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Tech Industry

The greater China high-tech highway

McKinsey experts explain how falling tariffs, and liberalizing trade and investment policies are changing the trade landscape between Taiwan and China.

    Taiwan's high-technology industry is about to benefit to an even greater extent from its economic ties with China now that both are members of the World Trade Organization.

    As tariffs fall, and trade and investment policies liberalize, Taiwan's tech companies will have more near-term business opportunities in China than will companies in most other sectors, a McKinsey study shows.

    The China-Taiwan high-tech relationship is of major interest to many multinational companies, which look to Taiwan for high-tech design, contract manufacturing and foundry services. These multinationals stand to benefit from lower costs if their Taiwanese suppliers pass along the savings generated by increased trade with China.

    A number of world-class high-tech manufacturing companies are based in Taiwan--Taiwan Semiconductor Manufacturing Co. (TSMC) in semiconductors, Asustek Computer in motherboards, Acer and Quanta Computer in PCs.

    The industry is a net exporter, with a trade surplus of $21 billion ($735 billion Taiwan new dollars). Over the past few years, however, many of these companies have started shifting some of their manufacturing operations to China in order to reduce production costs and stay competitive. This trend has rapidly accelerated over the past 18 months, as more and more cash-strapped U.S. customers have made moving to China a precondition for doing business.

    Much obliged
    WTO rules oblige both Taiwan and China to lift their limitations on foreign investment. In all likelihood, Taiwanese manufacturers will soon be able to invest directly in Chinese businesses. Historically, the authorities in Taiwan have restricted certain Taiwanese investments in China, but these restrictions were recently lifted for 122 types of electronic products.

    China has also pledged to streamline the guidelines for evaluating many investment proposals and to simplify import procedures. The easing of these regulations paves the way for even more Taiwanese direct investment in China?s high-tech sector.

    Moreover, as Chinese tariffs on high-tech products fall, Taiwanese companies can expect to increase their exports to China's hungry markets and thereby to raise their margins and market share. These changes will probably further encourage the creation of a more efficient Greater China supply chain, which would reduce overall manufacturing costs.

    A number of leading hardware manufacturers are already reconfiguring their supply chains to take advantage of this new state of affairs in the Far East.

    Only a few foreign companies have their own factories in Taiwan for manufacturing high-tech goods, but they do purchase significant quantities of these products from Taiwan for goods sold in their home markets. Foreign buyers will thus be able to share the cost reductions of their Taiwanese suppliers--a development that is likely to give them further incentive to outsource even more of their production and other operations to Taiwanese companies.

    For more insight, go to the McKinsey Quarterly Web site.

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