Textile industry still awaiting clarity on EU-Vietnam FTA

For http://www.wtin.com/

Although outgoing European Commission president José Manuel Barroso, on his late-August visit to Vietnam, presented the planned EU-Vietnam free-trade agreement (FTA) as a nearly finalised deal – and Vietnamese state media predict the signing will happen in October – the Vietnamese textile industry is still unsure about the FTA’s potential impact.

Anxiously awaiting an announcement on what rules of origins will apply, industry sources warn that Vietnam’s up- and mid-stream textile plants are so dependent on imported inputs that if the FTA does not cover raw materials acquired outside the country, the whole pact will be meaningless to them.

“In our three Vietnamese factories, we use many different raw materials the country cannot produce, so that we need to import them from China, Korea, India, Malaysia and so forth,” said Michael Grosbøl, CEO of Danish workwear manufacturer Mascot International, which has three plants in Vietnam. Speaking to WTiN, he said: “If the rules of origin will work out strict, the FTA’s textile-tariff reductions from about 12% to 0% would not benefit my company at all.”

However, with generous rules of origin, Mascot’s Vietnamese operations would become globally much more competitive through the FTA.

In the global textile supply chain, Vietnam primarily delivers labour, on which it is more competitive than China in terms of the supply and wage scale. But the country’s spinners churn out mainly basic acrylic and acrylic-cotton yarns, while its weavers, dyers and finishers are also generally far from being able to supply raw materials of the quality require to meet the EU’s stringent, such as the Oeko-Tex Standard 100 certification system and compliance with the EU’s Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) system.

According to Mr Grosbøl, Mascot International had recently harboured plans to invest in a Vietnamese dyehouse, but the perceived local ‘total lack of skill’ prevented the firm from carrying out the transaction, so that the fabric still has to be dyed in the UK, China, Korea and Thailand, among other countries.

“You need managers and technicians with an understanding of quality, and you need a laboratory, a colour kitchen and computerisation,” he said. “But the expert team we had flown in just shook their heads, declaring a co-operation mission impossible, given all that backwardness they encountered.”

Meanwhile, Bui Trong Nguyen, secretary general of the Saigon Association of Garment-Textile-Embroidery-Knitting (AGTEK) told WTiN that Vietnam’s own up and mid-stream textile plants would be able to supply more sophisticated yarns ‘in three to five years at the soonest’.

Mr Grosbøl foresees a 15-year timeframe for dying processes and finishing, with his bleak assessment based on the experience of China, which “spent many years to get to that point and is still not at same level as EU suppliers of fabrics.”

But there is yet another point of concern: Vietnam-based textile companies hope the EU-Vietnam FTA will address labour restrictions. In recent years the Vietnamese authorities have made it increasingly difficult to obtain work permissions for expat staff – requiring, for example, since 2012, that each extension of an expat work permit should be matched by a training contract with a Vietnamese national, in order to replace the expat staff member once the extension expires.

“All expats are subject to these regulations, even the most senior, at CEO level,” Mr Grosbøl observed. “Such restrictions have been met with repeated appeals from EuroCham [the European Chamber of Commerce in Vietnam] and other business organisations, but so far the Vietnamese authorities seem adamant to continue with even more restrictions.”

– See more at: http://www.wtin.com/article/2014/september/15_9_2014/eu-vietnam-fta/?channelId=1127#sthash.OV0vdv5B.dpuf

BRICs and beyond: Malaysia, Thailand eye growing global halal market

For just-food 

The global market for halal food is expected to grow from US$698bn in 2012 to reach US$830bn in 2016, according to Malaysia’s department of Islamic development, and manufacturers in its country and neighbouring Thailand are competing to service this demand. Jens Kastner reports.

The food industries in Malaysia and Thailand are seeking to demonstrate their ability to produce and market food and beverages complying with Islamic religious standards.

Large government-sponsored special industrial parks dedicated to halal are either under development, such as in Thailand’s southern Songkhla province, or operating, such as in Malaysia’s Selangor and Melaka states. And both countries are tightening their halal food production regulations.

The demand for products to be certified as halal has been intensified by the fact that most halal food is today no longer produced by Muslims – a particular issue in majority Buddhist Thailand. The recent frenzy over false claims that chocolate bars made by Cadbury sold in Malaysia contained pig DNA illustrated what is at stake for food processing companies.

“The definitions are changing profoundly; in the past, Arab countries never demanded a halal logo for Thai canned tuna because they felt [relatively unprocessed] tuna is naturally halal,” said Dr Winai Dahlan director of the halal science centre at Thailand’s Chulalongkorn University, in an interview with just-food.

“But now there is this new rationale that every pineapple passing the industrial process must be verified as halal.”

Dr Winai noted this approach, with its demands for more checks and production management by food manufacturers, has been encouraged by the Organisation of Islamic Cooperation (OIC) countries’ establishment in 2010 of the Istanbul-based Standards and Metrology Institute for the Islamic Countries (SMIIC). The SMIIC aims to craft a common standard for the some 300 halal certification bodies currently working in more than 125 countries, most of which are non-governmental organisations (NGOs), including associations established by the Muslim minority groups.

According to Malaysia’s international trade and industry ministry, the country exported US$10bn-worth of halal products last year with the food and beverage sector accounting for about 40% of these exports. Thailand’s halal food and beverage export performance pulled even with Malaysia last year, making both countries share fifth place in the world’s halal top ten, after Brazil, the US, India and China, Dr Winai said.

Major export markets include fellow Association of Southeast Asian Nations (ASEAN) members, most notably Indonesia with its 214m Muslim consumers. Sales to the United Arab Emirates, Saudi Arabia and Egypt are also important, with Chinese sales also rising.

Reflecting Malaysia’s aspirations to become the world’s halal hub, the country’s Third Industrial Master Plan 2006-2020 provided for the development of ‘Halal Parks’, where certified operators, industry players and logistic operators enjoy a variety of perks, including government subsidies. Meanwhile, Thailand, which has most of its some 3,500 facilities involved in halal food production clustered in its central region north of Bangkok, plans to establish a large halal industrial estate in its south. This would be near the Malaysian border, to supply halal products more efficiently to the ASEAN common market to be launched next year.

“The greatest potential is for finished products containing vegetables, fruits and seafood, with medium-sized companies probably to benefit the most,” said Dr Winai.

Mohd Suhaimi bin Mohd Yusof, assistant director of Malaysia’s department of Islamic development’s (JAKIM) halal hub division, observed that “processed food and beverages have managed to attract most consumers and market access at this point,” reflecting that more than 90% of applications for halal certifications with JAKIM fall in these two categories.

Whereas investment in special machinery is generally not needed for food manufacturers turning to halal, the main challenges are monitoring the supply chain and the stringent separation from non-halal production in factories.

Dr Winai says it is quick and inexpensive to obtain the official Thai halal logo for compliant factories, and that Thailand’s Halal Science Centre, of which he is the founder, “has top-notch laboratories and one of the world’s best data bases for supply chains with comprehensive raw material info.” These support factories that, for example, process bananas with egg yolk or galantine, which may, for whatever reason, contain pig DNA.

According to Dr Winai, a “real” Cadbury case can therefore not easily happen in Thailand.

Suhaimi said the same about Malaysia, despite the false alarm having occurred there. He holds that the Cadbury issue was blown out of proportion by social media users with responses from a few NGOs further aggravating the issue.

“While Muslim consumers have the right to be overly sensitive with the porcine DNA issue, they should also be informed on how halal certification is implemented, and how cross contamination can occur on halal products, while awaiting for the competent authorities investigation to complete,” Suhaimi said.

The issue was solved when JAKIM issued test results which confirmed the products were free of porcine DNA, he noted. Companies and governments agencies involved in Malaysia’s halal certification system “also learned from the issue as coordination between the agencies has been further improved,” he said, adding JAKIM had used the incident to publicise the quality of Malaysian halal certification.

Taiwanese Investors Bear Brunt of Viet Riots

For Asia Sentinel 

Drillship controversy results in Vietnamese attacks on Taiwanese businesses

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.”

Taiwan Executes 2 on China Cops’ Feeble Evidence

For Asia Sentinel 

Fate of executed brothers as warning for Taiwanese expatriates in China

Taiwan’s legal experts are up in arms after the government executed two convicts last week on what was regarded as shaky deciding evidence and witness statements supplied by China’s Public Security Bureau.

