TAIWAN A MARKET FOR U.S. PRODUCTS A SUPPLEMENT TO nternationa Commerce U.S. DEPARTMENT OF COMMERCE / Bureau of International Commerce A SUPPLEMENT TO International Commerce ... the weekly news magazine for world traders published by the Bureau of International Commerce and sold by the Superintendent of Documents, U.S. Government Printing Office, Washing- ton, D.C. 20402, and by Department of Commerce Field Offices for $16 a year. / - A Market for U.S. Products in TAIWAN DEPARTMENT OF COMMERCE PUBLICATION SHsfe X Penghu^>i Kaohs SOUTH CHINA SEA 25 c 24° 23° PROVINCIAL CAPITAL MUNICIPALITY COUNTY SEAT MUNICIPALITY BOUNDARY COUNTY BOUNDARY GOVERNMENT RAILWAY SCALE I I 1 MILES 22 o 120° 121' D.D.55-35 122° CHAPTER Overall Economy and Market ECONOMIC TRENDS AND OUTLOOK Taiwan has enjoyed rapid economic expansion in recent years. The population has grown by 3 percent since 1957, while real gross national product (GNP) has expanded at the rate of 6-8 percent, real per capita income at 4 percent, industrial production 13 percent, and agricultural production 6 percent. By 1965 GNP and per capita income reached an esti- mated $2.75 billion and 174 dollars, respectively. Present signs suggest even greater economic growth in the future. The country's infrastructure is sound and able to support rising industrial activity. The climate for doing business is steadily improving. The chronic threat of inflation is under control. Produc- tion levels are at all time highs in nearly every exist- ing industry. There is ample room for development of new industries. Domestic purchasing power and in- ternal demand for local products are increasing. Ex- port markets have yet to be fully tapped. Foreign exchange reserves are increasing. New foreign invest- ment is up sharply, and the Government is expanding its programs to encourage industrial and agricultural development. These favorable conditions should offset the island's main economic problems: Overpopulation, high unemployment and underemployment, inadequate managerial and technical know-how, and the high cost of borrowed capital (12 to 17 percent a year). The island's rapid economic growth up to 1964 was made possible by the infusion of over $1.3 billion in U.S. AID funds and supplies, $60.5 million in pri- vate foreign capital, and a total local capital invest- ment of about $3.2 billion, all coordinated in three Four Year Economic Development Plans covering the years 1953-64. These massive investments went toward the development of an infrastructure (power, trans- port, and communications facilities) second only to Japan in Asia, and helped to increase per capita income, purchasing power, and consumer expectation levels to among the highest in Asia. In turn, these improved conditions enhanced the climate for indus- trial activity and enabled local producers to rely more on the domestic market to absorb the increased out- put. In short, by 1964 Taiwan had reached the point of "take-off" into self-sustaining growth, with further rapid industrial growth virtually assured. Having reached this critical stage of economic development, Taiwan no longer required concessional foreign assistance after 1964 and could begin to afford foreign loans on normal commercial terms. Thus the U.S. AID program was officially terminated on June 30, 1965. Henceforth, Taiwan's external capital in- puts will come mainly from the World Bank, the various foreign Export-Import Banks, other lending institutions, and foreign investors. The projected rate and extent of economic develop- ment over the four years 1965-68 is outlined in the current and fourth Four-Year Plan. The Plan calls generally for an annual real growth rate of 7 percent for GNP and national income and 4.1 percent for per capita income, and annual increases in agricultural and industrial production of 4 percent and 11 percent, respectively. Services are to expand by 5.7 percent a year. By 1968, GNP should reach nearly $3.4 billion, national income $2.8 billion, and per capita income $196. Gross capital formation will be increased by 10.7 percent a year from $483 million to $725 million in the period. In that time, exports and imports are to be increased by 10 percent and 9 percent a year to roughly $620 million and $680 million, respectively. These are conservative estimates which could be sur- passed if present growth rates continue. An estimated $2.2 billion investment will be made over the 4 years to implement the Plan. Roughly 46 percent ($1.01 billion) will go to the industrial sec- tor, 12 percent ($268 million) for transport and com- munications projects; 14 percent ($314 million) for agricultural development, and 28 percent ($629 mil- lion) to other fields. Aside from the capital inputs, various legislative and administrative programs of the Government will also help to promote economic development. These include tax incentives; creation of industrial estates; provision of low-cost land for industrial sites; pas- sage of liberal foreign investment legislation to en- courage private foreign investment; special assistance to small and medium industries in the form of loans, technical advice, quality-control guidance and market- ing information; installment payment and rebate of import duties: selective waivers of import controls; and establishment of an export processing zone in Kaohsiung which will permit duty free entry of raw materials and equipment by the factories located there. As can be seen from the Government's economic incentive programs and measures and the projected investment allocations under the new Four-Year Plan, the main thrust over the next several years will be to advance the pace of industrialization. The Govern- ment will emphasize in order of priority, heavy and more sophisticated industries, export processing indus- tries, industries utilizing local raw materials, and labor intensive industries. Rapid industrial progress is already the salient feature of the economy. Industry's contribution to the net Domestic Product (NDP) which totaled $2,263 million in 1965 rose from 21.1 percent in 1960 ($253 million) to 23.3 percent in 1965 ($527 million). This compares with 26.7 percent in 1965 for agriculture, 15.4 percent for commerce, 4.0 percent for construc- tion, 4.4 percent for transportation and communica- tion, and 26.2 percent for all others. Within the in- dustrial sector, in 1965 manufacturing alone accounted for 19.5 percent of NDP or $442 million, an increase of 92 percent above the 1960 level of $230 million. Mining and utilities (power and water supply) con- tributed 2 percent and 1.8 percent, respectively. The annual increase in industrial output averaged 14.8 percent between 1960 and 1965. The value of overall industrial production increased in the period by 97 percent, from $751 million to $1,476 million; manufacturing output rose by 98 percent, from $663 million to $1,314 million. Taiwan's great industrial progress in recent years is also reflected in the in- creased number of registered factories and in the growth of industrial exports. Factory registration rose 57 percent, from 18,788 to 29,573 while indus- trial exports increased 129 percent, from $147 million to $336 million. IMPORT PATTERNS Although Taiwan is poorly endowed in natural re- sources, it is neverthless pursuing a vigorous indus- trialization program. In this process, imports have had to be substantial and steady. To feed rising domes- tic production, most of the required raw materials and capital equipment have had to be imported. To construct the Island's basic infrastructure, nearly all the required power generating, telecommunications, transport and construction equipment have had to be imported. To keep the farmlands fertile and pro- ductive, most of the required fertilizers, insecticides, and irrigation and flood control equipment have had to be imported. The only items which have not been imported in quantity are food products (other than wheat and soybean) which are locally grown in abundance and nonessential consumer goods which are controlled for domestic austerity purposes and to save foreign exchange. To meet these demands, imports have increased rapidly in recent years and further growth is expected. In the 5-year period 1960-65, they rose by $300 mil- lion or 120 percent to $555 million, while in just 2 years from 1963 to 1965 they increased by 65 per- cent or $220 million. Since 1960, import increases have averaged $50 million, or 17 percent each year. Although a lesser rate of increase is probable over the next 2 years because of accumulated inventories, imports should again pick up briskly after 1968. By that year total imports are expected to reach the $680 million level. Industrial imports have increased more rapidly than other categories because so much of the import expansion was in response to industrial growth — par- ticularly the development of export processing indus- tries utilizing imported raw materials, components and machinery. Thus, while total imports rose by 120 percent in 1960-65, raw material imports in- creased by 136 percent to $299 million and capital goods by 185 percent to $159 million. On the other hand, food and consumer goods imports rose by only 70 percent to $97 million, of which foods alone ac- counted for two-thirds. Taiwan's principal industrial imports include base metals, machinery and tools, vehicles and vessels, raw 4 cotton, electrical materials, crude oil, chemicals, man- made fibers, logs, chemical fertilizers, oil, grease and wax, raw wool, and synthetic resins. Major food and consumer imports include wheat, soybean, powdered milk, and pharmaceuticals (Table 16, Appendix C). The United States and Japan have benefited more than other countries from Taiwan's rising import demand. The two countries combined account for more than 70 percent of Taiwan's total imports each year, the United States taking 34 percent and Japan 37 percent in 1965. West Germany, the only other heavy competitor in a broad range of products, had only 4 percent of the market in 1965. German com- petition is confined mainly to specific kinds of ma- chinery, vehicles, chemicals, dyestuffs, and pharma- ceuticals. There are, of course, other suppliers who either dominate or count heavily in the sale of one or two products each, for example crude oil from the Middle East; raw wool from Australia; logs from the Philippines; metallic ores, crude rubber, and hides and skins from Southeast Asia; pharmaceuticals from Italy and Switzerland; dairy products from the Nether- lands; and paper products from Scandinavia. The United States and Japan, however, are the foremost competitors covering the broadest range of significant imports. The United States is the principal supplier of raw cotton, wheat, soybean, edible oils, wood pulp, scrap iron and steel, tobacco leaf, potassium fertilizer, oils and greases, and synthetic rubber. Against strong Japanese and other competition, U.S. suppliers also have done well in the sale of chemicals, pharma- ceuticals, synthetic resins, and scientific instruments. Yet, while U.S. suppliers in 1965 enjoyed a sizable $67 million sales volume of machinery and tools, vehicles, vessels and parts, ores, metals and manu- factures, and electrical materials, Japanese exporters of these products supplied twice that amount during the period. Japan is also the principal supplier of synthetic fibers, nitrogenous fertilizer, and photo- graphic apparatus among Taiwan's other high-volume imports (Table 16, Appendix C). MARKET FACTORS There are four main buying sectors in Taiwan — manufacturing, agricultural, service, and consumer. These will be discussed later in terms of growth trends, consumption needs, the economy's ability to fill these needs, degree and nature of reliance on im- ports, and prospects for increased sales of U.S. products. The manufacturing sector is by far the most im- portant. The island has few industrial resources and little production of industrial machinery, so this sector relies heavily on imports. In 1965, it took about $390 million worth, or 70 percent of total imports, in the form of industrial raw materials and machin- ery and equipment. Taiwan has some 38 principal manufacturing industries, most of them either large and highly developed or young and rapidly expand- ing. Few are stagnant. The industrial economy is clearly advancing very fast and should continue to be the leading buyer of imported products. The agricultural sector remains a dominant force in the economy, but its consumption needs are less substantial than manufacturing. It already provides many of the basic foods and related products ab- sorbed by the manufacturing and consumer sectors. Its only large requirements are farm implements and machinery to till the soil, irrigation facilities and fertilizer to keep the soil productive, and chemicals to protect the soil. More and more of these items are being produced locally, and over the long term de- mand for them will probably decline. This sector con- sumed $24 million worth of imports in 1965, or 4.3 percent of the total, and the annual rate will probably be maintained for at least several years. The service sector is steadily gaining in importance as a purchaser of goods. With rapid population growth and rising prosperity, the demand for such key economic services as transportation, communications, housing, health, and education is bound to increase. The basic service industries need plant and equip- ment of a heavy, sophisticated, or scientific and tech- nological nature, which few developing countries are able to supply from local sources. Hence, this sector, like Taiwan's manufacturing sector, depends on ever- growing imports. In 1965 this sector accounted for $54 million, or about 9 percent of total imports. The needs of Taiwan's consumers, who are be- coming more numerous and affluent, are being met locally by the largely consumer-oriented industrial and agricultural plant. Opportunities for developing the consumer market are further limited by tight controls necessarily imposed by a developing economy on imports of all but essential consumer goods. Total consumer goods imports in 1965 were valued at $89 million, or 17 percent of the total, of which $73 mil- lion comprised essential foods and medicines. Luxury consumer imports amounted to less than $16 million, or 3 percent of the total. Competition for the growing Taiwan market is extremely keen. For a number of years U.S. suppliers had not had to campaign strenuously because of the opportunities provided by the large U.S. aid program to Taiwan. However, since 1966 the proportion and value of Taiwan's imports financed with U.S. assist- ance has begun to fall off sharply, while imports purchased commercially with Taiwan's own foreign exchange have increased substantially. During the 4- year period 1960-64, about one-third of the island's total imports were aid-financed under a procedure which tied nearly all procurement to U.S. sources. Thus, during the operation of the aid program, U.S. suppliers enjoyed about a 30 percent share of the total market completely free of third-country com- petition. Of the remaining 70 percent of total imports which were purchased under competitive conditions, the U.S. share averaged only about 25 percent a year, for an overall share of about 45 percent of Taiwan's total imports a year. V, hen the aid program terminated in 1965, the proportion of commercially financed imports rose from $334 million to $453 million, nearly 90 percent of total imports. While U.S. sales to this larger com- mercially financed market also increased, the pro- portionate share of these imports fell from 25 percent in 1964 to about 22 percent in 1965. Despite the phase-out of U.S. aid, American ex- porters can still do very well in the Taiwan market on their own initiative. The commercial ties and ar- rangements forged while the aid program was still in effect certainly will have some carryover value for future sales. As a result of these ties, at least half of the imports heretofore obtained through AID fi- nancing should continue to come from U.S. sources. Whether U.S. exporters will be successful in keeping the remaining segment of the formerly aid-financed imports and in making further gains in the com- mercially financed sector will depend heavily on their sales enterprise. The U.S. share of the market will probably fall below the usual 45 percent, but U.S. suppliers can reasonably expect at least a 25-30 percent overall share of the market in the long run. Sales methods and practices in Taiwan are rather cut-and-dried. Credit transactions are discouraged by the Government's advance import payment require- ment. Thus, most imports are financed by irrevocable letter of credit (L/C). Long-term supplier credits are not permitted unless specifically approved by the Government on a case-by-case basis. Short-term cred- its (up to 180 days) are possible on a delayed or usance L/C basis, but this procedure has not yet be- come widely used. This situation, of course, eases the burden on suppliers who would normally prefer not to extend credit unless forced to do so by credit- minded competitors. However, as discussed further in Chapters Two and Four, there are occasions when credit may be indispensable to a particular sale, and it is not wise to be inflexible in this regard. Distribution practices in Taiwan are also confining. Most imported goods are bought direct by private end users (e.g., manufacturers) with or without a local commission agent, or by Government purchasing agen- cies (Central Trust of China or the Taiwan Supply Bureau ) in behalf of Government corporations and agencies. General traders and distributors importing and selling for their own account are few in number. The main reasons for the lack of such commercial middlemen are ( 1 ) the Government requirement that controlled (i.e., restricted) imports may be imported only by end users, (2) the large number of Govern- ment corporations whose import procurement may be handled only by the Central Trust of China (CTC) or the Taiwan Supply Bureau (TSB), and (3) the high cost of money which discourages accumulation of inventories for display and resale. CHAPTER a Import and Distribution: Regulations and Practices Taiwan's import policy, though ultimately com- mitted to freer trade, is presently burdened with re- strictive regulations. These restrictions are deemed necessary by the Chinese Government to balance Chapter Two of this report summarizes salient Taiwan Government regulations affecting pay- ment, distribution, and other trading practices: it discusses customary sales practices and sug- gests ways to use them to best advantage. Chapter Three describes the various marketing aids and services available in Taiwan for pro- moting sales. These include banking, insurance, warehousing, advertising, marketing, consulting, and commercial intelligence. In general, Taiwan lacks the facilities to provide such services effi- ciently. Therefore, U.S. firms may find it worth- while to set up branches or independent agencies in Taiwan to provide basic commercial services, while U.S. suppliers in need of such services may find it necessary to draw upon facilities in the United States. To that end, the many commercial services offered by the U.S. Department of Com- merce at its 42 field offices and in Washington, D.C., are also listed. Chapter Four analyzes in depth the competi- tion which U.S. suppliers face in Taiwan, and suggests techniques that can be used in dealing with it. Taiwan's international payments. Moreover, a large number of procedures and government agencies can often be involved in a simple business transaction. Once an American businessman learns the ropes, how- ever, he can cope with many of the apparent obstacles more easily. Despite restrictions and red tape, Taiwan is importing more and more, and its market is becom- ing large enough and profitable enough to warrant tolerating the inconveniences. The Government is also making a determined effort to liberalize restrictions and improve procedures. Even now, it is probably easier to do business in Taiwan than in any other developing country. If American suppliers make the effort, they will find doing business in Taiwan both feasible and profitable. IMPORT CONTROLS Imports are controlled through import licensing and, to a lesser extent, import duties. At present, import licenses are required for all imports. For licensing purposes, commodities are classified in three lists — the permissible, the controlled, and the prohibited. Import licenses for items on the permissible list are granted automatically with no limit on quantity. Any registered trader, manufacturer, or other importer is eligible to import them. In general, permissible im- ports include most of the industrial raw materials and capital goods which are not available locally in suit- able quality or price. Also included are some essential consumer goods not available locally, and some essen- tial and less essential goods which are locally available but can withstand import competition. The trend is toward greater liberalization of controls and broaden- ing of the permissible list. On the controlled list there are still some 500 items. They fall mainly into three groups: (1) essential and unessential items which are produced locally but re- quire protection against imports; 1 (2) unessential items, whether or not locally produced, which are restricted mainly to conserve foreign exchange; and (3) essential items which only government trading agencies may import. Private traders are precluded from importing any controlled items. Private and gov- ernment end users ( manufacturers, hospitals, public utilities, etc.) may import items in group 1 if a need is demonstrated, if the local product is inadequate for the specific need, or if its cost is at least 15 percent higher than the landed cost of the imported product. If government owned end users import them, procure- ment must be handled by government trading agen- cies. Group 2 items, mainly consumer goods, are nearly impossible to import so long as they remain on the controlled list, but they are more likely to be decontrolled as the foreign exchange position im- proves. Group 3 items are imported by the government trading agencies for their own account. They consist mostly of certain heavily imported basic foods and industrial materials which require some form of sta- bilizing influence to prevent market disruptions and wide price fluctuations. Items on the prohibited list, mainly contraband and a few luxury goods, are not importable except by the Government for special purposes. All import licenses, whether for permissible or con- trolled items, must be approved by the Foreign Ex- change and Trade Commission (FETC). Eligible im- porters may apply to FETC for an import permit through any of the 11 foreign exchange banks in Taiwan. If the application is approved the import permit is issued, which automatically entitles the im- porter to the necessary foreign exchange. In addition to import permits, certain commodities require special documents or procedures for import purposes. Such commodities and the pertinent docu- ments or procedures involved are listed in Appendix D. Taiwan's import tariff system, revised in 1965, is geared to product essentiality and local availability. In general, tariff rates for industrial raw materials ex- cluding machinery and equipment are lower than those for semifinished products, and those for semi- finshed products are lower than those for finished manufactures, such as consumer goods. Within this framework, tariffs are lowest for essential and un- available items (nil to 10 percent ad valorem) ; fairly low for essential but available items (10 to 25 per- cent) ; fairly high for unessential, unavailable items (25 to 50 percent) ; and highest for unessential, avail- able items (50 to 100 percent). Duties on production machinery run from about 7.5 to 25 percent, with most in the 10 to 15 percent range. Agricultural products readily available in Taiwan face rather high duties — ranging from 40 to 60 per- cent. Duties on essential foods not available locally are much lower, averaging 5 to 15 percent. The latter duties also apply to most agricultural raw materials, for example seeds, fertilizers, and insecticides. Tariffs are low also for educational materials and items for medical use, ranging from nil to about 15 percent. However, on finished pharmaceuticals pro- duced locally, the duties average about 25 percent. Samples and other advertising materials are subject to customs examination; but those of no commercial value (under $25) are admitted duty free. Those hav- ing commercial value — pens, pencils, calendars, and miniature packages of tooth paste — are dutiable under the appropriate tariff classifications. Care should be taken to send advertising materials early, since cus- toms classification and clearance of such articles often take considerable time. Value for duty purposes is determined in either of two ways. If the wholesale value (in Taiwan) of the product is known, the following formula applies: .... . wholesale market value T . . dutiable value = — , , . , _, . . — . It not known, 1 + duty rate + 0.14 then dutiable value is the c.i.f. price plui 20 percent. In addition to the basic ad valorem di ty rates, two different surcharges are imposed on all imports: a 3 percent ad valorem harbor due and a defense surtax of 20 percent of the assessed duty. (The Government is considering abolishing the defense surtax.) For example, the basic duty on a wristwatch is 15 percent ad valorem. If the wholesale value of the watch is $20, then the duty paying value is 1 In 1964, the government toughened the criteria for obtaining protection against imports. Under the new regulations, no local product is eligible for protection unless (1) its price is within 16 percent (previously 25 percent) of the landed cost (c.i.f. cost, plus import duty and surtax of the competing imports; (2) its quality is adequate for local needs; and (3) the import value of the competing import exceeds $30,000 per year. The control period is limited to 3 years (previously no limit). 1 + 0.15+0.14 or $15.50, and the assessed duty would be $2.33. Adding the 3 percent ad valorem harbor due ($0.47) and 20 percent of the assessed duty for the defense surtax ($0.47), then the total import tax on the watch is $3.27. From time to time, as the Government decontrols certain items or puts others, including permissible ones, on the controlled list, these changes are an- nounced in International Commerce magazine, pub- lished weekly by the Bureau of International Com- merce. Duty rates are not changed on an ad hoc basis, but must await a general revision of the entire rate structure. This was last done in August 1965. For restrictions and duties on special items, see also the MAJOR FUNNEL FOR IMPORTS: Keclung Harbor at northern tip of Taiwan is one of island's three international ports. Others are Kaohsiung in the south and Hualien on the east coast. product analyses in Chapters 5 to 8. For additional information on specific duties and restrictions, contact the Far Eastern Division, Bureau of International Commerce, U.S. Department of Commerce, Washing- ton, D.C. LABELING AND MARKING There are no specific regulations governing the labeling of goods imported into Taiwan, although it is recommended that labels on containers of prepared foods and pharmaceuticals show a quantitative analy- sis of the contents. The rules governing the marking and numbering of foreign import cargo are as follows: All import cargo must bear a mark of distinc- tive design, a sel of three or more letters, or a combination of design and letters indelibly painted, stenciled, stamped, or burned on the packing or on the cargo itself. For cargo packed in cases, boxes, crates, casks, drums, or cylinders, each container should bear a separate number which is not repeated during a period of 2 years. Bags or bales also must bear a nonrecurring number, date, or set of three or more letters. In addition to the above marks, each package of a consignment must be numbered consecutively. How- ever, numbering is not essential for large lots of cargo except when packed in cases, boxes, or crates, pro- vided that each package of the consignment contains cargo of identical weight. SHIPPING DOCUMENTS Documents required for shipments to Taiwan in- clude the consular invoice, commercial invoice, bill of lading or air waybill, packing list, and, for certain products, certificate of origin. Shipments of agricul- tural products, plants, animals, and used articles such as old clothing may require special documents. The importer may request an independent survey at the port of export and a surveyor's certificate stating that the goods meet the specifications of the order. WHO MAY IMPORT Taiwan offers three basic types of direct importers or distribution channels — private traders ( importer- wholesalers who buy and sell for their own account), end users I manufacturers, public utilities, hospitals, schools, etc.). and Government trading agencies (Cen- tral Trust of China and Taiwan Supply Bureau). Any of these may import direct or through local Taiwan commission agents appointed bv the supplier. In prac- tice, except in the case of a few general commodities and spare parts, very little business is done by private traders. While Taiwan has over 2,300 such registered traders, almost all are poorly capitalized, in fact finan- cially incapable of buying or selling in quantity for their own account and of maintaining stock for dem- onstration and resale purposes. In order to obtain registration as a trader, a firm need have paid-in capital of only $5,000 and an export or import record as a commission agent of $50,000 and $100,000, respectively, during the preceding 2 years. Only 46 traders in Taiwan are known to have capital of more than $125,000 while 119 are capital- ized between $25,000 and $125,000. Over 50 percent of the traders in Taiwan are capitalized under $7,500. Moreover, private traders are precluded from im- porting any items on the controlled list, and they are often unable to get government approval to import on deferred payment terms. Except for industrial raw materials, traders must pay by letter of credit (L/C), payable within 14 days after the import license is granted. For raw materials, payment on documents against payment (D/P) or consignment terms are allowed, provided FETC approves and the supplier is willing to sell on such terms. Thus, most of Taiwan's registered traders do a limited business for their own account and operate primarily as local commission agents of foreign suppliers. Probably more than half of all sales are made di- rect to industrial end users, even though they may only buy for their own consumption (e.g., raw mate- rials and machinery and equipment for specific pur- poses). They cannot buy general commodities for resale. They can buy any item on the permissible list for specific purposes, as well as items on the controlled list if prior FETC approval is obtained. They can also buy on a short term (60 to 180 days) credit basis, either documents against acceptance (D/A) or D/P terms, or, in the case of heavy machinery, on a long term installment basis, again if FETC approves in advance. They usually have adequate storage facilities and can buy in bulk. Purchases by government agencies and government- owned corporations account for about 23 percent of all imports financed with government foreign ex- change. At the beginning of each fiscal year, every government organization must file a detailed estimate of its import needs for that year. If approved, the necessary foreign exchange is set aside for allocation at the appropriate time. Approval is granted on two conditions — (1) if the proposed import is not avail- able locally in adequate quantity or quality, and (2) if available locally, the domestic price is at least 15 percent higher than the landed cost (c.i.f. cost, plus import duty and surtaxes) . Once approved, the procurement must be handled by one of the two government trading agencies, the Central Trust of China (CTC) or the Taiwan Supply Bureau (TSB). In some cases, the government end user may request a "restricted tender" and designate a specific foreign supplier; in cases where suppliers are limited, negotiation may be undertaken. However, a requirement that "approved equals" must be consid- ered tends to inhibit the gearing of specifications to particular suppliers. Thus, in practice, most govern- ment procurement is open to competitive worldwide bidding. In the case of bidding, CTC or TSB announces scheduled procurements in newspapers and bulletin boards, with invitations to bid made available at ad- vertised localities. Notices are also issued abroad through CTC's 11 branch offices, including one in New York and one in Los Angeles (Appendix D). Bids may be tendered direct by the foreign supplier or through his local Taiwan agent with a power of attorney. Each bidder must pay a bid bond of 1 per- cent of the bidding price which is returned if the bid is unsuccessful. The successful bidder must deposit a performance bond equivalent to 5 percent of the con- tract value within 14 days after the notice of award. Cargo delivery must conform to the terms of the con- tract. Normally, payments are made by L/C without the extension of foreign credit in order to save interest payments in foreign exchange. In addition to handling all procurement for Govern- ment end users, CTC and TSB are also authorized to buy certain items for their own account. These are usually essential and heavily imported foods or raw materials which, if bought in bulk when the world market price is lowest, would save foreign exchange as well as permit regulation of the supply to be allo- cated. Included are crude oil and petroleum products, fertilizers, tallow, rubber, leather, timber, glass, cement, motor vehicles, various chemicals, metals, foods, textile materials, and a few other items. A com- plete list of items which onlj CTC or TSB may import is given in Appendix D. 10 QUOTATIONS AND PAYMENTS TERMS The Chinese Government is trying to promote the use of Chinese shipping to save freight costs payable in foreign exchange. At present, the fleet is not large enough to carry substantial cargos outside the Asia region, say from the United States to Taiwan. Thus, U.S. suppliers may quote on c.i.f. or c & f basis, except occasionally in the case of CTC procurement for which f.o.b. prices may be requested. If c.i.f. or c & f quota- tions are used, however, the cost, insurance, and freight charges are to be identified separately. Jap- anese suppliers may only quote on f.o.b. basis. The New Taiwan dollar, the official currency in Taiwan, is not convertible. All payments for imports from the United States are made in U.S. dollars. The official selling rate for import business is US$1 = NTS40.10. There are five approved methods of payments in Taiwan — L/C, D/P, D/A, consignment, and install- ment plan. By law, trading firms are eligible only for L/C, D/P, and consignment purchases while end users may pay under L/C, D/A, D/P, and installment plan. Further, FETC limits D/A, D/P, and consignment purchases only to the import of industrial raw mate- rials approved by FETC. In practice, very little busi- ness is financed in these ways. Nearly all imports, whether by trading firms, end users, or CTC and TSB, are paid for by irrevocable L/C. Under a special advance deposit requirement, the importer must open the L/C within 14 days after he is issued the import permit. This means in effect that the importer makes a cash payment well in ad- vance of arrival of the import shipment. Thus, no extension of credit by the foreign supplier is involved, and there is little or no risk to him. The importer, however, suffers under this arrangement. Sometimes the advance payment comes out-of-pocket, an intoler- able burden if he is poorly capitalized to begin with and that same money could earn him nearly 1 percent a month even in a savings account. Certain importers, particularly those with greater assets and a steady income from exports, can apply for a loan covering up to 70 percent of the total pay- ment required. Even so, they must put the remaining 30 percent down and pay 0.625 percent a month on the balance. The longer it takes for the shipment to arrive, be put to use, and the profit realized (turnover averages 5 to 6 months per shipment in Taiwan), the greater his loss in interest payments. The obvious les- son is that most importers will favor suppliers who can deliver the goods promptly. A small but increasing amount of business is done on a deferred or time draft L/C basis (known in Taiwan as a Usance L/C). Under this procedure, the foreign supplier extends to the importer short-term credit of from 60 to 180 days. Interest charges may not exceed 5 percent a year, but this works out to about 1 percent or more a month for the 2- to 6-month duration of the loan. The Usance L/C's are only available for the import of raw materials and ma- chinery for end users. All such transactions must have prior approval of FETC, whose main concern in this regard is whether the importer has sufficient resources to pay off the draft upon maturity. Taiwan importers, of course, much prefer this ar- rangement to cash on the barrelhead, but FETCs screening process sometimes takes up to 25 to 35 days before a decision is made, and this discourages more widespread use of the Usance L/C. In practice, the main applicants for this type of credit are producer- exporters who can apply their export proceeds to pay- ing off the draft. Thus, the goods involved are usually raw materials for processing and reexport. The installment payment plan, in effect a long-term supplier credit, is available only to end users and mostly for the purchase of heavy machinery and equip- ment. Each such transaction must be approved by FETC. By law, the maximum interest rate chargeable to the importer is 6 percent, considerably below pre- vailing rates in the economy. Most manufacturer- importers are therefore very much interested in sup- plier credits. However, FETC generally opposes such credits, except for multimillion dollar purchases, in order to avoid foreign exchange losses in interest payments. Possibly, however, as the foreign exchange situation continues to improve FETC will liberalize its screening criteria and permit greater use of sup- plier credit. 11 jj§£ f^/v VV v*. v^M '.-. ' '"V"^. *^q^«^ Kr-' >- V r^Sfi ; - r *•■• • ■>.--.'-.' CHAPTER m Commercial Facilities and Marketing Aids Taiwan's commercial, banking, insurance, and ware- housing facilities and services are not well developed for a country which relies so heavily on foreign trade. Nor are marketing research, consulting, and advertis- ing facilities. Therefore, before getting too deeply involved in dealings with local businessmen, American businessmen interested in the Taiwan market should consider using economic and commercial intelligence facilities in the United States, including those avail- able from the U.S. Department of Commerce and the U.S. banks having correspondent relationships with Taiwan banks. BANKING Taiwan's banking system comprises 10 Government- controlled organizations, 5 private commercial banks, and 4 foreign banks. In addition to the banks, there are some 82 cooperative credit associations, 8 savings and loan companies, and 295 credit departments of Farmers Associations from whom credit is obtainable (Appendix D). Foreign exchange business is transacted by the Bank of Taiwan, the Bank of China, the five commercial banks (First Commercial Bank of Taiwan, Hua-nan Commercial Bank, Chang-hua Commercial Bank, Shanghai Commercial and Savings Bank, and the Overseas Chinese Commercial Bank), and the four foreign banks (First National City Bank of New York, Bank of America, the Nippon Kangyo Bank, and the Bangkok Bank of Thailand). The scope of operation of these institutions as it affects foreign trade includes handling outward and inward remittances, opening and accepting letters of credit, purchasing export bills, accepting foreign currency deposits, making foreign currency loans, and providing credit information serv- ices. The two U.S. banks were not allowed entry until 1965 and are still precluded from engaging in full- scale commercial banking activities. Standard bank charges for handling foreign exchange business are listed in Appendix D. INSURANCE There are 25 insurance companies, all Chinese, licensed to operate in Taiwan. The Government has frozen the number at this level since 1963 to avoid further proliferation, yet Taiwan has fewer insurance companies than most countries in this area. Until the ban is lifted, branches of foreign insurance companies will not be permitted. However, the Government per- mits local agents to represent foreign insurance com- panies in some cases. Present coverage by local firms includes life, property, casualty, and liability. One FIRST GOVERNMENT INDUSTRIAL ESTATE: the Liutu Industrial District is served by public facilities. Land in the district can be paid for on the installment plan, and loans are provided to build factories. 