Investing In Taiwan

Market Entry Strategy

Most new-to-market exporters entering Taiwan begin by finding a local partner to serve as agent, distributor, and/or representative. The Commercial Section of the American Institute in Taiwan, working in conjunction with the U.S. Department of Commerce, can offer assistance in locating pre-qualified partners and/or performing due diligence on prospective partners through a number of services.

Taiwan’s banking and international remittance systems are well developed, and there are no foreign exchange regulations that would significantly hamper a U.S. exporter from getting paid. Irrevocable letters of credit are widely used and “L/Cs” from leading Taiwan financial institutions can generally be confirmed by U.S. banks. One characteristic of Taiwan’s economy is the relative importance of small-to-medium sized enterprises (SMEs). While Taiwan does have large state-owned enterprises (now moving towards privatization) in some sectors, and has produced some very large private companies such as the Formosa Group and Taiwan Semiconductor Manufacturing Company, the vast majority of firms on the island employ fewer than 200. SMEs are quite active in trading as well as manufacturing, and offer a large pool of prospective agents, distributors, and representatives that can ably represent U.S. companies in Taiwan.

Using an Agent or Distributor

Most foreign firms gain their initial foothold in this market by using a Taiwan agent. Many Taiwan firms prefer the partnering aspect of an agent relationship. Although some companies are willing to act only as distributors, there is concern that foreign firms that are merely seeking distributors may not be serious about the market and will not support their distributors. Some U.S. exporters that sell equipment or machinery may find it necessary to locate a partner willing and able to do some assembly or manufacturing in Taiwan. Although not necessarily formal joint ventures, these efforts require a higher degree of commitment to the market than simply selling through an agent. If the size of the market warrants, companies may wish to consider setting up a branch office or subsidiary in Taiwan. Taiwan officially welcomes foreign investment and establishing an office in Taiwan is relatively easy, even if the procedures are sometimes bureaucratic. AIT's Commercial Section, on behalf of the U.S. Department of Commerce, provides a number of services to help U.S. firms, large and small, export their goods and services to Taiwan. Through our office in Taipei (covering northern and central Taiwan) and a branch in Kaohsiung (covering southern Taiwan), we offer a variety of resources and services (including market research, agent distributor searches, advocacy, counseling and trade promotion) to assist U.S. companies entering the Taiwan market. Please contact them at Tel: 886-2-2720-1550, Fax: 886-2-2757-7162, email taipei.office.box@mail.doc.gov. The information is also available at the website: www.buyusa.gov/taiwan/en. The first step in using these services is contacting an Export Assistance Center in the United States. A comprehensive list of U.S. Export Assistance Centers (USEAC) can be found at www.buyusa.gov/home/us.html. These offices can help U.S. exporters determine which service is most suited to their export needs.

Establishing an Office

Establishing a subsidiary, branch, or representative office in Taiwan is generally not particularly burdensome. However, there are a number of different corporate structures and issues to consider, and an array of forms and procedures to complete. In addition, a Chinese name is required. Consultations with reputable local attorneys or accountants are strongly recommended in order to identify the key issues relevant to each business, and to complete all the necessary steps for establishing the entity. The Ministry of Economic Affairs (MOEA) website has information on investing and setting up a company in Taiwan. Please see the following two websites: www.moea.gov.tw/ and www.moeaic.gov.tw.

The U.S. Commercial Service in Taiwan maintains an on-line listing of local professional service providers on its website at www.buyusa.gov/taiwan/en. The listing includes local attorneys, accountants, consultants, and other professionals and can be found at the website www.buyusa.gov/taiwan/en/businessserviceproviders.htm.

