Beyond Belgium: artificial intelligence drives Taiwanese economy

In a little while, Taiwan will enter the top 20 largest economies in the world. Older generations have remembered when income there was comparable to that in Kenya. 

The International Monetary Fund made no bones about it last month. In its 190-page World Economic Outlook, just one table showed that Taiwan is growing faster this year than previously expected. There is not 2.7% but just under 3% growth, far exceeding estimates for neighbouring countries such as Japan, South Korea, Hong Kong and Singapore. 

The adjustment makes the island state's economy a veritable white raven. Indeed, the Fund was a lot more negative for virtually every country in the world than six months earlier. The trade war launched by the White House would hit activity worldwide, but apparently Taiwan, with its 23 million inhabitants, was immune to it. Meanwhile, the brakes seem largely off again as Donald Trump swallowed a significant portion of his levies. 

Semiconductors 

Economists in Taiwan and the region, meanwhile, know what drives Taiwan: the semiconductor industry. TSMC has a 92% global market share of all advanced chips, and that is paying off as demand for AI servers and high-end processors picks up sharply, says market strategist Tai Hui of J.P. Morgan Asset Management in Asia. Together with all suppliers and related activity, TSMC will soon account for one-fifth of Taiwan's gross domestic product, according to Hui. 

Hui emphasises that direct semiconductor exports from Taiwan to the U.S. are $15.5 bln, accounting for less than 5% of Taiwan's total exports. The bulk of exports go to China and other countries in East and Southeast Asia. At most, that then ends up indirectly in the US. So the trade unrest does not affect the island that much. 

On the 70th floor of the iconic Taiwan 101, once the tallest building in the world, ING Taiwan echoes the same sentiment. 'Of world trade, 75 percent has nothing to do with the U.S.,' sighs Uday Sareen, ING’s chief executive and head of Wholesale Banking APAC. 'And we only seem to want to talk about that 25%.' Much rather, Sareen focuses on the fact that 60% of global growth is achieved in Asia. 

The market is growing fast 

Especially in the tech corner, they are not that concerned in Taiwan with Trump's trade policies—his geopolitical pronouncements may be disturbing, but entrepreneurs have little influence on that anyway, it sounds on the island. They look at the market and see that it is growing rapidly. 

'In 2024, most entrepreneurs were still cautious. They did see that demand for AI-driven products was growing, but still represented a relatively small portion of sales,' says Taiwan specialist Guido Giammattei of RBC Bluebay AM. 'Meanwhile, entrepreneurs especially stress that the expansion of AI markets is faster than expected.' ING's Sareen also underscores how AI has driven demand for semiconductors in recent months. 

In equally important consumer electronics, entrepreneurs see clear signs of recovery thanks to growing demand for Chinese smartphones and the start of a new PC replacement cycle. 

With growth in place for this year, GDP increases to converted $805 bln, the IMF thinks. This makes Taiwan's economy the 22nd largest in the world behind Poland and ahead of Belgium. Taiwan's rise is remarkable. In the early 1950s, the Taiwanese were at the level of Kenya in terms of income. 

“Between 1963 and 1997, we managed an average growth rate of over 9%,” said Lee-Rong Wang, research fellow at the Chung-Hua Institution for Economic Research, underscoring the country's status as an Asian tiger. Taiwan, with South Korea, Hong Kong and Singapore, had gone the way Japan had gone before. 

But those same countries are also considered textbook examples of how impetuous growth can stall, in their case after the 1998 Asian crisis. 'Certainly as far as Taiwan is concerned, that is unjustified,' Wang believes. 'It is true that we were no longer able to achieve those high percentages, but we still had a solid annual growth rate of about four to four and a half percent.' 

Higher up the value chain 

Hui explains how Taiwan and the other tigers developed in the 1960s and 1970s through exports and thanks to low labour costs in sectors such as textiles and clothing. As incomes rose, they began to specialise in niche markets. Thus Taiwan climbed higher and higher up the value chain by targeting electronics and later semiconductors with targeted industrial policies. 

Science parks 

Soon the wives of those techies began to sulk. They liked their life in California much better than the then drab Taipei. Then Minister Shien-Siu Shu came up with the idea of building a science and technology park about seventy kilometres to the west, in Hsinchu, a campus of housing with the same look and feel as Palo Alto. The tax breaks offered to lure promising high-tech companies proved hardly necessary. 

“It was revolutionary and a great success,” says Hsiu-Chen Lin, vice president of the Southern Taiwan Science Park (STSP). After it became clear how much of Taiwan's dynamism (and production) had come from the cross-fertilisation of companies and universities in Hsinchu, over time the government decided to establish parks in the central and southern cities of Taichung and Tainan as well. The one in Tainan, now the largest, is home to 285 companies, including 46 from abroad, such as ASML, Tokyo Electron and Merck, for example. 

At the STSP, more than 100,000 people work on more than ten square kilometres (about 1,400 football fields), not only on the development of ever more advanced chips—in order to keep that edge on the rest of the world, after all—but they are also in the premier league of biotech, opto-electronics, precision engineering and telecom, Lin said. "A new area to be developed near the station where the high-speed train stops will soon become our AI centre." 

Tainan port, by the way, was where the Dutch built their fort in the seventeenth century as a hub for trade between Japan, China, India and Persia. Vice Mayor Tse-shan Yeh is proud of that. 'Back then, major powers fought over Taiwanese products, or products improved here,' he says over a cup of tea in town. 'That's actually true again now.' That there were years when Taiwan accounted for one-fifth of the profits of the VOC, Yeh says to this day demonstrates the island's potential. 

Nowhere is the number of millionaires growing faster 

Taiwan is hot among Western wealth managers. Everyone is eager to get a piece of the island's growing wealth. Allianz estimates that the AI industry will generate over €330 bln in additional wealth between this year and 2028. 

UBS predicts that the number of millionaires in Taiwan will rise 47% in the next three years to nearly 1.2 million, again because of the boom in the semiconductor industry. In doing so, the Swiss institution points out that many of the new rich are eager to invest more adventurously, making them interesting to asset managers. At the same time, precisely the old money, which likes to hold deposits or take out annuity policies, would increasingly consider strategies that yield higher returns. 

Meanwhile, Taiwan's stock market is doing quite nicely. While the MSCI Asia Pacific has risen 32% over the past five years, the Taiex index has done more than three times as well with a 101% plus. 

By the way, Taiwanese like to put borrowed money to work. In good times that works fine, but in bad times the selling pressure usually increases exponentially. Volatility is high there. 

Originally published in Het Financieele Dagblad: Opens in a new tabhttps://fd.nl/economie/1555988/belgie-voorbij-kunstmatige-intelligentie-jaagt-de-taiwanese-economie-op