Mixed Message for Taiwan's Machinery Industry

Global tensions and competition take their toll, but a bright future lies ahead

Overall production in Taiwan's machinery industry will decrease 4.18% year-on-year to NT$905.8 billion in 2012 due to a slump in orders in the first half of the year. That's the prediction made by Yeh Lih-lun, an industry analyst with the Industrial Economics and Knowledge Center (IEK), part of the government-backed Industrial Technology Research Institute (ITRI) associated with the Industrial Technology Intelligence Services (ITIS) Program Office under the Department of Industrial Technology of the Ministry of Economic Affairs.

Nevertheless, Yeh also said that domestic machinery manufacturers should receive more orders from China and Southeast Asian countries in the second half of this year, and that in 2013 the overall production value in Taiwan's machinery industry should exceed NT$1 trillion.

In 2011, the overall production of Taiwan's machinery industry is expected to reach NT$945.3 billion, up 16.18% year-on-year, according to the IEK.

The IEK conducted a survey that shows the domestic machine-tool manufacturing sector, a fast-growing part of Taiwan's machinery industry, has had a slowdown in new orders since the beginning of the third quarter of last year. Yeh said this slowdown has been due at least in part to the European debt crisis, the fear that China might suffer an economic hard landing, and the free trade agreements signed between South Korea and the European Union and between South Korea and the United States.

Sales

Sales of Taiwan's machine-tool sector should reach NT$45.9 billion in the fourth quarter of 2011, up 19.2% from a year earlier. But its growth during the second half of 2012 should slow down due to the Chinese government's credit-tightening policy to curb inflation. According to the IEK, revenues of the domestic machine-tool sector might reach NT$165 billion in 2011, which would be a whopping 25.21% increase year-on-year.

The high-tech equipment sector is expected to sell NT$31.1 billion in the fourth quarter of 2011, down 4.53% year-on-year due to the sluggish demand from the semiconductor and TFT-LCD (thin film transistor-liquid crystal display) manufacturing industries. In comparison to the preceding year's NT$110.9 billion, the sector should grow 11.53% in 2011.

Industrial machinery is one of the largest manufacturing sectors in Taiwan. The sector includes the following kinds of machinery: woodworking, plastic processing, textile, food processing, printing, chemical and packaging. Taiwan's manufacturers of industrial machinery have seen limited revenue growth over the past several years due to the strength of their Chinese competitors. These Chinese competitors have explored Asian and Latin American markets aggressively, which has affected the exports of domestic manufacturers, according to an industry insider.

According to the IEK, in the fourth quarter of last year the industrial machinery sector's revenues should grow a mere 0.06% year-on-year to reach NT$43.6 billion. The sector's annual figures are expected to reach NT$161.9 billion in 2011, up 3.56% from 2010. (See table below)

Sales of Taiwan's Machinery Industry Unit: NT$1 million
Sector	Q4, 2010	Q4, 2011 (forecast)	Y/Y Change (%)	2011 (forecast)	2012 (forecast)	Annual Change (%)
Metalworking Machinery	38,516	45,912	19.2	165.030	155,063	-6.04
High-tech Production Equipment	32,554	31,078	-4.53	110,941	107,500	-3.1
Industrial Machinery	43,605	43,632	0.06	161,871	160,202	-1.03
Conveyors, Automation Equipment	11,202	11,540	3.02	40,863	39,953	-2.23
Mechanical Transmission Devices	8,026	5,513	-31.31	21,186	22,181	4.69
Pumps, Compressors, Fans	17,475	19,844	13.56	75,709	72,459	-4.29
Construction Engineering Machinery	278	219	-21.22	791	819	3.54
Agricultural Machinery	1,535	1,3,91	-9.38	5,507	5,462	-0.82
Engines	3,210	6,741	110	24,388	22,518	-7.67
Others	77,383	91,088	17.71	338,781	317,501	-6.28
Total	233,784	256,957	9.91	945,300	905,810	-4.18
Source: Industrial Economics and Knowledge Center, Industrial Technology Research Institute

Imports

In the fourth quarter of last year, Taiwan should have a 3.43% year-on-year growth in machinery imports to reach NT$149.4 billion, according to the IEK. Its total imports for all of 2011 should reach NT$619.2 billion, down 29.58% year-on-year.

In 2006 and 2007 combined, Taiwan's high-tech industry imported approximately NT$1 trillion worth of production equipment as a result of plant expansions. In 2010, following the freeze in imports after the 2008 global financial crisis, the domestic semiconductor and electronics sectors resumed procuring imported production equipment, for a total of NT$504.9 billion. Since most high-tech firms had already completed their plant expansion plans in 2010, the import value of production equipment should shrink to NT$212.5 billion in 2011, according to the IEK.

