24 Nov 2011
HKTDC Research: ECFA-Taiwan firms leverage Hong Kong in the Mainland market
- Since the signing and implementation of the Cross-Straits Economic Cooperation Framework Agreement (ECFA), Taiwan companies have generally become more positive in opening up the market of the Chinese mainland. According to a questionnaire survey conducted in Taiwan by the Hong Kong Trade Development Council (HKTDC)*, more than half of the Taiwan companies are going to set up or expand their business on the mainland. Many of them are targeting at two or more regions, such as the Yangtze River Delta, Pearl River Delta and Bohai Rim. The finding shows that Taiwan companies generally look forward to a more full-scale development of the investment, production and market potentials of different regions in the Chinese mainland.
- Apart from expanding their trade, sourcing and production activities in the Chinese mainland, Taiwan companies also look forward to tapping into the mainland market by engaging in the distribution and wholesale (36%) as well as retail (23%) business. A small proportion of the respondents also want to provide professional services on the mainland, such as information technology and product design. It is obvious that many Taiwan companies want to step up their sales of industrial products and consumer goods to mainland clients while the service providers want to seek business opportunities by capitalising on the rapid economic development of the mainland.
- To tap into the mainland market effectively, most Taiwan companies require different types of support services such as mainland market information (67%), protection of intellectual property rights (IPR) (48%), legal and mediation services for settling commercial disputes (42%), as well as marketing and publicity services (39%). At the same time, they also look for various professional services in relation to finance, accounting and taxation.
- Many of the services required by Taiwan companies fall into the sectors in which Hong Kong enjoys clear advantages. At present, nearly half (43%) of the Taiwan companies that engage in mainland business are actually using the services of Hong Kong. In order to expand their mainland business, 73% of the Taiwan companies indicate that they are interested in capitalising further on the services of Hong Kong including (1) sales and marketing; (2) management, shipping and transportation; (3) banking and finance; (4) legal and IPR-related services; and (5) technology and product development. Most of these Taiwan companies are interested in two or more categories of Hong Kong services, reflecting that if Taiwan companies look for Hong Kong support in their mainland business expansion, it is likely that they will use several categories of Hong Kong services.
- Taiwan companies have a high regard for Hong Kong as a service platform in the Asia-Pacific region. In their opinion, the advantages of Hong Kong, such as free flow of capital (70%), efficient/transparent financial services (66%), sound and transparent legal system (63%), advanced development and free flow of market information (62%), as well as IPR protection (61%), are “important” or “very important” in supporting their mainland business. It is expected that there will be more Taiwan companies looking for various services of Hong Kong to support their mainland business or their move into the mainland market.
Cross-straits economic and trade relations under ECFA
Since the signing and implementation of ECFA in 2010, both Taiwan and the Chinese mainland have lowered the import tariffs of the products covered by the ECFA Early Harvest Product List and have opened up part of their service sectors to each other with effect from 2011. Both parties will continue to negotiate further on cooperation in various cross-straits economic sectors with a view to further liberalising their markets.
The Early Harvest Program of ECFA has begun to bear fruit. According to the mainland’s Customs statistics, imports from Taiwan to the Chinese mainland reached US$83.1 billion during the first eight months of 2011, which is an increase of 9.5% over that of the same period last year. Among this import value, the preference granted by the mainland to Taiwan’s products covered by the Early Harvest list is about US$13.6 billion, which is an increase of 13.4% over that of the same period last year. The total import tariff being waived for eligible goods amounted to US$77.93 million.
In fact, cross-straits trade has sustained strong growth momentum over the past 10 years. According to the statistics of the Chinese mainland, exports from the mainland to Taiwan increased from US$3.1 billion in 1995 to US$29.6 billion in 2010. Although cross-straits trade fell in value in 2009 as a result of the financial tsunami, an average annual growth rate of 16.2% was registered from 1995 to 2010. On the other hand, the value of imports from Taiwan to the Chinese mainland was even greater, rising from US$14.8 billion in 1995 to US$115.7 billion in 2010, posting an average annual growth rate of 14.7%.
