VZCZCXRO5563
RR RUEHGH
DE RUEHIN #2011/01 2430934
ZNR UUUUU ZZH
R 310934Z AUG 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 6623
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3806
RUEHBJ/AMEMBASSY BEIJING 7195
RUEHUL/AMEMBASSY SEOUL 8868
RUEHGP/AMEMBASSY SINGAPORE 6986
RUEHKO/AMEMBASSY TOKYO 9036
RUEHML/AMEMBASSY MANILA 0136
RUEHJA/AMEMBASSY JAKARTA 4126
RUEHKL/AMEMBASSY KUALA LUMPUR 3806
RUEHHI/AMEMBASSY HANOI 3382
RUEHBY/AMEMBASSY CANBERRA 4586
RUEHWL/AMEMBASSY WELLINGTON 1860
RUEHHK/AMCONSUL HONG KONG 8449
RUEHGH/AMCONSUL SHANGHAI 1319
RUEHGZ/AMCONSUL GUANGZHOU 0504

UNCLAS SECTION 01 OF 03 TAIPEI 002011 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USTR 
STATE FOR EAP/RSP/TC, EAP/EP 
USTR FOR ALTBACH AND STRATFORD 
USDOC FOR 3132/USFCS/OIO/EAP 
TREASURY FOR OASIA/TTYANG 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB MARI 
BOLIS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taipei Economic Brief for August 2007 
 
REF: TAIPEI 1733 
 
¶1.  This cable summarizes selected August 2007 economic events in 
Taiwan: 
 
--Taiwan's Economy Outperforms Expectations 
--Prices Drop Unexpectedly, But Inflation Still a Risk 
--Effects of U.S. Sub-prime Mess 
--Worldwide Interoperability for Microwave Access (WiMax) 
--Subsidies for Animation and Gaming Industry 
--Customs Clearance Streamlining Efforts Pay Off 
--Foreign Investment in Generic Medicines Plant 
--Semiconductor Equipment Outsourced to Taiwan 
--U.S.-Taiwan JV to Make Solar Photovoltaics 
--DHL to Establish Gateway in Southern Taiwan 
 
Taiwan's Economy Outperforms Expectations 
----------------------------------------- 
 
¶2.  In July, Taiwan's economy performed far better than 
expectations.  Industrial production in July grew at a y-o-y rate of 
13%, an 18-month high.   Electronics, the backbone of Taiwan's 
industrial sector, reported a 30% production growth.  Semiconductor 
and flat panel plants were expanding their capacity, contributing to 
a double-digit growth in private investment.  July export growth of 
8% outpaced the forecasts of private and official think tanks. 
Export growth should accelerate over the next three to six months as 
export orders in July posted a 14-month high of 23.5%. 
 
¶3.  Consequently, in Late August, the Directorate General of Budget, 
Accounting and Statistics raised its estimate for Taiwan's 2007 
economic growth rate to 4.6% from the 4.4% it projected in May.  The 
office predicts that private consumption will expand as both stock 
and real estate markets have been booming.  Private investment 
growth in 2007 will set a three-year high.  Manufacturing firms 
expecting better performance over the next three-six months were 
more than those predicting worse performance, according to private 
and official think thanks. 
 
Prices Drop Unexpectedly, But Inflation Still a Risk 
--------------------------------------------- ------- 
 
¶4.  Although recent media focus on rising energy and food prices 
(reftel), July inflation figures announced August 6 surprised 
onlookers by revealing a 0.34% year-on-year decline.  The July drop 
was paced by steep falls in vegetable and fruit prices. 
Inflationary figures are expected to build in the second half of the 
year, however, as the advent of the tropical storm season crimps 
agricultural production and drives up food prices.  Inflation in the 
second half (H2) of this year is predicted to reach 2.5%, up from 
0.6% in H1. 
 
Effects of U.S. Sub-prime Mess 
------------------------------ 
 
¶5.  Problems with U.S. sub-prime mortgages have impacted Taiwan's 
stock markets.  Prices here have largely followed the recent 
fluctuations in New York and other major markets since late July. 
The Taiwan financial sector's exposure to U.S. sub-prime mortgage 
risk, however, has been limited and manageable.  According to 
Financial Supervisory Commission, the sector's portfolio investment 
directly and indirectly involving U.S. sub-prime mortgages totaled 
NT$70 billion (US$2.1 billion), which represents only about 0.5% of 
total portfolio investment.  Likely losses, as disclosed to the FSC 
by the financial institutions themselves, were estimated at NT$2.3 
billion (US$70 million), including losses of about US$36 million for 
Taiwan banks, US$13.6 million for insurance companies, and US$19 
 
TAIPEI 00002011  002 OF 003 
 
 
million for securities firms.  Sub-prime mortgage based products are 
also held by 27 mutual funds sold in Taiwan, but the total value of 
these products totaled US$1.95 million, which is less than 1% of 
their portfolio investment positions. 
 
Worldwide Interoperability for Microwave Access (WiMax) 
--------------------------------------------- -------- 
 
¶6.  In an open bid, six companies defeated Chunghwa Telecom and 
Taiwan Cell Phone, the two largest telecom firms in Taiwan, to win 
six regional WiMax operation licenses - three for northern Taiwan 
and the other three for southern Taiwan.  According to press 
reports, Chunghwa Telecom and Taiwan Cell Phone lost the bids 
because they were less interested in regional WiMax than in 
island-wide WiMax, whose operation licenses will be open for bidding 
in 2009.  The six regional WiMax license winners include WiMax 
(Taiwan), Tatung Telecom, Far Eastone, First International Telecom, 
Venture Capital I, Wei Da Telecom. 
 
