Economic Recovery, But Profits Thin! Supply Chain Overhaul Amid Cost Chaos, Corporate Competition Shifts to 4 Key Factors

The Chung-Hua Institution for Economic Research today (24) released its biannual 'Taiwan Purchasing Manager Business Outlook Survey,' showing that both Taiwan's manufacturing and non-manufacturing sectors have improved their business outlooks for the second half of 2026. However, the challenges companies face have shifted from insufficient demand to profitability and supply chain resilience in a high-cost environment. The survey indicates that the focus of corporate competition has gradually moved from past capacity expansion and price competition toward cost pass-through capability, backup of critical components, cross-regional service capabilities, and strategic alliance formation.

This survey, themed 'Supply Chain Restructuring and New Competitive Landscape Amid Cost Disruption,' covers business outlooks for the second half of the year, impacts of geopolitical tensions and Middle East developments, supply chain risk management, capacity allocation, strategic alliances, spillover effects of the semiconductor supply chain, and the impact of AI adoption on business operations.

Manufacturing Sector: Economic Improvement, but Costs Rise Faster Than Prices

The survey shows that the manufacturing sector's business condition diffusion index rose from 49.8% to 64.1% in the first half of 2026, with employment numbers also rebounding to 52.4%, reflecting a clear economic improvement.

However, companies still face significant cost pressures. The purchasing price diffusion index rose to 87.3%, with average procurement costs increasing by 13.8%. Although average selling prices increased by 9.8%, this was insufficient to fully reflect rising costs, resulting in a profit margin diffusion index of only 52.0%, with improvement lagging behind cost increases.

Looking ahead to the second half, the manufacturing business condition diffusion index remains at 64.1%. Procurement costs are expected to rise an additional 3.1% on average, product prices to increase by 1.5% on average, and the profit margin diffusion index to reach 53.1%. The Chung-Hua Institution believes the second half will see 'continued economic improvement, persistently high costs, and some companies able to pass on costs,' rather than a broad-based surge in demand.

Non-Manufacturing Sector: More Optimistic Outlook, but Profitability Limited by Costs

The non-manufacturing sector also maintains steady growth. In the first half of 2026, the business condition diffusion index was 63.6%, the employment index was 57.2%, procurement and operating costs increased by an average of 4.9%, service prices rose by an average of 2.2%, and the profit margin diffusion index was 54.4%.

For the second half, the non-manufacturing business condition diffusion index is expected to rise further to 66.0%, with profit margins increasing to 59.4% and employment demand continuing to grow. However, wages and procurement costs remain high, indicating that corporate profit margins are still constrained by labor and cost pressures.

Geopolitical Concerns Shift: Energy, Material Shortages, and Delivery Times Become New Focus

The survey indicates that corporate risk concerns have shifted from tariffs and political events toward energy, raw materials, critical components, and delivery times.

For the manufacturing sector, the top concerns are international energy and raw material prices (75.1%), shortages of raw materials and critical components (53.1%), and exchange rate fluctuations (50.2%). For the non-manufacturing sector, labor costs and labor shortages (52.8%) rank highest, followed by energy and raw material prices (46.4%) and exchange rate fluctuations (37.2%).

Regarding the impact of Middle East conflicts, manufacturing companies reported an average procurement cost increase of 9.4%, with nearly 75% indicating rising costs. Over half have raised selling prices, but orders increased by only 0.6% on average, delivery times extended by an average of 31.7%, and 16.7% of companies reported delivery uncertainty, indicating declining supply chain visibility.

For the non-manufacturing sector, cost increases and partial price pass-through are the main impacts, with overall service demand changes limited. However, industries such as wholesale, transportation, and warehousing face higher costs and supply chain risks.

Strengthening Supply Chain Resilience: Early Procurement Becomes Mainstream

Facing supply chain uncertainty, 86.9% of manufacturing companies have already taken risk management measures.

The most common practices are placing orders earlier and extending procurement lead times (78.9%) and increasing safety stock (73.2%). Additionally, 39.9% are actively developing new suppliers, 32.9% are diversifying supply sources, and 20.7% are adjusting order acceptance strategies and delivery sequences to manage risks. In contrast, only 32.9% of companies chose to directly raise selling prices, reflecting differences in pricing power across industries.

