Made in Taiwan, Straight to the United States

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Just how extensive has the impact of the US-China trade war, now in its second year, been on Taiwan’s economy and industry? In the deep of the night at Taoyuan International Airport, CommonWealth takes you to witness a high-growth, high-tech, high-added value industry with annual production value over NT$100 billion in the midst of a rapid ascension.

Effective on July 6, 2018, the United States began formally collecting 25 percent tariffs on products in 818 categories made in China valued at US$34 billion.

Today, “the biggest trade war in economic history” nears the conclusion of its first year. What kind of impact has it had on Taiwan’s industry and economy?

A look around the cargo area of Taoyuan International Airport deep in the middle of the night makes it all clear. A rapidly growing, high tech, high added-value industry worth over NT$100 billion annually is rapidly taking off.

Direct Cargo Flights Loaded with MIT Servers to the US

A Boeing 747 cargo plane carrying network servers and workstations made by Ingrasys Technology, a subsidiary of Hon Hai Precision, prepares for takeoff. The next day, after arriving at a U.S. airfield on the west coast, the cargo is transported to systems integration facility Hyve, where hard drives are installed, and a 2.5-meter tall, million-dollar server cabinet is installed at the Amazon Cloud Services center within a week.

Ingrasys Technology’s plant is located right next to the Taoyuan airport, within the Farglory Free Trade Zone, a unique combined manufacturing and office zone within Taiwan’s national territory but outside the jurisdiction of Customs authorities.

At 3 p.m., Ingrasys moves high-ticket semi-finished motherboards fitted with processors and memory, along with cases shipped from China, downstairs to the shipping zone for rapid Customs clearance. Next, airport container trucks carrying servers drive right up along dedicated lanes to the cargo hold of cargo planes waiting on the runway apron.

“Shipments go out in the afternoon, get put on a plane at night, and reach the U.S. the next day. That’s how fast we work,” says Ed Wu, corporate executive vice president of the Hon Hai Group and CEO of Ingrasys. Now 70, with a head of gray hair, Wu cut his teeth at Digital Computer in the U.S. The Hon Hai Group’s resident server expert, he is also deputy chairman of Foxconn Industrial, a company listed on the Shanghai A Exchange.

Last year, servers were placed on the list of items targeted under the third wave of U.S. Section 301 tariff increases. With tariffs increased from 10 percent to 25 percent in May, servers have become a mainstay product among the manufacturing wave returning to Taiwan. (Read: Taiwan, Unexpected Beneficiary of US-China Trade War)

According to statistics from DRAMeXchange, the four major Taiwan-based server manufacturers – Quanta, Inventec, Hon Hai (Ingrasys), and Winstron (Wiwynn) – account for over 80 percent of the 12 million annual global server shipment volume, 40 percent of which goes to the United States. Most of this volume was previously shipped out of China, but in just a year since U.S. President Donald Trump triggered the trade war, the industry has undergone drastic change.

US-bound Server Production Value Outstrips China

Reviewing U.S. Customs statistics, CommonWealth found that between January and April of this year alone, Taiwan shipped 2.6 more times the volume of server motherboards, valued at US$1.3 billion, compared to the same period the previous year.

In contrast, China exported US$4.95 billion worth of server motherboards over the same period, dropping 76 percent to US$1.18 billion.

In other words, the production value of servers made in Taiwan has quietly outstripped that of China.

In 2011, Ingrasys split its server production lines from its Longhua facility in Shenzhen between Tianjin and Taiwan. Having failed to attract enough customers since setting up in the free trade zone, Ingrasys packed up two SMT (surface mounting technology) production lines from the Longhua plant, shipped them back to Taiwan via cargo ships, and set up production in Taiwan.

