The proposed economic cooperation framework agreement (ECFA) with China is expected to create winners and losers in Taiwan and even within individual corporate groups.
Taiwan's Lealea Group is no exception, with separate companies within its synthetic textile business likely to see their prospects brightened or dimmed by the trade deal.
One group subsidiary, Li Peng Enterprise Co., the largest nylon chips manufacturer in Asia, is expected to benefit if textile materials are among the items given duty-free treatment under the agreement.
But another subsidiary, Lealea Enterprise Co., a maker of polyester chips and filament, will struggle to avoid being negatively affected.
Described as one of the “ECFA-concept stocks”, Li Peng Enterprise has become one of the most prominently mentioned companies in brokerage reports and has been given a “buy” rating by most analysts.
Its share price has been one of the top five risers in the textile sector, gaining 133 percent in the past six months and 336 percent in the past year.
Li Peng, which provides about 25 percent of China's demand for nylon chips, is expected to further expand its market share in the next few years because of China's growing import demand for the raw material.
“We can enjoy continuous growth for the next three to five years,” says Chang Ta-chuan, finance manager and spokesman of the Lealea Group.
The ECFA would give Li Peng even more reason for optimism.
If Taiwan signs the ECFA with China, and nylon products are among the first group of items listed in the deal's “early harvest program,” which would give them tariff-free status, Taiwan's nylon exports to China will no longer be subject to a 6.5 percent import duty.
“Chinese importers definitely want to save the 6.5 percent tariff, so they will import more Taiwanese products to meet their growing demand,” Chang says.
With China's demand for nylon chips exceeding supply, Li Peng also plans to increase its daily production capacity of the material used to make knitted garments, bristles for toothbrushes, and strings for musical instruments, from 800 tons to 1,100 tons by the end of Q1.
The increased production output will likely help Lipeng overtake German chemical giant BASF as the largest nylon chip manufacturer in the world, Chang says.
Another factor that could work in Li Peng's favor is China's decision last October to slap anti-dumping duties on imports of nylon 6, one of the main types of nylon chip, from the U.S., the EU, Russia and Taiwan, hitting companies in the U.S. with duties of as much as 36.2 percent.
Taiwan is expected to benefit because the anti-dumping duty imposed on its exports was well below that imposed on the other countries.
Li Peng, already the largest source of nylon 6 in China, was only assessed a 4.3 percent duty, and it believes it will receive orders that Chinese clients had originally placed with U.S. and European suppliers.
For the time being, Chang is not worried that China will try to increase local production of the raw material to reduce its dependence on imports, because Taiwan still has better technology, experience and talent, which contributes to a better product.
“The quality of people is important. Those machines need to be taken care by people,” he said. “It will take time for China to catch up.”
A senior industry analyst at a major brokerage house, who spoke on condition of anonymity because he is not authorized by the company to speak publicly, agreed that because China still has strong demand for nylon chips, Taiwanese nylon chip manufacturers like Li Peng will benefit most from an ECFA with China.
He pointed out the risk, however, that China might change its anti-dumping policies in the future.
“China will not be able to solve the shortage of nylon chips in the short term. But it can wait until it has reached a sufficient technological level and production capacity and then stop importing from Taiwanese companies,” the analyst said.
While Li Peng can potentially benefit from the controversial trade pact, the affiliated Lealea Enterprise stands on the other side of the fence. For the polyester yarn maker, “ avoiding China is the only way out,” Chang says.
The reason is simple. China is the world's biggest producer of polyester, and Chen admitted that Lealea Enterprise cannot beat Chinese manufacturers head-to-head in an industry that has a very low entry threshold.
Chang says that to differentiate itself, Lealea Enterprise has decided to focus more on customization and upgrading its product line, focusing, for example, on functional textiles.
Most of Lealea's production now comes from customized orders.
“If we serve clients well, clients will not easily go away,' Chang contends. “We have to find something that China is unable to do. If we do it well, then there is space for us to survive.”
Chang also suggests that worries that the ECFA will spark a flood of cheap Chinese textile products into the Taiwan market may be unfounded.
“Taiwan has established a solid base for the textile industry in past decades, and China may be reluctant to start a price war here because it may also suffer,” Chang says.
In the longer run, however, China will rise up in the sector because it has enough money to buy everything, including technologies or even companies it needs, he says, and local textile producers need to be prepared.
“Taiwanese companies need to grab every opportunity before the rise of China,” Chang says, because without sufficient capital, Taiwanese companies will have trouble successfully re engineering their businesses.
That is why Li Peng will do everything it can to make more money in the next few years, which will give it the resources necessary to improve its manufacturing process and keep ahead of the competition, the executive says.
Chang also suggested that the government needed to make more of an effort to promote the ECFA to the public, while proposing specific complementary measures to help those industries that might be adversely affected.
The government has given the electronics industry a lot of help in the past, he said, and now the government should think about how to use its resources to do something meaningful for other industries.
Money used to build bike lanes in Taipei City, for example, might be more productive if it were put into helping vulnerable sectors, he contended.
Chang also believes that for most of Taiwan's textile companies, setting up plants in China is not worth it because of the rising cost of land there and the limited role labor costs play in the companies' overall cost structure.
“The textile industry is a capital intensive industry, and with higher levels of automation, less manpower will be required in the future,” Chang says.
The industry analyst said, however, that the textile industry may not be as big a beneficiary from an ECFA as many people expect, especially if in exchange for getting tariff exempt status for its exports, Taiwan allows imports of basic textile materials from China that were previous barred.
“Although Taiwanese companies will be able to enter China's market, Chinese companies will also be able to come over and grab local market share market with cheaper prices,” he said.
Manufacturers of standard specs of polyester filament yarn and staple fibers will be particularly affected, he predicted.
The analyst noted that export-oriented Taiwanese textile companies will be less affected by the trade pact, but more domestically oriented producers would inevitably face competition from Chinese companies.
The Lealea Group remains aware of the perils, but for now it is committed to keeping its manufacturing base in Taiwan.
At present, Li Peng and Lealea's manufacturing facilities are all in Taiwan, with only subsidiary Libolon International Trading in Shanghai to focus on sales and customer service.
“To us, the China market is surely very attractive, but we also fear that we could lose our technologies to it,” Chang says, reflecting the “love-fear” relationship it has with Taiwan's long-time rival.
