This week, Eric Gau continues his conversation with Taipei Bar Association Chair Grace Shou about legal issues that SMEs face when expanding into the Southeast Asian market.
Listen hereTranscript below:
Eric Gau: Good morning, and welcome to the latest episode of Looking South, on ICRT. I’m Eric Gau, and we are joined once again by Grace Shou, the chair of the Taiwan Bar Association, talking about legal issues that Taiwanese companies will run into while expanding into the Southeast Asian market. Ms. Shou, welcome back to the show.
Grace Shao: Thank you, good morning everyone.
Eric: So, let’s take a look at legal issues by sector. What should companies in the manufacturing sector look out for when expanding into Southeast Asia?
Grace: From a compliance perspective, evaluating the needs of the business should come first. For the manufacturing sector, they should determine land/building requirements, commercial/science park space, and obtaining necessary permits for environmental protection, facilities safety, etc., and other technical specifications would be a helpful first step for Taiwanese them.
From a corporate investment perspective, several ASEAN countries maintain JV requirements where foreign shareholders are required to work with local partners in order to enter a market. Oftentimes, in practice this means that for new established corporations, local regulations require that local partners take a much higher stake in the new corporation than the foreign partner. Depending on the industry and the potential impact of foreign shareholding on domestic small and medium enterprises foreign shareholding requirements differ or in some cases, foreigners are completely banned from taking ownership in certain industries. Another notable obstacle worth mentioning is that some jurisdictions will require that foreign companies assign a nominee director, such as a local citizen of the target country, to sit on the board of the company. So seeking the services of a professional firm that provides company incorporation services would be beneficial to ensure a smooth incorporation process.
Eric: What about for companies that are involved with trade and commerce?
Grace: The same. For trade and commerce, you need to obtain relevant import and export licenses for products and determining which industries are available for FDI, these are all important factors if a Taiwanese company intends to launch a trade or commerce business. Also, taking note of any ‘negative lists’ that list out highly restricted industries related to sensitive areas such as military, telecom, e-commerce and infrastructure would be advised.
As we discussed in our Taipei Bar Association forum on e-commerce, we notice a significant growth of e-commerce in Southeast Asian market because of the young population. According to one speaker, the COO of Haowoo, he believes Malaysia is a very suitable place to develop e-commerce because of logistic and language reasons. It is also very important to understand the local culture and consumer behavior.
Eric: The service industry is very different from either manufacturing or commerce. What are some hurdles they are likely to face?
Grace: This question is quite difficult to answer without conducting a full survey of the service industry of each ASEAN member country. However, for financial services I can say that most ASEAN countries are heavily reliant on cash, so there is a lot of promise for the financial service industry to step-in, leveraging technology to solve problems like remitting money back home and opening a bank account in areas without a brick and mortar location. Stepping outside traditional industries like manufacturing and trade, Taiwanese financial institutions are expanding southbound and establishing branch locations to deliver on personal banking services, offer SME loan products, and develop the local lending environment. Taiwan businesses are fortunate to have access to their home banks to assist with funding requirements or wire capital where it is needed, so that is definitely a great thing to have.
Eric: What should companies do if policies or laws change while they’re still setting up their operations in these partner countries?
Grace: Capable compliance attitudes win the day. And, keeping a close eye on legislative developments happening in local jurisdictions would be greatly helpful towards understanding the projected future policies and laws. I would also like to emphasize that maintaining amicable relationships with government agencies, officials, chambers of commerce, and other business associations would be a wise move to ensure that you understand whether any potential changes will affect your business operation. I know that there are many Taiwanese trade associations locally, and based on recent news, there is a trend among ASEAN countries towards opening up markets and loosening regulations to attract FDI, so in some cases, amendments to law and policy changes may benefit companies during the incorporation process. In addition, Taiwan has investment protection agreements with Philippines and India, and is currently working on additional protections with hope to help Taiwanese business to cope with changes.
Eric: How likely are local politics to impact Taiwan companies that are setting up shop in Southeast Asia?
Grace: This is a little bit sensitive, relates more to the geopolitical climate we find ourselves in, than any legal issue I can think of. The South China Sea and territory within the first island chain in recent years has become a hotly contested issue impacting the relationship between China and neighboring countries. In some cases, Taiwanese business may be caught in the crossfire, similar to the rioting incidents. I am not sure if you remember but in 2014 there was massive rioting in Vietnam that was triggered by a South China Sea dispute with China. One unfortunate byproduct of those riots resulted in Vietnamese workers destroying Taiwanese factories due to possible confusion but also, in a possible response to heavy handed Chinese/Taiwanese managers that earned twice to three times as much as local hires.
So, I think taking pragmatic measures like observing local customs, hiring local managers, training up your work force, and clearly differentiating the business as being unaffiliated to China are all sound approaches. Of course, the last one applying where Chinese investment is a sensitive issue.
And I would like to add, as recent events in Hong Kong demonstrate, business communities are wary of operating in legal environments where transparency is uncertain, legal frameworks are little more than words on paper and judiciaries merely act as an extension of governments. According to the 2018 Corruption Perception Index, which tracks the level of perceived corruption in the public sector, Singapore, Brunei, and Malaysia, and Taiwan all score high marks for the cleanliness of their governments. Other countries such as Indonesia are slowly but surely rising through the ranks. Investors look for robust legal protections and stable financial institutions and hopefully the local politics can be more stable along with economic development.
Eric: We’ve been chatting with Grace Shao of the Taipei Bar Association. Miss Shao, thank you for joining us again on the show.
Grace: Thank you.
Eric: That wraps up our look at the legal hurdles companies could encounter while expanding their operations overseas. Next week, we’ll be chatting with another SME that is taking advantage of the New Southbound Policy to grow their business. I’m Eric Gau, thank you for tuning in.