Taiwan's industrial production is contracting despite the better than expected smartphone sales. We think even smartphones can't really do very much for the economy
Taiwan's industrial production surprisingly contracted by 0.75% year-on-year, following moderate positive growth in July and August.
We had hoped that better than expected smartphone sales might have helped the economy and industrial production, but it seems that the market was too optimistic.
We have already seen smartphone sales provided little support to overall exports and the same goes for industrial production now. Even though smartphone and supply chain production has been growing positively with electronic items growing by more than 24%YoY and electronic parts production growing by 3%YoY, they can't seem to stop overall manufacturing from contracting.
Expect industrial production to remain in contraction territory
If overall global demand for electronics is slowing down, then Taiwan's industrial production is unlikely to start growing any time soon given that it is a manufacturing hub for electronics. Until 5G becomes widely available and there is a wave of demand for new smartphones and other electronic equipment, Taiwan's manufacturing industry is likely to remain in the contraction territory.
It also seems that the policy to attract manufacturers to move factories from mainland China to Taiwan hasn't worked very well. According to news reports, lack of water, electricity, workers and the appropriate talent pool to start production when manufacturers move is a problem. Lack of infrastructure is not an easy problem to solve and can take years to resolve if things have not been planned properly. Wages will also likely rise given the limited size of the population.
It is difficult to find a positive aspect to support Taiwan's manufacturing uptrend, apart from the temporary strong sales of smartphones.
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