to look offshore, where return on equity (ROE) is much higher than in Taiwan.”

The China factor Because of oversupply in Taiwan’s domestic lending market, the loan-to-deposit spread – the differ-

A Report on the Financial Services Sector

ence between the lending rate charged to borrowers and the deposit rate paid to savers – is low, making offshore expansion a critical vehicle for growth. As the recipient of more than 60% of outward Taiwanese investment, China has been an obvious choice for that expansion. As of the end of January, a total of 13 Taiwanese banks had 18 branches, eight sub-branches, and two subsidiaries in China, according to the FSC. The FSC’s decision in 2011 to deregulate Taiwan’s offshore banking units (OBUs), making it possible for Taiwanese firms registered in China to borrow from the island’s banks, was a key catalyst for the current surge in growth, experts say. Taiwanese companies doing business in China previously borrowed from banks in Hong Kong or China, but switched over to Taiwanese banks because they offered lower-interest US$-denominated loans, says the local securities analyst. “As a net exporter, Taiwan has a surplus of US dollars to fund the loans in China,” he explains. Offshore lending has since become a major growth driver for several large Taiwanese banks, including Cathay United and Fubon, and has significantly outpaced the growth of local lending, says Cherry Huang, director of Fitch Ratings in Taiwan. “Taiwanese banks have been targeting China in particular to boost growth,” she notes. “Credit demand is much stronger there than in Taiwan.” In 2014, the branches and subbranches of Taiwanese banks in China earned profits of NT$2.9 billion (US$93 million), up 113% year-on-year, while subsidiaries on the mainland posted earnings of NT$2.3 billion (US$73.8 million), an increase of 63% over 2013, according to the FSC. Fitch forecasts that loans by Taiwanese banks’ offshore units will represent 19% of total loans by the end of 2016, up from 15% in mid-2014, with loans in China alone accounting for 14% of the total. Overall China exposure – including loans, interbank exposures, and securities investments – is predicted to reach 15% of total assets over the same timeframe. Huang cautions that increased offshore lending will heighten the risk of overconcentration on China in the banks’

portfolios, particularly if Chinese assets grow excessively without generating sustainable profit growth or if Taiwanese banks fail to maintain sufficient capital to withstand possible shocks linked to China’s economic slowdown. At the end of December 2014, the total risk exposure of Taiwanese banks in China came to NT$1.75 trillion (US$56.3 billion), or about 68% of the NT$2.58 trillion (US$83 billion) net worth of domestic banks, according to the FSC. For purposes of risk management, Taiwan requires that its banks’ aggregate China exposure not exceed their book value. Fubon Bank has already hit that limit; its China exposure was US$4.9 billion as of mid-January, Global Finance Magazine reported in April. (Fubon did not respond to Taiwan Business TOPICS’ request for comment.) Another challenge facing Taiwanese banks’ China business is the holdup in the Legislative Yuan in considering the Cross-Strait Service Trade Agreement (CSSTA), part of the Economic Cooperation Framework Agreement (ECFA). The proposed free-trade arrangement in services was concluded between Taiwan and China in June 2013, but remains stalled in the Taiwan legislature. The government has so far been unable to assuage the fears of the deal’s opponents, who believe it will harm Taiwan’s economy and make the island more susceptible to political pressure from Beijing.

The financial sector would be one of the top beneficiaries of the pact, market observers say. Under the agreement, China would give “special treatment” to Taiwanese banks in China, says Cheng Cheng-Mount, president of the Taiwan Academy of Banking and Finance (TABF). Perks would include a single license to operate anywhere in Fujian Province and the ability to undertake full RMB business after showing two years of profitability. “We need to ratify the Cross-Strait Service Trade Agreement,” he says. “If we can do that, it will be very good for our banking sector’s prospects in China.”

expansion in ASeAN Despite the importance of the China market, the FSC is also encouraging Taiwanese banks to expand to fast-growing Southeast Asia. “China is a huge basket,” says FSC Vice Chairperson Thomas Tien-mu Huang. “We should put some of our eggs in it, but not all.” To encourage broader expansion, Taiwan this January raised the limit on its banks’ overseas investments to 40% of net worth. The previous limit had been 40% of paid-in capital. The change is expected to free up NT$400 billion-$500 billion (US$13.3 billion- $16.7 billion) in capital throughout the banking sector for offshore acquisitions. “The regulator wants to moderate the

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concentration of risk in China, but the ambition goes beyond that,” says Phoo of Standard Chartered. “They hope Taiwanese banks can become regional Asian banks.” Cathay Financial Holding Co., Taiwan’s largest financial-services provider by assets, has been expanding rapidly in Southeast Asia. Since 2013, its subsidiary Cathay United Bank has set up branches in Singapore, Malaysia, and Vietnam, as well as representative offices in the Philippines, Thailand, and Myanmar. In 2013, Cathay acquired Singapore Banking Corporation Cambodia, becoming the first Taiwanese bank with a fully owned Cambodian operation. Cathay also applied in July 2014 to set up a branch in Laos. “Cathay is coming from behind,” says Cheng of TABF. “They have fewer foreign branches than Chinatrust [a major competitor] and are trying to catch up.” Cathay is also “asset-rich,” Cheng notes. “Their main business is life insurance. They need somewhere for all that liquidity to go.” For growth-starved Taiwanese banks, Indonesia is looking increasingly attractive, analysts say. The Organization for Economic Cooperation and Development (OECD) forecasts the Indonesian economy to grow at an average rate of 6% annually from 2014 to 2018, outperforming the regional average of 5.4%. In January, Cathay FHC entered the Indonesian market by acquiring a 40% stake in Bank Mayapada Internasional for US$280 million. Cathay was motivated by Bank Mayapada’s stable returns and its potential to benefit from Indonesia’s rapid economic growth, market observers say. CTBC Financial Holding Co., Taiwan’s third largest publicly traded financial firm by market value, is also active in Southeast Asia. Its subsidiary CTBC Bank (formerly Chinatrust) has 11 branches in Indonesia, 24 in the Philippines, and offices in Singapore and Vietnam. Overall, CTBC is considered the market leader in Southeast Asia among Taiwanese financial institutions. “The FSC chose them to be a pioneer in the region,” says Cheng. “Chinatrust’s former leadership had very strong unof-

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Taiwanese banks’ claims on China

USDbn 90 80 70 60 50 40 30 20 10 0

2008

2009

2010

2011

2012

2013

2014

NOTE: data on ultimate risk basis SOURCE: Central Bank of the Republic of China (Taiwan)

ficial relations with the leaders of many ASEAN countries. Now they just need to stay on top.” Taiwan’s state banks are eying Southeast Asia as well. In February, state-run Mega International Commercial Bank, the main subsidiary of Mega Financial Holdings Co., opened its second branch in Cambodia. Taiwan Financial Holding Co., the parent company of the Bank of Taiwan, is also mulling investment opportunities in Southeast Asia and may open a Myanmar office, chairwoman Lee Jih-chu said in February.

Prudent risk management As their offshore expansion accelerates, Taiwanese banks need to ensure prudent risk management, experts say. “Risk management is always our first priority,” stresses Thomas Huang of the FSC. “We need to strengthen the risk management mechanism.” Taiwanese banks also need to pay careful attention to the risks posed by expansion in Southeast Asia, Cherry Huang of Fitch Ratings says. “There are a lot of low sovereign rating countries in the region,” she says. “Indonesia, which is dependent on commodities, is vulnerable to a global liquidity shock. Governance deficiency is a problem in the Philippines.” At the same time, Taiwan banks are generally less capitalized – or more leveraged – than other international banks in the region. That limits their relative capability to withstand potential economic or other credit-quality shocks, she says. In addition, Southeast Asia poses operational challenges, Cherry Huang

says, noting that management at Taiwanese banks has limited experience with cross-border acquisitions or earning sustainable profits offshore. The banks’ largest Southeast Asian subsidiaries, primarily in the Philippines and Vietnam, have posted either losses or only modest profitability for the past five years, according to Fitch Ratings. Thus far, those subsidiaries have accounted for only a small proportion of the parents’ total assets. At the same time, says Cheng o f TA B F, Ta i w a n e s e b a n k s n e e d t o strengthen their due diligence in China. He cites the sudden insolvency of the Fujian-based Chinese footwear maker UltraSonic as an example, noting that Cathay United Bank led a US$60 million syndicated loan to the company. U l t r a S o n i c ’s c h i e f e x e c u t i v e Wi Qingyong and his son, chief operating officer Wu Minghong, were reported to have absconded with millions of dollars of company cash in September 2014. Although they resurfaced several days later and denied taking the money, UltraSonic, which is listed on the Frankfurt Stock Exchange, still defaulted on the loan. “We will definitely be more careful when reviewing related cases in the future... We have learned a lesson from the incident,” Cathay Financial president Lee Chang-ken said after a November investors’ conference. “It’s a costly lesson, but it’s not surprising,” Cheng says. “Fraudulent accounting is common in China. Taiwanese banks need to be especially careful when choosing their Chinese customers.”

