Taiwanese Businesses in Thailand and Vietnam

Rayong Industrial Land, an industrial park just a three-hour drive away from Bangkok, is the newest of Bangkok's three satellite industrial zones and provides its tenants the best perks. Taiwanese firms are well represented among the long stretch of factories flanking the 80-meter-wide Highway 36. Cheng Shin Tire, the Tuntex Group, and Tycoons Group all have facilities here.

The golden Buddha at the entrance to Tycoons' plant makes it look more like a five-star club than a business. It has nothing of the cold, hard look you'd expect of a steel maker.

"Land prices in Thailand are only one-tenth of those in Taiwan," says Tony Su, vice president of Tycoons' Thai operations. "Steelmakers need a great deal of land, so that's definitely an incentive to invest." Su says that Tycoons invested THB5 billion (roughly NT$5 billion) in its 70-hectare Thai plant in 1996 in a deal that provided it with an eight-year-long tax holiday, and an additional five years of taxes at only half the normal rate. (The company also found Thailand's efficient transport and logistics network attractive.)

Steel fasteners is an odd industry. Firms with significant capital resources have no interest in it, and those without can't afford to get into it. Yet the industry's products are essential to virtually every other industry, including aerospace, automotive, machine tool, construction, electronics, metals, and furniture.

Tycoons Group was founded as a hardware exporter in the 1980s, and gradually extended its operations up the manufacturing chain from steel fasteners to spheroidized wire. From there, it moved into wire rods and steel billets to better control its supply chain. Tycoons listed on the Taiwan Stock Exchange in 1995, but recognized that it would have difficulty competing with industry leader China Steel Corporation and began gradually expanding its operations outside of Taiwan.

Where most Taiwanese and mainland Chinese steel-fasteners manufacturers use a "collective division of labor" to provide one another with mutual support, Tycoons was on its own in Thailand and consequently developed an integrated manufacturing model that had it making everything from the wire rod and wire to the fasteners themselves. An oddball legend within the steel fasteners industry, Tycoons is one of only two fully integrated fasteners makers in the world. (The other is the US giant Nucor.) Tycoons is also currently the largest wire rod, wire, and fasteners maker in Thailand, and has been investing in steel billet production there as well. The company produces 360,000 metric tons of steel rod annually, selling 60% domestically and 40% abroad. It also manufactures nearly 50,000 tons of steel fasteners annually, all of it for export, the bulk of which is consumed by the construction industries in the US, Europe, and Russia. Tycoons Group had revenues of NT$12 billion in 2008.

The Tycoons Group's Thai operations utilize a vertically integrated production model that has them producing everything from steel wire rod to steel fasteners in-house. In the photo, a steel billet is sandblasted then smoothed. It will next be heated to a high temperature and worked into wire rod.

Little screws, lotsa knowhow

Our visit to the Tycoons facility was truly eye opening. We never imagined that making ordinary screws was so complicated a business!

The company first makes wire rod by heating, rolling, and pressing 12-meter-long, 15-centimeter-square steel billets weighing 2,000 kilograms into a jelly-roll shape. It next spheroidizes the wire rod to make it softer and more ductile, then draws, phosphatizes, and rustproofs it to create the wire it uses to produce fasteners.

Now 5.5 to 42 centimeters in diameter, the wire is cut, formed, threaded, and galvanized. In all, the company uses over 800 different heavy machines to produce fasteners to more than 10,000 different specifications.

"Our competitors are mainland Chinese steel companies," says Su. He explains that one of the consequences of Mao Zedong's "backyard steel furnace" program was that small steel mills proliferated throughout China. Once the Chinese economy liberalized, industrialization created enormous demand for steel. This in turn led to rapid development within the steel industry with the result that China has now become a net exporter of steel products ranging from steel billets to fasteners. Chinese manufacturers also pay very little in the way of environmental protection costs. Where manufacturers in Thailand must pay fees of THB0.7 per kilogram of finished product (an amount equal to 10-20% of total production costs) for the treatment of wastewater generated by the galvanizing process, Chinese manufacturers pay nothing. This has enabled them to export low-cost steel to the US and Europe in such high volumes that many nations have long levied anti-dumping tariffs of 60-200% on China's steel products.

