Taiwanese Investors Bear Brunt of Viet Riots

Taiwanese businesses in Vietnam have borne the brunt of rampaging mobs protesting China’s recent installation of an oil rig in disputed waters in the South China Sea. The mobs ransacked and torched hundreds of foreign-owned factories, most of them Taiwanese rather than mainland Chinese.

The attackers, who appear to have been allowed by the government to cause mayhem after the encroachment of the drillship into Vietnam’s exclusive economic zone, didn’t bother making a distinction between China and Taiwan. The riots killed 20 protesters as well as non-Taiwanese ethnic Chinese and Vietnamese staffers and injured many more at dozens of Taiwanese-owned factories, including ones churning out foodstuffs, textiles, steel and tires. They were either damaged or have temporarily suspended operations or both, according to filings with the Taiwan Stock Exchange.

Although Taiwan ranks behind South Korea, Japan and Singapore as Vietnam’s top sources for foreign direct investment, the Vietnamese government has shot itself in the foot by not quickly and decisively stopping the riots. Taiwan’s Vietnam-bound FDI, driven by Taiwanese firms fleeing China’s high costs, less favorable treatment by Chinese authorities and growing environmental regulation in China, has in recent years boomed. Taiwanese FDI in 2012 grew by 106 percent and 70 percent in 2013, now totalings US$28.5 billion.

While among the terrified Taiwanese expatriate community there is now much talk about withdrawal of investment, they appear more likely to stay, however reluctantly, primarily because their residency in Vietnam gives them proxy access to major western markets and because there are few places for them to go economically.

They are reluctant indeed, however.

“Since the Vietnamese government is incapable of protecting investors from abroad, we believe foreign investors will have to reconsider their future investments in the country,” said Hong Fu-yuan, president of the Vietnam division of Formosa Plastics Group’s (FPG), Taiwan’s largest industrial conglomerate, producing steel, textiles and plastic in Vietnam.

The attacks on FPG – offices, factories and dormitories were stormed – have led to the firm reconsidering a US$500 million capacity expansion project, Hong said. Taiwanese media have since quoted numerous Vietnam-based family-owned small and medium sized enterprises saying they are now considering leaving the country for good.

But next to the rising costs for labor and land in China a factor to make them stay is that Vietnam, unlike Taiwan, is a member in Trans-Pacific Partnership (TPP) negotiations to create the US-led free trade pact, which would eventually cover 40 percent of the world’s GDP. The agreement still faces considerable bilateral negotiations with Pacific governments and is also stalled in the US Congress until at least after November elections.

The Taiwanese, who almost certainly won’t join TPP for a long time to come due to China’s objection, see Vietnam as the only plausible low-labor cost conduit to the TPP market. This holds true particularly for Taiwan’s upstream textile industry, owing to the TPP’s “yarn forward” rule that stipulates that textiles enjoying the pact’s zero tariff treatment must be made from yarn produced in a TPP member country.

Since Vietnamese manufacturers lack the capacity to produce enough yarn and garments, they currently still rely for sufficient supply mainly on non-TPP member China. Business for Taiwanese-owned upstream plants within Vietnam’s borders would be boosted as soon as the “yarn forward” rule is implemented.

In this context in the past two months alone, Vietnam’s state media has reported that planned Taiwanese investments in the textile industry exceed US$200 million, creating nearly 10,000 jobs, and it is not yet clear to what extent such projects that would lift Vietnam’s international competiveness greatly will be affected by the riots.

However, if the assessment of Bert Lim, president of the Taipei-based World Economics Society think tank and an economic advisor to Taiwanese President Ma Ying-jeou, proves correct, Taiwanese companies are unlikely to significantly reduce their FDI in Vietnam despite the brouhaha.

“I talked to the Formosa Plastics CEO [Chen Wenchi] just yesterday, and there clearly is no panic discernable among the company’s leadership, as actually only a few FPG computers and electronics were stolen,” Lim told Asia Sentinel.

“It is important to understand that the Taiwanese businesses that were attacked are mostly clustered in the Pinh Duong province, which was targeted because it is being developed by Chinese firms, while Taiwanese-owned factories elsewhere in Vietnam, including the ones producing electronics, were largely unaffected.”

Lim dismissed a flow of media commentary promoting the notion that the Taiwanese firms may now flock back to China, “as the cost factor prohibits this,” or move to Myanmar, where an ongoing Taiwanese FDI boom will, he says, come to an end before long, “because the days of incentives granted by the Myanmar government are numbered.”

Elaborating on how political risk is traditionally put up with by the Taiwanese expatriate community (now seen on the TV screens being airlifted out of Vietnam), Lim resorted to historical comparisons.

“In the 1960s, we had anti-Chinese rioting in Jakarta but Taiwan’s FDI in Indonesia continued to increase until well into the 1980s,” he said, “and it was pretty much the same with anti-Chinese rioting in Malaysia and the Philippines,” he said. “And the reason the Philippines has now very little Taiwanese FDI is not because of political risk but because of red tape, which is worse from the investors’ perspective.”