The brothers, Tu Ming-hsiung and Tu Ming-lang, were among five prisoners executed on April 29. To the end, the brothers insisted they were framed by Chinese police for a series of murders in China’s Guangdong Province. Legal analysts say the brothers lost their constitutional right to cross-examination because the Taiwanese courts flatly accepted Chinese authorities’ contribution to the trials, warning that a precedent has been set with ominous repercussions for the hundreds of thousands of Taiwanese expatriates living in China.

Zheng Wen-xi, Ministry of Justice Director-General, defended the handling of the case in an interview with Asia Sentinel.

“The court ordered police to collect evidence, which the police located in mainland China, and that of course with the assistance of the Gongan (Public Security Bureau),” Zheng said. “Then, after the evidence was taken back to the court, it was strictly examined during the trial, and the principle of due process was not violated.”

Zheng emphasized that the evidence provided by China’s Gongan wasn’t the only evidence taken into account by the Taiwanese courts, “and that all evidence collected in mainland China was subject to particular critical examination by the Taiwanese courts in acknowledgment of the differences in the justice systems of Taiwan and mainland China.”

“The brothers said they were framed, and the way the victims were murdered reportedly points not at them but at military-trained killers. All I know for sure is that they were deprived of their right to cross-examine witnesses,” said Lee Chia Wen, an associate professor for criminal procedure at Taiwan’s National Cheng Kung University, who came upon the case while researching cross-border crime fighting. “Because the Taiwanese court now accepts evidence from China’s untrustworthy legal system, there is a high possibility that something similar will happen again to some of the many Taiwanese working, studying or traveling in China.”

Together with their father, who before the executions died in jail, the Tu brothers were found guilty in 2002 of the murders committed a year earlier of a Taiwanese businessman, three of his Taiwanese employees and a Chinese woman. According to the Taiwanese courts, the trio after the murders fled back to Taiwan, where they were arrested following a Chinese police alert, which was communicated to Taiwan’s judiciary through informal channels. At that time, the “Agreement on Jointly Cracking Down on Crime and Mutual Legal Assistance Across the Strait,” signed by Taiwan and China in 2009 hadn’t yet been in place.

The three were cleared in the first trial in July 2002 by southern Taiwan’s Tainan District Court, partly on grounds that the Chinese police did not send forensic evidence such as tape recordings, clothes or bags used in the crime, to Taiwan but only photographs. Contributing to the court’s decision to let them off the hook was the fact that a Chinese taxi driver cited by the Chinese police as a key witness against the defendants couldn’t be cross-examined because he was untraceable for the Taiwanese authorities.

The Tainan High Court in November 2002 overturned the lower court’s ruling, however, sentencing the defendants to death. The Tu brothers appealed to the Supreme Court, leading to six re-trials, resulting in the finalization of their death sentences in 2012.

“Strictly speaking, the Chinese police helped the Taiwanese police, but the Taiwanese court did not ask them to back up the evidence more, so that the right of the defendants to cross-examine witnesses and evidence was jeopardized,” Lee said.

“Adding insult to injury, the Supreme Court in its final statement explicitly expressed its high confidence in China’s legal system despite everybody knowing that this is not warrantable.”

Lee said the brothers’ execution also highlights a flaw in Taiwan’s own legal system, which is usually held in high regard for being by and large up to western standards. There has long been a tendency among Taiwanese judges to accept hearsay exceptions, their mindset being that otherwise too much valuable information cannot be used in the court.

“The court believes it hasn’t done anything special in the Tu brothers’ case because even though it is unconstitutional, exceptions to the right to cross-examination are often made in Taiwan, for example when a witness dies or cannot be traced,” Lee said.

Just as the informal judiciary channels between Taiwan and China that led to the Tu trio’s downfall were largely uncontroversial in Taiwan for the obvious reason that it has always been tempting for Taiwan’s bad guys to hide in China, the Agreement on Jointly Cracking Down on Crime and Mutual Legal Assistance Across the Strait is often cited as a poster child of cross-strait cooperation.

Since its implementation, the pact has led to the mediagenic repatriation of hundreds of wanted criminals including suspected murderers, telecom fraudsters, drug dealers, economic offenders and corrupt officials, the most recent prominent cases being two suspects in a botched high-speed train bomb case that failed to hurt anyone last year as well as former Bamboo Union gangster boss Chang “White Wolf “ An-lo, who is now free on bail nonetheless, vociferously steering a political party dedicated to achieving cross-strait unification.

According to Chen In-Chin, a professor at Taiwan’s National Central University’s Graduate Institute of Law and Government, one problem with the cross-strait judicial agreement is that its wording is vague, much vaguer than a similar agreement Taiwan has with the United States.

“The Taiwanese government kept it deliberately ambiguous because otherwise Taiwan’s courts would have to challenge China’s authorities’ adherence to due process, which our government doesn’t want, given that it lacks the guts to stand up to China,” Chen charged.

And as to whether Taiwanese courts should accept evidence and witness statements provided by the Public Security Bureau in the first place, Chen noted that although the bureau has been making improvements, all criminal cases in China are still dominated by them, “and when the Gongan (the Public Security Bureau) says ‘yes’, prosecutors won’t say ‘no’, and then the courts follows what the Gongan says.”

Making matters worse, Chen said, is that the Chinese authorities go after Taiwanese fugitives only arbitrarily, as proven by the case of Chen Yu-hao, the onetime chairman of the Tuntex Group, who has been a fugitive hiding in China since his indictment for embezzlement in Taiwan in 2003. In his factories in Fujian province, Chen Yu-hao is now openly making a fortune by producing paraxylene (PX), a chemical essential to the manufacture of plastic bottles and polyester clothing.

Taiwan as the Western Pacific Cargo Hub?

For American Chamber of Commerce in Taipei 

by JENS KASTNER

The logistics industry sees big opportunities for growth in the years ahead.

Last year the Port of Kaohsiung ranked 13th internationally in terms of container throughput, a drop of 10 places in just about as many years. Although the volume was still substantial – just under 10 million TEU (twenty-foot equivalent units, the standard measure of container traffic), the decline in the ranking is largely attributable to the relocation of many Taiwanese manufacturing facilities to China, as well as successive governments’ emphasis on developing the IT industry with comparatively little attention paid to the logistics sector.

But lately there has been growing optimism that Taiwan can more effectively leverage its strategic geographic position in between China (the “world’s factory”), the United States, the Association of Southeast Asian Nations or ASEAN (set to become the world’s biggest common market in 2015), as well as other dynamic APEC member countries. The primary beneficiaries of a potential cargo boom, however, would be Taiwan’s supporting industries, such as freight forwarders, warehouses, and custom brokers, and not necessarily the island’s shipping lines and airlines.

“Our business has been fine despite the weak global economy, but that of the shipping lines less so because demand and supply are unbalanced,” says Michael Tai, chairman of the International Ocean Freight Forwarders & Logistics Association, Taiwan’s biggest logistics industry association. “They have lost big money in the past three years because they focused on enlarging capacity by building ever bigger vessels, with the global economy then not doing as well as they had expected.” Tai is founder and CEO of Taipei-based Transworld Transportation, which he describes as the second-largest logistics company in trans-Pacific trade after Expeditors International of the United States.

While Taiwan’s major container shipping lines – Evergreen, Yangming, and Wanhai – thus largely face a challenge of overcapacity for their port-to-port services, logistics companies benefit from increasing requests from importers and exporters for additional services, such as trucking. Cargo has to be picked up at the factory, moved to the port, and then handled by a customs broker before being shipped out. On the other end, after it again clears customs, it is stored in a warehouse and eventually distributed to retailers. In industries such as consumer electronics, where products come in ever greater varieties and colors, and with thousands of spare parts involved, these processes have become so complicated that neither seller nor buyer nor shipping line could possibly take on the task with just their own resources, even if they had the necessary licenses.

According to Tai, the Taiwan government’s new plan to develop Free Economic Pilot Zones (FEPZs) – to include Taoyuan International Airport and the six major ports of Kaohsiung, Keelung, Taipei, Taichung, Anping, and Suao – may greatly boost demand for these types of services, provided that authorities remove regulatory hurdles as promised. “Singapore, South Korea, and Hong Kong have been clearing cargo electronically for more than 10 years, but here the law hasn’t been changed in the past three decades,” he says. “While all that the regional competitors require is a single code, every shipment coming into Taiwan for transit still has to submit import documents, which then have to be changed into other documents for export.” If the effort to simplify procedures in the FEPZs is successful, for example, a company operating in one of the zones could repair smartphones and send them back on the same day or the next, a crucial ability if the Taiwan zones want to compete with other regional zones.