"Fortunately, the Chinese government has begun implementing environmental measures, which should result in fairer competition in the future," says Su. Since Tycoons' products are of far higher quality that those of its mainland counterparts, the company is unworried that the 2010 rollout of ASEAN Plus China will allow Chinese steel to dominate the Thai market. Instead, Tycoons expects the agreement's elimination of tariffs to help it go toe-to-toe with Chinese manufacturers on their home turf, enabling it to regain the ground it surrendered when it pulled out of the Chinese market in 2003. The company further anticipates that the completion of the ASEAN Plus Japan accord (expected in 2018) will help it recover territory lost to Chinese manufacturers in the Japanese market. Looking even further ahead, Tycoons expects ASEAN Plus Six to extend its reach into the Indian market, bringing benefits never anticipated when it first set up shop in Thailand.

Asama bicycles (left) are a frequent sight in Ho Chi Minh City. Asama is Vietnam's top brand, and, like Giant, is a major Taiwanese success story. The company is likely to face an onslaught of new competition from Chinese manufacturers once ASEAN Plus China comes into force, and is preparing accordingly. The photo at right shows an Asama production line.

Tax perks

Most Taiwanese firms that, like Tycoons, export to the world from a manufacturing base within ASEAN are likely to benefit from the ASEAN Plus free-trade accords. In addition to benefits related to trade in end products, these firms also enjoy reduced tariffs on intra-ASEAN trade in raw materials and unfinished goods.

The Teco Group, a venerable Taiwanese manufacturer of electronics, acted to take advantage of these ASEAN-related perks in 2006 by moving its manufacturing of motors and home electronics for the Southeast Asian market from Taiwan to Vietnam. Teco bought 42 hectares near Ho Chi Minh City in the My Phu Industrial Zone to establish a Southeast Asian production base for heavy motors and home electronics and urged its suppliers to invest along with it. While construction continues on Teco's facility, the global economic slowdown and the concomitant softening of demand have necessitated delaying the start of production to some time after this year.

Wang Ching-hwa, general director of Teco (Vietnam) Electric & Machinery Co., says that Teco used to assemble parts and unfinished goods from Taiwan in Malaysia. But Taiwanese parts and unfinished goods are now subject to 5-20% tariffs, and finished goods to 26% tariffs, or about 15 percentage points more than those on ASEAN goods. Teco therefore moved its Malaysia factory from labor-scarce Malaysia to labor-rich Vietnam, and increased the new facility's size by transferring some of its Taiwanese capacity there. But this offshoring hasn't affected the group's Taiwan-based capacity; instead, it complements the technologically advanced and custom production lines that remain here.

Acer began sowing seeds in the Southeast Asian market some 20 years ago, at a time when most Taiwanese firms still had their gazes firmly fixed on the US and Europe. It has faced numerous challenges over the years, but has overcome them all to become the number one computer maker in this market of 500 million and a model for how to do business in ASEAN.

Taking advantage of ASEAN

When the six original members of ASEAN unified their markets in 2003, firms from outside the region were attracted by the tariffs perks and the other advantages that accrued to those nations' industries.

Taiwan's Cheng Shin Tire, which set up production facilities in Thailand in 2003, is a case in point. Cheng Shin came to Thailand for the exceptional rubber resources. But the country's car industry was also booming, and Cheng Shin hoped to win a share of the large maintenance market.

Thailand calls itself the "Detroit of Asia," and its automotive industry is the nation's third largest, behind food and electronics. Over the last decade, the Thai government's policy of welcoming foreign firms with open arms and allowing them to set up wholly owned subsidiaries has attracted investment from all the major American and Japanese car makers, as well as their parts suppliers. By 2008, Thailand's 16 car makers had built enough production capacity to produce 1.4 million vehicles per year, making the nation ASEAN's largest automobile producer and exporter. This rising automotive tide has also lifted aftermarket parts producers, which have also experienced rapid growth.

"We began production one year after breaking ground on our plant and rapidly ramped up capacity," says Lin Yu-yu, vice general manager of Cheng Shin's Thai subsidiary. "By 2008, our capacity had reached 26,000 tires per day, or 1.7 times that of our Taiwan facility. Even with the economy in recession, our order book remains full and we've got people working on Sundays."