Goods involved in cross-straits trade are mostly industrial products and raw materials, including electronic products (HS 85), machinery (HS 84), optical products (HS 90), plastics (HS 39) and chemical products (HS 29, 38). Together, these products accounted for some 85% of the total value of cross-straits trade in 2010, underscoring the close links between the manufacturing industries and supply chains of both sides. This is particularly the case with Taiwan where the Chinese mainland has become an important production base of many Taiwan companies and the key market of their industrial products. As a result, the role of the Chinese mainland as the trading partner of Taiwan is becoming more and more important. According to the estimation of the Ministry of Economic Affairs (MOEA) of Taiwan, the total value of its trade with the Chinese mainland, including those of re-export / transshipment, has risen from about US$21 billion or 9.7% of Taiwan’s overall external trade value in 1995 to US$120.8 billion or 23% of its overall external trade value in 2010.
At the same time, the investment of Taiwan companies in the Chinese mainland is also increasing. In the past, the abundant and cheap labour resources of the Chinese mainland have already attracted a great number of Taiwan enterprises to set up production bases there. According to MOEA statistics, the approved investment of Taiwan companies in the Chinese mainland amounted to a cumulative value of US$97.3 billion from 1991 to 2010, accounting for 60.9% of the total external investment of Taiwan during the same period. This is particularly the case after 2000 when the proportion of mainland investment in the overall external investment of Taiwan has significantly increased from about 9.5% in 1990 to 83.8% in 2010. Since its introduction of the Regulations Governing the Approval of Investment or Technical Cooperation in Mainland China in 1993, the Taiwan Government has been gradually lifting its restrictions on the technology contents of investment in the Chinese mainland in recent years, allowing the investment to shift gradually from traditional labour-intensive manufacturing industries to technology-intensive industries, particularly electronic parts and components industry as well as computers, electronic and optical products industries. These investments account for a total of 41.7% of the overall Taiwan investment in the Chinese mainland in 2010, representing a big leap from the ratio in the early 1990s.
In recent years, Taiwan companies are attaching growing importance to the development of the mainland market. In fact, Taiwan companies have been taking positive action in selling various kinds of industrial products, parts and components as well as raw materials produced by their production plants in Taiwan and the Chinese mainland to the local and foreign enterprises on the mainland. As a result, the mainland market has become an important contributor to the growth of Taiwan businesses. Some Taiwan companies have actively tapped into the consumer market of the Chinese mainland, making investment in non-manufacturing business such as distribution and retail. Closely following the liberalisation brought forth by ECFA in respect of some cross-straits service sectors, other related service providers have also expedited their investment in the service sectors of the Chinese mainland. Since the implementation of ECFA, for example, a number of Taiwan banks including the Land Bank of Taiwan, Taiwan Cooperative Bank, Chang Hwa Bank and First Commercial Bank have been approved by the China Banking Regulatory Commission to set up branches in the Chinese mainland. These Taiwan banks offer financial services to support the business operations of Taiwan companies on the mainland. They also set sights on tapping into the local market.
Following the gradual implementation of ECFA and the continuous expansion of the economy and market of the Chinese mainland, it is expected that cross-straits trade and investment will inevitably increase and Taiwan companies will further expand their business on the mainland. As Hong Kong has always been providing various services for cross-straits trade and economic exchanges, it is very likely that Taiwan companies will capitalise more on the service platform of Hong Kong in running and expanding their mainland business.
In view of this, the Hong Kong Trade Development Council (HKTDC) has joined hands with Importers and Exporters Association of Taipei and Taiwan Electrical and Electronic Manufacturers’ Association in conducting a questionnaire survey in Taiwan so as to better understand the intentions of Taiwan’s manufacturers, traders and related companies in the development of mainland business following the implementation of ECFA. The survey also looks at the needs of Taiwan companies for various support services and the areas where they will make use of the service platform of Hong Kong to support their mainland business operations.
