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Cablegate: Taipei Economic Brief for February 2008

VZCZCXRO9897
RR RUEHGH
DE RUEHIN #0319/01 0700545
ZNR UUUUU ZZH
R 100545Z MAR 08
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 8294
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 4082
RUEHBJ/AMEMBASSY BEIJING 7902
RUEHUL/AMEMBASSY SEOUL 9383
RUEHGP/AMEMBASSY SINGAPORE 7230
RUEHKO/AMEMBASSY TOKYO 9639
RUEHML/AMEMBASSY MANILA 0361
RUEHJA/AMEMBASSY JAKARTA 4267
RUEHKL/AMEMBASSY KUALA LUMPUR 3942
RUEHHI/AMEMBASSY HANOI 3527
RUEHBY/AMEMBASSY CANBERRA 4807
RUEHWL/AMEMBASSY WELLINGTON 2073
RUEHHK/AMCONSUL HONG KONG 9159
RUEHGH/AMCONSUL SHANGHAI 1801
RUEHGZ/AMCONSUL GUANGZHOU 0985

UNCLAS SECTION 01 OF 05 TAIPEI 000319

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR KATZ AND STRATFORD
USDOC FOR 3132/USFCS/OIO/EAP
TREASURY FOR OASIA/TTYANG AND HAARSAGER
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 SENV TW
SUBJECT: Taipei Economic Brief for February 2008

1. (U) Summary. Following are the highlights of February 2008
economic events in Taiwan: Better-than-expected export performance
prompted upward adjustment of economic growth in 2007....
Forecasters anticipate economic slowdown in 2008.... Economic
performance in January remained strong despite heavy inflationary
pressure.... Private investment exceeds 2007 goal.... Industrial
park renewals with low land costs are designed to accommodate
returning Taiwan firms.... Earnings by science industrial park
based firms increase.... Taiwan's tourism potential highlighted....
Tax reform program introduced three weeks before the presidential
election.... Multinational corporations to set up training and R&D
facilities.... Waste recycling industry grows.... END SUMMARY.

2007 Economic Growth Adjusted Upward
------------------------------------
2. (U) Better-than-expected trade performance in the fourth quarter
(Q4) of 2007 prompted forecasters to revise Taiwan's 2007 economic
growth rate upward. Taiwan's exports in Q4 posted a year-on-year
growth of 15%, higher than the 9% projected in November 2007 by the
Directorate General of Budget, Accounting and Statistics (DGBAS).
Taiwan's trade surplus in the quarter, therefore, set a new high of
US$10 billion, 27% more than forecast. In response, in late
February, DGBAS raised Taiwan's real GDP growth for Q4 to 6.4%,
overall 2007 economic growth from 5.4% to 5.7%. The private Taiwan
Institute of Economic Research (TIER) also raised Taiwan's estimated
2007 economic growth to 5.1% from the 4.4% it forecast in November
2007.

Economic Slowdown Projected for 2008
------------------------------------
3. (U) Both DGBAS and TIER expect the U.S. sub-prime mortgage
problem will dampen growth in developed economies which, in turn,
will adversely affect the performance of Taiwan's export-oriented
economy in 2008. According to DGBAS, export growth will slow from
10% in 2007 to 6% in 2008, and real GDP growth will decline to
barely above 4%, although private consumption will grow faster in
2008 as businesses distribute dividends to their shareholders.

Performance in January Remains Healthy
--------------------------------------
4. (U) Taiwan's economy, nevertheless, continued to perform well in
January 2008. Export value grew 12% year-on-year to US$22.14
billion, mainly driven by stronger demand from Taiwan's Asian
neighbors, where many Taiwan exporters have located their production
bases. Strong foreign demand remained in January, manifested by 17%
growth in export orders. Double-digit manufacturing growth spilled
over from the second half of 2007 to January 2008. The unemployment
rate in January 2008 declined to an 11-month low of 3.8%.