13 firm handles marine insurance; all reinsurance busi- ness is handled by the Central Trust of China. WAREHOUSING With high interest rates favoring quick turnover of capital, storage of goods in warehouses becomes very costly. Hence, there is little demand for independent warehousing facilities. Most general traders cannot afford the cost of storage and for that reason rarely import items that have to be stored. Some manufac- turers store raw materials and replacement parts on their own premises, keeping just enough on hand for short-run use. Other manufacturers, including the Government-owned firms, use the warehousing facili- ties of the Taiwan Supply Bureau (TSB) and the Central Trust of China (CTC). TSB operates the larg- est number of warehouses (about 175), but total stor- age capacity is limited. TSB charges private firms about 42 to 50 cents a ton monthly and Government clients 30 to 40 cents. A new bonded warehouse regulation was adopted in 1965 which permits duty-free entry and storage of certain raw materials intended for processing and reexport in finished form (Appendix D). The bonded warehouse procedure replaces the complex and time- consuming duty rebate system. If the measure proves successful, other raw materials for processing and reexport will be included. Additional warehouses are being built to accommodate the new procedure. MARKETING SERVICES The concept of market research is scarcely under- stood or as yet appreciated by most of Taiwan's pro- ducers and traders. Demand projection, cost calcula- tion, and other basic factors which U.S. manufacturers rely on to determine how much to produce and when and to whom to sell are considered only by the very large firms in Taiwan, particularly the locally based foreign companies. For the most part, production and sales decisions are opportunistic and follow a jump- on-the-bandwagon approach. This often leads to over- concentration on a particular commodity or export market, cutthroat competition, very low profit margins internally, and, consequently, a need to import raw materials and equipment at lowest possible cost. There is little in the way of good marketing research services available in Taiwan. Two Government orga- nizations provide some such services — the China Pro- ductivity and Trade Center and the Industrial Devel- opment and Investment Center. However, they are mainly concerned with assisting Taiwan exporters and foreign investors; their emphasis is not on the internal Taiwan market for direct sales from abroad. Thus, U.S. suppliers will either have to do their own research or employ a firm outside Taiwan (e.g., a U.S. firm with a branch in Tokyo) to do the job. Credit information on local firms is sparse. Taiwan firms tend to be secretive about their financial status, and the local banking institutions are generally not equipped to provide such information. Once they be- come more firmly established, the two new U.S. banks in Taiwan will undoubtedly introduce modern credit information collection procedures. A new firm — the Taiwan Credit Information Service — established in late 1964, is the only local firm believed to have some prospect of gathering reliable data on credit worthi- ness. Alternatively, U.S. suppliers would be well ad- vised to make use of the World Trade Directory Reports (WTDR's) available from the U.S. Depart- ment of Commerce as sources of credit information on particular firms in Taiwan. See p. 16 for further details. Management and engineering consulting facilities have not yet developed in Taiwan. Management is still too personalized in the hands of family heads who run so many of Taiwan's businesses and are usually set in their ways. Engineering consulting, on the other hand, is recognized as important, but local capability is still meager. There are some 22,000 engineers of all kinds in Taiwan, or roughly a l-to-500 ratio of engineers to total population compared to 1 to 200 in the United States. While the U.S. ratio is unreason- able for Asia, it indicates there is a substantial tech- nology gap which often must be filled from abroad. The demand for foreign engineering services is most pronounced in large-scale public works projects. In addition, the large corporations planning major ex- pansion projects, particularly if a foreign loan is involved, generally require imported engineering as- sistance. U.S. engineers who are licensed at home may practice freely in Taiwan without a Chinese license. Otherwise a Chinese license must be obtained. U.S. consulting engineers, however, must have a local Taiwan representative before they can practice. He may be a Chinese national or a foreign citizen (in- cluding U.S.) resident in Taiwan. For further details on requirements affecting U.S. consulting engineers in Taiwan (and all other free-world countries), see the Engineers' Overseas Handbook, published by the U.S. Department of Commerce and available for $2.25 from the Superintendent of Documents, U.S. Govern- ment Printing Office, Washington, D.C. 20402. 2 - Some excellent economic and commercial information is pub- lished in local journals. Three journals are particularly worthy of consideration: The Industry of Free China, published monthly, is the most authoritative English-language journal on economic mat- ters of all kinds, especially economic development planning, and conditions and prospects in particular industries; the Taiwan Trade Monthly, concentrates on trade and investment trends and oppor- tunities, as well as developments in the economy that affect trade and investment; and the bimonthly Economic Review of the Bank of China, a Government publication which specializes in monetary developments, also covers trade and industry conditions in Taiwan. Each of the three publications provides excellent statistical com- pilations. Oversea subscription rates for Industry of Free China and Taiwan Trade Monthly are $6.00 a year and the Economic Review is free of charge. 14 Advertising is an underdeveloped art in Taiwan. Only about $11.4 million was spent on advertising in 1965 — roughly 90 cents per capita, compared with $10 per capita in Japan and $75 in the United States. One reason for the dearth of advertising is that local busi- nessmen have not grasped its significance as a sales tool. The constant refrain, "It doesn't pay off," may have some merit when applied to machinery and raw materials. The number of major end users is small enough in many industries to permit effective direct contact by phone, correspondence, or personal inter- view. This approach, however, virtually ignores the increasing number of smaller firms setting up shop in import-reliant industries who should be reached. Another reason for the low level volume state of advertising is the tendency of traders and manufac- turers to create and place their own advertising, in- stead of relying on professional agencies. For example, the advertisers almost always personally design and print their own direct mail, pamphlets, and brochures, and they do much of their own advertising in publi- cations, on the radio, and via outdoor campaigns. The professional agencies usually handle only the TV and cinema work and some outdoor spectaculars. The top 12 advertising agencies in Taiwan account for about 40 percent of total advertising creation and placement. At present there are no U.S. advertising firms with affiliates in Taiwan. Among the several media available, newspapers account for about 50 percent of total advertising dol- lars. The rates are published, but sophisticated adver- tisers can negotiate for reductions of from 30 to 65 percent. Taiwan has 33 newspapers, of which 16 are published in Taipei and 2 in English. Total circulation is estimated at 750,000, very high for Asia. About half the typical issue is devoted to advertising. News- print is locally made, and reproduction of images is extremely poor. Radio and TV time accounts for about 23 percent of advertising expenditures and is sold at published legitimate rates. There were about 1.4 million radio sets and 60,000 to 70,000 TV sets in Taiwan in 1965. Magazine advertising (about 2 percent of total) is generally confined to technical and engineering jour- nals for the sale of machinery and equipment. Other media include outdoor (14 percent), cinema (4 per- cent), and direct mail and others (7 percent). Whatever the medium used, advertising in Taiwan should be adapted to the local Chinese since they com- prise the mass of the consuming public. The adapta- tion, however, should not have the effect of disguising the foreign origin of the product, inasmuch as its foreign character generally gives it a higher social and pecuniary value. Rather, the idea is to emphasize its foreign origin in a way which is clearly understood by the public. For example, if people are depicted, they should have Chinese faces; signs and movies should have Chinese subtitles. The importance of adapted advertising underscores the desirability of relying on local facilities through which to carry on an advertising program. Most for- eign suppliers prefer to have their local sales repre- sentatives do the advertising work. This arrangement is advantageous because of the agent's familiarity with local customs and his direct interest in increasing sales. Allowances provided for advertising vary with the product. In general, products which require advertis- ing in the United States will need to be advertised even more intensively in Taiwan. The expenditure for advertising may average about 5 percent of sales price for soft goods such as wearing apparel and shoes, to 20 percent for proprietary drugs and pharmaceuticals. Raw materials and machinery will probably need from 2 to 5 percent of sales price for advertising. MARKETING AIDS AVAILABLE IN U.S. Businessmen with oversea activities often make good use of private and government agencies that provide commercial information. Some of these facilities and sources are described below. Data on marketing, and economic and commercial conditions in Taiwan may be obtained from the Far Eastern Division, Office of International Regional Eco- nomics, Bureau of International Commerce, U.S. De- partment of Commerce, Washington, D.C. 20230, or from any of the Department's field offices which are located in principal U.S. cities (Appendix D, p. 120). Available are reports on the economy, trade, laws about doing business, import and exchange controls, business centers, ports, and tariffs. Many of these data have already been published for use by exporters. See reference to U.S. Department of Commerce, Bu- reau of International Commerce, Checklist of Interna- tional Business Publications, in the bibliography. Information on specific commodities or industries is available from the U.S. Department of Commerce, Business and Defense Services Administration (BDSA) , which collects, analyzes, and publishes information on the worldwide commercial activity of 20 general industry categories. A complete list of BDSA publica- tions may be obtained from any Field Office or the U.S. Department of Commerce, Washington, D.C. 20230. Information on agricultural commodities, livestock, and agricultural development programs is available from the Foreign Agricultural Service of the U.S. Department of Agriculture, Washington, D.C. 20250. The Chamber of Commerce of the United States, 1615 H Street, N.W., Washington, D.C. 20005, has a Foreign Commerce Department to assist international traders. 15 Banks and shipping companies, as well as private trade associations and consulting firms, are additional sources of economic and commercial information. In planning trips to Taiwan, businessmen are ad- vised to make advance arrangements by visiting or writing the Commercial Intelligence Division of the U.S. Department of Commerce, Washington, D.C. 20230. The Division forwards details on the itinerary and purpose of the trip to the American Embassy in Taipei, thereby alerting it to provide all possible assist- ance, including the setting up of appointments and plant visits. Once in Taiwan, businessmen are encour- aged and always welcome to call on the U.S. economic and commercial officers in the Embassy and to avail themselves of all the facilities there, including the commercial reading room. Embassy officers report on the business standing, reputation, ability, and activity of Taiwan firms. Their reports may be obtained from the U.S. Department of Commerce or its field offices for $2 per firm. A de- tailed description of these World Trade Directory Reports (WTDR) is available on request. Lists of firms (Trade Lists) handling specific com- modities in specific countries are available for $1 per country for each product from the Commercial Intel- ligence Division. These lists can help locate importers, agents, wholesalers, and distributors within Taiwan. Many exporters may find the export guarantees or export credit insurance offered through the facilities of the Export-Import Bank of Washington, the U.S. Government's principal export - financing agency, worthwhile in financing foreign sales. Information on this Bank's programs is available through local commercial banks or from the Eximbank, 811 Ver- mont Avenue, N.W., Washington, D.C. 20005. To supplement its own dollar loans, the Bank makes financial assistance from private sources more readily available to the American exporter. It underwrites foreign credit insurance, issues guarantees to com- mercial banks, and considers direct guarantees and financing for exporters when insurance or commercial bank assistance cannot be obtained. In providing these facilities the Bank takes into consideration the ability of the importer to make payment, the appropriateness of the credit terms involved, and the ability of the importer's country to service dollar debt. The Eximbank also arranges export consignment insurance. U.S. exporters now receive faster, better, and more flexible credit insurance services. Five programs are available to facilitate credit extension on favorable commercial terms to overseas customers. Four provide insurance policies issued by the Foreign Credit Insur- ance Associations (FCIA) and underwritten by that Association and the Eximbank. FCIA is an association of more than 70 private insurance companies. The fifth program, designed so that exporters may seek nonrecourse financing from their banks, consists of guarantees by the Eximbank to commercial banks or other financial institutions. Most of the FCIA's policies have been for short- term transactions of up to 180 days. Exporters who supply consumer goods abroad are finding this cover- age attractive because it enables them to sell on 90-, 120-, or 180-day credit. The comprehensive short-term policy insures up to 85 percent of the commercial risks and up to 95 percent of the political risks. It is also possible to insure against political risks alone. Insurance for medium-term transactions is also available in both comprehensive and political-risk-only policies. Terms vary from 181 days to 5 years. Much of this type of insurance relates to sales of capital goods and equipment. CHAPTER IV The Competition . . . and How To Beat It The following chapters will provide an analysis of specific sales opportunities available to U.S. suppliers in Taiwan in light of present economic conditions and growth prospects, and within the framework of the import control system. The opportunities available do not automatically fall into the laps of would-be U.S. suppliers. Far from it. For many items, U.S. firms will find tough competition every step of the way from other suppliers, principally Japanese, to whom the same fast growing opportunities are equally, perhaps even more readily, available. MAJOR COMPETITORS Taiwan does not appear to be a highly competitive market in the normal sense of attracting many con- tending sellers. It seems rather a captive market dominated by two major supply sources — Japan and the United States. It is captive in the sense that many essential raw materials and capital goods are not available locally and must be imported if the econ- omy is to develop. Its heavy dependence on these two countries is seen in the fact that it obtains more than 70 percent of its total imports from them. The percent accounted for by these countries was 75 percent in 1960 and 71 percent in 1965 — 34 percent from the United States and 37 percent from Japan. While the combined share of these countries is gradu- ally losing out to other suppliers, imports from the strongest contenders — from Western Europe — aggre- gated only 10 percent of the market in 1965. On a specific commodity basis (appendix C), competition from European and other suppliers can be quite formidable, but on an overall basis it is not significant. This currently favorable supply situation is no cause for complacency on the part of U.S. suppliers. About $66 million, or 35 percent of the U.S. share of the Taiwan market, was financed under U.S. AID and PL 480 programs x in 1965. The AID program has already been terminated effective July 1965, and the PL 480 program will gradually be phased out. Thus, this $66 million of trade will be exposed for the first time to Japanese and other competition — about $25 million worth of manufactures immedi- ately and $40 million of agricultural trade as the PL 480 program phases out (appendix D). Conceivably U.S. suppliers could sell commercially some portion of the items which heretofore have been AID financed. Of Taiwan's strictly competitive imports in 1965 ($489 million), the U.S. share was 26 percent ($125 million) compared to Japan's 37 percent ($206 million). Though still comfortably ahead of Europe's aggregate 10 percent ($54 mil- lion), the United States is clearly up against very stiff competition from Japan. As far as the U.S. sup- pliers affected are concerned, this development alone has sufficed to transform Taiwan from what would normally be a seller's market to a highly competitive 1 Public Law 480, as it affects Taiwan, provides for the sale of U.S. surplus agricultural commodities for New Taiwan dollars (Title I) or for U.S. dollars repayable within 20 years. 17 BOTH U.S. AND JAPANESE HELP: firms from both countries provide technical assistance to the Yue Loong Motor Co., Taiwan's only automobile manufacturer. Yue Loong makes trucks, jeeps, sedans and motor scooters. buyer's market. For it is apparent that the Japanese are making a strong marketing effort in Taiwan. Japanese suppliers presently enjoy several key com- petitive advantages over U.S. suppliers in the Taiwan market. The most important of these are Japan's proximity to Taiwan and its long history of contact with the Taiwanese people. These have given Japan an edge in shipping and business travel costs, in delivery time, and in access to Taiwanese buyers. Just as important in accounting for Japan's success in the Taiwan market, however, is the greater ag- gressiveness of the Japanese businessman in creating his own competitive advantages. The techniques used include willingness to cut prices, extend credit, and coinvest with Taiwan manufacturers; high priority treatment of export orders; effective distribution practices; follow-up servicing of exported equipment; and aggressive salesmanship. Most U.S. exporters to Taiwan have not used these techniques. Many have not had to do so until now because of the large and readily available AID-financed sales opportuni- ties. Much of the substantial 40 to 45 percent U.S. share of the market available annually in Taiwan before 1964 was financed with AID funds. Typically, the U.S. supplier has rarely traveled to Taiwan or attempted to meet the sales terms or serv- ices of his competitors. Too frequently, the U.S. sup- plier has been content simply to appoint a local agent and expect customers to take the initiative. Now that AID financing is gone, U.S. exporters will have to give more attention to the marketing of their products. By 1967, except for some PL 480 commodi- ties, nearly all Taiwan's imports will be purchased on a worldwide competitive basis. The Japanese exporter, in particular, is well prepared for the new market situation owing to his built-in competitive advantages and aggressive salesmanship. U.S. products still preferred in Taiwan are: • Highly sophisticated or unique materials and equip- ment which are obtainable in suitable form only from the United States; • Spare parts to repair machinery and equipment already purchased from the United States, par- ticularly under the AID program; and • Superior quality materials and equipment which are priced within 10-15 percent of the competition. Prospects are, however, that Taiwan's greatest im- port needs in the next few years will be more for 18 relatively unsophisticated, moderately priced, and qual- itatively adequate machinery and equipment, and for standard raw materials obtainable from any number of sources. This, then, is the kind of market which U.S. suppliers will increasingly be facing — a large and re- warding but highly competitive market. There are specific and feasible approaches open to U.S. suppliers in the face of mounting foreign com- petition. Flexibility and aggressive salesmanship are paramount — flexibility on price, delivery, credit, and distribution; and aggressive salesmanship in terms of finding customers, educating them as to what is best for them, and convincing them that the product offered fits the bill. THE PRICE FACTOR Taiwan is, above all, a price market, and will con- tinue to be one for some time to come because of (1) very high local interest rates which favor the least possible expenditures of capital; (2) the widespread feeling among local manufacturers that they must buy the least costly raw materials and equipment so that the final product, when exported, can compete abroad; (3) the Government's import licensing cri- teria, which aim at the least expenditure of foreign exchange;- and (4) the Government's tendency to accept the lowest bid on goods procured for its own consumption, irrespective of quality or other con- siderations. Department of Commerce research indicated, sig- nificantly, that U.S. f.o.b. prices are competitive with Japanese f.o.b. prices for a broad range of products. However, the higher freight charges (roughly 4 to 5 times those of shipments from Japan) weigh heavily in the landed cost of U.S. goods. Thus, Japanese c.i.f. prices of many industrial goods tend to average 20-30 percent less than the U.S. equivalent in most cases. The crucial price differential appears to be in the range of 10 to 15 percent. Japanese products, though recognized as usually inferior to U.S. makes, are nevertheless considered by most purchasers as adequate for Taiwan's needs, and the premium for superior quality would rarely exceed 15 percent. When Japanese suppliers encounter price competi- tion from other foreign (including Japanese) sup- pliers, they may cut prices in order to make a sale and meanwhile secure a near monoply by discourag- ing competitors. Once the monopoly is achieved, losses incurred in the process can be more than offset. Another Japanese tactic is to offer lower prices for equipment requiring continuous supplies of spare parts. Taiwan buyers are either not aware of the 2 Although foreign exchange has become fairly abundant in the last year, import screening criteria are still conditioned by the history of shortage. There are signs of progressive relaxation, but the process of change may be rather slow. higher cost to them in the long run, or do not object to it. They would rather make the smallest possible initial outlay since they are generally undercapitalized and cannot afford the high local interest rates on borrowed capital. To meet this price competition, U.S. exporters might consider: (a) Concentrating on product lines which come within the 10-15 percent differential; (b) Adapting their product for the Taiwan (and most other Asia markets) by stripping it down to the basic production unit; (c) Taking in consideration in their price quota- tions, as many of their Japanese competitors do, the repeat business generated by the demand for spare parts and components or auxiliary equipment involved; (d) Emphasizing and selling the idea that the superior quality of U.S. products ultimately results in lower production costs; and (e) Investigating the possibility of setting up a central warehouse and distribution facility (in Hong Kong, for example) to take ad- vantage of cheaper freight rates for larger shipments for the trans-Pacific haul. THE DELIVERY FACTOR Prompt, timely delivery is always a competitive asset in any market. In Taiwan, because of the Gov- ernment's advance deposit requirement on imports and the high prevailing interest rates, it is essential. Taiwan importers are required to pay for half the value of their purchase and open the letter of credit (L/C) within 14 days after receiving an import permit. The purposes of this requirement are to main- tain surveillance of foreign exchange disbursements, to guarantee payment to the supplier, and to dis- courage imports. The importance of quick delivery is seen in the fact that the importer's capital is tied up for as long as it takes the goods to arrive after the L/C is opened. Even if he is able to borrow money from a local bank to make the advance deposit, his interest charges of 0.625 percent a month become extremely costly if delivery is delayed. In this con- text, as well, stockpiling of raw materials and com- ponents for longer run use becomes a luxury, while fast turnover and, accordingly, prompt delivery be- come crucial to the buyer. Delivery time from Japan to Taiwan, port to port, is 4-10 days, compared with 30-50 days from U.S. ports. Obviously, little can be done to reduce transit time direct from the United States except perhaps to build inventory in a Hong Kong storage facility for reexport to Taiwan (and other countries) when orders are placed. This should be considered when- 19 ever possible, as bulk delivery to Hong Kong also offers several pricing advantages. However, the transit time differential is not usually the most serious delivery problem for U.S. suppliers. The real problem is one more within the power of the exporter to solve — namely, the total elapsed time between the initial placing of the order by the im- porter and actual arrival of the goods in Taiwan. The average order-to-arrival times from Japan and the United States are 2 and 6 months, respectively, for most items except heavy or specialized machinery. This difference is due namely to the fact that most Japanese suppliers treat export orders on a priority basis, and many Americans do not. U.S. suppliers have a reputation in the Taiwan market for not even beginning production of the order until an L/C has been opened. In addition, U.S. suppliers will often request extensions of the L/C because thev find they cannot meet the time schedule. These are exceedingly poor practices when exporting to Taiwan, and Taiwan buyers do not put up with them for very long. THE CREDIT FACTOR Foreign credit transactions are discouraged by FETC in order to minimize interest charges payable in foreign exchange, even though, in so doing, the buyer winds up paying more because of the higher local currency interest costs. Two FETC requirements inhibit the use of foreign credit to finance imports — the advance deposit requirement and a requirement that only end users can apply for long term credit, (p. 10). In effect, the two requirements tend to stifle commercial middlemen, i.e. importer-wholesalers and distributors. To operate effectively, these middlemen must carry stocks and have showrooms. Turnover is slow. Since they are not eligible for long-term credit, are not the best of risks for short term credit, and usually cannot afford to pay cash in advance, they find it hard to survive in business. This leaves the end users as the only good prospects for long- or short- term credit sales. Nevertheless, credit can be an extremely important competitive factor in the sale of raw materials, and machinery and equipment to such end users. Suppliers willing to take the risk get excellent results, particu- larly from short-term (60-180 day) credit for the sale of raw materials, and an increasing business is done on this basis. Long-term credit (usually 3-10 years and payable in installments) for the sale of machinery and equipment is used less frequently since it can be offered only to end users and since a local bank guarantee cannot be obtained without the Government's approval of each installment payment proposal. The Government tends to be reluctant to approve such arrangements. Japanese suppliers are strongly credit oriented in their sales campaigns, while U.S. suppliers have shown little enthusiasm for credit ventures. Japanese readi- ness to extend credit, both short and long term, is not usually intended to counteract U.S. competition. Most Japanese suppliers admit that they have to ex- tend credit to compete against each other. However, there is no known basis for the often heard rumors of spectacular Japanese credit terms. At least in Taiwan Japanese terms are reasonably conservative. Short- term credit has been running 1 percent or more a month, depending on the risk. Long-term credit is at about 5.75 percent a year, a 20 percent down payment. Probably U.S. suppliers, if so inclined, can match any terms being offered by the Japanese. Japanese techniques in the credit field are worth exploring in some detail. In offering short-term credit, Japanese suppliers take what seem to be extraordinary risks, but the default rate is reportedly very low. Owing to the advance payment requirement, the only feasible means of extending short-term credit is to allow the buyer a deferral, usually 60-180 days, for paying the draft. The supplier delivers the goods. The buyer guarantees or promises to pay in 60-180 days. The buyer uses the goods during this period. After the 60-180 day grace period, he pays in full. This arrangement, known as a Usance L/C in Taiwan, requires prior Government approval. An estimated 25 percent of total Japanese exports to Taiwan are purchased under Usance L/C's. Although payment is handled through the Japanese branch bank in Taiwan (the Nippon Kangyo Bank) and the supplier gets his money immediately from that bank, the supplier nevertheless assumes the ulti- mate risk in case of default. This is because the Nippon Kangyo Bank requires a guarantee from the supplier that the customer will pay up when the 60- 180 draft matures. The Usance L/C arrangement is in effect an un- secured loan from the supplier to the buyer, and, accordingly, the interest rates are fairly high (at least 1 percent a month). Even at that high rate, U.S. suppliers usually avoid such transactions. One reason for the lack of U.S. interest in extending short-term credit is the paucity of credit information on Taiwan firms. However, there are certain safety features in this arrangement, both financial and cul- tural, which lessen the actual risks. For example, the goods sold are usually raw materials, and the cus- tomers are almost always manufacturer-exporters who can process the materials, export the finished product, make their profit, and pay up before the 60-180 day limit expires. In addition, the Japanese supplier will try to deal with customers who can put up their own collateral. When this is not feasible, the supplier will accept a guarantee, supported by collateral, from two or three prominent friends or relatives of the cus- 20 tomer. 2 The quality of trustworthiness based on per- sonal honor and "face" is especially important in the Orient and may itself constitute justification for Japanese credit without prominent guarantors, if they cannot be found. This sociological factor, so important in Sino-Japanese business relations, scarce- ly impresses the American businessman but can be in fact an effective safeguard. As noted earlier, Taiwan end users cannot obtain a Government bank guarantee for long-term credit transactions without specific FETC approval. Once the approval is given and the Taiwan bank guarantee is secured, however, the risk to the foreign exporter is virtually nil. Japanese suppliers understand this fully and, acting through the Japanese Export-Import Bank, are more than happy to sell on an installment-payment basis. In contrast to the usual U.S. Eximbank pro- cedure, the Japanese Export-Import Bank loans are made to the Japanese exporter rather than to the foreign importer. The Japanese supplier then relends to the Taiwan importer on terms set by the supplier. Reportedly, the Japanese Export-Import Bank will not extend a credit for use in Taiwan without a Taiwan bank guaranty. However, action is automatic and immediate if the Taiwan bank guarantee has been secured. Japanese suppliers get their Export-Import Bank loans at upwards of 4 percent and, in turn, normally charge their Taiwan customers 5.75-6 percent a year, 20-25 percent down payment, and 3-10 years to pay. (Chinese law prohibits interest rates higher than 6 percent on such transactions). The down payment is often staggered, e.g., 5 percent down, 10 percent on delivery, and the remaining 10 percent six months after delivery. To compete with Japanese suppliers in the credit field, U.S. suppliers should strongly consider greater use of 60-180 day Usance L/C's to Taiwan importers of raw materials, on the strength of guarantees backed by the importer, prominent businessmen, and/ or a local commercial bank. U.S. firms should also strongly consider long term supplier credits (3-10 years on D/A terms) for sales of heavy machinery, if the importer's application for installment payment has been approved by FETC. If U.S. commercial bank credit cannot be obtained, even though the long term credit would be guaranteed by the Chinese Govern- ment, U.S. suppliers should explore the loan, guar- antee, and insurance facilities available from the Ex- port-Import Bank and the FCIA. 2 Taiwan firms are notoriously undercapitalized, principally be- cause money is tight, and also to avoid local taxes assessed on capitalization. Thus, potential buyers frequently do not have ade- quate collateral themselves, or their assets may already be mort- gaged for some other purpose. Therefore, a procedure has evolved whereby prominent friends or relatives of the buyer will guarantee his payment. If the buyer fails to pay, a rarity because disgrace and loss of face are intolerable, the guarantors are liable. THE DISTRIBUTION FACTOR There are four ways to reach buyers in Taiwan. From the most to the least effective, they are (1) establishing a branch office; (2) establishing a re- gional office in Hong Kong or Tokyo to service the Taiwan market; (3) selling through a locally ap- pointed commission agent; and (4) direct selling without a local intermediary of any kind. In addi- tion, it may be worthwhile under certain conditions to invest in or license a plant to produce the product locally. A branch office of a type similar to those established by certain Japanese suppliers, clearly offers the most effective means of distribution. However, since it re- quires a relatively greater capital investment than other techniques, the branch office should be con- sidered only if the supplier anticipates a large sales volume for a specific product, or if he has a diversi- fied line of products to sell. A successful American branch office would be more than an order taker. Although it would not need to import for its own account, it would search for sales opportunities, know who the buyers are and when materials and equip- men are needed, advise on and guarantee Usance L/C's when the need arises, and provide technical advice and engineering services on the products it handles. The branch office should receive full support from the parent office and/ or other principals. It should have full authority to quote prices and negotiate con- tracts and adequate advertising allowances. Support should include timely presence of a key troubleshooter from the home office when needed. Few U.S. firms outside of the business machines field have branch sales offices in Taiwan, although some have regional offices in Hong Kong or Tokyo. Taiwan's once limited market has grown so sub- stantially in the last few years that now there is clearly a need for additional U.S. branch offices (or at least regional offices serving Taiwan regularly). The need is heightened by the dearth of importer- wholesalers and distributors who can buy and sell for their own accounts and who have the wherewithal and incentive for aggressive promotion. In markets where such middlemen operate successfully, they can satisfactorily perform many of the functions of a branch office. In Taiwan, however, the only alter- native to a branch office is a local agent, a far cry in terms of performance and effectiveness. Most local agents in Taiwan are simply order takers working on an indent basis. They are per- mitted to represent any number of suppliers and when left to their own devices tend to overload them- selves and then push only the easy sale, ignoring the slower moving lines. Many are not equipped to pro- vide technical advice or service. They will not guaran- 21 tee short term Usance credits even on the safest risks. According to one of the largest indent firms in Taiwan handling U.S. accounts, local agents cannot afford to risk the guaranteeing of Usance credits because their income (derived from commissions only) is not large enough to cover possible defaults by Taiwan customers. Rather than draw lines as to which customers are or are not credit worthy, the agent simply refuses to guarantee any credits. Despite the inadequacies of local agents in Taiwan, it is preferable to use this distribution medium than sell direct without any local representation, the main advantage being that the agent is empowered to issue quotations in the supplier's behalf. In addition, only suppliers who have local agents in Taiwan (or a branch office) can sell on D/A or D/P terms. There are about 1,000 firms in Taiwan qualified to act solely as commission agents. In addition, most of the 2,200 or more registered traders also handle com- mission accounts. While there is no real substitute for a branch office, the combination of a local Taiwan agent and a regional sales office in Hong Kong or Tokyo can be effective; the supplier's regional officer can thereby keep closer watch on the local agent to assure that the product is always given maximum sales promotion. The right agent may be found among reputable "lean and hungry" firms: one that is not over- burdened with other accounts and would be able to devote much of its attention to the supplier's product. On the other hand, large, well-established firms, even though they have multiple accounts, are usually staffed by specialty — sales, engineering, research. This can be a decided advantage when the product is of a complex or sophisticated nature requiring more tech- nical expertise than door knocking to promote ef- fectively. Local agents operate under a set of special regula- tions promulgated by FETC. All local agents ap- pointed by foreign suppliers must be given an ex- clusive contract, i.e. the agent must be the supplier's sole representative for whichever line or lines are covered in the contract. Other agents may be appointed to represent different and unrelated products of the same supplier. Conversely, the agent normally will not represent any competitive products of other sup- pliers but this not being a requirement, the supplier should verify in advance that his agent will not take on competitive lines. Commissions vary widely with the product sold, but average 5-10 percent. Standard exceptions are bulk raw materials (metals, cotton, etc.) and heavy machin- ery, mostly under 2 percent; and spare parts and machinery requiring the agent's technical services, often 15-20 percent. The agent usually handles local advertising and publicity, but the extent of his ad- vertising efforts depends on the size of the advertising allowance granted by the supplier. If the supplier is generous in this regard, more advertising can be undertaken. Although many agents in Taiwan are not particu- larly aggressive, direct selling without intermediaries of any sort is futile. The Taiwan buyer might have pursued the supplier under the AID program, and occasional success might still be possible in selling to the Government. Otherwise, the only possibility of making a sale without a local contact is if the sup- plier's product is unique or a highly specialized one, if that fact is known to the buyer in Taiwan, and if the buyer happens to need that particular product. Because many products are still subject to import restrictions — particularly consumer goods — none of the above conventional approaches to the market is of any value in selling them. The only alternative is to produce the items locally by setting up a wholly owned subsidiary, by joining with local investor- partners, or by licensing a local firm to produce them. Profits or royalties can usually be fully remitted. Moreover, the gains can be maximized by stipulating in the investment or licensing agreement that the raw materials, components, and/ or machinery required to produce the product locally must come from the investor or licensor. Since Taiwan manufacturers are long on ambition but short on capital and technology, they are very receptive to joint foreign investments and licensing agreements. Moreover, Chinese Gov- ernment investment incentive laws and investment promotion agencies strongly encourage such under- takings. (For details on procedures for investing or setting up licensing arrangements in Taiwan, see the Department of Commerce publication "Establishing a Business in Taiwan", Part I, No. 67-23.) THE SALESMANSHIP FACTOR Selling to the private sector in Taiwan requires an intensive promotional campaign. It is also a teaching process. U.S. suppliers should start by assuming that the buyer who needs something may not know it, in which case the need must be pointed out to him. If he recognizes the need, he often will not know what is best for him or even what the best is. In short, he is reachable. Providing the buyer with catalogs and other product literature is an absolute minimum necessity. These printed materials need not be translated into Chinese, although this is helpful. Industrial films or models showing the item or process in operation are valuable. On-the-spot demonstration, if feasible, is of course even more effective. In some cases, it may be desirable to invite the buyer to the supplier's plant to see for himself. A direct approach through the supplier's agent, or preferably by the supplier himself, in 22 combination with any or all of the above techniques, is the best approach. One factor which hampers U.S. suppliers in par- ticular is the widespread reluctance of Taiwan buyers to purchase from anyone other than the actual foreign manufacturer through his branch office or local agent in Taiwan. Rarely will they buy from combination export managers or other middlemen in the supply- ing country. This attitude stems from the false im- pression that the price will necessarily be higher if selling is through an independent export house as opposed to direct by the manufacturer. Few Chinese realize that the cost of maintaing a special export department by the manufacturer may be just as great as the commission charged by independent export managers who represent producers not having special export departments. Since this attitude will not easily be dispelled, U.S. combination export managers may find Taiwan a frustrating market and manufacturers should be aware that they may have to establish direct contact with the prospective buyer or risk loss of the sale. Selling to the Government sector is far easier in terms of the approach but just as difficult in terms of meeting the competition so here again a strong promotional effort is needed. First, the supplier and/ or his agent should try to ascertain in advance whether particular Government end users are planning ex- pansion projects (a good local agent with broad contacts can do this effectively) ; second, they should make an aggressive sales presentation as early as possible to convince the prospective buyer that their equipment is best suited for that agency's needs (this could result in specifications attuned more nearly to the product being sold) ; and, third, and perhaps most important, they should make the price as low as possible. The essential ingredient in selling both to private end users as well as the Government is to give fullest possible support to the local agent. This means keep- ing him current on prices and new products, keeping him adequately supplied with catalogs and other product literature, answering his correspondence, and providing him with an adequate advertising allow- ance and all the other basic amenities which suppliers give their distributors in selling to the U.S. domestic market. If the product is not moving, periodic on-the- spot investigations by a home company official may be indicated to help determine whether the product is competitive, whether the agent's morale and efforts need boosting, or whether a more effective represen- tation is called for. The Taiwan market does not require a superhuman sales effort. American products are their own best salesmen in many cases. They can compete well with the best the competiton can offer, providing their features and virtues are made known to the buyer. Very often, all that is needed is the same brand of salesmanship used to great advantage in the domestic market. 