A Report on the Financial Services Sector

The FORMOSA BOND MARkeT IgNITeS Taiwan’s offshore RMB bond market is growing rapidly after investment was opened to domestic insurers.

aiwan’s Formosa bond market is surging on the back of deregulation measures that have made the renminbi-denominated notes more accessible to the island’s cash-rich insurance firms. In the first quarter of 2015, issuance totaled 11.35 billion yuan, up 132% from 1.5 yuan billion a year earlier, according to Standard Chartered. Formosa bonds are issued in Taiwan and listed on the Taipei Stock Exchange (formerly the GreTai Securities Market), which provides an over-the-counter system for trading. “We see plenty of room for the Formosa bond market to grow in 2015,” says Tony Phoo, a senior economist at Standard Chartered in Taipei. He forecasts that the regulatory loosening will enable the yuan-denominated market to reach 50-60 billion yuan this year, up from 20.8 billion yuan in 2014. The upper end of that forecast matches the 60 billion yuan target set by the Financial Supervisory Commission (FSC) in June 2014. If the goal is reached, Taiwan would become the world’s second largest offshore trading market for yuan-denominated bonds, surpassing Singapore, the FSC says. A broad swath of international banks has been selecting Taiwan as an alternative offshore renminbi-funding destination. Issuers are coming from a number of newly appointed offshore yuan hubs, including France, Germany, the U.K., South Korea, and Malaysia. The speed of the turnaround in the Formosa bond market is striking. It had been anemic in its first two years of existence, with little primary market issuance and just 21 deals. The catalyst for the market’s takeoff came in May 2014 when the FSC removed onshore foreigncurrency bonds from life insurers’ 45%

overseas investment ceiling. Under the revised regulation, insurance investors can count a foreign-currency bond listed in Taiwan as a domestic investment even if the issuer is based offshore and the security is cleared outside Taiwan. Taiwan’s life insurers are flush with cash. Their assets have grown to US$600 billion as annual premium income more than doubled from NT$1.2 trillion in 2003 to NT$2.7 trillion in 2013, according to the FSC. Now the insurers are looking for 3.5-4% returns on those assets in the Formosa bond market, according to Standard Chartered, the second largest underwriter of offshore yuan bonds last year. “Life insurers are focused on meeting their minimum yield target,” says Wu Soushan, chair of the Taipei Exchange. “They are also concerned about tenor and have a preference for duration.”

Swaps and yields But Taiwan’s life insurers cannot find such high yields in government bonds or other NT$-denominated invest ment-grade notes. A one-year NT$denominated government bond offers a coupon rate of about 1.12%, while its five-year benchmark has a yield of 1.62%. Assets in Taiwan’s domestic market have offered poor returns for over a decade as the Central Bank has maintained a low benchmark interest rate (it has stayed at 1.875% since June 2011). The removal of foreign-currency bonds from life-insurance firms’ overseas investment cap is “super important” for the insurers, says an analyst at a local brokerage, speaking on condition of anonymity. “It’s going to allow them to increase their investment spread signifi-

cantly,” the analyst says. “The yields of more than 4% on Formosa bonds look very attractive.” By Taipei-based CTBC Bank’s estimates, the removal of foreign-currency bonds from life insurers’ overseas investment quota could free up between US$12 billion and US$15 billion for Formosa bond purchases in 2015. The Formosa bond market is also benefiting from attractive cross-currency basis swaps, which allow foreign issuers to price deals within their US dollar funding costs, provided they can find investors. On February 16, the threeyear offshore yuan cross-currency swap rose 125 basis points to 4.18%, reaching its highest point in at least four years, according to Bloomberg. With cross currency basis swaps between the US dollar and renminbi at historical highs, issuers are able to achieve cost savings of 30-40 basis points over their USD funding curve by issuing Formosa bonds and swapping the proceeds into US dollars, according to a research note in March by Becky Liu, a Hong Kong-based senior rates strategist at Standard Chartered. Foreign issuers’ appetite for Formosa bonds is growing as converting yuan proceeds into US dollars becomes less costly. Deals have already been priced this year from Air Liquide, the Export-Import Bank of Korea (Kexim), Société Générale, Deutsche Bank, Goldman Sachs, Morgan Stanley, and Maybank. All of the issuances were inaugural except for those coming from Deutsche and Kexim. Japanese and U.K. banks are also considering deals, market insiders say. Yield rates, meanwhile, have climbed to 4% or higher, as offshore renminbi funding costs have risen amidst fears

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of further RMB depreciation and tightening liquidity. In January, Kexim issued three-year and seven-year notes, priced at 4.05% and 4.20% respectively, followed by a three-year note with a coupon rate of 4.4% in February. That same month, Morgan Stanley became the first U.S. bank to issue a Formosa bond, selling five-year notes priced at 4%. Then in March, Deutsche Bank, Maybank, and Société Générale debuted in the Formosa market with three-year, five-year, and three-year deals respectively, with coupon rates of 4%, 4.12%, and 4.03%.

Chinese lenders In a further bid to develop Taiwan’s offshore renminbi market, the FSC in March raised the ceiling of yuan-denominated bonds issued by Chinese banks to 45 billion yuan (US$7.25 billion), boosting the former limit of 25 billion yuan by 80%. Chinese lenders currently have renminbi-denominated notes totaling 23 billion yuan in Taiwan, according to the FSC, and may sell more following the raising of their Formosa-issuance cap, analysts say. But the FSC has not commented on when it will expand the scope of Chinese firms permitted to issue Formosa bonds. Since March 2013, China-based banks, branches, and subsidiaries of Taiwanese banks operating in China, as well as subsidiaries of China-registered Taiwanese companies, have been permitted to issue

the renminbi-denominated notes. Because of the substantial risks tied to China exposure, the FSC has yet to relax the restrictions for Chinese issuers, market insiders say. “It is difficult for Taiwanese investors to monitor Chinese firms’ credit risk, and they are also exposed to systematic risks brought by China’s economic slowdown and overcapacity,” says an analyst at a local securities house, who spoke on condition of anonymity. “The fact that not all Chinese firms can issue Formosa bonds is not a big problem right now as the market is still in its infancy,” notes the analyst. “But the regulator will be able to expand the size of the market significantly by allowing more types of Chinese companies to issue the bonds.” With regard to increasing Chinese participation in the Formosa bond market, the Taipei Exchange “is going step by step,” says Chairman Wu. “We are gradually building a larger offshore RMB center in Taiwan.”

Further liberalization The FSC also plans to allow retail investors to invest in Formosa bonds issued by Chinese banks, citing the rising demand among retail investors for financial products. During a trip to Beijing in December 2014, FSC Chairman Tseng Ming-chung said that the Commission was likely to allow retail investors to buy

FSC Chairman William Ming-chung Tseng, left, and Wu Yuqun, head of China’s securities and futures bureau, while meeting in Beijing in December 2014. photo : cna

taiwan business topics • May 2015

Formosa bonds issued by Chinese banks in the first half of 2015. However, once retail investors are permitted to buy the bonds, the FSC expects it will take longer to review each Formosa bond issuer’s application “to provide more protection to retail investors,” Tseng said in Beijing. Some market players question that approach. “The regulator will ‘protect’ retail investors at any cost,” says an executive with a foreign brokerage, who spoke on condition of anonymity. “Some retail investors complain to Taiwan’s legislators – who control the FSC’s budget – when their investments do not work out as planned. It would be better if there were more education for retail investors about the securities market than ‘protection.’ The FSC has yet to announce when it will allow retail investors to purchase notes issued by Chinese banks. But Taiwan will launch a yield curve for one to ten-year Formosa bonds on May 25; 10 to 15 financial institutions will be market makers based on their share of the Formosa bond market, according to the Taipei Exchange. “The curve is very complete,” says Wu of the Taipei Exchange, adding that with pricing reference points and credit ratings for issuers, it “will make the Formosa bond market efficient and more transparent.” According to Reuters, the financial institutions selected to be market makers are MasterLink Securities, Taipei Fubon Bank, Yuanta Securities, SinoPac Securities, Capital Securities, Bank of Taiwan, Mega Bank, KGI Securities, CTBC Bank, and HSBC (Taiwan). Further liberalization is important for the Formosa bond market to continue growing, says Phoo of Standard Chartered. “Hong Kong is a preferred offshore renminbi center, but that should not undermine Taiwan’s ambitions,” he says, noting that in the first two months of the year, Taiwan’s RMB-denominated bond market attracted more issuers than Hong Kong’s. But for the Formosa bond market to grow sustainably, he adds, “Taiwan must leverage its current foundation to get more international investors to participate, and not just focus on mainland Chinese and Taiwanese corporates.”

