Taiwan Today

Roaring through the parking lot at thirty miles per hour, the spanking new white Toyota Celica GT4 tries to brake at the far end, but turns a 180 and knocks hard against the curb. After a half-second pause, the car tears straight back toward the small crowd gathered to watch. At the last second, with a twist of the control stick, it veers to the right and spins to a stop.

The GT4, now quietly awaiting its next driver, is one of the newest radio­ controlled cars developed by Thunder Tiger Model Co. of Taichung. Built to one-tenth the size of an actual race car and weighing about four pounds, the four­ wheel-drive, gas-powered speedster runs as fast as forty-four miles per hour and travels up to five hundred meters from its driver. But those test-driving the car hope it will travel much farther than that from the factory in central Taiwan. The company’s radio-controlled cars, boats, and airplanes are exported worldwide to a limited circle of enthusiasts of this high­ priced hobby. Specifically, Thunder Tiger is targeting markets in Japan, Europe, and the United States, where such cars sell for upward of US$250, complete with engine and control board.

It is a tall order to fill. Succeeding in this highly sophisticated and competitive industry means the company must make a name for itself among top international manufacturers, mainly Japanese. Most competitors have been in the business far longer than Thunder Tiger’s sixteen years. Breaking into such an industry is particularly challenging for a Taiwan company; only a decade ago, the local toy business was characterized by companies churning out low-cost plastic dolls and stuffed animals as OEM (original equip­ment manufacturer) products for overseas makers.

During the 1970s and early 1980s, Taiwan’s toy industry boomed as foreign manufacturers flocked to the island to take advantage of the low wages and growing industrial capabilities. By 1987, toy export values reached US$1 billion. But then, as happened in other labor-in­tensive industries, the toy business was hit hard by a rapidly appreciating NT dollar, rising local wages, and a shortage of blue collar laborers. Foreign toy companies quickly took their product orders to Mainland China and Southeast Asia, and local toy exports slumped to US$830 million in 1989 and US$770 million in 1990. The downturn sent many manufacturers looking for a new line of work. Arthur Wang (王雲平), chairman of the 430-member Taiwan Toy Manufacturers Association (TIMA), estimates that fifty member companies have switched to other fields since the late 1980s.

But Taiwan’s toy industry did not die out; it was transformed. By moving to low-cost production sites, upgrading technology, and branching into value-added products, many companies survived. Ex­ports rose to US$850 million in 1991 and US$950 million in 1992, and Wang ar­gues that if the total included the export values of toys manufactured in Mainland China by Taiwan­ supported companies, the figure would be far larger.

But maintain­ing growth has re­quired drastic changes for most local toy makers. The Taiwan toys now surviving best are cars that kids sit in and “drive,” video games, board games, and holiday toys such as Halloween costumes and Christmas decorations. Wang explains that the first two categories are high-investment toys that benefit from Taiwan’s skilled, educated work force and strong IC (integrated circuit) industry. The last two are mid-tech toys that survive because they require materials or production techniques still difficult to find in less developed economies.

But keeping these products viable on the island requires continual fine tuning, from streamlining production and distribution to tracking consumer tastes in Tokyo, Munich, and Los Angeles. Thun­der Tiger is a case in point. Company president Lai Chun-lin (賴春霖) founded the business in 1977 with US$500, one employee (his wife), and an enthusiasm for radio-controlled toys. Today, Lai proudly points to glowing reviews of his brand-name products recently published in Swedish and French hobby magazines, and says that his products have repeatedly been named “outstanding” by the indus­try’s largest magazine, U.S.-based Re­mote Control Modeler. Such publicity is vital in a business where customers often have strong brand loyalty.

The company’s main goals are to stay on top of current technological devel­opments and production advances. “We have a very strong R&D department,” Lai says. Eighteen of his 180 employees work in the research section. “We spend almost 7 percent of our turnover per year on R&D,” he adds. “That’s a lot of money. Almost US$1 million. But without this kind of investment, I don’t think many [Taiwan] companies can go on.”

In the company’s main research center, half a dozen engineers hunch over worktables, designing new models with the click of a computer mouse. Multi­colored diagrams of engines and chassis glimmer on oversized computer screens, changing shape, size, and structure as their designers work. Company engineers hold degrees in either mechanical engineering or aerodynamics. Most of the researchers are local, but two are Japanese and one is American.

