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Cablegate: Taipei Economic Brief for August 2007

VZCZCXRO5563
RR RUEHGH
DE RUEHIN #2011/01 2430934
ZNR UUUUU ZZH
R 310934Z AUG 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 6623
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3806
RUEHBJ/AMEMBASSY BEIJING 7195
RUEHUL/AMEMBASSY SEOUL 8868
RUEHGP/AMEMBASSY SINGAPORE 6986
RUEHKO/AMEMBASSY TOKYO 9036
RUEHML/AMEMBASSY MANILA 0136
RUEHJA/AMEMBASSY JAKARTA 4126
RUEHKL/AMEMBASSY KUALA LUMPUR 3806
RUEHHI/AMEMBASSY HANOI 3382
RUEHBY/AMEMBASSY CANBERRA 4586
RUEHWL/AMEMBASSY WELLINGTON 1860
RUEHHK/AMCONSUL HONG KONG 8449
RUEHGH/AMCONSUL SHANGHAI 1319
RUEHGZ/AMCONSUL GUANGZHOU 0504

UNCLAS SECTION 01 OF 03 TAIPEI 002011

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR ALTBACH AND STRATFORD
USDOC FOR 3132/USFCS/OIO/EAP
TREASURY FOR OASIA/TTYANG
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB MARI
BOLIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taipei Economic Brief for August 2007

REF: TAIPEI 1733

1. This cable summarizes selected August 2007 economic events in
Taiwan:

--Taiwan's Economy Outperforms Expectations
--Prices Drop Unexpectedly, But Inflation Still a Risk
--Effects of U.S. Sub-prime Mess
--Worldwide Interoperability for Microwave Access (WiMax)
--Subsidies for Animation and Gaming Industry
--Customs Clearance Streamlining Efforts Pay Off
--Foreign Investment in Generic Medicines Plant
--Semiconductor Equipment Outsourced to Taiwan
--U.S.-Taiwan JV to Make Solar Photovoltaics
--DHL to Establish Gateway in Southern Taiwan

Taiwan's Economy Outperforms Expectations
-----------------------------------------

2. In July, Taiwan's economy performed far better than
expectations. Industrial production in July grew at a y-o-y rate of
13%, an 18-month high. Electronics, the backbone of Taiwan's
industrial sector, reported a 30% production growth. Semiconductor
and flat panel plants were expanding their capacity, contributing to
a double-digit growth in private investment. July export growth of
8% outpaced the forecasts of private and official think tanks.
Export growth should accelerate over the next three to six months as
export orders in July posted a 14-month high of 23.5%.

3. Consequently, in Late August, the Directorate General of Budget,
Accounting and Statistics raised its estimate for Taiwan's 2007
economic growth rate to 4.6% from the 4.4% it projected in May. The
office predicts that private consumption will expand as both stock
and real estate markets have been booming. Private investment
growth in 2007 will set a three-year high. Manufacturing firms
expecting better performance over the next three-six months were
more than those predicting worse performance, according to private
and official think thanks.

Prices Drop Unexpectedly, But Inflation Still a Risk
--------------------------------------------- -------

4. Although recent media focus on rising energy and food prices
(reftel), July inflation figures announced August 6 surprised
onlookers by revealing a 0.34% year-on-year decline. The July drop
was paced by steep falls in vegetable and fruit prices.
Inflationary figures are expected to build in the second half of the
year, however, as the advent of the tropical storm season crimps
agricultural production and drives up food prices. Inflation in the
second half (H2) of this year is predicted to reach 2.5%, up from
0.6% in H1.

Effects of U.S. Sub-prime Mess
------------------------------

5. Problems with U.S. sub-prime mortgages have impacted Taiwan's
stock markets. Prices here have largely followed the recent
fluctuations in New York and other major markets since late July.
The Taiwan financial sector's exposure to U.S. sub-prime mortgage
risk, however, has been limited and manageable. According to
Financial Supervisory Commission, the sector's portfolio investment
directly and indirectly involving U.S. sub-prime mortgages totaled
NT$70 billion (US$2.1 billion), which represents only about 0.5% of
total portfolio investment. Likely losses, as disclosed to the FSC
by the financial institutions themselves, were estimated at NT$2.3
billion (US$70 million), including losses of about US$36 million for
Taiwan banks, US$13.6 million for insurance companies, and US$19

TAIPEI 00002011 002 OF 003


million for securities firms. Sub-prime mortgage based products are
also held by 27 mutual funds sold in Taiwan, but the total value of
these products totaled US$1.95 million, which is less than 1% of
their portfolio investment positions.

Worldwide Interoperability for Microwave Access (WiMax)
--------------------------------------------- --------

6. In an open bid, six companies defeated Chunghwa Telecom and
Taiwan Cell Phone, the two largest telecom firms in Taiwan, to win
six regional WiMax operation licenses - three for northern Taiwan
and the other three for southern Taiwan. According to press
reports, Chunghwa Telecom and Taiwan Cell Phone lost the bids
because they were less interested in regional WiMax than in
island-wide WiMax, whose operation licenses will be open for bidding
in 2009. The six regional WiMax license winners include WiMax
(Taiwan), Tatung Telecom, Far Eastone, First International Telecom,
Venture Capital I, Wei Da Telecom.

