A Turning Point For


Economic Turmoil
Emerging China
 China’s low production costs disadvantaged Taiwan production  Large amount of investments and employment had moved from Taiwan to China


Emerging China


Unstable Cross-straight Relationship

Unstable Cross-strait Relationship
 No direct flight – Taiwan lost geographical advantages
 Prohibiting capital inflow from China created an economic disequilibrium between Taiwan and China  Taiwan lost much of its economic/strategic advantages

Consumption decreased and Taiwan’s economy weakened
- Page 1 -

Depreciation of financial assets

Unemployment Rate Rises After 2000

Year Data Source : Directorate-General of Budget, Accounting and Statistics

 After 2000, China replaced Taiwan production due to China’s lower production costs, which impacted Taiwan’s labor market
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Change in Taiwan’s GDP Structure
GDP Breakdown (2000 vs. 2008)

Data Source : Directorate-General of Budget, Accounting and Statistics

 Private consumption accounted for 60.39% of GDP in 2000 and shrank to 54.5% in 2008

- Page 3 -

Higher Degree of Trade Dependence

Year Data Source : Directorate-General of Budget, Accounting and Statistics

 The degree of Taiwan’s dependence on trade increased from 100% in 1981 to 144% in 2008
Higher degree of trade dependence Higher risks when global economies are negatively affected
- Page 4 -

FX Reserve Accumulated Rapidly

Data Source : Directorate-General of Budget, Accounting and Statistics

 Taiwan’s Real Trade Surplus to GDP ratio achieved a high level of 17%  Trade surplus helped accumulate a large FX reserve
Taiwan was ranked Top 5 worldwide in FX Reserve Size
Ranking Source : Bloomberg, Sept 09 - Page 5 -

Taiwan’s Susceptibility to Changes in World Economy

 Taiwan’s economic growth shows more volatility in comparison to the World

% GDP Growth Rate

Data Source : IMF

- Page 6 -

Proactive Management Policy in 2000-2008

Data Source : IMF

 The Four Asian tigers, who are export-oriented economies, showed rapid economic growth from 1980-2000  Taiwan lost its economic/strategic advantages as its relations with China weakened Taiwan’s Average GDP growth fell to last place during 2000 - 2008.
• Taiwanese investments in China were restricted to 40% of a company's asset value
- Page 7 -

% GDP Growth Rate

2000 – 2007 Shows Astonishing Cash Outflow

Data Source: Central Bank, 2009/8

 From 2000-2007, financial account showed 40.8Bn/USD net capital outflow
 After deducting approximately 114.7 Bn/USD in foreign capital inflow

 Taiwan’s total capital outflow is estimated to be 156.25Bn/USD
Capital outflow from Taiwan to China is estimated to be 125Bn/USD (80%)
- Page 8 -

USD Million

Depreciation of Equity Market


Year Source: TEJ

 From 1994 to 2000  PBR of TAIEX traded between 2.5X - 4.0X  After the internet bubble and cross-strait tension, PBR of TAIEX traded between 1.2X - 2.0X
- Page 9 -

2008 Presidential Election
Party Platform Change  Opening-Up Policy
2008/7 - Permitting Chinese tourists to Taiwan - Raised max level of investments to China for Listed Company - Opened the exchange of RMB/TWD - Three small links normalization - Three linkages - Opening QDII - Chartered Flight to Regular Flight - Opening 192 items for China capital 2009/5

- Development of western economy zone

2008/9 2008/12 2009/4 2009/5 2009/6

2009/5/29 2009/6/1 2009/6/8 2009/7/13 2009/8/19

- China Trade Mission 1 to Taiwan - Color TV purchasing Group - LED purchasing Group - China Trade Mission 2 to Taiwan - China Trade Mission 3 to Taiwan

MOU for finance cooperation is expected to be signed at the end of 2009 ECFA cooperation is expected to be sign in the first half of 2010
- Page 10 -

