Taiwan Machinery Sector Rocked by Surging Raw Material Prices in 2007

With sky-high oil prices and hence metal ore extraction and refining costs also climbing alongside last year, the machinery industry in Taiwan was generally upset by such rocketing prices, while the unfavorable scenario is expected to continue in 2008, according to a research report prepared by the Industry & Technology Intelligence Services Office (ITIS) under the Department of Industrial Technology, Ministry of Economic Affairs.

The ITIS report shows that the domestic machinery manufacturing industry has had to counter by raising their quotations in the wake of sharp price hikes in such raw materials as steel and cast iron-as the average selling prices for such ingredients last year exceeded their historic highs in 2004. Another impact, incidentally, of the incredible jumps in steel prices in 2007 and so far this year has been the multiple rises in the prices of rebar in Taiwan, which has been reported to have stalled public works projects: No contractor has even dared to bid for about a dozen, various sized projects on the island.

Unsurprisingly and adopting the traditional strategy to pass on rising costs onto end users, Taiwan machine tool makers have raised their prices by 2% to 8% since the beginning of this year. The trend is setting an example in the sector, with other machinery producers following suit to also upwardly adjust selling prices for their products.

Various factors have worked in Taiwan machine-tool makers' favor despite the price hikes in raw materials and energy: The ITIS report shows that local machine-tool manufacturers still managed to post growing turnover in such emerging markets as Eastern Europe, India, Russia and Brazil, and that the suppliers of metalworking machinery and machine tools succeeded in selling more products in Eastern Europe because of the consistent appreciation of the euro against the greenback, or simply that Eastern European buyers had enhanced purchasing power last year due to a stronger euro.

India, the Rosiest Market

India was also the most-promising export market for the Taiwan-based machinery industry last year because of its strong economic growth. India has been promoting economic reform, leading to an over-6% year-on-year GDP (gross domestic product) growth over the past decade. With annual production value totaling US$11 billion, the machinery sector contributed to approximately 30% of India's total industrial output last year. Amid the backdrop of its robust development of the machinery sector in India, the machine-tool manufacturers in Taiwan stand an excellent chance to further profit from exploring such burgeoning market. Moreover, the fast-growing automobile industry in India-for example the global-scale Tata Motors and its people's car Nano-is but one driving force that continues to open windows of opportunities for machinery manufacturers in Taiwan.

Wei-chieh Chuang, industry analyst at the Industrial Economics and Knowledge Center of the government-funded Industrial Technology Research Institute (ITRI), says that Taiwan has been shipping increasingly more machinery to Russia over the past few years. Chuang justifies such trend by explaining that the sharp rises in crude oil prices and raw materials have significantly benefited the resource-rich nation. Russia's Federal State Statistics Service estimates that average income soared by 8.3% in 2005 over that in 2004; moreover, average wages also increased by 23.3%.

Despite the upward spiral of raw material prices, the global economy still showed strong momentum pushed along by the amazing economic growth seen in the emerging nations. Fueled by such global growth, Taiwan's machinery industry has been steadily growing over the past three years.

Production Value

The ITIS report shows Taiwan's machinery industry saw overall production value amount to NT$627.4 billion (US$20.23 billion at US$1:NT$31) in 2007, up 6.8% year-on-year. The industry registered NT$297.6 billion (US$9.6 billion) in production value in the first half of last year, up 6% year-on-year. It is expected the industry will see production value reach NT$329.7 billion (US$10.63 billion) in the second half of last year, up 7% from the year earlier.

Chuang says machine tools, including metal-cutting and metal-forming models, were the largest category produced by the domestic machinery sector in terms of production value in 2007. The overall production value for Taiwan's machine-tool industry amounted to NT$99.4 billion (US$3.2 billion) in 2007 and will break the NT$100 billion (US$3.22 billion) mark this year.

The second-largest product category of the domestic machinery industry, the metal-mold segment saw production value reach NT$56.7 billion (US$1.82 billion) in 2007, up a mere 3% year-on-year. Chuang says that many Taiwanese enterprises located in mainland China only procure first set of metal tooling in Taiwan for designing and testing to take advantage of the expertise offered by domestic mold manufacturers; but they usually procure the metal molds for mass production in China for the cheaper wages there.

