NEW CHINA POLICY

A Turning Point For

TAIWAN’s ECONOMY
IN THE LAST DECADE . . .
Economic Turmoil = Emerging
China + Unstable Cross-straight
Relationship

Emerging China Unstable Cross-strait Relationship

 China’s low production costs
disadvantaged Taiwan production
 Large amount of investments and
employment had moved from
Taiwan to China
 No direct flight – Taiwan lost
geographical advantages
 Prohibiting capital inflow from China
created an economic disequilibrium
between Taiwan and China
 Taiwan lost much of its
economic/strategic advantages

Consumption decreased and

Depreciation of financial assets
Taiwan’s economy weakened
- Page 1 -
Unemployment Rate Rises After 2000
%

Year
Data Source : Directorate-General of Budget, Accounting and Statistics

 After 2000, China replaced Taiwan production due to China’s

lower production costs, which impacted Taiwan’s labor market

- Page 2 -
 Change in Taiwan’s GDP Structure

GDP Breakdown (2000 vs. 2008)

Data Source : Directorate-General of Budget, Accounting and Statistics

 Private consumption accounted for 60.39% of GDP in 2000 and

shrank to 54.5% in 2008

- Page 3 -
 Higher Degree of Trade Dependence

Year
Data Source : Directorate-General of Budget, Accounting and Statistics

 The degree of Taiwan’s dependence on trade increased from 100% in 1981

to 144% in 2008
Higher degree of trade dependence

Higher risks when global economies are negatively affected

- Page 4 -
 FX Reserve Accumulated Rapidly

Data Source : Directorate-General of Budget, Accounting and Statistics

 Taiwan’s Real Trade Surplus to GDP ratio achieved a high level of 17%
 Trade surplus helped accumulate a large FX reserve
Taiwan was ranked Top 5 worldwide in FX Reserve Size

Ranking Source : Bloomberg, Sept 09 - Page 5 -

Taiwan’s Susceptibility to Changes in World
Economy
% GDP Growth Rate

Data Source : IMF

 Taiwan’s economic growth shows more volatility in comparison to the World

- Page 6 -
 Proactive Management Policy in 2000-2008
% GDP Growth Rate

Data Source : IMF

 The Four Asian tigers, who are export-oriented economies, showed rapid economic growth
from 1980-2000
 Taiwan lost its economic/strategic advantages as its relations with China weakened

Taiwan’s Average GDP growth fell to last place during 2000 - 2008.
• Taiwanese investments in China were restricted to 40% of a company's asset value
- Page 7 -
 2000 – 2007 Shows Astonishing Cash Outflow
USD Million

Data Source: Central Bank, 2009/8

 From 2000-2007, financial account showed 40.8Bn/USD net capital outflow

 After deducting approximately 114.7 Bn/USD in foreign capital inflow
 Taiwan’s total capital outflow is estimated to be 156.25Bn/USD

Capital outflow from Taiwan to China is estimated to be 125Bn/USD

(80%) - Page 8 -
 Depreciation of Equity Market

P/B
Index

Year
Source: TEJ

 From 1994 to 2000  PBR of TAIEX traded between 2.5X - 4.0X

 After the internet bubble and cross-strait tension, PBR of TAIEX traded between
1.2X - 2.0X

- Page 9 -
 2008 Presidential Election
Party Platform Change  Opening-Up Policy

TAIWAN CHINA
2008/7 - Permitting Chinese tourists to Taiwan 2009/5 - Development of western economy zone
- Raised max level of investments to
China for Listed Company
- Opened the exchange of RMB/TWD
2008/9 - Three small links normalization 2009/5/29 - China Trade Mission 1 to Taiwan

2008/12 - Three linkages 2009/6/1 - Color TV purchasing Group

2009/4 - Opening QDII 2009/6/8 - LED purchasing Group

2009/5 - Chartered Flight to Regular Flight 2009/7/13 - China Trade Mission 2 to Taiwan

2009/6 - Opening 192 items for China capital 2009/8/19 - China Trade Mission 3 to Taiwan

MOU for finance cooperation is expected to be signed at the end of 2009

ECFA cooperation is expected to be sign in the first half of 2010
- Page 10 -
 The Content of ECFA