A Report on the Financial Services Sector

PROMOTINg The ONShORe MUTUAL FUND BUSINeSS Regulators are tightening the screws on offshore fund managers in an effort to strengthen the asset-management sector at home.

aiwan punches above its weight in the asset-management sector. The island of 23 million people had over US$167 billion assets under management (AUM) at the end of 2014, according to the Taipei-based consultancy Keystone Intelligence. Offshore funds – funds domiciled outside of Taiwan issued by foreign asset management companies – dominate the burgeoning market, comprising about US$105 billion, or 65% of AUM, compared to roughly US$63 billion for onshore funds, Keystone says. Onshore funds are registered in Taiwan by domestic groups as well as by foreign managers with onshore subsidiaries. Taiwanese investors have tended to prefer offshore funds because they offer a wider variety of products and the expertise of global fund managers, experts say. They are also widely believed to offer more consistent returns than onshore funds. “Foreign fund managers are more capable of adopting a multiple income strategy or managing a global fund,” says Derek Yung, chairman of AllianceBernstein Investments Taiwan. But from the perspective of Taiwan’s Financial Supervisory Commission (FSC), offshore funds have benefited disproportionately to their contributions to the Taiwan market, while onshore funds have faced stricter regulations. “The FSC’s goal is to narrow the current gap of operating conditions between offshore funds and onshore funds and ensure that operators develop on a fair and equitable basis,” says Thomas Tien-mu Huang, vice chairperson of the FSC. “The FSC will keep communicating with offshore fund institutions, and encourage them to devote more resources in Taiwan and endeavor to develop the asset management industry,” he adds. Ironically, it was an earlier government policy decision that allowed the offshore funds market to flourish beginning in the mid-2000s. The 2004 Securities Investment Trust and Consulting Law, which formalized the registration and distribution of cross-border funds, established a system under which asset managers could act as master agents, allowing them to avoid the costly process of building local distribution networks. The savings accrued by offshore fund managers enabled them to reward the major distributing banks with higher commission fees, sometimes up to 3% per sale, compared to 1.5-2% for onshore funds. As a result, banks now account for almost 60% of offshore fund distribution, but for only 30% of onshore fund

distribution, according to Keystone Intelligence. This differential has led to complaints from onshore managers that banks give priority to offshore funds because of the higher commission fees. “The Taiwanese regulators feel they made it too easy for cross-border business,” says Thomas McGowan, a Taipeibased attorney at the law firm Russin & Vecchi and an expert in banking and finance law. “It has been very successful, but the skill sets for everything besides sales are outside of Taiwan.”

More stick than carrot As it seeks to build a stronger Taiwan-based asset-management sector, the FSC is using a carrot-and-stick approach. “On the one hand, the system works like a platinum card for an airline,” says McGowan. “Offshore entities who move business into Taiwan can cash in points for benefits.” Those include fewer restrictions on new product launches and the ability to apply for more fund authorizations, McGowan notes, adding: “When you combine that with arm twisting, you see there are a number of pressures to come onshore.” Thus far, restrictions outnumber incentives. For instance, in 2013 the FSC reduced the number of offshore funds permitted to be included in a single registration application from three to one, with applications taking three to six months to complete. As a result, latecomers to the Taiwan market now need three to five years to build a complete product line. “It’s effectively creating an oligopoly for the offshore market players who are here,” McGowan says. The FSC has also placed restrictions on high-yield bond funds, which can offer yearly returns of 7-8% and are among the most popular offshore funds with Taiwanese investors. The regulations favor onshore funds, which can launch multiple high-yield bond funds yearly as long as two such funds are not introduced in succession. But for offshore funds, a master agent is permitted to distribute only one high-yield bond fund in Taiwan per year. “The regulator doesn’t want investments concentrated into one asset class,” says Andrew Wang, chief investment officer of Manulife Asset Management (Taiwan). “If there is a monetary tightening cycle and liquidity falls, high-yield bonds and the investors holding them will be hurt disproportionately.”

taiwan business topics • May 2015

INDUSTRY

CUS AUM In Different Asset Types 180

167.7 156.3

157.1

143.4 131.2 120

0 2010

2011

2012

2013

2014

Offshore Funds

80.3

73.4

92.4

91.0

105.1

Onshore Funds

63.1

57.8

63.9

66.1

62.7

SOURCE: SITCA / Keystone Intelligence Inc.

US$bn

Asset Weighting in Asset Management Industry

2010

2011

2012

2013

2014

Offshore Funds

43.84% 41.08% 43.98% 42.06% 44.89%

Onshore Funds

34.46% 32.33% 30.40% 30.55% 26.78%

Domestic Mandates

14.20% 18.32% 16.01% 16.76% 16.92%

Global Mandates

7.50%

8.28%

9.61% 10.63% 11.41%

SOURCE: SITCA / Keystone Intelligence Inc.

Number of Funds by Asset Type 2100 1686

1720

1733

1716 1730

1400

700 0 Offshore Funds Onshore Funds

2010

2011

2012

2013

2014

1026

1025

1023

1016

1025

660

695

710

700

705

SOURCE: SITCA / Keystone Intelligence Inc.

taiwan business topics • May 2015

Some older Taiwanese investors like to buy high-yield bond funds and use the regular dividend payments as a major source of income, notes Donna Chen, president of Keystone Intelligence. “But it can be a bit distorted in that they don’t know whether the dividend comes from their principal,” she says. Still, global high-yield bond funds remain popular with Taiwanese investors. They were among the top-selling offshore funds in Taiwan in 2014, with net sales of US$6.2 billion, according to Keystone Intelligence. High-yield bond funds also comprised 36% of total offshore AUM – a figure amounting to US$38.43 billion – as of the end of 2014, according to the Taipei-based Securities Investment Trust and Consulting Association (SITCA). In another move to curtail offshore business, the FSC announced in November 2014 that sales to Taiwanese investors of each offshore fund may not exceed 50% of the fund’s assets, down from the previous limit of 70%. The new rule, which will take effect on January 1, 2016, will affect about 20 offshore funds out of more than a thousand, Chen says. Fund managers affected by the new policy will likely need to suspend or discourage new subscriptions to meet the FSC’s requirements by the end of 2015.

Coming onshore At the same time as it is crimping the offshore fund market, the FSC is rolling out incentives for foreign fund managers to develop their businesses onshore. An incentive scheme introduced in February 2013 is designed to reward foreign firms that commit to building an assetmanagement business in Taiwan. The scheme includes faster approval for retail launches and waivers of derivative product restrictions. Other benefits are the ability to apply for more fund authorizations, relaxed restrictions on fund distribution, and permission to launch new products such as index-tracking and fixed-income funds. Participating foreign fund managers are also exempted from the new 50% AUM requirement. But so far, only two foreign fund managers have been qualified under the scheme: JP Morgan and Allianz Global Investors, which received FSC approval in September 2014. The FSC stated that the performances the two companies delivered in 2013 fulfilled the plan’s criteria, including having AUM among the top third of the industry and operating incomes that exceed the median. Chen of Keystone Intelligence says few foreign fund managers are likely to qualify under the scheme. “The threshold the regulator has set is very high,” she says. The FSC is also channeling the allure of the large China equities market to bolster onshore funds. Since 2012, onshore players have been permitted to launch funds that can invest 100% of their assets in China A-shares – renminbi-denominated stocks of companies incorporated in mainland China that trade on the Shanghai and Shenzhen exchanges. By contrast, offshore funds can invest a maximum of 10% of their assets in A-shares. There are eight onshore funds with specific A-shares in their fund names, managing a total of NT$28.2 billion as of this Feb-

A Report on the Financial Services Sector

ruary, according to Keystone Intelligence. In addition, local asset managers may issue renminbi-denominated funds in Taiwan while foreign fund managers may not. Wang of Manulife says the RMB-denominated fund platform has strong potential to perform well amid the internationalization and appreciation of the Chinese currency. Manulife’s Investor Sentiment Index survey for the second quarter of 2014 showed about 45% of Taiwanese respondents having exposure to RMB-denominated assets. These same investors indicated that RMB-denominated assets comprised 30% to 40% of their total investment allocation.