Franchising

In recent years franchise operations in Taiwan have continued to expand. Fast food restaurants, casual restaurants, convenience stores, health & drug stores, spa services, organic products stores, language cram schools, hair salons, real estate brokerage services, apparel stores, shoe stores and sporting goods franchises have all sprung up in Taiwan. A variety of franchise arrangements exist in Taiwan, ranging from shared joint venture partnerships to a model in which stores are managed and operated by a master franchisee or a regionally based conglomerate. Currently, there is no specific body of law that regulates franchising in Taiwan. Franchise agreements are generally subject to the Civil Code with some regulated by the Fair Trade Law. The laws, regulations and practices concerning the intellectual property aspects of international franchising are the same as those of domestic franchising, regardless of whether the transaction involves foreign persons or is purely a domestic arrangement. In order to succeed in the Taiwan market, foreign franchises should provide considerable support to their local partners that must include: management know-how, system integration, personnel and customer service training, and consistency in product quality. Successful franchisers in Taiwan usually use a reliable professional service provider, such as an attorney or accountant for advice on the structure and implementation of a franchising agreement.

Direct Marketing

On-line and TV shopping has become very popular in Taiwan in recent years, and the market has expanded rapidly. The market size of on-line shopping has increased from US$272 million in 2001, to US$2,833 million in 2006. The TV shopping market is expected to reach approximately US$200 million in 2006. On-line shopping and TV shopping have attracted consumers by providing diversified products, competitive prices, a safe transaction process and convenience. Multi-level sales has become a popular second job to supplement household incomes. Multi-level sales businesses in Taiwan specialize primarily in health care products, cosmetics, skin care products and household cleaning items. Foreign brands are selling well in the categories of health care products, cosmetics, skin care products and water filters. Direct marketing techniques continue to expand in the Taiwan market and the outlook for the next two years remains positive.

Joint Ventures & Licensing

Foreign investors who wish to establish new enterprises in Taiwan through joint venture activities or by furnishing technical know-how, trademarks, patent rights, or other management services to a locally incorporated business enterprise must file an application for approval by the Investment Commission (IC) of the Ministry of Economic Affairs (MOEA). The IC generally issues a decision within approximately two months of receiving the completed application. Capital should not be remitted for joint-venture investment until approval is obtained. Information regarding regulations for approval and consideration of foreign investment or technical cooperation is available at the IC’s website www.moeaic.gov.tw.

Distribution & Sales Channels

The most common distribution route in Taiwan moves products from suppliers to distributors, from distributors to retailers, and then from retailers to consumers. Some suppliers use shorter distribution channels, distributing products directly through retailers only. Multi-level marketing is accepted in Taiwan, and some direct-selling organizations are well established here. Foreign firms, especially small- and medium-sized companies, generally rely on agents to sell their merchandise to distributors. For certain products such as apparel, however, the distribution channels tend to be more complex. There are four ports and harbors in Taiwan: Kaohsiung, Taichung, Suao, and Keelung.  They are located in southern, central, eastern, and northern Taiwan, respectively, and are the island’s major distribution centers.

Selling Factors & Techniques

The most important consideration for the majority of Taiwan buyers is price. The most common complaint against U.S. goods is that their price is too high. Americans often find Taiwan businesspeople short-term oriented, and are frequently frustrated by the fact that most Taiwan firms do not factor in life-cycle costs when negotiating a purchase. Although attitudes are changing, most Taiwan firms will only pay a higher price for a product if they see a near-term payoff. After price, the next most important considerations are quality and after-sales service. Labeling, instructions and sales literature in the Chinese language are required when selling products in the Taiwan market.

Electronic Commerce

Taiwan’s Internet infrastructure is very well developed and fully capable of supporting the development of electronic commerce, but the island’s approach to electronic commerce and related issues is still evolving. According to the Institute for Information Industry, over 90% of Taiwan’s companies have corporate networks and a network infrastructure, while 5.3 million, or 72.1% of households in Taiwan link their computer to networks – mainly by broadband digital subscriber line (DSL). A law protecting personal on-line data was approved in 2001. A positive development is the Electronic Signature Law, passed by the Legislative Yuan in late October 2001. This law adopts the principles of the United Nations Commission on International Trade Law’s Model Law on Electronic Commerce and recognizes the legal validity of electronic contracts, records, and signatures.

