Sun, Oct 23, 2011 - Page 8 News List

EDITORIAL : Business in China getting costlier

Just like the spate of worker suicides at Foxconn Technology Group’s Chinese factories one year ago highlighted the rapid societal and cultural changes in China, Taiwanese metal-casing maker Catcher Technology Co’s partial suspension of its operations in Suzhou a week ago over environmental disputes points to a deeper issue to be taken seriously.

Catcher’s factory suspension soon turned into a social issue, after China’s state-run broadcaster CCTV ran an investigative report that said 27 companies in Apple Inc’s supply chain have contributed to pollution in China. The report also accused Apple of turning a blind eye to its suppliers’ activities in China.

Just as several of the Taiwanese suppliers — including system assemblers Hon Hai Precision Industry Co and Pegatron Corp, touch-panel makers TPK Holding Co and Wintek Corp, and printed-circuit board suppliers Compeq Manufacturing Co — denied their Chinese production facilities had been forced to shut down because of pollution concerns, several Taiwanese newspapers last week said that the Apple supply-chain companies may have fallen prey to a potential trade war between China and the US, suggesting the whole issue is a political matter.

This speculation came amid worries about the US Senate’s recent passage of a bill that, if signed into law, would call on the White House to impose unilateral and broad-based tariffs against countries, China in particular, that are willfully manipulating their currencies.

Because Catcher is one of the leading aluminum alloy and magnesium alloy casing makers in Taiwan, which counts Apple, Dell Inc and Hewlett-Packard Co among its major customers, local newspapers speculated that the company’s partial factory shutdown in Suzhou was yet another sign of a looming China-US trade war. The first sign of Beijing’s retaliation against the Senate’s bill, according to critics, emerged when the yuan began depreciating against the US dollar after the bill was passed on Oct. 11.

Whether or not a trade war between China and the US becomes a reality, the pollution dispute at Catcher will affect Taiwanese companies’ operations in China, bringing to mind the Foxconn issue in China last year. It should also serve as a wake-up call for investors and shareholders of these supply-chain companies.

First, Taiwanese firms that have long relied on China’s ample labor supply and low wages are now faced with the challenges of not only pay hikes, but also higher environmental standards. Catcher announced last week it would invest US$4 million to reduce odors, but small Taiwanese companies are unable to do so, given their financial constraints.

Second, if Apple’s suppliers are to secure orders from the US company, they will have to ramp up investment in environmental protection and green technology, in addition to maintaining efficient and flexible production. However, there is no guarantee that they will be able to maintain profitability, especially with the increased investment risks facing them in China.

The yuan exchange rate and the potential China-US trade war are issues beyond investors’ control, because they are political in essence. However, Catcher’s factory shutdown is a reminder of the heightened risks that these companies face and that investors should review their portfolio from a longer-term perspective.

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