Commentary: Reconsideration on Taiwan-Japan industry alliance

A Taiwan delegtation formed by government officials, researchers and industry players recently concluded a six-day visit in Japan, where they probed the possibilities of forming strategic alliances between the two countries.

According to participants, the visit did not end with signing any memorandum of understanding (MOU) between the two sides. The "fruitless" efforts implies that Taiwan may be wrong thinking that Japan's industries are in desperate need of support from Taiwan-based firms or that Japan-based firms need to cooperate with Taiwan-based peers to enter the China market through the Economic Cooperation Framework Agreement (ECFA) that Taipei and Beijing have signed.

Dissolving hopes

The March 11, 2011 earthquake-tsunami disaster severely damaged Japan's industrial and economic growth. Taiwan believed that the geographical proximity and the ECFA would increase its chance of receiving more investments from Japan. However, according to statistics from Taiwan's Investment Commission under the Ministry of Economic Affairs (MOEA), there was a 40% increase in the number of investment projects from Japan, but the total investment value fell by 6.8% on year in 2012. And Japan-based investors only accounted for 7.45% of total foreign investment in Taiwan in 2012. This shows Japan-based firms have not been as eager about investing in Taiwan as the Taiwan government would want to see.

The recent cabinet reshuffle in Japan has also made a Taiwan-Japan economic alliance even less likely. Japan's new prime minister, Shinzo Abe, has been promoting a series of astonishing policies including a tougher stance on the territorial dispute over the Senkaku (Diaoyutai/Tiaoyutai) islands, which are currently under Tokyo's control, but also also claimed by Beijing and Taipei. Tensions between China and Japan over the islands have been particularly high, and are likely to fuel the anti-Japan sentiments in China. Japan-based firms could hide the "identity" of their products by shipping them to China from Taiwan under some form of partnership between Taiwan and Japan firms. But there is always the risk of being uncovered, with both the Japan and Taiwan firms enrgaing the Chinese people.

Abe has also been aggressively increasing government spending despite the fact that the Japan government is heavily in debt. The Japan government has also set an inflation target at 2%.

Japan's valuable assets

After the March 11 disaster, many research institutes in Taiwan believed that Japan and Taiwan were likely to cooperate closely to compete against South Korea-based firms. But the scale of cooperation between Japan- and Taiwan-based firms was small in 2012, during which South Korea-based competitors saw a business boom.

The 2011 nuclear disaster created electricity shortages in Japan, and it seemed logical that Japan-based firms should invest abroad to diversify risks, with Taiwan being a seemingly logical destination for their investments because of its geographical proximity and technogical strengths. But political factors - particularly Taipei's closeness to Beijing - have been some of the stumbling blocks. Japanese politicians and businesspeople are still very cautious about China.

The main reason for Japan-based firms to set up plants in Taiwan is to supply products to Taiwan-based customers. Japan-based firms tend to view Taiwan-based peers as OEM firms who lack key technologies and are only needed to help upstream Japan-based makers develop end market products. ITRI discovered that in the past 10 years, South Korea-based firms published 31 DRAM related papers while Taiwan published none. That speaks volume about Taiwan's lack of key technologies. Against such a backdrop, Japan-based firms would be unlikely to transfer their key technologies to their Taiwan peers even if the two sides formed some kind of partnership.

Japan does not need Taiwan

Japan-based Toray Industries invested only NT$2.4 billion (US$81 million) to set up a production plant in Kaohsiung, southern Taiwan, employing about 100 people. The investment was very small compared to a 12-inch wafer fab or a 10G LCD panel plant. However, such a small amount operation is enough to produce upstream materials for displays that Taiwan-based firms cannot make. In addition, Japan's current quantitative easing policies will depreciate the yen more, which means Taiwan will rely more heavily on Japan-based materials.

Furthermore, Taiwan believed the ECFA would be attractive to Japan-based firms, which neverthelss seem more interested in the prospects working with the Association of Southeast Asian Nations (ASEAN).

ASEAN will complete a free trade agreement with China in 2015. If Japan-based firms do not want to lose the China market and the ASEAN market, the best strategy is to shift production to Indonesia, Vietnam, Thailand or the Philippines. Because in the future, exports from ASEAN countries to China will only carry an average tariff of 0.1%.

If that happens, Taiwan will no longer be important. Hence Taiwan should continue to develop core technologies and identify its core value in order to stay competitive.