Taiwan technology: Homeward bound?

Amid drawn-out China-US trade tensions, many companies are looking to diversify their operations and ease reliance on mainland manufacturers. Taiwan’s government has a simple message for local industrial technology players caught in this bind: come home.

Earlier this year, it launched a comprehensive action plan to incentivize companies to move back, including cheap loans, cut-price land, and preferential tax policies. As of mid-November, 156 enterprises had applied for the program and passed an initial review. They are expected to invest a combined NT$700 billion ($23 billion) over three years.

“At the end of the day, nobody likes this kind of uncertainty. President Trump might say there’s a 25% tariff on Monday, and then no tariff on Tuesday. Moving back to a neutral location like Taiwan is a good choice,” says Edith Yeung, a partner at Proof of Capital, a Taiwan-based venture capital firm.

The initiative has contributed to a resurgence in M&A activity as relocation strategies are wound into industry consolidation and reinvigoration themes. Deal flow rose 75% year-on-year to $10.7 billion in 2018, according to a white paper released by PwC, and more is expected to come. Following its acquisition by KKR last year, Tsai-hsing Hung, chairman of LCY Chemical, observed that the company “would be able to launch acquisitions of its peers much more quickly.”

Big picture trends

Private equity and venture capital investors are also looking for ways to refocus on the sometimes-ignored Taiwan market. For example, captive investment units are pursuing transactions in the technology space that complement core operations. These efforts are not purely driven by the return home agenda – local technology manufacturers recognize they need to stay ahead of the curve on innovation. But the domestic market is an attractive place to do it.

UMC Capital is the investment arm of Taiwan’s second-largest chip foundry, United Microelectronics Corporation. It spun out TGVest Capital as an independent manager in 2016 and the firm received strong support from local technology companies in its first fund, according to D.C. Cheng, chairman of TGVest.

Both UMC Capital and TGVest recently backed Appier, an artificial intelligence (AI) and data analytics platform that helps corporate clients optimize advertising campaigns. Other investors included Temasek Holdings-owned Pavilion Capital and Hopu-Arm Innovation Fund, an entity established by Chinese GP Hopu Investments and SoftBank-owned semiconductor specialist Arm holdings. Appier, which has raised $162 million since inception, is Taiwan’s first unicorn.

“Taiwan has strong technology education that supports the development of abundant technical talent. Corporate management is also mature. What we’re short of in this relatively small domestic market is ambition,” Cheng tells AVCJ. “Appier targeted Asia from day one. It has the ambition to go regional and global. The user base and the databases are the key for any AI solutions.”

HTC, Taiwan’s leading laptop manufacturer, recently made an LP commitment to Proof of Capital’s $50 million debut blockchain fund. Proof of Capital is led by Yeung, a former head of mobile at 500 Startups, Chris McCann, whose last role was head of community at US-based VC firm Greylock Partners, and Phil Chen, creator of HTC’s Vive virtual reality headset. He is now working on its Exodus blockchain phone.

“For HTC as our anchor LP, it’s obvious, they are looking to develop a blockchain phone,” Yeung explains. “This gives us an advantage as an investor. When I talk with a potential portfolio company, I can call HTC and ask whether they would be interested in becoming a customer.”

Other technology players looking for investment opportunities include leading industrial computer manufacturer Advantech, which is targeting the internet-of-things space, according to sources familiar with its strategy.

Then there are local financial investors like China Development Financial’s CDIB Capital. Hamilton Tang, a managing director with the firm, tells AVCJ that a dedicated AI fund is in the process of being launched, with local insurance companies likely to feature among the LPs. In October, CDIB Capital led a $6 million pre-B Series funding for Taiwanese AI and cloud services provider CloudMile. The new funding will support international expansion, with the company set to enter Singapore next year.

Strategic imperatives

These forays into venture capital are happening alongside significant strategic shifts by Taiwan manufacturers that want to upgrade their technology. Hon Hai Precision Industry, which trades under the name Foxconn and is a key supplier to Apple, is investing NT$7 billion locally in 5G capabilities. As the CIO of a Taiwan insurer observes, these companies are global leaders in hardware and they will retain a customer following regardless of where they operate.

Taiwan Semiconductor Manufacturing (TSMC), for example, is playing a key role in the trade war. It is the world’s largest independent semiconductor foundry and one of few able to produce 7-nanometer chips, the most efficient products of their type and critical to delivering devices that are smaller yet more powerful.

After the Huawei Technologies was blacklisted by the US government – effectively cutting it off from US suppliers, though implementation has been repeatedly delayed – TSMC said it would continue shipments to the company. Despite massive investment in the mainland semiconductor industry, no one can match TSMC. According to IC insights, Taiwan manufacturers accounted for 21% of global wafer capacity, compared to mainland China’s 3%.

The mainland will remain the largest customer for Taiwan’s semiconductor industry, presenting an opportunity to reconstruct supply chains with Taiwan rather than the US as the hub. However, politics remains a key deterrent for PE and VC investors – especially those with mainland ties – looking to take advantage of this trend.

“There are many good companies in Taiwan, with low valuations, but there is too much political uncertainty,” says Eric Xin, a managing partner at CITIC Capital. “It is difficult for mainland funds to enter Taiwan. When the ruling party changes, the policy changes, but we need continuity to run business.”

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• Topics
• Greater China
• Technology
• Buyouts
• Early-stage
• Expansion
• Taiwan (China)
• manufacturing
• CDIB Capital