Exploring Taiwan: From Colonial History to Modern Day Economic Super Power

Official Name:  Republic of China ("ROC"), also known as Taiwan.

GDP and global rank (2010): US$ 429.8 billion ranking as the 24th largest in the world.

Per Capital GDP and rank (2010): US37,931 ranking as 18th largest in the world.

Local Currency: New Taiwan dollar (NT$).

How did Taiwan get to where it is today?

Due to Taiwan’s strategic location as a hub between Far East and Southeast Asia, many countries have colonized Taiwan throughout its history.  The Kingdom of Middag (China) were the first rulers of Taiwan from 1540-1732.  Since this time period Taiwan was ruled by the Dutch, Spanish, Kingdom of Tungning (Chinese) and Qing Dynasty (Chinese.)  In 1895 China and Japan signed a treaty of friendship which involved the Qing Dynasty handing over complete control of Taiwan to Japan.  Following the Japanese defeat in World War 2 Taiwan was returned to the Chinese Nationalist Party who declared Taiwan to be named the Republic of China.

In 1949, millions of mainland Chinese nationalists fled to Taiwan to escape the communist revolution and further establish The Republic of China.  The first step towards building up the island’s economic activity involved land reforms by selling public land to farmers at discounted prices and minimizing rent costs.  Existing land owners had the option to sell excess land to the government at a huge premium so the land can be further redistributed to many farmers. 

Universal education was introduced and the economy grew by an average of 9.21% from 1952 to 1961 as the economy slowly shifted from agriculture to industry.  The Taiwanese economy shifted focus to heavy industry and infrastructure in the 1970s and shifted again to high tech electronics in the 1980s.  An industrial park named Hscinchu Science and Industrial Park was created to further spur growth in the electronics segment and attract foreign companies to set up research and development facilities. 

Taiwanese companies such as Acer and Realtek established themselves as international leaders in the electronics field while already established companies like Philips PHG invested tens of millions of dollars in research facilities in Taiwan which provided thousands of jobs to the highly skilled, English speaking and educated population.  The park is often nicknamed “The Asian Silicon Valley” due to the very similar characteristics of Silicon Valley in California, USA.

In the 1990s, virtually all Asian economies were experiencing growth. Taiwan was faced with competition from China and Vietnam, both of which boasted similar resources but with substantially cheaper work forces.  Taiwan diversified its trade exports and has focused efforts to export to European markets and Southeast Asian markets instead of being heavily dependant on US exports. 

Taiwan escaped the global financial crisis of 2007 relatively un-harmed and the government introduced a stimulus offering tax breaks and promoting trade with new emerging markets such as Russia and Brazil.  Taiwan is one of the few countries in the world that grew by over 10% in 2010.

Where is Taiwan Today?

Today the unemployment rate is low at 4.73% and the medium salary has increased almost 20% from the previous year.  Private consumption, retail sales are all at strong levels and Taiwanese students often rank among the highest in the entire world in the fields of science and mathematics. 

Education is both free and compulsory for seven years however this will be increased to 14 years by 2014.  National Taiwan University ranks among the most prestigious educational institutions in the world and has one of the highest ranked Global M.B.A programs for business studies.

Industrial goods represent 98% of exports - the majority of which include electronics - which is Taiwan’s most important sector.  Taiwan is the global leader of computer chips and manufactures over 80% of the world’s notebook computer designs.

Taiwan is also home to the world’s second largest building, Taipei 101 (formerly known as Taipai World Financial) which was the world’s largest building from when it opened in 2004 until 2010 when it was outranked by the Burj Khalifa, the world’s current largest building located in Dubai.

COMPUTEX Taipei is the world’s second largest computer and technology fair in the world where local small and medium sized businesses can show their products to foreigners looking to either purchase their products or offer investments.  The fair showcases companies involved in security, IP telecoms and IP TV, eLife, Automotive Electronics, Linux and Open Source software and Digital Home appliances. 

The current status of Taiwan is of political concern.  Taiwan claims they are an independent state while mainland China claims that Taiwan is a part of China.  Only 25 countries worldwide recognize Taiwan as an independent state, many others do not recognize Taiwan due to extreme pressure from China not to do so. 