Between January and March this year, in response to the redirection of orders to Taiwan as fallout from the US-China trade war, Ingrasys purchased two additional sets of high-priced SMT facilities, each one costing NT$200 million, to pave the way for servers and storage production. (Read: Ingrasys Technology achieved revenue exceeding NT$100 billion last year)

Currently overseeing 670 employees, five SMT lines, and four assembly lines in Taiwan, Ingrasys is not only the biggest tenant in the Farglory Free Trade Zone, but the Hon Hai Group’s main base expressly manufacturing servers for all non-PRC markets.

“Last year, when the news (of increased tariffs) came out, everyone started looking for solutions. Not just us, but other companies like Quanta and Inventec started thinking about disassembling (production lines) and moving,” relates Chen Chun-hui, senior company president at Ingrasys, based in the free trade zone.

A look inside the Ingrasys plant in Taoyuan, where the server manufacturing process is highly automated. (Photo by Chien-Ying Chiu/CW)

Chen Chun-hui is an old hand at setting up production plants. This past February, Ed Wu called to inform him that he was being transferred back to Taiwan from the Tianjin facility to prepare plant expansion operations. Riding the wave of returning operations stirred by the trade war, two buildings in the Farglory Free Trade Zone had already been leased out by the third and fourth quarter of last year, compelling Ingrasys to lease a plant facility in neighboring Nankan. There, the company is looking to set up six production lines, which would be twice the size of the free trade manufacturing zone.

“If it’s still not enough, next year we might look for another facility to expand,” relates Chen Chun-hui, a native of Taoyuan.

Having followed the electronics industry across the strait, and having lived in China for the last 15 years, Chen could never have imagined that the trade war would not only bring about a reshuffling of the industry supply chain, but propel him back to his hometown.

Not only the production of motherboards critical to servers, but “even the metal server cases are moving back to Taiwan, and we’ve already bought land in Kaohsiung,” says Ed Wu.

This past March, Hon Hai Group founder Terry Gou led a delegation to the Ho Fa Industrial Park in Kaohsiung to view three contiguous plots of land totaling 40,000 square meters, the sale of which was approved on June 18. In the future, from inside-out, from motherboard assembly to cases, Hon Hai will be able to manufacture high-end servers in Taiwan.  (Read: Terry Gou Moving Hon Hai Production Lines from China to Kaohsiung)

Major Electronics Firms Vying to Bring Production Back to Taoyuan

On the other side of Taoyuan at the Hwa Ya Technology Park, directly across from Quanta Computer’s headquarters, banners with help wanted notices have been posted for a good six months, along with ads on public buses, signifying that Quanta’s plans to move production back to Taiwan continue apace. (Read: Quanta’s Made-in-Taiwan Robot Is Drawing International Attention)

“We started making servers in 2000, and now we’re the biggest in the world,” said Quanta Chairman Barry Lam during the first press conference held by subsidiary Quanta Cloud Technology (QCT), Quanta’s golden goose server brand, this May at the Computex Taipei computer show.

Photo by Justin Wu/CW

Lam, who is known for his slow and steady, tortoise-like approach, purchased two facilities next to Quanta’s headquarters last November on top of the space already in place in the production building across from the headquarters. (Read: Quanta Forging a New Future) These moves were made in anticipation of existing company clients, including major U.S. brands Google, Facebook, Microsoft and Apple, establishing production lines for manufacturing in Taiwan.

“Quanta moved quickly, deciding to hurry up and return (to Taiwan) within a short period. And they made sure they could bring a few technicians over from China, as they’ll be needed to monitor all those new production lines,” says Wang Mei-hua, vice minister of economic affairs. Wang’s ministry treated the issuance of work visas for PRC-born technicians as special cases, even so far as acting as a guarantor on their behalf.

“Last July, when the trade war broke out and the tariffs started, we began setting up production lines in September. We brought one of those back first,” says Mike Yang, Quanta vice president and president of Quanta Cloud Technology.

“We’re focusing on Taiwan for the ones (production lines) we’re currently adding,” he says. “Our U.S. customers want to add more. Our customer profile is very broad,” adds Yang.