Cheng Shin's Taiwanese parent currently supplies the Taiwanese market and functions as the company's global operational hub; its Shanghai and Xiamen plants supply the China market (at 50% of revenues, the company's largest market); and its Thai facility, located in the Bangkok-area Rayong Industrial Land, supplies the European, Asian, and Australian markets.

"Thailand not only enjoys tariff benefits within ASEAN, it also has bilateral free trade agreements (FTA) with the US and Australia, which helps boost our sales there," explains Lenny Lee, director of international sales at Cheng Shin's Taiwan headquarters. "If we were to export to those markets from Taiwan or the mainland, we'd have to pay a 5% tariff, which would really hurt our bottom line."

Cheng Shin entered the motorcycle and light-truck tire markets in Vietnam three years ago, while also setting up a bias tire manufacturing facility in Vietnam. The company's reason for "opening up a new front" was to "expand [its] product lines and cover a larger market," says Li. In addition to supporting one another, the Vietnamese and Thai operations also provide a backup to the company's mainland operations.

This large bundle of steel wire (upper photo) was produced from a single steel billet. Cutting, forming, and other processes will eventually turn it into steel fasteners (lower photo).

China Plus One

In recent years, Chinese-made products have flooded global markets, prompting many nations to erect every barrier to Chinese goods that they can, even to the point of levying anti-dumping tariffs on China's high-volume exports. Examples of the latter include Egypt's tariffs on Chinese car and truck tires, and Turkey's on Chinese car and motorcycle tires. The US and India have also been studying the volume of China's exports of tires for passenger vehicles. Companies such as Cheng Shin can ameliorate these kind of China-specific risks by moving production to ASEAN factories.

But these external risks aren't the whole story. There are also internal risks associated with Chinese manufacturing. Over the last three years, the Chinese government has implemented demanding new labor, environmental protection, and taxation regimes intended to push traditional manufacturers into the interior. Taiwanese firms have responded by pouring investment into ASEAN in recent years in an effort to better distribute their risks. Vietnam-now a member of the World Trade Organization (WTO) offering government-sponsored investment incentives-became a hotspot for investment in 2007. Though the global financial crisis has slowed the pace of inbound investment and caused many Taiwanese-invested projects to be postponed, Vietnam is still widely viewed as the best of the "China Plus One" options.

A 2007 investment by Taiwanese electronics giant Foxconn in northern Vietnam offers an illustrative case in point.

"Foxconn had two principal reasons for investing in northern Vietnam," says Chen Yo-kuei, head of the northern branch of the Council of Taiwanese Chambers of Commerce in Vietnam and a developer of industrial parks. The first is that Vietnam has the most stable economic and political system in ASEAN. It has no guerillas and no religious dissidents, but does have convenient air and sea links. It also takes only 18 hours (including customs clearance) to transport parts overland from Guangzhou to northern Vietnam via the Friendship Pass. That's less time than it takes to transport them within China. Finished goods for export can go out by sea (via the port at Hai Phong) or by air (via Noi Bai International Airport), all less than two hours' drive from Hanoi. These factors make northern Vietnam one of ASEAN's best manufacturing locations.

"Given the pressure the Chinese government has been putting on firms, [Foxconn] Chairman Kuo sought to build the new factory as quickly as possible," says Chen. "He thought that since his company already had a development permit, getting land on which to build would be easy." Kuo hadn't realized how time consuming the process-including purchasing the land, providing compensation for existing structures, and sweeping for mines left over from previous wars-would be. Delayed to mid-2008, the project then encountered still other problems, including labor unrest and rising inflation in Vietnam, and the global financial crisis. In November, the company announced that it was putting the project on hold.

But Foxconn hasn't actually stopped work on its factory. In fact, it currently has more than 1,000 Taiwanese and mainland Chinese supervisors and operations personnel laying the groundwork in northern Vietnam, and has kept its production lines in the Que Vo and Dong Vang industrial parks running. The handover of a further 400 hectares of land the company purchased in Bac Giang and Vinh Phuc Provinces is also moving forward.

"If the Vietnamese government learns its lessons from the labor strikes and the troubles companies are having acquiring land, it will act to improve the investment environment," argues Chen. "That might well spark a new wave of investment once the current economic crisis passes."