Deep-rooted strategy Looking ahead, opportunities remain abundant for both onshore and offshore fund managers in Taiwan. A major reason is that Taiwan’s pension funds are gradually outsourcing more of their assets to external managers. In March 2014, Taiwan’s Public Service Pension Fund hired BlackRock, UBS, and Allianz Global Investors to manage a total of US$1 billion in foreign mandates. Reform of Taiwan’s labor-pension plan could help make pension funds a larger source of revenue for asset managers. A proposed reform would entail adopting a “self-directed definedcontribution plan” such as the U.S.’s 401K or Singapore’s CPF. Workers would have the option to stay with the current scheme – under which the fund will be managed by the government with a minimum guaranteed earning equivalent to two-year fixed deposit interest – or select an asset-management company to

manage it for them. “We have high hopes that workers will soon be allowed to decide how they want to invest their pensions,” says Christine Jih, chairman and chief executive officer of BNP Investment Partners in Taiwan. Taiwanese authorities have indicated that the new pension plan, known as the Employee Choice Scheme Pension, could be launched in early 2016, she adds. In another new initiative, in December 2014 the FSC issued a ruling that allows securities investment consulting enterprises (SICEs) and securities investment trust enterprises (SITEs) with master agent qualifications to sell unregistered funds in Taiwan to institutional investors. The ruling gives such alternative investment vehicles as hedge funds and feeder funds a chance to enter the Taiwan market, notes Chen of Keystone Intelligence. Overall, however, industry players concur that the FSC will continue working to drive Taiwan’s asset-management business onshore. “The regulator has a deep-rooted strategy,” says Jih of BNP Paribas. “They want to cultivate local Taiwanese investment expertise.” “It’s natural to want a more vibrant onshore market,” says Yung of AllianceBernstein, who sees Taiwan as having strong potential to become a hub for regional asset-management operations. “The workforce is highly educated, costs are reasonable, and there is a demand for greater manpower on the operations side of the business.” At the same time, however, many foreign fund managers are less than pleased about the FSC’s push to bring business onshore, says Chen of Keystone intelligence. “Of course they don’t like it,” she says. “But they can’t fight it.”

TAIwAN’S PAYMeNT PLAN The introduction of mobile and third-party payment platforms is expected to bolster the nation’s burgeoning e-commerce market.

aiwan’s payments industry is getting a needed shakeup with the adoption of contactless technology to facilitate mobile transactions and the passage new legislation to legalize third-party electronic payment services. Those changes will not fundamentally alter the island’s payments landscape, which is dominated by big banks and credit card companies. But they will make it easier for Taiwanese consumers to make purchases on their mobile phones, giving a boost to the e-commerce

market, and also increase competition in the payments sector. Rising e-commerce growth and rapid smartphone penetration are driving the campaign to augment connectivity. E-commerce transactions in 2014 increased year-on-year by 15% to over NT$900 billion (US$28.5 billion), according to Taiwan’s Financial Supervisory Commission (FSC). At the end of 2014, total smartphone shipments expanded to 22.58 million units, nearly equaling Taiwan’s population, according

to the research firm IDC. “We believe Taiwan is ready to grow its mobile wallet business,” says Peipei Wu, a senior analyst with research firm IDC in Taipei. “The rising popularity of smart devices, introduction of new mobile payment standards, and favorable regulations will facilitate this trend.” IDC estimates that mobile payments in Taiwan will increase by 42% to NT$89 billion (US$2.84 billion) this year and to NT$160 billion in 2017, with most transactions coming from mobile commerce.

taiwan business topics • May 2015

INDUSTRY

CUS

Mobile payment platforms The arrival of large-scale mobile payment platforms is expected to provide a strong foundation for the development of mobile payments in Taiwan, spurring growth in the e-commerce industry, analysts say. The biggest of these platforms is the Taiwan Mobile Payment Co. (TWMP), a consortium of more than 30 banks together with the state-backed Financial Information Service Co., National Credit Card Center, and Taiwan Payments Clearing System Development Foundation. Launched in December 2014, TWMP is a near-field communication (NFC) mobile payment service. NFC-enabled devices use electromagnetic radio fields to send and read information without contact. To access TWMP’s service, users download the t wallet interface app, which is currently compatible with about 20 smartphones. With an NFC-enabled SIM, a handset can function as a debit card, credit card, and public transit ticket. Users simply tap the handset on a card reader at participating retailers. TWMP processes payments over its trusted service manager (TSM) platform, which provides security for contactless service over mobile networks. Security issues have frustrated previous efforts to develop mobile payment systems in Taiwan, Wu of IDC notes, but TSM is helping to resolve that problem. “Risks related to fraudulent transactions can result in big losses both for merchants and card companies,” she says, adding that as payments go mobile, it is necessary to develop new risk management tools for the new platform. TSM mitigates risk in mobile commerce by introducing interoperability and setting common standards for telecom providers and merchants, Wu says. Among Taiwan’s mobile operators, Chunghwa Telecom was the first to adopt mobile payments using the TWMP platform. Other carriers including Taiwan Mobile, Far EasTone and Asia Pacific Telecom will launch the service soon, analysts say. TWMP has ambitious plans for the Taiwan market. At a December press

taiwan business topics • May 2015

The WAVE beep-beep bear, TWMP’s audio jack plug-in NFC payment solution. photo : cna

conference to mark its launch, chairp e r s o n C h a o Ya n g - c h i n g s a i d t h e company has set a target of NT$10 billion (US$314.8 million) in transactions via smart cards and smartphones over the next three years. TWMP has two main competitors: Smart Catch International Co., which began offering mobile payments last September through Union Bank, and Alliance Digital Tech Co., a joint venture between Taiwan’s major telecoms, smartcard issuer EasyCard Corp. and several local banks. AllianceDigital plans to initially issue 300,000 NFC-enabled SIM cards during its second-quarter launch, increasing that number to 500,000 cards by the end of the year. “TWMP has big backers from the standpoint of authority and backend architecture support,” Wu says. “But we believe there is room for other service providers as there are many market niches to address, especially in fraud management and corporate services.”

Third-party payments Meanwhile, long-awaited legislation on third-party payments passed in February is expected to provide another impetus for growth in the e-commerce sector. The Electronic Payments Pro-

cessing Institutions Act will do so by permitting both banks and non-banks to offer third-party payment services, including open collection and payment, deposits, and remittances. The FSC forecasts that enactment of the legislation will increase Taiwan’s e-commerce market transactions from NT$880 billion (US$28.9 billion) in 2014 to between NT$1.2 trillion and NT$2 trillion (US$39.3 billion and US$65.6 billion) in 2015, making online shopping in Taiwan a “trillion-dollar industry.” The FSC has not confirmed when the law will come into effect, but most observers believe it will be in the first half of the year. Marco Ma, Visa’s Taiwan country manager, welcomes the new legislation. “We should encourage more alternative payments,” he says. But Jamie Lu, marketing manager of PChome, Taiwan’s largest e-commerce company, is skeptical. “The minimum capital requirements are too high, which will deter many potential market entrants,” she says, noting that the legislation requires electronic payment institutions to have paid-in capital of at least NT$500 million (US$15.9 million), and firms engaging in third-party payment collection and transfer businesses to have a minimum paid-in capital of

A Report on the Financial Services Sector

NT$100 million (US$3.2 million). The legislation works in favor of banks with their ample liquidity, Lu notes. “The banks are happy about this,” she says. “They don’t want competitors.” Nor will it be easy for foreign thirdparty payment providers to enter the market. While big firms like PayPal and AliPay – a subsidiary of Chinese e-commerce giant Alibaba – would have no trouble meeting the FSC’s capital requirements, the bill requires foreign companies to set up a local subsidiary, which would have to obtain approval from the regulator to operate in Taiwan. That may deter PayPal and AliPay from entering the market, analysts say. PChome chairman Jan Hung-tze has sharply criticized the FSC’s handling of third-party payment legislation. When the FSC assigned the Bankers Association of the Republic of China to draft the bill in December, Jan accused them of “cutting backroom deals.” Banks had reason to skew the legislation in their favor because third-party payment providers would be their competitors, he argued. The FSC requested the Bankers Association to draft the bill “for reasons of efficiency,” says Thomas Tien-mu Huang, an FSC vice chairperson. After the first draft of the proposal was completed, the FSC invited third-party payment providers and government agencies “to hold relevant meetings,” during which participants were “able to fully participate in the discussion and express their views,” he says. Wu of IDC believes the FSC is setting

the bar too high for new entrants to the third-party payment business but that the reason is straightforward: “They want to protect consumers,” she says.

gradual evolution Perhaps the greatest challenge facing Taiwan’s new payment technologies and platforms is persuading consumers of their benefits. To begin, cash remains king in Taiwan. It accounts for 75% of overall payment transactions, compared to just 30% in Hong Kong and South Korea, according to TWMP. The number of merchants accepting credit cards is rising yearly, notes Ma of Visa, but many small businesses still deal only in cash. “Cash is expensive to print and hard to keep track of,” he says. “The government wants transparency, so we should help Taiwan move away from cash.” Emily Tsai, an analyst at the government-backed Marketing & Consulting Institute (MCI), says third-party payment providers will need to offer strong incentives to win business. Even if cash dominates overall payments in Taiwan, credit cards account for 90% of online transactions, according to MCI data. “For people too young or without enough income to apply for credit cards, third-party payments will be appealing,” she says. “It will become more convenient for them to shop online. But for everyone else, there will have to be a good reason to use a third-party payment service instead of a credit card.” Tsai is more sanguine about the prospects for mobile payments, but expects

