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Taiwan's Machinery Sector Recalibrates in Wake of US-China Trade War

With its two mega-markets at protracted loggerheads, Taiwan's US$35.6 billion machine-manufacturing sector has been forced to weather diminishing demand and empty order books, but is now pinning its hopes on technological upgrade.

Photo: Big hand-out: Reinvestment seen as the salvation Taiwan’s ailing machinery manufacturing sector. (Xinhua News Agency)
Big hand-out: Reinvestment seen as the salvation of Taiwan's ailing machinery manufacturing sector.
Photo: Big hand-out: Reinvestment seen as the salvation Taiwan’s ailing machinery manufacturing sector. (Xinhua News Agency)
Big hand-out: Reinvestment seen as the salvation of Taiwan's ailing machinery manufacturing sector.

One of the little-reported casualties of the on-going China-US trade war is, apparently, Taiwan's machine-manufacturing and assembly sector. The territory's third-largest industry, after semiconductors and flat-panel displays, its 2017 output value was some NT$1.1 trillion (US$35.6 billion), but this figure is expected to have fallen dramatically by the time the comparative 2018 statistics have been finalised.

It is already clear that the fallout from the trade war saw the sector stagnate from the end of Q2 2018 onwards, with the export figures for both September and November showing year-on-year contraction. With the figures for the first half of 2019 expected to chart a further decline, the focus is now on alleviating the likely impact and developing a forward strategy that will ensure growth is again assured.

A brief look at the relevant statistics shows just how important the sector is to the territory's overall economy. According to figures released by the Taiwan Association of Machinery Industry (TAMI), as of the end of 2017, there were 17,357 machinery-related enterprises operating on the island, collectively employing 308,000 workers. Over the same period, its NT$1.1 trillion output value represented an 11.1% year-on-year increase, while its export value was $25.6 billion, a 21.1% rise compared with 2017. In total, the sector accounted for 8.1% of Taiwan's exports.

In recent years, mainland China has emerged as the sector's largest export market, followed by the US, the ASEAN bloc, Europe and Japan. Among its primary exports to the mainland have been semiconductor manufacturing equipment, machine tools, ball-bearings and transmission shafts. For 2017 as a whole, the value of such exports was $8.3 billion.

In the first half of 2018 the sector maintained steady growth, recording year-on-year export growth of 15.9% – notably outperforming the 10.9% average reported across all Taiwan's exports. Throughout the year, mainland China and the US remained the leading export markets, with their respective export values rising by 22.7% and 15.1%. In terms of market share, mainland China accounted for 30.6%, while the US accounted for 16.2%.

In mid-2018, when the US-China trade war began in earnest, the two countries imposed 25% tariffs on $34 billion of each other's imports, including a wide range of machinery products and machine tools. With Taiwan a key contributor to the machinery supply chains of the two antagonists, the negative impact on the territory was almost immediate.

According to TAMI, Taiwan's machinery exports fell to $2.24 billion in September 2018, a 1.3% year-on-year drop and the first single-month decrease for more than 12 months. Although the value of such exports rebounded to $2.28 billion in October (up 2.7% year-on-year), it fell to $2.05 billion in November (a massive 13.4% year-on-year fall).

Largely due to growth in the first half of the year, the accumulated export value of the sector for the first 11 months of 2018 was $24.9 billion, representing year-on-year growth of 7.8%. Throughout that period, exports to mainland China edged up by just 5%, while exports to the US enjoyed an 18% increase and sales to both Japan and Hong Kong were up 22%.

It is worth noting that from August to November last year, Taiwan's machinery equipment exports to mainland China declined for four consecutive months, with September registering the biggest drop at 16%. In light of this, TAMI cut its estimated annual export value to $27 billion from $28 billion, while also forecasting that annual growth would be down to 7%.

Dissecting the figures further, TAMI reported that a number of Taiwan's leading machine-tool businesses, including Victor Taichung, Tongtai and Goodway, had begun receiving notices from their mainland clients suspending purchases and renegotiating prices as early as the end of June 2018. This slowdown in mainland orders was the prime reason for the declining export values recorded from August last year onwards.

Exacerbating the effects of the trade war, the exchange rate between the New Taiwan dollar and the US dollar rose 1.5% in the first 11 months of 2018. At the same time, the Taiwanese currency was also strong against the Euro and the Japanese Yen. This fluctuation in the exchange rate not only eroded export earnings, but also weakened the competitiveness of Taiwan's machinery sector compared with its European and Japanese rivals. As a result, the territory's currency regulators have been lobbied by representatives of the sector with regard to possibly depreciating the New Taiwan dollar.

At present, the majority of Taiwan's machinery businesses are pessimistic about their prospects in the first half of this year. This largely reflects concerns about the continuing decline in demand from the mainland, the world's largest market for machinery and machine tools. Although orders from the US continue to rise, the expectation is that any increase will not be substantial enough to make up the shortfall occasioned by the shrinkage in the mainland market.

At present, a substantial number of the orders currently in place are scheduled for completion prior to Chinese New Year in early February, leaving many companies with the very real prospect of having comparatively empty order books in the months that follow. There are still hopes that two forthcoming major industry events – March's Taipei International Machine Tool Show and April's Beijing-based China International Machine Tool Show – may offer some respite, though few are wholly-confident of a positive result.

Reflecting this downbeat sentiment, Alex Ko, the Chairman of TAMI, has gone on record as saying: "The majority of the orders currently underway were received some time ago, so it is entirely possible that the first and second quarters of this year could be very tough indeed. Despite this, we should never lose sight of the fact that there is abiding global demand for machinery."

Photo: While China and the US trade blows, it’s Taiwan that’s on the ropes. (Shutterstock.com)
While China and the US trade blows, it's Taiwan that's on the ropes.
Photo: While China and the US trade blows, it’s Taiwan that’s on the ropes. (Shutterstock.com)
While China and the US trade blows, it's Taiwan that's on the ropes.

One bright spot on the horizon is that, due to rising labour costs on the mainland, coupled with the likelihood that the US-China trade war will prove protracted, many Chinese companies have relocated all or part of their production facilities to third-party countries – notably Vietnam and India – in a bid to circumvent a number of their current operational challenges. With many of these relocated operations requiring the installation of new equipment, this is seen as a real opportunity for Taiwan.

In addition, the territory has also rolled out its Five plus Two initiative – a programme that has prioritised the development of seven industrial sectors / projects, including intelligent machinery. Moves are already underway to upgrade Taiwan's existing array of precision machinery to state-of-the-art smart systems, a development seen as likely boost competition while creating new job opportunities.

The hub of this renewal programme is the Dadushan district of western Taichung, Taiwan's second-most populous city. Traditionally a focal point for the territory's machinery-manufacturing sector, it has been designated by the Ministry of Economic Affairs as the site for the Shengang Smart Machinery Industrial Park.

In addition to the domestic manufacturers that have now begun relocating to the site, several Taiwanese companies are said to be shuttering their mainland China operations and investing in new smart facilities within the precincts of the park. This move is expected to accelerate the pace of the promised overall technological upgrade, which, in turn, is seen as likely to boost the competitiveness of Taiwan's machinery-manufacturing sector.

Robert Kang, Special Correspondent, Taipei

Content provided by Picture: HKTDC Research
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