Wednesday, December 21, 2016

Taiwan’s Export Processing Zones: Forward-looking at 50 (Taiwan Business Topics)

Free trade zones of one kind or another have been around since at least the 1930s, but when the Taiwan government created an export-processing zone (EPZ) in Kaohsiung in December 1966 – half a century ago this month – it was still a very bold move.

“Two major psychological barriers and a number of minor problems had to be overcome before the idea evolved into an actual program,” the late K. T. Li, the technocrat given much credit for Taiwan’s economic transformation, wrote in his 1988 book The Evolution of Policy Behind Taiwan’s Development Success.

The first obstacle was that “resentment of the extraterritoriality (freedom from local jurisdiction) enjoyed by foreigners in prewar China created opposition to both free trade zones and EPZs,” said Li. “Although it is true that the zones allowed investors to operate under a different set of rules than those outside – which was the whole point – they were nonetheless [Taiwan’s] rules.” The second barrier was the fear of exploitation – “the sale of relatively cheap Taiwanese labor for the enrichment of foreign investors,” as Li put it.

There was also a concern that companies inside the EPZ would have an unfair advantage over exporters operating outside the zone. But as Li pointed out, enterprises that invested in the EPZ had already established their export markets, so they posed little threat. “Indeed, during the early years they helped promote Taiwan as a supplier of light consumer goods and not merely as a source of agricultural products,” Li explained. “In fact, after visiting factories located in the EPZs, foreign buyers would necessarily come to Taipei to examine products produced by firms outside the EPZs. In this way, new business connections were established. Consequently, I have always regarded the EPZs as showcases for our industries.”

The EPZ was created just as Taiwan was beginning its export-driven economic takeoff, and it became a source of national pride. Among early investors in the zone were companies that helped established the foundations of Taiwan’s information, consumer electronics, optics and TFT-LCD industries, including Philips Electronic Building Elements Industries (now known as NXP Semiconductors Taiwan Ltd.), Hitachi, and Canon.

According to an August 1972 report, of the 161 factories in Kaohsiung’s EPZ, 37 were electronics manufacturers, 23 made textiles, 21 produced handicrafts, and 14 were garment manufacturers. Only the first of these sectors is still important. Nowadays, the EPZs’ most important tenants are semiconductor testers-and-packagers and LCD companies. Electronics production no longer means TVs and radios, but flat-panel displays for mobile phones and components for photovoltaic arrays. Intangible goods like apps, as well as animation and cloud-computing services, are coming out of the zones’ software parks.

Over the years, EPZ tenants have became important customers for Taiwanese companies outside the zones. Back in 1967, a mere 2.1% of the inputs shipped into Kaohsiung’s original export-processing zone were of local origin. By 1973 that figure had risen to 17%, and in the 1980s it reached 33%. Last year domestic inputs equaled 48% of the zones’ total export value, according to the Ministry of Economic Affairs’ Export Processing Zone Administration (EPZA).

Today several hundred export-processing zones operate around the world, and many of those set up in the 1970s and 1980s were directly inspired by Kaohsiung’s success. The original site, a 68.3-hectare plot next to the city’s harbor, filled up so quickly with factories that within five years new zones had been designated in what are now Taichung City’s Tanzi District and in former sugarcane fields in Kaohsiung’s Nanzi District.

Between late 1967 and 1976, total employment in the zones grew 13-fold. Since then, the number of workers has fluctuated, but the current tally of 81,045 (12.4% of whom are foreign nationals) is the highest it has been in this century. The most recent nadir was in 2009, when employment came to 58,002. In addition, the workforce is far better educated than ever before, with recent data showing that 7.5% of zone employees hold graduate degrees.

First-mover advantage was one reason for the EPZs’ initial popularity with investors. In a 1992 issue of Asian Survey, Canada-based academics Jing-dong Yuan and Lorraine Eden wrote: “EPZs in Taiwan and South Korea were established in the late 1960s when the first wave of global industrial restructuring was taking place. A new international division of labor was created as multinational enterprises in labor-intensive, non-complex, light industries began to move offshore to reduce production costs… There were few other countries with EPZs, so they faced little direct competition.”

As Yuan and Eden explained: “Both countries had already achieved a measure of economic growth by the late 1950s so that labor-intensive industries were relatively well developed, making it possible for zone enterprises to establish linkages with domestic producers.” Japanese colonial rule was a recent memory in both countries, making them “natural sites for Japanese FDI.”

Half the NT$138.2 billion total foreign investment in Taiwan’s EPZs between their creation and October 2016 came from Japan, according to EPZA data. Although the zones’ contribution as a proportion of the island’s exports has declined since 1974, when they stood at just over 9%, the 2014 figure of 4.7% was the highest for some years. Cumulatively, exports from EPZ tenant enterprises have earned Taiwan around US$76 billion.