Import-Driven Inflation
-----------------------
5. (U) Higher energy, grain, and basic metal costs, which
contributed to 15% import growth, fueled inflationary pressure in
January as Taiwan's consumer price index rose at a year-on-year rate
of 3%. The wholesale price index in January 2008 increased 10.2%
year-on-year, the highest rate since November 2004. Higher oil
prices caused the January import price index to surge to an 18-year
high of 16.94%. Crude oil import costs in January averaged US$88
per barrel, up 70% from January 2007.

6. (U) With higher import costs likely to persist, local forecasters
predict inflation will stay at almost 3% during the first half of
the year, even though money supply leveled off in January. To
stabilize prices, Taiwan authorities will reduce the 5% business
transaction tax on imported grains and grain products, in addition
to the freeze in gasoline prices implemented in January.


TAIPEI 00000319 002 OF 005


Private Investment Exceeds MOEA's 2007 Goal
-------------------------------------------
7. (U) Private investment figures in 2007 surpassed targets set by
the Ministry of Economic Affairs (MOEA). According to the MOEA's
Cooperative Office for Investment Promotion (COIP), investment in
private projects completed in 2007 totaled NT$1.17 trillion (US$37.3
billion), surpassing the MOEA-set target of NT$900 billion (US$28.6
billion) by 30%. There were 1,466 new private projects launched in
2007, the investment value of which was NT$1.65 trillion (US$52.4
billion), exceeding the MOEA's target of NT$1.1 trillion (US$35.2
billion) by 50%. The MOEA's 2008 new private investment target is
NT$1.77 trillion (US$56 billion), up 7.3% from 2007.

Industrial Park Renewal Program
-------------------------------
8. (U) The Executive Yuan recently approved a 2008-2010 "Industrial
Park Renewal Demonstration Plan." Initially, two old unused
industrial parks will be renovated, and the plan will eventually be
expanded to cover all aging industrial parks. Demand for industrial
land has been strong due both to the expansion of science parks, and
to a growing number of returning Taishangs (Taiwanese companies
abroad), many of which are manufacturers in traditional industries.
According to the Industrial Development Bureau (IDB), nearly half of
Taiwan's industrial parks are over 30 years old and lack sufficient
infrastructure.

Additional Funding for Industrial Land Program
--------------------------------------------- -
9. (U) The Executive Yuan approved an additional NT$20 billion
(US$625 million) for the '006688' program, which provides businesses
with industrial land for lease at discounted rates. The program
aims to encourage Taishangs abroad to invest in Taiwan. The funds
will be available through December 31. The Industrial Development
Bureau expects the program to attract 300 manufacturing plants to
invest NT$106 billion (US$3.3 billion) in Taiwan's industrial parks,
create NT$120 billion (US$3.75 billion) in production, and increase
tax revenue by NT$1.8 billion (US$56 million). Under the program,
industrial land will be rent-free for the first two years,
discounted by 40% in the next two years, and discounted by 20% for
the fifth and sixth years.

Taishangs Returning Home
------------------------
10. (U) A growing number of Taishangs are returning to Taiwan,
mostly from China, where legal changes have resulted in relatively
less positive investment climate for some Taiwan firms. Labor,
land, and utilities costs in China have risen and drastically
narrowed the gap with Taiwan. The PRC has also reduced or
eliminated some tax incentives for foreign investors. According to
Taiwan's Department of Investment Services (DOIS), over the past
year, 102 Taishangs have expressed interest in returning to Taiwan,
and many of them have returned in clusters. Ten bolt and nut
manufacturers in China, for example, have located their plants at
the Gangshan Benjhou Industrial Park in Kaohsiung County. PCB
manufacturer Unitech and Process Advance Technology Ltd. have set up
factories at the Litze Industrial Park in Ilan. The recently opened
Kaohsiung Software Science-based Industrial Park has accommodated
ten returning companies. Cheng Shin Rubber Inc. Co., the largest
tire supplier in China and 12th-largest tire supplier in the world,
will invest NT$15 billion (US$461.5 million) in Taiwan. A number of
Taishangs who maintain operations in China prefer to remain low-key
about their investment in Taiwan to avoid any potential
repercussions in the PRC.