Stage 1 of the FEPZs began last year. Stage 2 requires legislative approval, and the necessary bill has not yet been enacted by the Legislative Yuan. “We have been lobbying hard for many years for easier customs clearance, but now it is 90% through [with respect to the FEPZs], and President Ma Ying-jeou is strongly supportive of the issue,” Tai notes. “Once the law is changed, it will be very helpful for the Taiwanese economy since cargo to Shanghai from different Western countries can all be combined together with Taiwan export cargo in the same container in our FEPZs,” he says. Given the exodus of so much manufacturing from the island, Tai considers that the only option for Taiwan’s economy to improve is to further develop its trading and transportation capabilities.

Labor conditions ease

Bert Lim, president of the Taipei-based World Economics Society think tank and an economic advisor to President Ma, notes the quiet elimination in recent years of a major obstacle preventing FEPZ ports from becoming attractive to logistic companies: labor conditions at the ports. “Taiwan had in the 1990s already tried its luck with free trade port pilot measures, but the labor recruitment situation in the ports used to be very unattractive for investors due to the ‘heritage system,'” Lim says. “Taiwanese port jobs were handed down from father to son with few exceptions, and that was a major hindrance, particularly to foreign companies who wanted to efficiently repackage their goods before reshipment to other places, such as China.” In effect, the heritage system meant that companies could not handle their own port-area operations with personnel chosen on merit alone.

The scrapping of this heritage system was facilitated by a reorganization in 2012 that brought about the establishment of the Maritime and Port Bureau (under the Ministry of Transportation and Communications) and the Taiwan International Ports Corp. The former is now the government body in charge of all maritime- and port-related public administration, while the latter is an independent, though still government-owned company in charge of harbor management and development. Previously, the four port authorities of Keelung, Taichung, Kaohsiung and Hualien were separate jurisdictions. The revised organizational structure provided an opportunity to change various operational practices, including the heritage system.

Lim adds, however, that a large question mark still hangs over the future potential of Taiwan’s ports. In China, transportation-related departments had shown interest in expanding cooperation with Taiwanese harbors, and the cross-Strait Service Trade Agreement signed last year was intended to provide a framework under which the two sides could enter into further agreements on shipping cargo services. But objections from the opposition Democratic Progressive Party have kept the agreement bottled up in the Legislative Yuan. “Because the pact remains stalled in the legislature,” says Lim, “we don’t know how service charges, regulations, and monitoring mechanisms between cross-Strait authorities might eventually work out.”

Nevertheless, port officials on the two sides of the Strait are diligently upgrading their relations at the working level. According to Port of Kaohsiung Harbormaster David Cheng, Taiwan port officials have been traveling to China on a monthly basis to inspect ports, including river ports located far inland. “We’re still in the stage of introducing ourselves to one another and signing MOUs [memorandums of understanding],” he says. “This is good for both sides. The overall idea is that in the future smaller Chinese vessels can carry cargo from China to the Taiwanese ports for further trans-Pacific shipment on vessels operated by Taiwan’s shipping lines, which are reliable and efficient,” Cheng says.

He adds that without much fanfare the Port of Kaohsiung late last year already took a step toward restoring its old glory. Cheng is referring to a decision by the London Metal Exchange, the world’s largest non-ferrous metals exchange, to designate Kaohsiung as one of its delivery ports in this region. Following its inclusion in the network, various types of metal mainly destined for China will go through Kaohsiung Port, greatly boosting the warehouse business there. None of China’s own ports are designated as a delivery location, even though China is among the world’s largest metal importers. (Shanghai reportedly turned down the opportunity because it would have necessitated some operational changes). “A new port area to accommodate the warehouses in Kaohsiung will be completed in Q3,” Cheng says. “Automatically, the financial industry will pay more attention to us, as they are very interested to invest in this field.”

As to the prospects of the other FEPZ ports, Chiu Rong-her, professor of shipping and transportation management at National Taiwan Ocean University, predicts that the Port of Taipei will draw substantial vessel traffic from the Port of Keelung, which is too small, and that the Port of Taichung, originally designed for bulk cargo, will reorganize its container terminal. “Meanwhile, the Port of Hualien, which is not to become an FEPZ port, may launch roll-on/roll-off ferries for passengers, cars, and trucks, connecting it to China, focusing primarily on tourism,” he says.

Aviation sector

Generally, Taiwan’s airlines make good money on passenger business but take a loss on the cargo side. One reason is that computers and mobile phones, which in the past were virtually all shipped by air, are not being replaced by consumers as frequently as they used to be, meaning rapid delivery by air freight has become less important than the cost advantage of shipping by sea. “A few years ago, if you had the money, you got yourself a new cell phone every three months,” says Tai. “But nowadays I am still happy with my iPhone 4 and don’t see why iPhone 5 is so significantly better.”

Besides the continuing relocation of Taiwanese electronic production facilities to China and Southeast Asia, another factor in the decrease in the cargo business is that 3C products are getting smaller and lighter, which erodes carriers’ margins because cargo is charged by weight.

The size of aircraft has also been increasing, aggravating the oversupply problem. “On the demand side, air trade showed only slight growth in 2013,” says Anita Wang of China Airlines’ Media Affairs office, adding that CAL’s forecast is in line with those of the International Monetary Fund, International Aviation Transport Association (IATA), and Boeing that world air-cargo volume will see 3% to 4% growth in 2014. “But on the supply side, growth in global wide-body belly capacity is predicted to remain at around 5% in 2014, which will result in capacity continuously outpacing global demand.”

In terms of strategy for 2014, the Taiwanese flag-carrier will focus on cargo revenue management, which aims to optimize revenue through “re-mixing” cargo origins and destinations, cargo products, and customers, Wang says. The company plans to introduce more temperature-controlled containers to enhance its “cool chain” service, and to pay increased attention to emerging markets such as Vietnam, Indonesia, and Latin America. Moreover, CAL will seek to gain a firmer foothold in the booming cross-Strait and global e-commerce business and express mail service (EMS), she says.

“China Airlines carried 4,854 million ton-kilometers of cargo in 2013, up 6.9% in tonnage from the previous year,” Wang notes. “But given the combination of slow global economic recovery, overcapacity, and volatile oil prices, achieving air cargo growth will remain challenging in coming years.” While CAL for the time being expects to stick with the 18 B747-400F freighters it currently has in service, EVA Airways, Taiwan’s second- biggest carrier, announced in late 2013 that it will reduce its freighter fleet by more than a third in the face of overcapacity.

Rapid Growth in E-Commerce, Whether B2B, B2C, or O2O

For the American Chamber of Commerce Taipei 

But a big share of the business is being captured by mainland Chinese companies.

BY JENS KASTNER

Given that the Taiwanese love English-language abbreviations, bargain buys, and convenience in general, it is no surprise that the terms “B2C,” “C2C,” and “O2O” have penetrated the local parlance as e-commerce reshapes the island’s retail landscape. Facilitated by home delivery, convenience store pick-up service, and attractive group deals, Taiwan’s business-to-consumer (B2C) and consumer-to-consumer (C2C) online shopping markets registered revenue growth in 2013 of 18.2% and 12.3% respectively, bringing total revenue to NT$764.5 billion (US$25.5 billion), according to the Institute for Information Industry. The institute predicts growth in 2014 by another 15% to reach NT$879.4 billion (US$29.3 billion) and forecasts revenue topping NT$1 trillion in 2015

But it would be premature to pop corks to celebrate the performance of the local e-commerce platforms, as a large portion of the business is being captured by China-based operations. “Taiwanese consumers last year bought 8 million items on mainland China’s Taobao, which has a whopping 900 million products on offer,” says Alvin Bor, secretary-general of the Non-store Retail Association of the ROC, referring to Taobao Marketplace (淘寶網), an online shopping website run by Alibaba, China’s largest e-commerce company. “Taobao calls itself C2C, but some of it is actually B2C, while its offspring Tianmao (天猫) aims to provide higher quality products.”

Bor notes that since Beijing views Taiwan as one of its provinces, parcel postage rates from China to Taiwan are artificially low. In addition, Taiwan does not impose import duty on items valued below NT$3,000. Adding to Taobao’s attractiveness for Taiwan consumers is that payment on cross-Strait transactions is facilitated by China’s AliPay, which has established connections with numerous Taiwanese banks. As a result of all these factors, Bor says, AliPay has become the dominant force in Taiwan’s third-party payment market, for which a regulatory structure was officially finalized last year, 15 to 20 years after China. “Most merchandise sold in Taiwan’s night markets is now sourced via Taobao, causing a major headache for Taiwanese platforms, as well as for the tax collectors,” he notes.