The members of the Association of Southeast Asian Nations (ASEAN) have provided Taiwanese firms operating on their territory with unlimited business opportunities in recent years, and Taiwanese firms have been jumping on them, creating niches for themselves and reporting impressive results.

Good and bad

Free trade benefits large exporters with global reach, but it hurts the majority of small- and medium-sized firms. Taiwanese firms that sell primarily to the Southeast Asia region will suffer particularly badly once signatories to the ASEAN free trade agreement begin flooding the market with their goods.

Asama Bicycles is a case in point. The Taiwanese company has established itself as the number-one brand in Vietnam, but is anticipating an onslaught of new competition once ASEAN Plus China comes into force.

Asama president Eddie Fang originally offshored his production to avoid head-to-head conflict with Taiwanese compatriot Giant Bicycles, and chose Vietnam because it had an advantageous tariff regime with the European Union (EU) and was not subject to any anti-dumping tariffs. When the company first established its facility in 2000, its products were intended primarily for export to Japan and the EU. Fang then noticed that the bikes made locally for the domestic market tended to be of poor quality, and often broke down within a week of their purchase. Sensing an opportunity, Fang began steering more Asamas into the Vietnamese market. Though his bikes are about 40% more expensive than other Vietnamese-made cycles (roughly NT$2,000 each versus NT$1,400 each), their reputation for durability quickly spread and attracted buyers. "We became famous without having to spend much on advertising," says Fang. The company began selling to the Vietnamese market in volume in 2004, and within three years had become the number-one brand in this nation of 80 million. These days seven out of ten bicycles on the streets of Ho Chi Minh City are emblazoned with the Asama logo.

But the company's success has created new challenges. Chief among them is that other local manufacturers are constantly counterfeiting Asama's products. In one instance, a thief ripped the logos off an entire row of Asama bikes parked at a school, then sold them to a counterfeiter.

"There are patent laws and other regulations, but Vietnam's public security system isn't very efficient," says Fang. "There's no way to get the counterfeiting under control unless you can track down the counterfeiting factory and get photographic evidence yourself." Fang's solution to this Wild West environment has been to hire more than 20 R&D personnel to keep new products rolling out of his factories at a steady clip.

Asama currently sells about 400,000 bicycles per year, and Fang predicts that that number could rise to 1 million. In his view, the 500-million-person ASEAN market and the 1.8-billion-person ASEAN Plus China market offer Asama good and bad in equal measure. "On the one hand, we'll be able to cheaply import Chinese raw materials," he explains. "On the other, we'll also face competition from Chinese manufacturers." His strategy is to increase the percentage of components the company manufactures for itself. Asama currently makes about half the parts its uses itself. The remainder, including tires, chains, hubs, and other parts, are either sourced locally or imported from Taiwan. If the company can increase its in-house manufacturing of parts to 60% and its suppliers' in-house manufacturing rate to 90%, the savings on transportation and import tariffs will make it more competitive.

While many businesspeople are salivating in anticipation of getting into the vast ASEAN market, Fang feels he needs to make sure he has his company on a solid footing before expanding, and the Vietnam market continues to present challenges.

After work, more than 10,000 workers stroll along a tree-shaded thoroughfare within a factory compound. Shyang Shin Bao Industrial Co. has been making shoes for major international brands for years, and continues to grow. Its impressive Vietnam campus, which houses an advanced, "green" factory, is surprisingly pretty.

Selling to ASEAN

Unlike the many Taiwanese businesses that still see ASEAN as a low-cost "factory," Acer Computers has been selling to this newly wealthy market, and turning big profits in the process. How did Acer become ASEAN's number-one notebook computer brand?

"At a July computer expo in Bangkok, one of every two computers sold was an Acer," says Harry Yang, the managing director of Acer Thailand. Yang says that Acer established itself in ASEAN early, and that it has put down deep roots. The company began laying the groundwork here in the 1980s, while the world's other major computer makers were still focused on Europe, the US, and China. After establishing distributors in each of the ASEAN nations, it listed Acer Computer International, a subsidiary handling sales and service in the Singaporean, Malaysian, Indonesian, Filipino, and Thai markets, on the Singaporean stock market in 1995.