¶7.  WiMax equipment manufacturing is a rapidly growing industry 
here.  According to the Institute for Information Industry (a 
government-funded research and industrial promotion center), 
customer premise equipment (CPE) turned out by Taiwan's producers 
will shoot up from NT$750 million (US$22.7 million) in 2006 to 
NT$121.6 billion (US$3.68 billion) in 2012.  Taiwan is the second 
largest WiMax investor in the world, after the United States. 
Taiwan's cumulative investment in the WiMax industry totals US$664 
million. 
 
Subsidies for Animation and Gaming Industries 
--------------------------------------------- 
 
¶8.  The Executive Yuan has approved the "Program to Strengthen 
Computer and Other Digital Games" submitted by the Ministry of 
Economic Affairs.  The program will encourage development of 
animation and computer games by subsidizing local firms.  The 
National Development Fund (NDF) will allot NT$20 billion (US$606 
million) to fund the program.  Two animation production firms, 
currently in cooperation with U.S. companies, are expected to 
receive NT$100 million (US$3 million) each in funding.  Over the 
next five years, the program will invest NT$1.36 billion (US$41 
million) in 60 animated programs and another NT$4.12 billion (US$126 
million) in animation and game R&D.  According to projections from 
the Ministry of Economic Affairs, the program will create some 2,000 
new jobs, and production value of the industry will reach NT$600 
billion (US$18 billion) by 2011. 
 
Customs Clearance Streamlining Efforts Pay Off 
--------------------------------------------- - 
 
¶9.  The Council for Economic Planning and Development (CEPD) 
announced in early August that its five-year "obstacle-free customs 
clearance program" has expedited the customs process and 
substantially reduced paperwork for trading companies in Taiwan. 
The program whose cost over the past five years totaled NT$780 
million (US$23.6 million) has cut the customs clearance 
administrative expenditure by NT$5.05 billion (US$153 million) and 
reduced the customs clearance processing time by 14.57 million 
hours. 
 
Foreign Investment in Generic Medicines Plant 
--------------------------------------------- 
 
¶10.  US-based Impax Laboratories, specializing in generic 
pharmaceuticals, announced it will build a generic medicines factory 
in Taiwan's Hsinchu Science Park.  Initial investment is NT$200 
million (US$6.1 million).  The factory, Impax's first production 
 
TAIPEI 00002011  003 OF 003 
 
 
base overseas, will be 100% owned by Impax.  Construction will begin 
in October this year, and commercial operation is scheduled for 
¶2009.  Medicines made by the factory will be sold in the United 
States, Canada, and Europe. 
 
Semiconductor Equipment Outsourced to Taiwan 
-------------------------------------------- 
 
¶11.  Taiwan, the world leader in semiconductor production, has now 
started to get orders to produce the high cost equipment used in 
semiconductor production.  Media reports indicate that Taiwan's 
Marketech International Corporation received NT$1 billion (US$30.3 
million) in orders for semiconductor exposure equipment from ASML of 
the Netherlands, a leading provider of lithography systems for the 
semiconductor industry.  ASML's seeking a partner in Taiwan marks an 
opportunity for Taiwan to develop its own production capability for 
semiconductor manufacturing equipment.  Taiwan's semiconductor 
industry is world-renowned for chip fabricating, packaging and IC 
design, but it still relies heavily on foreign suppliers for 
semiconductor equipment.  Factory start up costs for a 12-inch wafer 
fab usually exceed NT$100 billion (US$3.03 billion), with 90% of the 
costs going towards equipment.  Taiwan already has 10 factories 
producing 12-inch wafers and is building another 12, whose total 
start up costs amount to NT$1.2 trillion (US$36.4 billion), more 
than the semiconductor industry's annual output. 
 
U.S.-Taiwan JV to Make Solar Photovoltaics 
------------------------------------------ 
 
¶12.  Gloria Solar, a subsidiary of Taiwan's E-ton Solar Company, 
which specializes in manufacturing solar modules, will enter into a 
joint venture arrangement with US-based Spire Corporation, the 
world's largest solar power module equipment supplier.  The new 
venture -  Gloria Spire Solar - is designed to take on the 
photovoltaic (PV) systems market.  The new company, which will be 
based in Bedford, Massachusetts, represents E-ton Solar's efforts to 
integrate its supply chain.  E-ton Solar recently acquired 100% of 
Adema, a US silicon chip company.  With Gloria Spire, E-ton Solar 
will have direct access to resources from upstream (silicon chips) 
to midstream (solar cells) and downstream (solar modules and 
systems).  After Gloria Spire is formed, Gloria Solar will have 
production capacity of 95 MW by the second quarter next year, nearly 
three times its current capacity.  It will continue to expand with 
an additional 75 MW of module manufacturing equipment from Spire and 
become a leading PV player in the world. 
 
DHL to Establish Gateway in Southern Taiwan 
------------------------------------------- 
 
¶13.  DHL (Taiwan) will establish a service gateway at Kaohsiung 
International Airport prior to the end of the year.  Due to drastic 
cuts in domestic flights to and from Taipei after the opening of the 
high-speed rail, DHL needs this new service gateway to serve 
companies in central and southern Taiwan.  DHL currently operates a 
service gateway at the Taoyuan International Airport and 10 service 
locations across the island, including Taipei, Hsinchu, Taoyuan, and 
Chiayi. 
WANG