In its 2013 ranking of sales by Taiwanese internet retailers, U.K-based market research firm Euromonitor placed Yahoo! Kimo first with a market share of 11.4%, followed by PChome (8.4%), Fubon Group’s Momo (6%), PayEasy (4.8%), and Rakuten Taiwan Ichiba (3.5%). According to local market researcher EOLembrain, PChome’s site saw the most traffic in 2013, followed by Rakuten.

Other major players operating popular B2C platforms in Taiwan include the United Daily News (UDN) Group, President Chain Store Corp., Far Eastern Retail Group, and Dongsen TV’s ETmall, as well as Gomaji, whose primary focus is group buying, similar to the United States’ Groupon.

The business model of Japanese-originated Rakuten, which is aiming for 50% revenue growth in Taiwan this year, is labeled “B2B2C.” Under this approach, merchants open a virtual shop on Rakuten’s platform with an initial one-time payment of NT$27,000, followed by monthly rent of NT$1,000 and a 3% to 5% commission on each deal. Currently, Rakuten Taiwan has 2,500 of these shops and educates their owners in e-commerce strategies through courses held in Taipei by its “Rakuten University.” Each shop is also coached by an “ECC” (e-commerce consultant), who provides guidance on such aspects of the operation as target setting, pricing strategies, and customer communication.

Grace Lo, Rakuten’s general manager for Marketing & Business Development, says the platform got a huge boost last year from its revolutionary “picture search” feature, which works similarly to face recognition software. “People no longer have to key in words to search a product, but instead take a picture of something they desire in the real world, upload it, and let the system find such a product in one of our shops for a good price,” she explains.

 

A key trend is mobility

Another current major trend shaping the market is mobility. Lo notes that new apps have made it convenient to use a smartphone instead of a PC for many activities, with consequent changes in the time of day when transactions take place. “Increased use of mobile devices means that more purchases are made while commuting and before bedtime, which is a shift that demands our attention,” she says.

UDN Shopping – a genuine B2C model where merchants pay a settlement of 10% to 15% per deal – confirms this strong trend toward mobility. General Manager Apollo Sun reports that while just 2% to 4% of clicks on the UDN shopping site were made with mobile devices in early 2013, the rate had reached 12% by the end of the year. UDN Shopping’s total revenue doubled in 2013 to reach NT$1.5 billion (US$50 million), with a target of NT$3.5 billion set for this year, Sun says. One advantage over the B2B2C model is that the merchant incurs no costs if the merchandise doesn’t sell, he notes. “But more importantly, if you cooperate with us, you have the UDN group’s whole media range – with websites, TV news channel, and newspapers – as your partners.”

He does express concern about Chinese competition, however, noting that although Chinese products have an image problem in Taiwan, the fact is that most products sold by Taiwanese platforms also are made in China. Sun considers that Taobao was wise to set up Tianmao, which carefully selects its suppliers to increase its trustworthiness. “But Chinese consumers still cannot access the UDN shopping site due to its connection with the UDN news website, while other Taiwanese e-commerce platforms might be blocked for other reasons, including tax issues,” he notes.

The cross-Strait service trade agreement – signed last year but not yet approved by Taiwan’s legislature – will not provide much of a remedy, in Sun’s opinion. Under the agreement, Taiwanese online retailers can hold a 55% stake in joint ventures with Chinese firms as long as the operation is based in Fujian Province just across the Taiwan Strait from Taiwan. “But you would be competing with China’s top 10 online shopping websites in an environment where Taobao has 75% market share already,” Sun says.

Despite the challenges, some Taiwanese e-commerce firms have already taken up minority stakes in cross-Strait joint ventures, and ETmall and Momo plan to set up subsidiaries in China this year. Market observers believe that demand exists among wealthier Chinese consumers for Taiwan-made cosmetics, health foods, and other products. According to the Non-store Retail Association of the ROC, 2 million items were sold online from Taiwan to China in 2013.

In yet another market segment, online to offline (O2O) e-commerce, Groupon was initially the market leader in Taiwan, but was overtaken in mid-2012 by a local company, Gomaji, according to Rio Chen, Gomaji’s deputy general manager. Gomaji operates in three main channels – travel, food and shopping – with different settlement commissions for each category. “The settlement average could be higher in the beauty segment, as satisfied customers of beauty parlors, spas, and the like tend to sign up for membership instead of again purchasing vouchers with us,” Chen explains.

According to Gomaji’s own surveys, 75% of its customers are female, with the overwhelming majority in the 25 to 45 age bracket. Accordingly, Gomaji’s home delivery focuses on local delicacies in packages suitable for small families. “Housewives love it,” Chen says. “What costs NT$200 elsewhere might be purchased for NT$70 through us.”

Gomaji’s promotion channels include Yahoo! and Facebook, and it engages in cooperative campaigns with movie houses, local governments, and famous brands, most notably McDonald’s. It also publishes a magazine sold at 7-Elevens, is featured on 7-Eleven’s in-shop monitors, and sponsors a weekly TV show where local artists endorse the site.

Chen sees this strong local emphasis as the main reason why the company managed to squeeze Groupon’s share of the Taiwan market. “The O2O business model is inherently local,” she says. “We get the consumer online and bring them offline – to a local restaurant, a local fashion shop, and so forth. Only a local management team will truly understand the local customers’ preferences.” Chen adds that while Groupon does have a local team, “its senior management might be from Hong Kong or Malaysia.”

Acknowledging the strong standing that local players have with Taiwan consumers, eBay Taiwan joined forces with PChome in 2006 to form the joint venture Ruten, which now handles all local transactions. At that point, eBay Taiwan’s business model shifted to B2C exports, enabling Taiwanese suppliers to utilize eBay’s 40 websites across the world as retail platforms.

“Our sellers come from many corners – some are manufacturers, some trading companies, some online sellers,” says Clare Lin, head of eBay Taiwan Marketplace. “We provide open platforms for buyer and seller, and through PayPal we can support 26 currencies and also provide shipping solutions, as well as connecting the sellers to reliable warehouses in the U.S. and Australia.”

Lin adds that since shipping is usually a bottleneck in cross-border trade, eBay’s service includes working with premium shipping providers to obtain efficient and cost-saving packages for the sellers. “For these services, the seller pays us a low-cost insertion fee of US$0.30 or less per item and a final value fee on the transaction of between 9% and 12%,” she notes.

According to Lin, eBay has high hopes for retail exports from Greater China, because the area has very strong supply chains that eBay can help connect to mature consumer bases in the United States, Australia, and Europe. Transactions to emerging markets often go through eBay’s U.S. or U.K. sites.

“Owing to the impressive flexibility of our Taiwanese sellers, they managed to sell to buyers in 200 countries over the past three years,” Lin says. “In June 2013, year-on-year growth in export value to Argentina, Russia, and Brazil reached 162%, 38% and 37% respectively.”

Further, from 2006 through last year, the sales volume of eBay’s Taiwan sellers every year has achieved double-digit growth, with a similar result expected for this year. Momentum was strengthened in 2013 by improved growth in the key corridors of Germany and the U.K., a significant achievement given the language barrier in Germany’s case and the high customs duty in the whole of the European Union. Looking ahead, Lin says, increased export business is likely in the popular categories of “home and garden” and “auto parts,” both of which have a very strong supply base in Taiwan for manufacturing and R&D.

Recently eBay Taiwan has also been putting more emphasis on branding. “Taiwan has many internationally unknown but good-quality brands that eBay can help to step onto the global stage,” Lin says.

In the near future, however, eBay Taiwan may also be among those having to share more of the market with Chinese e-commerce players. Alibaba Taiwan in mid-February announced its intention to launch an e-commerce association on the island to help local small and medium-sized enterprises break into the global market.

