With costs quickly climbing across the Taiwan strait, many Taiwanese companies are reassessing their relationship with mainland China, a region that is both its biggest market and its fiercest competitor.

In the past, cheap machines out of mainland China have cut into the margins of Taiwanese companies, which bear higher production costs. As prices in China rise, however, and the Chinese yuan gains strength, the island’s companies also are seeing their sales drop in their largest market.

“Competition with China has cut into the growth of a lot of Taiwanese companies,” said Jason Tieh, a sales executive at Kai Mei Plastic Machinery Co. Ltd. “This year is average for us, which means we are actually doing well.”

Over the years, competition from China forced Taiwanese companies to change their marketing tactics, look to adapting new technologies, or even switch their manufacturing focus. Jenn Chong Plastics Machinery Works Co. Ltd. switched its focus from blown film machines to monofilament, after competition from China cut into the company’s sales.

“Once Chinese manufacturers came into the picture, blown film became too competitive,” said Tony Wang, part of Jenn Chong’s export department.

While mainland China’s competition may have cut into Taiwanese profits, Chinese consumption has helped to build its industry. With a small domestic market of its own, the island became heavily dependent on customers across the Taiwan strait. According to the Taiwan Association of Machinery Industry, Hong Kong and mainland China made up 30 percent of global sales for Taiwanese plastics companies during the first half of 2008. In previous years, the percentage has been even greater.

The slowdown, while in part due to companies looking to other markets around the globe, also reflects the impact of rising costs in China, said Charles Wei, vice president of Fong Kee International Machinery Co. Ltd.

Alongside a new, and more costly, taxation system, Fong Kee has seen salaries go up around 20 to 30 percent, according to Wei.

Taiwanese equipment firms declined to share financial details publicly, but privately some executives said they project sales to be off substantially, in some cases down 30 percent from last year.

Injection press maker Huarong Plastic Machinery Co. Ltd. said the market in China has been very difficult lately. Other markets have been better, but China’s rising costs and slowing market have taken a toll, the company said. “In terms of the China market, it is totally a disaster,” said Apo Ho, sales manager for the Tainan-based firm.

Still, he said Huarong sees a silver lining because the problems will weed out weaker firms, leaving firms like Huarong better positioned. Many companies in China expanded too rapidly in recent years and that has left them particularly vulnerable to the slowdown, he said.

“So far we do suffer from these impacts, more or less, but we consider ourselves well-positioned in terms of a situation like this,” he said.

“We hope we will be well prepared for this cold winter.”

Fong Kee and Kai Mei are also focusing on the positives of the market. “For me this is no problem,” commented Wei. “Labor costs in Taiwan are around 10 percent; even with the increase, labor costs in China are around 3 to 4 percent.”

Kai Mei’s Tieh hopes that trouble in mainland China will bring some manufacturing back to Taiwan, and some companies are already seeing a trend starting to emerge. Injection press maker Fu Chun Shin Machinery Manufacture Co. Ltd., for example, said one Taiwanese customer found it advantageous to bring high-end sunglasses manufacturing from mainland China back to Taiwan, where employees are more efficient than on the mainland.

“China will always be a big market for Taiwanese companies,” said Tieh. “But I think [rising costs in mainland China] will be a good chance for us to catch up to the competition.”

Plastics News Asia bureau chief Steve Toloken contributed to this report.