The Content of ECFA
Item Merchandise Trade Service Trade Investment Other Content  Bilateral exempt of tariffs  Increase in import items  Agreement of service trade  Investment liberalization  Opening-up bilateral investment  Protection of intellectual property rights  Cooperation of customs  Avoidance of double-taxation agreement Members of ASEAN+3 FTA will be exempt from tariffs on most merchandises in 2010 and ECFA will help enhance competitiveness
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What We Have Seen So Far

- Page 12 -

Strong Growth Support From China [1]
Taiwan Export Orders come from (YoY)

Year Source: Bloomberg

 Strong orders from China have offset the decrease in demand from developed countries
Export orders from China have turned to positive annual growth
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Strong Growth Support From China [2]
# of Chinese Tourists

Data Source: TEJ


 Tourists and direct investments from China should help boost TW’s private demand
Assuming tourists from China reach 3000 limit daily . . .

 0.6% - 0.7% GDP growth per year could be generated  Retail sales show positive annual growth since July
- Page 14 -

Return of Capital From Overseas

Data Source: Central Bank of Republic of China

 Capital from overseas expected to return due to reduction in inheritance tax from 50%  10%  Such capital inflow should provide sufficient liquidity for capital market
- Page 15 -

TAIEX Outperformance Vs. Major Indices
Market TSE Dow Jones NASDAQ S&P 500 Shanghai A-Share Hang Seng Nikkei 225 KOSPI DAX FTSE
Data Source: TEJ

7,509 9,712 2,122 1,057 2,916 20,955 10,133 1,673 5,675 5,133

63.56% 10.66% 34.58% 17.03% 52.57% 45.65% 14.38% 48.79% 17.98% 15.78%

 Continual improvements in cross-straight relations and capital inflow

 TAIEX outperforms - from beginning of 2009
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What We Expect for Taiwan’s Future . . .
Consumption to increase Rerating of equity market
New milestones for Taiwan’s property market
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ECFA Helps International Trade
Weights of TW Export - 2000

Weights of TW Export - 2009/8

Data Source : TEJ

 Exports to China accounted for 44% of Taiwan exports  There are 230 FTAs in the world and if membership is achieved, Taiwan’s trade ability will be at an advantage  CIER estimates that Taiwan’s GDP will increase 1.65%
CIER: Chung-hua Institute for Economic Research, Taipei - Page 18 -

ECFA Will Boost Taiwan’s Domestic Consumption
 CEPA was signed on 06/2003 and formally implemented in 2004  HK shows strong private consumption growth after CEPA


Taking HK’s experience

We expect TW private consumption to increase after ECFA
Data Source : Bloomberg - Page 19 -

Re-rating of TAIEX

Data Source: TEJ

 During 1994 & 2000 …
PBR of TAIEX traded between 2.5X - 4.0X  Post internet bubble and cross-strait tension …

PBR of TAIEX traded between 1.2X - 2.0X
 Due to improvements in cross-strait relations … We expect the PBR ratio to trade higher up to 3.0X.
- Page 20 -

Money Supply Benefits Property Demand
 The increase in growth rate of Taiwan’s money supply M1B is beneficial to property stock  Record low interest rates drive money into the property market
900 800 700 600 TSE Construction Subindex M1b YOY% 30 25 20 15

M1B Growth Rate


400 300 200 100 0 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009

5 0 -5 -10 -15

Source: Central bank of Republic of China (Taiwan) - Page 21 -

New Regulations for Chinese Investment:

Taiwan’s Property Market
 The holding period on residential property investments should be no less than three years  Taiwan-registered Chinese corporations can own commercial property for purposes restricted to own-use only (no reselling)  Initial investments are expected to flow into the commercial property market

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The Hong Kong Experience [1]
Since CEPA
 Chinese companies that applied for branches in HK showed peaked growth in 2005  HK’s commercial property demand has increased  Initial positive change in capital inflow helped boost domestic confidence
Mainland China Companies in Hong Kong
Regional Regional office Headquarters 70 172 96 170 84 148 106 156 107 160 112 156 93 152 95 128 96 127
- Page 23 -