Country Comparison

Taiwanese consumers to warm to them gradually. Currently, only 50% of the island’s mobile users surf the Internet with their smartphones, despite a smartphone penetration rate close to 100%, according to MCI. That odd situation is a legacy of Taiwan’s poor 3G connectivity, which made browsing the Web on a handset arduous without a Wi-Fi connection, she says. The nationwide implementation of 4G networks will boost mobile Internet browsing and ultimately mobile payments as well, Tsai adds. Currently, 4G subscribers account for 13% of Taiwan’s overall telecom service users, according to research firm DigiTimes. Ta i w a n i s w e l l p o i s e d t o a d o p t mobile payments due to its “solid financial services foundation, a receptive regulatory environment, and key partnerships beginning to emerge,” according to MasterCard’s Mobile Payments Readiness Index, which assesses 34 markets worldwide. Taiwan ranked 11th overall, behind China (10th), Japan (6th), South Korea (5th) and Singapore, which finished first. MasterCard found that Taiwanese consumers lack familiarity with mobile payments, suggesting that robust marketing will be needed before significant adoption occurs. At present, about 8% of Taiwanese consumers use a mobile device to make purchases online, according to the credit card giant’s data. “Mobile payments have strong potential in Taiwan, but consumer habits are not going to change overnight,” concludes Wu of IDC. Taiwan Mobile Payments by Method

Accumulated smart-phone units shipped as a % of population, 2012-2014

SOURCE: IDC FINANCIAL INSIGHTS

taiwan business topics • May 2015

interview

OBSERVATIONS ON THE RETAIL SECTOR A beverage industry executive shares insights based on long experience in the Taiwan market.

AS TOLD TO DOn ShApirO

oug Klein has lived in Taiwan for 17 of the past 28 years, on three different tours of duty separated by stints in Hong Kong. In 1987, Klein was working for McCann Erickson Advertising in his native Perth, Australia, assigned to the Coca-Cola account, when he became aware of an internal job posting that seemed perfectly suited to his talents and interests. The agency was looking for someone with a background in marketing, pro-

motion, and media buying to handle the Coke account in Taipei. Klein applied, was offered the position, and arrived in Taipei for what was to be a two-year assignment. His career path then took him to The Coca-Cola Company and subsequently to Swire Beverages, the Coke bottler in the region. From 2005 until last year, he was Director and General Manager of Swire Coca-Cola Taiwan, and since 2008 has served as a member

of the AmCham Taipei Board for six years and as co-chair of the Retail Committee for seven years. Currently General Manager for Business Development at Swire Beverages, Klein reaches the company’s mandatory retirement age of 60 at the end of this month, but plans to remain in Taiwan in another capacity. Klein recently sat down with Taiwan Business TOPICS to talk about the changes he has witnessed in Taiwan.

On the development of the local retail sector

Last November, Klein spoke to business students at Fu Jen Catholic University as part of a CEO Lecture series sponsored by AmCham’s Innovation Council.

taiwan business topics • may 2015

When I came in the 80s, more modern retailing was just coming to Taiwan, including the introduction of convenience stores, McDonald’s, and We l l c o m e , C a r r e f o u r, a n d M a k r o (which later moved on). A whole revolution in the business took place in that era, so it’s now a very, very different world for the companies supplying those retailers. The general trade – the mom and pop stores and the independent supermarkets – used to be a very significant part of the market. That’s not the case anymore. Instead, you’ve got much more pro-

interview

fessional retailers and a greater concentration of retailers. For Coca-Cola, over half of our business now is with just 10 customers. And if I were at Procter & Gamble or Nestle or Unilever, it would be even more concentrated, because Coca-Cola also sells to restaurants, entertainment, vending and other on-premise channels. Retailing has become better in many ways for the consumer in terms of variety, safety and cleanliness, while from a supplier point of view it’s more challenging – and of course this is a worldwide trend. Retailers now have much better knowledge and they’re rightly more demanding than they used to be, so the suppliers have had to lift their game Klein with some of his company’s products, including Coke in bottles and cans, as well as MinIn other ways, though, things ute Maid orange juice and Japanese green tea. haven’t changed all that much. When I first arrived and was undergoing orientation, I was told that you’re doing business. It means you this is a very competitive market, with have to work harder on your marketing 200 new beverage products introduced and cost control. in the previous year, and that the situation couldn’t last. There had to be a shakeout, there had to be consolidation On changes in the beverage after a while. Well, 28 years later it still market looks the same. Almost the same list of companies In our case, our original, core brands is still here. A few have disappeared, are centered on sparkling beverages. a couple have come in, but for the You have to keep refreshing those and most part it’s the same cast of characgiving consumers a reason to keep ters. That makes for a very fragmented coming back to them. At the same time market, with the result that many comyou’ve got to extend into other catepanies struggle to achieve economies gories. In many ways we follow what of scale. Each one holds just their little Coke does in Japan, where we compiece of the pie, and it’s hard to get a pete in many non-sparkling categories. significant share of the market. The Coca-Cola Company sells the Whereas in the huge market of number one coffee, the number one China we compete against five or six sports drink, the number one green tea, major companies, in Taiwan I can and the number one blended tea. We’ve think of 30 competitors. In our system tried to adapt some of those products Taiwan is recognized as one of the most into Taiwan. challenging markets in Asia. And the We really have had to transform fact that we’ve had such little inflation the portfolio over the years. Since I adds to the problem. Prices are very low came back in 2005 for my third time for what is really a developed country in Taiwan, we’ve initiated many new and haven’t gone up for a long time, products. We’ve gone into juice with while a lot of our raw material costs are Minute Maid, and we’ve introduced international and are rising. So margins various Japanese teas since 2010 – and are always under pressure. That’s great we’ve also had Nestea lemon tea going for the consumer, but not so easy when back 20 years.

Interestingly, everyone thinks of Coca-Cola in terms of sparkling drinks having plenty of calories, but 20% of our sales today have no calories at all, between the two Japanese teas, Coke Zero, and water. That’s a huge change from just a few years ago. One of the challenges here, of course, is that the demographics are working against us. As the population ages, our core target – the age group between 12 and 24 – is smaller every year. As that shrinks, you’ve got to compensate for it in some way, and that comes back to putting a lot of stress on marketing. That includes developing new channels, new packaging, and linking with food – for example, we do a lot of promotion with food occasions. It also entails a lot of work with social media. It’s all about how to take an old brand and keep it relevant. The other interesting thing for beverages in Taiwan is the popularity of bubble tea, which is massive here, and brewed coffee. In fact, the two biggest developments for Taiwan beverages in the last 15 years have been the growth of brewed coffee and bubble tea. Not so many years ago, Taiwan wasn’t a coffee market at all. When I first came here, coffee was either Mr. Brown, which was a coffee-flavored soft drink, or sweet and creamy 3-in-1, which was invented for the Taiwan market. The whole brewed coffee culture is really a phenomenon of this century. Last year a BBC article even included Taipei on a list of the six top coffee cities in the world, along with Seattle, Melbourne, and a few others. It’s incredible, considering that Taiwan is so strong on tea and came to coffee so late. But it’s just embraced coffee in a big way. And there’s still a lot of tea consumption. Visitors from abroad are just amazed at how much tea is consumed. In most soft-drink markets, our colleagues talk about the number of “black doors” in a convenience store, exclusive for Coke and Pepsi. Here you have “green doors.” And perhaps one shelf of soft drinks.

taiwan business topics • may 2015

interview

On the spate of food-safety incidents in recent years If you go back to the melamine episode of 2008, that was a serious health issue. Babies died – not here, but in China. But a lot of the “crises” since haven’t proven to be so serious in terms of their effects. A lack of leadership and a lack of respect for science allows them to become a scare, and everyone panics. Too many of the people in the media and in politics and NGOs are interested in turning it into a bigger issue instead of trying to exert a calming influence. It becomes a contest over who can grab the latest headline with the latest scare tactic. I don’t think you can blame a particular political party or individuals, but it rather reflects the changing social environment and shifts in the power base among stakeholders. Unfortunately all these little things become distractions, causing some big things to be ignored. Taiwan has some major long term infrastructure challenges, such as the water supply, which we’ve known was a problem for a long time but haven’t addressed. Electrical power supply is another major crisis coming up. It doesn’t help to allow distractions to keep you from dealing with such major infrastructure challenges. How could the process be managed better? Right now there’s too much of a tendency to point fingers and blame people. Something goes wrong and you change the premier and reshuffle the cabinet. It becomes a real disincentive

for good people to go into government service. Ministers come into office knowing that if a problem comes up they’ll have to fall on their swords, whether or not the problem really had anything to do with them. The food issue is really symptomatic of larger issues in Taiwan. In the U.S., if there was a food crisis and the leading government scientists and academics gave reassurances, 95% of the people would listen. Such authorities would have credibility, and that applies in many countries. But here those same types of people aren’t accorded a similar level of respect. With its aggressive media, heated opposition politics, and active NGOs and Legislative Yuan, Taiwan is very different from what it used to be. Maybe some of the problems just stem from this being a learning curve for a young democracy. Adding to that now is the existence of social media and the 24-hour news cycle. There’s a worldwide phenomenon of shorter attention spans, and Taiwan democracy, without a lot of history behind it, is developing within that cauldron. It becomes hard for government to come out and make long-term commitments.