23 mw SB ■ :■■■ P"? f iii 1 I 1 » .0 id s ^ * U- i i B '■'I i •« ! >, jtr-r " P hi r i CHAPTER V Selling to Manufacturers Taiwan's manufacturing sector accounts for more imports than all others combined, mainly because (1) natural resources are scarce and most of the key local industries are import reliant and (2) manu- facturing activity is booming, thereby creating greater demand for raw materials and machinery. There may be some change in the structure of demand as more import substitutes are produced locally, but the over- all outlook is for sharply increasing imports in both the short and long run. Anticipated expansion of the heavy, the sophisticated, and the export processing industries, in particular, will directly stimulate im- portation of both raw materials and machinery. Pro- motion of labor intensive industries will also enhance demand for imported raw materials, while the develop- ment of industries using local raw materials will re- quire increased imports of productive equipment. Total imports of raw materials, intermediates, com- ponents, and machinery and equipment by the manu- facturing sector reached $390 million in 1965, up 150 percent over the 1960 level of $155 million. By 1968, they could well exceed the $500-million level. THE BUYERS OF PRODUCER GOODS The ultimate consumers of imported producer goods are the 29,573 factories in Taiwan. In some cases, they buy direct from the foreign suppliers; more often, they buy through the 2,000 or more sales agents on the island or, if they are government-owned fac- FROM CRUDE TO GOLD: the Kaohsiung refinery of the Chinese Petroleum Corporation turns imported crude oil into high-grade gasoline and intermediate products for the island's petrochemical industry. tories, through the two Government procurement agencies — the Central Trust of China (CTC) and the Taiwan Supply Bureau (TSB). There are very few importer-wholesalers equipped to buy and sell im- ported producer goods for their own account. Of the 29,573 registered factories on the island in 1965, nearly 85 percent (more than 25,000) were small scale, i.e. capitalized below 2,500, having less than 5hp. in total power generating equipment in- stalled, and employing fewer than 30 persons. The remainder were considered large scale by Taiwan standards but would be medium size by U.S. standards. Only about 500 factories are big in the U.S. sense, the largest being Government owned. The latter group of 500 factories accounts for the greatest share of imports. (Table 9 in Appendix B shows the com- position and relative size of Taiwan's factories.) This does not mean that U.S. exporters should ig- nore small-scale producers in favor of the large com- panies. On the contrary, there has already been too much emphasis by U.S. suppliers on the "big" sale. Smaller producers represent a greater potential market for increased sales, particularly for raw materials. For one reason, the number of smaller factories is increasing at a faster rate than large firms. In the last 13 years, the number of small factories has in- creased by 559 percent, while large factories increased by only 112 percent. Secondly, the aggregate demand of smaller producers within the various industries is already substantial and homogeneous enough to war- rant a marketing approach which can accommodate individual small orders. Thirdly, that demand is rising quickly and, as the economy continues its dynamic 25 growth, today's small manufacturer could well be- come a substantial importer in another few years. It would prove highly beneficial to have built up a business relationship with that firm during its growth period. FACTORS IN PURCHASING DECISIONS The factors influencing the purchasing decisions of small and large scale buyers differ, as do those of government and private buyers, although some con- siderations are common to all. Small-scale private firms are typically family owned and managed, technologically deficient, undercapital- ized, but highly flexible. Purchasing decisions usually are made by the owner himself, and he is more often than not uneducated and uninformed about new proc- esses and technological innovations. Whatever tech- nical expertise the small firm has is usually supplied by an educated son or relative. The shortage of capital often compels the small firm to buy in small lots, to buy cheaply with little regard to quality and on credit whenever possible. However, family enter- prises are not the best of credit risks. Collateral is limited and family accounting tends to be secretive, although not necessarily unreliable. Small firms can survive only by being flexible and quick to adapt to changing conditions, and, therefore, they may be more receptive to advice as to new ideas, new raw materials, and new tools and machines. They are also more inclined to use multipurpose machinery rather than the more specialized equipment used by the large, mass production firms. Like the smaller producers, large-scale private manu- facturers are often undercapitalized relative to their size. However, they have more access to short- and long-term credit because their assets are greater and, as exporters, have a more stable and consistent in- come. Also as exporters, they must consider the quality of their products and in line with this, the quality of the raw materials and machinery they buy. In addition, large manufacturers generally have a high volume turnover and need a constant supply of raw material. Since they also have adequate storage facilities, they prefer to buy in bulk and from the supplier who can deliver promptly. Much of Taiwan's large-scale production is done on an a99embly line basis. However, since labor is abundant and cheap, manual and semiautomated processes are more common than full automation. The larger firms have better organized management, and many have their own import or purchasing de- partments or engineering departments to advise or decide on which goods should be procured and from whom. Many of the large firms, like the small ones, lack know-how and technology. Foreign technical as- sistance is therefore highly prized, particularly in the form of expert advice or, even better, in the form of licensing agreements or joint venture invest- ments. The latter are beneficial to the foreign licensor or investors, in that the arrangement often stipulates the use of the foreign firm's machinery or raw ma- terials which it otherwise might not be able to sell in Taiwan. Government factories, though on a par with the large private producers in terms of capitalization and output, operate under different procurement criteria. Normally, all procurement by government-owned cor- porations must be effected through the Central Trust of China (CTC) or the Taiwan Supply Bureau (TSB). Roughly 23 percent of all imports financed with Gov- ernment foreign exchange are handled in this way, reflecting the importance of government participation in the industrial sector. Nearly all the large producers are government owned. Altogether, there are some 26 government enterprises involved to some extent in most of Taiwan's industries. They accounted for 39 percent of the island's total industrial output in 1965, and about 16 percent of imports (excluding aid-financed imports). A complete list of government- owned corporations is given in Appendix D. CTC and TSB procurement is usually done through tenders open to competitive worldwide bidding. In some cases, the government factory may suggest re- stricted tenders limited to a specified country source; in cases where supplier firms are limited, negotiated bids may be authorized. In open tenders, the lowest bid is usually successful. Occasionally, even on an open tender, the buyer is able to draft specifications which, in effect, rule out all but the piece of equip- ment actually wanted. This is difficult, however, be- cause of the government's procurement requirement on open tenders that not just the specified equipment, but approved equals must also be considered. As a consequence, many government corporations some- times cannot escape having to equip their plants with machines of varying quality and origin to perform the same function. Another aspect of government procurement is the preference for straight cash purchases in order to avoid interest payments in foreign exchange. Thus, most sales to government corporations, even of heavy equipment, are made on a straight cash basis. (For details of bidding procedures see p. 10). Certain raw materials may only be imported by CTC or TSB. These are usually procured in bulk when commodity prices are low, so that an adequate domestic supply can be maintained and distributed locally at a reasonably stable price. Some of these are wheat, soybeans, chemical fertilizer, raw cotton, wool, manmade fiber, and crude oil. (For a complete listing of commodities imported directly and only by CTC and/or TSB, see Appendix D). 26 MARKET FOR SPECIFIC PRODUCTS The import demand for specific producer goods will largely depend on four factors: Availability of local raw materials and productive equipment; Taiwan's capability for developing import substitutes to meet industrial needs; growth prospects for particular im- port-reliant industries; and the extent of import con- trols and duties on specific items. The best sales pros- pects will be for those goods which are not now or likely to be available locally in adequate supply and quality, which are needed by local industries most likely to expand, and which are not unduly restricted. Taiwan's industrial resource supply is limited. Ex- cept for materials provided by the agricultural sector — foods, timber, livestock — and a few nonmetallic minerals, most other primary raw materials have to be imported. The island's machinery capability is confined to a few kinds of unsophisticated light in- dustrial equipment. Thus the overwhelming portion of machinery requirements must also be imported. Tai- wan is still far from being able to replace imported machinery with their own brands, and prospects are dim for the discovery of additional primary resources. Therefore imports are likely to grow with demand. Not so, however, for intermediate products required by industry. Taiwan is rapidly developing import substitutes for intermediates currently imported in volume, for example base metals and chemicals. In the long run, therefore, imports of many intermediates will probably fall off. Basically, Taiwan has two groups of import reliant industries. First are the light and heavy industries which depend almost entirely on imported raw ma- terials and produce mainly with imported machinery and equipment. These include many of the largest industries — the textile, plywood, paper, pharmaceutical, plastics, electronics, rubber, oil refining, iron and steel, aluminum, machinery and appliance, and vehicle- assembly; among the smaller ones are the tobacco, leather, and dairy industries. The second group of import consuming industries comprises those which produce mainly with imported machinery and equipment but which can utilize locally available raw materials and intermediates. These in- clude sugar refining, food canning and freezing, beverage, glass, cement, metal and nonmetallic min- eral mining, oil and natural gas prospecting, lumber, pulp, and the electric power industries using locally available primary raw materials; and the clothing, lubricating oil, fuel, petrochemical, and part of the chemical, plastics, and paper industries using inter- mediates mostly produced in Taiwan. Appendix A contains a detailed inventory of the consumption re- quirements of Taiwan's major industries showing as of the time this survey was made which primary and intermediate materials and machinery and equipment HOT SPOT: demand for steel is growing steadily due to industrial expansion. Establishment of an integrated steel mill on Taiwan is being actively promoted. items are locally available, which must be imported, and the extent of import. Using that inventory in Appendix A, best overall sales prospects for producers goods can be narrowed down to those which must be imported by industries having the highest growth potential. These industries, in turn, can be identified by their past output per- 27 ■*"*nry COOPERATION PAYS OFF: paper-rolling machinery gives a wave-like efftct at a plant at the Taiwan Pulp and Paper Corp., which has entered into technical cooperation with a leading foreign manufacturer to produce high quality papers. formances; their relative attractiveness to new local and foreign investors; and the relative priorities accorded them in the Government's various promotion and encouragement programs. In general, the expanding industries are the export processing industries and those which are producing raw materials, intermediates, and machinery for other local industries. Those with the smallest potential are those producing consumer goods for local consump- tion only, those which have limited export potential, or those whose export markets are becoming saturated. In terms of past performance (see Table 7 in Ap- pendix B), the following products within the major industries have had sustained, rapid output growth exceeding 20 percent a year (production of asterisked items was begun after 1960). Textiles — wool yarn, woolen serges, synthetic fab- rics, silk fabrics*, underwear, hosiery*, and shirts*. Wood products — plywood. Pulp and paper — pulp, paper bags, and carbon paper. Rubber products — automobile tires and tubes, rub- ber belt, rubber rollers*, and foam rubber*. Mining — lime, crude oil, and natural gas. Food processing — peanut oil, peanut cake, MSG, and canned and frozen foods*. Chemicals — Sulfuric acid, hydrochloric acid, salt, sulfur black, urea, ammonium sulfate, ammonia, powdered and refined camphor, camphor oil, plastic powder, plastic products, carbide, indus- trial BHC, and detergents*. Base metals — pig iron, cast iron pipe, steel balls, aluminum ingot, iron wire, wire cable*, and steel cable*. Machinery and appliances — prime movers, water pumps, power tillers*, machine tools*, water meters*, electric motors*, electric cookers*, household refrigerators*, transformers, fluores- cent lamps, and general machinery and parts. Vehicle assembly — automobiles. Ceramics — ceramic tile, cement bricks. The following industrial products have also shown a rapid, but more moderate (10-20 percent a year) ex- pansion since 1960: Food processing — canned pineapple, tea, beer. Textiles — rayon staple, synthetic yarn, knitting yarn, and canvas shoes. Wood products — lumber, pencils, matches. Pulp and paper — paperboard and stencil paper. Rubber products — bicycle tires and tubes, rubber boots. Mining — gypsum, sulfur, and talc Chemicals — caustic soda, calcium superphosphate, nitrochalk, fuel oil, paints, soap and toothpaste, and plastic tooth brushes. Base metals — tin plate, aluminum sheet, aluminum products, and aluminum extrusions. Machinery and appliances — electric bulbs. Ceramics — cement bricks. Electric power — electricity. The category of industrial products that has shown gradual or no expansion (under 10 percent a year) or in some cases a decline in output includes: Food processing — canned meat and poultry*, wheat flour, brown sugar, refined sugar, molasses, yeast, soybean oil, soybean cake, nonalcoholic and al- coholic beverages. Tobacco — leaf tobacco, cigars, and cigarettes. Textiles — rayon filament, cotton yarn, cotton fabrics, jute yarn*, jute fabrics*, gunny bags, towels. Wood products — treated lumber*, artificial board*, and bagasse board. Pulp and paper — paper. Leather products — leather shoes, upper leather, sole leather. Rubber products — pedicab tires, cart tires and tubes, and rubber hose. Mining — coal, gold, silver, copper, pyrite, marble, asbestos, and dolomite. Chemicals — soda ash, calcium cyanamide, fused 28 phosphate, nitrophosphate, nitrogen solution, al- cohol, printing ink, bleaching powder, liquid chlorine, industrial DDT, potassium chlorate*, oxygen*, gasoline, kerosene, diesel oil, asphalt, and coke. Base metals — iron and steel rods, bars and slabs, black plate, galvanized sheet, nails, aluminum foil, and collapsible tubes*. Machinery and appliances — sprayers, sewing ma- chines, dry batteries*, battery poles, insulated wire, copper wire*, enameled and cotton covered wire*, electric fans, watt hour meters, high volt- age electrolytic capacitors*, telephones*, and switchboards. Vehicle assembly — shipbuilding, trucks and buses, bicycles, and bicycle frames*. Ceramics — plate glass, glassware*, fire bricks, fire clay, and asbestos tile. Industrial products which have the best production records are most likely to enjoy further progress. Accordingly, import demand for the raw materials and/ or machinery required to produce those items should also increase at much faster rates than the producer goods required for the less active industrial products. Consideration should also be given to the fact that, among the more dynamic industries, the Government has selected eight which are to receive special promotional emphasis during the current Four- Year Plan and which, therefore, should particularly require increased imports of raw materials and/ or machinery. These designated industries are the food processing, petrochemical, plastics, manmade fiber, iron and steel, machinery and appliance, electric power, and all export processing industries. To en- courage the export processing industries in particular, the Government in 1965 opened the island's first Export Processing Zone in Kaohsiung. All factories allowed to set up in the Zone will be exempted from import duties on their imports of raw materials, semifinished products, and machinery and equipment, provided the finished products are exported. The export processing industries eligible to estab- lish in the Zone include the following: First priority . . . Precision machines and instruments, including timepieces (watches and clocks), chemical instru- ments, automatic control instruments, electronic instruments, radioactive ray instruments and mu- sical instruments. Electronic manufactures, including transistor ra- dios, vacuum tube radios, television receivers, tape recorders, and electronic telecommunications equipment and supplies. Optical manufactures, including cameras, binoc- ulars, microscopes, magnifying glasses and slide projectors. Metal manufactures, including hand tools, metal manufactures for construction and household use, tablewares, and home decorative wares. Plastics manufactures, including flowers, toys, and household items. Machinery manufacturing, including all kinds of machinery for export. Furniture. Second priority . . . Handicrafts. Electrical appliances, including household ap- pliances, electric razors, and small motors. Rubber manufactures. Chemical manufactures, including candles, soaps, detergents, antibiotics, and photographic chem- icals. Printed matter, including books, pamphlets, and stationery. Confection products. Cosmetics. Hide and leather manufactures, excluding the processing of raw hides. Third priority . . . Knitted and woven goods, excluding those with cotton as raw material. Garments, excluding those with cotton as raw material. The acid test of the growth potential of particular industries is whether entrepreneurs are willing to risk capital in them. From 1960 to 1965, a total of 10,785 new factories were registered in Taiwan. Of these, 4,408 were new food processing plants and 1,926 were in chemicals, mainly plastics and pharmaceu- ticals. The remainder comprised machinery and tool making 692, ceramics 601, base metals 574, lumber and woodworking 537, textiles 466, printing and bookbinding 388, and others 1,193. Foreign investors have followed a similar industry- type pattern. Of the 284 equity and loan investments made by foreign and overseas Chinese investors through June 1966 (valued at $75.6 million in actual arrivals), 31 ($6.7 million) involved food processing; 35 ($8.2 million) textiles and apparel; 62 ($13.4 million) petrochemicals, pharmaceuticals, and other chemicals; 28 ($7.0 million) machinery and ap- pliances; 5 ($1.0 million) electronics; 6 ($1.5 million) mining; 5 ($244,000) base metals; 6 ($1.2 million) paper; 2 ($218,000) plywood; 1 ($1.6 million) glass; 4 ($1.4 million) cement; 1 ($37,000) leather prod- ucts; 1 ($28,000) rubber products; 6 ($260,000) plastics; and 3 ($240,000) printing. Another factor affecting sales potential of specific producer goods is the extent of import controls and duties imposed on them. In general, producer goods are not restricted or heavily taxed. Some of those 29 which do appear on the "controlled import" list may still be imported, but only by end users with prior Government approval. Importer-wholesalers are not permitted to import any producer goods on the con- trolled list. Most of the producer goods on the con- trolled list are tightly restricted to protect local in- dustries, and even end users have difficulty getting import licenses for those items. A list of those con- trolled imports which may only be imported by end users appears in Appendix D. Import duties on producer goods generally range between 10 percent and 25 percent, excluding surcharges. MOST NEEDED PRODUCER GOODS U.S. producer goods, by and large, are benefiting substantially from the dynamic expansion of industrial demand underway in Taiwan. While a number of U.S. products have succumbed to competitive forces, particularly as the AID program has been phased out, many others have strengthened their position in the market. The following U.S. producer goods, categor- ized according to their level of imports in 1965, are believed to have the best prospects for future sales growth. During the 5-year period 1960-65, their sales increased at a faster rate than competitive products from other sources, and their market share has risen accordingly. Moreover, the same demand factors which occasioned their better-than-average sales growth up to 1965 are still present and are likely to continue over the next several years. (The U.S. share of the market in 1965 is given in parentheses. See tables in Appendix C for 1965 import values. Best U.S. Sales Prospects U.S. sales above $5 million in 1965 — iron and steel scrap (70); steam engines, turbines, and parts (99); raw cotton (65). U.S. sales between $1 million and $5 million in 1965 — leaf tobacco (83) : sulfite wood pulp (53) ; phthalates (60) ; synthetic resins (48) : sulfur (31) ; inedible animal oils and fats (99) : pumps and pumping machinery (76) ; aircraft parts (99) ; automotive vehicle parts (18) ; radio parts and accessories (41); line telephonic and tele- graphic apparatus (71). U.S. sales between .$100,000 and $1 million in 1965 — mercury (29); calcium phosphate (87); potassium chlorate (99) ; borax, crude and re- fined (99) ; resin (64) ; flavoring essences (25) ; old newspapers for pulping (99) ; un worked aluminum (85); unworked zinc (14); decorated tinplate (99); steel pipes and fittings (25); steam boilers and boiler house plant (99) ; boiler fittings and mountings (51); industrial air con- ditioning machinery (78) ; office machinery (35) ; oil drilling and refining equipment (70) ; radar apparatus and radio navigation equipment (78) ; transistors, photoelectric cells, and thermionic tubes (22); batteries or cells (22); radio tele- phonic, telegraphic, and broadcasting apparatus (67) ; mechanical handling vehicles (42) ; air- craft engines (100) ; surgical and medical instru- ments (30) ; tires and tubes (70) ; office supplies of paper (71) . U.S. sales between $10,000 and $100,000 in 1965— inedible vegetable oils and fats (32) ; inks (25) ; glue (39): waste cotton (58); packing and wrapping paper (77); unworked nickel (14); worked nickel (62) ; aluminum sheets and plates (87) ; aluminum wire (67) ; wire rope (19) ; welding rods (17); metal articles for binding and capping (85) ; transmission chain parts (18) ; bulbs, tubes, and arc lamps (19); electrolytic condensers (21); household electrical fixtures (17) ; electrical visual signaling equipment (11) ; copying machines (19). A second category of U.S. producer goods includes those whose sales to Taiwan have increased, but not as rapidly as sales of competitive products by other suppliers. Thus, while these U.S. products have in- creased in overall sales value, their share in the mar- ket has declined. Since Taiwan import demand for these products is still increasing, the fall in the U.S. market share is mainly the result of intensified com- petition from third-country suppliers, particularly Japan. More promotional effort is clearly needed if U.S. products in this category are to benefit to a greater degree in Taiwan's industrialization. Good U.S. Sales Prospects, but Greater Promotion Required U.S. sales above $1 million in 1965 — plain tin plate (12) ; mining and excavation machinery (42). U.S. sales between $100,000 and $1 million in 1965 — synthetic rubber (33) ; waste paper (62) ; pitch and asphalt (90) ; surface active agents (16); plastic manufactures (35); nonferrous metal scrap (24); unworked zinc (14); tool steels (11); steel pipes and fittings '25); in- sulated wire and cable (12) ; textile machinery (6); metalworking machinery (14); machine tools (11); machine shop tools (15); refriger- ator parts (12) . U.S. sales between $10,000 and $100,000 in 1965— soaps and detergents (71); essential oils (11); paraffin (10); waxes (20); cellulose lacquers (24); paperboards (18); insulating materials (14); magnet blanks (10); low voltage power generating machinery (14); electrical ignition equipment (13): industrial refrigeration machin- ery (13); typewriters (30); parts for record players and tape recorders (10); safes, cash boxes, and vaults (55). 30 The following U.S. producer goods, which include several mainstays of U.S. trade with Taiwan in the 1950's and early 1960's, have generally declined in sales volume in the last few years. A number of fac- tors have contributed to this decline. Most importantly, Taiwan's development and protection of import sub- stituting industries have simply reduced import re- quirements from all sources, including the United States. Import demand for some of these items could continue to go down. In the case of other products, however, imports as a whole have increased, while only those from the United States have decreased. Here, the main factor is more extensive competition from third-country suppliers. U.S. sales in this latter category (asterisked) could probably be stimulated by a more aggressive competitive effort. U.S. Sales Declining, May Fall Further U.S. sales above $1 million in 1965 — lubricating oil (57)*; internal combustion engines and parts (20)*. U.S. sales between $100,000 and $1 million in 1965 — lubricating grease (55)*; cow hides (22)*; high-voltage power generating machinery (16)*; pulp and paper machinery (25); hand tools and implements (10)*; railway materials and parts (39). U.S. sales between $10,000 and $100,000 in 1965— transformer oil (34); flotation reagents (67)* carbon blacks (14)*; paints and enamels (25)* carbolic acid (7)*; zinc sheets and plates (19)* nuts, bolts, and nails (26) ; locks and padlocks (19)*; sewing machinery (5); knitting and em- broidery machinery (2) ; electricity meters and parts (26)*; water meters and parts (10)*. Following is a list of producer goods imported into Taiwan which are not supplied by the United States to any significant extent. U.S. sales of these items in 1965 were either all valued under $10,000 or their share of the market was under 10 percent in that year. In some cases, Taiwan imports only negli- gible amounts from any source (total imports of asterisked items were valued under $50,000 in 1965) . In other cases, the United States does not produce the items and/ or does not export them. In still other cases, where there is both an import demand in Taiwan and a supply capability in the United States, the meager U.S. sales are most likely due to a competitive prob- lem, or lack of effort, or lack of interest. On balance, however, prospects for increased U.S. sales of the listed items are not likely to improve greatly. U.S. Sales Under $10,000 or Accounting for Less than 10% of Market in 1965 Raw wool; all textile yarn, thread and piece goods; chemical elements; acids; sodium com- pounds; potassium compounds; manganese diox- ide; methyl alcohol; alkyl benzene; rubber chem- icals; synthetic organic dyestuffs, titanium di- oxide, and other pigments; stearine; varnish; turpentine; shellac; linseed oil; tanning materi- als; gums, ammonium sulfate, phosphate rock, crude oil; fuel oil; asbestos fiber; asbestos manu- facures; cement*; gypsum; tiles*; glass sheet and plate*; natural rubber; waste rubber; rub- ber manufatcures; hides other than cow; skins*; leather*; logs, timber, and lumber; cork and cork sheet; chemical wood pulp*; mechanical wood pulp*; coated paper; printing and newsprinting paper* ; document paper* ; glassine paper and cellophane; tissue paper; wallpaper; cigarette paper; iron ores; bauxite; other metallic ores; aluminum foil; brass bars and rods, sheets and plates, tubes and fittings, wire, strips and bands; other worked brass* ; copper brass and rods, sheets and plates, tubes and fittings, wire, strips and bands; worked and unworked lead; un- worked tin; ungalvanized iron and steel sheets and plates; galvanized sheets; worked and un- worked structural shapes; iron and steel wire, bands and strips, castings and forgings, angles, nail rods, hoops and rails; spring steel; silicon steel; metal netting, grill and fencing; steel balls; ball, roller, and needle bearings; crucible molds and parts; high tension insulated cable; farm and fishing machinery; sugar manufacturing and brewing machinery; dairy machinery*; flour mill machinery; tobacco processing machinery; print- ing and bookbinding machinery; rubber manu- facturing machinery; machine tool lathes; elec- tric traffic control equipment; electric sound sig- naling equipment; starters, dynamos, and parts; motor vehicle chassis; motorcycle parts; bicycle parts; ships and boats, materials, and parts. SPECIFIC MANUFACTURING INDUSTRIES The following analysis of specific industries in Taiwan is geared to the would-be U.S. supplier of raw materials, intermediates, and machinery. It shows the extent of specific raw material and machinery usage in each industry; whether and to what extent the needed items are locally produced or must be imported; the principal sources of supply; and the pertinent import controls and duties. It also describes the status and outlook for each major in- dustry — relative size, current product mix, growth prospects, and the specific expansion projects, if any, which have been programmed and which would re- quire increased imports of producer goods. Food Processing Taiwan's young food processing industry has ex- cellent potential. It has already enjoyed rapid ex- 31 HEADING OVERSEAS: these pineapples will emerge in cans and, like 90 percent of all of the Republic of China's three million case output each year, find their way onto the export markets of the world. Taiwan's food processing industries are also a leading buyer of imported machinery. pansion, has very good export prospects, has much room for diversification, and is one of the industries specially promoted and encouraged by the Govern- ment. Drawing mainly from ample local supplies of sugar, fruits, vegetables, fish, poultry, and some meat and other foods, the value of food processed by the industry rose from $143 million in 1960 to $230 million in 1965. During the same period exports of processed food, excluding sugar, increased from $11 million to $64 million. Despite the abundance of local foods, the industry is by no means self sufficient. Some primary grains and other produce for processing still need to be im- ported, and the industry's further growth will cer- tainly require increased imports of machinery and equipment for food canning, bottling, freezing, and packaging, as well as refrigerated storage and dis- tribution facilities, packaging materials, tin plate, and can-making machinery. Opportunities for U.S. sup- pliers of food processing equipment are very promis- ing. However, while direct sales potential looks good for the immediate future, the best insurance for longer run sales may be to team up with a local food processor, with the proviso that U.S. equipment be installed in the new plant. Otherwise, Japanese sup- pliers may well get in first on the same basis and monopolize the sale of food processing equipment. Taiwan's total imports of food processing machin- ery, including canning, bottling, refrigerating, and packaging equipment, amounted to about $500,000 in 1965. The United States and Japan were the leading suppliers. In general, American quality in machinery is recognized, but practical considerations of cost and size have until now directed purchase of as much local machinery as possible. Most factories are ex- panding, but on a step-by-step basis, and are therefore not yet prepared to invest in very large-scale, highly automated equipment. All are aware that cheap labor will not last forever and eventually mechanization must come, but they prefer to buy one small machine at a time because production has not yet reached the scale where large models are practical. Therefore, if American equipment manufacturers are to be com- petitive in Taiwan now, machinery must be relatively small scale. This general condition is true of all types, from food processing to food packaging equipment. American suppliers in some cases, especially in the frozen food industry, have already overcome these obstacles. In addition to better quality, more ad- vanced technical know-how is offered, and most im- 32 portant, familiarity with the needs of the American market for the local producers' products. A Government-supported Food Industry Research and Development Institute was established in 1965 to assist further development of food canning and freez- ing and dehydrating fields. It will also build a pilot plant and laboratory in Hsinchu. This organization will have a major influence on the types and sources of food processing equipment bought by local can- neries, and U.S. suppliers would be well advised to maintain close contact with it. The best sales prospects lie in the food canning, bottling, and freezing industry. This sector, particu- larly food canning, has accounted for most of the industry's growth in the last 5 years. Taiwan is al- ready one of the world's leading producers and ex- porters of canned pineapple, mushrooms, and tea. Also fairly well established is the canning of man- darin oranges, asparagus, bamboo shoots, and water chestnuts. The "comers" include canning of pickles, fruit juices, jams, preserved fruits (lichees, longans, mangoes, passion fruit, guava, papaya, and fruit salad), peas, mixed vegetables, tuna, and prepared Chinese foods. The Government hopes to attract more foreign investment in all these fields. Particularly needed is technology in improving shape, packing, flavor, color, and sanitary techniques. There are now some 180 food canneries and 5 can manufacturing plants in Taiwan. Total canned food production in 1965 was over 7.5 million standard cases and is still rising. Canned food exports rose from only $10 million worth in 1960 to $58 million in 1965. The industry's own 10-year plan projects out- put increases of about 1 million cases a year, but this pace may well be exceeded. Most canneries in Taiwan are small. Of the 180 factories, only about 20-25 produce more than 100,000 cases a year. Their small size and the availability of cheap labor limit the use of automated equipment for the time being. The larger factories, for example, have a very small nucleus of permanent workers — between 10 and 70 — with anywhere from 200 to 2000 standing by on seasonal basis. The peeling, washing, sorting, slicing, coring, trimming, preparing, and labeling operations are usually done by hand. Most of the equipment presently used is locally made. In an average canning factory, only some pumps and lab- oratory equipment are imported. Semiautomatic pine- apple parers, mushroom grading cylinders, pineapple and mushroom slicers, semiautomatic and automatic sealers, semiautomatic bottlers, and conveyor belts are all locally available. The demand for more sophisticated equipment in the canning industry will depend on how rapidly the industry develops. Certainly a greater tapping of Tai- wan's export markets, for which