Taiwan's government may soon follow the initiation of limited trade and travel links last week between Taiwan's frontier island groups of Kinmen and Matsu and China with an easing of the restrictions on Taiwan's high-tech sector to invest and manufacture in China. For Taiwan's notebook makers, such changes cannot come soon enough. \nSlowing world demand for personal computers is forcing the world's biggest computer makers such as Compaq Computer Corp and Dell Computer Corp to search for and expand into new markets. Taiwan's notebook makers, which make computers for such computer heavyweights as Compaq on a contract basis, are facing ever tighter profit margins and demands by its major clients to move production to China. \nAs a result, Taiwan's ban on such notebook manufacturing in China creates a major dilemma. "To not go is not possible; to go is not possible," said an official at Quanta Computer Inc (廣達), Taiwan's largest notebook computer maker. \nAfter making 2.6 million notebooks last year, Quanta plans to make four to 4.5 million laptops this year. But building new plants in Taiwan to increase capacity is proving increasingly difficult and expensive. \n"Labor and land related reasons make expansion and increased production in Taiwan quite difficult and slow," said Hsu Wei-che, an analyst at Taiyu Securities. \nTaiwan is also suffering from a worsening business environment and political deadlock, the American Chamber of Commerce in Taipei's Topics magazine said in its November issue, quoting Lin Kuen-Chong, chairman of the Chinese National Federation of Industries. \n"It is true that Taiwan's investment climate is not as favorable as before due to higher wages, shorter working hours, the restrictive quota on foreign laborers, and especially the problems surrounding the Fourth Nuclear Power Plant," Lin said. \nThe government cancelled construction of the plant in October. The cancellation exacerbated the difficult relationship between the government and its opposition parties. \nStill, the main reason behind Quanta and other major notebook makers' investment in China is to increase production capacity, the notebook makers and analysts say. Indeed, Quanta is investing in China, not moving itself there, the company pointed out in an effort to dispel concerns that China's attractions and growth as a competitor spell the end for Taiwan's notebook industry. \nQuanta received permission at the end of last year to invest US$26 million in the construction of two plants located in Shanghai to produce computer-related parts. Production can easily shift to notebook manufacturing if and when regulations change. \nTaiwan's other major notebook makers are pursuing similar strategies. \n"We already do have facilities in Shanghai," said an official at Inventec Corp (英業達). "However, all notebook manufacturing is still located in Taiwan," he said. Inventec made about 1.5 million notebooks last year for Compaq, its sole customer. \nThe company is in the midst of building a factory for computer-related products in Shanghai that can change to make other products if the government policy changes. "The plan for the new factory is notebooks," the official said, adding that production should come on line in the fourth quarter of this year. Production may begin earlier if the government removes or reduces restrictions before then, he said. \nThe Minister of Economic Affairs, Lin Hsin-yi (林信義), presented a reporter to the government's Cabinet last week recommending a broad lifting of restrictions and trade with China. \nThe eased restrictions would include investment in and production of more powerful notebook computers. Current restrictions limit production to notebooks with processors first introduced in 1991 and far slower than present-day processors. \nConcrete plans on the eased investments will be announced within one month, local media in Taiwan reported the premier as saying on Sunday. \nBesides the ability to increase capacity more easily, Taiwan's notebook makers are also under pressure from their foreign clients such as Compaq, Dell, and Apple Computer Inc, to move production to China, so that they can more easily expand in the China market, analysts said. Costs will also be lower. \n"Many foreign clients and buyers require that we go there to manufacture notebooks," said the Quanta official. Quanta's clients include Dell and Apple. \nProfit margins of under 10 percent among notebook makers in Taiwan are also encouraging the migration to China, and Shanghai in particular, though savings from labor costs will be limited. \n"Labor costs account for less than 5 percent of production costs of a notebook," said Hsu Wei-che. "But because the profit is already so low, the companies will save on costs wherever they can." \nShanghai offers many tax breaks and other incentives to entice high-tech investments in the area, analysts said, which makes the city attractive as a manufacturing base. Such incentives and the opportunity to trim costs in the current climate of increasingly tight profit margins and uncertain demand is drawing most of Taiwan's major notebook makers to the area. \nTighter laws and less corruption compared to the rest of China add to the draw of Shanghai. \n"The regulations in Shanghai are very clear-cut, and officials do things by the book," said Andrew Teng, a manager at Dotcom International, an investment advisory company in Taiwan. \n"People don't like Guangdong because the regulations there are messy and the social order there is not stable," he said. \nShanghai's growing wealth, increasingly modern infrastructure, and generally positive attitude to Taiwanese investment also entice investors. \nAs well as Quanta and Inventec, notebook maker First International Computer Inc plans to set up a notebook plant in Shanghai, the company announced last month. Compal Electronics Inc (仁寶電腦) has already built two plants in Kunshan, near Shanghai, and said last month that it had plans for five more plants in the area by 2002, local media reported. \nOnly Acer has set up manufacturing operations in Guangdong, analysts said. \n"Jiangsu and Zhejiang provinces are developing very fast," said Tracy Deng, operations director of New Allyes \nInformation Technology Co, a major online advertising agency in China and the biggest competitor in China to world online advertising service leader Doubleclick. "Shanghai will be a service center for China and these two provinces. That is the golden economic triangle," said Deng, who is based in Shanghai. \n"The Chinese look at the Yangtse River as a dragon," said the official at Inventec. \n"Shanghai is the head of the dragon," he added. \nWith the migration to Shanghai by Taiwan's notebook makers only recently under way, analysts anticipate they will need six months to a year to complete construction of plants, and production to begin in the first half of next year.
* Although Taiwan firms are barred from manufacturing notebooks in China, they are allowed to make parts there
* China's lower costs would allow Taiwanese notebook makers to maintain or improve their margins
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