Yang says that when he first transferred from Australia to Thailand, the Thai government still didn't allow foreign firms to set up wholly owned local subsidiaries. Acer therefore had to establish a joint venture with a Thai computer firm. But the two firms had very different notions about decision-making and operations, which caused headaches from the outset. Then, the year after the joint venture was formed, the Asian Financial Crisis swept across the region. The company lost one-quarter of its capital base of THB200 million almost overnight. "Who would have guessed that the financial crisis would actually save us?" muses Yang. He explains that in an effort to rescue the economy from the crisis the Thai government decided to permit foreign firms to create wholly owned subsidiaries. As a result, Yang at last had free rein to run the company the way he wanted.

"At the time, I was focused on three things," says Yang. "First, if we were going to put down solid roots, I had to build a service network. Second, I needed to carry out a major realignment of our distributors, culling the weaker ones and supporting the stronger ones. Third, I set about establishing 13 branches around Thailand to stay on top of local markets." Yang says that he first targeted the government and academic markets by using payment plans to entice hundreds of thousands of students and civil servants to buy their first computers, then won over the private sector by offering rapid repair and maintenance services.

"In Bangkok alone, we hired 250 service technicians and assembled a fleet of 13 cars and 20 motorcycles for repair calls," recalls Yang. "We recruited a virtual army, even outfitting them with GPS systems." The Thai banks were particularly demanding, requiring that maintenance techs show up within two hours of a repair call. But his people managed to deliver, in spite of Bangkok's enormous sprawl-it covers over five times the area of Taipei-and its terrible traffic.

Yang has also crisscrossed the country for more than a decade to maintain good relationships with Acer's distributors "Localization is crucial to Acer's strategy," he says. "That means hiring local people and tailoring our products to local demand."

Acer is ASEAN's number-one notebook computer brand, controlling 30-40% of the market in each of its member nations. It also has a 10-20% market share in each of ASEAN's desktop markets. Figures like that helped the company keep last year's revenues at about THB14 billion (about NT$14 billion) in spite of the sluggishness of the economy. Acer hopes to grow them to THB15 billion this year.

Acer, unlike other Taiwanese businesses that fixed their sights on Europe and America, has been sowing seeds in Southeast Asia for 20 years. The company is now reaping a bountiful harvest, and has great prospects for further development in the region. After all, only about 10 million of Thailand's 65 million people currently own computers. And Acer's development plans now extend to more recent additions to ASEAN-nations such as Vietnam and Cambodia-as well.

Looking at the incentives for Taiwanese investment in ASEAN-that is, at everything from cheap land, labor, and materials to tax perks, industrial policy, risk distribution, and the development of new markets-it seems that though the issues under consideration differ at every point in time and with every firm's every project, all of the Taiwanese firms that have been successful have played to their strengths and built their own niche. We should applaud these firms as they turn Southeast Asian economic integration to their own advantage.

Asama bicycles (left) are a frequent sight in Ho Chi Minh City. Asama is Vietnam's top brand, and, like Giant, is a major Taiwanese success story. The company is likely to face an onslaught of new competition from Chinese manufacturers once ASEAN Plus China comes into force, and is preparing accordingly. The photo at right shows an Asama production line.

This large bundle of steel wire (upper photo) was produced from a single steel billet. Cutting, forming, and other processes will eventually turn it into steel fasteners (lower photo).

Cheng Shin Tire invested in Thailand to take advantage of that country's excellent rubber resources and booming automotive industry. Most of the supervisors at its Thai facilities are Taiwanese. All are experienced and down to earth. The company's corporate culture stresses that a stable home is good for business, and it therefore discourages extramarital affairs.

Teco is among the world's leading manufacturers of electric motors, both in terms of production capacity and production value. The company is in the process of consolidating its Southeast Asian assembly plants and expanding them with full production lines to better take advantage of ASEAN's zero-tariff regime. With that in mind, Teco purchased land and built a new facility in Vietnam in 2006. The photo was taken at the Long Thanh Industrial Zone in Vietnam.

Many Taiwanese firms are employing a "China Plus One" strategy to diversify risks associated with their Chinese production, and most are choosing ASEAN members as their "Plus One" option. Foxconn's large investment in northern Vietnam in early 2008 is a case in point, though one which has seen its completion delayed by the global financial crisis. The photo shows the exterior of the company's Que Vo facility.