rigid quality control and volume production is required, should create needs for semi- and fully-automated canning equip- ment from abroad. Other imports might include boil- ers, extractors, concentrators, fermenters, separators, and juice-making, jam making, and control instru- mentation. The canning industry has no carton packing ma- chinery. Canneries may use this type of equipment in small-scale varieties, while factories making cans for sale to canneries, with their high-speed production, could well use such machines to pack empty cans in cartons for transport to the canning factories. There are two modern bottling facilities in Taiwan, in addition to those run by the Government-owned Taiwan Tobacco and Wine Monopoly Bureau. Several outdated plants are also doing some bottling of guava, mango, and orange juice. Local soft drink bottlers are usually canners who bottle only during the summer months when soft drink demand is high. Semiautomatic soft drink bottling machines are locally made. However, a potential market does exist for im- ported bottle and jar washing, filling, and capping machines. Taiwan bottlers who export to the United States are often asked by the U.S. importers to con- form to certain bottling specifications which in many cases can be met only by using American bottling equipment. The food freezing industry is just getting started, but the potential seems unlimited. There are now 12 frozen food factories in Taiwan, all set up in the last two years, and more are expected. Taiwan's exports of frozen foods have increased from only $280,000 in 1960 to nearly $2 million worth in 1965. Before 1964 the only products to be quick frozen and exported were fish, eels, shrimp, and other sea food. Quick freezing of mushrooms, asparagus, peas, water chestnuts, brussel sprouts, strawberries, bananas, ly- chee nuts, prepared Chinese foods, and chicken and meat did not begin until 1964, and will undoubtedly expand. In addition to quick freezing, several com- panies are experimenting with various freeze drying processes, and one has already begun freeze-drying of mushrooms, using Danish equipment. Most of the quick freezing equipment is also imported, including freezing units of up to 5 tons, compressors, and industrial motors, mostly from the United States. New types of freezing equipment offer the brightest prospects, and American equipment has an advantage owing to technical quality. Pumps are made locally, and packaging is now done entirely by hand. How- ever, the complete lack of equipment on the packag- ing end suggests a market potential for this type of machinery, particularly if production demands in- tensify. Since frozen food plants are necessarily located near their source of food, the market for 33 m LARGEST FOOD PROCESSING INDUSTRY: sales of sugar, such as that contained in these bins at a Taiwan Sugar Corporation refinery, earned the Republic of China $130 million in foreign exchange in 1966. imported refrigerated trucks should grow with the industry. Investments or licensing agreements in the food freezing field are definitely worth considering. Officials estimate that $150,000 or $250,000 would be needed to set up a medium-size frozen food plant. Another relatively new field which is still in the experimental stage is dehydration of foods. A num- ber of food processors have applied home-made equip- ment to what they consider very special variations on the normal dehydrating process. Although there are a number of primitive drying plants for various Chinese-style foodstuffs, only one or two companies are commercially involved, and these are mainly dry- ing pineapple slices and bananas for the domestic market. However, interest in the dehydrated food field appears great enough to warrant proposals for selling machinery or for joint ventures or licensing agreements. The sugar industry is Taiwan's largest and per- haps most important food processing industry. Re- fined sugar is the island's major export, accounting for 14 percent of the total in 1965, and is a basic ingredient of other processed foods. The sugar in- dustry suffers, however, from uncertain world market conditions, and efforts are being made to keep sugar cane acreage constant in order to avoid overproduc- tion. Total production in 1965 exceeded a million tons, a record output. All sugar refining is done by the Government-owned Taiwan Sugar Corporation (TSC) in its 25 sugar mills. Total daily grinding capacity is 57,000 tons of sugarcane. TSC is the largest profit making corpora- tion owned by the Government. It is also the main grower of sugar cane, although contract farmers grow a large supply as well. In addition to its mills, re- fineries, and plantations, TSC owns an extensive rail- way system; byproduct factories (including bagasse board factories, a yeast plant, hog breeding farms, alcohol distilleries, and a pineapple cannery) ; ware- house and storage facilities which can accommodate about 550,000 tons of sugar: machine shops; wharf installations; and other properties. TSC is in the 8th year of a 10-year program to modernize its sugar mills, and in the 4th year of a 10-year program to improve its plantations and rail- way facilities. These programs will require purchases of about $16 million in imported refining and process- ing facilities, tractors (60 or more hp.), and diesel locomotives (42-inch gage). Present plans call for most of these purchases to be financed under a Japa- nese loan, which means that Japan will also be the source of supply. However, TSC would welcome offers from American suppliers if adequate credit terms can be arranged. Beiierage and Tobacco Production and distribution of alcoholic beverages is monopolized by the Government-owned Taiwan Tobacco and Wine Monopoly Bureau (TTWMB). That agency operates 11 distilleries and 1 brewery. Output (32 million gallons in 1965) consists mainly of rice wines, fruit-based wines, and beer. Hard liquors, liqueurs, and other spirits are not produced. Per capita annual consumption of alcoholic bever- ages was 8 quarts in 1965. All imports are tightly restricted to protect the local monopoly and to con- serve foreign exchange. TTWMB occassionally im- ports some alcoholic liquors — about $136,000 worth in 1965 — for local distribution ,and may increase this amount to complement its own lines. The local demand for TTWMB products has not risen substantially in recent years (about 2 percent a year ) and output levels have accordingly been kept rather stable. As a result, the need for new brewing and distilling equipment is limited. Some of it can be locally produced. About $600,000 worth of malting and wine making equipment was imported in 1965, mainly from Germany. The air-conditioning equip- ment and control instrumentation comes mostly from the United States. TTWMB is the only eligible im- porter of brewing and distilling equipment, and the 34 duty is 12 1 /-; percent. Of raw materials, barley is im- ported from the United States or Thailand, hops from the United States or Germany, and malt from Aus- tralia. Roughly 10,000 tons worth $1 million were imported in 1965. Again TTWMB is the only eligible importer for alcoholic beverage use. Duties are T 1 /^ percent on barley, 25 percent on malt, and 40 percent on hops. Nonalcoholic beverage production consists mostly of fruit juices and carbonated soft drinks in bottles. Total output in 1965 was 8 million dozen, up 60 per- cent over 1960. Some syrups and bottles are imported, but not in significant quantities. Production and distribution of tobacco and tobacco products are also monopolized by the Government- owned Taiwan Tobacco and Wine Monopoly Bureau (TTWMB). In 1965, there were approximately 11 factories and plants manufacturing cigarettes and cigars and redrying leaf-tobacco. Both filter and non- filter, and some menthol cigarettes, are produced. Most of the cigarette and cigar output is consumed locally, although some is exported. Production of cigarettes and cigars has increased only gradually in recent years, and will probably not rise at a much faster rate in the future. The market is too limited for further expansion. Thus, there will be little increased demand for such raw materials as leaf tobacco, cigarette paper, and filter-making materials, or for such machinerv as cigarette making machines, filter machines, and pack- ing machines. Taiwan supplies most of its own cig- arette paper and filter materials and some of its tobacco leaf and machinery. Imports of tobacco leaf in 1965 were valued at $3.5 million. The tobacco comes mostly from the United States and South Africa. The United States supplied much of the existing ma- chinery, and Germany and Italy the more recent acquisitions. Machinery imports in 1965 were valued at $574,000. Only TTWMB is permitted to import tobacco and the processing equipment; the import duties are 30 percent and 12y2 percent, respectively. Taiwan is taking steps to expand and improve its own leaf tobacco, and the market for U.S. tobacco may eventually be reduced. Two varieties of tobacco are now grown in Taiwan — the "Van Hicks" and "Van-Va-Gold" — both of which are resistent to Mosaic disease. Mining Taiwan's mineral endowment is poor. The island's only abundant resources are nonmetallic, such as coal, limestone, marble, and dolomite. Taiwan also has sulfur, asbestos, talc, and gypsum reserves which supply part of present requirements. Of metallic re- sources, small quantities of copper, gold, silver, iron pyrites, manganese and limonite are mined, but the ores are all low grade. No bauxite, lead, zinc, tin, nickel, or other important industrial ores are present on the island. While consumption requirements are growing rapidly, Taiwan's local minerals production rarely increases by more than 5 percent a year. The result is a sizable import demand, reaching $8.7 million in 1965, with sulfur, bauxite, iron-bearing ores, and gypsum heading the list. The paucity of native minerals has impeded mech- anization of the mining industry. Most mining is done with hand tools. Techniques include trenching, test pitting, and tunneling and boring. Some geo- physical prospecting by electrical and electro-magnetic measurements is also used in certain cases. Thus, on the whole, the demand for imported machinery is very limited, although it is tending to increase. Revitalization of the mining industry is a major target of Government planning. Over the next 10 years, the provincial Government is to invest $26 million in an effort to increase production, improve quality, reduce costs, and streamline procedures. It is not clear whether substantial mechanization of the industry will be involved, but there could well be some machinery sales opportunities arising from this development. Coal (high-volatile bituminous) presently dominates the mining industry and accounts for over 80 percent of total minerals production. Workable reserves are estimated at 239 million tons, sufficient for about 30-40 years at foreseeable consumption rates. No coal is imported. Efforts to increase coal production will be difficult. Generally, coal beds in most mines are heavily faulted and very thin, ranging from 1 to 3 feet thick, and moderately to steeply pitched. The mines are also extremely small. More than half of the 400 or more mines produce only 10 tons a day. Only about 34 mines can produce more than 100 tons daily. Mechan- ization is practically impossible under these conditions. Thus, hand labor constitutes 50-70 percent of the delivered price of coal. Efficiency is very low, about 0.4 tons per man-shift. Although the Government is pushing hard for improved productivity and greater coal production, there will probably not be much re- quirement for new machinery. A limited mechaniza- tion by the employment of selected mechanical in- stallations is about all that can be expected. Taiwan's sulfur output cannot meet local needs. The island consumes over 100,000 tons of sulfur a year, and the demand is increasing, particularly as the fertilizer, chemicals, textile, pulp, and rubber in- dustries expand. Current sulfur ore reserves are esti- mated at over 2.6 million tons with a 10-30 percent sulfur content. Another 2.2 million tons of pyrite ores, with a 7-30 percent sulfur content, are also thought to be available. In 1965, sulfur and pyrite 35 production combined amounted to only 46,000 tons. Nearly 120,000 tons of sulfur were imported in 1965 at a value of $5 million. Roughly 150,000 tons may be needed by 1968. Canada and the United States are the main suppliers and compete strictly on a price basis. The import duty was lowered in 1965 from 25 percent to only 10 percent. Imports are not re- stricted. The Government is considering means of encourag- ing sulfur and pyrite mining so as to reduce import dependency. However, domestically produced sulfur cannot compete on a price basis with imported sulfur because of the high recovery costs using low grade ores. Some thought had been given to setting up beneficiation facilities for pyrite ore, but no action has yet been taken. The recent import duty reduction suggests that the Government may slow down its efforts to develop the local industry. The prospect is, there- fore, for increased sulfur imports and limited demand for sulfur producing equipment. Copper, the only metallic ore of industrial val- ue found in Taiwan, is mined almost entirely by the State-owned Taiwan Metal Mining Corporation (TMMIC) in the Chin Kua Shih mine near Keelung. The ore in that mine averages only about 0.7-0.8 per- cent copper, possibly the lowest grade copper ore mined anywhere in the world. Reserves are estimated at 5.7 million tons, but total output in 1965 was only about 1,900 tons. Most of TMMIC's copper— in the form of flotation concentrate — is shipped to Japan for smelting and refining and then reimported as electro- lytic copper. Little or no copper ore is imported; how- ever, the amount of electrolytic copper obtainable from local ore is hardly adequate, and this material must be largely imported. TMMIC has recently announced plans to build a $5-million integrated copper plant. As part of this project, mining activity will be intensified to increase the supply of ore. This should present opportunities for the sale of such mining equipment as sharpeners, rock drills, electric locomotives, and mine cars as well as equipment for making copper concentrate such as crushers, classifiers, thickeners, filters, and flotators. (For further details on copper development, see dis- cussion under "Base Metals Industry.") Since no other metallic ores of industrial value are native to Taiwan, they must be imported. Except for the aluminum industry and to a minor extent the steel industry, none of Taiwan's metal processing in- dustries are integrated. Ore reduction facilities are therefore rather limited. Thus, raw material demand is greater for scrap and unworked metals than for ores. Metallic ore imports in 1965, excluding bauxite, amounted to 56,000 tons worth about $800,000. These consisted mostly of iron, manganese, and hematite ores from Malaysia. There will not be a marked in- crease in the demand for iron ores unless the large integrated steel mill, now being considered, is finally constructed. Bauxite, on the other hand, is in great demand because of rapid development of the alumi- num industry. Bauxite imports, also supplied by Ma- laysia, reached 105,000 tons valued at $1.1 million in 1965. There are no import restrictions on any ores, and the duty is 5 percent. Petroleum and Natural Gas Taiwan has abundant natural gas, some crude oil potential, and a highly developed, modern refinery. Rapid growth of the petroleum industry is assured. The State-owned Chinese Petroleum Corporation (CPC) is the sole producer and distributor of petro- leum and petroleum products in Taiwan. Its oil and gas wells are concentrated around Miaoli along the central western coast, and the refinery is located at Kaohsiung in southwest Taiwan. The import market for refined petroleum prod- ucts is somewhat limited at present. CPC can already meet most domestic requirements and is beginning to export. However, plans are underway to construct two new oil-fired thermal power plants after 1969, and heavy imports of fuel oil will be needed for that pur- pose unless substantial expansion of refinery capacity is undertaken. Local output includes automotive and aviation gasoline, jet fuel, diesel oil, kerosene, naphtha, re- formate, liquefied petroleum gas, and refinery gas. Excluding lubricating oil, about $1.3 million worth of these items were imported in 1965, mostly fuel oil, lubricating grease, and transformer oil from Iraq, the United States, and Japan. Imports of lubricat- ing oil, still quite heavy in 1965 (7.6 million gallons worth $3.1 million) may no longer be necessary after 1966. A new lubricating oil plant with a 23-million- gallon annual capacity, built jointly by CPC and the Gulf Oil Company in May 1965, should satisfy local needs and provide a large exportable surplus. The United States and Japan have been the principal sup- pliers of lubricating oil. To keep pace with rising domestic requirements, CPC plans to expand production of all refined petro- leum products. Local civilian consumption in 1965 totaled about 32 million gallons, 54 percent over 1964. Some expansion of refinery capacity will there- fore be necessary, particularly for fuel oil. Present facilities at the Kaohsiung refinery include 3 topping units, a visbreaking unit, 2 hydrodesulfurization units for gasoline and distillates, a light end superfraction- ation unit, 2 catalytic reforming units, a catalytic cracking unit, an alkylation unit, a sulfur recovery unit, a sulfuric acid plant, and an asphalt plant. Within the next 2 years, CPC will add a new 50,000 36 1 «*_» . TO FILL THE NEED: growing industries need lubricating oil, so the China Gulf Oil Co. built this $11 million plant to furnish China's factories and trucks with 1,500 barrels per day. barrel-per-day topping plant to increase production of fuel oil from the present 400 million gallons to 750 million gallons annually. Most of the equipment needed for the topping unit can be made locally. However, pumps and instruments will have to be imported. Imports of oil refinery equipment fluctuate sharply from year to year in line with CPC expansion pro- grams. The United States, however, generally supplies this equipment. Increased production of refined products will also require greater imports of crude oil. CPC's refinery now has an annual crude capacity of 42.2 billion gallons. Local crude production for the entire year of 1965 was only 20,800 tons. Crude oil imports are substantial, totaling more than 1.4 million tons worth $22.1 million in that year from Iraq and Iran com- pared with 1.1 million tons worth $19.3 million in 1960. CPC, in the hope of finding crude oil on Taiwan, has been conducting petroleum explorations there since 1949. Some crude oil has been found in Miaoli, Chiayi, and Tainan. A new well at Chutung will raise annual output to a mere 4 million gallons from 20 oil-producing wells. Despite the small success so far, many geologists believe that substantial reserves are on the island and that systematic explorations should continue. Taiwan lies in the same geological belt as the important oil producing areas in the Far East. Favorable structures and possible oil traps have been discovered through geological study and seismic survey, and many oil and gas seepages have been reported. Encouraged by the prospect of finding oil, CPC will intensify its geological study by continuing map- ping and aerial surveys; surface, subsurface, and sedimentary studies; micropaleontologic research; stratigraphic evaluation and by geophysical prospect- ing including gravimetric, magnetic, and seismic sur- veying. More elaborate drilling programs that require deep-well drilling rigs procured from abroad will be undertaken. In late 1965, CPC applied to the U.S. 37 Export-Import Bank for a $4 million loan to finance import of drilling equipment. The deepest rig now in use goes to a depth of 15,000 feet with 4y 2 " drill pipes. So far, all CPC's drilling equipment has come from the United States, and more opportunities for the sale of U.S. equipment should develop. Imports are free of duty. CPC's oil drilling bore unexpected results in 1959 and 1963 when huge natural gas deposits were found near Miaoli. Reserves of at least 5.3 trillion gallons have been proved and an additional potential of 7.9 trillion gallons is estimated. Most significantly, avail- able reserves are believed sufficient for developing a large scale petrochemical industry as well as for use as a household and industrial fuel. With these aims in mind, CPC has increased its production of natural gas from only 9.8 billion gallons in 1961 to 81.8 billion in 1965. As of 1965, 21 natural gas wells were in operation. Greatly expanded drilling activity is already planned. CPC also has plans to build a $1.5 million natural gas treatment plant which will require imported equipment. Other opportunities are anticipated for the sale of oil and gas distribution facilities. CPC wants to im- port and install a $l-million oil-unloading buoy in the Kaohsiung harbor and is considering a $20-25 million gas pipeline system running from Miaoli to Kaohsiung in the south and from Miaoli to Hsinchu and Keelung in the north. Both lines will use 20" high-pressure steel pipe, and heavy equipment rather than hand labor will be used to install it. In the future, branch lines will be laid to Tainan, Taichung, and other industrial areas where large fuel quantities are consumed. At least $12 million of the total project cost will be for imported pipe, control meters, and other equipment and services. Petrochemical With the discovery of natural gas in 1959 came hope that Taiwan could develop a petrochemical in- dustry. Then, with the addition of catalytic cracking and catforming units at CPC's Kaohsiung refinery and the establishment of an aromatic solvent works at Chiayi, actual production of petrochemical intermedi- ates and of some end products became feasible for the first time. This industry presently dominates much of the Government's future economic development plans and has attracted some of the largest American investments ever to come to Taiwan. CPC can now supply the five basic petroleum ma- terials needed to produce petrochemical intermediates — natural gas, refinery gas, liquefied petroleum gas, naphtha, and reformate. Other locally available raw materials include coal tar, naphthalene, molasses, and calcium carbide. Although Taiwan is a long way from self-sufficiency in petrochemicals and intermedi- ates, that era at least can be envisioned. At this stage, however, nearly all intermediates, as well as some intermediate raw materials, are imported. Over $13 million worth were imported in 1965, of which the U.S. supplied about $6 million, and demand is in- creasing rapidly. Some local production of petrochemical raw ma- terials has begun, but on a limited scale. Output in- cludes acetylene, vinyl chloride, and vinyl acetate for PVC: urea and ammonia for fertilizer and resins; phenol and formaldehyde for resins and adhesives; dodecyl benzene for detergents; ethyl alcohol for alcoholic beverages, solvents, and acetic acid; and some benzene, toluene, and xylene for solvents and synthetic resins. Of these, only mixed xylenes are imported in quantity. Imports of the xylenes are not restricted. The duty is 20 percent. Raw materials not produced locally that are im- ported in quantity include methanol, phthalic anhy- dride, and styrene. Methanol and phthalic anhydride are both dutiable at 10 percent while styrene is subject to a 25 percent duty. Imports are not restricted. Intermediate petrochemicals not produced locally that are imported in substantial quantities include dioctyl phthalate (DOP), dibutyl phthalate (DBP), polyethylene, polypropylene, caprolactum, ethylene gly- col, and dimethyl terephthalate (DMT). Polystyrene is now being produced locally, but imports are still required. The synthetic resins are generally duitable at 25 percent and the phthalates at 20 percent. There are no restrictions. Acetone, methyl ethyl ketone, methyl isobutyl ke- tone, acetaldehyde, butyl alcohols, chlorinated solvents, and maleic anhydride are not produced on Taiwan but the demand for them is limited. Several large new projects for making petrochemi- cals are now under study, and some are already being built, mostly with U.S. private capital. They include two new methanol plants; new facilities for aromatics extraction, dealkylation, isomerization, and separa- tion; a new naphtha cracking unit; and new poly- ethylene, caprolactum and DMT plants. Though their output would gradually replace imports over the long run, the projects will involve substantial imports of new machinery and equipment and thus provide ex- cellent sales opportunities for U.S. equipment sup- pliers in this field. The best approach is through in- vestments or licensing agreements. For further details on petrochemical consumption by the plastics and manmade fiber industries, see pages 44 and 48, respectively. Forest Products Taiwan's forest products industry has enormous potential. Inaccessibility to the quality conifer timber has prevented the island's vast resources from being 38 developed effectively. Nevertheless, logging, lumber- ing, and wood manufacturing has expanded rapidly, as is reflected in the growth in exports of lumber, timber, and manufactures from $5.5 million in 1960 to $44.2 million in 1965. Further increases in produc- tion and exports are anticipated and should open up excellent opportunities for selling machinery and equipment to saw mills, wood n anufacturers, and furniture makers. On the other hand, as more local timber is felled and processed, the market for imported wood will gradually decline. Only those wood species not grown in Taiwan, such as lauan for the plywood industry and high-quality specialty woods for the furniture industry, will find a growing market. Imports of lauan logs reached nearly $17.4 million in 1965 compared with only $3.5 million in 1960, reflecting the recent spectacular growth in plywood production. Only $145,000 worth of other wood was imported in that year. Taiwan's forests cover 55 percent of the total land area or about 5.3 million acres. Growing stock is estimated at 239 million cubic meters. Much of the timber is not readily accessible, and several of the more valued species are not grown in abundance. Over 60 percent of total standing timber is in relatively low value hardwoods and bamboo. About 40 percent is in conifer woods, but only a quarter of these can be reached and logged economically. Among the im- portant species in which Taiwan is self-sufficient are bamboo; conifers including red and yellow cypress, hemlock, and several varieties of spruce and pine; and hardwoods, for example acacia, camphor, oak, zelkova, michelia, and cryptomelia. Woods not grown in quantity and which must be imported include lauan, seraya, sandalwood, teak, mahogany, walnut, and. corkwoods. Import duties range between 25 and 35 percent. The Government hopes to develop additional timber varieties through its reforestation and afforestation programs. It is also encouraging the lumber and woodworking industries to substitute local wood for imported wood wherever feasible. However, the im- pact of these developments on lauan and specialty woods imports will hardly be felt since there are no satisfactory local substitutes in the quality and amount needed by plywood and furniture manufacturers. On the other hand, local woods can be used increasingly in the construction and pulp and paper industries and for producing railway ties, coal mine props, garden tools, boats, pencils, and matches. Timber logging is done by 3 Government agencies and 10 private companies mainly in the high, rugged areas of the central mountain range. Total timber cut in 1965 was 1.1 million cubic meters compared with only 822,300 cubic meters in 1960. Felling and slicing are done with hand tools. Power chain saws and truck logging facilities are being introduced by Government loggers, but the rugged terrain limits their effectiveness. The private concerns are still using primitive hauling methods such as wooden sleds and narrow gage (19.7") railtrucks powered by human labor. In steep mountain areas, light, gravity operated cableways are occasionally used. There are more than 650 saw mills on the island, all but 15 of which are privately owned. Only Govern- ment mills and about 10 private mills use modern high-speed equipment and produce in quantity. All the other private mills are small operations averaging less than 100 cubic meters production daily. A typical electric powered mill has one or two 42"-49" band headsaws with a cable powered carriage, 2 or 3 38" band resaws with logs pushed through by hand, and 2 or 3 swing-type circular saws for crosscut and trimming. Taiwan's subtropical, humid climate exposes local timber to decay and worms, and wood processed into railway ties, poles, mine props, and construction lumber must be chemically treated. Coal tar creasote is generally used for exterior lumber while pentachlo- rophencol is most often used for interior lumber. Both preservatives are locally produced. The creasote treat- ment plants are fairly modern and are equipped with U.S. -made full-cell and empty-cell pressure treating facilities. Plywood manufacture is by far the most important forest product industry in Taiwan. It is also the most prodigious consumer of imports. Limited production of plywood first began in 1958. By 1960, Taiwan was producing about 110 million square feet and by 1965, 847 million square feet. Roughly 90 percent of the output is exported, earning $26.4 million in 1965. There were 15 plywood factories on the island making plywood sheets, flush doors, flooring blocks, furniture parts, and prefabricated window frames. Although softwood is generally used in the United States to make plywood, Taiwan's industry uses hard- wood and must import all of it, mainly Philippine lauan logs. Local cypress is also used to some extent, but the cost is high. Virtual Philippine control of lauan log supply poses a potential threat to Taiwan's industry. It is conceivable that the Philippines will some day want to curtail its export of lauan to com- petitive industries in Taiwan, Japan, and other coun- tries. Taiwan will then have to look elsewhere for its log supply, possibly North Borneo. The Government would prefer, of course, to develop a local substitute and therefore is promoting the use of teak, spruce, and hemlock as possibilities. Logs may only be im- ported by end users (e.g. manufacturers). The duty is 25 percent. Resin and glue requirements are met locally with urea resin and phenolic resin glue. 39 Plywood factories are generally well equipped with modern production facilities in order to maintain adequate quality control for export. Machinery in- cludes cross-cut chain saws, automatic electric dimen- sion saws, rotary lathes, veneer slicers, automatic clippers and veneer dryers, glue spreaders, cold and hot presses, scrapers and sanders, miscellaneous wood- working machinery, and temperature and humidity control instrumentation. Nearly >1 million worth of plywood and laminating olant machinery and parts were imported in 1965. No import restrictions apply. Japan and Germany have been the leading suppliers, although some U.S. and local machinery is being used. The artificial board industry is relatively new, but because of marketing difficulties and competition from plywood, its growth has been slow. Six plants are now operating. Four use local bagasse to produce bagasse hardboard, insulation board, and acoustical tile, and two are using wood waste, resin, and wax to produce particle board. No raw material imports are required. Bagasse board is made either by the wet pressing process or the combination process. With the former, the wet board formed is directly hot-pressed and dried into hardboard. In the combination process, the wet board is first dried into insulation board (sometimes sold as such), and further compressed under high temperature and pressure into two-sided, smooth, high-grade hardboard. Digesters and beaters are locally made, but the refiners, the board forming and drying machines, and the hot presses are imported. The United States is the leading supplier of such equipment. Production of bagasse board rose from 2.7 million pieces in 1960 to 3.3 million pieces in 1965. The two particle wood shaving-board plants use a dry process, mixing shavings with synthetic resin and wax under heat and pressure. Most of the machin- ery is imported including wood shaving machines, dryers, glue mixers, forming stations, prepresses, hot presses, and sanders. Germany, Japan, and the United States are the main suppliers. There are no import restrictions on any of the machines used. The woodworking industry represents a modest but growing market for imported machinery and, to some extent, high quality woods. Woodworking, particularly furniture making, is an ancient art among the Chinese, and there are probably more than 2,000 furniture craftsmen throughout Taiwan. Most of their shops are not mechanized and almost all work is done with hand tools. However, the Gov- ernment is encouraging the development of a mecha- nized furniture industry, and this could well generate VERSATILE SHIHMEN DAM: it's used for flood control, power generation and water supply. demand for certain types of woodworking machinery. There are now only about ten large woodworking factories in Taiwan producing furniture, flooring, parquet, window sashes, flush doors, and precision shuttles and bobbins for textile looms. Local cypress and camphor wood are mainly used, along with local and imported teak. High quality mahogany and walnut are also imported. Other furniture woods, now under import control, are being considered for import to improve the quality of locally made furniture. The large factories are generally equipped with planers, jointers, drill press, surface scrapers, routers, carvers, radial saws, borers, dovetail machines, shapers and single-end tenoners, with 7- to 10-cubic meter com- partment kilns. As new factories are set up, each would require an estimated $150,000 worth of machin- ery to equip a 10,000-square-meter plant. Although some of the common machines can be made locally, most of them will have to be imported. U. S., Japa- nese, and German equipment is preferred. Pulp and Paper Taiwan's pulp and paper industry, with rich fibrous raw materials to draw upon, has excellent potential for expansion. However, rapid progress has been hampered by the inaccessibility of conifer pulping wood, the high cost of logging hardwoods for pulping, the small scale of most pulp and paper mills, anti- quated machinery and equipment, low-quality output fit only for local consumption, and overproduction of certain paper. Improvement and development of the industry is on the Government's top priority list. Considering the present high level of literacy (above 90 percent), the country's comprehensive education program, and the expanding industrial sector, one can expect a substantial increase in internal demand for paper and industrial packaging materials and in- creased production of these items. Taiwan's per capita annual consumption of paper and paper products in 1965 was about 28 lbs. To permit the necessary in- crease in production, there will have to be a sizable increase in imports of wood pulp and waste paper over the next several years, as well as some additional imports of pulp and paper making machinery. Taiwan is already self-sufficient in production of nonwood pulp including bagasse, rice straw, and bamboo pulp; of chemical raw materials such as caustic soda and chlorine; and of most paperboards, paper, and paper products. Certain specialty papers, however, will still have to be imported. There are some 72 pulp and paper mills now in Taiwan, almost all small. Only four have a daily out- put of more than 30 tons; 55 have a daily output of under 10 tons. Most of the mills are using the simple soda process for making pulp. Fewer than 5 mills are using the Kraft process or acid sulfite pulping process, 41 and none presently uses the Sutherland Kraft, bisul- fite, neutral sulfite, chip ground, or chemiground process. There is, however, particularly strong interest in utilizing the 2-stage bisulfite process for bleaching pulp. The attractiveness of this method is heightened by the development in the United States and Canada of the ion exchange recovery process and the Atom- ized Suspension Technique (AST) for chemical re- covery of soda and sulfur from bisulfite. Improve- ments and expansion in these directions are good possibilities for the future, and foreign participation would be well received. Pulp production is confined mostly to bagasse, rice straw, and bamboo pulp since these raw materials are all locally available and relatively inexpensive. The pulp quality, of course, is far poorer than can be obtained from using wood as the raw material. Very little wood pulp is manufactured in Taiwan despite the island's vast forest resources. In fact, only two mills currently use wood as a raw material for chemical pulp. Conifers, which make the best quality pulp, are generally inaccessible and too costly to log in sufficient quantity. Only pine saplings for ground- wood pulp and hemlock for sulfite pulp are used to any extent. Hardwoods and mixed hardwoods are abun- dant but seldom used since their fiber is similar to that of bagasse, which is cheaper and more suitable for use in the many small soda-process mills. There is no production at all of unbleached Kraft pulp. Pulp production in 1965 was about 38,200 tons. Taiwan can presently meet all its requirements for bagasse, rice straw, and bamboo pulp, but only 40 percent of its wood pulp needs. The balance of the wood pulp reauirement, mostly kraft and sulfite pulp, is imported. Wood pulp imports will almost certainly increase, for local production capacity is expected to lag further and further behind demand, particularly as the need for strong packaging papers made from wood pulp grows. Taiwan can now supply all its current coniferous groundwood pulp needs. However, the island's maxi- mum groundwood pulp capacity is only about 21,000 tons, and consumption requirements will probably go beyond that by 1972. Thereafter, groundwood pulp will have to be imported. The current white wood pulp capacity is already at its maximum, about 10,000 tons, and still cannot fully meet local requirements. Roughly 8,000 tons were imported in 1965. By 1968, an estimated 23,000 tons of white pulp will be needed, of which about 13,000 tons will have to be imported. As there is no local production of unbleached wood pulp, the entire requirement must be imported. Imports of 28,000 tons were needed in 1965, and by 1968 about 39,000 tons may have to be imported. The value of these wood pulp imports is consider- able, and increasing rapidly. From 1960 to 1965, wood pulp imports rose from $2.1 million to $5.2 million. The United States and Canada are the leading suppliers of sulfite pulp, the main pulp import. Only end users may import pulp; the duty is 10 percent. The Government has been urged by foreign experts to eliminate the duty as a means of stimulating health- ier development of the paper industries, but as yet no action has been taken. The use of long fibered waste paper as a possible substitute for wood pulp is gaining popularity (par- ticularly for the production of chip board and bottom liner for folding box board). Imports of waste paper in 1965 amounted to over $850,000, compared with only $4,000 in 1960. Further increases are likely. The United States is the main supplier, mostly of over- issue news. Imports are not restricted, and the duty is 10 percent. Taiwan is more or less self-sufficient in production of paperboard and most paper and paper products. Paperboards now being manufactured include manila board, kraft liner board, strawboard, corrugated me- dium board, chipboard, and matrix board. Total im- ports of paperboard in 1965 amounted to only $465, 000, with Japan and the United States the principal suppliers. Although a wide variety of papers are produced, the industry has concentrated heavily on newsprint and other printing papers, (art, printing and poster paper, woodfree printing paper, book paper, blueprint paper) and a few grades of fine paper such as bond and manifold paper. These are all, in fact, being overproduced, with adverse financial consequences. Other papers in which Taiwan is more or less self- sufficient include box cover paper, catalog paper, envelope paper, magazine paper, pamphlet paper, periodical paper, and ticket stock, among printing papers; fine Bristol stock, drafting, ledger, menu, postage stamp, school, text, and writing paper; coarse asphalting, bag and sack, and all grades of wrapping paper; and some tissue papers, for example wrapping tissue and toilet tissue stock. Imports are, however, still depended upon for docu- ment bond paper, drawing paper, bank note paper, high quality cigarette paper, coated paper, wallpaper, some carbon paper, glassine paper, adhesive paper, postage stamp paper, paper yarn, and some tissue writ- ing and printing papers. Total imports of these items in 1965 reached nearly $3 million, compared with about $1 million in 1960. Japan is by far the leading supplier even though U.S. papers are recognized to be of superior quality. Norway and Sweden (tissue paper) and France (cigarette paper) are also repre- sented. Price, rather than quality, appears to be the decisive sales factor. In the long run, Taiwan may again become a sub- 42 stantial importer of paper and paperboard. It is estimated that by 1974, Taiwan's paper production capability could fall behind the amount needed for internal consumption and export. Present production capacity for paper and paperboard is about 160,000 tons. Expansions planned within the next 2 years will boost capacity to about 300,000 tons, which is probably the maximum attainable under foreseeable raw material conditions. However, by 1973, total consumption and export requirements are expected to reach the 300,000 tons that can be supplied locally. Thereafter, imports of paper and paperboard will be increasingly necessary unless new and better wood pulping facilities are established. Taiwan is greatly in need of new pulp and paper making machinery to modernize existing facilities and to accommodate planned expansions in production ca- pacity. Since many of the 72 paper mills have inte- grated pulp and paper facilities, they will be needing both pulp making as well as paper making equipment. Only one plant, the Taiwan Pulp and Paper Corpora- tion's (TPPC) large Hsinying operation makes pulp (bagasse) alone, while about 21 small firms make only paper and paper products. Machinery and equipment now installed at the 72 plants include 22 stationary digesters, 128 rotary spherical digesters, 13 rotary cylindrical digesters, 1 open aquabrusher and 1 asplung difibrator for pulp making; and 17 Fourdrinier, 4 Fourdrinier yankee, 33 cylinder, 90 cylinder yankee, and 19 cylinder board machines for paper and paperboard manu- facturing. Only 2 roll grinders are installed. Expansion projects in the planning stage which will require additional machinery and equipment in- clude a doubling of bagasse pulp capacity and new production of coated papers at the TPPC Hsinying plant, increased production of high quality manifold paper and other papers of industrial use at TPPC's Tatu plant, a new kraft pulp plant of 100 to 150 tons per day capacity at the Chung Hsing Paper Corpora- tion's proposed mill at Hualien, increased produc- tion of kraft paper at Chung Hsings's Lotung Plant, and a new plant of the Pao Feng Industrial Com- pany to produce 10,000 tons of corrugated paper annually. As there are only four manufacturers of paper mill machinery in Taiwan, much of the new heavy equip- ment requirements will have to be imported. One local firm can cast a yankee paper machine dryer up to 120" wide and 10' in diameter, and another can make paper machines up to 84" wide and board machines up to 76". The other firms are producing chippers, screens, pumps, bleach plant equipment, refiners, pulpers, agitators, beaters, head boxes, regu- lators, widers, lay boys, trimmers, sheeters, cutters, and baling presses. Imports of pulp and paper machinery, largely supplied by Japan, the United States, Germany, and Sweden, rose from $482,000 in 1960 to $1.8 million in 1965. Recognized to be of superior quality, U.S. machinery is higher priced than that of competitive suppliers. The best avenue for increased U.S. machin- ery sales would be through joint ventures or licensing agreements with the larger pulp and paper manufac- turers. There are no import restrictions on machinery. The duty is 12% percent. Leather Taiwan has nearly 100 tanneries and 200 or more firms engaged in manufacturing of shoes, gloves, hand- bags, belting, and other leather products. Most of them are very small operations which use hand labor. The quality of the products is usually not high enough to merit exporting, and the local market is too narrow to warrant significant expansion. The leather industry is heavily protected, and im- ports of most leather and leather products are con- trolled. Only cow hides for making upper and sole leather are imported in substantial quantity, over $1.7 million worth in 1965. The raw hide market will con- tinue to grow, as Taiwan's policy of protecting draft cattle severely limits the number of oxen which can be slaughtered. The United States and Thailand are the principal suppliers of hides. U.S. hides are pre- ferred for sole leather and Thai hides for upper leather. The import duty on hides is 15%. Leather belting and roller leather imports are also permitted, but imports are negligible. The duties are 40% and 10% respectively. Taiwan is self-sufficient in most other leather products, including upper and sole leather, patent leather, leather manufactures and hog- skin. High-grade upper leather, however, must still be imported, owing to inferior tanning techniques used in Taiwan. Tanning compounds are mostly imported, averaging $200,0004300,000 a year. South Africa and several Asian countries are the leading suppliers, although some resins and oils come from the United States. Imports are not restricted, and the applicable duties on tanning agents range from 20-25 percent. To increase locally available tanning materials, Taiwan will plant more tannin-yielding trees and will use the tanning extract in conjunction with chemical tanning agents made from spent liquor produced in sulfite paper pulp plants. Also, research into utilization of chro- mium salts will be undertaken. Machinery for tanning, leather processing, and shoe manufacturing is imported, but in negligible amounts. German tanning equipment is usually pre- ferred, while the United States has been able to supply some shoemaking machinery. There are no restrictions on imports. The duty is 15 percent. 