TIPS^®  Taiwan Intellectual Property Special

China Updates

Stock Dividend Fee System Turns New Technical Noble into New Poverty Clan

In order to encourage industrial development, the Taiwan government has particularly favored the science and technology industries with privileges in the financial and taxation system. In accordance with the current accounting principle, employee dividends are post-tax expenditures not included in the income statement as a deduction, so that regardless of the amount of enterprise dividends for the employees, corporate earnings in the account book are not reduced, which means that some companies seem to have made money from the accounting records, are in red in fact if the cost of employee dividends is included, thus forming an " employees benefit, while shareholders suffer" deformity phenomenon.

For convergence with the international accounting standards, the government recently issued No. 39 bulletin, which announced that employee dividend fee system will be implemented from 2009. In other words, stock dividends for a new technical noble in the future will be included in the cost of the enterprises that dilutes EPS. Enterprises as in the past can no longer tie the employee to the stock and the technical noble may also start worrying about becoming depleted.

This policy has the biggest impact for the IC design and software industries, because the two industries are most dependent on the creativity and skills of the employee, and the employee salaries in the two industries are expected to be higher than in other industries. Engineers in order to meet with expectations of their parents and economic needs would be expected to give up the time of the first halves of their lives and lock themselves in clean rooms to become advanced Master Workers. For example, when MediaTek Inc. became the king of shares, a staff member of MediaTek Inc. can receive an average of 34 shares equivalent to at least NTD13 million if calculated according to the share price at that time. Engineers’ dreams to become rich are possible. This year, a staff member of MediaTek Inc. receives dividends worthy of about RMB6.27 million dividends which are still far higher than salary of general workers. But after dividends being included in the cost, in total, the dilution of the surplus in the next year will be about in the range of 30%, for example, TSMC, around 15% and Foxconn, about 8%.

Stock dividends system has a smaller impact on companies with a high proportion of foreign ownership, because overseas ADR and GDR issuers already adopt international standards on the financial statement rule. In companies with the proportion of over 50% of foreign ownership, foreign capital is often required for related items, thus impact of the cost of dividends on the share prices of these companies is limited. As for companies with foreign shareholding ratio of less than 50%, further observation is required on the dilution effect after the implementation of the new system since the past financial statements only meet with standards of the Taiwan stock market and majority part of foreign investment in these companies is driven by the mentality of short-term operation and is more sensitive to market factors with uncertain dilution effects, thus share dividends system has a greater impact on these companies.

With the new system, companies’ battles for talents loom. Technology companies are considering retaining talents with higher salaries. According to private disclosing of UMC employee members, UMC has changed from this year to replace the issuance of shares with cash dividends. Five-level engineers in this year are expected to receive RMB100,000 of cash dividends and six-level engineers about RMB200,000, which are inferior to that of the previous years in which 10 million shares were issued. Therefore, middle and high-grade executives with research and development capabilities and management experience would be likely to leave technology companies with large amounts of share capitals and to join unlisted new companies in fields such as energy and photovoltaic industry. And technology companies also consider retaining the middle- and high-end managers with a high recontractual fee, therefore saving enterprise costs and high bonuses as dividends to retain talents will now become the biggest headaches for high-tech companies.

Taiwan's electronic technology has excessive competition, and energy industry is another way out for electronic nobles. Because the earlier production stage of energy industry is similar to the semiconductor industry, many companies in the energy industry all headhunt for semiconductor engineers. Another way out is to enter the western part of Mainland China. According to the survey, among the process, biotech and other technology-related R & D engineers, as much as 60% are willing to work in Mainland China. But now entering China is not as easy as 10 years ago as the chance is limited to the specific talents such as senior managers with research and development skills and management experience. According to investigation of the international human-capital management consultant – DDI, the future lack of middle- and high-end talents will become a universal phenomenon; 61% of enterprises in Taiwan have indicated that in the next five years it will become more and more difficult to find good high-end executives, 37% indicated that it will be more and more difficult to find good middle-end managers, and 53% indicated that they are willing to promote executives from their own enterprises. Obviously, professional competence is the only way to ensure competitiveness.