On living in Taiwan On my first trip to Taiwan, I was staying in what was the Hilton Hotel, now the Caesar Park, opposite the train station, with four lanes of traffic each way and buses belching exhaust fumes into the air. Having just come from a

very clean and quiet city, Perth, it was rather off-putting. Plus, I was alone and everything seemed so foreign and unfamiliar. But if you got through the first six to nine months, you were okay. You got a different perspective, and what you at first had considered crazy or at least disconcerting became the charm of the place. The living conditions these days are so much better. In the early days, my wife and I would say ‘let’s fly over to Hong Kong for some fresh air and cheap meals out.’ Not now. Taiwan today is so much cleaner and nicer, partly due to positive initiatives and partly because many industries have relocated offshore. The traffic is much better, the air quality is better, and the introduction of the MRT in the 90s has made Taipei a much easier place to live. I’ve also enjoyed working with the people – employees, customers, suppliers, the whole network. Despite the bureaucratic problems, Taiwan really is very welcoming to foreigners. Our company has brought a number of people in from other countries and they all settle in very well, from singles to people with families and kids. Hong Kong in many ways is operationally more efficient, but you don’t have the same personal relationships. I’ve enjoyed that opportunity to build relationships, and it’s possible to do that even when you may not have a language in common. I’ve just recently received my Permanent ARC, and so look forward to many more happy years in Taiwan.

Klein served as master of ceremonies at AmCham’s Creativity Night last October. Here he poses with the top team in identifying CLIO-awardwinning advertisements and ad campaigns.

THE WORLD VEGETABLE CENTER IS IN TAINAN The institute, the only Taiwan-based international organization, contributes to the global fight against malnutrition and poverty.

BY STEVEN CROOK Cold work in the AVRDC gene bank. pHOTO : AVRDC

short distance from the Southern Taiwan Science Park and its cluster of optoelectronics and green-energy companies, an institute quietly engages in vital work in an entirely different sphere. What is now known as “AVRDC – The World Vegetable Center” aims to alleviate both malnutrition and poverty around the world by increasing the production and consumption of nutritious vegetables. “The world depends on 15 to 20 staple crops, but there are thousands of vegetables which can be eaten,” says Dyno Keatinge, the center’s directorgeneral. Citing the World Health Organization’s recommendation that people eat at least 400 grams of fruits and vegetables per day, excluding starchy foods like potatoes and cassava, he says: “The nutrient value of most vegetables has fallen over the past 50 years because they’ve been bred for shelf-life and appearance. If people are to eat a more balanced diet, we need to have much more investment in vegetables. The lack of research is a major problem.” Keatinge points out that “biofortified” crops – those selectively bred

so as to be especially rich in nutrients – offer an alternative to vitamin supplements. “The golden tomatoes developed here are rich in vitamin A,” he notes by way of example. “However, because their color is different from normal tomatoes, winning over consumers took some effort.” Since 1978, the Center has released 184 tomato varieties (also called “lines”) in 44 countries, including 22 varieties in Taiwan and 17 in India. Besides improving diet, some of these have reduced “food miles.” Until recently, for instance, Tanzania’s biggest tomato processor and producer of ketchup had to import most of the tomato pulp it uses from China. But since the Center introduced a new cultivar with thicker skins (making for easier shipping and lasting much longer without refrigeration after harvesting), the company has undertaken to source tomatoes from 3,800 local smallholders and hopes to increase this number in the future. The Center’s efforts go far beyond improving vegetable varieties and helping farmers maximize yields. Researchers also identify inexpen-

sive and convenient food-preparation methods that retain vegetables’ nutritional value, and devise ways in which vegetables can be profitably processed and marketed by farming households and small-scale entrepreneurs. In Keatinge’s opinion, improving humanity’s diet requires cooperation between the public and private sectors. “Prebreeding, hybridization work is very expensive. No private-sector body can afford it,” he says. “The private sector has the distribution networks that enable us to share new lines with farmers in a timely manner.” “Our work is very multidisciplinary, and goes all the way from the farm to the table,” says Maureen Mecozzi, AVRDC’s head of communications and information. In the Philippines, which currently has the lowest rate of vegetable consumption in Asia, the Center works with celebrities to encourage people to eat more vegetables. Seed kits are given to families in South Asia, where small home gardens have been found to dramatically increase vegetable consum ption whil e c utt ing grocery bills. The Center’s scientists search for biocontrol agents, such as

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flies and wasps that prey on Maruca vitrata, a moth whose larvae can decimate legume crops.

Taiwan location The Center is unique in being an international organization based in Taiwan. Cars driven by its expatriate staff carry quasi-diplomatic license plates, leading some Taiwanese to mistakenly believe the Center is connected to the United Nations. In fact, AVRDC was set up as an intergovernmental organization just as the Republic of China government in Taipei was leaving the UN. As the Asian Vegetable Research and Development Center, it was founded on May 22, 1971 by the United States, the Asian Development Bank, and six Asian governments: Japan, the Philippines, South Korea, South Vietnam, Taiwan, and Thailand. The Taiwan government donated 116 hectares of sugarcane fields in what is now Tainan City’s Shanhua District. The main campus was dedicated on October 17, 1973. To better reflect its global role – it is active in Africa and Oceania as well as most of Asia – in 2008 the center rebranded itself as “AVRDC – The World Vegetable Center.” Keatinge d e s c r i b e s AV R D C a s “ a U N - s t y l e agency, but not recognized by the UN or the FAO [Food and Agriculture

Organization] simply because its headquarters are in Taiwan.” The Center’s status, he explains, means it is ineligible for UN or UN-derived funds. The Asian Development Bank no longer provides direct assistance. Throughout the 1980s, the Center’s annual budget hovered around US$5 millon. During the 1990s it averaged a little over US$8 million, and by the following decade had reached approximately US$11 million. In the calendar year 2014, AVRDC received US$19.34 million in grants and other revenues, up from US$17.59 million in 2013. Keatinge, an Irishman, believes these

sums are far from sufficient. “We’re spread very thinly over so many disciplines,” he explains. “A budget of US$100 million per year, comparable to that of the International Rice Research Institute (IRRI), would be appropriate.” According to its website, in 2013 the Philippines-based IRRI received US$93.5 million in grants, with more than 40% of that total coming from the Consultative Group for International Agricultural Research (CGIAR), a global partnership of national governments and philanthropic foundations. Beijing has blocked the Center’s efforts to join CGIAR. “Long-term, this has impacted the funding we can receive,” laments Keatinge. The lion’s share of the Center’s budget comes from donor nations, with NGOs and for-profit companies chipping in for specific projects, he says. In 2012, the Center became a founding member of the Association of International Research and Development Centers for Agriculture (AIRCA), a grouping of nine institutions. Keatinge is the current chairman of AIRCA, which includes the Beijing-based International Network for Bamboo and Rattan (INBAR). “The politics is beyond our control,” says Keatinge. Moving AVRDC to a country holding UN membership has been considered, “but not seriously and not recently,” he adds. “Taiwan has

Left: Harvesting tomatoes at AVRDC headquarters in Shanhua. Right: Blackjack leaves and various types of eggplant. pHOTOS: AVRDC

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been very loyal to us, and we’ve been very loyal to it.” D i r e c t o r- g e n e r a l s i n c e 2 0 0 8 , Keatinge holds a Ph.D. in Crop Physiology from Queen’s University in Northern Ireland. He previously held research and teaching positions in India, Nigeria, Pakistan, Syria, Turkey, and Trinidad. He plans to retire in April 2016, and later this year the Center’s 15-member board will choose a successor. If the job goes to a Taiwanese, it will not be the first time, as from 1994 to 2002 the post was held by Samson C.S. Tsou. Despite a degree of decentralization, Shanhua continues to be where most of the Center’s work is done. There, 29 international staff (among them six Americans) work alongside 186 Taiwanese. In all, the organization has 353 employees from 33 countries. Eight Taiwanese work for the Center outside Taiwan. “We hire qualified people no matter wha t c ount ry th e y ’r e fr o m ,” s a y s Mecozzi. “However, in some instances, project donors may indicate that only nationals of specific countries can be hired for particular positions.” Because their passports contain courtesy visas issued by Taiwan’s authorities, Shanhua-based non-Taiwanese staff cannot enter the People’s Republic of China. “Taiwanese staff can visit the mainland, however, and PRC delegations come here very often,” Keatinge says. Over the past two decades, China has consistently ranked among the top five countries worldwide receiving germplasm (vegetable seeds or tissue preserved for cultivation or research) from AVRDC, which distributes seed to any country that requests it. “We share everything with them, but they’ve never given any germplasm to us,” he explains. China behaves in a similar “all take and no give” manner toward other agricultural research bodies, he adds.