43 Rubber Though relatively small, Taiwan's rubber products industry is overproducing, and imports of rubber products are tightly controlled. However, Taiwan has no crude rubber resources, and all natural and synthetic rubber must be imported. Many of the chemicals used in the manufacture of rubber products are also imported. With some exceptions, machinery is locally produced, and overall imports of rubber processing equipment are limited. Established in the early 1950's, the rubber industry grew very rapidly until about 1962, when it began to level off as production caught up with local de- mand. In 1965, production value amounted to $15.2 million. Further expansion of the industry will take place if new export markets can be secured. Some diversification is also a possibility, and this could generate increased demand for raw materials and some machinery. There are now about 100 factories in Taiwan pro- ducing rubber products, including tires and tubes, shoes and boots, belting, insulated wire and cable, sheeting, hose and tubing, foam rubber, and reclaimed rubber. In 1965 total imports of these items excluding tires and tubes amounted to $500,000 and came mostly from the United States and Japan. Taiwan can also produce much of its tire and tube requirements in- cluding the following sizes whose importation is re- stricted, 1000-20, 900-20, 825-20, 750-20, 700-20, 700-15, 670-15, and 600-10. Other sizes, although they are being locally made in larger quantities, must still be imported. Imports of tires and tubes in 1965 amounted to about $58,000, with the United States and Japan the principal suppliers. Import duties on most rubber products are 40-50 percent. The industry's consumption of imported crude and synthetic rubber is over 800 tons a month. Imports of natural and synthetic rubber in 1965 were valued at $3.4 million and $1.5 million, respectively. Synthe- tic rubber comes mainly from the U.S. and Japan, while natural rubber is bought mostly from Malaya, Singapore, and Vietnam. There are no restrictions on imports. Duty on both natural and synthetic rub- ber is 15 percent. All crude rubber is procured by the Taiwan Supply Bureau for end users. Rubber chemicals which must be imported include accelerators, antioxydents, stearine, lithopone, tita- nium dioxide, pigments, carbon black, and pine tar. Imports of rubber accelerators and antioxydents were valued at $305,000 in 1965. Imports of the other chemicals cited are fairly substantial, but are princi- pally for consumption by the paint and other indus- tries. Taiwan can already produce sufficient zinc oxide, calcium carbonate, solvent, naphtha, paraffin, and other chemicals used in the rubber industry. Almost all rubber processing machinery can be made locally, including rubber mixing mills with sizes ranging from 24' to 8' in diameter. The most common size is 12' diameter. Imported equipment is confined to chilled casting rolls, Bambury mixers, and friction calendars. Japan is the main supplier. Im- ports in 1965 were only valued at $120,000. The duty is 12% percent and there are no import restrictions. Most of the testing equipment has also come from Japan because of greater familiarity and, to some ex- tent, lower prices. Plastics Within 4 years, Taiwan could become one of Asia's major producers and exporters of thermoplastics and fabricated articles. Today the island produces only PVC resins and compounds; urea formaldehyde and phenol formaldehyde resins; and fabricated articles of PVC, polyethylene (PE), polystyrene (PS), and a few others. Large imports of raw material such as methanol, plasticizers, and PE and PS resins are still required. However, new plants under construc- tion or being considered for the near future could make the island self-sufficient in all plastic raw ma- terials by 1968 or 1969. In the meantime, imports should increase very rapidly to keep pace with rising output of processed articles. Taiwan's plastics industry is following the same pattern of extremely rapid initial growth seen earlier in Japan and Hong Kong. Unlike Hong Kong, which exports most of its production, Taiwan has strong internal demand as well as export potential. Since plastics can be produced cheaply in Taiwan, they substitute readily for many of the more costly rub- ber, leather, textile, and even metal products. Hence, total thermoplastics consumption for local and export use should increase much faster than in Hong Kong. This trend is already strikingly evident. For ex- ample, consumption of PVC, PE, and PS in 1961 was only about 14.5, 2.8, and 0.8 million pounds, respectively. In 1964, it had increased to 51, 22, and 2.7 million pounds. By 1968, the total requirement could reach about 132, 40, and 4.5 million pounds. All the PE and most of the PS will still have to be im- ported until 1968, after which time production may become adequate. Imports of dicotylphthalate (DOP) and dibutylphthalate (DBP), the main raw materials for PVC, should approximate 20 and 4 million pounds, respectively, by 1968. Taiwan's plastics industry, first established in 1957, turned out only 1,000 tons of PVC that year and exported only $4,000 worth. By 1965, the island was producing 25,300 tons and exporting over $2 million worth of PVC resin and compound and a wide range of PVC, PE, and PS fabricated products. There are four major producers of PVC resins and com- pounds, but more than 300 plastics processing plants 44 have sprung up. Their output includes PVC film and sheet (tubes and pipes, belting, plates, tiles, netting, raincoats, shoes and slippers, garden hoses, phono- graph records, window shades, folding doors, and air mattresses; PE bags, flowers, toys, dolls, bottles, containers, piping, hose, woven rope, shoes, helmets, and kitchenware; PS toys, toothbrush handles, kitch- enware, and radio cases; polyurethane foam; acry- lic plates, and some bakelite. PVC is made by the Formosa Plastic Corporation and three new plants which were set up in 1966. By 1967 annual capacity will reach 36,500 tons. The basic raw materials for making PVC — calcium carbide and hydrochloric acid — are available locally as byproducts of the alkali and fertilizer industries. Prospect exists for cracking CPC's liquified petro- leum gas to obtain acetylene, but no efforts in that direction have yet been made. From the PVC resin, Formosa Plastics makes both plasticized and rigid compounds, as well as copoly- mers and copolymer compounds. The plasticized com- pounds (70 percent of total production) requires about 500 tons of DOP, DBP, and other plasticizers for each 1,000 tons produced. Since no plasticizers are yet manufactured on the island, imports are substan- tial. About 17 million pounds of DOP and DBP, worth $2.4 million, and another $1.1 million worth of PVC chemicals, were imported in 1965. The DOP and DBT requirement could reach 20 and 4 million pounds respectively by 1968. Other phthalate plasticizers, such as DOP substitute (Messamol), epoxy plasticizer, tricresyl phosphate, diisooctyl phthalate, and diiso- decyl phthalate, are less significant imports. The United States, Japan, and Italy are the main suppliers. Imports are not restricted. Duty is 20 percent. After 1968, Taiwan may be producing its own DOP. Union Carbide Asia Ltd. is building a $1.4 million plant to produce 50 million pounds of DOP a year and will begin operating in 1968. In addition, For- mosa Plastics is constructing a 9.2-million-pound-a- year plant to supply part of its needs. The total out- put of these two plants should cover all the island's DOP requirement, and imports would begin falling off sharply by 1969. Both plants will have to import phthalic anhydride as the raw material, since none is produced locally. Imports of the latter have not been very great thus far, about 1 million pounds a year for making paint and alkyd resins, but they could go as high as 20 million pounds when the DOP plants begin producing. The Government believes local production of phthalic anhydride from O-xylene may become feasible once CPC adds a proposed mixed xylene separation unit to its Aromatic Solvent Works at Chiayi. However, this is a long-run prospect, and will not affect imports of phthalic anhydride during the next several years at least. No import restrictions apply, and the import duty was reduced in 1965 from 20 percent to 10 percent. Aside from PVC, urea and phenol formaldehyde resins are the only other plastic molding compounds made in Taiwan. The nine producers of the phenolic resins can meet the domestic requirement, as few firms are processing the materials into plastic articles. All the raw materials — urea, phenol and formaldehyde — are also locally available. Urea is produced from local natural gas by a U.S. firm jointly with CPC Most of the urea goes for urea fertilizer, but an ade quate supply is available for resin production. Pheno is made primarily by CPC from sulfonation of ben zene and by another firm from local coal tar. For malin is produced by two firms, using imported methanol. Methanol imports are heavy. In 1965 they totaled 24 million pounds worth $800,000. By 1968, the methanol requirement may reach 50-60 million pounds, but two methanol plants being constructed could cut import needs to about 14 million pounds by that time. Japan and the United States are the main suppliers. Duty is 10 percent. Since no PE or PS resins are yet produced locally, Taiwan's increasing fabrication of those plastics will depend entirely on imports until projected new plants are constructed in 1967. There are now about 70 processors of imported PE on the island. About 75 percent of the PE resin imported into Tai- wan is the conventional (high-pressure or low-density) type used for thin packaging films and injected molded plastic articles. Linear PE is used for heavy duty films and extruded plastics. Since PE is in heavy demand for packaging in the rapidly expanding food industry, its consumption should grow at a faster rate and eventually have a larger market in Taiwan than PVC. By 1968, the annual PE requirement should exceed 40 million pounds compared with 28 million pounds in 1965 and only 1.5 million pounds in 1960. The 28 million pounds imported in 1965 were valued at $4.7 million and came mostly from the United States, Canada, Japan, and the U.K. There are no import restrictions. Duty is 25 percent. Experts believe that a 40 million pound internal demand for PE could support local production of the resin, To assure raw material availability, CPC will borrow $5.4 million from the U.S. Export-Import Bank to finance construction of a naphtha cracking unit by 1967 which will have an initial annual capa- city of 50 million pounds of ethylene and 28 million pounds of propylene, as well as butadiene, benzene, and toluene. Anticipating a sufficient ethylene supply becoming available, American National Distillers and Chemical Corporation is constructing a $15-million plant to produce 40 million pounds of conventional PE a year. Its completion in 1967 should then make Tai- 45 wan virtually self-sufficient in low density PE resin. Linear PE. however, will still have to be imported. As with PE fabrication, Taiwan's PS processing industry is also growing rapidly. Until 1965, the industry had relied entirely on imported PS. Over 6.4 million pounds worth $590,000 were imported in 1965, more than double the 1964 import of 2.6 mil- lion pounds and 8 times the 1962 level of 830,000 pounds. By 1968 the demand could reach 8-10 million pounds, but newly begun local production could re- place most of the imports. Two plants were built in 1965 with a combined yearly capacity of 8 million pounds of PS resin. The United States and Germany have supplied most of the PS thus far. No import restrictions apply yet. Duty is 25 percent. Most of the PS now consumed in Taiwan is general purpose type used for making plastic toys, tooth- brush handles, and kitchenware. About 20 percent of total usage is of high-impact resin, while very little medium-impact resin has been needed. Greatly in- creased use of both general and high-impact PS should develop to supply plastic cases and parts for radio and TV assembly industry. PS foam was intro- duced in 1961 for soundproofing and insulation purposes. Annual consumption is now approximately 100,000 pounds. The two PS plants established in 1965 are im- porting styrene monomer raw material and poly- merizing it locally. To some extent, then, decreased imports of PS will be offset by rising imports of styrene, which also comes mainly from the United States. There are no restrictions. Duty is 20 percent. If internal demand for styrene becomes large enough, local production might be feasible. Sufficient amounts of ethyl benzene raw material to manufacture styrene should be available when CPC completes its planned expansion of naphtha cracking and mixed xylene facilities. Foreign investment is already being sought for a styrene plant. About $1.5 million would be needed for a plant of 5,500 tons annual capacity, the estimated styrene monomer requirement by 1968. The overall outlook for growth of the plastics in- dustry is excellent. As indicated there should be in- creased production of fabricated plastic articles for export; increased production of PVC resin and com- pounds for local use and export; new production of DOP plasticizers for the PVC industry; new pro- duction of phenol formaldehyde, urea formaldehyde, and polyethylene and polystyrene resins for their respective processing industries; and new production of petrochemical raw materials and intermediates for making PVC, DOP, formaldehyde, polyethylene, polystyrene, and styrene. These developments will cause imports of phthalate plasticizers, polyethylene and polystyrene resins, styrene, methanol, and various plastic chemicals to decline eventually, though with- in the next 2 or 3 years there will almost certainly be sharp import increases for all these raw materials. Continued rapid expansion of the plastics industry will mean increased imports of machinery and equip- ment in both the short and long run. Nearly all the equipment required to construct and operate new PVC, DOP, polyethylene, polystyrene, styrene mono- mer, and other plastic raw material plants will have to be imported. The Government has already an- nounced it would allocate large amounts of foreign exchange for this purpose. U.S. equipment suppliers should benefit mainly from the expansion of raw material producing capacity. The producers are pleased with their present U.S. -made equipment. They are aware of American superiority in chemical en- gineering technology, and in this instance they are financially strong enough to afford the best available equipment. U.S. plastics fabrication machinery, on the other hand, is not well represented. Local processors are using mostly Japanese and German processing ma- chinery, which is cheaper than the U.S. equipment. In addition, Japan appears to be able to deliver more quickly. Nevertheless, an aggressive marketing ap- proach by U.S. firms could be effective. An American manufacturer who can tie in new product ideas and technology with the sale of machinery could develop a profitable business in Taiwan. More than half the local fabricators use only in- jection molding machines. The large fabricators have extruding and rolling equipment as well. The small hand-operated injection machines with capacity of 2.5 ounces or below are made locally. About half have a capacity of 3 to 8 ounces and are either semi- or fully automatic. Some are made locally, but most are imported. Those injection machines with capaci- ties of from 8 to 80 ounces are fully automatic and are all imported. There are about 20 local manufac- turers of injection molding machines. The machines produced are not of modern design or very efficient, but the price is low enough to attract the smaller fabricators. Total imports of plastics manufacturing machinery amounted to $3 million in 1965 and are not restricted. Duty is 15 percent. Textile and Apparel Taiwan is a major producer and exporter of cotton textiles and apparel, and is rapidly developing its wool, rayon, polyamide, and polyester capability. Textile exports began in 1954 and were valued at only $350,000 in that year. By 1960, they reached $21 million and in 1965, $65 million. Fifteen years ago, Taiwan was a multimillion dol- lar importer of textile yarn, fabric, and clothing. Now, Taiwan can export all these products and im- ports are negligible. Import demand has shifted to- 46 ward primary raw materials and machinery, imports of which are prodigious and increasing. For example, raw cotton, raw wool and wool tops, manmade staple fibers and filament in 1965 exceeded $66 million, more than double the 1960 import level of $27.8 million. Correspondingly, general textile machinery and sewing and knitting machinery more than trebled from $5.1 million in 1960 to $18.6 million in 1965. The cotton textile industry, Taiwan's largest export exchange earner after sugar, experienced phenomenal growth from about 1958 to 1962. Thereafter, further expansion of capacity, production, and export leveled off owing to voluntary export restraints. Future devel- opment of the cotton textile industry will continue to be more gradual and will emphasize renovation and modernization of existing facilities and production of diversified and high quality items. Main products of the industry now are yarn; ginghams; flannels; grey, bleached, and yarn-dyed piece goods; print cloth; corduroy and velveteen; children's wear; blouses and shirts; ladies' and men's slacks; knitted underwear; pajamas; handkerchiefs; and towels. Production amounted to 55,000 tons of yarn and 253 million yards of piece goods in 1965, compared with 40,000 tons and 192 million yards, respectively, in 1960. Cotton textile spinning and weaving capacity is substantial. In 1965, there were 527,000 spindles and 20,000 looms installed in more than 100 mills. However, about 20 percent of the industry is substand- ard. Many of the spindles are old and inefficient, and the majority of the mills have too few spindles to op- erate economically. Much new equipment will be needed, and to a large extent it will have to be im- ported. On the other hand, some mills, particularly the vertical plants, are fully equipped with the most modern automatic machinery. If additional expansion of capacity takes place, it will probably be undertaken by the vertical mills, which are well financed and will then be in the market for the latest type of equipment. Japanese, German, and Swiss suppliers have provided most of the equipment, generally quoting lower prices and longer term credit than U.S. suppliers. Raw cotton is not grown sufficiently in Taiwan and must be imported in substantial quantities. Imports in 1965 amounted to 285,000 bales (500 lbs. each) NOTHING BUT THE BEST: the latest in equipment reflects the newness of the United Nylon Corporation's factory, which was completed and began turning out nylon-6 in late 1964. 47 valued at $36.2 million. The United States is the major supplier, mostly of middling cotton, followed by several countries in Central and Latin America. The more modest wool textile industry has also enjoyed considerable expansion, but unlike the cotton textile sector, anticipates further rapid growth. The industry's product mix includes woolen and worsted yarn, worsted knitting yarn, woolen and worsted fabrics, wool gloves and sweaters, and, beginning in 1965, wool tops. Production in 1965 amounted to 7.8 million pounds of woolen and worsted yarn and 6.4 million yards of woolen serges, compared with only 1.5 million pounds, and 1.8 million yards, res- pectively, in 1960. Exports of yarn and fabric in 1965 were valued at $5 million. The industry has been totally dependent on raw wool imports, supplied mostly by Australia, New Zealand, and Japan. In 1965, imports of raw wool amounted to 7.6 million pounds valued at $6 million. Until 1965, wool tops were also a major import; in that year they amounted to 4.3 million pounds at $5.4 million. Australia and Japan were the main suppliers. In 1965, two wool top plants were built whose combined capacity is nearly 8 million pounds a year, to make Taiwan virtually self-sufficient in wool tops. As for machinery and equipment, there were 44,- 600 spindles and 600 looms in operation in 10 mills in 1965. Spindle capacity alone has more than tre- bled since 1956, when it totaled 11,150. Further expansion is expected. Most of the machinery has come from Japan, the United States, Germany, and Switzerland. Very little can be produced locally. There are no import restrictions; the duty on all textile machinery is 15 percent. By far the most promising of Taiwan's textile in- dustries is the manufacture of manmade fiber and products. Very limited production of rayon filament and staple fiber began in 1957 and 1958, and total output reached 3,571 tons in 1960. By 1965, total fiber production had risen to 5,100 tons. Production (about 50 tons) of polyamide (Nylon) filament was started in 1964, and some polyester (Dacron) fiber capacity was added in 1965. By 1968, however Tai- wan's total output of manmade fiber is expected to increase by 8 times to reach 50,000 tons, including rayon, polyamide, polyester, and polyacrylonitrile (Orion) fiber. The manmade yarn and fabric industries have pro- gressed more rapidly. In 1960, only 5,850 tons of yarn and 6.8 million yards of fabrics were produced. By 1965, output had increased to 14,300 tons and 38.1 million yards, respectively. Further large increases are expected as more locally produced fiber becomes available. Imports of both the fiber and the yarn and fabrics SERIOUS WOOLGATHERING: the Chungho wool-top factory is the first of its kind established in Taiwan. It supplies the island's growing woolen textile industry. have been sharply affected by the industry's dynamic expansion. The tremendous growth in yarn and fabric output, for example, has virtually eliminated once sizeable imports of those items. On the other hand, the same growth in yarn and fabric output has sharp- ly increased the demand for imported fibers. Gradual- ly, as local fiber production expands, the substantial imports of fiber will also begin to fall off. Imports of rayon, polyamide, polyester, polyacrylic, polyvinyl alcohol, polyvinyl chloride, polypropylene, and other staple fiber and filaments reached $19 million in 1965, compared with only $3.3 million in 1960. Japan is the chief supplier. The next significant import wave will be for the raw materials needed to produce the various fibers — dissolving pulp in the case of rayon fiber, and capro- lactum and dimethyl terephthalate (DMT) for polya- mide and polyester fibers. Imports of dissolving pulp and the petrochemical intermediates have been in- creasing markedly since 1964. Eventually, as Tai- wan's own petrochemical industry develops, and par- ticularly as aromatic hydrocarbons become abundant, even the caprolactum and DMT will be able to be made locally. Thus, the long run outlook is for little or no im- ports of yarn and fabrics, steadily declining imports of fiber, and very gradually reduced imports of 48 caprolactum and DMT. Only the dissolving pulp has a long term future. In the short run, however, at least until 1968, imports of both the fiber and petro- chemical intermediates, as well as dissolving pulp, should expand. Since the United States is the princi- pal supplier of caprolactum, DMT, and dissolving pulp, U.S. sales to the manmade fiber industry should do well for at least several years. Japan, as the lead- ing supplier of fiber, yarn, and fabric, is likely to lose its markets first. Following is a more detailed analysis of the principal manmade fiber sectors. Demand for rayon is fairly high in Taiwan because this material is a good substitute for cotton, and it can be blended with other fibers to make quality clothing material for the export market. Domestic fiber output, though begun relatively early, cannot yet meet the entire demand. In 1965, only 5.1 million pounds of 150 denier rayon filament and 6.2 million pounds of rayon staple fiber were produced, requiring imports of an additional 25 million pounds ($5.3 mil- lion) in 1965, mostly from Japan. The Government hopes to attract foreign investment to set up additional rayon fiber plants. One U.S. firm is already planning a joint investment in a cellulose acetate plant. Another, Chemtex, Inc., has increased its investment share of Taiwan's leading rayon producing firm — the China Man-Made Fiber Corporation. Local production of polynosic fiber — an improved version of rayon — is also considered feasible. By 1968, output is expected to reach 7.9 million pounds of filament, 30.8 million pounds of staple fiber, 30.8 million pounds of poly- nosic fiber, and 2.6 million pounds of cellulose acetate. This will still leave a deficit of about 25 million pounds of rayon filament and 27 million pounds of rayon and other cellulose staple fibers in 1968 which will have to be made up with imports. As local pro- duction approaches self-sufficiency, import restrictions will probably be imposed and the import market shut off. At present, only the factories can import rayon fiber. The duty was reduced in 1965 from 80 percent to 40 percent. Taiwan has an adequate domestic supply of caustic soda for rayon fiber manufacture. However, dissolving pulp, the other basic raw material, is not yet produced locally, mainly because suitable wood is not available in large enough quantities. Although one new rayon plant plans to set up a wood pulp mill to supply its own needs, most of the dissolving pulp for the rayon fiber industry is and will continue to be imported. About 12,000 tons arrived in 1965, all from the United States. By 1968, the demand should reach about 16,000 tons for both rayon and cellophane produc- tion. Only end users may import dissolving pulp. Duty is 10 percent. Demand for polyamide fiber materials is also high because they are suitable for Taiwan's warm climate and have good blending capacity for the export mar- ket. Until 1964, Taiwan's production of polyamide yarns depended entirely on imported multifilament and stable fiber. Local production of Nylon 6 filament began in 1964 (110,000 pounds), and several new filament and staple fiber plants are now being con- sidered, it is hoped with foreign investment participa- tion. Production capacity by 1968 may reach only about 13.8 million pounds of filament and 1.5 million pounds of fiber, still below the projected combined requirement of 17.4 million pounds. Hence, imports will be needed in large quantities for several more years. Roughly 15.9 million pounds worth $8.2 mil- lion of Nylon 6 multifilament and staple fiber were im- ported in 1964, mainly from Japan. In addition, the United States has supplied very small quantities of Nylon 66. End users only may import the fibers. Duties were reduced in 1965 from 50 percent to 40 percent on the staple fiber and from 55 percent to 45 percent on the filaments. The polyamide fiber plants now being established in Taiwan will all use imported caprolactum from the United States as the basic raw material. Demand for caprolactum is high, currently running over 7 million pounds a year. Imports should increase sharply, per- haps up to 19 million pounds by 1968. The polyester fiber industry also has considerable potential. Since the fiber blends easily with cotton suitable for warm climates and wool for cooler cli- mates, it has good export prospects in many countries. Thus, like the polyamide fiber, local polyester fiber production is also being started (110,000 pounds in 1964), with several plants in the construction stage. By 1968, polyester fiber capacity may reach about 7.5 million pounds of filament and 8.6 million pounds of staple fiber, considerably above the projected 1968 requirement of about 10 million pounds. Imports, which in 1964 reached 4.4 million pounds, worth $2.3 million, will increase sharply over the next several years until local production catches up with the demand. Japan is the dominant supplier. Only the end users are eligible to import. The duties on poly- ester staple fiber and filament are 40 percent and 45 percent, respectively. Taiwan's polyester staple fiber is made entirely from polymer resin, which is locally produced from imported dimethyl terephthalate (DMT) and ethylene glycol. DMT imports are now running over 2 million pounds and are increasing rapidly, with the United States the main supplier. However, the Government believes that production of DMT from local para- xylene will soon be feasible. Local production of ethylene glycol is not feasible, and this will still have to be imported. As yet, Taiwan is producing no other manmade fibers. Under consideration for the near future, how- 49 ever, are plants to manufacture polyacrylonitrile staple fiber using locally produced propylene. Since the acrylic fiber is an inexpensive, low quality material which most people in Taiwan can afford, it has per- haps the greatest potential for local development. The fiber is now imported in large quantities from Japan — nearly 4 million pounds valued at $2.1 million in 1964. The projected 1968 requirement of 14.8 mil- lion pounds will still exceed the 9.7 million pounds officials hope will be produced by 1968. Duty rates are the same as for polyamide and polyester fiber. As indicated, Taiwan is already self-sufficient in the production of manmade yarn and fabrics for the local garment industry and for export. Total yarn im- ports in 1965, entirely from Japan, amounted to only about 65,000 pounds worth $30,000 of rayon yarns; and 12,000 pounds worth $17,000 of polyamide, poly- ester, acrylic, and other yarns. Imports are tightly restricted to protect the local industry, and duties are 50 percent on spun yarn, 55 percent on filament yarn, and 60 percent on thread. Fabric imports, although tightly restricted as well, totaled 443,000 pounds worth $1 million in 1965, again mostly from Japan. The import duty on all manmade fabric is 80 percent. Local production of manmade yarn and fabrics in- cludes spun rayon yarn, stretch Nylon yarn, Orion spun yarn, Nylon thread, Tetoron yarn, spun rayon flannel and gingham, Nylon fabrics and secondary goods. In addition, Taiwan is also producing blended yarn and fabrics for local consumption and for ex- port. Products include polyester and wool yarn and fabrics, polyester and cotton fabrics, Nylon and cotton fabric, spun rayon and cotton blended yarn, rayon and cotton fabric, and silk and rayon fabric. In the case of cotton blends, the cotton content is kept below 50 per- cent in order to satisfy the multilateral agreements on cotton textile exports. Thus, blended fabrics have the greatest export potential of all Taiwan's textile manu- fatcures. Considerable expansion of production can be expected, with corresponding increased demand for raw materials. All the machinery for the manmade fiber industry is imported, with the United States the principal sup- plier. In 1965, there were approximately 126,000 spindles and 550 looms installed. Some spinners are expected to modernize their facilities to include poly- merization as well as spinning. Almost all existing producers plan to expand their capacity. By 1968, at least 6 new companies will join the current 3 in producing rayon, polyamide, polyester and polyacrylic fiber. In addition, the Government is encouraging es- tablishment of a manmade fiber industrial center at Towfen, where the largest rayon and nylon plants are now located. The plants to be built there would pro- duce and export textiles processed from locally pro- duced filament and staple fibers. The preliminary plans call for construction of 4 or 5 brocade plants for daily output of 500-550 yards, 2 or 3 knit- ting plants for 15,300 yards of feather yarn a day, 1 printing and dyeing plant to process 1,800 to 2,000 yards of sheeting daily, 2 or 3 knitting plants to produce 4,400 to 4,500 pounds of gray sheeting a day, 1 plant to turn out 200 pounds of metallic yarn and 500 pounds of paper yarn daily, 1 or 2 stretch Nylon plants to produce 3.200 pounds of stretch Nylon yarn a day, 1 laminated fabrics plant to make 2,000 yards of material a day, 2 or 3 garment plants to produce 900 to 1,000 dozen shirts or other gar- ments a day, 1 rug plant to produce 2,000 to 2,100 yards of rugs a day, 1 plant to make 5,000 square yards of fabrics that are not knitted, and 1 fully equipped research institute. The printing, dyeing, and finishing industry has considerable need for improvement. Although present capacity appears large enough to meet Taiwan's needs for bleaching, dyeing, printing, and sanforizing cloth, the quality of output is not as high as it should be to enjoy better export markets. Much of the equip- ment is of local manufacture and obsolete. Replace- ment of machinery and installation of new testing instruments are essential. Sales opportunities for dye- ing and finishing machinery should, therefore, be good. Taiwan also lacks technical knowledge of advanced dyeing and finishing methods. Licensing agreements in this field would be particularly wel- come and could be tied in with the sale of machinery. Synthetic organic dyestuffs are in great demand and are nearly all imported, with Japan, Switzerland, and Germany the main suppliers. Imports on the whole are increasing. In 1965 total imports amounted to $3.2 million, compared with only $1.2 million in 1960. The demand is highest for acid dyes, basic dyes, dis- persed dyes, sulfur dyes, naphthol dyes, and vat dyes. Reactive and mordant dyes have limited demand. Taiwan, now can only produce sulfur black, but the Government is encouraging the development of the dyestuff industry, and over the long run imports may fall off. Except for sulfur black, imports are not restricted; the duty is 25 percent. The garment industry has developed from prac- tically nothing only 5 years ago to one of Taiwan's main export performers. Production of cotton gar- ments began on a small scale in about 1960, followed in short order by wool, rayon, polyester, and blended fabric items. Value of production in 1960 was too small to be recorded. It grew to $44 million by 1964 but declined the following year to $28 million. During the same 1960-65 period, exports of wearing apparel increased from only $2.8 million to $18.3 million. At present, the garment industry produces mostly cotton, rayon, and cotton-rayon apparel, such as underwear, shirts, blouses, sweaters, socks, pajamas, children's 50 THE FINAL TOUCH: huge machines polish the glass products of the Hsinchu Class Works, which makes sheet glass and rolled figure glass for export to the United States and several European countries. wear, slacks and outerwear; Nylon hosiery and other Nylon garments; and increasingly, polyester and wool- worsted slacks and suits. It is expected that Taiwan will be increasing its exports of garments made of cotton and/ or wool polyester blends. Fabric and piece good requirements for the gar- ment industry are almost all produced