Each year, the company introduces about twenty new products to its various markets. For each new car, boat, or airplane, marketing analysts evaluate con­sumer trends and economic shifts to de­termine the best sales strategy and price. More than 50 percent of sales go to Eu­rope, 30 percent to the United States, 5 percent to local buyers, and 10 percent elsewhere in Asia.

“Our dream is to create consumer de­mand,” Lai says. Although one-fourth to one-third of Thunder Tiger’s production is OEM items, Lai stresses that it is company policy to keep this a small part of the busi­ness. To promote Thunder Tiger’s own brand-name products, the company has been dedicating an increasing percent of operating costs to marketing—from 5 per­cent in 1988 to about 7 percent in 1993.

This year, marketing efforts will take a giant step when Thunder Tiger opens sales offices in the United States, Britain, and Japan. With these offices up and run­ning, Lai expects to boost annual sales from the 1993 total of US$10 million to US$15 million this year.

Although Thunder Tiger has sur­vived by shifting to a high-tech, value-added product line, the company is not immune from the need to trim production costs. Over the past three years, Lai has poured US$4 million into a fully compu­terized production system to streamline factory operations. "Before, we were making a 3,000-piece engine using seventy people—and the quality was so-so," he says. “Now, we make a 15,000-piece engine using only thirty people, and there is no comparison in the quality.” At his two factories, Lai annually produces about 40,000 airplanes, 40,000 cars, and 150,000 engines.

Thunder Tiger’s biggest competitors are in Japan. But Lai believes he and other local producers of high-end toys can quickly overtake Japanese manufacturers. Production costs are cheaper in Taiwan, yet technological capabilities are rapidly catching up to those of Japan—a position that Lai believes will serve Taiwan well for many years to come. “Taiwan still has a lot of opportunity to gain market share,” he says. “We’ve been preparing for this for years.”

Beating Japanese manufacturers at their own high-quality game has become his main goal. Last year, Thunder Tiger introduced a two-year product war­ranty—a rarity in the radio-controlled toy industry. "Now, every company in Japan is offering a warranty," he says. This year, he plans to introduce a three-year war­ranty, and a service guarantee promising customers that models needing repairs will be fixed within forty-eight hours of arriving at a Thunder Tiger office. “We want to kill the Japanese,” Lai grins.

But many Taiwan toy makers are painfully familiar with the op­posite side of Lai’s equation: getting "killed” by foreign competitors who offer lower costs and improved technology. Dah Yang Toy In­dustrial Co. is a prime example. One of the oldest toy companies on the island, Dah Yang began creating simple, battery operated toys in 1958. When Taiwan’s technology improved during the 1970s, it began picking up OEM business, especially making wind-up plastic toys for Tomy Co. Ltd of Japan and Illco Toy Co. of the United States. When company president Lisa Lin (林麗香) joined the firm in 1977, Dah Yang began picking up orders from half a dozen big-name U.S. producers including Mattel and Kenner. Dah Yang was pulling in annual revenues of NT&600 million (US$15 million at the 1977 exchange rate).

But the gravy days ended abruptly. “The OEM business lasted until about 1984,” says Lin. “After 1985, the business became harder and harder. In 1986, it was very difficult. By 1987, the OEM business was almost finished.”

The company made several drastic moves in order to survive. “In 1984, we started to promote our own line,” says Lin. After decades of filling orders for foreign buyers, the company was suddenly starting from scratch—searching for viable prod­ucts for various markets. They began with battery-operated amusement items, such as the Playful Penguin, a colorful plastic game which, when turned on, sends a group of penguins repeatedly climbing a ladder, then sliding down a slide. Their main markets were department stores and airport duty-free shops.

As another safety measure, Dah Yang also branched into telecommunica­tions and computer products in 1982. In 1993, the toy division was again made in­dependent, but it continues to share the R&D department with the communications and electronics divisions. This arrange­ment has helped in its current mission to create high-tech toys. As an example, Lin points to the computerized sound-and-graphics product called ColorVision, a television peripheral that kids use to com­bine their own on-screen drawings with computer graphics. The drawings can be edited to change the shape, size, and color of any element, or even to add motion to a graphic. Kids can also play music by pointing to on-screen piano keys that cor­respond to a cartoon bird who chirps out a note. “This was an in-house product de­veloped from the electronic R&D,” Lin says. “We design the content, they design the technical part.” Under this arrange­ment, the company is now pulling in be­tween US$10 million and US$12 million per year.

