2022.11 The Taiwan Banker NO.155 / By Ingrid Chang
Mega Bank offers a foreign perspective on US marketsBanker's Digest
Taiwanese firms entering the United States face a great variety of challenges. Supply chain disruptions caused by the pandemic and the outbreak of Russian’s invasion of Ukraine in early 2022 have pushed up international oil prices, causing energy prices to soar, and the nation to face the highest inflation rates in 40 years. The Federal Reserve is expected to keep hiking interest rates until the first half of 2023. Mega Bank, which has four branches in the US, has altered its strategy in response. From trade liberalization to made in America Mega Bank won the Best Overseas and Best Corporate Finance Awards at the Elite Awards this year, and has been deeply involved in overseas markets for many years. Hsiao Yu-mei, vice president in charge of Mega’s corporate finance and overseas business, has observed a change in American political and economic thinking, from advocating trade liberalization to American manufacturing. Since the second World War, the US has been the largest advocate of global trade liberalization. American companies have outsourced manufacturing to low production cost areas such as China and Southeast Asia. Only high value-added industries such as design and marketing remained. Political thinking has however begun to emphasize clear barriers and a new national security paradigm. In 2018, president-at-the-time Donald Trump began to increase tariffs and set import quotas, under the framework of “America First.” Domestically, he reduced corporate taxes, introduced policies to encourage the return of manufacturing investment, advocated “Made in America,” and emphasized supply chains that do not depend on China, aiming to reorganize the international production structure. More than four years later, the trade war has deepened, evolving into more of a long-term confrontation. Originally starting at the level of economics and trade, it has gradually expanded to an all-around geopolitical struggle involving technology and finance. In August, in order to promote development of semiconductors in the US, current President Joe Biden signed the CHIPS act. The US suppression of China’s chip industry has forced foreign chipmakers to choose sides between the two powers. Since semiconductors are a core Taiwanese industry, Taiwanese businesses also need to think geopolitically. Although the tension between the US and China is serious, it has also strengthened the relationship between Taiwan and the US, which has reached its highest point in decades. Taiwanese businesses are more willing than ever to invest in US. The rivalry between the US and China will be a key factor in shaping future global strategy, not only affecting bilateral trade between the two, but giving a strong impetus to adjust supply chains in the Asia-Pacific region. These changes have caused new tectonic shifts in the industries of the US, and even Taiwan. Hsiao said that there is no possibility of significant changes in the short term, and the banking industry must take these trends into account when evaluating individual investments in order to control geopolitical risks. This is why Mega Bank has been emphasizing “New Southbound” and “New Eastbound” growth. Three major aspects of investment in the United States Due to factors such as the pandemic, the trade war, and geopolitical tensions, the US government recently been advocating supply chain security, and pushed for reshoring. The industries on which it is focusing coincide with the “six strategic industries” and “Asian high-end manufacturing and advanced semiconductor processing center” promoted by the Taiwanese government. Due to the complementary advantages of Taiwanese and US technology industries, bilateral economic and trade relations have continuously deepened, from the 2020 Taiwan-US Economic Prosperity Partnership Dialogue to the 2021 Taiwan-US Technology Trade and Investment Cooperation Framework, and this year’s Taiwan-US 21st Century Trade Initiative. Leading Taiwanese companies such as TSMC, Formosa Plastics, Far East and Hon Hai have successively driven their supply chains eastward to the US. Based on observations by its local US team, Mega Bank recommends that Taiwanese businesses look for investment opportunities in the US with an eye on the following areas: · US manufacturing: US manufacturing policy has reorganized international production structures. The government requires sensitive products to be 100% “made in the USA,: giving comparative benefits to electronic components (such as PCB, wire and other supplies) that were originally located in labor-intensive Asian economies. The proportion of US domestic sales has increased by year, and industry has become regional. In addition, an expansion of domestic production and new foreign investment in the US have also increased demand for infrastructure industries such as engineering and raw materials. · Niche industries: The US has promoted a number of important recent laws, such as the 2021 Infrastructure Act, to drive the US economy by building roads and bridges, and increasing investment in high-speed internet infrastructure. The 2022 CHIPS Act will invest more than $50 billion in subsidies for the semiconductor industry, and the Inflation Reduction Act will also promote green industry transformation, energy conservation and health care. The US has invested a lot in sustainable infrastructure industries such as semiconductors, medical care, new energy, electric vehicles, solar energy and 5G, which will become the focus of its long-term development. These are future investment niches for Taiwan. · State government subsidies and business environment: Besides the federal government, state governments have also launched various subsidies or tax cuts to attract overseas investment and encourage reshoring. Arizona, where TSMC is setting up factories, as an example, offers tax cuts and cheap water, electricity and land to attract investment from