The Chung-Hua Institution notes that corporate risk management focus has shifted from 'whether to take measures' to 'which tools to use' and 'whether supply chain coordination capabilities exist.'

Capacity Not Fully Utilized: Investment Continues in Taiwan and ASEAN

The survey shows that in the first half of 2026, 27.8% of manufacturing companies reported operating at optimal capacity, up from 20.7% in the second half of 2025, but overall capacity utilization remains below full levels.

Despite this, 52.2% of companies have already expanded or plan to expand capacity since 2023. New factory locations are predominantly in Taiwan (72.7%), followed by ASEAN (29.7%), mainland China (12.5%), and the United States (7.0%), indicating that corporate investment remains centered on Taiwan while using ASEAN to diversify risks.

Strategic Alliances Replace M&A: Geopolitical Risk Mitigation as Primary Driver

Corporate strategies in collaboration models are also shifting. Among manufacturing companies taking collaborative actions, 74.3% chose strategic alliances, while M&A accounted for only 28.6%. The primary motivation for collaboration is mitigating geopolitical risks (65.7%), followed by meeting customer requirements (40%) and expanding into new product areas (34.3%).

In the non-manufacturing sector, 26% of companies have taken collaboration or merger actions, with the strategic alliance ratio rising from 51.3% in 2021 to 87.7%, while M&A dropped to 10.8%, reflecting a greater emphasis on cooperation networks and service capabilities rather than high-capital mergers.

Semiconductor Spillover Effect Expands: Impact Extends Beyond Direct Suppliers

The survey shows that 17.6% of manufacturing companies have already joined TSMC or the semiconductor supply chain, with another 10.6% planning to join. However, 38.8% of companies reported that AI and advanced process demand have already significantly impacted procurement and operations, indicating that the semiconductor effect has spread beyond direct suppliers.

Among affected companies, 52.6% reported increased orders, 40% increased procurement volumes or extended procurement periods, 38.9% saw higher revenue shares from related activities, and 26.3% increased equipment or factory investments.

In the non-manufacturing sector, 29.2% of companies serve semiconductor-related clients, covering logistics, engineering, professional services, finance, and distribution. Among them, 65.7% reported increased customer inquiries and service demands, and over half have increased professional talent and training, indicating that semiconductor demand is gradually driving service sector development.

AI Adoption Focuses on Efficiency: No Large-Scale Layoffs Yet

Regarding AI adoption, 69% of manufacturing companies have implemented, are evaluating, or planning AI, primarily used for process automation, customer management, demand forecasting, and IoT data analytics. Full automation of smart factories has not yet become widespread.

In the non-manufacturing sector, 60.4% of companies have adopted or are planning AI, mainly applied to administration, customer service, document processing, and process automation, followed by sales management and demand forecasting.

Regarding labor impact, 35.5% of manufacturing companies reported that AI has mainly changed job content and functional allocation, 24.1% believe it has limited impact on overall labor demand, 18.8% reported a slight reduction in labor needs, and only 5.3% experienced significant layoffs. In terms of operating costs, the focus is on improving efficiency and reallocating functions rather than immediate large-scale cost reductions.

Business Outlook Remains Strong for the Next Year: Corporate Competition Focuses on Supply Chain Positioning

Looking ahead one year, the manufacturing business outlook diffusion index rose from 59.6% at the end of last year to 66.5%, while the non-manufacturing index increased from 59.4% to 69.8%, indicating improved economic outlooks for both sectors, though manufacturing remains relatively conservative.

The Chung-Hua Institution concludes that the second half of 2026 will not be a period of full recovery or widespread capacity expansion, but rather a phase where operational improvement, high costs, differentiated cost pass-through capabilities, critical component backup, strategic alliances, and semiconductor spillover effects develop simultaneously. Corporate competitive advantages will depend on supply chain positioning, ability to secure key customers and materials, cost pass-through capability, and the ability to enhance supply chain resilience through AI adoption, cross-regional services, and strategic alliances.