Item Content
Merchandise  Bilateral exempt of tariffs
Trade  Increase in import items
Service Trade  Agreement of service trade

Investment  Investment liberalization

 Opening-up bilateral investment
Other  Protection of intellectual property rights
 Cooperation of customs
 Avoidance of double-taxation agreement

Members of ASEAN+3 FTA will be exempt from tariffs

on most merchandises in 2010 and ECFA will help
enhance competitiveness
- Page 11 -
What We Have Seen So Far

STRONG GROWTH SUPPORT from China

RETURN OF CAPITAL from overseas

OUTPERFORMANCE of equity market

- Page 12 -
 Strong Growth Support From China [1]

Taiwan Export Orders come from (YoY)

Year
Source: Bloomberg

 Strong orders from China have offset the decrease in demand from
developed countries
Export orders from China have turned to positive annual growth
- Page 13 -
 Strong Growth Support From China [2]
# of Chinese Tourists

Year
Data Source: TEJ

 Tourists and direct investments from China should help boost TW’s private
demand
Assuming tourists from China reach 3000 limit daily . . .
 0.6% - 0.7% GDP growth per year could be generated
 Retail sales show positive annual growth since July
- Page 14 -
 Return of Capital From Overseas
USD/Mn USD/Mn

Data Source: Central Bank of Republic of China

 Capital from overseas expected to return due to reduction in inheritance

tax from 50%  10%
 Such capital inflow should provide sufficient liquidity for capital market
- Page 15 -
TAIEX Outperformance Vs. Major Indices
Market Index(2009/9/30) YTD
TSE 7,509 63.56%
Dow Jones 9,712 10.66%
NASDAQ 2,122 34.58%
S&P 500 1,057 17.03%
Shanghai A-Share 2,916 52.57%
Hang Seng 20,955 45.65%
Nikkei 225 10,133 14.38%
KOSPI 1,673 48.79%
DAX 5,675 17.98%
FTSE 5,133 15.78%
Data Source: TEJ

 Continual improvements in cross-straight relations and capital inflow

RESULT?
 TAIEX outperforms - from beginning of 2009
- Page 16 -
What We Expect for Taiwan’s Future . . .

Consumption to increase

Rerating of equity market

New milestones for Taiwan’s property market

- Page 17 -
 ECFA Helps International Trade
Weights of TW Export - 2000 Weights of TW Export - 2009/8

Data Source : TEJ

 Exports to China accounted for 44% of Taiwan exports

 There are 230 FTAs in the world and if membership is achieved,

Taiwan’s trade ability will be at an advantage

 CIER estimates that Taiwan’s GDP will increase 1.65%

CIER: Chung-hua Institute for Economic Research, Taipei - Page 18 -
ECFA Will Boost Taiwan’s Domestic Consumption

 CEPA was signed on

CEPA 06/2003 and formally
implemented in 2004

 HK shows strong
private consumption
growth after CEPA

Taking HK’s experience

We expect TW private
consumption to
increase after ECFA
Data Source : Bloomberg

- Page 19 -
 Re-rating of TAIEX

Data Source: TEJ

 During 1994 & 2000 …

PBR of TAIEX traded between 2.5X - 4.0X
 Post internet bubble and cross-strait tension …
PBR of TAIEX traded between 1.2X - 2.0X
 Due to improvements in cross-strait relations …
We expect the PBR ratio to trade higher up to 3.0X.
- Page 20 -
 Money Supply Benefits Property Demand
 The increase in growth rate of Taiwan’s money supply M1B is
beneficial to property stock

 Record low interest rates drive money into the property market
900 30

800 TSE Construction Subindex M1b YOY% 25

700 20

600 15

M1B Growth Rate

500 10
Index

400 5

300 0

200 -5

100 -10

0 -15
1990
1990
1991
1991
1992
1992
1993
1993
1994
1994
1995
1995
1996
1996
1997
1997
1998
1998
1999
1999
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2007
2008
2008
2009
2009
Source: Central bank of Republic of China (Taiwan)
- Page 21 -
 New Regulations for Chinese Investment:
Taiwan’s Property Market
 The holding period on residential property investments should be
no less than three years