11. (U) When delivering a keynote speech to the Taiwan business
community's Lunar New Year Party in late February, President Chen
Shui-bian announced that he plans to grant amnesty to Taiwan

TAIPEI 00000319 003 OF 005


business firms illegally investing in China because these firms are
suffering from a deteriorating investment environment in China.
Minister of Economic Affairs Steve Chen has outlined the following
assistance to Taishangs in China:
--setting up a Taiwan firms service office in July 2006;
--encouraging Taiwan firms to return to Taiwan through industrial
land rental waivers and discount programs;
--offering sufficient financing;
--reducing the tax burdens on foreign expatriates employed in
Taiwan;
--relaxing restrictions on employment of foreign blue-collar
workers;
--providing Taishangs with capital for investment in Latin America;
and
--planning to lower the corporate income tax from 20% to 17.5%,
verse the PRC's 25%.

Science Industrial Parks
12. (U) In 2007, the sales revenue of business firms in Taiwan's
science industrial parks grew 12.3% from 2006 to a new high of
NT$1,966.4 billion (US$60.5 billion). The number of business firms
in science industrial parks as of December 2007 totaled 686, up 6%
from 2006. The workforce in the science industrial parks grew 10.5%
to 201,608 persons.

Taiwan: 30th in Tourism
-----------------------
13. (U) In its 2007 Travel and Tourism Competition Report, the World
Economic Forum (WEF) ranked Taiwan the 30th-best tourism destination
of 124 economies surveyed, and fourth in Asia. With further
development, Taiwan will become an "important tourism destination"
for overseas tourists. In terms of human, natural, and cultural
resources, Taiwan ranked second in Asia and 23rd in the world
because of destinations, such as Taroko Gorge, Sun Moon Lake, and
the National Palace Museum. Taiwan's tourism promotion efforts have
paid off. Following growth of 4.2% in 2006, the number of inbound
passengers in 2007 rose 5.6% to a new high of 3.7 million. This led
to a 10% increase in 2007 tourism revenue to US$38 billion,
according to a survey by the World Tourism and Travel Council
(WTTC).

Tax Reform
14. (U) In mid-February, the Executive Yuan (EY) approved a tax
reform proposal submitted by the Ministry of Finance (MOF). The
proposal requires Legislative Yuan approval. The EY will phase out
tax incentives offered by the Statute for Industrial Upgrading
(SIU), which will expire at the end of December 2009. The phase-out
of all tax incentives will increase the annual tax revenue by NT$148
billion (US$4.6 billion). The EY will use the increased revenue to
make up losses arising from the planned tax cuts, which are
estimated to cost NT$150 billion (US$4.7 billion). For corporate
income, the 10% tax on retained earnings will be dropped and the
corporate income tax will be reduced from 25% to 17.5%. For
personal income, the tax rates will be lowered from 6-40% to
5.5-37.5%. The across-the-board deductible will increase from
NT$46,000 to NT$60,000 (US$1,875) per unmarried taxpayer and from
NT$92,000 to NT$120,000 (US$3,758) per couple. In addition, the
deductible for each wage earner will increase from NT$78,000 to
NT$100,000 (US$3,125), the deductible for a disabled person will
increase from NT$77,000 to NT$100,000 (US$3,125), and the deductible
for education will increase from NT$25,000 per household to
NT$25,000 (US$781) per student.

Biotechnology Training Center
-----------------------------
15. (U) Merck Group, a German pharmaceutical and chemical
conglomerate (not directly related to the U.S. pharmaceutical firm

TAIPEI 00000319 004 OF 005


of the same name), and Taiwan's state-owned Development Center for
Biotechnology (DCB) will set up the Asia Technology Training Center
(ATTC) joint venture. Through the joint venture, Merck will develop
a platform for protein-based drugs by promoting its manufacturing
processes in the Asian market. ATTC is Merck's first training
center in the Asia-Pacific region, and third in the world, with the
other two located in the United States and Germany. ATTC will be
located in the DCB compound in Taipei County. DCB will provide
manpower and logistic resources, while Merck will supply systems,
lab technicians, and a technical manager to handle clients in Asia.
Initial investment in the project will be a modest NT$10 million
(US$312,500). Improved manufacturing processes for protein-based
drugs, nevertheless, will generate annual revenue of US$100 million,
according to Merck. The ATTC will benefit small pharmaceutical
firms by providing top-notch consulting services for the production
of protein-based drugs.