A wide range of vegetables At the end of 1973, the Center decided to focus its efforts on six vegetables: Tomatoes, soybeans, mung

beans, sweet potatoes, white potatoes, and Chinese cabbage. In purely botanical terms, a tomato is a fruit, but it is classed as a vegetable by, among others, U.S. Customs and Border Protection. In the 1980s, research began on additional crops, including cauliflower, radishes, and peppers. Work on both white potato and sweet potato strains has ceased, in large part because those staples are being thoroughly researched at the International Potato Center in Lima, Peru. However, AVRDC still works on sweet potato varieties grown not for their roots but for their leaves. In Taiwan, the latter (a rich source of vitamins C and B6) are often boiled or stir-fried for human consumption. These days, the World Vegetable Center concentrates its efforts on six vegetables groups: Solanaceous crops (tomatoes, sweet peppers, chilis, and eggplants); bulb alliums (onions, shallots, and garlic); crucifers (the cabbage family); cucurbits (cucumbers and pumpkins); legumes (mung beans and soybeans); and traditional vegetables. The traditional-vegetable group includes amaranth (sometimes known as Chinese spinach), bitter gourd (which has excited researchers because of its antidiabetic effects), okra, and spider p la n t (an he r b whos e s hoots pr ovide protein, beta-carotene, ascorbic acid, calcium, and iron). Falling into the same category is African eggplant, specimens of which can be seen in the Center’s Demonstration Garden. Unlike the tubular purple eggplants familiar to Western and Taiwanese consumers, African eggplants are shorter and a vivid red-orange. They contain betacarotene, calcium, vitamin C, and iron. Some of the little-known vegetables the Center is studying are featured on its Facebook page: www.facebook.com/ WorldVegetableCenter Elsewhere in the Demonstration Garden there is Bidens pilosa, a plant also known as blackjack or cobbler’s pegs. In Taiwan and many other places, Bidens pilosa is considered an invasive weed, although some people make tea from the leaves. According to AVRDC scientists, however, the young shoots and leaves are a poten-

Packaging seeds at the AVRDC gene bank. pHOTO : AVRDC

tial food because they contain useful amounts of vitamins C and E as well as beta-carotene. Nipple fruit (Solanum mammosum) is another unusual vegetable which Center researchers are studying for use as a valuable rootstock for vegetable grafting. The garden contains examples of low-cost drip-irrigation systems, plus two alternatives to pesticides. One, called “farmscaping,” is the embedding among crops of certain plants known to attract birds and bats, which then eat troublesome insects. The other is use of sticky traps, which are like flypaper. Most are yellow, but blue has been found to be especially effective at countering tiny insects called thrips. T h e C e n t e r ’s g r a f t i n g c h a m b e r enables visitors to gain a better understanding how this technique can benefit farmers unable to make large investments. In the tropics, grafting tomato scions onto eggplant rootstock allows the tomatoes to be grown during the hot-wet season, as eggplant roots can survive in waterlogged soils. After grafting, seedlings must spend about a week in a grafting chamber, where the reduced light, higher humidity, and cooler temperatures help them harden.

The gene bank The Center’s Genetic Resources and Seed Unit, or gene bank, houses the world’s biggest collection of vegetable seeds. “We’re the guardians of this germplasm. We preserve it and taiwan business topics • may 2015

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share it,” says Keatinge. Companies or research institutes that ask for vegetable germplasm are charged only for shipping, and bona fide requests are never refused. Seed transfers are governed by the rules of the International Treaty on Plant Genetic Resources for Food and Agriculture, which guarantees access to such materials unrestricted by intellectual property rights. Each unique member of a plant species is known as an accession, and is assigned a unique number. To date, the Center’s Seed Unit has gathered 61,280 accessions, including 15,476 soybean variants, 8,261 of various kinds of tomatoes, 8,235 of peppers, 6,742 of mung beans, and 3,713 of eggplants. All in all, 172 genera and 440 species from 155 different countries are represented. Seeds that have been properly dried and packaged can be kept for extremely long periods. “One scientist has calculated that dried mung bean seeds can be stored for hundreds of years,” says Huang Yung-kuang, an assistant specialist in the unit. Seeds are first placed in a chamber where the RH (relative humidity) is 5-10% – drier than the Sahara Desert. The drying process takes up to three weeks, depending on the size of the seeds and their moisture content. After packing in airtight 100-gram bags, the seeds are placed in either medium-term or long-term storage. The medium-term storage conditions are around 5 degrees Celsius (41 degrees Fahrenheit) and 45% RH, while the long-term storage is much colder at no more than minus 15 degrees Celsius (5 degrees Fahrenheit). Because exposure to such cold temperatures can be fatal, Huang and his team follow safety protocols. In addition to donning extra-warm clothes, staff members always work in pairs. One enters the storage area while the other waits outside. A timer is set. After 15 minutes, it sounds to remind the person inside to leave the storage chamber. If the work is not finished, the partner takes over. In case the person inside has not exited after 20 minutes, an alarm sounds in the unit’s office, and if a further five minutes elapses without an exit, the center’s security office is automati50

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Dyno Keatinge (left), then Deputy Agriculture Minister Hu Sing-Hwa (center), and ROC Vice President Wu Den-Yih (right). pHOTO : AVRDC

cally alerted and security staff intervene. The seed collection, which started in 1972, exceeded 23,000 accessions by 1985. By the early 21st century, it was clear that more space would soon be needed. An expansion project funded by Taiwan’s Ministry of Foreign Affairs was completed in 2011. “We won’t have to worry about storage space for the next 30 or 40 years,” says Huang, who also notes that the newest chambers have been built approximately 1 meter above ground level to be safe from flooding. To date, samples of almost 20% of the accessions stored in Shanhua have been dispatched to the Svalbard Global Seed Vault, located on a frigid Norwegian-ruled island 1,300 kilometers from the North Pole. The Seed Vault serves as a backup facility for gene banks around the world. In recent years, seed banks in Iraq and Afghanistan have been destroyed by warfare, while the major gene bank in the Philippines was destroyed by fire in January 2012, just six years after it suffered serious flood damage. About once a year, the World Vegetable Center adds to its deposit in Svalbard. Because the Center’s collections of tomato and mung bean seeds are probably the world’s most complete, sending samples of those seeds is considered a priority, Huang says.

Keatinge supports using genetic engineering techniques where appropriate to bolster pest- or disease-resistance, or to enhance nutritional value in crops [see the separate article in this issue on GM crops]. He describes the testing regime for GM crops in many countries as “ludicrously strict,” reducing opportunities for consumers to benefit from GM breakthroughs. But because of the controversy surrounding GM food, no GM crops have been planted in the recent past in AVRDC’s fields. By 2013, agriculture’s share of Taiwan’s GDP had shrunk to just 1.7%. Nonetheless, Keatinge is full of praise for the training and marketing assistance farmers receive from the government’s Council of Agriculture (COA) and local farmers’ associations. “The level of collaboration is splendid, and I fully agree with the ‘Small Landholder, Big Tenant policy,” he says. Under that program, started in 2009, the COA has been encouraging landowners unable or unwilling to engage in farming to lease their fields longterm to professional farmers. “Of course, it would be nice if the younger generation could regard agriculture as a profitable sector and a good career choice,” says Keatinge. “Nevertheless, Taiwan is the world’s best exemplar of high-tech, mechanized small-plot agriculture.”

amcham event

Offering Thanks through Hsieh Nien Fan

ach year for the past 47 years, the American Chamber of Commerce in Taipei has held its Hsieh Nien Fan banquet as a way to express gratitude to the Taiwan government and members of the local business community for their cooperation and support during the past year. The 2015 edition of the gala event took place April 9 in the Grand Ballroom of the Grand Hyatt Hotel, with nearly 700 AmCham members and guests in attendance. As he has done every year that he has been in office, President Ma Ying-jeou served as the keynote speaker and stayed for dinner and to greet and toast each table. Director Christopher Marut of the American Institute in Taiwan (AIT) also delivered remarks, and Peter Dernbach reprised his last year’s role as master of ceremonies. The evening was opened by a speech by AmCham Taipei Chairman Thomas Fann, who expressed thanks to both the Taiwan government and AIT for helping to promote a positive business environment in Taiwan. Fann said that “AmCham’s fervent wish is that the year to come will bring Taiwan closer

President Ma Ying-jeou on stage, together with AIT Director Christopher Marut and AmCham Taipei Chairman Thomas Fann.

to cementing its role in the evolving international trade framework for the Asia Pacific” known as the Trans-Pacific Partnership or TPP. He noted that “perhaps the Chamber’s number-one current theme is the absolute necessity of assuring eventual membership for Taiwan in the TPP.”

