EDITORIAL: Opportunity in China crisis

Over the past 20 years, China has developed into the world’s factory through its low labor, land and raw material costs. While tariffs levied against Chinese goods by US President Donald Trump’s administration has made it less attractive for businesses in the past two years, it is the COVID-19 outbreak that has shone a light on Beijing’s questionable and unsustainable crisis management capabilities and governance mechanisms. The outbreak has also created risks for the global electronics and automotive industries, and affected the production of pharmaceutical ingredients and textile materials.

Taiwanese electronics manufacturing service providers, such as Hon Hai Precision Industry Co and Pegatron Corp, expect to suffer from supply chain disruptions, as more than 80 percent of their output comes from China. No wonder Apple Inc last week updated its sales guidance for this quarter, warning that sales would be lower than its previous estimates because of the outbreak. Indeed, it is the second time Apple has cut its quarterly guidance since its analyst meeting late last month, indicating how the fallout from public health issues such as COVID-19 can constrain global iPhone supply and end-market demand in China.

The unprecedented supply chain disruptions have clearly created a crisis for the manufacturing sector, as the extended Lunar New Year holiday and the slow resumption of work at Chinese factories have dealt a blow to businesses, either in delayed downstream production or through shortages of upstream raw materials and labor. Given Taiwanese firms’ role in regional supply chains, damage to their businesses seems all but inevitable in the short term.

However, these disruptions could serve as a stress test in gauging Taiwan’s ability to withstand wide swings from any situation in China and how long it would take to recover from a crisis. The outbreak could also spell good news for Taiwan, because it might help speed up the return of investment and jobs from China. It might become a tipping point in the decoupling process for companies considering moving their supply chains out of China. Regardless of the degree of damage or the pace of decoupling, there is a consensus that Taiwanese firms’ heavy dependence on China is a real danger.

The outbreak is a wake-up call for Taiwan, because more than 75 percent of the nation’s publicly listed companies, or 1,201, have aggregated investments in China totaling NT$2.54 trillion (US$83.54 billion) as of the third quarter of last year, up NT$43.1 billion from the end of 2018, government statistics showed. This is only the tip of the iceberg, as the data did not include investments made through firms’ overseas channels. This should raise concerns, as excessive and concentrated investments in a single market are not healthy for businesses or the nation’s economy.

Another growing consensus is that the triangular trade model — in which firms take orders in Taiwan, but produce goods at plants in China before shipping them elsewhere — is not durable and needs to be adjusted quickly. Some businesses have started to shift production out of China in response to the US-China trade dispute, and more are expected to follow suit. Together with government incentives that aim to boost domestic investment amid the trade row, the outbreak might prove to be a crisis as well as an opportunity for Taiwan.