HP to expand R&D center in Taiwan
---------------------------------
16. (U) HP, the world's largest personal computer (PC) supplier,
will expand its Product Development Center (PDC) in Taiwan by
doubling the size of the PDC's workforce. This will make the Taiwan
PDC the largest among HP's R&D centers in the world. The center
will add 600 new employees by the end of this year. HP's PDC in
Taiwan started with only 24 employees in 2002. The Taiwan PDC
offers a number of advantages, including relatively low R&D costs
and proximity to Taiwan's original design manufacturers (ODMs) of
PCs and handheld devices, which will improve HP communications
efficiency. With its focus on notebook computers over the past five
years, HP's PDC in Taiwan has developed 50 product lines for 100
different specifications, including its first MCE (multimedia center
edition) notebook computer. In 2008, software will be an area of
focus for HP Taiwan. The company's global software business
revenues grew by 306% in 2007. According to the Ministry of
Economic Affairs, HP maintained its position as the world's top
seller of notebook computers, shipping 23.3 million units worldwide
in 2007, up 58% from 2006.

Sony Computer Entertainment to Establish R&D Center
--------------------------------------------- ------
17. (U) Sony Computer Entertainment (SCE) has signed a letter of
intent with the Ministry of Economic Affairs (MOEA) to develop
digital media. Under this arrangement, SCE will set up an R&D
center and offer game development training in Taiwan. SCE will
cooperate with Taiwan educational organizations to implement
training programs, which will be aimed at college/university
students. Lecturers will include SCE's own gaming R&D experts, as
well as leading game developers in Japan. The ultimate goal is to
build Taiwan's capability to produce universal, world-class game
software.

Vestas to Form Wind Power Subsidiary in Taiwan
--------------------------------------------- -
18. (U) Vestas Wind Systems A/S of Denmark announced it will form a
subsidiary in Taiwan. Vestas, one of the major wind turbine
suppliers in Taiwan, accounts for over 30% of the global wind power
market and 70% of the offshore wind turbines market. Vestas has
supplied Taiwan with over 70 wind turbines, and its major customers
is the state-owned Taiwan Power Company, which has built several
wind generators in Yunlin County. Vestas' potential customers
include Aerospace Industrial Development Corporation and Star
Electric Power Corporation. Meanwhile, Vestas will be an important
source of technologies for Taiwan's wind turbine component
manufacturers, including TECO Electrical Engineering. Under
Taiwan's long-term wind power development plan launched in 2001, TPC
will build 200 wind turbines in three stages, at an estimated cost
of NT$100 million (US$3.1 million) to NT$150 million (US$4.7

TAIPEI 00000319 005 OF 005


million) for each stage.

Solar-Power Generation Program
------------------------------
19. (U) On February 1, the state-owned Taiwan Power Company (TPC)
announced a NT$3.57 billion (US$110 million) solar-power generation
program. Under the program, TPC will build solar-power generators
to provide electricity to local authorities and primary/middle
schools. Each generator will have a capacity of 1,000 kwh, and the
annual power generated under the program will reach 12.5 million kw,
which will reduce carbon dioxide emissions by 7,750 tons.

Industrial Wastes Recycling
---------------------------
20. (U) Taiwan began to promote recycling of industrial wastes in
2001. The number of industrial waste recycling firms increased from
305 in 2002 to 915 in 2007. The amount of industrial waste recycled
surged from 8.04 million tons in 2002 to 11.82 million tons in 2007,
and the output value grew from NT$24.9 billion (US$778 million) to
NT$42 billion (US$1.3 billion) during the same period.

YOUNG

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