The second largest import sector was industrial machinery, mainly chemical machinery, distillery equipment, printing machines and glass-making equipment. Its imports reached NT$29.2 billion in the fourth quarter of 2011, down 12.45% year-on-year. Total imports of industrial machinery should reach NT$113.7 billion in 2011, up 7.55% annually, according to the IEK.

Pumps, compressors and fans comprised the third largest import sector, with a value expected to reach NT$22 billion in the fourth quarter of 2011, up 6.99% year-on-year. Total imports for this sector should reach NT$89.4 billion in 2011, up 15.06% year-on-year.

Imports of machine tools, including electric discharge machines, metal-cutting and forming machines, and components and parts, should reach NT$8.3 billion in the fourth quarter of 2011. Imports should total NT$33.5 billion in 2011, up 10.93% annually.

Imports of mechanical transmission devices should reach NT$8.7 billion in the fourth quarter of 2011, up 19.42% year-on-year. (See table below)

Machinery Imports to Taiwan Unit: NT$1 million
Sector	Q4, 2010	Q4, 2011 (forecast)	Y/Y Change (%)	2011 (forecast)	2012 (forecast)	Annual Change (%)
Metalworking Machinery	8,302	8,304	0.02	33,481	32,496	-2.94
High-tech Production Equipment	86,365	45,596	-47.21	212,476	300,193	41.28
Industrial Machinery	33,335	29,186	-12.45	113,713	111,383	-2.05
Conveyors, Automation Equipment	4,205	4,577	8.85	18,196	19,553	7.46
Mechanical Transmission Devices	7,275	8,688	19.42	32,399	30,799	-4.94
Pumps, Compressors, Fans	20,606	22,046	6.99	89,431	85,899	-3.95
Construction Engineering Machinery	3,580	3,331	-6.96	13,542	13,526	-0.12
Agricultural Machinery	232	418	80.17	1,819	1,731	-4.84
Engines	13,572	14,889	9.7	55,389	53,804	-2.86
Others	12,436	12,427	-0.07	48,746	47,843	-1.85
Total	189,907	149,463	-21.3	619,197	697,229	12.6
Source: Industrial Economics and Knowledge Center, Industrial Technology Research Institute

Exports

In the fourth quarter of 2011, exports of Taiwan's machinery industry should reach NT$142.4 billion, down 0.6% from the preceding quarter but up 4.86% year-on-year, according to the IEK. The industry's exports should total NT$560.7 billion in 2011, up 12.23% year-on-year.

The machine tools sector should see its exports reach NT$36.7 billion in the fourth quarter of last year, up 11.3% year-on-year. Exports for all of 2011 should reach NT$143.4 billion in 2011, up 23.18% year-on-year.

For the first time ever, total exports of machine-tool components should exceed NT$30 billion to reach NT$32.7 billion in 2011, up a whopping 36.25% from NT$24 billion a year earlier. The total amount of exports of machine-tool components manufactured domestically should equal that of machine tools within the next two years, according to the IEK.

Exports of the industrial machinery sector should reach NT$35.2 billion in the fourth quarter of 2011, down 2.87% year-on-year. The sector's annual value should amount to NT$140.8 billion in 2011, up 3.1% annually, according to estimates. In the next few years, Southeast Asia should replace China as the largest export outlet of Taiwan-made industrial machinery. According to the IEK, the export value of industrial machinery manufactured domestically and sold to Southeast Asia should amount to NT$45 billion in 2011, up a whopping 21.3% year-on-year.

Exports of mechanical transmission devices manufactured domestically should reach NT$19.9 billion in the fourth quarter of 2011, up 70.9% year-on-year. In all of 2011, the sector's exports should amount to NT$51.3 billion, up 78.75% year-on-year. The most represented export items in this sector were ball screws, gears and bearings. (See table below)