locally. How- ever, there would appear to be good potential for sales of garment making machinery in Taiwan, par- ticularly knitting and sewing machinery. Imports have increased sharply since 1960, from just about zero. By 1963, over $1 million worth of sewing and knitting machinery was imported and in 1965 over $2.6 mil- lion worth. Further expansion of the industry is al- most a certainty. Japan has thus far supplied most of the sewing and knitting machinery, with Germany and the United States exporting some. There are no import restrictions; the import duty is 15 percent. Glass Once a sizable import, flat glass is now produced locally in sufficient quantity for export as well as for the domestic market. Less than $32,000 worth of glass was imported in 1965, mostly high grade sheet and plate glass, common window glass, and colored, stained, ribbed, embossed, and wired glass. Of these, only wired glass and silvered glass are not restricted. Duties on all flat glass items range from 40 to 60 percent. Other glass products namely bottles, fluores- cent light tubes, ampoule tubes, glass lamp bulbs, and glassware are also locally available in sufficient supply Raw materials for glass manufacture including sili con sand, soda ash, dolomite, salt cake, charcoal and limestone, are locally available and not importable However, while there is virtually no market for im ported glass raw materials and flat and other glass 51 products, there will be periodic opportunities for sales of machinery and equipment. Only one company in Taiwan, the Hsinchu Glass Works, now makes flat glass. It has five plants largely equipped with U.S. machinery and produces annually 1.500,000 cases of sheet, frosted, figured, sculptured, and laminated safety glass. A new com- pany, the Taiwan Glass Company, is constructing a plant which, under a Japanese license, will produce about 400,000 cases of sheet window glass and 200.000 cases of figure glass annually. The initial machinery requirements of over $2 million will be supplied by Japan. With the demand for flat glass constantly rising, the two major flat glass producers will be expanding productive facilities from time to time. This process will create continuing opportunities for sales of glass- making machinery i.e., drawing, cutting, annealing, bonding, frosting, grinding, washing, drying, rolling, cooling, beveling, and polishing machinery, and vari- ous kinds of glass testing equipment — screen testers, grain size counters, spectrophotometers, and density and viscosity testers. In addition to flat glass expansions, other glass projects are being considered that will require imports of machinery and equipment. These include establish- ing a large-scale glass sand processing plant, a fiber- glass plant, and optical glass plant, and plants for glass blocks and other glass construction materials. Foreign investments and licensing agreements are par- ticularly being sought to produce these products. Im- ports of glass making machinery and equipment are not restricted. Cement Taiwan is the fourth largest cement exporter in the world, after Japan, Belgium, and France. It can supply all its own limestone, clay, sand, and pyrite cinder requirements and needs only to import gypsum, usual- ly from Egypt, Mexico, and Cyprus. Although the industry is not yet producing at its full capacity of 3 million tons, further expansion of production facili- ties is already in process. Over the longer run, capacity will have to be expanded even further. Large quan- tities of cement are needed for commercial and resi- dential construction and in national defense, com- munications, agriculture, forestry, water conservation and other industrial construction. Taiwan's cement ex- port markets, though nearly saturated, will still in- crease to some extent each year. Production in 1965 amounted to 2.4 million tons. The 1968 target is 3.5 million. Thus, by 1968 new kilns will have to be built from time to time to keep up with the internal and foreign demand for Taiwan cement. There are now 14 cement manufacturers in Taiwan producing portland and some white cement. The Tai- wan Cement Corporation (TCC), the largest, operates 7 kilns in its plants at Kaohsiung, Chutung, and Hualien, and alone accounted for half the island's total production of cement in 1965. The Asia Cement Corporation and the Chia Hsin Cement Corporation, each with a 300,000-ton capacity, are the 2 other large producers. Some cement machinery is made locally, but only for small cement plants. The major requirements therefore have to be imported. The original equipment in the largest plants was procured with U.S. AID funds and came from the United States, Germany and Japan. Recent equipment purchases have come prin- cipally from Germany and Japan on a package basis, with the rotary kiln, grinders, pelletizers, coolers, panels, motors, coal preparation equipment, packing equipment, and other parts all included. U.S. prices on package plants apparently have not been competi- tive. However, American coolers, mill motors, kiln drives, and pneumatic pumps seem to be preferred for their superior quality. Also, American parts are often used for replacement purposes. Approximately $5 million worth of cement machinery was imported in 1965. There are no import restrictions on this type of equipment. Base Metals Owing mainly to lack of mineral resources and insufficient capital and technology, Taiwan does not yet have an important metal producing industry. At present, only aluminum and some iron, steel, and copper products can be manufactured locally. How- ever, the Government has clearly set forth as a main economic goal the further development of heavy indus- tries, particularly the base metal and metal consuming industries. A proposed integrated steel mill is one reflection of this new trend, as are the plans to expand copper and aluminum producing capacity. Another expression of this emphasis was the creation in 1963 of a Metal Industries Development Center in Kaoh- siung, financed with the $l-million U.N. grant. The principal functions of the new Center are to assist local plants to improve their metal manufacturing processes, productivity, management practices, and marketing techniques. The Center is also equipped with workshop equipment and research and testing devices whereby to keep up with and train personnel in the latest technological developments in the metals industry. These developments will afford increasing oppor- tunities for the sale of raw materials and machinery and equipment. Metal imports, already very large, are increasing rapidly to meet growing industrial needs, particularly those of the machinery and appliance, vehicle assembly, metal fabrication, transport, com- munications, and construction sectors. Imports of base metals in 1965 were valued at about $78 million, 52 compared with only $32 million in 1960. Japan has been the principal supplier. Machinery imports, on the other hand, have only recently reached noteworthy levels. The island's limited production capability kept imports of metal working machinery under the $1 million level until 1965. In that year, however, im- ports rose to $2 million, supplied mainly by Japan, Germany and the United States; further increases are expected. All of Taiwan's lead, zinc, nickel, tin, and brass requirements have to be imported, and come mostly from Japan, Australia, Malaysia, and Thailand. They are normally procured in unworked form for further processing into bars, rods, sheets, plates, and pipes. Imports reached $5.8 million in 1965, more than triple the 1960 value. The United States supplies part of the zinc but little else. No significant expansion of rolling or extruding capacity is expected. Some electrolytic copper is produced direct from copper concentrate by the Taiwan Metal Mining Cor- poration ( TMMIC ) and, to a lesser extent, by private companies using copper scrap. Total production is far below the domestic requirement, and substantial imports are necessary. Output of electrolytic copper in 1965 was only 1,900 tons, a slight increase over previous years. Another 1,500 tons of unworked copper valued at $1.7 million was imported in 1965, along with 2,700 tons of copper bars, rods, sheets, plates, pipes, wire, strips, and foil valued at $2.8 million. Japan is the major supplier of both worKed and unworked copper. There are no restrictions on imports; the duty ranges from 15 percent on unworked to 20 percent on worked copper. The Government is strongly encouraging increased local production of copper to replace imports. TMMIC plans a major step in that direction with its proposed construction of a $5-million electrolytic copper plant, with an annual capacity of 6,000 tons. This would presumably make Taiwan self-sufficient in copper ingot. It could also lead to an expansion of processing capacity once a greater supply of ingot is produced. Much of the machinery for the new ingot plant will have to be imported. Thus, TMMIC may soon be in the market for blast and refining furnaces, electro- lyzing equipment for smelting and refining, and pumps and compressors. The aluminum industry is the most highly devel- oped and successful of Taiwan's several metal indus- tries. A low-cost power supply, booming local demand for aluminum products, and limited competition from higher priced steel products, all make the outlook for further growth excellent. The sole producer of base aluminum is the state-owned Taiwan Aluminum Corporation (TALCO), and its plants are operating at nearly full capacity to keep pace with local demand. Some 70 small-scale factories are also processing various aluminum products, including wire, cable, door and window frames, zippers, tooth- paste tubes, and utensils. Export markets have yet to be fully exploited. Further expansions will clearly be necessary and are already being planned. The latest by TALCO, in 1965, involved purchases of $4.6 mil- lion worth of machinery and equipment from Germany to expand rolling facilities. TALCO can now produce 42,000 tons of alumina and 20,000 tons of ingot a year, using imported bauxite from Malaysia, petroleum coke and soft pitch from the United States, and caustic soda from local sources. It also has its own rolling, foil, and extruding mills turning out sheets; strips and circles; plain, paper-backed, printed, and embossed foil; and bars, rods, wire, nails, rivets, pipes, sections, and other finished aluminum products. The new expansion proj- ect will enable TALCO to begin production of bus and truck chassis, railroad rolling stock, fishing ves- sels, textile spindles, electrical plates, cables and wires, and parts for television sets, refrigerators, and wash- ing machines. Under another expansion project, TALCO will spend $5 million more to raise alumina and ingot production to 70,000 tons and 30,000 tons, respectively. TALCO s overall output of aluminum and alumi- num, products is nearly sufficient for local needs. Only about 2,700 tons of aluminum, worth $475,000 was imported in 1965, largely unworked aluminum alloys from the United States. However, most of the ma- chinery required for TALCO's expansion projects, which are planned every 2 years on the average, must be imported. Since TALCO is a government enter- prise, procurement of machinery is done on a com- petitive bid basis through open tenders issued by the Central Trust of China, Taiwan's state trading agency. Price is the decisive sales factor. U.S. machinery is already well represented in TALCO's plants, as is Japanese, German, and local equipment. For example, in the reduction plant, the electric arc furnaces and tapping ladles are American, the digesters are Japa- nese, and the pots are local; in the casting shop, the continuous casting mold and oil-fired furnaces are local, the slab cutting machines German, and the scalping machines Japanese; in the rolling and foil mills, the roll grinding, rough and fine rolling, and embossing machines are U.S., the shearing machines and cold mills for sheet foil (2, 3, and 4 high) are Japanese; the slitter and color printing machines German; and the hot rollers, slab heating furnace, and paperbacking laminating machines local; in the extrusion mills, all the presses and stretchers are U.S. In addition the laboratory equipment is mostly Japa- nese, and the machine shop mostly German. Taiwan's iron foundry industry is not well struc- tured or particularly efficient, but the demand for its castings is increasing and some improvement and expansion will have to take place to raise production 53 and meet the quality standards needed. There are now about 118 foundries on the island producing sufficient gray iron castings but not enough high strength and malleable iron castings. Output consists primarily of cast iron pipes and fittings, vehicle parts, ingot molds, iron parts, and parts for industrial machinery. No separate data are available to show imports of cast- ings; the figures are included in overall import statistics for machinery parts. By 1970. the demand for iron castings is expected to reach 60,000 tons, or 50 percent above 1965 pro- duction. In particular, the demand for better quality irons and better quality castings should increase. Thus, the foundry industry has potential for growth. Although this growth will not likely require appre- ciably increased raw material imports, it could lead to greater imports of foundry machinery. Present equipment is not at all adequate for quality pro- duction. Virgin pig iron, the main raw material for iron castings, is produced locally from one small blast furnace and several small electric furnaces. None is imported, although the unit price of Taiwan pig is from $15 to $42 a ton higher than equivalent U.S. grades. Other locally available raw materials include low grade pig (made from foundry-shop returns and machine shop chips and turnings), scrap iron (con- sisting of machine shop turnings and discarded con- sumer and capital goods), coke, limestone fluxes, acid-type furnace linings (either firebrick or silica blocks), and molding and core sands. Scrap iron, mainly in the form of engine blocks from the United States, is also imported, but under carefully controlled conditions to guard against their conversion into usable engine blocks. The import duty is 10 percent. Most of the foundries are small scale, inefficient, and inadequately equipped. The quality of castings produced is generally poor, and improved techniques and machinery are clearly needed, particularly in terms of cupola design, sand preparation handling facilities, and cleaning and fettling equipment. Mold- ing practices also require improvement, notably in the use of prepared sands for molding and core making to obtain higher quality castings. The majority of installed melting units are either of the small or conventional cupola types, with metal temperatures generally in the range of 1380-1430°C. Only a few of the plants have hot blast cupolas for producing at higher metal temperatures (1480- 1530°C). The few Girod arc furnaces in use are out- dated and cannot control chemical composition accu- rately. Only 3 foundries have molding machines. The demand for particular castings is too limited for eco- nomical machine molding. For large molds, a few shops employ pneumatic rammers; sand slingers are not used. Sand preparation is done mostly by hand, although some of the larger shops have sand mullers for mixing purposes. Green sand molding is the process used in nearly all the shops, even though it is obsolete and results in defects in the castings. Pit and floor molding is widely used for larger casting, while centrifugal casting is used to make cast iron pipes. Core making is done almost entirely by hand. The pouring equip- ment employed for transferring hot metal from cupola to mold is primitive. Only a few foundries have shot-blast equipment or tumblers for cleaning the castings, which is largely done by hand with wire brushes. Often, too, the castings are delivered as cast, with only the runners and fins removed. Import values for foundry equipment are not available. Most of the equipment in use was locally made. The hot blast cupolas were bought from Ger- many and Belgium. Taiwan probably cannot manu- facture the better equipment needed to modernize its foundry industry, so that any significant improve- ment in this industry would be dependent on imports of machinery. The steel industry has made little progress in recent years. Lacking iron ore resources and having no significant iron producing capability, Taiwan's steel has been refined mainly from imported scrap in elec- tric arc furnaces and rolled in 40-50 small, poorly equipped mills. Production costs are relatively high. Only round-rolled steels can be made locally. Virtually the entire requirement for flat-rolled steels, as well as most shapes, heavy rails, seamless and special pipes and fittings, and silicon and tool steels, must be imported in finished and semifinished form. The industry is just recovering from a financial crisis, brought on by high costs, excess capacity in round-rolled steels, obsolete equipment, mismanage- ment, and overextended borrowing. Thanks to for- tuitous large purchases from Viet-Nam and timely government action, excess production is being siphoned off and the most critical financial difficulties are being overcome. The main problem of high cost production will remain, however, unless the scrap- reliant electric arc furnaces and the antiquated rolling equipment are modernized. Nevertheless, the future of the steel rolling industry is much brighter than could have been imagined only a few years ago. One development offering great promise to existing mills is the proposed $35-million investment by the Esso Standard Eastern Co. of the United States to build a 1 -million-ton sponge iron plant, using imported iron ore from Malaysia. The most dramatic prospect is the proposal now under consideration for an 800,000-1 million ton inte- grated steel mill costing some $200 million. If it is built, such a mill would triple Taiwan's 1965 steel output of about 310,000 tons. An American consulting and engineering team submitted its report on the feas- ibility of the proposed mill in November 1966. 54 Of the 50 or more steel plants now operating, only 2 are equipped with iron and steel smelting and steel rolling facilities. Most of them simply refine scrap into steel ingot and process the ingot into a few round rolled products — mainly round bars, wire rods, small angles, light rails, rivets, nails, and screws. Small quantities of flat products are also produced, for example black and galvanized sheets and tin plate, but in each case the base plates or sheet bars must be imported. They are rolled and later galvanized or coated with tin. Steel plate is not produced; it must be entirely imported. Some steel pipe can be made locally from imported strips by the welding process. Scrap refining is done almost exclusively in electric arc furnaces having high rates of power consumption and limited ingot output. The largest furnace now installed has a 10-ton-a-day capacity. All the rolling mills are small and poorly equipped, with a maximum 4" size billet-rolling capacity. Only one steel plant has integrated facilities for producing steel direct from iron ore by electric smelters and oxygen convert- ers, but its capacity is only about 30,000 tons a year. Pig iron is not used for steel melting because the electric arc furnaces in nearly all the plants take 100 percent scrap charges. With no great demand for pig iron in the steel industry, few pig producing facilities have been established. Total output in 1965 was only 72,000 tons, just sufficient for the needs of the iron foundry industry. Thus, there is no substantial iron producing facility in Taiwan to form a foundation for the steel industry, hence demand for steel scrap should increase at least for the next several years. About 440,000 tons of iron and steel scrap worth $22 million were imported in 1965, mostly from the United States. Even if an integrated mill is built, the existing, scrap using plants will be expanding their production and will need more scrap. The proposed sponge iron plant may replace some of the scrap import, but current plans call for most of the sponge iron to be exported rather than to be used locally. The import duty on iron and steel scrap was increased from 5 percent to 10 percent in 1965, and only end users are eligible to import it. Basic iron and steel imports are high. In 1965, about 300,000 tons valued at $44.3 million were imported, mainly flat rolled steels from Japan. Pre- sumably, the flat rolled steels made in the integrated mill would eventually replace part of the present import requirement. However, since the project is still uncertain at this stage and, in any case, would not become operational for some time even if established, the steel import market for at least the next several years should expand. Taiwan's steel industry needs improved machinery. Production is carried on for the most part in small, very inefficient units. Fixed assets per plant, for exam- ple, average only about $134,000, while the average horsepower in use per plant is 583. Nearly all the smaller plants have obsolete equipment, some manu- factured locally and some recovered from pre-1945 Japanese plants left on the island. The electric steel refining furnaces in these plants are all of too small capacity. Even the few large plants are operating a good deal of obsolete equipment. Little can be done for the smaller plants in terms of modernization or expansion. Such efforts would be extremely costly and probably not worthwhile. In the case of the larger plants, however, if they are to produce steel at competitive prices, they will have to replace some of their facilities. And if they are to expand and diversify, as they must to survive, they will be needing much new equipment. The most likely fields for expansion are steel bars and rods, angles, steel pipes, galvanized wire, nails, and iron and steel castings. Promising areas for diversification in exist- ing mills, for which additional machinery will also be needed are billets, sheet bars, medium rails, 6" angles, 10" channels, 6-12" I beams, tin plate, and black and galvanized sheet. In addition, the proposed integrated mill would need new machinery for produc- ing pig iron, steel ingot, heavy and thin plates, pipe skelps, black sheets, galvanized sheets, and tin plate. ECONOMY-SIZED SPOOLS: they hold the output of the China Electric Wire & Cable Company. Imports of wire-making machinery jumped more than 600% in value between 1960 and 1965. 55 Imports of steel manufacturing and wire making machinery (excluding machine tools) amounted to nearly $1 million in 1965 compared with $150,000 in 1960. The most active future import demands should be for larger electric smelting furnaces, continuous heating furnaces, graphite electrodes and electrode paste equipment, oxygen converters, cranes, wire and nail making machinery, pipe and tube casting machin- ery, sheet rolling machinery, and equipment for a 24-28" rail and structural mill, cold reversing mills, and plate mills. There are no restrictions on machinery imports; the duty is 10 percent. Machinery and Appliances Perhaps no industry in Taiwan has progressed more rapidly or appears to have a brighter future than the machinery and appliance industry. In just the 5 years from 1960 to 1965, production value of machinery and appliances rose fivefold, from $17 mil- lion to $86 million. Yet, this rising output has hardly kept pace with the rapid growth in demand for ma- chinery and equipment. The rate at which domestic production is beginning to replace the large import requirement is even slower. Thus, machinery imports have expanded from about $36 million in 1960 to about $89 million in 1965, and the prospect of an even faster rate of import increase appears likely. Taiwan has rather limited ability to produce gen- eral industrial machinery. The only machines made with some degree of acceptance are small diesel and gasoline engines, power tillers, textile machinery other than automatic looms, sewing machinery, edible oil extraction equipment, sugar manufacturing and brew- ery equipment, dairy and grain milling machinery, tobacco and rubber processing machinery, printing presses, bookbinding machinery, small industrial steam boilers, small compressors, standard centrifugal pumps, simple machine tools and a variety of hand tools for woodworking, plumbing and machine shop use. Although output of these machines is rising and to some extent replacing imports, many years will elapse before Taiwan can offer adequate substitutes for the machinery and parts that now must be imported. Thus, the long run outlook is for expanding machin- ery imports. Still imported in large and increasing amounts are high-voltage power generating equipment and parts, internal combustion engines, textile machinery, indus- trial sewing and knitting machinery, pulp and paper- making machinery, lumber and woodworking machin- ery, glass and cement making machinery, chemical manufacturing equipment, metal working machinery, pumps and pumping machinery, oil refining equip- ment, and excavation machinery. Also imported in- creasingly, but on a smaller scale, are food processing machinery, packaging machinery, air-conditioning and refrigeration equipment, plastics fabrication machin- FLUORESCENT FOREST: products of the Taiwan Fluorescent Lamp Company are enjoying brisk sales throughout the entire Southeast Asia area. ery, printing and bookbinding machinery, oil drilling equipment, compressors, quality control and testing instruments, and parts for low voltage power generat- ing machinery. (The market for specific industrial machinery is discussed in detail in the relevant indus- try analyses.) There are now about 700 factories in Taiwan mak- ing various kinds of electric appliances and apparatus. Relatively few of these, however, are important pro- ducers. The main emphasis has been on light consumer electric appliances — fans, refrigerators, air condi- tioners, washing machines, freezers, mixers and blend- ers, toasters, incandescent and fluorescent bulbs and lamps, watthour meters, and telephones. Production has increased from practically nothing in 1960 to export capability levels in 1965. New product lines are added each year to the overall mix, and consid- erable plant expansions are taking place all the time, often as a result of licensing agreements with Japanese and some U.S. firms. 56 Imports of consumer appliances in finished form are generally restricted, both to protect the local industry and to avoid spending foreign exchange on unessential luxuries. Nevertheless, imports have in- creased from about $500,000 worth in 1960 to over $1 million in 1965. If the restrictions are ever liberal- ized, as may eventually happen if present economic trends continue, the demand for imported consumer appliances could well expand sharply (the market for these products is discussed further on pp. 56 and 91). Production of electrical apparatus, specifically in- duction motors, transformers, power capacitors, stor- age batteries, and dry cells, is often undertaken by the appliance producers as well as a number of small, specialized firms. To an increasing extent, local production of these items is reducing the former dependence on imports. Transformers are the main item still imported in significant amounts, although their import value has declined from about $1.6 mil- lion in 1960 to under $1 million (290,000 kva) in 1965. Further plant expansions should increase trans- former production to 380,000 kva by 1968, and reduce the import requirement to about 200,000 kva. Local output of transformers under 50 kva capacity is already adequate. Imports of motors, batteries, dry cells, and capacitors fell by more than half from $1.2 million in 1960 to only about $500,000 in 1965. Motors under 1 hp. are now produced locally in sufficient amount. Although the demand for motors is expected to rise sharply from about 220,000 hp. in 1965 to 296,000 hp. in 1968, increased local produc- tion will gradually reduce the import requirement from the 23,000 hp. in 1965 to only 16,000 hp. by 1968. Capacitors below 50 MFD are sufficiently pro- duced, and imports are restricted. Secondary batteries and cells and B dry cells were still importable in 1965, but a new U.S. -owned battery plant near Taipei will probably make Taiwan self-sufficient in batteries in the very near future. Import duties on motors, transformers, and capacitors range from 15 to 35 per- cent, while the duty on batteries and dry cells is 35 percent. Japan has been the principal supplier of most electrical apparatus. The spectacular growth of electric appliance and apparatus output has resulted in sharply increased local demand for electrical materials and components. Some can be made locally, such as low-voltage insulators, switches and sockets, permanent magnets, copper and magnet wire, and insulated wire and cable. However, Taiwan is a long way from self-sufficiency in these materials, and considerable imports, which increased from about $3 million to $6.4 million in 1960-65, are still required. The principal imported items are parts for refrigera- tors and air conditioners (compressers, evaporators, and condensers), parts for watthour meters and trans- formers, electric cords, bare copper and insulated wire, insulating materials, and plugs, sockets, insu- lators, and fuse switches. Of these, only insulated wire and cable show a declining import trend as a result of increased local output. They fell from $1.7 million in 1960 to $1.4 million in 1965, with Japan the main loser. Refrigerator parts imports increased from nil in 1960 to over $1.9 million in 1965, mostly from Japan and the United States. The latter may begin leveling off, but imports of air-conditioner parts should increase rapidly. U.S. suppliers should there- fore find excellent opportunities in the air conditioner field, particularly through licensing agreements and joint ventures for local assembly. In fact, Japanese licensors or partners usually require in their agree- ments that the raw materials be purchased from or through them. This technique offers the best promise of penetrating the import barriers against finished consumer appliances. The Chinese Government is also very receptive to this approach, since it brings in foreign capital and technology and helps to develop local export industries. Duties on imported materials and components are generally in the 20-25 percent range, but may be exempted altogether if the proc- essed appliance is exported from Taiwan. Several United States and Japanese firms have already concluded investments or licensing agreements with local manufacturers in the consumer appliance field ( a full list of such United States firms is given in Appendix D). A case in point is the Tatung Engineering Corporation, Taiwan's leading domestic manufacturer. Capitalized at $2.5 million and oper- ating 14 plants, Tatung has licensing agreements with Whirlpool Corporation of America, International General Electric Co., Westinghouse International, and several Japanese firms. The company produces the entire range of consumer appliances now available in Taiwan and adds, on the average, one new appliance a year to its production line. It also produces motors (1/10 to 1,000 hp. ), transformers (37.5 KVA round core and 500 KVA distribution types ) and power capacitors (260 KMFD ) . Future expansion plans will also include permanent magnets, refrigerators, air conditioners, and tool making equipment. Rapid development of machinery and appliance manufacturing is reflected in the growth of imports of machine tools and specialized equipment used in the industry. Machine tools are, of course, the basic requirement in machinery manufacture. Taiwan can make some of its own drill presses, planers, shapers, simple lathes, power and friction presses, filing and dye making machines, and machine shop tools. But the more sophisticated and precision tools and a large number of machine shop tools must be imported, namely heavy lathes and shapers; milling, grinding, boring, broaching, polishing, slicing, dye making and contour machines; pneumatic and electrically operated portable tools, twist and other drills, files, 57 GROWING ELECTRONICS INDUSTRY: this electronic components plant is owned by a wholly-owned subsidiary o the General Instrument Corp. of the United States. wrenches and wrench sets, pliers, tool sets and kits, screw drivers, taps and dies, tips, hack saw blades, band saws, circular saws and augers and bits, planes and blades, hammers, chisels, cutting tools, reamers, and diamond tools. Total imports of machine tools increased from $665,000 in 1960 to $1.7 million in 1965, while machine shop and hand tool imports rose from $1.6 to $3.4 million. Japan and the United States are the main suppliers of machinery and tools, although German and some Swiss and British machine tools are gaining acceptance. Imports are not re- stricted; the duties range from 7l/> to 10 percent. Instruments for testing electrical properties are also widely used in the industry. No data are available on the amounts imported. However, since little or no electrical testing equipment can be made locally, the entire requirement is probably imported. Electronics The electronics industry is Taiwan's newest. As late as 1960, there were no factories producing electronic products of any kind except for a few small plants assembling tube radios for the local market. All the components were imported. By 1965, more than 30 modern factories were producing 100,000 tube radios, 600,000 transistor radios, 30,000 TV sets, and some electronic components. The potential for further rapid development i. excellent. The manual dexterity and low cost of Tai wan labor, combined with Government encourage ment of the industry and the promise of rich local anc export markets, are particularly conducive factors Several major foreign producers are already setting up their own plants in Taiwan or are working ou licensing agreements with local firms. Japanese pro ducers, in particular, have used the joint ventun and licensing approach as a means of cornering th( market for their electronic components. For example with an aggregate equity investment of only about $] million and several other licensing agreements will local producers, a few Japanese firms have acquirec virtual control over the supply of TV and transistoi radio components. The United States approach has inclined mon toward setting up wholly-owned Taiwan subsidiaries to produce low cost components and complete units for shipment back to the United States. General In struments Corporation, the first United States firrr to invest, set up its plant in 1964 to produce transis tor radio and TV components for the United States market. The largest United States investment in the 58 field, and easily the most important electronics un- dertaking by any foreign firm in Taiwan will be made by the Philco Corporation. Its investment in a wholly-owned plant may eventually total $24 mil- lion over the next 5 years. The plant will turn out subassemblies and complete TV sets and radios. These American firms generally have equipped their plants with the most advanced United States- made equipment, especially quality control and test- ing apparatus, as good as they use in their plants at home. On the other hand, they do to a considerable extent draw on the open market for supplies and components, procuring part of their requirements from Japanese sources, for example, when the quality and price of such items are found to be competitive. With all but a very minor sector of Taiwan's elec- tronics industry in the hands of Japanese and Ameri- can producers, who generally pattern their procure- ment policies along the same lines as they follow at home, there presently appear to be few opportunities in Taiwan for nonaffiliated United States exporters of apparatus, supplies, and components. As local production of components expands and im- proves in quality, the demand for raw materials used in their manufacture will also increase. Taiwain can- not yet supply such quality materials as fine aluminum foil, insulating tissue paper, mica sheet, silicon steel sheet, magnet steel, bakelite sheet, carbon elements, tube elements, silk and enameled covered wire, and high impact polystyrene. With the emphasis on producing for export and the clear need for raising quality to meet international standards, increasing use of electronic testing instru- mentation will also be required. Almost none can be made locally. Oscilloscopes, oscillators, signal gen- erators, genescopes, current testers, and related in- struments must be imported. Japan has been the princi- pal supplier, partly because of lower prices but also because local firms are not familiar with American equipment. Opportunities for United States sales in this field are believed to be very good if the price is right. Electric Power Taiwan's electric power generating capacity is one of the highest in Asia. Per capita output of 580 kw.-hr. in 1965 was exceeded only by output of Japan and Israel. Yet industrial power is still occasionally interrupted, and substantial new capacity will be needed to permit industries to operate in the future without power stoppages. Capacity at the end of 1965 was 1,186,200 kw. Under a 10-year program begun in 1965 capacity is to be increased to 1,943,790 kw. by 1968 and 3,037,790 kw. by 1974. United States and Japanese power generating ma- chinery dominates the present system. In fact, the electric power industry has probably consumed more American machinery than any other industry on the island. From 1960 to 1965, Taiwan imported a total of $170 million worth of U.S. machinery of all kinds, of which power generating, transmission, and conver- sion machinery alone accounted for over $29 mil- lion, or 17 percent. However, $20.7 million, or about 72 percent of this United States-supplied power ma- chinery was financed with United States aid. With the AID program phased out, power machinery is likely to be purchased increasingly with institutional financ- ing (World Bank, Export-Import Banks) and under long-term supplier credits. The general payment terms in these latter arrangements have been 10 percent down on signing of the contract, 10 percent on deliv- ery, and the balance due over a 10-year period at 5.8 percent interest a year. The competition for this market, particularly from Japanese suppliers will become very much keener. The Government-owned Taiwan Power Corporation (TPC), the island's sole electric utility company, is the main user of imported equipment. While indivi- dual factories are encouraged to install their own power generating units, very few have or are likely to because of their high cost and the relatively cheap power available from TPC. Thus, no generating plants other than TPC's have a capacity above 10,000 kw. TPC now has an integrated, balanced system con- sisting of 35 generating stations, of which 26 are hydro plants having an installed capacity of 628,500 kw., and 9 are thermal having an installed capacity of 558,000 kw. Of the hydro stations, 4 are storage plants, 5 are pondage plants, and 17 are run-of-river- plants. The demand for electricity has increased sharply in recent years, owning mainly to rapid industrializa- tion, a massive rural electrification program, and ris- ing incomes resulting in greater use of electric appli- ances. For example, consumption of power by indus- try and residential and commercial consumers has increased by an average of 13.6 percent a year since 1960. TPC has barely managed to keep pace with demand, even with continuous expansion projects. Total system energy output rose by 13 percent a year during the same period and reached a record 6,455 million kw.-hr. in 1965. About 80 percent of this was sold to industrial consumers and 20 per cent to resi- dences and businesses for lighting purposes. Officials expect the demand for overall electric power to increase by a somewhat lesser rate over the next 10 years — 9 percent a year on the average ( 10.5 percent a year for residential and commercial light- ing and 8.6 percent for industrial use). On this basis, demand will reach 12,292 million kw.