The United States is an important military partner with Taiwan supplying military jets and anti missile equipment.  The official policy of the United States is to defend Taiwan in the event of a Chinese hostile takeover of Taiwan but military and political experts almost all agree that the possibility of this happening is very small.

What are some dangers in investing in Taiwan for 2012?

Given that over 70% of Taiwan’s economy is dependent on exports of electronics and machinery, Taiwan’s economy can see a pullback if the global economy slumps further.  The Polaris Research cut its forecast for Taiwan’s economy growth in 2012 from 3.93% to 3.88% based on weaker export growth and global economic uncertainties.  Even though the economy has improved since the global recession in 2007-2010, high unemployment rates can translate to a decrease in global demand and rising oil prices can translate to higher operating costs for Taiwanese companies.

ETFs of interest

iShares MSCI Taiwan Index Fund EWT  holds 116 of the largest companies that are based in Taiwan.  An investor would choose to invest in the fund if they believe that the large technology companies within Taiwan are competitive enough to compete in the global market.  Not surprisingly the largest sector of the fund is Information Technology which represents over 56% of the entire fund’s value.  Financials are well represented at 14.50%.  Other components include Materials, Telecom, Consumer Discretionary, Industrials, Consumer Staples, Energy. 

The largest holding in the fund is Taiwan Semiconductor Manufacturing Company TSM who owns the world’s largest semiconductor plant.  HTC Corporation is also a large holding in the fund and the company is well known for being the first manufacturers of touch and wireless hand-held devices in the late 1990s.  Today HTC is known for their advanced smartphones and tablets.  The HTC Dream was selected by Google GOOG to be the first phone to operate on the Android platform.  The CEO of HTC is Taiwan’s richest person, Wen Chi has a personal net worth at over US$8 billion.

IQ Taiwan Small Cap ETF TWON holds 100 companies that are considered to be ‘small cap’ that is have a market capitalization of at least US$150 million but no more than $US500 million.  The majority of the stocks trade on the local Taiwanese stock exchanges and the scope of these companies range from international firms competing at the ‘global stage’ to local companies that derive the majority of their revenue from sales within Taiwan.  An investor could choose to invest in this fund if they believe that the international companies can gain prestige at the international stage by offering superior products and the Taiwanese economy will continue to improve helping the local companies. 

The fund holds 100 companies, with the largest holding composing 1.89% of the fund and the smallest composing 0.48%.  The largest holding is Flexium Interconnect Inc. which was founded in 1997 and is a manufacturer of Flexible Printed Circuit Board ("FPC"): a method for assembling electronic circuits to conform to a specific shape.  Flexium Interconnect Inc has seen its sales revenue increase by over 20% from fiscal year 2011 to 2011 totaling over US$165 million. 

Another company in the index is a local company, T. Join Transportation Co., which provides transportation and distribution services to individuals and clients within Taiwan.  The company offers delivery of products ranging from household products purchased online to airport services and 50 gallon barrels of oil.  International delivery is also available to mainland China and Europe. 

Notable Companies

Taiwan Semiconductor Manufacturing Company TSM is the world’s largest producer of semiconductors with their headquarters located in the industrial park in Hsinchu.  TSMC is valued at over US$60 billion and is currently developing the A5 duel core and A6 chips for Apple AAPL to be used in iPads and iPhones. 

Other notable and well recognized clients include Qualcomm QCOM, Broadcom BRCM, and Nvidia NVDA  In 2010 the company declared revenues of US$13.9 billion.

Hon Hai Precision Industry Co. HNHPF is the world’s largest maker of electronic components.  The company is also known as Foxconn and is an original design manufacturer of the iPad, iPhone, PlayStation 3, Wii, Xbox 360 and Kindle.  Foxconn is the largest employer (over 1.2 million employees) and exporter in greater China, mainland China, Hong Kong, Taiwan, and Macao.  Total revenue for 2010 was US$59 billion.  Given the companies extremely impressive list of clients Foxconn is well poised for continued growth over the years.