Questionnaire survey on Taiwan enterprises
The questionnaire survey was conducted in Taiwan in August and September, 2011. During the survey, HKTDC mailed the questionnaires to 7,416 member companies of the Importers and Exporters Association of Taipei and Taiwan Electrical and Electronic Manufacturers’ Association. A total of 785 valid and duly completed questionnaires were collected during the survey period. The return rate of valid questionnaires is l0.6%.
In terms of the nature of their core business, the Taiwan companies surveyed are mostly manufacturers (53%) and traders (38%), accounting for 92% of the respondents in total. The products involved in their business mainly include the parts and components of electronics and electrical appliances (22%), electronic products and electrical appliances (18%), hardware and metal products (17%), machinery, parts and components (16%) as well as automotive and auto parts and components (13%).
On the other hand, 6% of the respondent companies are service providers, engaging in sectors such as retail (17%), distribution and wholesale (15%), transportation and logistics (13%), product design (13%), marketing and advertising (6%), real estate and construction (6%) as well as hotel and catering services (6%).
Among the respondent companies, 45% are small enterprises that have an annual global turnover of NT$100 million or less. Another 52% indicate that their annual global turnover is above NT$100 million, and they are mainly medium-sized with annual turnover ranging from NT$100 million to NT$1 billion.
ECFA spurs mainland business expansion
As the economic and trade relations between Taiwan and the Chinese mainland have been developing for a number of years, many Taiwan companies have already set up their mainland business in various sectors. According to the survey findings, 74% of the respondent companies are running mainland business. Among them, 55% are engaged in the export of goods to the mainland market and 44% are engaged in production activities on the mainland. Besides, some companies have already ventured into the mainland market, dealing in the distribution and wholesale business (25%) as well as retail business (13%). Another 21% are providing various kinds of services on the mainland, including technology importation, catering, and equipment installation/consultancy/maintenance/after-sale services. The remaining 10% are running other business on the mainland such as product sourcing.
With the rise in their mainland business operations, nearly half of the respondent companies (48%) indicate that they already have offices in Hong Kong or the Chinese mainland. Most of them (55%) set up their offices in the Yangtze River Delta (YRD) such as Shanghai and Jiangsu, followed by Pearl River Delta (PRD) and other places in Guangdong Province (45%), while 22% set up their offices in Hong Kong. A smaller proportion of Taiwan companies have located their offices in other cities such as Xiamen and Ningbo.
Since the signing and implementation of ECFA, Taiwan companies have generally become more positive in expanding their mainland business and opening up the market of the Chinese mainland. According to the questionnaire survey, more than half of the Taiwan companies (56%) indicate that after taking the ECFA into account, they will “definitely” or are going to (by saying “yes”) set up or expand their mainland business in the coming three years. Those who indicate that they will “probably” do so also account for 31% while those saying “no” only account for 13%.
For the respondent companies, manufacturing and trade are the major types of mainland business. Among those who gave their answers as “definitely”, “yes” or “probably”, 56% indicate that they will set up or expand the business of exporting to the Chinese mainland; 49% will engage in the sourcing of goods and raw materials on the mainland and 32% will be setting up or expanding their manufacturing activities. However, many respondent companies also want to tap into the mainland market by engaging in distribution and wholesale business (36%) as well as retail business (23%), and to provide professional services (9%) in the Chinese mainland such as information technology and product design. A small proportion of respondent companies also want to engage in technology R&D activities (7%) in the Chinese mainland.
In setting up or expanding their business in the Chinese mainland in the coming three years, Taiwan companies mostly prefer the YRD region such as Shanghai and Jiangsu (67%) as well as PRD and other places in Guangdong Province (52%). However, some of them will also focus on the Bohai Rim region such as Beijing and Shandong (28%), the central and western provinces (18%) as well as the provinces in Northeast China (10%).
