Wednesday, October 28, 2009 1 comments ++[ CLICK TO COMMENT ]++

What is the future of Taiwan?

People always talk as if America—or Canada or other developed countries—have the biggest difficulty adjusting to China's economic prowess. Yet, what these countries face is very minor compared to the challenges faced by someone like Taiwan.

Taiwan has been struggling mightily—it saw one of the biggest plunges in exports of any country during this crisis—and I'm not sure how its future will unfold. There are two big problems for Taiwan.

Firstly, China is located close to Taiwan, and, hence, is a direct competitor in almost every industry. Given the huge discrepancy in wealth between the two countries, it is very difficult for Taiwan to compete with China on costs. Americans and Canadians complain about China's low costs but at least you have shipping costs and cost of time—time is money after all—to act a barrier. But imagine if you are situated right next door to China and costs are as little as 1/10th.

Secondly, Taiwan's biggest wealth generator in the last few decades has probably been its manufacturing sector. In particular, semiconductor and electronics manufacturing. China, needless to say, is a manufacturing powerhouse with very low costs. Taiwan has to compete directly and it's not clear what strategy it can pursue. In contrast, although people in America complain about the loss of manufacturing, it only employs 11% of the population (do note that there are many more indirect jobs created.) The loss of manufacturing in America has moderate impact but that is not the case in Taiwan.

Mark MacKinnon of The Globe & Mail has a good summary of the issues I have discussed above. Let me excerpt some of the key points but do check out the article if you are interested in investing in Asia:

Manufacturing, for decades the basis of the island's success, is moving to cheaper and less-regulated places like China and Southeast Asia. Taiwan is still a leader in research and development, but outside of laptop computers, little of what it produces reaches consumers directly. Many items that once reached store shelves in North America and Europe branded “Made in Taiwan” now have the final touches put on them in China or Vietnam instead.


It hasn't turned out as dire as predicted, but 2009 will nevertheless go down as the worst year in the island's history.

The economy is now expected to shrink by a painful 4 per cent. And unemployment recently soared above the 6-per-cent line for the first time since the Kuomintang conceded the Chinese mainland to the Communists and set up its government-in-exile here back in 1949.

Exports, which account for more than two-thirds of the economy, fell an astonishing 41 per cent in December and 44 per cent in January, when the economic storm raged last winter. While those figures have started to look better (exports were down 12.7 per cent in September, the slowest pace of decline since the crisis began), many believe the game will have changed completely by the time the recession is over.

According to the U.S. Department of Labour, average compensation costs in Taiwan's manufacturing sector were $6.58 (U.S.) an hour in 2007, a figure slightly higher than Hong Kong's $5.78. In comparison, compensation costs in China were estimated in 2006 to be $0.81 an hour.

The Taiwan situation shows how easily investors can be badly burned with unpredictable outcomes. If you were investing in the mid-90's, Asian Tigers roamed the investing world, although not quite to the degree of the presently ubiquitous BRICs, and many would have considered Taiwan a sure-fire bet to be one of the leading countries in a few decades. Well, it did rise and generate a lot of wealth for its citizens and its companies. However, if you invested for 20 years, you would have done poorly. If you look at the TSEC Taiwan index on Yahoo! Finance, you'll note that it has literally gone nowhere since 1998. The chart is price-index only so, if you include dividends, you would have posted slightly higher returns (perhaps 1% to 2% annualized) but it's still nothing to write home about. (note: the chart goes from late 90's but if you invested in the early to mid 90's, you would have done better, but still not great.)


1 Response to What is the future of Taiwan?

October 29, 2009 at 12:16 AM

I wonder as well about the future of Taiwan.

Of course, none of this means that Taiwanese stocks are neccessarily a bad investment, since these factors may be discounted by the market already.

Taiwan has a very high dividend yield (I own DGS & DEM, two emerging markets dividend-weighted funds, and Taiwan is the highest weighted country in each).

Looking at a Taiwan only ETF, ishares EWT provides a yield of 4.89%, and this is after rising 56% so far this year.  In January 2009, EWT probably yielded almost 8%.

I have no idea what a longer term yield history for Taiwan would look like, but if the yield drops relative to other emerging markets (either through dividend cuts or price appreciation), then my fundamentally weighted indices will reduce their weighting in Taiwan.

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