 Taiwan-registered Chinese corporations can own commercial

property for purposes restricted to own-use only (no reselling)

 Initial investments are expected to flow into the commercial

property market

- Page 22 -
 The Hong Kong Experience [1]
Since CEPA
 Chinese companies that applied for branches in HK showed peaked growth in 2005
 HK’s commercial property demand has increased
 Initial positive change in capital inflow helped boost domestic confidence

Mainland China Companies in Hong Kong

Regional
Regional office Local office Total New add.
Headquarters
2001 70 172 160 402
2002 96 170 290 556 154
2003 84 148 307 539 -17
2004 106 156 373 635 96
2005 107 160 443 710 75
2006 112 156 449 717 7
2007 93 152 480 725 8
2008 95 128 499 722 -3
~2009/9 96 127 527 750 28
Source: Hong Kong Census Statistics Department

- Page 23 -
 The Hong Kong Experience [2]
 Hong Kong property price increased (%) from 2004 - 2007

Factories > Office > Retail > Residential

Source: Hong Kong Census and Statistics Department

- Page 24 -
 Taiwan Property is Lagging in Asia
 Residential and non-residential property investment
3.7% of GDP since 2000

 Taipei office rental rates are among the lowest in Asia

Taipei Office Rental Rates

US$/m2/annum
Tokyo 1698.5 Housing Investment as Percentage of GDP
Hong Kong 1400.9
Mumbai 941.6
Singapore 936.8
Ho Chi Minh City 687.6
Shanghai(Pudong) 428.7
Beijing 335
Taipei 275.5
Seoul 258.7 Taiwan
Bangkok 250.2
Manila 249.5
Bangalore 228.7
Jakarta 95.8
Source: GGBAS ,CLSA ASIA-Pacific Markets
- Page 25 -
 Can ALL of This LAST ?
Taiwan’s STRENGTHS
 Geographical advantages  Near the world production
center & biggest market: China
 Taiwan’s industrial competitive advantage
 High quality human resources
 Intellectual property management and protection measures
 Excellent R&D environment and output
 Freedom of speech and information

To be the center of research and development

- Page 26 -
 Taiwan: Geographical Advantages

 Located at the heart of the Asia-Pacific region

• Links NE Asia & SE Asia from its position off the SE cost of China
 which it shares both language and cultural ties
 Direct cross-straight flights have been extended to 7 days a week
 Compared to HK , Shanghai, and Singapore:
• Taiwan enjoys the shortest average sailing times to 5 major Asia-
Pacific harbors
• Shortest average flying time to 7 major cities in Western Pacific

- Page 27 -
 FREEDOM of  Speech | Media | Information
Taiwan has the freest media environment in East Asia due to its:

 Open legal environment

 Economic freedom
 Highly competitive media market
Map of Freedom 2009

SOURCE: Freedom House

- Page 28 -
Establishing R&D CENTERS in Taiwan
 CURRENT IMPLEMENTATION
TAIWAN  Ideal location for multinationals to establish bases for innovative R&D activities
 Leading multinationals (HP, Sony, Dell, IBM, Intel … etc.) have already established 40
R&D centers in Taiwan by September, 2009
 TW’s industrial environment & infrastructure exceeded expectations  Some even
expanded the scale of their R&D centers
 Introduction of key technology by these R&D centers will help mold Taiwan into a
valued partner to the world’s multinational corporations in the area of technology
This will further advance the development of Taiwanese industries