It should be noted that about 48% of the respondent companies choose one mainland region for setting up or expanding their business while another 49% choose to expand their business in two or more mainland regions. It shows that many Taiwan companies want to move further into different regions on the mainland so as to have a more full-scale development of the investment, production and market potentials of the Chinese mainland.
Seeking service support
In order to launch or expand their mainland business more effectively, most Taiwan companies would seek support services of various kinds or strengthen their own support capabilities. These companies constitute 96% of all the Taiwan companies surveyed. The services that they seek are mostly those related to the development of the local market in the Chinese mainland, especially mainland market information, which accounts for 67% of all the respondent companies, followed by IPR protection (48%), legal and mediation services for settling commercial disputes (42%), as well as marketing and publicity services (39%).
It is obvious that apart from engaging in processing activities in the Chinese mainland, many Taiwan companies also want to tap into the mainland market for the sale of industrial products and consumer goods to mainland clients. Service providers also look for more business opportunities arising from the rapid economic development on the Chinese mainland. However, both the availability of useful market information and the execution of effective marketing and publicity campaigns are crucial to the successful development of the mainland market. As for day-to-day operation, how to effectively protect the companies’ IPR in the Chinese mainland and how to avoid or settle any commercial disputes with the mainland partners or clients are the difficulties that Taiwan companies need to face. All these lead to their demand for the related services.
Besides, the service demands of Taiwan companies also focus on various professional services that are related to finance, accounting and taxation, including the fund procurement of Renminbi and foreign exchange (36%), accounting and taxation services (32%), credit management for reducing clients’ outstanding payment for goods/services charges (31%) as well as financing and borrowing for their mainland business (22%).
Many of the services required by Taiwan companies fall into the sectors in which Hong Kong enjoys clear advantages. Among all the respondent companies, 37% indicate that they are already using the services of Hong Kong, and most of them (87%) are running mainland business. Hence, the overall ratio of the surveyed Taiwan companies running mainland business is 74% as mentioned in the preceding section. In other words, among the Taiwan companies that are running mainland business, nearly half (43%) of them are using the services of Hong Kong.
At present, the most popular Hong Kong services used by Taiwan companies are the re-export/transshipment of goods via Hong Kong and staff of Taiwan companies travelling to and from the mainland via Hong Kong, which account for 52% and 44% respectively among the Taiwan companies using Hong Kong services. Other Hong Kong services that they use include banking and finance (37%), exhibition (31%), corporate secretarial services such as setting up and incorporating new companies (18%), and liaison with mainland clients through Hong Kong (15%).
In fact, Hong Kong is playing a particular role in the cross-straits economic activities. Ever since the conclusion of the Cross-straits Air Transport Agreement and the Cross-straits Sea Transport Agreement in November 2008 when the designated ports and airports of Taiwan and the Chinese mainland can have direct cross-straits air transport and sea transport links with each other, some of the cargo and passenger transportation services that use Hong Kong as the transit point may be affected. Yet as Hong Kong is a highly efficient service platform, many Taiwan companies still prefer to use the services of Hong Kong.
For example, Hong Kong is a major international trade and shipping centre of the region and the adjoining Guangdong Province has attracted many Taiwan companies to set up their factories there. Among the total value of cross-straits bilateral trade, the ratio of cross-straits re-export trade handled by Hong Kong has gradually dropped from 46.9% in 1997 to 22.8% in 2010. However, Taiwan’s re-export trade to the mainland via Hong Kong has been growing continuously, and the trade value involved has steadily increased from US$11.5 billion in 1997 to US$27.5 billion in 2010 at an average growth rate of 7% per annum. This shows that Taiwan companies continue to treat Hong Kong as a service platform for handling cross-straits trade.