-hr. by 1974, more than double the present output. To meet the demand TPC estimates the necessary annual plant expansion at 93 mw. of firm power and 140 mw. of dependable peaking power plus a suitable system re- 59 EXPANDING TO MEET DEMAND: the generating capacity of the Shenao Thermal power plant was doubled to reach 250,000 kw. in a major development project completed during 1966. serve. Thus, TPC has programmed a 10-year, $352 million expansion plan to raise installed capacity from 1,186,196 kw. to 3,037,800 kw. by 1974, of which 1,270 mw. will be hydro, 1,647 mw. thermal and 121 mw. reserve. Of the total cost, roughly $213 million will be for imported equipment and materials. These will mainly include turbines, generators and acces- sories, boilers, cooling systems, automatic control instrumentation, power transformers, circuit break- ers and other switch gear, ash handling equipment, piping and insulation, excavation and tunneling equip- ment, and miscellaneous construction materials, such as structural steel shapes, drilling rods and bits and concrete additives. Blasting materials, reinforcing bars, and cement are locally available. Import duties on the generating equipment are 15 percent for high- voltage machinery and 25 percent for low-voltage equipment. Construction has already been completed or begun on some of the new generating projects. These include the new Tunghsiao gas turbine project (four 14,000- kw. package type gas-fired units), completed in 1965; 60 extension of the Kukuan hydro project (2 new 45,000- kw. units), completed in 1966; extension of the Shenao thermal project (a new 200-mw. turbo generator, 1800- psig, 1000°F/1000°F reheat, hydrogen-cooled unit), completed in 1966; the new Linkou thermal project (300-mw. turbo generator, 2,400-psig, 1000°F/1000°F reheat, hydrogen-cooled unit ) , due for completion in 1968; and the new Lower Tachien hydro project (45- meter-high concrete gravity dam, 3.3-mile-long and 22-ft. -diameter pressure tunnel, two 820-ft.-long pen- stocks, and an underground power station to house four 90-mw. generators), due to be completed in 1969. The remaining plants to be built after 1969 will in- clude two 300-mw. oil-fired thermal plants at Talin (the U.S. Export-Import Bank will lend TPC $31 million to finance the import of United States equip- ment for this project, scheduled for completion in 1969-70); the 94-mw. Tachien Dam project; a 300- mw. nuclear plant in the north; and possibly the 100- mw. Tsengwan reservoir project in South Taiwan. With the increase in generating capacity, TPC will also have to expand its transmission and distribu- tion facilities. The power system is now served by a primary transmission trunk line of 154-kv. running the length of the island along the western coast, a 66-kv. and several 33-kv. lines along the eastern coast, and a 66-kv. tie line interconnecting the east and west generating systems. Transmission lines reach- ed a total circuit length of over 2,800 miles in 1965. Twelve primary (high voltage) substations along the primary line are stepping down the 154-kv. voltage to 66 or 33-kv. to supply 153 secondary (low voltage) substations at the load centers. Total installed trans- formation capacity of the primary substations was 1,038,300-kva. in 1965, while the secondary sub- stations had a total capacity of 1,002,300-kva. Primary distribution feeder lines coming out from the secondary substations are operated at 3.3, 5.7, or 11.4-kv. TPC is about halfway through its program to convert the old 3.3-kv. primary distribution volt- age to 5.7 or 11.4-kv. Secondary distribution lines to end consumers were originally 100-v. single-phase and 200-v. 3-phase. These were all converted in 1962 to 100-v. single-phase for lighting and 220-v. 3-phase for industrial power in order to meet international standards. Total circuit length of distribution lines in 1965 was 23,000 miles. The transmission lines are generally mounted on galvanized steel towers, while reinforced concrete poles are used for most distribution applications. The latter are locally spun, but fabricated galvanized steel must be imported. The original 154-kv. lines were conductored with 300 mem hard-drawn copper. All further expansions, however, will use all-aluminum steel-reinforced (ACSR) conductors. All-aluminum conductors are also being installed in some distribu- tion and subtransmission lines. ACSR wire is imported, while aluminum wire is locally produced. The origi- nal 154-kv. lines carried galvanized steel over-head ground wires. These are being replaced in specific high corrosion areas with copper-weld conductors, and elsewhere with high-strength specially galvanized steel. Over the ten-year period 1965-74, TPC plans to spend an estimated $218 million on new transmis- sion and distribution projects to coordinate with the proposed additions to generating capacity. About $48.6 million of this amount will be for equipment imports, mainly high-voltage conductors, high- and low-voltage transformers and capacitors, switch gear, and circuit breakers. Specific projects to be under- taken during the 1965-68 period will include: For the transmission system: Construction of 150 miles of new 154-kv. steel tower transmission lines. Installation of a 13-mile 154-kv. circuit on an exist- ing tower line. Reconditioning of 62 miles of existing 154-kv. trans- mission lines. Construction of 4 new primary substations with a combined transformation capacity of 300-mva. Expansion of 8 existing primary stations totaling 478.5 mva. Addition of 20 new 54-kv. transmission line ter- minals and replacement of 9 existing 154-kv. break- ers at primary substations and power plants. Addition of 20-mvar. switched capacitor banks in primary substations. For the new subtransmission system: Construction of 7 new distribution substations with a total capacity of 96 mva. Extension and/or reinforcement of 66 distribution substations, totaling 425 mva. Erection and/or reconstruction of subtransmission lines, 69/34.5 mv, totaling 240 miles. For the distribution system: Installation of additional distribution transformers, 118.1 mva. Installation of 68 mvar of additional distribution capacitors. Improvement of distribution system in the Kaoh- siung and Taipei areas. Distribution voltage changeover, 119 miles. Installation of 400,000 additional kw.-hr. meters. MARKET FOR GENERAL INDUSTRIAL EQUIPMENT AND MATERIALS Pumps and Pumping Equipment The market for pumps and pumping equipment ment is fairly large and active. Total imports reached $1.4 million in 1965, compared with $800,000 in 1960. Best prospects are for the more sophisticated types, such as submersible pumps, centrifugal pumps, and vertical line shaft deep-well pumps. The expanding 61 petroleum and power industries are particularly heavy consumers. Submersible pumps are in demand be- cause of easy installation and adjustment to reach a gradually dropping water level in the deep wells lo- cated throughout the island of Taiwan. Local pro- duction, confined to simple water pumps, is done by about 38 small producers. United States-made pumps and pumping equipment sell very well. Pump imports from the United States in- creased from $520,000 in 1960, to $1 million in 1965, when they accounted for 76 percent of the market. Japan and West Germany trail well behind as sup- pliers. Imports of most pumps are not restricted and the duty is 12% percent. Industrial Air-Conditioning and Refrigerating Equipment The market for industrial air-conditioning and refrigerating equipment is potentially excellent. Tai- wan's hot and humid climate, the rise in construc- tion of large buildings, and the growth in industries that require climate control, for example textiles and frozen foods, all suggest further growth in de- mand. Most equipment of this type must be imported. There is only one known local producer making large size package units of air conditioning for factories and large buildings. Several other firms import and assemble parts and make only the duct work locally. In 1965, imports were valued at $1 million, with the United States supplying nearly all the air-con- ditioning equipment and Japan, Denmark, and the United States sharing the industrial refrigeration mar- ket. Imports are controlled and may be procured only by end users. The import duty is 12Vi> percent. Internal Combustion Engines The market for internal combustion engines is large and growing. Total imports nearly doubled from $4.4 million in 1960 to $7.4 million in 1965. The United States share of the market, however, has been declining, due mainly to increased competition from Japan. Imports from the United States in 1965 were valued at $1.5 million, or 20 percent of the market, compared with $5.6 million, 75 percent from Japan. Taiwan's biggest demand is for diesel marine en- gines in the 500-hp. and under range. United States sales have mostly been in the 200-hp. to 500-hp. range, while Japan has concentrated on 300-hp. and below. The main purchasers of diesel marine engines are the Keelung and Kaohsiung Harbor Bureau, gov- ernment fishing cooperatives, and the Chinese Navy. U. S. marine diesel engines, though fully competi- tive pricewise, have not sold as well as the Japanese engines mainly because Taiwanese fishermen and mechanics are more familiar with the Japanese en- gines, and spare parts can be obtained faster from Japan. American manufacturers might consider set- ting up a regional sales and service organization to serve Japan, Korea, Okinawa, and the Philippines, as well as Taiwan, so as to provide promotional assist- ance, mechanical training, after-sale service, and spare parts more quickly and cheaply. Although the market is greater at this time for marine than other diesel engines, United States sup- pliers have been more active and successful in the sale of diesel engines for industrial use and power generation. The key to increased sales in this field is to establish close relations with plant engineers who write the specifications for new orders, since most imports of engines for industrial use are procured under a competitive bid basis through the Central Trust of China. The market for gasoline engines in Taiwan is less significant. The only American engines in this cate- gory that sell well are in the 10-hp. and under range. They are used mostly on the farms for water pumps and small threshing machines. Imports of internal combustion engines of over 10 hp. for the generation of electricity and parts thereof are not restricted and the duty is 15 percent. Engines under 10 hp. currently must be procured from North America, or in effect, the United States. The duty on these is also 15 percent. All other types of internal combustion engines are dutiable at 10 percent and are not restricted. As for parts, imports of pistons of 3 to 5 inches in diameter and piston pins thereof are limited to end users, while imports of all other parts are not restricted. Packaging Machinery and Materials With the. food processing and other raw material processing industries growing in leaps and bounds, the market for various kinds of packaging materials and container making equipment is very promising. In most cases, the packaging materials are available locally — paper, burlap, cardboard, wood, polyethy- lene, and glass. Tin plate for can making is entirely imported, mainly from Japan. The art of container making, however, is still somewhat crude and un- imaginative, and good opportunities exist or could be developed for selling machinery or for investment or licensing agreements. There are now about nine local producers of quality cans. Most of their manual and semiautomatic equip- ment — from shears, stampers, roll benders, to seal- ers — is locally made. However, only one type of auto- mated line is produced locally, and this turns out 120 cans a minute. Thus, some automated equipment, par- ticularly for higher volume (300-450 a minute) pro- duction, must be imported. United States can making equipment is about 40 percent higher in price than Taiwan-made machinery. Japanese-made machines are priced about 20 percent higher than local equipment. 62 Thus the outlook for any large sales of American can making equipment is not very bright at this time. There are nevertheless opportunities for licensing local manufacturers in this field. Only the one large can producer now has a can printer (under technical cooperation with a Japanese firm). Another local can maker is now negotiating with a different Japanese can printing firm for similar equipment. The outlook for the carton making industry is much more promising. Besides the making of cartons for the expanding food processing industry, this industry will soon have a large market in the fresh fruit field. Taiwan exported $49 million in bananas in 1965, packed in more than 7 million bamboo baskets. Ba- nana exporters are now seeking suitable suppliers of cardboard cartons. One carton maker is already pro- ducing chemically treated waterproof cardboard car- tons as samples for the banana exporters. Another has reached agreement for technical cooperation with an American firm for production of the same type carton. In addition, exporters of fresh pineapple, which is growing in importance, also expect to introduce car- tons for export shipping. Of the two main carton making factories now in production, one has one line of machinery making 3-ply cardboard and is adding a second to make 5- ply. The other has one line and is adding two addi- tional lines all capable of making 5-ply. One line now produces about 30,000 cartons a day. There is also known to be a consortium of canners discussing the organization of yet another carton making company. There are many bottle makers in Taiwan, but only a few can produce in large quantities. One plant belongs to the Taiwan Wine & Tobacco Monopoly Bureau, the government agency which produces and sells all alcoholic beverages and tobacco products. The Monopoly Bureau plant produces 4 million beer bottles a month from two ovens with two oil-fed bottle mak- ers on one and two gas-fed makers on the other oven. Another bottle maker, with one oven and two bot- tle making lines (oil-fed), is already making jars accurate enough for the exacting food processing in- dustry. In general, the industry reports that the bottle making equipment from Japan is cheapest, Ameri- can equipment more expensive, and Swedish machines more expensive still. The use of glass jars in place of cans has a very definite potential. One large American buyer is al- ready purchasing mushrooms in jars. The fact that glass jars can be made locally from local materials is also a favorable consideration. The lack of jar cap making equipment is probably the biggest single deter- rent to the rapid expansion in the use of glass jars in the food processing industry here. There is no suitable jar cap making machinery on Taiwan at the present time. One bottle making com- pany is having difficulty locating an American counter- part interested in some form of cooperation in cap making. The principal drawback now is small quantity de- mand. However, a considerable market would exist for glass jars if the caps were available locally. In addition, considerable experimentation with various types of jam makes this another potential market for jars and caps. MARKET FOR OFFICE MACHINERY Sales prospects for office machinery are improving all the time. Though demand is not yet substantial, there is much room for market development. Total imports of all types of office machinery exceeded $1 million in 1965, up 170 percent from 1960. United States equipment sells extremely well and has ac- counted for most of the increased sales. The United States share of this market in 1965 was 42 percent, with sales of $441,000. The principal users of office machinery are government offices, banks, and foreign firms. Specifically, the U.S. has little or no competition in electric caculators, tape labeling and marking ma- chines, franking machines, and computers. In addi- tion, American typewriters and dry (electrostatic) copying machines compete well against German, Jap- anese and Italian models. On the other hand, American semiautomatic and manual calculators, time recorders, duplicators, and chemical copiers have proved either too expensive or unsuited to the Taiwan market. In the case of chemical copiers, the use of chemical paper is too expensive and is highly dutiable. Thus, electrostatic copiers are much preferred. United States duplicators generally use a paper size somewhat smaller than the standard paper used in Taiwan and are therefore not too saleable. The demand for teletypes, intercom systems, and addressographs is still quite limited. Safes are pro- duced locally. Imports of office machinery are not restricted; the duty is 30 percent. 63 *VI: S3wl 1K& ! If! f §| 89 I I ,»— -^. ■-. 1 jn^i e;;i si, * 1? I H * ' 1 1 j ^l ir I'M V > Fi r. . h .li- •u ~- Ife** U'-s-ii ? Si f \-1f.;.~i -■* > v "-.« * »« ~*3a«L3L: ! CHAPTER VI Selling to the Construction And Service Industries Taiwan's dynamic industrial and agricultural growth combined with a fast rising standard of liv- ing have put pressure on the country's infrastructure to provide supporting facilities and services. The is- land already has a well established infrastructure com- pared with other developing countries. Transport, communication, health, and education facilities are among the best in Asia. Housing, sewerage, water supply, and related facilities are less well developed. All must be expanded to keep pace with the demand. Gross output of the construction and service indus- tries is expected to increase by about 6 percent a year to $1.5 billion in 1968. An investment of an estimated $580 million will be needed to carry out the specific expansion and improvement projects mapped out under the fourth Four-Year Plan. Owing to the limited domestic funds available for these purposes, however, and the general reluctance of foreign private capital to venture into these fields, the planned expansions will still barely be adequate to meet the island's require- ments by 1968. Whether adequate or not, Taiwan's steady progress in developing its infrastructure, and its basic need at this stage to import most of the equip- INDUSTRIAL GROWTH TAXES BUILDING CAPAC- ITY: Taiwan's industrial building surge is putting pres- sure on the nation's construction industry to keep pace. At left, a large new chemical fertilizer plant. ment and some of the materials used in the various projects offer promising sales opportunities for United States suppliers. Indeed United States equipment and materials are already well represented in Taiwan's power and communications networks. In addition, most of the excavation and site development work on major public works projects have utilized American earthmoving equipment. Until recently, the United States AID program financed much of the United States equipment and materials imported by the con- struction and service sectors. Although demand is still heavy and increasing, United States suppliers will now have to compete more aggressively to maintain their high share of this market. Appendix A contains a detailed inventory of ma- teriel requirements of the principal construction and service industries. Generally, the equipment items shown in the inventory which must now be imported will have to be imported in growing amounts as the various expansion programs are carried out. At this stage, the economy cannot yet produce the needed heavy excavation and transport equipment or the technologically sophisticated communications and medical equipment. In the case of pharmaceuticals, however, rising local production may well reduce the present reliance on imports. Following are U.S. products used in the construc- tion and service industries which appear to offer the 65 best prospects for future sales growth. During the 5 years through 1965, United States sales of the aster- isked items increased at a faster rate than competitive products from other sources, and their market share has accordingly risen. Sales of the other products have also increased during this period, but less rapidly than competitors' products. Greater sales promotion is called for in those cases to meet foreign competition. (The United States percent share of the market in 1965 is given first in parentheses, followed by the United States sales magnitude in that year using the key: a. United States sales above $1 million; b. $500,000-11 million; c. $ 100,000-$ 500,000; d. $50,- 000-$100,000; e. $10,000-$50,000) . Building and Construction Materials and Equip- ment: Excavating equipment (42a), pitch and asphalt (90c), paperboards (18d), household plumbing and sanitary fixtures (70e)*, lacquers (24e) waxes (20e) Transport Equipment: Aircraft parts (99a)*, air- craft engines (100b)*, mechanical handling vehicles (42c)*, electrical visual signaling equipment (lid)* Communications Equipment: Line telephonic and telegraphic apparatus (71a)*, radio telephonic, tele- graphic, and broadcasting apparatus (67b)*; radar apparatus and radio navigation equipment (78c)** switches, lightning arresters, key coils, and antenna equipment (20d)*; insulated wire and cable solely for telecommunications use (19d)* Medical Equipment and Supplies: Surgical and medical instruments (30c) ; serums and vaccines (48d) ; vitamins (9d) ; miscellaneous chemical medi- caments (14b) The following United States goods used in the con- struction and service industries have generally de- clined in sales volume in the last few years. A number of factors have contributed to this decline. Most im- portantly, Taiwan's development and protection of import substituting industries may have simply re- duced import requirements from all sources, including the United States. Import demand for some of these items could continue to go down. Others, however, have increased in overall imports, while only those from the United States have decreased. Here, the main factor is more extensive competition from third country suppliers. United States sales in this latter category (asterisked) could probably be stimulated by a more aggressive competitive effort. Building and Construction Materials and Equip- ment: Nuts, bolts, and nails (26d) ; locks and pad- locks (19d)*; paints and enamels (25d)*; fire bricks and clay (lid). Transport Equipment: Railway materials and parts (39c); trucks (22c)*. Medical Equipment and Supplies: Antibiotics (21b). Following are goods imported into Taiwan which are not supplied by the United States to any signifi- cant extent. United States sales of these items in 1965 were all valued under $10,000, or their share of the market was under 10 percent in that year. In some cases (asterisked), Taiwan is a very limited importer (under $50,000) of these items from any source. In other cases the United States does not produce the items and/or does not export them. In still other cases, where there is both an import demand in Tai- wan and a supply capability in the United States, the meager United States sales are most likely due to a competitive problem, or lack of effort, or lack of interest. On balance, however, prospects for in- creased United States sales of the items listed below are rather limited and are not likely to improve greatly in the long run. Building and Construction Materials and Equip- ment: Asbestos sheets and other manufactures, gyp- sum, cement*, glass sheet and plate*, lumber and ply- wood, cork and cork sheet, tiles*, wallpaper, linoleum and floor coverings*, worked structural shapes of metal, prefabricated forms of base metals, household switches and fixtures, varnishes, shellac. Transport Equipment: Tractors and trailers, am- bulances and fire engines, ships and boats, electrical sound signaling equipment, electric traffic control equipment. Communications Equipment: Radio receivers, TV apparatus, radio facsimile apparatus and microphone equipment, high tension insulated cable. Medical Equipment and Supplies: Sulfa drugs; plasma; miscellaneous chemical pharmaceuticals; ginseng; crude vegetable, mineral, and animal medi- cinal substances; dental materials, surgical and sani- tary sundries of cotton. BUILDING AND CONSTRUCTION Construction needs in Taiwan are rising sharply, particularly in urban and suburban areas where the growing industrial population is concentrating. In fact, the rate of population growth in metropolitan areas is double the overall average, creating severe prob- lems of congestion in the streets and in housing. Also strained by the heavy urban population buildup is the availability of sanitary sewerage facilities and potable water. The usual standard for roads and streets in city planning is 18 square yards per person. Taiwan's rate is 6 square yards per person. Only 37 percent of the city population enjoy safe potable water, while just 32 percent are served by storm sewerage and BUGS BEWARE: maximum security is the rule at the Yuen Foong Chemical Industry Company's pharmaceutical plant, (at left) where these girls help produce antibiotics and several other types of pharmaceuticals. 67 only 1 percent by sanitary sewerage. The housing shortage in Taiwan's cities is severe and has led to the illegal, but thus far condoned, construction of squatter shacks along some city streets. The fourth Four Year Plan calls for a total invest- ment of $230 million during 1965-68 to be spent on area and city planning projects. Of this sum, about $220 million will be for actual construction and domes- tic procurement and $10 million for imported ma- terials and equipment. The $230 million will be allocated as follows: $306,000 for area and city planning projects; $26.7 million for widening 1.7 million square yards of city streets and adding 1.4 million square yards of new city streets; $4.9 million for construction of sanitary sewerage (industrial and household waste removal) ; $8.3 million for storm sewerage construc- tion (drainage of surface water) ; $11.5 million for expanding the existing water supply system by 1.6 million cubic yards of water a day for household and industrial use, and $178 million for construction of 120,000 new housing units. As noted, by far the greatest proportion of allocated funds are to be spent for labor and procurement of local materials. Basic structural materials — cement, bricks, stone, lumber, glass, and reinforced concrete — are all locally available, and imports of these items are negligible. Other raw materials, including pitch, asphalt, asbestos, and gypsum, are imported in mod- erate but increasing amounts, aggregating $1.1 million in 1965. The United States supplied most of the pitch and asphalt, and Mexico, Egypt, and Cyprus all of the gypsum. Asbestos fiber and sheets come mainly from Canada and Japan, respectively. Although paper- boards are locally produced, the quality is too poor to rule out all imports. About $465,000 worth were imported in 1965, mostly from the United States and Japan. Heavy structural shapes, including worked and unworked structural sections and prefabricated forms, are generally imported. About $1.6 million worth were received in 1965, mostly from Japan. Plumbing, sanitary, and lighting fixtures and mis- cellaneous hardware (nails, nuts, bolts, rivets, etc., but not tools) are made domestically and, though local quality is poor, imports are restricted. Total im- ports in 1965 were valued at about $600,000, sup- plied mainly by Japan. Only the hotels, large office buildings, and similar major construction projects are eligible end users for imported quality materials. Paints and paint materials are also locally produced, and again, though they are of poor quality, they are protected against imports. Total imports of paints, enamels, varnishes, lacquers, and similar items ag- gregated less than $740,000 worth in 1965, with Japan and the United States the principal suppliers. The main sales opportunities arising from Taiwan's building activity will be for construction machinery and equipment, such as pile drivers, cement mixers, cranes, hoists, and excavating, earthmoving, and road construction equipment. Except for simple cranes and construction elevators, no construction equipment is produced locally. Despite heavy imports averaging $2- 3 million yearly, equipment shortages still exist. For example, although piling is a fundamental aspect of site formation for large buildings in Taiwan, there are only five old-model piledrivers on the entire island. The United States and Japan currently share most of the market for construction machinery and equipment. Imports are not restricted and the import duty is 10 percent. Public works projects involving port and airport construction, highway expansion, and electric power, flood control, and irrigation development are discussed separately in this report. TRANSPORT SERVICES Taiwan has a highly developed inland transport sector reaching all important cities and towns. How- ever, the demand for passenger and freight transport services appears to be increasing faster than new facili- ties can be added. The Government has ambitious ex- pansion plans for both the railway and highway sec- tors to try to keep up with rising demand. These pro- grams should present United States suppliers with sales opportunities for railway rolling stock, com- mercial vehicles, vehicle parts, traffic control equip- ment, and construction equipment. The main development emphasis will be on expand- ing the railway system, the principal means of trans- port on the island. Over 80 percent of Taiwan's freight traffic is carried by rail and nearly half the island's passenger traffic. Railway freight traffic is expected to increase by about 2 percent annually to a total of 1.4 billion ton-miles by 1968, while passenger traffic should grow at an average annual rate of 4 percent to a total of 2.5 billion passenger-miles. The Government's Taiwan Railway Administration (TRA) operates West Line and East Line systems with a total length of 606 route miles. The West Line sys- tem consists of a 255-mile trunk line and 243 miles of branch lines linking the two main ports of Keelung and Kaohsiung and serving most of the industrial cen- ters and key cities over western Taiwan. The 110- mile East Line joins Hualien port with Tatung along the eastern Pacific coast. The greatest part of both lines is single track, but the track gauge on the West Line is 42", while that on the East Line is only 30". In addition to TRA's system, there is substantial nar- row-gauge trackage (about 1,700 miles) operated by the mining, forestry, and sugar industries. Rails weigh- ing 81.4 lbs. per meter are mainly used on TRA's West Line and those weighing 48.4 lbs. per meter on the narrow-gauge lines. Rails can be made locally, but about 3,900 tons ($525,000 worth) were imported 68 from Japan and Germany in 1965. Railway ties are also produced locally and in sufficient quantity for export. TRA's motive power and rolling stock in 1965 con- sisted of 215 steam and 64 diesel locomotives, 90 railcars, 746 passenger coaches, and 7,000 freight wagons. Complete dieselization of the system is the main ultimate objective. Other TRA property includes 10 marshaling yards; a new diesel locomotive main- tenance center fully equipped to handle 200 diesel locomotives; several workshops, roundhouses, freight sheds, and depots; and a large number of grade cross- ings and bridges. Some automatic block systems and centralized traffic control systems have been installed; the main stations are equipped with all relay inter- locking plants or electro-mechanical interlocking plants; and some of them have new teletype equip- ment. However, improvement of many TRA facili- ties is still needed. TRA's proposed modernization and expansion pro- gram for 1965-68 will cost an estimated $39 million. At least $20 million of that will be for imported rolling stock and equipment to be financed by a World Bank loan. The imports will include 22 diesel locomotives at 1,400 hp., 12 diesel locomotives of 600 hp., and 21 diesel locomotives of 900 hp. ($8.5 mil- lion) ; 25 diesel railcars, 6 trailers and 30 reversible- chain coaches ($2.6 million); components for 74 re- versible-chain passenger coaches and 15 baggage cars ($1.5 million); components for 1,065 freight wagons ($3 million) ; centralized traffic control, automatic-bloc signaling and grade crossing equipment ($2.2 mil- lion) ; and equipment for constructing a new marshal- ing yard ($1.2 million). TRA will make its own pas- senger coaches and baggage and freight wagons. Pro- curement of the imported equipment will be handled through the Central Trust of China and will be open to worldwide competitive bidding. There are no im- port restrictions on rolling stock or railway equip- ment; the duty is 5 percent. Motor transport is gaining in importance in Taiwan. Over half the total passenger traffic and 20 percent of freight traffic were carried by bus, taxi or truck in 1965. Highway freight traffic rose by 92 percent from 1960 to 1965 to 365 million ton-miles, while passenger traffic increased by 52 percent to 2.9 billion passenger M CORPORATION ^ CHINA HANDLE WITH CARE: both the building construction and roadbuilding industries use the output of the commer- cial explosives plant of the Atlas Taiwan Corp. at Kaohsiung. The plant is a joint venture involving the Atlas Chemical Industries of the U.S. 69 miles. By 1968, further increases of about 40 per- cent and 19 percent, respectively, are expected. To meet the increased load, more trucks and buses will be needed. At the end of 1965, there were about 5,000 buses and 6.200 trucks registered on the island which car- ried about 393 million highway passengers and 15 million tons of highway freight. About 50 percent of the buses and 65 percent of the trucks are overage and should be replaced. In recent years, new bus and truck registrations have averaged roughly 450 and 1.500 a year, respectively. Under the fourth Four \ear Plan, 1,870 new vehicles will be procured, in- cluding 307 new buses for the Taiwan Highway Bureau's Fleet, 285 buses for city bus companies, 353 buses for private bus companies, and 925 trucks for private trucking companies. There is only one producer of motor vehicles in Taiwan. In 1965, that producer assembled 944 trucks and buses and 2,317 passenger sedans (nearly all taxicabs ) . Passenger sedan imports are restricted to protect locally assembled cars. Trucks can be im- ported by the trucking companies without restriction, but only with self-financed foreign exchange. Most buses are imported by the Government-owned Taiwan Highway Bureau, which operates the largest fleet in Taiwan. The United States and Germany have been the chief suppliers of buses, while Japan and the United States have shared the truck market. The duty on all commercial vehicles was reduced in 1965 from 40 percent to 35 percent. The increased highway traffic expected over the next several years will also require considerable im- provement and expansion of the highway network. Highway mileage in Taiwan has not increased signi- ficantly in the last several years. Total mileage in 1965 was 10,130 miles, making density of highway net- work — 73 miles of highway per 100 square mil*"* of surface land — second only to Japan in Asia. How- ever, except for the 250-mile North-South paved high- way along the western coast, road conditions are rather poor. The roads are often too narrow, im- properly drained, and lack suitable surfaces and road- beds. Over 80 percent are either gravel or dirt roads. The Government's main highway development efforts over the next several years, therefore, will emphasize paving, repairing, and widening roads to accommodate heavier traffic and axle load requirements. Asphalt is produced locally, but roadbuilding and repair equip- ment will have to be imported. Total investment in the road transport sector; including that for vehicle procurement, should approximate $53 million during 1965-68. Road congestion, particularly in the cities is a seri- ous problem. There is a need for traffic control and safety equipment, which in due course will create a demand for imports of such devices. Accordingly, United States suppliers might well anticipate that demand and establish contact with the appropriate municipal authorities. Sea transport facilities are also inadequate. The rapid increase in seaborne trade, particularly since 1962, has strained the island's cargo-handling capacity, while Chinese ships are no longer carrying as large a share of that trade as before. Crash Government programs to ease both the harbor and shipping prob- lem are underway. Acute congestion developed for the first time in 1965 at the two main ports of Kaohsiung and Keelung. Foreign trade is apparently increasing faster than construction of new port facilities. Yearly cargo-han- dling capacity at Kaohsiung, Keelung, and the smaller port at Hualien is about 9-10 million tons. Actual car- go traffic in 1965 was 9.8 million tons, and by 1968 it could increase by 20-30 percent to 12-13 million tons. To meet this demand the Taiwan Provincial Government (TPG) will invest some $9.7 million through 1968 to expand all three harbors, and anoth- er $15.7 million to build a second commercial harbor at Kaohsiung. These programs will involve land re- clamation; dredging of deep water channels; con- struction of deep water wharves, transit sheds, ware- houses, and access roads; installation of mooring buoys; expansion of mechanical cargo-handling equip- ment; and renovation of ship repair facilities. All construction will be done by the Harbor Bureaus of each port. U.S. suppliers of harbor dredging and construction equipment and shipbuilding and repair machinery should find excellent sales opportunities arising from these programs, since nearly all the equipment will have to be imported. The main imported items should include tugs, dredgers, buoys, floating cranes, mobile cranes, wharf cranes, crane upper machinery, forklift trucks, tractors, trailers, road rollers, tractor shovels, pile drivers, hydraulic rams and pumps, electric hoists, and various machine tools (lathes, shapers, boring, milling, and grinding machines, and pipe and angle bending machines). The shipping problem, though less critical, is cost- ing Taiwan substantial sums annually in lost service income. Only about a third of the island's payments for ocean freight goes to Chinese shipping companies. The Republic of China has the fourth largest mer- chant marine in Asia, but this fleet's operations are confined mainly to river and coastal waters and to the China Seas. It carries less than half of Taiwan's international cargos. By 1965, fleet tonnage had been increased to just over 1 million d.w.t., comprising 145 vessels of various types. Many of the ships, however, are obsolete and need to be replaced. Ninety-four of the vessels were built prior to 1948, including at least 70 built before 1946. By 1968, Taiwan plans to add at least 500,000 d.w.t. to its fleet, for a total of nearly 70 1.5 million d.w.t. and a mean age under 15 years. But even this will not eliminate the deficit in shipping payments. Under present planning, a favorable balance probably cannot be attained before 1975. Total invest- ment in the shipping industry during 1965-68 is proj- ected at $59 million. Taiwan's shipbuilding industry will not be able to supply very many of the ships n^ ! ed. The one large shipbuilder on the island — Taiwan Shipbuilding Cor- poration (TSBC) — has built only two 36,000-ton oil tankers and two 12,000-ton freighters in the last de- cade. In 1965, TSBC signed a licensing agreement with a Japanese firm under which the local firm is to build three 15,000-ton and ten 1,000-ton ships annual- ly. Even if these ambitious plans materalize, Taiwan's fleet will still be short some 326,000 tons by 1968, and additional ships may have to be imported. New regulations affecting imports of foreign vessels were promulgated in 1965 by the Ministry of Com- munications. All foreign ships purchased must be at least 7,000 tons for ocean service and 3,000 tons for coastal use, and the ships may not be older than 7 years. For irregular service, ships must not be less than 2,000 tons or older than 12 years. All ships bought under these criteria will be free of duty. Ships imported for scrapping purposes are duitable at the same rate as scrap iron, 10 percent. Taiwan's civil aviation facilities serve mainly the passenger trade and have generally kept pace with the limited passenger flow. However, Taiwan is begin- ning to attract more and more of the huge tourist flow going to Japan and Hong Kong each year, and some expansion of airport and passenger facilities will be needed. The total number of incoming and out- going flights at all airports more than doubled from 8,300 in 1960 to about 17,000 in 1965. Airline pas- senger traffic during the same period rose from 122,- 000 to about 500,000. By 1968, the passenger flow could increase by an additional 40 percent to around 700,000. At present, the island has only one international airport, located in Taipei. There are 7 smaller air- ports at Taichung, Tainan, Kaohsiung, Makung, Taitung, Hualien, and Sun Moon Lake handling do- mestic flights and private aircraft. Taipei International Airport is equipped with ICAO (International Civil Aeronautics Organization) standard Instrument Land- ing System and other ICAO-approved air navigation, traffic control, and telecommunication facilities. Eight jets and 3 piston planes can be accommodated at one time. The main runway is 2,850 yards long. A new $l-million passenger terminal with modern convenient services was added in 1964. To accommodate the large increase in tourist traffic expected over the next several years, Taiwan will add facilities to the present airfield at Kaohsiung (Hsiao- Kang Airport) so as to form a second international airport. The first phase will include construction of a 1,750 