Local office 160 290 307 373 443 449 480 499 527

Total 402 556 539 635 710 717 725 722 750

New add. 154 -17 96 75 7 8 -3 28

2001 2002 2003 2004 2005 2006 2007 2008 ~2009/9

Source: Hong Kong Census Statistics Department

The Hong Kong Experience [2]
 Hong Kong property price increased (%) from 2004 - 2007

Factories > Office > Retail > Residential

Source: Hong Kong Census and Statistics Department - Page 24 -

Taiwan Property is Lagging in Asia
 Residential and non-residential property investment 3.7% of GDP since 2000  Taipei office rental rates are among the lowest in Asia
Taipei Office Rental Rates
Tokyo Hong Kong Mumbai Singapore Ho Chi Minh City Shanghai(Pudong) Beijing Taipei Seoul Bangkok Manila Bangalore Jakarta US$/m2/annum 1698.5 1400.9 941.6 936.8 687.6 428.7 335 275.5 258.7 250.2 249.5 228.7 95.8

Housing Investment as Percentage of GDP


Source: GGBAS ,CLSA ASIA-Pacific Markets - Page 25 -

Can ALL of This LAST


 Geographical advantages  Near the world production center & biggest market: China

 Taiwan’s industrial competitive advantage
 High quality human resources  Intellectual property management and protection measures  Excellent R&D environment and output  Freedom of speech and information

To be the center of research and development
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Taiwan: Geographical Advantages
 Located at the heart of the Asia-Pacific region • Links NE Asia & SE Asia from its position off the SE cost of China

 which it shares both language and cultural ties
 Direct cross-straight flights have been extended to 7 days a week  Compared to HK , Shanghai, and Singapore: • Taiwan enjoys the shortest average sailing times to 5 major AsiaPacific harbors

• Shortest average flying time to 7 major cities in Western Pacific

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FREEDOM of  Speech | Media | Information
Taiwan has the freest media environment in East Asia due to its:

 Open legal environment  Economic freedom  Highly competitive media market
Map of Freedom 2009

SOURCE: Freedom House
- Page 28 -

Establishing R&D CENTERS in Taiwan
TAIWAN  Ideal location for multinationals to establish bases for innovative R&D activities

 Leading multinationals (HP, Sony, Dell, IBM, Intel … etc.) have already established 40 R&D centers in Taiwan by September, 2009
 TW’s industrial environment & infrastructure exceeded expectations  Some even expanded the scale of their R&D centers  Introduction of key technology by these R&D centers will help mold Taiwan into a valued partner to the world’s multinational corporations in the area of technology This will further advance the development of Taiwanese industries Approved projects of the Multinational Innovative R&D centers in Taiwan Program
Company Name Hewlett-Packard International Pte. Ltd. Taiwan Branch Sony Taiwan Limited Sony Taiwan Limited Becker Electronic Taiwan Ltd. (Becker Avionics) Aixtron Taiwan Co., Ltd. IBM Taiwan Corporation Pericom Taiwan Limited Dell Computer (Taiwan) B.V., Taiwan Branch IBM Taiwan Corporation Project Name HP product Development Center SONY Design & Engineering Center Taiwan System in Module Center Taiwan Avionics Certification Skill & Key Technology Development Center Manufacturing Oriented Research Lab Mobile e-Business R&D Center PERICOM Advanced Mixed-Signal IC R&D Center Dell Taiwan Design Center Life Sciences Center of Excellence - Page 29 -