An estimated 5,000 Taiwan companies are actively operating in Hong Kong at present, which is a significant increase from the estimated 3,000 in 2002. According to the latest data of Hong Kong’s Census and Statistics Department, 22 Taiwan companies have set up their regional headquarters in Hong Kong and another 175 have set up regional offices in Hong Kong as at June 2011. The main purpose of setting up companies, regional headquarters or offices in Hong Kong is to make use of the various services and conveniences of Hong Kong to handle their investment and operation in the mainland.
Following the implementation of ECFA and the strengthening of cross-straits economic and trade relations, it is expected that more and more Taiwan companies will set up or expand their mainland business. Their demand for various support services will thus grow further and their demand for various Hong Kong services will also be rising continuously.
Further utilisation of Hong Kong services in developing mainland business
The survey also looks into the intention of Taiwan companies in starting or continuing the use of five categories of Hong Kong services in future when they are setting up or expanding their mainland business. These five categories of services are: (a) banking and finance; (b) management, shipping and transportation; (c) sales and marketing; (d) technology and product development; and (e) legal and IPR-related, under which there are 21 service items. The Taiwan companies are asked to indicate whether they have/are (1) no interest at all; (2) not interested; (3) indifferent; (4) interested; or (5) very interested in these five categories of services.
According to the survey findings, 73% of the Taiwan respondent companies indicate that “they are interested” or “very interested” in using at least one category of Hong Kong services and among them, 81% indicate that they are interested in two or more categories of Hong Kong services. This shows that if Taiwan companies choose to have Hong Kong’s service platform to support their mainland business, it is likely that they will use several categories of Hong Kong services.
In respect of individual service categories, more than half of the respondent companies indicate that they are “interested” or “very interested” in the sales and marketing services (56%) as well as the management, shipping and transportation services (53%) of Hong Kong. Since the implementation of ECFA, Taiwan companies have become more positive in running mainland business and in tapping into the mainland market, which naturally gives rise to the demand for a series of support services. Regarding logistics, for example, Hong Kong has well-established port facilities and shipping support services, attracting many Taiwan companies to choose Hong Kong as their regional distribution centre. Thanks to its close proximity to the mainland market, advanced development and free circulation of market information, as well as availability of mainland market management and promotion services provided by experienced service providers, Hong Kong has become a desirable platform of Taiwan companies for managing their mainland business and opening up the mainland market.
Besides, 44% of the respondent companies are “interested” or “very interested” in the banking and financial services of Hong Kong in respect of its Renminbi settlement, bank financing, credit facilities, borrowing, fund procurement as well as financial management services such as accounting and auditing. The increasing number of Taiwan companies engaged in cross-straits trade and investment while tapping into the international markets has triggered their demand for various international financial services and financing facilities. The financial sector of Hong Kong has built close links with the international capital markets and can thus provide international financial services and financing facilities for enterprises across the straits. Besides, the free flow of capital, great transparency and high efficiency are the strengths of Hong Kong’s financial service sector. It is therefore expected that following the growth of their mainland business, Taiwan companies will increasingly make use of the banking and financial services of Hong Kong to meet their development needs.
38% of the Taiwan companies are interested in the legal and IPR-related services of Hong Kong. As mentioned above, both IPR infringement and handling of commercial disputes in the mainland are difficulties facing Taiwan companies. To protect their interest, they want to seek the services related to technology transfer, trade mark protection, product design and commercial contract execution. Hong Kong has a sound legal system that follows the international practices. It has also entered into several arrangements with the Chinese mainland on the mutual recognition and reciprocal enforcement of arbitral awards and judgments in civil and commercial cases. Taiwan companies can capitalise on the strengths of Hong Kong for the execution of arbitral awards and court judgments to settle their commercial disputes on the mainland and for IPR protection in both Hong Kong and the Chinese mainland.
