Because Taiwan is a technological, commercial and logistic powerhouse
Taiwan can benefit from the rethinking of global supply chains. The analysis by Marcus Weyerer, Senior ETF Investment Strategist at Franklin Templeton ETFs EMEA
With a territory equal to 0.4% of that of the United States, and a population equal to 1.7% of that of China, the island-state seems to be flourishing in its role as a challenger to the world superpowers. Taiwan has given birth to the only democracy in the South China Sea region, dominates the global semiconductor trade with a nearly two-thirds share of the market, and has established itself as a key logistics hub. In fact, in addition to being widely known as a technology exporter, the country also controls around 10% of the world's trading fleet. Taiwan plays a vital role in global supply chains, not only as a manufacturer, but also as a container ship operator. This position is further strengthened by its strategic geographic location on the maritime trade route linking East Asia to Southeast Asia and the Suez Canal. We believe the country is well positioned to benefit from the Biden administration's strategic priority of "decoupling" some major global supply chains from China.
Taiwan, also known as the Republic of China (ROC), is a small island state in the South China Sea that lies less than 100 miles from mainland China's Fujian province. The Communist Party (CCP) of Beijing considers Taiwan a "renegade province" and most countries of the world adhere to the so-called One China Policy, having informal cultural, economic and even military ties with Taiwan, but recognizing diplomatically only the CCP as China's only legitimate government. This has been the status quo for over seventy years and a daily reality in Taiwan. This has not prevented the country from achieving extraordinary successes in its political and economic development.
After the Chinese Civil War and the creation of the People's Republic of China (PRC) on October 1, 1949, the defeated Kuomintang (KMT) retreated to Taiwan and ruled the island with an iron fist for decades. The Taiwanese government only started introducing elements of democracy in the 1980s and early 1990s. Today Taiwan has a "vibrant and competitive democratic system", scoring 94 out of 100 in the Freedom House rating, and is the only country in the South China Sea area to be considered "free." 1 The KMT remains a 'imported political force; the other is the Progressive Democratic Party (PDP), from which President Tsai Ing-wen comes and which currently also leads the progressive majority coalition in the legislative assembly. Tsai was re-elected for a second term in January 2020.
Along with Hong Kong, Singapore, and South Korea, Taiwan is one of four Asian Tigers that have made outstanding economic progress in a short period of time. For 2022, Taiwan's statistical office estimates a per capita GDP of nearly $ 35,000, more than three times the world average and roughly in line with that of countries such as Spain, Italy and France.2,3
Specialization and addiction
A key pillar of this success is Taiwan's strength in innovation and technology leadership. The country spends around 3.5% of its GDP on research and development (R&D) – surpassed in this only by Israel and Korea – and boasts one of the highest labor productivity rates in the world. exceptions, Taiwanese spend far more time on work than people in other countries: over 2,000 hours in 2020.6
Taiwan is at the top of the Ease of Doing Business index, again ahead of economic giants such as Germany, France and Italy. The government is particularly dedicated to supporting foreign direct investment (FDI) and seeks to “leverage Taiwan's strengths in advanced technology, manufacturing manufacturing and R&D” .7
To appreciate the importance of the technology to the country, it is useful to look at Taiwan's business profile. High-tech goods such as electrical equipment and machinery, mechanical appliances and, to a lesser extent, optical and medical equipment account for more than two-thirds of Taiwanese exports. Total exports of goods stood at $ 347 billion, while imports totaled $ 287 billion. By comparison, trade in services is insignificant, with exports worth just over $ 41 billion and imports worth $ 38 billion.8
The country is undoubtedly subject to concentration risks in the technology sector, especially as exports account for a large share of GDP. Exports can be somewhat unpredictable and are naturally affected by factors that are largely beyond the control of the government. On the other hand, private consumption – usually a more stable component of growth – makes up only 44% of Taiwan's GDP.
The government is aware of the benefits associated with a diversification of its economy and, to this end, actively promotes a number of partnerships with strategic sectors; this also includes grants for R&D expenses of Taiwanese joint ventures with foreign entities and the “5 + 2 Innovative Industries” program. Some of the sectors concerned, not directly related to Taiwan's current economic mix, are biomedicine, the Internet of Things, green energy and the circular economy. Despite decades of diplomatic stalemate with the PRC, most sectors in Taiwan accept investments from mainland China; Sensitive sectors considered relevant to national security are an exception.
China is by far Taiwan's most important trading partner, with a share of over 26% of total trade. In second place are the United States with 13%, followed by Japan (11%), the European Union and Hong Kong (both at 8%). 9
While greater diversification would likely benefit the country, Taiwan has been able to successfully leverage its skills-based comparative advantage by focusing mostly on electronics.