Microsoft Taiwan Co. Intel Innovation Technologies Ltd. Ericsson Taiwan Ltd. Broadcom Taiwan Co. Motorola Electronics Taiwan Limited DuPont Taiwan Ltd. Taiwan International Standard Electronics Ltd. (Alcatel) GlaxoSmithKline Far East B. V. Taiwan Branch IBM Taiwan Corporation NEC Taiwan Ltd. Synopsys Taiwan Limited. AKT America, Inc. Festo Co., Ltd. Atotech Taiwan Ltd. Telcordia Technologies, Inc. General Instrument of Taiwan, Ltd. Underwriters Laboratories Taiwan Co., Ltd. Dow Chemical Taiwan Limited Fujitsu Taiwan Ltd. ULVAC Research Center Taiwan, Inc. IBM Taiwan Corporation ASML Taiwan Ltd. Mycom International Inc., Taiwan Branch Synopsys Taiwan Limited. Taiwan International Standard Electronics Ltd. (AlcatelLucent) Microsoft Taiwan Co. Telcordia Applied Research Center Taiwan Company DuPont Taiwan Ltd. Sony Computer Entertainment Taiwan Ltd. Underwriters Laboratories Taiwan Co., Ltd. DuPont Taiwan Ltd.

Microsoft Technology Center Intel Innovation Center ERICSSON Innovation Center Network SoC R&D Center Motorola Taiwan Product Development Center DuPont Taiwan Technical Center Alcatel ICT Application Research Center GSK Taiwan R&D Operation Center IBM xSeries Taiwan Development Center NEC Innovative Product Joint Development Center for Engineering VDSM EDA R&D CENTER AKT Asia Research & Development Center Festo CEC R&D Center Taiwan Atotech Technology R&D Center Taiwan Telcordia R&D Center Motorola Connected Home Solutions Taiwan Technology Center Green Electronic Materials and Energy Device Safety Testing and Inspection Technology Research and Development Center Dow Chemical Taiwan Plastics Application Development Center Fujitsu Taiwan Development Center ULVAC Advanced Technology Center IBM Taiwan Systems and Technology Laboratory ASML Worldwide Center of Excellence Mycom strategic R&D center Advanced Process EDA R&D Center WiMAX Application Development and IOT Center Microsoft Innovation Center Telcordia Telematics Taiwan R&D Center DuPont Taiwan Display Materials Technical Center Digital Content Creation Center Advanced Energy Safety R&D Center DuPont Taiwan Photovoltaic Materials Technical Center - Page 30 -

Source: Department of Industrial Technology Ministry of Economic Affairs

Establishing R&D CENTERS in Taiwan
 Tax deduction and exemption
• Tax credit up to 30% of amount invested in R&D against business income tax payable

 Human resource support
• Companies may recruit overseas

 Subsidy for operating capital
• Salaries of local R&D personnel, consultant fees, remunerations of overseas R&D personnel, travel expenses, rent, overseas training expenses … and more

 Priority in administrative procedure
• Simplified administrative procedure, assistance for multinationals in negotiation with government agencies
- Page 31 -

Source: Department of Industrial Technology Ministry of Economic Affairs

World Competitiveness Ranking – TAIWAN
[2009 – 2010]
 Taiwan known for its high-tech industry
 Taiwan gets fully rewarded for outstanding capacity to innovate [6th]

 Number of utility patent (i.e., patents for invention) [1st]

 Availability of scientists and engineers [7th]
 Government procurement of advanced tech products [7th]  State of cluster development [6th]  Venture capital availability [8th]  Financing through local equity market [5th]

 Pay and productivity [3rd]
 Flexibility of wage determination [10th]
Source: World Economics Forum - Page 32 -

No part of this material may be reproduced or distributed further without the written approval of the Company. These materials are not intended for distribution to, or use by, any person in any jurisdiction where such distribution would be contrary to local, or international law or regulation. The companies, securities, sectors and/or markets referenced herein are included solely for illustrative purposes regarding economic trends and conditions or investment processes and may or may not be held by accounts managed by the Company or by its affiliates. The strategies and asset allocations discussed do not refer to any service or product offered by the Company or by its affiliates. The global asset and strategy allocation models presented are hypothetical allocation models shown for illustrative purposes only and does not necessarily reflect the management of any actual account. Following the allocation recommendations presented will not necessarily result in profitable investments. Past performance is not an assurance of future results. Nothing herein should be viewed as investment advice or as a recommendation, solicitation, or an offer to buy/sell any security, or to adopt any investment strategy, nor should it be considered an offer to provide investment advisory or other allocation services.

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