Plastic and rubber processing machinery, the island's third-largest machinery category, registered NT$42.1 billion (US$1.35 billion) in overall production value in 2007, down 3% year-on-year. The ITIS office attributes the production decline to the decreased demand of such emerging nations as mainland China and Southeast Asian nations because domestic manufacturers in this line mainly export their products to these emerging nations. Over the past several years, there has been a drastic reduction in demand for imported plastic and rubber processing machines in China as its own makers have been increasing degrees of independence. Accordingly and typical of the problem facing many others in machinery export in Taiwan is the urgent need to raise manufacturing skill and sophistication, which would enable the sector to build products with higher added-value, hence effectively evading impact from merging nation rivals' escalating self-reliance and underselling advantage.

After posting record year-on-year growths of 9% and 43% in 2005 and 2006, the sector of electronic and semiconductor manufacturing equipment saw production value drop 3% annually to reach NT$41 billion (US$1.32 billion) in 2007. The ITIS says that it's difficult to see consistent production growth in the electronic and semiconductor manufacturing equipment sector as domestic suppliers are incapable of rolling out sophisticated products to meet the requirements of domestic electronic and semiconductor firms.

Import and Export

The ITIS report also showed that Taiwan imported NT$619.8 billion (US$19.99 billion) worth of machinery in 2007, up a mere 0.7% year-on-year. Of the imported machinery, import value for electronic and semiconductor-manufacturing equipment was down 4.6% annually to reach NT$12.3 billion (US$396.77 million) in 2007. That for metal-cutting machine tools came to NT$80 billion (US$2.58 billion), up a significant 28.9% year-on-year. Chuang says that the domestic machinery industry has been on a path of enhanced production, which has been enabled by importing mostly high-tier models-ones able to take on sophisticated machining tasks-made by Japan and other highly industrialized western European nations.

On the contrary, Taiwan exported NT$490.4 billion (US$15.81 billion) worth of machine tools in 2007, up 7.9% year-on-year, of which the value for metal-cutting machine tools came to NT$86.2 billion (US$2.78 billion), up 18.3%; and that for metal-forming machine tools amounted to NT$23.8 billion (US$767.74 million), up 10%.

Other major export items included textile and garment making machines, plastic and rubber processing machines, and electronic and semiconductor manufacturing equipment. The import value for textile and garment making machines reached NT$33.4 billion (US$1.07 billion) in 2007, down 1.8% year-on-year. That for plastic and rubber processing machines came to NT$32.5 billion (US$1.04 billion), up 6.8%; and that for electronic and semiconductor manufacturing equipment totaled NT$24.5 billion (US$790.32 million), up 4.2%.

Projected Production Value for Taiwan-made Machinery in 2007, 2008 Unit: NT$ million
Category	Production Value
	2007	Annual Change	2008	Annual Change
Boiler	8,236	5.9%	9,238	12.2%
Generators	44	-45.7%	68	55.4%
Agricultural, Gardening Machinery	3,205	-12.5%	3,491	8.9%
Metal-cutting Machine Tool	77,141	14.9%	84,855	10%
Metal-forming Machine Tool	22,332	7%	24,565	10%
Metal Hand-tool	14,197	1.6%	14,085	-0.8%
Non-conventional Processing Machinery	2,408	-21%	2,456	2%
Food and Beverage Machinery	4,820	11.7%	4,728	-1.9%
Textile, Garment Machinery	29,600	-4.1%	31,071	5%
Woodworking Machinery	16,239	5.4%	15,726	-3.2%
Papermaking Machinery	7,170	32.9%	7,887	10%
Printing Machinery	8,353	25.6%	9,188	10%
Chemical-processing Machinery	20,177	-11%	22,836	13.2%
Plastic & Rubber Processing Machinery	42,192	-3%	42,931	1.8%
Electronics and Semiconductor Manufacturing Equipment	41,027	-2%	43,078	5%
Special-purpose Machinery	21,100	-5.7%	21,321	1%
Construction Machinery	664	-6.5%	727	9.5%
Office Machinery	8,921	3.1%	9,099	2%
Machines for Pollution Prevention	2,649	56.5%	3,179	20%
Compressors, Ventilation Fans, Blowers	13,389	20.4%	14,728	10%
Bearings, Gears, Transmission Systems	12,462	2.3%	12,651	1.5%
Packaging Machinery	4,448	22.1%	4,893	10%
Conveying Machinery	34,468	18.2%	37,915	10%
Potable Water Processing Machinery	1,609	-0.5%	1,550	-3.6%
Molds and Dies for Metal Components	56,783	3.2%	59,622	5%
Other Types of Machines	173,828	12.8%	182,519	5%
Total	627,462	6.8%	664,412	5.9%
Source: Industry & Technology Intelligence Services Office, Department of Industrial Technology, Ministry of Economic Affairs (Taiwan)