Exports of Taiwan's Machinery Industry Unit: NT$1 million
Sector	Q4, 2010	Q4, 2011 (forecast)	Y/Y Change (%)	2011 (forecast)	2012 (forecast)	Annual Change (%)
Metalworking Machinery	33,036	36,769	11.3	143,381	135,287	-5.64
High-tech Production Equipment	11,485	9,652	-15.96	37,703	38,864	3.08
Industrial Machinery	36,272	35,232	-2.87	140,804	139,161	-1.17
Conveyors, Automation Equipment	4,512	4,506	-0.13	18,529	17,104	-7.69
Mechanical Transmission Devices	8,206	14,024	70.9	51,257	44,496	-13.19
Pumps, Compressors, Fans	17,599	19,864	12.87	77,961	75,418	-3.26
Construction Engineering Machinery	2,144	2,162	0.84	8,588	8,272	-3.68
Agricultural Machinery	1,057	1,045	-1.14	4,393	4,422	0.65
Engines	3,032	4,233	39.61	15,573	14,318	-8.06
Others	18,489	14,948	-19.15	62,461	64,987	4.04
Total	135,832	142,436	4.86	560,655	542,332	-3.27
Source: Industrial Economics and Knowledge Center, Industrial Technology Research Institute

Major Industrial Developments in Q4, 2011

Hon Hai Prepares to Establish an Intelligent Innovation Park

Hon Hai Group, Taiwan's largest industrial conglomerate, has launched a "NT$100 billion robotic kingdom project" to establish an intelligent innovation park in Taichung City in central Taiwan. It submitted a development project to promote the establishment of the park to the Taichung City Government on Oct. 29, 2011.

Hon Hai plans to establish in stages several plants at the proposed park to produce CNC devices for machine tools, all-electric injection molding machines, high-tier medicare robotics, medical robotic arms, automobile electronics, powerful batteries and green energy-generating systems.

Hon Hai also plans to become involved in automation equipment and robotics, relying on the strong production support from its well-established subsidiary, Foxnum Co., which is a specialist manufacturer of servo-driven systems, CNC devices, robotics and injection molding machines.

Exports of Taiwan-made Machine Tools Should Reach US$4B. in 2011

As a result of the implementation of the Cross-Straits Economic Cooperation Framework Agreement (ECFA), Taiwan exported US$3.65 billion worth of machine tools in the first 11 months of 2011. The island should see its annual exports value total US$4 billion in 2011, in which case it would replace Italy as the world's third-largest machine-tool exporting nation.

Since the beginning of 2012, ECFA has benefited the following machine-tool exports: CNC horizontal lathes, CNC surface grinding machines, pressing machines, shearing machines and textile machines. These products when shipped to China have been subject to zero custom duties.

FTA Between South Korea and the U.S.

The annual impact on Taiwanese machinery exports of the free trade agreement (FTA) between South Korea and the United States that became effective at the beginning of 2012 should be NT$350 billion, according to statistics compiled by the Ministry of Economic Affairs. The domestic industries that will be affected most by the FTA between South Korea and the United States includes plastic products, textile products, petrochemical products, machinery, metal products and large-sized TFT-LCD panels.

P.C. Huang, honorary chairman of the Taiwan Association of Machinery Industry, said the domestic manufacturers could see a loss in profit margin of between 3% and 5% due to the impact of the FTA between South Korea and the United States. And one result of this will be that some low-margin products made in Taiwan will be forced to leave the international marketplace due to an inability to remain competitive.

Manufacturers of Machine-Tool Components Eager to Invest in Taiwan

The implementation of the ECFA has led some domestic and foreign manufacturers of machine-tool components to expand their investments in Taiwan.

China offers a large market for Taiwan's products and services, and ECFA allows foreign companies to enter the Chinese market through Taiwan. The zero-tariff provided by ECFA is a strong incentive for foreign manufacturers to invest in Taiwan.

In 2003 China became the world's largest importer of machine tools. Although China's domestic manufacturers provide an abundant supply of low-end machine tools, it must rely on foreign suppliers for medium- to high-end models, mainly from Germany, Japan, Taiwan and Switzerland.

China's demand for high-priced imported machine tools should continue to increase due to the country's need for state-of-the-art production equipment to upgrade its plants, according to the IEK. Currently, China's domestic machine-tool output cannot meet this demand.

According to ECFA regulations, all the CNC controllers embedded in the machine tools that are shipped to China must be 100% manufactured in Taiwan or China in order to enjoy zero custom tariffs. Presently, Taiwan and China need tens of thousands of sets of CNC controllers yearly.

Pou Chen Group and Hon Hai Precision Industry Co. have decided to increase investments in the research and development of domestic CNC controllers to benefit from the lucrative business opportunities created by the ECFA. Within the next three years, Hiwin Technologies Corp., Taiwan's leading manufacturer of key machinery components, will invest over NT$10 billion in Taiwan. And Fair Friend Group will launch an investment project totaling NT$1 billion to build a new plant in Taichung Precision Machinery Park.