Taiwan’s Falun Gong dilemma

For Al Jazeera 

Tour guides on the island are encouraged to shun protesters when showing around Chinese tourists. Jens Kastner

Most Chinese tourists to Taiwan ignore the Falun Gong activists they encounter [Jens Kastner/Al Jazeera]

Taipei, Taiwan – Trying not to lose any of the Chinese tourists she is gathering outside the Taiwanese capital’s iconic skyscraper Taipei 101, tour guide Ku Su-zhi holds up a pointer with a little blue flag in order to make herself conspicuous in the Sunday afternoon crush. Every now and then, she feistily tells off a handful of Falun Gong activists trying to approach members of her group. In a bid to shift from reliance on the export industry, Taiwan opened its doors to free-spending tourists from its rival China in 2008. Now, nearly three million Chinese come annually, generating handsome revenues for restaurants, hotels and shops. But all along the Falun Gong movement, a religious sect persecuted in China but respected in Taiwan, has been following the Chinese tour groups at every turn, exposing them to graphic pictures of torture victims and organ harvesting. The Chinese tourists tend not to react to this, presumably because decades of autocracy at home have taught them to stay clear of politics. Meanwhile, Taiwan’s tour guides have been finding it difficult to handle the awkward situations. “Yes, we do have freedom of speech in Taiwan, but the Falun Gong people are really over the top,” Ku tells Al Jazeera. “As a tour guide I must protect my clients, so that they leave me no choice but to chase them off.” She adds that some younger female tourists get scared when approached by the Falun Gong, and that visitors from northern China easily feel offended, “as they are more fond of the Communist Party”. China and Taiwan hold historic talks Chinese citizens who travel to Taiwan typically make their bookings with Chinese travel agencies, which then subcontract the sightseeing tours to Taiwanese enterprises. Sheltering tourists According to Flora Chang, a Falun Gong representative and professor of journalism at the prestigious National Taiwan University, this makes the Taiwanese tour guides susceptible to blackmail by the Chinese Communist Party. “These guides have two motivations to drive a wedge between the tourists and the Falun Gong,” she says. “The first one is that the Chinese could land themselves in big trouble if they bring the brochures back to China, but the second one is that the Chinese communists warn them not to let the Falun Gong impact the people’s minds.” And Tony Kung, a Falun Gong activist, puts the allegations in concrete terms. “If the communist agents who are secretly embedded in those tour groups report back that a certain tour guide hasn’t kept us at bay, the Taiwanese travel agency employing him loses its lucrative subcontract with the Chinese,” he says. Falun Gong complaints Apart from the tour guides’ practice of shielding the tourists from the Falun Gong and occasionally taking away their flyers, other clues point at their closeness to the Chinese Communist Party. According to Chang, the Taiwanese Tourism Bureau has long been bombarded with tour guides’ complaint letters regarding the Falun Gong, causing the bureau to issue a directive last October ordering Taiwan’s local governments to remove Falun Gong banners and billboards at tourist attractions. “But, of course that is illegal in our free political system,” Chang says. “We made it very clear with the authorities that they cannot prohibit the Chinese tourists from looking at the Falun Gong material, and the Tourism Bureau indeed quickly backtracked and apologised.” Still, according to a tour guide who wished not to be named, a Tourism Bureau-sponsored video is still shown to virtually all Chinese tour groups upon their arrival in Taiwan, advising them to stay away from the Falun Gong during their trip. Meanwhile, at the Chiang Kai-shek Memorial Hall, a landmark swamped with hundreds of Chinese tour groups every day, a lone Falun Gong activist named Fan Jong-qin occupies about 15 square metres of public space with a carpet, billboards, petition-signing table and garden parasol. There are no other activists, hawkers or commercial promotions at the massive downtown site, about as big as 20 football fields. Although someone doing what Fan does would normally face stiff administrative fines in Taiwan, he tells Al Jazeera that “police let [him] alone even though Taiwan’s pro-China unification political party presses one legal complaint after another”. US support An incident last July may be part of the explanation. Back then, three US congressmen – Frank Wolf, Dana Rohrabacher and Christopher Smith – penned high-profile protest letters to Taiwanese President Ma Ying-jeou, blasting his government’s plan to tear down Taiwan-based shortwave radio towers used by the Falun Gong to broadcast deep into China. Two years earlier, Rohrabacher had threatened “to end his strong legislative support for Taiwan” as the result of a state-owned company’s decision to terminate satellite services for a Falun Gong-connected TV channel. According to Gary D Rawnsley, a professor at the UK’s Aberystwyth University specialising in Taiwan’s public diplomacy, it is this kind of international attention that is bringing about Taiwan’s hands-off approach towards the Falun Gong. Rawnsley tells Al Jazeera that Taiwan’s handling of the issue is key in differentiating it from China, which claims to be the rightful ruler of Taiwan against the people’s wishes. “While the government of the PRC [People’s Republic of China] politicises the Falun Gong, bans it and turns it into a bogeyman, the Taiwanese government gains political leeway by portraying Taiwan as a democracy that tolerates different belief systems, however crazy or unpalatable,” Rawnsley says.

PHILIPPINES: Garment sector seeking alternative to SAVE Act

For just-style 

By Jens Kastner | 20 February 2014

The Philippines continues to seeks US trade benefits following typhoon Haiyan (Photo credit: Save the Children)

The Philippine garment industry says it will relaunch its lobbying efforts to push a law through the US Congress giving it privileged access to American markets, after the shelving of the long-anticipated Save Our Industries Act (SAVE Act).

SAVE would have given a range of Philippines-made apparel duty-free access to the US. However, the Filipinos have been forced to think outside the box since news broke that the bill now has to wait until the next US Congress, which takes office in January 2015.

“The original SAVE Act bill no longer exists – it’s dead in Congress. We have to refile and give the drive a new name,” said Robert Young, president of the Foreign Buyers Association of the Philippines (FOBAP).

“We will tie it to Yolanda [2013’s monster typhoon Haiyan], naming it something like ‘Help the Philippine Textile Industry.'” Young elaborated that this should be modelled on the US’s Help HAITI Act of 2010, implemented after the Caribbean country’s devastating earthquake.

Private sector advocacy groups have been urging the Philippines Department of Trade and Industry to quickly craft such a new initiative. They claim Philippines government officials have indicated the United States Agency for International Development (USAID) could promote such a bill.

“This will have to go through process, but we hope our new drive might somehow facilitate a sympathy switch in Washington,” Young said.

 

Disaster recovery — Philippine Accountants and the Relief Effort

For Accounting and Business 

 After monster typhoon Yolanda – internationally called Haiyan – in early November 2013 devastated much of the Philippines’ Leyte and Samar islands, the humanitarian aid machinery was quick to get going, with spectacular footage of a US aircraft carrier supplying the horrified locals dominating the world’s TV screens for days. Less headline grabbing but equally important for the survival of thousands has been the work of auditors and financial reporters on the ground. The Philippines had just been shaken by a massive “Pork Barrel Scandal” implicating dozens of lawmakers, officials and private citizens in the outright theft of money intended for relatively small infrastructure and other development projects, so that one cannot but wonder how much of the Yolanda donations and reconstruction funds has been, and likely will be, stolen. Between theft and efficient aid dispersion is now standing the army of auditors, who also play a key role in bringing the region’s small businesses back on their feet in the longer run. This is a daunting task, given that not only lives and property were destroyed but also much financial data.

“Of course, our challenges are plenty; to begin with it’s the unprecedented scope of the disaster and the need to deal with very immediate expenditures and disbursements,” says Maria Gracia M. Pulido Tan, Chairperson
of the Philippine Commission on Audit (COA), in an interview with Accounting & Business.

“Relief goods such as rice and noodles have to be procured in huge quantities with little paper trail because the survivors simply cannot wait for bureaucracy to sort out the red tape,” she elaborates.

Pulido Tan took over as head of the COA in 2011, and it was her together with two other female officials in key positions who exposed the Pork Barrel scandal, earning the trio the nickname “the three furies” with the Philippine media. The COA is mandated per Constitution to audit the receipts and distribution of Yolanda donations that is coursed through the national government agencies, with Pulido Tan’s strategy to keep corruption at bay being based on two pillars: The first is that the audit has all along been conducted almost simultaneously with the dispersion of relief goods and funds, and the second one that the COA has an overwhelming number of auditors on the ground.

“The persistent threat of corruption is why we audit as relief work happens — where relief goods have been brought, where funds came from and so forth,” she says.

Pulido Tan brings into account that she is not aware of the actual number of auditors, but that there are “many”. To achieve this, the COA has in mid-November brought in the Philippine Institute of Certified Public Accountants (PICPA), as well as the National Federation – Junior Philippine Institute of Accountants (NFJPIA).

“PICPA has its regional chapters involved, which gives us sufficient boots on the ground,” she notes.

