Taiwan: Risk Update

Following Taiwan’s January 2020 seventh direct presidential elections, Taiwan is increasingly commanding global recognition as a lively democracy. The Democratic Progressive Party (DPP) president, Tsai Ing-wen was voted back into power by the biggest margin in Taiwan’s electoral history, in what Western media are describing as a “stinging rebuke” to Beijing.

Meanwhile, as the Hong Kong Semi-Autonomous Region enters its eighth month of protest convulsions, Taiwan – the world’s 22nd largest economy by purchasing power parity (PPP) and the world’s sixth largest holder of foreign reserves – looks increasingly attractive as a business proposition. The World Bank recently placed Taiwan 13th out of 190 economies worldwide in its Doing Business 2019 rankings.

Taiwan’s advantages as a place to do business are manifold: it’s strategically located within easy reach of China, Japan, South Korea, Hong Kong, Thailand, Vietnam, Cambodia and Malaysia. It has a massive industrial base – Taiwan is the world’s fourth largest electronics producer – with significant research and development (R&D) supported by public spending. It also has a highly educated and skilled workforce that is regionally competitive on a salary basis – in terms of Artificial Intelligence (AI) research alone, Taiwan salaries average one-fifth of those in the United States. Taiwan’s financial markets are booming.

As of November 2019, foreign direct investment (FDI) into Taiwan was up 20% year-on-year (to USD 10.21 billion) compared to an FDI increase of 6% in the PRC. Taiwan’s FDI attractiveness is largely driven by investments in the semiconductor sector, energy renewables – chiefly wind power, which is currently seeing enormous interest – and internet companies. In terms of the latter, United States DRAM chipmaker Micron Technology Inc invested USD 2.12 billion in its Taiwan subsidiary in 2019 and Google invested USD 835 million in a second Taiwan data center.

In 2019, from January to November, Taiwan’s Investment Commission reportedly approved 3,968 foreign investments. In line with the Taiwan government’s New Southbound Policy (which aims to wean Taiwan from economic reliance on the PRC), investments from countries such as Australian and Singapore jumped 166%.

Overall, it is a story that sounds too good to be true – and Access Asia Group (AAG) advises that in some ways, it actually is. Navigating business in Taiwan poses risks, and often in ways that are not intuitive to investors new to Taiwan.

A Taiwan-based lawyer told AAG, “One higher-level risk that many would-be Taiwan startups or investors overlook is political: Do you have China investments or is China invested in you? Due to the complicated relationship between Taiwan and the PRC, China investments are treated differently from those of other jurisdictions and come under much greater regulatory scrutiny. This is often particularly a problem for Hong Kong investors.”

The source added, “Some businesses come into Taiwan unaware of the extent to which their business is enmeshed with China and discover that, as a result, doing business in Taiwan is far harder than they’d expected.”

China political risk aside, the legal source noted that doing business in Taiwan is subject to far more regulatory hurdles than many Taiwan market newcomers anticipate. “It’s interesting that foreign investors going into, say, Germany or Japan often put teams onto understanding the regulatory environment before making a first move, but in the case of Taiwan, they often blithely make a market entrance, assuming that it’s a far looser regulatory environment – and it’s not.”

A current hotspot in terms of foreign investment in Taiwan is offshore wind power. The Taiwan government has aggressive targets for renewable energy sources, with 500 MW in offshore wind farms set to be commissioned this year, 5 GW in 2021-2025 and yet more coming online in 2026-2030. This is frequently described as an “exciting opportunity” for foreign investors. But it has to be approached eyes wide open.

Another legal source said, “Would-be foreign investors in Taiwan’s renewables sector often make hiring mistakes. They go for local management with the best English, but that doesn’t mean that they know a great deal about Taiwan’s energy sector – and it’s a sector with thousands of regulations, and not only that, but regulations that shift with changing county-level governments from one election to the next.

It’s often the case that foreign companies in this sector would be better off hiring someone with two decades of experience with Taiwan Power Company [Taipower],” the source said, adding: “There’s a wind-power gold-rush going on in Taiwan, but a lot of incomers have no idea what they’re up against in terms of the regulatory environment and they need energy-sector insiders to guide them through it.”

Another general risk that foreign businesses looking to set up shop in Taiwan often overlook, a foreign business insider said, is leasing and zoning issues. The source added: “Some foreigners look at Taiwan and seem to get the impression that anything goes, but actually there are strict provisions on what you can do and where in Taiwan. When it comes to leasing property or land, you need to look closely at your lease contract, because sometimes your lease will be interrupted by a decision by the owners to redevelop if the contract is not locked down properly.”

Meanwhile, numerous legal and business sources stressed that foreign newcomers to the Taiwan market frequently perceive it as a freewheeling high-tech incubator zone and are unaware that the Taiwan government is politically very much in the thrall of vested-interest groups that push back against disruptive technologies.

To take one example, as a source noted, Airbnb continues to “somewhat thrive” in Taiwan, but legally all units should qualify as a “homestay facility,” which for the most part they don’t and can face fines of up to NTD 500,000 (USD 16,600) and be shut down.

In another example: ride-hailing tech company Uber Technologies Inc (“Uber”) has been embroiled in a long-running dispute in Taiwan over Article 130-1 of the Transportation Management Regulations. In October 2019, Uber announced it would change its operating model and partner with local taxi firms in order to avoid contravening a so-called “Uber clause” legal amendment.

All of these things are examples of how Taiwan is subject to a far more complex regulatory environment than many outsiders realize,” said a legal source, who added that Taiwan’s strict money-laundering rules are another issue that can slow doing business down in Taiwan for foreigners.

Taiwan’s Money Laundering Control Act of 1996 was amended as recently as January 2019 and is now inclusive of cryptocurrencies, but as one legal source noted, “Even for legitimate companies, any large transactions coming into Taiwan can be flagged and can turn into a problem for investors.”

The same source added: “The main risks in Taiwan are ordinary risks – it’s a competitive market with smart businesspeople, a complex regulatory environment and, in short, it’s easy to fail.

But there are other risks. It’s easy to fall prey to government policy-making ‘progressive on business,’ ‘forward-looking’ hype and not to realize that there’s an entrenched bureaucracy that doesn’t share the vision and will actually get in the way of foreign businesses following through on progressive policy.”

The source added: “Further issues to consider are poor corporate governance, a preponderance of family-run businesses – in fact most Taiwanese businesses continue to be family run – and a sound, independent, but creakily slow legal system that makes it very difficult to resolve local contract disputes if you’re owed money.”

The legal source said, “Some foreign businesses come here and do very well, but there are far more pitfalls than many new to the market realize.”