A country ideally positioned to benefit from the rethinking of global supply chains
Taiwan's economic prosperity depends on the rest of the world. Whether it's importing mostly locally deficient commodities, tourism, or its reliance on exporting electronic circuits and semiconductors, the country needs a robust global economy and functioning trading mechanisms. However, the opposite is also true, to an even greater extent. The world, in many ways, depends on Taiwan.
The latter occupies an unrivaled position in the global supply chain from many points of view. Most important is its dominant weight in the semiconductor industry. However, there are other factors at play that help reduce the risk of the highly specialized country and create long-lasting and high-value opportunities.
Strategic geographical position and geopolitical importance
To start with the obvious, Taiwan's position poses a risk factor in the face of China's military might and growing assertiveness on the global stage. At the same time, paradoxically, it could also turn out to be life insurance and Taiwan's main intangible asset. The island state lies just off the coast of the world's second largest economy, closing off the northeastern edge of the South China Sea. According to calculations by the Australian Strategic Policy Institute, around a third of global shipping – and thus nearly a quarter of all global trade in terms of volume – passes through these waters.10
Located between Japan, the main trading nation in the north-east, and Singapore, which is home to the world's second largest container ship port in the south, Taiwan connects two of the most important destinations in the world economy. From Singapore, ships head to India and the Middle East or to Europe via the Suez Canal.
Taiwan is located on one of the most important trade routes in the world
Taiwan also has two of the largest ports in the world, Kao-hsiung and Taipei. Taiwanese ship operators, most notably Evergreen, Yang Ming Marine and Wan Hai, control over 10% of global container capacity.11
Even a minor mishap along one of the busiest shipping routes can have a substantial negative impact on world trade and economy. The world's two largest superpowers, the United States and China, have a vital interest in having operations in and around the Taiwan Strait run smoothly, and this necessarily includes Taiwan's stability and security. Taiwan, for its part, exerts considerable soft power given its delicate position in the South China Sea.
Overall, we believe the above factors constitute strategic and enduring strengths for the Taiwanese economy, because the geographic location is immutable and many political and economic considerations affecting it have been there for decades. While China's tone has become more uncompromising and airspace violations and other provocations have become more frequent in recent years, this is consistent with the overall picture of a more aggressive foreign policy on the Chinese side. In our view, this does not call into question the status quo regarding the reunification or independence of the ROC. The Russian invasion of Ukraine in February 2022 certainly shook markets and called into question the global security architecture we were familiar with, but we believe that the dynamics between China and Taiwan are not directly comparable to those of Eastern Europe.
Dominant position in electronic circuits and semiconductors
Taiwan as a nation has a territory equal to about 0.4% of that of the United States and a population equal to about 1.7% of that of China. As mentioned, the small country also accounts for about a tenth of the global shipping capacity. More impressively, Taiwanese foundries dominate nearly two-thirds of the semiconductor market. Taiwan Semiconductor Manufacturing Company, TSMC, controls 84% of the production of the most advanced and efficient chips.12,13
The Covid-19 pandemic has only accelerated an already established trend towards digitalization and a world increasingly dependent on electronics, in which demand for semiconductors will be high for years, if not decades to come. Thinking of the often cited and multifaceted "supply chain crisis", Taiwan can only be part of the solution. Chips are invisible components in most products, but they are critical to a large number of appliances, from cell phones to computers, from cars to defense systems. Put simply, without semiconductors the world doesn't move.
With a dominant position in such an important market, Taiwan can exert influence far beyond its weight. This illustrates the country's mutual dependence with the rest of the world. Apart from Taiwan, there are few other nations with noteworthy capabilities, mainly South Korea, the United States and China. These countries are likely to enjoy a lasting comparative advantage in the sector due to a number of factors that are difficult to obtain. These include a highly skilled workforce, high levels of capital to build and maintain foundries and the ability to withstand market cycles. Building a new factory can take over two years and being a feat in itself is prohibitive for most companies. In late 2021, for example, TSMC announced the construction of a new plant in Phoenix, Arizona, which will cost $ 12 billion and will not go into production until 2024.14 Overall, TSMC plans to invest $ 100 billion over three years to expand. your own ability. These figures highlight the very high barriers to entry into the sector and, given the short life cycle of semiconductors, the massive resources needed to compete. Given the massive upfront costs incurred in setting up structures that start generating cash flow only many years later, possibly in a short cycle, smaller companies are simply cut off from the industry.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/taiwan-commercio-tecnologia-catene-fornitura/ on Sat, 30 Apr 2022 06:42:33 +0000.