Auto parts makers among fast-tracked gainers

As many businesses in China and Taiwan waited with bated breath during the negotiations and signing of the Economic Cooperation Framework Agreement (ECFA), which contained a list of products designated as “fast-tracked gainers” or ones to benefit shortly after the inking of the accord, auto parts makers are relieved to know they are among the lucky to profit early. But the ECFA, signed in June, excludes ready-to-drive cars from the fast-tracked gainers list, making such products unable to enjoy favorable duty until a couple of years later.


The ECFA essentially offers reciprocal trade duty exemptions and reductions, lowering costs to create more favorable climates for Taiwanese and Chinese companies to do business across the Taiwan Strait. The fast-tracked gainers list includes 500 Taiwan-made items and 250 China-made products eligible for tariff exemption or reduction.

Signed in China’s southwest municipality of Chongqing on June 29 by Taiwan’s representative P.K. Chiang, chairman of Straits Exchange Foundation (SFE), and his Chinese counterpart Y.L. Chen, president of Beijing’s Association for Relations Across the Taiwan Strait (ARATS), the ECFA is expected to be ratified and then become effective the beginning of 2011.

Assembled Cars Excluded
The fast-tracked gainers list includes parts and materials for cars, motorcycles and bicycles, but excludes assembled vehicles, primarily due to as yet clearly defined quotas and finalized auto safety standards, according to observers.

Both Taiwan and China protect their auto sectors, with the former, upon joining the World Trade Organization (WTO) in 2002, having asked for quotas to restrict car import; but Taiwan now is considering raising such quota to ship more cars to China.

Despite having opened its market to auto imports, China levies a high 25% duty on imported cars. Such move discourages foreign automakers from importing cars, motivating them to form joint-ventures with Chinese partners to produce cars in China to evade such disadvantageous duty.

Carmakers in Taiwan, realizing the saturated and relatively small car market on the island, are trying to find new segments in China, now the world’s biggest new car market, and will make it a priority to negotiate in the next round with China to lower tariffs on car trade across the Strait.

Initially, Taiwan may ask China for a quota of 100,000 cars to be availed favorable tariffs under the ECFA, around 0.7% of China’s annual auto sales in 2009, and reciprocate by offering China a quota of 10,000 cars—or 3.3% of the cars sold in Taiwan last year.

For China, where over 13.6 million cars were sold last year, to allow duty-free import of Taiwan-made cars would be hitting the jackpot for carmakers on the island, where auto production could double annually to 600,000 from the current 300,000 vehicles.

Investment Incentives
While Taiwan’s carmakers work on driving their way into the massive China market, for now the recently signed ECFA should boost the auto parts trade between Taiwan and China.

With the ECFA to tremendously lower the cost of auto parts trade between Taiwan and China by offering duty exemption, operators in this sector would be more willing now to invest in either side, said Yulon Motor president K.R. Chen, who remains disappointed at assembled cars being sidelined from the fast-tracked gainers list.

With Taiwan-made cars to be shipped to China under favorable tariffs soon, foreign automakers are more confident to invest in Taiwan, likely to make cars for export to China.

VW Shows Interest
According to Taiwan’s Ministry of Economic Affairs (MOEA), several foreign carmakers have expressed interest in establishing new plants in Taiwan: Senior Volkswagen executives have already made an exploratory visit of the coastal Changhua Coastal Industrial Park in Changhua County, central Taiwan.

Volkswagen once ran a joint venture with Taiwan’s Chingfong Group, producing T4 vans, and is eyeing a new investment project valued at US$90-150 million, turning out 100,000 vehicles a year initially.

The Changhua Coastal Industrial Park is spread across 3,643 hectors, the largest industrial park in Taiwan, and houses a cluster of manufacturers and operators engaged in glass, textile, plastics, chemicals, metalworking, machinery, hardware, providing a full supply chain of parts and materials for the auto industry.

Delta’s Ambitious Goal
Meanwhile, Taiwan’s Delta Electronics plans to produce auto electronic parts through cooperation with China’s top-10 automakers, targeting annual revenue of over US$307 million within five years. Delta Electronics is one of the few in Greater China turning out a full line of in-house made material and parts.

China is the world’s largest auto market, one that is the next major frontier for Taiwan companies who can take advantage of favorable tariffs under ECFA, said a senior Delta Electronics executive, who believes the firm would control one-third of the global auto electronics market once it joins the supply chains of China’s top-10 automakers.

Tong Yang Inspired
The Tong Yang Group, a leading automaker in Taiwan, has established 18 production sites in China. Also inspired by the ECFA, Tong Yang announced in June, after the signing of the agreement, its plans to set up two auto parts factories in China—one a joint venture with China’s FAW Group and the other with Guangzhou Automobile, .
“We are ready to take advantage of the ECFA framework,” said Tong Yang CEO Y.M. Wu, who estimates the two auto parts factories in China and the new project in southern Taiwan will raise corporate productivity by 30%.

New Business Model
In fact, the ECFA was signed when China’s economy is about to transform from being export-oriented to one more driven by domestic demand. All kinds of stories are being reported in China about explosive demand for various products and services, with parents waiting overnight to enroll children in top-rated kindergartens, and buyers lining up hours to buy new condo developments. The foreseeable, rapid growth in domestic demand in China will be a hotbed of business for Taiwanese companies.

The ECFA puts Taiwanese companies on the same playing field as their Southeast Asian counterparts, which have just started to enjoy duty-free trading with China under the ASEAN (Association of Southeast Asian Nations) free trade agreement, effective from the beginning of this year. No longer worrying about being marginalized in the ASEAN free-trade bloc, Taiwan businesses can tap the ECFA to develop closer trade links with countries in the Western Pacific Rim.

The ECFA also amplifies the proximity advantage enjoyed by Taiwanese companies, who are actually better positioned literally than their ASEAN counterparts, being closer to China to be able to cut freightage.
(by Michelle Hsu)