To bolster Taiwan’s TPP candidacy, Fann stressed, “it will be vital to send clear signals in the months ahead that Taiwan is dedicated to liberalizing its regulatory regimes and to ensuring that it is fully in conformity with international standards and practices. There is no clearer signal than taking concrete measures to resolve certain areas of contention. And it’s also critical that robust communications with the public takes place in timely fashion.” Fann cited forward-looking policies adopted by the Financial Supervisory Commission (FSC) under Chairman Tseng Ming-chung as a model for other agencies. He also stressed the need for the Legislative Yuan’s support in the effort to demonstrate Taiwan’s commitment to free trade and regulatory coherence. In his keynote address, President Ma noted that the following day would be the 36th anniversary of pas-

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sage of the Taiwan Relations Act by the U.S. Congress. He went on to stress the longstanding warm relationship between the Republic of China and the government and people of the United States. He referred to the two countries as continuing “partners in progress.” Director Marut noted the “positive trajectory of the U.S.-Taiwan economic relationship,” reflected in the fact that Taiwan last year reclaimed its position as the United States’ 10thlargest trading partner, while the United States reclaimed its position as Taiwan’s second-largest trading partner. At the same time, he praised AmCham’s annual White Paper and Business Climate Survey for “highlighting structural weaknesses that imperil the sustainability of recent growth trends” and offering solutions. He said that “improved regulatory coherence in Taiwan and harmonization with international standards” would go a long way toward improving Taiwan’s attractiveness as an investment destination. Besides the President, other highlevel dignitaries in attendance included former Vice President Vincent Siew, National Security Council Deputy Secretaries-General Jacob Chang and Liu Da-Nien, Minister of Foreign Affairs David Lin, Minister of Economic Affairs John Deng, National Development Council Minister Duh Tyzz-jiun, Environmental Protection Adminis-

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Among the dignitaries at the head table was former Vice President Vincent Siew, seated on the left.

tration Minister Wei Kuo-yen, FSC Chairman Tseng Ming-chung, and various vice ministers and department directors-general. Attendees enjoyed a sumptuous meal featuring barbecued U.S. beef ribs, accompanied by Jacob’s Creek Sparkling Chardonnay Pinot Noir, Jacob’s Creek Shiraz Cabernet, Jacob’s Creek Chardonnay, and Royal Salute 21-Year-old Scotch Whisky. Making the event possible was the generosity of the 2015 Hsieh Nien Fan sponsors: Platinum Sponsor Citibank;

Wine & Liquor Sponsor Royal Salute Scotch Whisky by Pernod Ricard; Gold Sponsors Corning Display, Franklin Templeton Investments, and Standard Chartered Bank; Silver Sponsors 3M, HSBC, JTI, and Micron; Bronze Sponsors Air Products, Alcatel-Lucent, American Express, Baker & McKenzie, K&L Gates, Philip Morris, Siemens, and Synopsys; General Sponsors Audi, Dun & Bradstreet, Ford Lio Ho, Grand Hyatt Taipei, IBM, Procter & Gamble, Samsung, and the Tobacco Institute of the Republic of China.

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Festivals Add Excitement to Springtime in Taiwan

pend a week in Taiwan, and you are likely to have the chance to see a festival of some kind. Some are traditional yet raucous expressions of the folk beliefs that, combining Buddhism and Taoism, give the island a uniquely colorful religious landscape. Others are of much more recent origin, and have been organized to promote a particular place or industry. Taiwan’s rich and diverse festival culture is one of the country’s unique characteristics, and to help potential visitors plan itineraries around events that interest them, Taiwan’s Tourism Bureau is highlighting 35 world-class activities between late 2014 and the end of this year as part of its “Time for Celebration” promotion. In Taiwan, as in all ethnic Chinese societies, fireworks have a cultural significance far exceeding that in Western countries. Massive quantities are shot off during temple parades and deities’ birthday celebrations, while

families mark weddings and other happy occasions with barrages of rockets and strings of firecrackers. No wonder fireworks displays are much loved by Taiwan’s people. The Penghu Ocean Fireworks Festival, now in its 12th year, enlivens visits to the Penghu archipelago. This cluster of 90 islands, around 45 kilometers from Taiwan’s southwest coast, offers pristine beaches and ancient, semiabandoned villages such as Erkan. The first Chinese settlers came here almost a thousand years ago, and many of the very old and intensely photogenic homes they made using local coral stone still stand. The archipelago also boasts excellent seafood and a thoroughly relaxing vibe. Many tourists find themselves imitating the islanders’ early-to-bed, early-to-rise habits, but each Monday and Thursday evening between April 20 and June 25 there is a good reason to stay out a little later. At 9 p.m. on

those days, the skies above Magong’s Guanyin Temple erupt with 15 minutes of fireworks displays sponsored by the Penghu National Scenic Area Administration (www.penghu-nsa.gov.tw). B y M a y, t h e w e a t h e r t h r o u g h out Taiwan is warm. Not surprisingly, many people head to beaches such as Baishawan and Fulong near Taipei, or Kending on Taiwan’s southernmost tip. Running from May 2 until the final day of June, the 2015 Fulong International Sand Sculpting Festival will be the eighth edition of an event that draws crowds to Taiwan’s northern coast. Fulong’s three-kilometer-long beach has soft quartz sand that sticks together very well when wet. The conditions are thus

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taiwan business topics • may 2015

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perfect for creating works of art, some of which are as big as an SUV. Drawing inspiration from myths and legends as well as movies and cartoons, the sand sculptors – both Taiwanese artists and professionals from overseas – will shape on-the-spot masterpieces, hoping to scoop cash prizes as well as the adulation of visitors. The annual Taiwan Balloon Festival offers chances to see Taiwan’s stunning East Rift Valley from high above. Running from June 27 through to August 9, the festival features the launching of balloons from Luye High Terrace, a plateau that is also one of Taiwan’s top paragliding spots. A short video on the event’s website (http:// balloontaiwan.taitung.gov.tw) shows off the area’s magnificent scenery. Even those with no interest in balloon rides or paragliding should consider heading east to sample the region’s scenic, ecological, and cultural treasures. Sights on the eastern coast such as Sanxiantai (Terraces of the Three Immortals) have been on the tour-group circuit for many years. Far less well-known, and ideal for nature lovers, is Baibao Creek. In addition to rich flora, the banks of this inland waterway host an exceptional butterfly population. The low wooden weirs here are specially designed to allow freshwater fish species to thrive.

One in six of the 557,000 people residing in the counties of Hualien and Taitung are indigenous. Aboriginal traditions are evident in villages inhabited by the Amis, Paiwan, and Truku minorities, among others. All forms of exercise have grown in popularity in Taiwan in recent years, 54

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but one of the older sports on the island is dragon-boat racing. Traditionally, these races are held at the time of the Dragon Boat (Duanwu) Festival, which is celebrated on the fifth day of the fifth lunar month (June 20 in 2015). This year the major boat races will take place in the town of Lugang from June 19 to 21, and will feature teams from overseas as well as around Taiwan. Each boat is guided by a drummer whose beats help the 20 paddlers synchronize their strokes. The vessels get their name from dragon-head decorations at the bow and a dragon tail at the stern. The races, as well as the sticky rice dumplings (zongzi in Mandarin) on which Taiwanese people feast at this time of year, commemorate the death of Qu Yuan. A great poet and patriotic government official, Qu served the State of Chu more than 2,300 years ago during China’s Warring States Period. He was in exile when he learned that the State of Qin had captured the Chu capital. Distraught, he tied rocks to his feet and ended his life by jumping into a river in what is now China’s Hunan province. The boat races originated from the efforts of people who took to their boats in an unsuccessful bid to save Qu’s life. When news of Qu’s demise spread, friends and supporters rushed to the riverside and began throwing rice balls into the water, so that his body would not be eaten by the fish. That is how the custom got started of eating rice dumplings, which are usually filled with pork, mushrooms, and peanuts, and then wrapped in bamboo leaves for steaming.

Lugang is not the only place where tourists can enjoy dragon-boat races, as similar events are held in Taipei, Tainan, and elsewhere. Even if you cannot attend the town’s dragonboat events, do make sure Lugang is on your itinerary. Once Taiwan’s second-largest settlement and a major trading port, it remains jampacked with genuine culture and antiquity. A different kind of watery fun can be had on June 21 and 22 at the 2015 Xiuguluan River Rafting Activity. The Xiuguluan River in the eastern county of Hualien is Taiwan’s most popular whitewater rafting location. It is calm enough to be safe for first-timers, yet has enough eddies, rapids, and drops to guarantee excitement for all. To encourage visitors to make the most of summer’s long days and uplifting sunshine, the 2015 edition of “Taiwan Fun on the Tropic of Cancer” will run from June 22 to September 30. As in previous years, the festival offers an enticing combination of refreshing local delicacies best enjoyed in the summer, as well as exciting outdoor activities. For further details of these and other events, plus general travel information about Taiwan, visit the website of Taiwan’s Tourism Bureau (www. taiwan.net.tw). Alternatively, call the 24-hour tourist information hotline (0800-011-765). It is toll free within Taiwan, and those picking up the phones speak English and Japanese in addition to Chinese.