The Taiwan authorities have passed several laws and regulations governing electronic commerce since 2003. In May 2005, the Ministry of Finance announced guidelines to impose a business tax on Internet vendors who sell products for profit and have monthly sales over NT$60,000 (approximately US$1,820). In addition to a business tax, the authorities discussed a proposal to assess import duties for software sold and downloaded over the Internet. If implemented, such a policy would appear to run counter to the Doha Declaration that WTO Members would maintain their current practice of not imposing customs duties on electronic transmissions. Taiwan has declined to join the United States at APEC in advocating for a permanent moratorium on taxation of Internet transactions.

Trade Promotion & Advertising

Taiwan businesspeople are active participants in the global marketplace. They read trade journals from the United States, Europe, and Japan, participate in major international trade events, and are well aware of current trends in their industries. There are local trade shows for most major industries and the Taiwan External Trade Development Council (TAITRA) is the co-organizer of many of these shows (usually in conjunction with the relevant industry associations). A local partner can give the best advice on where and how to advertise, but participation in the major trade shows and advertisements in Taiwan trade journals and industry newspapers are also important. Information on trade shows in Taiwan can be obtained from TAITRA’s website: www.taiwantrade.com.tw. TAITRA also offers several lists, including a frequently updated calendar for international conferences and trade exhibitions held at the Taipei World Trade Center. TAITRA-sponsored trade shows can be found at www.taipeitradeshows.com.tw. Most trade exhibitions in Taiwan are exportoriented. Some have a significant number of non-Taiwan companies exhibiting. U.S. companies that do not have representatives or agents in Taiwan should target professional journals and magazines.  Taiwan's advertising sector is comparable to that of other developed economies and covers a wide range of media. There are some restrictions on advertising, especially for alcohol and tobacco commercials on television.

Pricing

Brand is an important determinant of pricing strategy, especially in the consumer goods sector. Generally speaking, price margins at the distributor level for international brands are lower than for local or regional brands. Distributor price margins range an average between 15% and 40%, depending on whether the distributor controls the marketing. Price breaks and discounts for quantity purchases are commonly offered. A five percent value-added tax (VAT) of the sales amount is imposed on all products and services sold in Taiwan. Products -- including rubber tires, cement, machine-made cool drinks, oil and gas, certain electric appliances, flat glass, and motor vehicles -- are subject to commodity taxes that range from 8% to 60% ad valorem. In addition to customs duties, all imports are assessed a Commercial Harbor Service Charge, which is based on cargo weight and net ship tonnage.

Sales Service & Customer Support

Taiwan’s buyers, especially commercial and industrial product users, consider many factors when deciding where they should purchase their products. These factors include customer technical support, after-sales service, product performance, durability, software availability, and overall commitment. U.S. firms should, however, be aware of the fact that price is often paramount.

Protecting Your Intellectual Property

While Taiwan companies are known for their ability to quickly incorporate ideas found in competing products, Taiwan's copyright, patent, trademark, trade secret and integrated circuit layout protection laws generally meet most international standards. Market monitoring systems (for both the export and domestic markets) are in place to help deter the sale of pirated and counterfeit goods, although concerned U.S. industries report that enforcement against the illegal manufacture and sale of such items is inadequate to satisfactorily protect their IPR. Patent, copyright and trademark holders should investigate the need or desirability of filing for those rights in Taiwan. While Taiwan is not a member of the Bern or Paris Conventions, it generally adheres to the principles embodied in those agreements. In connection with its accession to the WTO, Taiwan has made progress in revising its Copyright Law, Patent Law, and Trademark Law to conform to the TRIPS agreement and with other international treaties administered by the World Intellectual Property Organization (WIPO).