Moreover, 35% of Taiwan companies are also interested in the technology and product development services of Hong Kong. In the current technology supply chain, Taiwan, Hong Kong and the Chinese mainland are occupying different positions in terms of front-end R&D and design, technology application, and high-tech production respectively. As ECFA will inevitably strengthen cross-straits economic links, the cooperation in technology industries among mainland, Hong Kong and Taiwan will increase correspondingly. Besides, Hong Kong has a strong cluster of technology sectors (particularly the electronics industry that contributes to more than half of the total export value of Hong Kong) which has built up close, long-standing links with its Taiwan and mainland partners in terms of production and sales. Hong Kong is therefore an existing and desirable partner for technology players from Taiwan.
As a service platform in the Asia-Pacific region, Hong Kong has distinctive advantages and is highly regarded by Taiwan companies. The survey makes a list of the characteristics of Hong Kong’s platform in supporting mainland business where the Taiwan companies may indicate their views as (1) not important at all; (2) not important; (3) indifferent; (4) important or (5) very important. According to the survey findings, 70% of the respondent companies indicate that the “free flow of capital” is “important’ or “very important” to them in using Hong Kong as a platform to support their mainland business. Other “important” or “very important” Hong Kong characteristics include efficient/transparent financial services (66%), sound and transparent legal system (63%), advanced development and free flow of market information (62%), IPR protection (61%) as well as well-established port facilities and shipping support services (60%). The views of Taiwan companies are indeed similar to those of other multinational companies that have set up their regional headquarters/offices in Hong Kong.
As for the activities involved, most Taiwan companies (98%) indicate that trade events of various kinds could help them open up the mainland market. Among these, the most popular ones are business advisory services regarding the mainland market (57%), exhibitions held in the Chinese mainland (56%), and release of research studies and analyses on the mainland market (55%). As for other activities, such as talks and seminars on the mainland market, business matching activities, and exhibitions held in Hong Kong and Taiwan, more than 30% of the Taiwan companies reckon they are useful in tapping into the mainland market.
Following the implementation of ECFA and the strengthening of cross-straits economic and trade relations, Taiwan companies generally look forward to expanding their mainland business and tapping into the mainland market, which gives rise to a rapid growth in their demand for various support services. For long, Hong Kong has been a service platform facilitating cross-straits business cooperation as well as the gateway of many Taiwan companies for tapping into the mainland market. It is therefore expected that Taiwan companies will further utilise the services of Hong Kong in their future expansion of mainland business so as to meet the development needs of their operation.
Apart from the traditional shipping and transportation services, many Taiwan companies are very interested in using the sales and marketing services of Hong Kong. It shows that Taiwan companies do not only focus on the export and processing business on the mainland, but also look forward to marketing their industrial products and consumer goods to the mainland market. They will continue to make use of various Hong Kong services including the financial, legal and technology sectors for exploring the business opportunities brought forth by the economic development of the Chinese mainland. It is expected that there will be more Taiwan companies seeking the various services of Hong Kong to support their mainland business. They will also capitalise on the strengths of Hong Kong as an international financial and trade centre with a view to building links with the global markets and further enhancing their competitiveness in the international markets.
 The Chinese mainland agreed to reduce or waive the import tariffs of 539 categories of Taiwan products (according to tariff code of 2009), including petrochemicals, machinery and textile products as well as means of transportation and their parts and agricultural products; while Taiwan agreed to reduce or waive the import tariffs of 267 categories of mainland products (according to tariff code of 2009), including petrochemicals, machinery and textile products as well as means of transportation and their parts. The import tariffs of the related products have been lowered with effect from 1 January, 2011 and will be eliminated with effect from 1January, 2013.
 The Chinese mainland agreed to open up 11 service sectors to Taiwan service providers including accounting, auditing and bookkeeping, computer services, natural science and engineering R&D, convention services, professional design services, motion pictures, hospital, aircraft repair and maintenance, insurance and banking services as well as securities and futures; while Taiwan agreed to open up nine service sectors to mainland service providers including R&D services, convention services, exhibition services, specialty design services other than interior design, motion pictures, agency services, sporting and recreational services, air transport computer reservation system and banking services. Both parties started the implementation of the related liberalisation measures in two phases in November 2010 and January 2011 respectively.