The EPZA now supervises seven EPZs, a logistics park, and two software parks. In all, they cover 530.3 hectares. The number of tenant companies now totals 602, up from 568 at the end of 2013. Manufacturing tenants pay a service charge of 0.08% to 0.22% of turnover (to reward success, the rate is regressive).

Both software parks have made notable progress. Total sales volume of the Kaohsiung Software Park approached NT$15 billion in 2015, 30% higher than in 2014, and 100% of the land (but not all of the office space) in the Taichung Software Park has been rented out. In the past, the zones offered a very different business environment compared with the rest of Taiwan. The infrastructure was better and the paperwork less onerous, but until 1986 the tenant manufacturers were required to export everything they produced.

The science parks in Hsinchu, Taichung, and Tainan nowadays enjoy a higher profile than the EPZs, but the former undoubtedly benefited from Taiwan’s experience with the latter. "The statute for the establishment and administration of the science parks, as well as the systems of one-stop services and factory-building land, are all copied from the export-processing zones," says EPZA Director-General Huang Wen-Guu.

Even though the rest of the island has caught up in terms of simplified procedures and efficient transportation links, the EPZA still strives to accommodate every qualified investor. "The main challenge is that we lack space," says Huang. "We need to expand, or figure out how to relocate older buildings to make space..."

To read the whole article online, follow this link. To see the article I wrote about Taiwan's EPZs half a decade ago, go here. The photo is courtesy of, and shows a new factory belonging, Advanced Semiconductor Engineering, one of the zones' key tenants.


Monday, December 19, 2016

New life for Taichung's old buildings (Compass)

I’ve long been captivated by architecture, concerned about the environment, and fascinated by Taiwan’s past. These interests converge neatly at dozens of locations where the authorities or private landowners have decided to preserve old buildings, and adapt them for modern uses. Thanks to surging interest in local history, sites becoming available as old industries wither, and Taiwan’s booming tourism industry, several such projects have been completed in recent years.

These repurposed buildings add diversity and beauty to the cityscape. At the same time, the environmental argument is compelling. Professor Lin Hsien-te, one of Taiwan’s leading practitioners of sustainable architecture, points out that many buildings on the island are knocked down before they’re 30 years old. This obviously represents a massive waste of resources. 

The great majority of new buildings in Taiwan are reinforced concrete (RC). Not only does cement have a huge carbon footprint, but on average each square meter of floor area for an RC structure generates 1.8kg of dust and 0.14m3 of solid waste during construction, and then another 1.23m3 of solid waste when the building is demolished. Even the most thorough of renovations, therefore, has a smaller environmental impact than destroying a building and starting again from scratch. 

In Taichung, one of the first repurposing projects transformed a row of warehouses immediately behind the old railway station. What’s now called Stock 20 was built around 1917; since 2000, they’ve been made available to artists for exhibitions and performances. Air-conditioning and modern bathrooms were added, and if you look up while inside you’ll notice a lot of work has been done to make the roof safe.

How much you’ll enjoy Stock 20 depends a lot on whether the current events appeal to you. If industrial heritage rather than art floats your boat, walk five minutes southwest to Taichung Cultural and Creative Industries Park. It’s quite easy to spend an hour or so looking at and inside the buildings which dot this 5.6-hectare former winery.

Since 2011, the complex has served to nurture startups in various fields such as broadcasting, design, and digital content.  A couple of sizable new structures have been added to the site, but the original infrastructure - including 50,000-liter tanks in which rice wine was fermented - remains in place. Bilingual information boards explain how the architect took into account both Taiwan’s hot, humid climate and the frequency of earthquakes. Even if none of this interests you, you’re sure to enjoy wandering around in search of photo ops.

Aficionados of Japanese-style architecture should head next to the Natural Ways Six Arts Cultural Center, a landmark so gorgeous it’s hard to believe it was once part of a prison. The main attraction here is the dojo where, before and during World War II, prison staff practiced martial arts such as kendo. The building now hosts classes and lectures on a variety of subjects; its current name alludes to the six disciplines Confucius regarded as essential to a good education.


While here, it’s worth taking a quick look at the old dormitory buildings a stone’s throw to the south. Several dates from around World War I, and only a few are still occupied. One of the uninhabited bungalows is being torn apart by an immense banyan tree. If preserved, it could easily be turned into a smaller version of Tainan’s Anping Tree House.

In a different part of the city, not far from National Taiwan Museum of Fine Arts and the Calligraphy Greenway, is Shen Ji New Village. The buildings here aren’t especially old, but they’re very typical of the housing provided for government employees and their families between the 1950s and early 1970s. Each has two floors, and there are two housing units per building. Unlike more modern homes, there are no balconies, and no external shelves to hold air-conditioners...

I wrote this article at the same time as this piece about repurposed buildings throughout Taiwan. To read the entire article, pick up the December issue of Compass (a very useful bilingual city guide for Greater Taichung), or visit the publisher's website. I took the top photo at Taichung Cultural and Creative Industries Park; it also appears on the cover of Compass. The lower photo was taken at Natural Ways Six Arts Cultural Center.