Taiwan has made the efforts to take measures to improve enforcement of IPR, including intensifying raids against manufacturers and retailers. In order to improve Taiwan’s ability to protect IPR, the Executive Yuan formulated a three-year (2003-2005) IPR Action Plan. One important measure within this “three-year IPR Action Plan” framework was to establish in January 2003 an Integrated Enforcement Task Force (IETF) consisting of 220 IP police officers. The task force conducts raids on retail optical media sales points and has led to a significant decrease in the number of vendors of counterfeit CDs and DVDs. Other enforcement measures include increasing informant rewards to up to approximately $310,000 per counterfeiting seizure; strengthening border control inspection for optical media exports; increasing day and night inspections on optical media production facilities, night markets, and retail shops; as well as opening three warehouses for storing counterfeiting seizures. The current “IPR Action Plan 2006-2008” focuses on combating Internet infringements and campus piracy.

In general, Taiwan is moving towards improved IPR protection. Counterfeit goods from Taiwan origin by the U.S. Customs dropped from US$26.5 million in FY2002 to US$1.1 million in FY 2005. The Business Software Alliance (BSA) also estimates that the software piracy rate in Taiwan decreased steadily from 72% in 1994 to 43% in 2002, but the rate has remained basically unchanged for the past four years. Despite these gains, areas for improvement remain. Taiwan is still facing serious Internet piracy and illegal peer-to-peer downloading threats. However, the Taiwan Intellectual Property Office (TIPO) initiated an “implementation plan for strengthening preventive measures against Internet infringement” in May 2005 to deter Internet piracy. TIPO also created a joint Internet infringement inspection taskforce to conduct Internet inspections, and has made efforts to strengthen cooperation with enforcement agencies in other nations to tackle cyber crime. To strengthen the legal basis for curbing Internet infringement, draft laws are currently before the Legislative Yuan which define P2P and ISP liability, penalties, and enforcement responsibilities.

Counterfeit and parallel imported pharmaceuticals are common in the Taiwan marketplace. Although the Legislative Yuan passed amendments to the Pharmaceutical Affairs Law in March 2004 to increase penalties for pharmaceutical counterfeiting, the Department of Health (DOH) enforcement mechanism remains relatively weak. On a positive note, in late 2005 the local authorities broke two smuggling rings, in one instance confiscating a sizeable amount of counterfeit pharmaceuticals. In January 2005, Taiwan’s legislature approved a bill to provide data protection for pharmaceutical products, an Agreement on Trade- Related Aspects of Intellectual Property Rights (TRIPS) commitment, and an incentive for innovative pharmaceutical manufacturers to introduce new products into the Taiwan market, but final implementing regulations are still pending. Innovative drug firms also face the problem of patent linkage. The Bureau of Pharmaceutical Affairs sometimes licenses generic version of drugs still under patent protection.

Generally, U.S. IPR holders continue to complain of slow progress in judicial cases, experiencing difficulties in handing technical cases, or poor protection on trade dress properties, such as packaging, configuration, and outward appearance features. However, The Legislative Yuan passed the first reading of a draft of the “Intellectual Property Litigation Law” on December 11, 2006. Under the draft, civil, criminal and administrative litigation involving intellectual property rights will be tried in a special court to be established for that purpose, probably in March 2007. The law would allow a judge to request a technology expert to decide technology issues. If confidential matters are involved the trial may be decreed private upon the parties’ request and the related documents kept from review or copying by third parties. For more information, AIT has produced the following IPR toolkit for reference: www.ait.org.tw/en/economics/IPR_Toolkit/.

Due Diligence

Prior to entering into a relationship with an unknown Taiwan company, a U.S. firm would be wise to confirm the reputation of the company. Local attorneys and accountants can be excellent sources of information, as can trade associations. The U.S. Commercial Service in Taiwan maintains an on-line listing of companies that provide professional service providers on its website at www.buyusa.gov/taiwan/en. These companies can be found under the heading “Business Service Providers” in subcategories such as
market research, patent and trademark law services, legal services, and accounting and auditing. The Commercial Service also offers an International Company Profile (ICP) service to help U.S. firms with due diligence in Taiwan.  Taiwan’s privacy laws often make it difficult to collect background information on individuals.