According to PICPA Executive Director Jose M. Ireneo, under normal circumstances PICPA would not audit the receipts and distribution of donations going through government agencies, but those going through private organizations, if commissioned to do so. “That the COA now fields a new approach by choosing us as partners is probably because we have made a name for ourselves participating in the audit of resources and accounting for the last national elections,” he says.

Small businesses worst hit

Another big challenge to auditors is to deal with individual enterprises that have been devastated by Yolanda. According to Ben Punongbayan, founder of Philippine accounting and consultant firm Punongbayan & Araullo, it is first necessary to distinguish between big businesses, particularly those based in Metro Manila, and the independent, stand-alone businesses in the calamity areas, which will typically be small.

“The losses of the affected entity in the first group generally would not be significant in relation to the total operations of its parent company or head office; but it is the small businesses that were severely affected in relative terms,” he says. He elaborates that their buildings, warehouses, facilities and inventories might have been either lost due to the typhoon or due to the subsequent looting resorted to by some typhoon victims.

Punongbayan notes that if accounting records were also lost or damaged, record reconstruction is a big problem for stand-alone entities that operated only in the typhoon-affected areas, as they have no Manila head office to turn to for a backup.

“But even with their data re-captured, they will most probably not be able to pay their debts to banks and suppliers, as collaterals for bank loans may no longer exist, except for parcels of land which the bank may foreclose,” he says.

Punongbayan adds that to make matters worse, the stand-alone businesses in the calamity areas may have receivables from customers who in most instances are also typhoon victims, hence, will not be able to pay their accounts. The businesses concerned will have to write off such receivables, adding such write-offs to their losses, he predicts.

Tax deductions

Bureau of Internal Revenue (BIR) Commissioner Kim Henares has relatively quickly announced that taxpayers who are Yolanda victims may file sworn statement of loss and other requirements necessary to substantiate claim of losses within 40 days if the losses are not paid by their insurance company. Tax deductions will also be given to businesses that can prove their losses were due to theft, and they can prove this, for instance, by filing a police report. As of press time, it was not known whether the BIR will grant some tax breaks or other reliefs, such as relaxation of documentary and substantiation requirements, or extension of deadline for filing reports of losses and documents, to the typhoon victims.

In terms of audits of the tax reductions, Punongbayan points again at the difference between Manila-based businesses and those operating solely in the typhoon-affected areas.

Particularly for the latter, “external auditors will have difficulties in auditing the losses to be reported by a business in its financial statements, as copies of previous annual financial statements were required to be filed with agencies which offices typically have been located in the same typhoon-affected areas,” he says. Furthermore, the original copies of supporting documents, such as invoices, official receipts and contracts, might have all been lost as well, according to him.

As to how the BIR is to deal with all that, Punongbayan sees only one plausible direction. “The BIR may be lenient, and most likely it will be,” he says, adding that to get restarted, it is not far-fetched to assume that small businesses affected by Yolanda may receive some aid from the Philippine government coming from the government’s own funds or donated funds, or both.

And Josephine Adrienne A. Abarca of the Philippine professional services firm SGV weighs in that ”the BIR may more rely on other means of verifying the amount of taxable income of a taxpayer, for instance by securing third party information.”

 

 

 

 

 

 

 

 

 

 

 

New Impetus for Biotech

For the American Chamber of Commerce in Taipei

Key in “Shengyi Road, Hsinchu” on Google maps and all that is visible is scrub and grass. But go there and you’ll find a brand-new biomedical plant – the headquarters of JHL Biotech, a start-up founded in California in 2012 – that is top-notch even by U.S. and European standards. After key figures in Taiwn’s biotech community were shown around the facility at its inauguration in early December, they were lavish with their praise. “It’s as spacious as if it were in the States,” says one of the VIP guests, who asked not to be named. “Taiwan’s biotech laboratories are usually cramped, which has been an issue with the U.S. Food and Drug Administration when local companies apply for regulatory approval.”

The domestic biotech industry is still far from being a key factor in Taiwan’s overall economic performance. But recent months have produced three developments suggesting that talk of biotech at some point offsetting the decline in the island’s IT sector can no longer be dismissed as a mere pipedream.

First was JHL’s sudden emergence, getting its pilot plant in operation in record time for manufacturing monoclonal antibodies for use as active pharmaceutical ingredients (APIs) in biologics, which are drugs derived from a living cell. Second, Taiwan’s government-initiated Development Center for Biotechnology (DCB) spun off a company called EirGenix Inc., which has taken over DCB’s pilot plant to engage in the commercial manufacturing of antibodies. And third, ASLAN Pharmaceuticals, a Singaporean drug developer focused on both biologics and “small molecules” (the industry’s term for traditional, chemically engineered drugs), set up a subsidiary in Taiwan in what was viewed as a major breakthrough.

While the three firms are following very different business models, their stories have one important aspect in common – securing sufficient investment funds was not a problem. “We raised more money than Genentech’s IPO 40 years ago and we built the Hsinchu plant in just nine months, which are both quite some achievements,” says Racho Jordanov, JHL’s co-founder, president, and CEO. Genentech, where Jordanov’s career and those of other key JHL personnel took off, was the first biotech firm in the United States, and its IPO in 1980 famously set off an investor frenzy.

JHL’s website lists high-tech venture capital firms (VCs) such as Kleiner Perkins Caufield & Byers, as well as Taiwan’s China Development Industrial Bank, as the company’s main sources for financing. The company entered Taiwan with an initial approved investment of US$20 million. “European banks are playing a role, too, extending generous loans under the condition that we purchase European equipment to go with the U.S. equipment to be imported into China for use in our plant there,” notes Jordanov. Additional capital is coming from the Chinese government, also due to strategic considerations.

 Companies involved in biologics and biosimilars (the term for biologics’ successors after patent expiration) are currently investors’ darlings, partly because the technological and regulatory threshold to develop and manufacture them is extremely high. While Indian and Chinese manufacturers are unbeatable in terms of price when it comes to producing small molecules, the steep biotech threshold is expected to provide Taiwan with a continuing competitive edge for a number of years.

Another difference between biopharma and traditional drugs is the nature of their applications. Biotech drugs typically target diseases for which treatment with chemical drugs alone is not an ideal option. One of the earliest examples was the use of biologics in producing insulin, and one of the latest is their use in anti-cancer immune therapy, which transforms patients’ blood cells into “soldiers” that go on “seek-and-destroy missions” against cancer cells.

JHL’s Hsinchu pilot plant will be operational in early 2014, producing small quantities of antibodies for use mainly in early-stage clinical trials. Simultaneously, JHL is building a commercial manufacturing facility in Wuhan, China, scheduled to begin production of APIs for commercialized drugs in mid-2015. JHL says it will be the world’s largest single-use biopharmaceutical plant.

 Typically, the customers for the firm’s APIs will be either small biotech research companies, which generally wish to avoid having to invest in building their own plant during drug development, or “Big Pharma,” the leading multinational drug companies, which might prefer outsourcing for strategic reasons (JHL says it is currently in discussion with Pfizer and Novartis). Either type of customer might later partner with JHL for drug development and manufacturing in exchange for royalties in the Asia market. Jordanov also cites the development of biosimilars as a third pillar in the company’s business model, “as many mega-sale drugs are coming off patents.”

The choice of Taiwan

 After the idea for establishing JHL was conceived in San Francisco, there were ample reasons to choose Taiwan as the location for the headquarters, says Jodanov. “We wanted to position in Asia because the Asia market is the fastest growing,” he notes.

“The main draws for Taiwan were the availability of talent, a strict but clear regulatory environment, government support, as well as respect for IP, which makes us more comfortable here than in China.”

 What resulted was a win-win situation for both the company and the host country. JHL’s staff in Taiwan – which has started with a headcount of 40 people and is expected to double in two years – includes only a few expats. In addition, Jodanov estimates that the Taiwan plant will eventually generate about US$80 million a year in pre-tax profits, while JHL’s research projects carried out in cooperation with Academia Sinica and local universities will benefit the Taiwan biotech industry as a whole.

 He further notes that as the Hsinchu and Wuhan plants will use the same computer controls, JHL will be bringing in three Chinese staff members per month for training. This arrangement means that from day one, the Wuhan operators will be familiar with the entire system, which in turn is an assuring notion for investors. “What counts for the VCs is the business plan, the management team, and the track record,” says Jordanov. “We have delivered on every milestone agreed on with the VCs in the 15 months since we’ve been established.” 