Approved projects of the Multinational Innovative R&D centers in Taiwan Program

Company Name Project Name
Hewlett-Packard International Pte. Ltd. Taiwan Branch HP product Development Center
Sony Taiwan Limited SONY Design & Engineering Center Taiwan
Sony Taiwan Limited System in Module Center Taiwan
Becker Electronic Taiwan Ltd. (Becker Avionics) Avionics Certification Skill & Key Technology Development Center Cont.
Aixtron Taiwan Co., Ltd. Manufacturing Oriented Research Lab
IBM Taiwan Corporation Mobile e-Business R&D Center
Pericom Taiwan Limited PERICOM Advanced Mixed-Signal IC R&D Center
Dell Computer (Taiwan) B.V., Taiwan Branch Dell Taiwan Design Center
IBM Taiwan Corporation Life Sciences Center of Excellence
- Page 29 -
Microsoft Taiwan Co. Microsoft Technology Center
Intel Innovation Technologies Ltd. Intel Innovation Center
Ericsson Taiwan Ltd. ERICSSON Innovation Center
Broadcom Taiwan Co. Network SoC R&D Center
Motorola Electronics Taiwan Limited Motorola Taiwan Product Development Center
DuPont Taiwan Ltd. DuPont Taiwan Technical Center
Taiwan International Standard Electronics Ltd. (Alcatel) Alcatel ICT Application Research Center
GlaxoSmithKline Far East B. V. Taiwan Branch GSK Taiwan R&D Operation Center
IBM Taiwan Corporation IBM xSeries Taiwan Development Center
NEC Taiwan Ltd. NEC Innovative Product Joint Development Center for Engineering
Synopsys Taiwan Limited. VDSM EDA R&D CENTER
AKT America, Inc. AKT Asia Research & Development Center

Source: Department of Industrial Technology Ministry of Economic Affairs

Festo Co., Ltd. Festo CEC R&D Center Taiwan
Atotech Taiwan Ltd. Atotech Technology R&D Center
Telcordia Technologies, Inc. Taiwan Telcordia R&D Center
General Instrument of Taiwan, Ltd. Motorola Connected Home Solutions Taiwan Technology Center
Green Electronic Materials and Energy Device Safety Testing and
Underwriters Laboratories Taiwan Co., Ltd.
Inspection Technology Research and Development Center
Dow Chemical Taiwan Limited Dow Chemical Taiwan Plastics Application Development Center
Fujitsu Taiwan Ltd. Fujitsu Taiwan Development Center
ULVAC Research Center Taiwan, Inc. ULVAC Advanced Technology Center
IBM Taiwan Corporation IBM Taiwan Systems and Technology Laboratory
ASML Taiwan Ltd. ASML Worldwide Center of Excellence
Mycom International Inc., Taiwan Branch Mycom strategic R&D center
Synopsys Taiwan Limited. Advanced Process EDA R&D Center
Taiwan International Standard Electronics Ltd. (Alcatel-
WiMAX Application Development and IOT Center
Lucent)
Microsoft Taiwan Co. Microsoft Innovation Center
Telcordia Applied Research Center Taiwan Company Telcordia Telematics Taiwan R&D Center
DuPont Taiwan Ltd. DuPont Taiwan Display Materials Technical Center
Sony Computer Entertainment Taiwan Ltd. Digital Content Creation Center
Underwriters Laboratories Taiwan Co., Ltd. Advanced Energy Safety R&D Center
DuPont Taiwan Ltd. DuPont Taiwan Photovoltaic Materials Technical Center

- Page 30 -
Establishing R&D CENTERS in Taiwan
 INCENTIVES

 Tax deduction and exemption

• Tax credit up to 30% of amount invested in R&D against business income tax
payable

 Human resource support

• Companies may recruit overseas

 Subsidy for operating capital

• Salaries of local R&D personnel, consultant fees, remunerations of overseas
R&D personnel, travel expenses, rent, overseas training expenses … and more

 Priority in administrative procedure

• Simplified administrative procedure, assistance for multinationals in
negotiation with government agencies

Source: Department of Industrial Technology

Ministry of Economic Affairs - Page 31 -
 World Competitiveness Ranking – TAIWAN
[2009 – 2010]
 Taiwan known for its high-tech industry
 Taiwan gets fully rewarded for outstanding capacity to innovate [6th]

 Number of utility patent (i.e., patents for invention) [1st]

 Availability of scientists and engineers [7th]
 Government procurement of advanced tech products [7th]
 State of cluster development [6th]
 Venture capital availability [8th]
 Financing through local equity market [5th]
 Pay and productivity [3rd]
 Flexibility of wage determination [10th]
Source: World Economics Forum http://gcr.weforum.org/ - Page 32 -
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- Page 33 -