One SMT equipment vendor revealed Quanta’s intent to purchase equipment to outfit four production lines, and is rushing to complete setup by July to begin volume production in September. These lines are configured around high-end servers and notebook computers, with a combined capacity of around 600,000 server motherboards.

Given Quanta’s annual production of around three million servers for export to the U.S., Quanta will have moved around one-fifth of its production capacity from its Songjiang plant in China back to Taiwan by September.

Production line staff recruitment banners appeared along the roadside in front of Quanta’s headquarters in the Hwa Ya Technology Zone in the first half of this year. (Photo by Ming-Tang Huang/CW)

Reinvestment in Taiwan Already Over NT$400B

In what almost looks like a competition to see who moves the quickest and/or most, Investec, also based in Taoyuan, has also quietly moved two motherboard production lines back to Taiwan. These will be installed in the Guishan plant facility purchased three years ago from HTC, especially to serve the company’s four big North American clients, Facebook, Microsoft, Google, and Amazon.

“At the time, it (the plant facility) seemed expensive. Now it doesn’t seem that expensive,” says Inventec chairman Tom-Hwar Cho.

Prompted by CommonWealth’s inquiries, Cho revealed that two production lines have already started shipping, adding that ”servers will reach top acceleration in the second half of next year.”

Photo by Ming-Tang Huang/CW

Interestingly, although major server manufacturers have returned production to Taiwan one after another, and their moves have been quite overt, however, when we asked Wang Mei-hua, who oversees the Ministry of Economic Affairs investment operations, which of these major players have applied for low-interest loans under the Welcome Taiwanese Businesses Back to Taiwan Investment Action Program, she was mum.

The reason is that most Taiwanese businesses that applied for the loans requested confidentiality, “because if a lot of noise was made about it, those across the strait would not be pleased.”

All she can confirm is that all of the investors of NT$10 billion or higher are from the electronics industry.

Even if an executive at a major electronics company revealed in the media that his company would invest over NT$10 billion in Taiwan over the next three years, she still would not confirm which company it was, saying, “They don’t want to be placed together with the Taiwanese reinvestment program.”

The only one that can be made public is Quanta, as Quanta Chairman Barry Lam has spoken at length about expanding production in Taiwan at numerous public events recently, making the plans “relatively less sensitive.”

According to statistics from the Department of Investment Services (MOEA), since the Welcome Taiwanese Businesses Back to Taiwan Investment Action Program was rolled out in January, as of June 29, a total of 81 companies had been approved, with total investment already surpassing the NT$400 billion mark.

From the list of investors in the Taiwan reinvestment program, the new face of Taiwanese manufacturing three to five years from now is coming into view.

In addition to manufacturers of high-end servers that directly affect the evolution of such advanced technology as global data security, AI, and Big Data – such as Quanta, Investec and Ingrasys – cycling industry powerhouse Giant has set up a high-end e-bike manufacturing plant in Taichung, and automobile parts and components vendor Hota Industrial is also making high-end e-bike parts and components. (Read: Taiwan-made Smart Bikes Versus the Red Supply Chain)

Then there are investments exceeding NT$10 billion, such as Unimicron Technology’s NT$20 billion investment in circuit boards, which is actually a new technology bringing about “heterogeneous integration” led by the likes of TSMC.

George Chiou, regional general manager of North East Asia Region at Dimerco Information Management, relates that while Taiwan’s air cargo exports dropped 9.4 percent overall between January and May of this year, “Only US-bound exports grew by 7.7 percent,” he said as he pointed to the report in his hands.

“Between network communications, servers, and e-bikes, exports of servers grew the most,” relates Chiou.

Wang Mei-hua’s stance on this wave of Taiwanese businesses returning to Taiwan or staying rooted in Taiwan to invest heavily in expanded operations is to welcome everyone with open arms.

“If high-end (product manufacturing) wants to come back, of course we want to win them back,” she says.

(This is the first of the two-part series. The second part: Why Are Google, Microsoft, and ASML Flocking to Taiwan?)