 Meanwhile, EirGenix, the new operator of what was the DCB’s biologics pilot plant, lists Formosa Laboratories, Taiwan’s National Development Fund, CTBC Capital (part of what was formerly called the Chinatrust group), and Waterland Venture Capital, among others, as its shareholders. It has an asset value of NT$540 million (US$18 million). Like JHL, EirGenix can be labeled a contract development and manufacturing organization (CDMO), and according to DCB Chairman Johnsee Lee, much of the money that has been raised will be used for technological upgrades.

 “Not many companies in Asia can do what EirGenix and JHL do,” Lee says. “And the quantities of APIs needed for clinical trials alone are sufficient for good business already.” Lee further stresses the importance of the Good Manufacturing Practice (GMP) certifications possessed by both the DCB and JHL plants, as regulators in the United States, Europe, Taiwan, and elsewhere will only clear drug candidates for trial use in humans if they have been manufactured under that standard. Lee predicts that after successful clinical trials and regulatory approvals, many clients will return to EirGenix and JHL for commercial manufacturing.

 Lee sees the emergence of the two CDMOs as a highly significant step for Taiwan’s biotech development. “Both JHL and EirGenix were set up over the last six months and take Taiwan to a new stage. Before this, Taiwanese drug companies have mostly done small molecules, which exposes them to more cut-throat competition,” he notes. 

 Also auguring well for Taiwan’s biotech industry is the ongoing regulatory harmonization with China. Lee, who is one of Taiwan’s top cross-Strait negotiators in pharmaceutical affairs, points to a new cooperative drug development program with China to be launched later this year. Under the program, the two sides will nominate a total of about 30 drug candidates, and from that pool several will be chosen for joint clinical trials on the basis of their commercial prospects or medical urgency.

 “This cooperation will greatly accelerate drug development because clinical trials will no longer have to be repeated on the other side for regulatory approval there,” Lee explains. Presumably the lion’s share of the drugs selected under the program will focus on diseases that disproportionally plague ethnic Chinese populations, such as liver cancers and diabetes. As the prevalence of these diseases is lower in the West, Big Pharma is regarded as less likely to compete with Chinese and Taiwanese developers and makers of treatments aimed at the rapidly growing China market.     

 Lee also notes that DCB has recently been certified by China to test Taiwanese biotech-based cosmetics for marketing in China. The arrangement should facilitate sales of these products across the Strait, since DCB can complete the testing faster than the Chinese laboratories now doing the job. As cosmetics are a major source of revenue for many biotech research companies, and since Chinese consumers have proven very receptive to Taiwanese cosmetics brands, this regulatory relaxation is seen as an additional shot in the arm for the Taiwan biotech industry.

 Looking beyond Singapore

 ASLAN, the Singaporean virtual drug developer whose investment last year in Taiwan was said to be even larger than JHL’s, is considered a potential client for Taiwan’s biotech CDMOs JHL and EirGenix, according to industry observers. ASLAN’s business model is to in-license drugs that typically have six to seven years of toxicity studies and animal testing behind them and have either just started or are about to start clinical trials. ASLAN typically in-licenses global rights to drugs and then designs and executes clinical trial programs, starting with phase 1 clinical trials, which usually involve 20-100 healthy volunteers, followed by phase 2, which typically look at results from 100-500 patients. At some stage, the company will seek to find partners for global phase 3 clinical trials, which may involve several thousand patients, and for eventual commercialization.

 “We are focusing on the four years during which a drug that works in a mouse is proven to work in a human,” says Carl Firth, ASLAN’s CEO. “We acquire a drug that has made it through animal testing, that has a competitive profile, and where the partner is unable to progress it themselves, which might be for strategic reasons.” He adds that the out-licenser’s motivation could also be a desire to have a partner with a different or innovative approach to develop the compound.

 ASLAN’s method is to try to identify drugs that work in a particular kind of patient, possibly in combination with other drugs, rather than seeking cures that are effective for the entire population. Taking lung cancers as an example, Firth explains that the term covers what are actually hundreds of different diseases, and that the effectiveness of a treatment may vary according to a patient’s genome, ethnicity, and the stage of the disease, among other factors. ASLAN focuses only on the 10% to 20% of patients that will have a positive response to the drug, he says.

 Because the company is targeting tumors prevalent in Asia, in addition, ASLAN says it chose to locate in Taiwan because of its good medical and research infrastructures and ample clinical trial experience. “Taiwan has come quite a long way in becoming an attractive biotech location,” notes Firth. “Three or four years ago, a strong Singapore biotech firm would not even have considered Taiwan in the first place.”  

 Firth points out that ASLAN’s in-licensing deals typically do not involve initial payments. That approach saves money that can be used for the clinical trials, which can be very expensive. Backend profits can be shared with the partner later. Firth notes that Big Pharma, on the other hand, might make an upfront payment in the neighborhood of US$80 million for oncology drugs ready to enter global phase-3 clinical trials, with the subsequent milestone payment for commercialization reaching as high as US$700 million. 

 “But it is obviously a very risky and expensive process to get there,” he says. “The reason we run clinical trials is that we don’t know what the answer will be,” adding that as a rule of thumb, only one in three candidates will make it from phase 1 to phase 3. Firth cautions that if a drug developer has only one or two drugs in the pipeline, as is the case with many Taiwanese developers, it is accordingly quite precarious from an investor’s perspective.

 In contrast, ASLAN looks like a safer bet for the four VCs that are backing it (BioVeda Capital, Cenova Ventures, Morningside, and XinChen Ventures) as it currently has three compounds in the pipeline – two for solid tumors and one for rheumatoid arthritis, with a few more compounds being targeted over the course of the year. “We have no lab, no plant, and we only have 11 people,” says Firth. “But if you look at our portfolio, you’ll see that no biotech company in [East Asia excluding Japan] has more innovative drugs in the pipeline than us.” 

 Research Institutions

 In its strategic quest to in-license more compounds, ASLAN is likely to benefit from the world-class research facilities in Taiwan, most prominent of which are DCB, Academia Sinica, and the government’s Industrial Technology Research Institute (ITRI) in Hsinchu, including its Biomedical Technology and Device Research Laboratories. Traditionally the ITRI labs have primarily researched botanical and chemical drugs, but in recent years have turned more to biologics. ITRI also runs GMP-certified manufacturing plants, which Taiwanese biotech research companies can turn to for favorable production conditions.

 According to Richard Shau, the division’s General Director and VP, the current focus of ITRI’s biotech research is a novel “scaffolding” made of biotech-engineered collagen, which enables the linking of chemical and botanical compounds and antibodies. “The key advantage of the scaffolding will be targeted drug delivery,” he explains. “A drug only cures when delivered to the targeted part of the body, whereas elsewhere it may be a poison.”

 Although a chemical drug may be good at killing a cancer cell, he continues, it can cause drug resistance, as well as other side effects, if it doesn’t hit the right target. The scaffolding now allows the chemical drug to sniff out the cancer cell at a lower dosage, with the antibody taking over the job from there. “This is the state of the art in cancer drugs currently,” he notes. Firth adds that a botanical drug can also be linked to the scaffolding, as such drugs are good at suppressing certain side effects, such as appetite loss or drowsiness.

 

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Biochips for a better diagnosis

The availability of the best treatment for a disease means nothing without the right diagnosis, and Taiwan is making impressive strides in the development of so-called diagnostic biochips. These chips, as produced by Hsinchu-based Phalanx Biotech under the brand name CytoOneArray, are 1×3-inch glass slides hosting 26,000 probes. When the probes hook up with genes or gene parts in a DNA sample, a staggering 305 genetic diseases for developmental delay or intellectual disability can be detected in prenatal and postnatal tests. All of the diseases and disorders are relatively rare, but doing the math, it becomes clear that the product is destined to pay off. About 1% of people suffer from autism and 1% from schizophrenia, and when all diseases on the CytoOneArray target list are added together, they affect 6% to 8% of a given population. A prenatal diagnosis of autism, for example, is important, as it facilitates treatment of children before the unrecognized disease turns them into an outsider in the social environment.

“Our product line focuses on two markets, the first being R&D with our CytoOneArray chip and the second prenatal screening with CytoOneArray,” says Gordon Ho, Phalanx’s CEO. “As CytoOneArray is classified as a medical device, it will require regulatory approval, which we are preparing for.” Ho says he expects the regulatory nod to come sometime in 2015 because detection is much better with CytoOneArray than with current technology.

