Written by Chun-Chien Kuo.
By adding fire to the existing US-China Trade War, Covid-19 has accelerated the current economic adjustment pace, along with the need for supply chain reallocation in industries. Thus, industries and firms in Taiwan have responded to adjust their production of diverse parts and components. They have also attempted to establish their own sufficient domestic supply chains. New trends in supply chain reallocation have also emerged, such as localised supply chains, shorten supply chains and digitalisation under the Covid-19 threat.
However, one should ask, under this new reallocation trend, what are Taiwanese industries’ roles in adjusting to global value chains? Indeed, how Taiwanese industries reposition themselves securely in global value chains (GVCs) have become an interesting and important issue. It goes without saying that the global value chain has been vastly discussed both in empirical and theoretical studies. However, firms’ decisions to locate their value chain configurations regarding location decisions and geographic scope have become more complicated in recent years. This is a result of the US-China trade war and the on-going unexpected Covid-19 crises.
Firstly, the on-going US-China trade war leads to the pressuring of reallocation supply chains out of China (Delink China). Thus, individual Taiwanese firms could react differently according to their cost-benefit concerns. At the same time, the industry as a whole may add more considerations in positioning its status on the possibility of supply-chain reallocation. Therefore, Taiwanese firms (and industries) could reallocate themselves to different regions accordingly. They can choose to return to Taiwan or reallocate to the US, Mexico, ASEAN or multiple locations to reduce the US-China trade dispute’s tariff risks. The reallocations of the supply chain for industries rely on different concerns and reasons. US and Mexico being favourable locations may come from market proximity and cost reduction.
On the other hand, choosing Taiwan or ASEAN may be influenced by cost, tariff reduction, potential market and government promotion policy. The Taiwanese government has provided many incentives to attract investors’ return by promising to solve the corresponding insufficient water, electricity, land, labour and funding problems since the 2018 US-China trade dispute. As of February 04, 2021, three major programs investing in Taiwan have been promoted by the Taiwanese government, which has attracted NT$ 1.1922 trillion, with 814 enterprises’ applications approved and the creation of 99,457 new jobs.
What is more, the Action Plan for Welcoming Overseas Taiwanese Businesses to Return to Invest in Taiwan has attracted NT$792.5 billion investment. This should be compared to the 182 billion from Action Plan for Accelerated Investment by Domestic Corporations and the 217.7 billion from Action Plan for Accelerated Investment by small and medium enterprises (SMEs). The Action Plan for return Taiwan Businesses investment composes around two-thirds of the newly attracted investments under Covid-19.
Secondly, there are two possible supply chains and two standards system emerging here. China has reacted to the Delink China threat by promoting what is known as the China Standards 2035 plan. This is the blueprint for China’s government and leading technology companies to set global standards for emerging technologies like 5G internet, the Internet of Things (IoT) and artificial intelligence—among other areas. The China standard 2035 is an ambitious attempt from China to direct global future first-tier technologies. This is important for China as currently, most of its technologies -except for 5G – are in the second or third- tier levels.
Nevertheless, as long as China maintains its huge global influence and continues its aggressive innovations, the world will eventually encounter these two possible supply chains and two standard situations. The two chains refer to the supply chains linked to China (red supply chain) and the non-China (Delink China) supply chains. The two standards mean products applied to the China standard and non-China standard, respectively. Many global name-brand automobile producers have thus been forced to stop their productions because of the recent shortage of car chips. This chip shortage puts pressure on the US Biden administration, strengthening further cooperation with Asia’s alliances—including Taiwan—to secure semiconductor and battery supply chains to reduce its dependence on China. It is important to note that the two supply chains trend has emerged gradually, but the two-standard trend has not yet appeared as China still has a long way to catch up and take the lead in many key technology areas.
In dealing with this new development, Taiwanese industries (firms) should be cautious in positioning themselves on decisions relating to supply-chain reallocation. It would be unwise to take a single-sided approach as Taiwan’s economic growth relies primarily on its exports. China and the US are also Taiwan’s largest and second-largest export counties. Thus, they should seek a balance between these two systems. Based on their competitive advantage, target market and cost constraints. Each industry (firm) can either stay in one system or engage in both systems simultaneously with a different focus. In short, industries in Taiwan should choose their adjustments accordingly to possible new developments.
Here are some suggestions. For traditional industries – such as steel and textiles- they should consider their competitive edge to secure their GVC roles by either staying in China or moving to Vietnam to avoid tariffs. For those existing domestic supply chains with competitive advantages or potential competitive advantages in GVCs, the Taiwanese government should utilise these competitive edges through proper promotions. The semiconductor industry is the top choice, followed by AI, 5G and other high-technology industries. Besides, Taiwan’s government can also help by providing incentives to attract more innovative investors – international and national – in medical, automotive (e-car), aerospace-engineering and ICT-related industries to establish domestic supply chain systems. These can provide vigour for the Taiwanese economy and help more industries secure important positions in future GVCs.
Taiwan has been praised for successfully fighting Covid-19, and the importance of Taiwan’s semiconductor in GVCs has also gained recognition recently. Taiwan is an export-led growth economy. Thus, having essential roles in GVCs can secure Taiwan’s economy with further prosperity. We expect more Taiwanese industries to position themselves as the semiconductors producers of the future.
In conclusion, because of the inevitable supply chain adjustment reallocation trend, Taiwanese industries should carefully consider their existing supply chain deficiencies and improve adjustments to pursue a sustainable and resilient position in the coming shuffle of global value chains.
Chun-Chien Kuo is Associate Professor at the Department of International Business, National Taipei University of Business.