Taiwanese semiconductor manufacturers. Tesla, a major electric vehicle manufacturer, went there to set up its headquarters, indicating a southward shift of the electric vehicle (EV) industry supply chain. When Taiwanese businesses deploy in the US, they not only need to consider taxes, but also operational factors such as the sales market, supply chain, and transportation. Based on Mega Bank’s experience serving Taiwanese businesses in the US, in addition to the opportunities, some other points require special attention when investing. Taiwanese companies should carefully assess the cost of breaking into local supply chains First, the US attaches great importance to ESG issues related to environmental protection, labor rights and social responsibility. The process of environmental assessment and obtaining various licenses is rigorous and time-consuming. Taiwanese companies must consider the resources and expenditures required. Second, for Taiwan's semiconductor benchmark companies, although investing in the US will drive further action by upstream and downstream businesses, if the supply chain only relies on orders from Taiwanese factories, it may not be enough to cover the cost of operations. They will have to break into local supply chains, and should consider the time and cost needed to obtain certifications and orders to do so. Major differences exist between the US and Asia-Pacific business environments. The US has a vast territory, and its states are highly autonomous. It is important to first understand the business environment before investing in the US, properly assess the fixed and operating costs of a factory, plan investment and financing structures, and be familiar with tax and labor regulations. Mega Bank has observed the needs of Taiwanese businesses in this regard, and designed lectures with finance and taxation experts to share tips. Through its rich local operating experience and the resources of its four branches in the US, it provides financial and consulting assistance in company establishment, operation, investment, and factory setup, as well as real-time service from its domestic and foreign teams. Although reshoring is the overall policy, in the recent environment of high inflation and the Fed’s continued interest rate hikes, the outlook for the US and the global economy for next year remains to be seen. Rather than building a base, leverage fintech synergies Will Mega Bank continue to expand its presence in the US, despite the challenges? Hsiao said that Mega was the first Taiwan-funded bank to enter the US. It has been in the market for more than 80 years, and has four branches: New York, Chicago, Los Angeles and Silicon Valley. It is the Taiwan-funded bank with the largest asset scale and branch base. Therefore, it will focus not so much on a more expansive layout in the US, but rather on making good use of its existing branches on both coasts for syndicated or individual lending, creating geographic synergy and making good use of its technology (the Mega global financial network) to provide 24-hour foreign exchange fund settlement and one-stop service. Mega Bank has also observed that due to the aforementioned recent policy changes, the technological center has gradually extended from Silicon Valley of California to Arizona and Texas, southwestern states bordering Mexico. In Arizona, semiconductor supply chain manufacturers led by TSMC, such as Chang Chun Petrochemical, Topco, UIS, and TPC have set up factories. Texas has become the first choice for electric vehicle suppliers like Pegatron, Hota, and AUO. In addition, optimistic about business opportunities for electric vehicles, Hon Hai also has a joint venture with an American company to build a North American electric vehicle factory. In order to grasp the new opportunities, Mega has established a cross-business group marketing team to pay attention to the dynamics of potential industries such as semiconductors, green energy and medicine, and quickly coordinate domestic and foreign resources to serve customers. The domestic branches maintain relationships with Taiwanese parent companies, understand current trends and needs, and explain business conditions to overseas branches; the overseas branches implement on-site inspections, provide advice, and introduce relevant experts according to customer needs. During the pandemic, the bank improved service its efficiency through cross-time-zone video communication, and cooperated with domestic and foreign companies to provide precision support, becoming the main bank for many Taiwanese businesses in the US. In addition to serving existing customers, Mega Bank is also committed to developing new business opportunities, and has participated in government and business activities such as the Ministry of Economic Affairs Taiwan-US Linkage Forum and AIT SelectUSA summit to understand industry dynamics and customer needs. At the same time, it is working to improve its digital systems using big data analytics, connecting upstream, midstream and downstream opportunities in key industries. Through the information platform, the Silicon Valley and Los Angeles branches provide professional services and rich local experience, and the global financial network provides complete financial planning and cash flow services for customers and their third parties. Although the journey to the US market is difficult, Mega Bank believes that it is necessary to give credit to Taiwanese businesses earlier, so that they can enter the market without worries. Its recent loans to TSMC and Tesla suppliers, and syndicated loans for plant expansion in South Asia in the US, also drove lending growth of 10% at Mega Bank’s US branches in the first three quarters of 2022. The ratio of loan volume in the US region to overseas branches also increased from 18% in 2020 to 22% in 2022 to date. Mega has actively grasped the Fed's interest rate hike trend and used funds flexibly to increase its profits, making use of its expertise for both internal and external growth.