The 404,000 Taiwanese living in China are not the only ones getting anxious about the coronavirus outbreak. Taiwanese firms operating in China are exposed to yet another danger of over-reliance on its cross-strait neighbor.

Central News Agency reported the electronics giant Foxconn has its operations impacted by the outbreak, as over 13,000 workers based in China’s Hubei province have been ordered to an extended holiday. Delays are expected in Foxconn’s output in the global electronics supply chain.

Major Taiwanese conglomerates with operations in Wuhan, including Uni-President and Far Eastern Group, are likely to see operations disrupted within the now-locked-down city.

The Wuhan coronavirus only adds to the anxieties of China-based Taiwanese firms that are already reeling from the ongoing U.S.- China trade war.

The Sino-American trade war has shown the vulnerability of Taiwan’s economy to any rifts between the world’s two largest economies. Official figures show China and the U.S. accounting for 23.9 percent and 11.8 percent of Taiwan’s total trade respectively. With exports accounting for 70 percent of Taiwan’s GDP, the island cannot afford to pick a side without significant economic consequences.

In response to such uncertainties of operating in China, Taiwanese firms are reducing their dependence on China-based manufacturing facilities. Coinciding with President Tsai Ing-wen’s reshoring initiative, Taiwanese manufacturers are expected to repatriate their factories to Taiwan. The effort to bring manufacturing operations back home also offers a chance for Taiwan-based firms to get the investments and policy attention they need to improve their technological competitiveness.

A lesson from Japan

Taiwan only needs to look at Japan’s automobile industry, which makes up 30 percent of Japanese GDP, to see the repercussions of failing to enact policies that encourage businesses to keep operations at home.

Major Japanese automakers have been emulating U.S.-based rivals in outsourcing parts manufacturing to other countries, a steady move away from the traditional approach of working with local small and medium-sized enterprises (SMEs).

Japan-based SMEs have suffered as the increased outsourcing of car parts manufacturing led to the creation of new auto component clusters in China, Thailand, and the Philippines. An OECD brief noted that 21 percent of Japanese SMEs collapsed between 1994 and 2014 as they failed to keep up with the changing demands of their clients.

The unwinding of Japan’s domestic supply chain for automobile is set to speed up in the age of electric vehicles. Both international automakers and Japanese consumer electronics firms are jumping into the electric vehicle market, seeking to eclipse traditional auto giants in the still-slumbering EV space. The supply chains of these new players continue to bypass traditional Japanese auto parts makers, further dimming the future prospect of Japanese SMEs being involved in the industry.

The rapid decline of Japan’s domestic auto manufacturing is a lesson that Taiwan needs to act quickly in order to avoid a similar hollowing out. While also suffering from aging and labor crunch like their Japanese counterparts, Taiwanese firms are in a better position to move their manufacturing back home. The trade war and the Wuhan coronavirus have presented the significant risks of operating in, and thus the urgency to shift operations out of, a China that attracts 44 percent of Taiwan’s foreign direct investment.

As operational disruptions become more frequent, many Taiwanese firms may be considering the option of setting up shop on the familiar shores of Taiwan to minimize those risks.

To push the wavering Taiwanese firms to reshore, the Taiwanese government should seize the opportunity created by the recent business uncertainties to bring back Taiwanese manufacturers operating abroad. By enacting business-friendly policies that help re-emphasize “home” as a destination for mitigating those uncertainties, Taipei can further direct Taiwanese manufacturing away from outsourcing and encourage inward investment.

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TNL Editor: Jeremy Van der Haegen, Daphne K. Lee (@thenewslensintl)

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