Until CytoOneArray can be sold to prenatal screening clinics, hospitals, or doctors, Phalanx’s revenue-creation is based on two pillars. First, there is the service model, where clients – typically researchers – send in cell samples for analysis. Second, Phalanx supplies other service laboratories with consumables and disposables (that is, the biochips) and provides technical support, so that they can execute the analysis services in their local regions.

A particular illustrious example among Phalanx’s clients is the U.S. National Aeronautics and Space Administration (NASA), whose researchers are using the Taiwanese biochips to profile the gene expression of mice that have gone on space missions versus those that remained on the ground.

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The opportunities and risks of the drug-development business are exemplified by Anti-CD3, the first drug that ITRI successfully embedded in its scaffolding. After years of development work, the compound had failed phase 3 clinical trials in the United States a decade ago because of too many complications and side effects. In 2010, ITRI took on Anti-CD3 to use in its collagen platform and succeeded in markedly reducing side effects through better drugreformulation technology. Following autoimmune system trials in chimpanzees, ITRI out-licensed the drug to a Taiwanese drug developer in early 2013. Shau predicts that the product may gain approval from the U.S. FDA for a phase 1 clinical trial sometime in 2014. 

 Asked about the ITRI biotech division’s strategic direction, Shau said the stunning successes reported in the United States in recent months in relation to gene therapy technology opens even more opportunities for targeted delivery based on ITRI’s collagen scaffolding. The challenge for Taiwan now is how to bring all the research done on the island together. “The DCB has the antibodies, we have the scaffolding. Together we can create spin-offs for multimillion and billion-dollar projects,” he says.

 There is still some way to go until then, however, and what the Taiwanese biotech industry has been achieving is still humble in concrete macroeconomic terms. As the common definition of “biotech” on the island differs from Western parlance in that that it also covers pharmaceuticals, medical devices, and even traditional Chinese medicine, the industry’s total revenue statistics can only serve as a broad indicator. DCB puts the figures at NT$240.3 billion (US$8 billion) for 2011, NT$263 billion in 2012, and an estimated NT$281 billion in 2013. In comparison, TSMC, Taiwan’s world-leading semiconductor foundry, alone accounts for nearly double that amount per year.   

 But despite this relatively low level of revenue so far, the capital market has been very supportive in investing in the local biotech sector for the last several years. As a result, capitalization in the industry has grown 6.6-fold, from US$2.5 billion to US$16 billion, from 2009 to 2013.

 While that rate of growth exceeds that of the United States, Singapore, or Korea, the focus of investment activity has been concentrated largely on a few “poster child” firms, especially drug discoverer and developer TaiGen Biotechnology, as opposed to the kind of agile start-ups credited with providing the U.S. biotech industry with is dynamism.

 “The Taiwanese government has traditionally been very protective of the mom-and-pop investors that make up some 30% of stock investments here, and has therefore made listing difficult for biotech start-ups, as they do not yet really create revenue,” says Clark Su, Secretary General of the Taiwan Venture Capital Association. “And for VCs, which typically work on a timeframe of only 7 to 10 years, the 15 years needed for the drug development cycle was too long.”

Promoting startups

 But the rules of the game changed abruptly on January 7, 2013 for the benefit of startups, says Su. On that day the GRETAI Securities Market (GTSM), which operates the local over-the-counter market, implemented a reform that makes it easier for individual investors to buy startup shares through their stockbrokers. In addition, GTSM last month launched a special incubation board – similar to Hong Kong’s Growth Enterprise Market, Singapore’s Catalist board, and London’s AIM board –to help small-cap startups raise funds.

 These innovations are expected to have far-reaching consequences for the modus operandi of VCs. Su notes that they can now identify a biotech company that has just received a patent or readied a compound for clinical trials, invest in it until it has listed on GTSM, and then exit as individual investors move in.

 Besides the markedly rising share prices the new rules have brought, Su sees other signs of growing interest – and perhaps even a bubble – in the biotech sector. He has long organized matchmaking events between local biotech firms and VCs, but notes that before the GRETAI reform a given presentation was usually attended by just three or four VCs. “But since then, it has always been close to 30,” he says.

 Still, if a bubble is developing, Su believes it is not going to burst in the next three to five years. He considers that it will take that long for the first few Taiwanese-developed drugs to have entered the market, and for “people to find out that the margins are not as astronomical as they expected.” But that timeframe will be sufficient for good biotech companies to grow, he says, as well as for Taiwanese banks and other institutional investors to have educated themselves thoroughly on the subject.

 As to whether the industry will face a hard or soft landing, Su holds that it will to some extent depend on the number of biotech firms listed by then. “The bubble will burst if there are only a handful of biotech companies in the stock markets. But if there are 50 or so, we can analyze which are good and which are bad, and then share prices will be reasonable rather than crash.” 

 Accordingly, Su has been urging the government to be less concerned about protecting individual investors and instead approve more biotech firms for stock exchange listings. He expresses confidence that the authorities have been persuaded to follow that course, and that significantly more biotech listings will take place this year.

 Yet another obvious factor working against a bubble burst is the prospect of Chinese investment. Mainland-based pharmaceutical companies are “very rich” and are eager to invest in Taiwanese biotech firms, says Su, but the Taiwanese government has so far applied the brakes because of strategic considerations. As the permitted investment from China gradually expands, however, a large new source of investment funding is expected to be available for Taiwan biotech.

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Making it through the pipelines

As a rule of thumb, it takes a compound 15 years from discovery to commercialization as a drug. Typically, the candidate would have been in-licensed and out-licensed more than once on its way, with each research company involved adding value. But trials could go wrong at any given time. A compound that has been in-licensed for millions of U.S. dollars could be worthless overnight and likewise the business that owns it.

Three milestones are coming up for Taiwan biotech, and the stories behind them are indicative of the nature of the business:

In a first for a Taiwanese drug developer, TaiGen Biotechnology Co will soon have brought a drug through to marketing. Taigexyn, an antibiotic to treat pneumonia and skin infections in-licensed by TaiGen in phase 1 clinical trials, is about to pass phase 3 clinical trials and is projected to gain regulatory approval in Taiwan and China at the same time. It will be the first drug jointly approved by the two sides, showcasing great strides in cross-Strait regulatory harmonization. “That will probably be announced in the first half of 2014 and will be a very big milestone for the industry,” says David Silver, president of BiotechEast, a Taipei-based consultancy for the biotech industry.

As the first Taiwanese drug to have been developed from scratch – from discovery through to clinical development and market approval – AOP2014/P1101, a biologic developed by PharmaEssentia Corp., is well on its way to hit the market. The drug, originally meant for hepatitis B and C, has had a real rollercoaster ride behind it, as during the development years a more promising drug type appeared, albeit a very expensive one. Luckily, Silver says, PharmaEssentia identified a totally new application, a rare blood disease. The company is now partnering with Austria’s AOP Orphan Pharmaceuticals to help it run phase 3 clinical trials for AOP2014/P1101 in Europe. The drug is classified as an “orphan drug,” meaning there are very few patients and thus lower regulatory hurdles. “So far it sounds all good,” Silver notes. “PharmaEssentia has built a new plant to supply the clinical trials in Austria, and once the compound has gained regulatory approval, it will do the manufacturing of AOP2014/P1101 for the market.”

Liver cancer drug PI-88from Medigen Biotechnology is in phase 3 clinical trials, which are being run in Taiwan, mainland China, Hong Kong, and South Korea, making them very expensive. According to Silver, PI-88 could be highly significant for two reasons. “First, Medigen is running the phase 3 trials alone, which is remarkable for a local biotech company because of the costs. Second, it is not clear yet, but there is the expectation that China will flatly approve the ongoing phase 3 clinical trials for PI-88’s commercialization in the Chinese market, so that Medigen won’t have to do additional trials in China to back up its phase 3 data.”

If this scenario pans out, it would mean that Taiwan biotech companies do early-stage clinical trials in Taiwan and then follow up with the rest in China, facilitating speedier commercialization of Taiwanese-developed drugs in the rapidly growing Chinese market. But Silver says the real jackpot would be if this approach could enable Taiwan to be a “drug approval portal into China” not just for drugs from Taiwan but from other countries as well.

At this stage, no one is sure if or how this approach would work, adds Silver, as his understanding is that the cross-Strait Economic Cooperation Framework Agreement (ECFA) applies to Taiwanese companies only. “However, if a licensing agreement is formed early enough between the overseas company and their Taiwan partner company to share the benefit of future China market access, then it might work out well for the overseas company when the drug from the Taiwan company gets approved,” he notes. 

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