Manufacturing activity accelerating

Taiwan’s manufacturing activity accelerated in May, reaching its fastest pace in nearly five years as demand for AI-related products sustained growth. The manufacturing purchasing managers’ index (PMI) climbed 1.1 points to 61.4, marking the eighth consecutive month of expansion above 50, according to the Chung-Hua Institution for Economic Research (CIER). CIER president Lien Hsien-ming attributed the surge to strong demand for electronics and AI components, which are supporting exports and maintaining growth momentum. However, rising inventories raise concerns about potential imbalances. The manufacturing inventories index jumped 5.3 points to 65.7, its highest level ever, as firms aggressively stockpile ahead of expected demand. While inventory buildup can reflect confidence, analysts note that excessive stockpiling has historically preceded corrections, as seen during the COVID-19 pandemic when canceled orders triggered prolonged inventory adjustments. Supply Management Institute adviser Jerry Pai cautioned that the shift toward high customer inventories warrants monitoring, though he emphasized it is too early to conclude demand is weakening. CIER researcher Chen Shin-hui observed that inventory trends vary by sector: chemical manufacturers are already adjusting stock levels due to earlier front-loaded orders, while electronics and optical products sectors continue to see steady order growth. Manufacturers remain optimistic, with the six-month outlook index rising to 66.8, its highest since June 2021. Confidence is particularly strong among electronics and machinery producers, reflecting sustained AI-driven investment. The rise of AI is reshaping Taiwan’s industrial structure, weakening traditional seasonal patterns in electronics manufacturing and creating opportunities beyond chipmakers, including for industries linked to the AI ecosystem. Despite global geopolitical tensions and higher energy prices, Taiwan’s manufacturing sector benefits from one of the strongest technology investment cycles in decades. The non-manufacturing sector also expanded in May, with its index at 58.2, indicating broad-based economic growth. CIER noted that while risks persist, the AI boom is driving long-term structural changes in Taiwan’s economy.