7. WiMax equipment manufacturing is a rapidly growing industry
here. According to the Institute for Information Industry (a
government-funded research and industrial promotion center),
customer premise equipment (CPE) turned out by Taiwan's producers
will shoot up from NT$750 million (US$22.7 million) in 2006 to
NT$121.6 billion (US$3.68 billion) in 2012. Taiwan is the second
largest WiMax investor in the world, after the United States.
Taiwan's cumulative investment in the WiMax industry totals US$664
million.

Subsidies for Animation and Gaming Industries
---------------------------------------------

8. The Executive Yuan has approved the "Program to Strengthen
Computer and Other Digital Games" submitted by the Ministry of
Economic Affairs. The program will encourage development of
animation and computer games by subsidizing local firms. The
National Development Fund (NDF) will allot NT$20 billion (US$606
million) to fund the program. Two animation production firms,
currently in cooperation with U.S. companies, are expected to
receive NT$100 million (US$3 million) each in funding. Over the
next five years, the program will invest NT$1.36 billion (US$41
million) in 60 animated programs and another NT$4.12 billion (US$126
million) in animation and game R&D. According to projections from
the Ministry of Economic Affairs, the program will create some 2,000
new jobs, and production value of the industry will reach NT$600
billion (US$18 billion) by 2011.

Customs Clearance Streamlining Efforts Pay Off
--------------------------------------------- -

9. The Council for Economic Planning and Development (CEPD)
announced in early August that its five-year "obstacle-free customs
clearance program" has expedited the customs process and
substantially reduced paperwork for trading companies in Taiwan.
The program whose cost over the past five years totaled NT$780
million (US$23.6 million) has cut the customs clearance
administrative expenditure by NT$5.05 billion (US$153 million) and
reduced the customs clearance processing time by 14.57 million
hours.

Foreign Investment in Generic Medicines Plant
---------------------------------------------

10. US-based Impax Laboratories, specializing in generic
pharmaceuticals, announced it will build a generic medicines factory
in Taiwan's Hsinchu Science Park. Initial investment is NT$200
million (US$6.1 million). The factory, Impax's first production

TAIPEI 00002011 003 OF 003


base overseas, will be 100% owned by Impax. Construction will begin
in October this year, and commercial operation is scheduled for
2009. Medicines made by the factory will be sold in the United
States, Canada, and Europe.

Semiconductor Equipment Outsourced to Taiwan
--------------------------------------------

11. Taiwan, the world leader in semiconductor production, has now
started to get orders to produce the high cost equipment used in
semiconductor production. Media reports indicate that Taiwan's
Marketech International Corporation received NT$1 billion (US$30.3
million) in orders for semiconductor exposure equipment from ASML of
the Netherlands, a leading provider of lithography systems for the
semiconductor industry. ASML's seeking a partner in Taiwan marks an
opportunity for Taiwan to develop its own production capability for
semiconductor manufacturing equipment. Taiwan's semiconductor
industry is world-renowned for chip fabricating, packaging and IC
design, but it still relies heavily on foreign suppliers for
semiconductor equipment. Factory start up costs for a 12-inch wafer
fab usually exceed NT$100 billion (US$3.03 billion), with 90% of the
costs going towards equipment. Taiwan already has 10 factories
producing 12-inch wafers and is building another 12, whose total
start up costs amount to NT$1.2 trillion (US$36.4 billion), more
than the semiconductor industry's annual output.

U.S.-Taiwan JV to Make Solar Photovoltaics
------------------------------------------

12. Gloria Solar, a subsidiary of Taiwan's E-ton Solar Company,
which specializes in manufacturing solar modules, will enter into a
joint venture arrangement with US-based Spire Corporation, the
world's largest solar power module equipment supplier. The new
venture - Gloria Spire Solar - is designed to take on the
photovoltaic (PV) systems market. The new company, which will be
based in Bedford, Massachusetts, represents E-ton Solar's efforts to
integrate its supply chain. E-ton Solar recently acquired 100% of
Adema, a US silicon chip company. With Gloria Spire, E-ton Solar
will have direct access to resources from upstream (silicon chips)
to midstream (solar cells) and downstream (solar modules and
systems). After Gloria Spire is formed, Gloria Solar will have
production capacity of 95 MW by the second quarter next year, nearly
three times its current capacity. It will continue to expand with
an additional 75 MW of module manufacturing equipment from Spire and
become a leading PV player in the world.

DHL to Establish Gateway in Southern Taiwan
-------------------------------------------

13. DHL (Taiwan) will establish a service gateway at Kaohsiung
International Airport prior to the end of the year. Due to drastic
cuts in domestic flights to and from Taipei after the opening of the
high-speed rail, DHL needs this new service gateway to serve
companies in central and southern Taiwan. DHL currently operates a
service gateway at the Taoyuan International Airport and 10 service
locations across the island, including Taipei, Hsinchu, Taoyuan, and
Chiayi.
WANG

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