yard runway, a connecting taxiway and apron, and a passenger terminal, plus installation of air navi- gational aid facilities. In the second phase, the runway will be extended to 2,850 yards. The project will be undertaken by the Civil Aeronautics Administration. All navigation equipment will be imported through the CTC and will include two 50-watt VHF transmit- ters and fix-tuned receivers, a DCB-36 type rotating beacon, a standard free-floating wind tee, a PTS type signal projector, and aerocom M-1000D locator, and miscellaneous meteorology observation equipment (barometers, thermometers, psychrometers, baro- graphs, thermographs, and hydrographs ) . The total investment required to carry out this and all other civil aviation expansion projects during 1965-68 is estimated at $2.6 million. The Bepublic of China's flag carrier — Civil Air Transport (CAT) — serves only countries in the Asian region. A second domestic airline — China Air Lines (CAL) — hopes to begin service outside Taiwan and may eventually share some of CAT's overseas runs. CAT has the only jet carrier, a Convair 880 M, while CAL is using DC-4's on its longer domestic runs. However, if service to other Asian countries expands, either CAT or CAL may need an additional jet. Also, as tourist traffic within Taiwan picks up, CAL or the other two domestic carriers — Foshing Airlines and Far Eastern Air Transport Corporation — may want to procure additional propeller planes and possibly some helicopters. No aircraft or parts are locally produced on the island. All aircraft maintenance is done by Air Asia Co., Ltd., at Tainan under contract of the several air- lines. Air Asia's shops are well equipped, but new maintenance machinery will need to be imported from time to time. Imports of aircraft engines and parts are substantial, reaching $3.1 million in 1965 and supplied almost entirely by the United States. TELECOMMUNICATIONS SERVICES Taiwan's fast growing telecommunications network is still inadequate. The demand for service, spurred by rapid industrialization, has grown faster than system expansion. Although the Government's Taiwan Telecommunications Administration (TTA) has stead- ily added new facilities, the day is yet remote when full demand can be serviced effectively. Hence, TTA must continue its expansion programs. U.S. suppliers should benefit greatly, since much of TTA's existing equipment is United States made, and additional facili- ties should be complementary. TTA's main emphasis has been on expanding domestic telephone plant capacity. From 1960 to 1964 alone, TTA added 45,000 new automatic telephone lines for local calls and 300 microwave circuits and 801 short-haul circuits for toll calls. Further additions 71 in 1965 brought the total system capacity in that year to 120,150 city telephone lines, 2,264 long-distance telephone channels, and 1,826 public telephone pay stations. About 60 percent of the city telephone lines were automatic (lineswitch type) in 1965. Eventually all the manual magneto-type switchboards installed in the remaining lines will be converted. The long- distance telephone network consists of open wire, underground cable, VHF. and the newly installed microwave radio system. More than 70 percent of Taiwan's toll calls are now handled by a nondelay or CLR (Combined Line and Recording) system. Even with these new facilities, however, TTA has barely kept pace with the demand for service. TTA still had a large backlog of applicants for telephone service in 1965. The 1965 telephone density (tele- phones per 100 persons) of 0.78 was well below the rate in Japan and Hong Kong (more than 5 and 3 per 100 persons, respectively). It is also considerably below TTA's own goal of at least 2 telephones per 100 persons by 1968. As with local telephone service, the demand for long-distance service is also straining the system's present capacity. In late 1966, TTA began negotiating with the World Bank for an $18.3-million loan to help finance a $50-million project for further improvement of Taiwan's telephone system. This plan includes the installation of an additional 118,000 city telephones, an addition of 240 circuits to the existing microwave long-distance call system linking major cities on the island, and the establishment of a direct- dialing network linking Taipei, Taichung and Kaoh- siung. Under this major expansion plan, TTA will be needing substantial new telephone communications equipment. Most of it will have to be imported, par- ticularly central office switching equipment and dial exchange and operator toll dialing equipment. Ancil- lary air-conditioning and power supply (batteries, rectifiers, and gasoline engine-generators) equipment will also have to be imported. Existing automatic equipment in TTA's plant is mostly United States- made, and consists of the step-by-step direct control type, either of Siemens-Halske type F or Strouger type. New procurement will most likely be of the same type. Taiwan can supply its own outside plant ma- terials and station apparatus, including cable and wire, terminals, conductor and pole line materials, telephone sets and protectors, and manual switchboards and accessories. The demand for domestic telegraph services has also grown sharply in Taiwan, despite competition from the toll telephone facilities. The number of tele- graph messages sent more than doubled from 1960 to a total of 1.1 million in 1965. During the same period, TTA expanded its domestic telegraph circuits from 256 in 1960 to 331 in 1965. As the demand picks up, TTA will add more circuits and continue to modernize its telegraph facilities. To that end, additional tele- printers (English and Chinese), line concentrators, and facsimile equipment will have to be imported. TTA's microwave radio system was completed in 1964 at a cost of $4.1 million. It serves as a "back- bone" communications network for linking all large cities along the western coast for long-distance tele- phone, telegraph, and leased circuit services, including TV. The entire system covers a total airline mileage of about 218 miles between the terminal stations of Taipei and Kaohsiung. Signals are relayed across the inter- vening space by four through-repeater stations and two drop-repeater stations. The system is designed for multiplex operation of up to four radio channels, each capable of providing 1,800 telephone circuits. Thus ultimately 7,200 telephone circuits can be made available. However, in the initial phase completed in 1964, just one radio channel with 300 telephone cir- cuits was installed. As the traffic demand picks up, more circuits will be added, and additional equipment will have to be imported. Since all the initial microwave equipment was U.S. supplied, it is likely that any additional equipment for the system will also be procured from the United States. The principal imported items should include the microwave (R.F. ) and carrier equipment, engine generator and voltage regulators, air-conditioning equipment, testing instruments and tools, and steel towers and tower lighting equipment. Taiwan's total imports of telephone and telegraph apparatus have averaged between $1.5 and $2.5 million a year since 1960. In 1965, imports rose to $4.8 mil- lion, supplied almost entirely by the I nited States and Japan. There are no restrictions on imports of line telephone and telegraphic apparatus and parts, and the duty is 15 percent. However, radiotelephonic and telegraphic equipment may only be imported by TTA, and the duty is 20 percent. Taiwan's international telecommunications services include international telegraph, telephone, facsimile, telex, leased circuits, newscast, and recording. In recent years, considerable new equipment has been added to keep pace with rising demand, including radio-telephone terminal equipment, additional high- powered radio transmitters and high performance receivers, radio-telegraph, radio-telephone, facsimile equipment, microwave length, a new time-division ARQ multiplex, a long-distance VHF forward scatter system, and international telex facilities. With demand for services increasing steadily, fur- ther system expansion will be required. Emphasis un- der the fourth Four Year Plan will be put on expan- sion of the existing communication system by increas- ing the capacity of the equipment for telegraph, tele- phone, facsimile, and other services by adopting new types of machines and new methods of communica- tion, improving the quality of communication, offering 72 new services, and establishing, step by step, an auto- matic remote control system. Efforts will also be made to participate in the international plan of devel- oping a telecommunication network and in the satel- lite communication program, and to establish a tropo- scatter system between Taiwan and Hong Kong as well as a standard frequency broadcasting station. Principal construction items for the fourth Four Year Plan are: 1. Expansion and modernization of communications facilities: . . . Additional telegraph facilities including new type and high efficiency teletype, time-division ARQ multiplex, automatic or semiautomatic telex, and testing instruments; . . . Additional radio voice terminal facilities in- cluding terminal equipment, high-efficiency scram- bler, automatic volume control, and testing equip- ment; . . . Additional facsimile facilities including new types of transmitters and receivers, modulators, and testing instruments. . . . Additional radio facilities including powerful multiplex transmitter, precision receiver, accessories of transmitters and receiver, large high-gain direc- tional antennas, and testing instruments; . . . Additional link facilities including remote control circuits, carrier equipment, microwave and VHF linking equipment, and testing instruments; . . . Additional frequency monitor facilities includ- ing frequency meter, monitor antennas, mobile monitor facilities, standard frequency equipment, standard-frequency broadcasting equipment; and . . . Additional power supply facilities and acces- sories including different kinds of power supply and their accessories. 2. The proposed additional direct circuits and telex subscribers are: Taipei-Hamburg telegraph 1 channel telex 1 channel Taipei-Singapore telegraph 1 channel telephone 1 channel telex 1 channel Taipei-Hong Kong telephone 3 channels telex 1 channel New telex subscribers in Taipei — 100 subscribers. 3. Establishing of the troposcatter system between Taiwan and Hong Kong and linking Taiwan with Europe, America, and Southeast Asia. Radio and TV broadcasting networks extend to all parts of the island. There were more than 70 radio broadcasting stations throughout Taiwan in 1965, or at least one in each county and municipality. They are all privately owned and operated under the supervision of the Ministry of Communications. About 5 stations are added each year. The total number of transmitters exceeded 150 in 1965 with total installed transmitting capacity of about 1,240 kw. The Broadcasting Corpora- tion of China (BCC) operates the largest network with 10 stations, 63 transmitters, and total output of 1,053 kw. in 1965. The other two large networks are the Armed Forces Radio Network and the Cheng Sheng Broadcasting Company. The remainder are small sta- tions of 1-3 kw. capacities. There were some 1.4 mil- lion radio receiving sets in Taiwan at the end of 1965, with about 1.7 million anticipated by 1968. BCC's island-wide relay system consists of telephone carriers, a microwave system, and a VHF system. A relay station in northern Taiwan and one in central Taiwan link the VHF system. A reverse relay system from central, eastern, and southern Taiwan to Taipei is being established. BCC's transmitting power has been stepped up 10 times in the last 16 years from 100 kw. to 1,053 kw. The largest medium-wave trans- mitter is 150 kw., and the largest short-wave transmit- ter is 50 kw. To achieve high-power gain, all BCC's directional short-wave antennas are rhombic and cur- tain type. For medium-wave, high-power transmitters, 3-tower or 4-tower directional antennas are used to step up the transmission power 3 or 4 times. For small medium-wave transmitters, BCC uses duplexors or triplexors to connect 2 or 3 transmitters together to a single vertical antenna to save ground space. BCC is seeking a loan to finance construction of a 1,000-kw. medium-wave broadcast transmitting equipment for operation in 1967. Taiwan has one educational and one commercial television station. The latter is operated by the Taiwan Television Enterprises (TTE), and is located in Taipei. Commercial telecasting first began in October 1963 and covered only northern Taiwan. A microwave extension to Kaohsiung was completed in 1965, and the entire island is now able to receive TTE's broad- casts. To spur sales of TV sets, now running about 1,500 a month, local dealers are urging the Govern- ment to permit additional stations to be set up. There were about 60,000-70,000 TV units in operation at the end of 1965, and 177,000 expected by 1968. Japanese interests hold much of TTE's stock, and all of its installed equipment is Japanese. TTE has a total transmitting power of 252 kw. The U.S. -Japanese NSTC systems are in use, and presumably U.S. equip- ment could be used if other stations are established. Color television is at least 5 to 10 years away from adoption. TTE is interested in importing more TV films. The fiscal 1966 quota has been set at 986 foreign films (16mm.), of which 786 can come from the United States. Not affected by the quota are newsreels no longer than 410 feet; documentaries no longer than 820 feet; advertising films less than 130 feet; and cartoons less than 985 feet. Chinese subtitles are inserted by TTE. The duty is 15% except for news- reels and educational films which are duty free. 73 HEALTH SERVICES Taiwan has one of the better public health networks in Asia and one of the highest standards of general health in the area. The crude death rate is only 6.1 per 1.000 persons, one of the lowest in the world, and life expectancy is 63 years for males and 67 years for females, among the world's highest. The provincial Government spends roughly 4 to 5 percent of its annual budget on health care and control. About $4 million was expended for this purpose in 1965, mainly to provide public health and medical care services, to control communicable diseases, to control food and drugs, to improve environmental sanitation, and to improve hospital facilities. Another $17 million is to be spent for these purposes during 1965-1968. The import market for medical equipment and supplies ($622,000 in 1965), though not yet large, is expanding. It could become quite significant because of the growing recognition that health and economic development go hand in hand, and because present facilities are generally inadequate. The market for pharmaceuticals, however, is very large even now. About $7 to $10 million worth of drugs a year are imported annually, mainly from Japan, the United States and Italy. In 1965 Taiwan's public health network consisted of 22 health bureaus, 578 health centers and offices, 441 mobile medical units, 27 general hospitals, 3 maternity hospitals, 4 communicable disease hospitals, 20 TB centers and control stations, 3 sanitariums, 1 health laboratory, and 8 quarantine stations. In addition, there are 17 hospitals run by Government corpora- tions, 22 missionary run hospitals, 170 private hospi- tals, and more than 5,800 private clinics, including 800 dental clinics. Altogether, there are more than 12,000 hospital beds on the island — or about 1 bed per 1,000 persons. Physical and diagnostic facilities in the Government hospitals greatly need to be improved, but lack of funds has thus far limited progress in that direction. Taiwan is one of the best doctored countries in the area. In 1965, there were 23,000 registered medical personnel on the island, including about 8,400 physi- cians, 2,400 herb practitioners, 1,400 dentists, 2,100 pharmacists, 4,100 nurses, and 4,500 midwives. The ratio of medical personnel to population in 1965 was about 1.82 per 1,000 persons. Many of the doctors have had training in the United States and are familiar with American equipment. Nevertheless, most of the equipment sold in Taiwan is Japanese made, mainly because the Japanese have been more active in their sales effort and partly, too, because some of the local doctors were trained in Japan. Imports of surgical, medical, and dental instruments and parts have averaged about $500,000 a year since 1960, and reached $622,000 in 1965. Japan and the United States are main suppliers. The fourth Four Year Plan projects import costs during 1965-68 at about $1.1 million, or roughly $275,000 a year. This estimate may well be exceeded. Through mass immunization, improved environ- mental sanitation, and popular use of chemothera- peutic drugs, great progress has been made in eradicat- ing disease on the island. Nearly all of the dreaded communicable diseases either are under control or have been eliminated. For example, there have been no cases of plague, smallpox, rabies, typhus, relapsing fever, yellow fever, or scarlet fever in many years. An outbreak of cholera in 1962 was the first in more than 10 years. Intestinal infections — typhoid, para- typhoid, and dysentery — have declined gradually. Tuberculosis, diptheria — pertussis, trachoma, polio- myelitis, and venereal diseases are still serious menaces to public health. In addition, because of the moist tropical climate, the traditional use of excremental fertilizer in vegetable gardens, and the prevalence of arthropods (mosquitos, ticks and mites, fleas, etc.), the island suffers heavily from parasitic diseases (par- ticularly hookworm, ascariasis, tapeworm, ancycloto- measis, and trichuriasis), and arthropod diseases (notably filariasis, encephalitis, and scrub typhus). On the other hand, malaria, long a scourge of the Far East, has been virtually eliminated. Overall, the major causes of death in Taiwan (other than suicide, vio- lence, and other external factors) include vascular lesions of the central nervous system, pneumonia, TB, neoplasms, heart diseases, gastro-entero-colitis, dis- eases of early infancy, nephritis and nephrosis, and bronchitis. Of the chief causes of disease, poor sanitation is a particularly serious problem in Taiwan. About half the rural population lacks safe water, which accounts for the extremely high rate of worm infec- tions and the abundance of mosquitos and other arthropods. To improve the island's environmental sanitation, the Taiwan Provincial Government will carry out a $6.3-million program in 330 villages dur- ing 1965-68. This program will involve construction of tap water and sewage systems, and public bath- houses and toilet facilities. Specifically, 238 rural waterworks, 24,000 public wells, 40 rural drainage systems, 30,900 public toilets, 8 improved market places, and a number of compost plants with a total capacity of 40 tons are to be built. Although the steady improvements in medical facili- ties and environmental sanitation have had a marked beneficial effect on general health, the greatest success in controlling and eradicating disease on the island is due to the widespread use of vaccines and chemo- therapeutic drugs, particularly antibiotics and sulfa drugs. Imports of these and other pharmaceuticals are very high, averaging over $9 million annually during 1961-65. However, the existence of a large internal market for medicines prompted the development of a 74 MARCHING TO THE BREAKFAST TABLE: bottles of whole milk roll along the line at the Wei Chuan Foods Corp. dairy plant. A vigorous sanitation program is making headway against Taiwan's diseases. local pharmaceutical industry, and the Government has encouraged it through import protection in order to cut down foreign exchange losses. Faced with gradual erection of barriers against pharmaceutical imports in finished form, about 12 U.S. and Japanese pharmaceu- tical firms have set up local assembling operations, and another 16 have licensing agreements with local firms. In addition, one U.S. firm has invested in a plant to produce the raw materials themselves. There are now about 1,000 registered pharma- ceutical plants on the island and about 22,000 kinds of imported and locally produced medicines and medical products. The raw material producers are making glucose, caffeine, soda, and five kinds of antipyretics and analgesics (sulpyrene, aminopyrene, phenacetin, antipyrene, and acetanilide) . Imports of these in both raw material and finished form are restricted. The Government believes that the following addi- tional raw materials could be produced locally and is encouraging foreign firms to consider investments to produce them: Glucuronic acid, ascorbic acid, sulfa drugs, enzymes, and aminosalicylic acid. The local assembling plants are importing raw materials for making chloramphenicol, herbal products and about 1,200 kinds of vitamins, nutrients, tranquilizers, and hormones. These may no longer be imported in fin- ished form. In addition, local assembly of four types of antibiotics, particularly the tetracyclines, and five varieties of sulfanomides has expanded to the point where import controls on the finished products may soon be imposed. On the whole, imports of pharmaceuticals have remained fairly steady over the last few years, with the decrease in assembled products offset by the in- crease in raw materials. This condition will likely prevail until more firms get into local production of raw materials. The principal imports (valued above $100,000 each) are antibiotics (mainly penicillin, streptomycin and dihydrostreptomycin, tetracyclines and derivatives, chloramphenicol, erythromycin, and novobiocin), sulfa drugs (sulfadiazine, sulfa guanadine, sulfa mera- zine, sulfanomide, sulfa mezathine, thiasin, domian and others), vitamins, central nervous system de- pressants, gastrointestinal agents, anti-infectives, nu- trients, hormones, autonomic drugs, enzymes, hema- tological agents, cardio-vascular agents, antihistamines, and dermatological agents. Of these, increasing im- 75 ports of sulfa drugs, gastrointestinal agents, autonomic drugs, enzymes, cardio-vascular agents and derma- tological agents appear likely, while imports of vita- mins and hormones will probably fall off sharply. The others will continue to enjoy high but steady import levels. Of the pharmaceuticals now imported in values below $100,000 a year, the following appear likely to increase over the next several years: Serums and vac- cines, central nervous system stimulants, local anes- thetics, oral contraceptives, detoxicution agents, and antineoplastic agents. All imported medicines must be approved in advance by the Ministry of Interior ( MOI ) . For this purpose, MOI requires, ( 1 ) certificate of origin issued by the health authority in the country of origin, (2) a state- ment from that authority certifying that the particular item is permitted to be freely sold in the country of origin, (3) full details of the prescription and contents of the drug, together with qualitative and quantitative analytical methods furnished by the manufacturer, (4) submission of about eight original samples (with complete label and package) for analysis and regis- tration, and (5) a supply of appropriate clinical and pharmacological literature. Appointment of a local sales agent in Taiwan is also required. Import duties on some pharmaceuticals were revised in 1965. Duty reductions were allowed for chemicals solely for compounding into medicines (from 22.5 to 15 percent), non-medicament antibiotics (17.5 to 15 percent), nonmedicament sulfa drugs (22.5 to 20 percent) and medicament sulfa drugs (32.5 to 30 percent ) . Increased duties were put on medicament antibiotics (22.5 to 25 percent), medicament vitamins (32.5 to 35 percent), and miscellaneous medicaments (32.5 to 35 percent). Unchanged were serums, vac- cines, and plasma (5 percent), nonmedicament vita- mins (22.5 percent), and chemicals solely for process- ing into medicines (22.5 percent). Effective quality control over the production and vending of drugs is becoming more difficult as their availability increases. Antiquated regulations and lack of administrative funds and personnel have enabled local producers and importers to market substantial quantities of unlicensed, inferior drugs. Some of these drugs, moreover, are unsafe copies of well-known, reliable brands. The problem is compounded by the fact that nearly all medicines, including antibiotics and other potentially injurious drugs, can be pur- chased over the counter at any of the 13,500 or more drugstores on the island. Since 1959, the Government has acted to improve the quality of local production, but progress has been slow. Of the 1,000 producers, about 700 were using acceptable quality control equipment and procedures in their plants in 1965. The remaining factories are turning out substandard products. The Government has stipulated that the latter firms must bring their fac- tories up to the prescribed standards within a specified period of time or lose their licenses. New pharmaceu- tical producers will not be permitted to start up unless the factory is fully and adequately equipped. In this connection, U.S. suppliers of pharmaceutical manufac- turing and quality control equipment might find good sales opportunities. Another potential customer for laboratory and testing equipment is the Food and Drug Bureau which the Government plans to set up. 76 CHAPTER VII Selling to the Farm Sector Despite the great industrial progress made in the last decade, agriculture is still the mainstay of Tai- wan's economy. About half the population depends directly on farming. Primary and processed farm products account for 56 percent of total exports and nearly 90 percent of the island's total food consump- tion. A wide variety of food, feed, and cash crops are grown. Rice, sweet potato, peanut, vegetables, soy bean, wheat, corn and rapeseed are the main food and feed crops, while the cash crops include sugar cane, pineapple, tea, banana, citrus fruit, mushrooms, asparagus, citronella, tobacco, jute, sisal, and flax. Only wheat, soy bean, and some dairy products are imported in large quantities. Although farmland is Taiwan's most important natural resource, only small portions are arable. Only a fourth of total land area, about 2.2 million acres, can be cultivated. This includes large tracts of slope and foothill lands difficult to farm. Moreover, soils are generally poor; they lack sufficient mineral plant foods (nitrogen, phosphorus, and potash), and are subject to rapid chemical decomposition, leaching and erosion. These problems are further compounded by the small size of farm units. Overpopulation (1,660 farmers and dependents per square mile of arable land) has reduced average arable acreage per farmer to about 0.4 acres. Farm plots range in size from less than l 1 /^ acres in suburban Taipei to 5-7% acres in the Miaoli- Hsinchu foothills and in Taitung. Throughout the fertile alluvial plains in Chianan, Pingtung, and Ilan, farm size averages between 2Vi> and 5 acres. Rapid population growth (3 percent a year) and scarcity of arable land make necessary the extraction of the highest possible yields from the soil. Otherwise, more food would have to be imported, an intolerable luxury for the economy at this stage of development. Fortunately, Taiwan farmers, like* the Japanese, excel at their trade and now produce enough for both local needs and export. Only a few food products not grown on the island have to be imported. The great obstacles are being overcome mainly through hard work (very few farms are mechanized) ; multicropping; liberal irrigation; heavy doses of fertilizer, pesticides, weed killers, and other agricultural chemicals; and use of better seed varieties. These efforts, together with continued growth of the food processing industries utilizing domestic crops, and further expansion of export markets for primary and processed farm products should permit a reason- ably bright future for the agricultural sector. Growth in agricultural output averaged about 6.9 percent a year from 1960 to 1965. Under the fourth Four Year Plan, output is expected to increase further by about 4 percent each year to a value of $730 million by 1968. To achieve this goal, an estimated $314 million will be invested into the agricultural sector during the 1965- 68 period. Local industries that will help meet the farmers' basic needs have sprung up quickly in the last few years. Taiwan can now make most of its fertilizer and some of the equipment for its irrigation facilities, insecticides, farm implements, and farm machinery. Eventually, local production may replace currently large imports but, except for fertilizers, this prospect is still distant. Total imports of farm raw materials 77 PARTNERSHIP WITH U.S. FIRMS: many projects which require a high level of technical know-how are partially and equipment (excluding food and sulfur) amounted to $24 million in 1965 compared with $26.5 million in 1960. Appendix A contains an inventory of production materials and equipment required by the farm sector, indicating the extent to which these items are available locally or must be imported. FERTILIZER The fertilizer sector is the industry that comes closest to meeting local needs. Nine plants are produc- ing calcium cyanamide (20%N), nitrochalk (20%N), ammonium sulfate (21%N), urea (46%N), nitro- phosphate (16%N, 14%P), calcium superphosphate (18%P), and compound fertilizer (20%N, 5%P 2 5 , 10%K 2 0). Eight of the nine are Government owned, seven by the Taiwan Fertilizer Corporation (TFC) and one by the Kaohsiung Ammonium Sulfate Cor- poration (KASC). The other is a $22-million joint venture by Socony-Mobil, Allied Chemical, and the Chinese Petroleum Corporation. Over 1 million tons of nitrogenous and phosphatic fertilizers were produced in 1965, more than double the 1961 output of 413,000 tons. Total imports of all fertilizers have correspondingly declined from about 434,000 tons in 1961 to 400,000 tons in 1965 ($17.4 million worth) . Taiwan had expected to be self-sufficient in nitro- genous fertilizer by 1965. However, despite sharply increased local production, Taiwan farmers have not yet adjusted to local nitrogen fertilizers. On the one hand, they prefer ammonium sulfate, which is not yet produced in sufficient amounts, to the more abundant urea. On the other hand, they prefer the Japanese ammonium sulfate to the local variety, even though the ingredients are identical. Consequently, over 110,000 tons of ammonium sulfate and 72,500 tons of other nitrogenous fertilizer were imported from Japan in 1965 at a cost of $9.4 million. These imports will probably be cut off or sharply reduced after 1968. By that year TFC will have com- pleted a $21.5-million project to rebuild its Hsinchu plant. The projected annual output of that plant — 145,000 tons of ammonia, 110,000 tons of urea, and 160,000 tons of ammonium sulfate — combined with production at the nine existing plants, should increase nitrogen output to about 236,000 tons, compared with the projected local requirement for nitrogen of about 158,000 tons in 1968. Except for sulfur, all the raw materials used in nitro- genous fertilizers are available locally, including nat- ural gas, coke, ammonia, sulfuric acid, and pyrite. Due mainly to sharply increased production of sulfuric acid and -ammonium sulfate, sulfur imports more than doubled from 40,412 tons in 1963 to 119,000 tons ($5 million worth) in 1965. Canada, the United States and Mexico are the main suppliers. The duty on sulfur was reduced in 1965 from 25 to 10 percent. Taiwan has already attained self-sufficiency in phos- phatic fertilizers. Local output of calcium superphos- phate and nitrophosphate (189,000 tons in 1965) rose to 204,000 tons in 1965 with the addition of new sulfuric acid plants in early 1965. Thus imports — 10,000 tons of ammonium phosphate valued at $600,000 in 1964 — were no longer needed in 1965. However, since Taiwan has no phosphate rock de- 78 owned by American firms, such as this urea fertilizer plant of Mobil China Allied Chemical Industries- posits, import of this raw material will increase as local output of super and nitrophosphate rises. The United States and Morocco are the main suppliers. About 123,000 tons ($3.5 million) were imported in 1965. Potassic fertilizers will continue to be imported, as Taiwan has no potash reserves. The import require- ment in 1965 reached 90,000 tons and should go up to about 110,000 tons by 1968. Potassium sulfate and potassium chloride, the main imports, are supplied by the United States and Germany. Eventually, Taiwan may import only the potassium chloride and treat it with sulfuric acid to obtain potassium sulfate locally. Very little potash is imported in crude form. The import duty on all fertilizers is 5 percent. Ferti- lizers may be imported only by the Taiwan Food Bureau and the Taiwan Sugar Corporation. Those Government agencies administer the complex rice- fertilizer barter mechanism by which fertilizer is dis- tributed to the farmer in exchange for a certain por- tion of the annual rice crop. United States firms engineered and designed most of the equipment being used in Taiwan's nine fertilizer plants. Hence, a great part of the machinery and parts came from the United States. Recently, however, the Japanese have made inroads in this field and, as future expansion and equipment renovation is undertaken, United States firms will find stiffer competition. Never- theless, if they maintain close contact with TFC and KASC, in particular, excellent opportunities should arise for sales of electric furnaces, burners, ovens, boilers, kilns, air blowers, air liquefying machines, hydration machines, rectifiers, electrolytic hydrogen cells, gas producers, gas reforming units, partial oxida- tion units, crystallizers, electrode manufacturing equip- ment, compressors, pumps, centrifuges, pipes, valves, jaw and cone crushers, granulators, and grinding machines. AGRICULTURAL CHEMICALS Use of insecticides, fungicides, herbicides, plant regulators, soil stabilizers and other agricultural chemi- cals is essential in Taiwan, because the island's tem- perate climate and high humidity encourage pest infestation and plant disease. Among the more com- mon pests are rice, corn, and vine borers; stem and leaf miners, leaf beetles, stem maggots, aphids, red spider mites, soybean beetles, potato weevils, and white and yellow moths. The main diseases include downy mildew, brown spot, rust, leaf blight blast, nematode white tip, virus yellow dwarf, sclerotium wilt, sclerotial sheath blight, and sclerotial culms rot. Taiwan farmers regularly spray or dust their crops with chemical protectives, but they tend to play favor- ites and distrust new products, particularly locally produced ones. Thus, despite increasing local produc- tion of some items, imports are still preferred. Most often used are DDT, BHC, parathion, methyl para- thion, malathion, sumithion, drivon, fumiron, diazi- non, endrin, dieldrin, aldrin, pyrethrin, sevin, phos- drin, akatin, asozin, heptachlor, tuzet, manzet, lime sulfur, agrosan, granosan, lebaycid, folidol, dithane, kelthane, karathane, chloradane, dipterex, soilcin, metasystox, DDVP, PMA, EPN, PIN, and various organic mercuric compounds for field and seed sterili- zation and soil fungicization. 79 In most cases, the chemicals are imported in raw material form and processed locally. Nearly $5 million worth were purchased in 1965. The United States and Japan are the main suppliers. United States sales, some of which had been financed under the AID program in the past, declined in 1965 in the face of stiffer competition. One factor working to the advan- tage of continued U.S. sales, however, is the farmer's reluctance to try something new, even though the Japanese image among Taiwan farmers is excellent. The main competition will likely come from locally produced chemicals. A few are already produced in raw material form, and no imports of these are re- quired or permitted. They include DDT, BHC, rotanone, bromodan, 2-4-D, and pentachlorophenol. Others, for example malathion, DDVP, and PMA raw materials are also produced locally, but total demand for them far exceeds current capacity. The only raw material producer is the Kaoshiung Agricultural Chemical Works. Import duties on both raw materials (except DDT and BHC) and processed agricultural chemicals were increased in 1965 from a flat 5 percent to between 5 and 25 percent. The increased duty reflects the official belief that, given some protection, all the chemicals now being imported could be produced locally in a single, well- equipped plant. Since they are all made through organic synthesis, the same production equipment could be used even though ingredients would differ. Moreover, nearly all the basic chemical raw materials are also available, including natural gas; naphtha; aromatic solvents; hydrochloric, sulfuric, nitric, and acetic acid; formalin; ethyl alcohol; acetone; and sodium hydroxide, carbonate, and hydrosulfite. United States suppliers might well consider an investment or licensing agreement in this field, particularly if the increased duty and competition from other direct suppliers begin to affect their market there. IRRIGATION EQUIPMENT Irrigation is vitally important in Taiwan where paddy rice is the dominant crop. Roughly 1.3 million acres, or 60 percent of the total cultivated area, are already irrigated. The source is mostly surface water from streams and reservoirs, but the rugged topog- raphy limits feasibility of building many more large scale reservoirs. Although several huge multipurpose projects are still under construction or in the planning stage, the main emphasis in the future will be more on ground water pumping, rotational irrigation, canal lining, and flood control. The entire water resources development program for the 1965-68 period will cost the Government and the 26 self-financed irrigation associations an estimated $108 million. Specific proj- ects will include the drilling of 365 additional wells and construction of 213,000 yards of new dikes and 312 new spur dikes. Expansion of the irrigation system along the lines outlined should lead to excellent sales opportunities for drilling rigs, pumps and motors, transformers, accessories and spare parts, welded steel casings, and water measurement facilities. The Provincial Ground Water Development Bureau has responsibility for actual well drilling and would be the main customer for irrigation facilities. All procurement, however, would be handled through the Central Trust of China. Imports of water pumps alone amounted to $550,000 in 1965. The United States and Japan are the main suppliers. The duty is 12yo percent. FARM MACHINERY Mechanized farming is a fairly recent development in Taiwan. Most farming is still done by hand, using draft animals (mainly water buffalo) and basic implements. The pattern of small-size farm plots and hilly terrain, combined with overabundant farm labor, are the main obstacles to more widespread use of farm machinery. For example, efficient utilization of the most popular 4.5 hp. power tiller (roto tiller) requires an estimated minimum area of 17 acres. Even a tiller of less than 4.5 hp. will operate efficiently only on a farm of at least 6 acres in area. Few farms, except for the sugar cane land of the Taiwan Sugar Corporation (TSC), come close to 6 acres, let alone 17. Nevertheless, the farmers' pressing need to increase yields, combined with a growing shortage of water buffalo, make the use of farm machinery more and more essential. There are presently about 400,000 buffalo on the island. At least 100,000 more could be used productively. A single 4.5 hp. power tiller could, of course, replace nearly five buffalo and could also provide power for other farm purposes. Thus, farmers are being encouraged to invest in farm machinery to increase productivity. By pooling their resources and removing the barriers between plots, the farmers are gradually moving in that direction. The number of power tillers in use on the farms increased from only 7 in 1954 to 3,200 in 1960 to about 13,500 in 1965. The Government estimates that at least 50,000 additional small power tillers will be bought in the next 5 years. Until recently, all power tillers and accessories were imported. Now, nearly half are made locally at five plants, with the two factories using Japanese licenses accounting for most of the output. In 1965, local production was 2,500 tillers of various sizes, ranging from 3 to 10.5 hp. Also produced were attachments, such as single and double plows, pulverizing wheels, pudding wheels and rakes, planters, cultivators, rotors, ridgers, and grass mowers. Lacking, but greatly needed, are attachments for intertilling, weeding, har- vesting, sprinkling, applying fertilizer, and other more sophisticated operations. These and more than half 80 ttfflU*' 'M /<«& \<& of «»<**>> r \x\ »r^^°4^ wtio" "!«>> °». ,.»« Ita&e lU \aW nS S»»P «t* c