Lin says that interactive, higher-tech products are “the new direction” for the company. In 1993, Dah Yang introduced a line of educational toys called EZ Learning. The line now offers ten prod­ucts, including the Electronic Funtime Talking Clock and the Funtime at the Zoo board, both of which contain audio func­tions allowing kids to listen to questions, then answer them by setting the time or pointing the dial to a particular animal.

Dah Yang also moved much of its production to Mainland China and Thai­land in 1988. Sales, R&D, and production of high-tech items such as ColorVision take place in Taiwan; all other products are produced offshore. Splitting the busi­ness between three locations makes op­erations more complex, but Lin says there is no alternative. “Integration used to be our speciality—we had everything under one roof,” she says. “After we started off­ shore production, we couldn’t do that anymore. We can’t go back.”

These days, the number one chal­lenge for Dah Yang, and many other local companies, is gain­ing access to a narrowing field of international marketing channels. Lin says that a growing number of mergers through­ out the industry has narrowed the field of toy distributors, wholesalers, and retailers. “In the future, there will be fewer suppliers and fewer buyers,” Lin says. “In these cir­cumstances, positioning ourselves has be­come the most difficult thing.”

Gone are the days when Taiwan pro­ducers simply sold their toys to a trading house that handled the sales, distribution, and marketing. Many of those trading companies no longer exist because more and more international manufacturers are selling directly to the larger retailers. The result is that smaller toy makers and retail­ers are being squeezed out of the business.

“Our major market is the United States,” says Taiwan Toy Manufacturers Association chairman Arthur Wang, who is also founder and president of Metro Toys Industrial Co. in Taichung. “Among big manufacturers in the U.S., about three-fourths sell directly to retailers. If we don’t go to direct sales, we will lose the competitive edge no matter how cheap production is.”

How can medium-sized manufactur­ers in Taiwan make a name for them­selves in the face of such changes? With difficulty. Wang’s solution is to take mar­keting and sales into his own hands. He has set up offices in California and Indonesia, where representatives sell to retail­ers, home shopping TV channels, and hypermarkets. Wang stresses that learn­ing this side of the business is difficult, es­pecially in foreign markets: “There are many different kinds of sales channels: mail order catalogs, chain stores, hyper­markets, discount stores, and they each require a different strategy.”

Today, Metro has 450 employees and operates two factories in Taichung and one in Manila. The company annu­ally produces about 1.5 million plastic and plush toys that feature sound and movement capabilities. Newer models include IC chips that activate responses to heat, touch, or sound, such as the touch­ activated Pat Me Puppy that whimpers and wags its tail when petted, and the newly released Dino Band, a sound-acti­vated trio of plastic dinosaurs that play along whenever music is played. As Wang points out, the Dino Band capital­izes on the dinosaur craze inspired by the film Jurassic Park. Such toys bring the company sales of about US$8 million annually.

In designing a new toy, Wang says he must come up with a concept capable of overcoming a host of obstacles in the market. “The most important step is the first step: find a trend,” Wang says. “Then decide the age group, the functions, the color trends, the price. If the concept is wrong, all the investment in time and money will be wasted.” On top of the problems of growing competition from low-cost Asian producers on one end and big name multinationals on the other, Taiwan toy makers must predict consumer trends in markets around the world. In the fickle world of toys, what’s hot now could be ice cold next season. Consider the fate of the Cabbage Patch Kids. Even Teenage Mutant Ninja Turtle toys are now passé.

Ongoing recessions in the United States, Europe, and Japan have posed an­other challenge for the toy industry. Wang has felt the effects of the U.S. downturn very dramatically. “Five years ago, you could retail a toy in the United States for US$24.99,” he says. “But prices are drop­ping. Now the standard price is US$14.99.”

Moving offshore is, of course, the biggest way to cut costs. Wang believes that one-fifth of Taiwan’s estimated five hundred toy makers now have manufac­turing operations in Mainland China, the Philippines, Thailand, or other low-cost Asian sites. Metro Toys moved most production operations to Manila in 1988. But moving offshore was not enough to stay competitive. The mainland quickly emerged as a source of even cheaper labor, and Wang had to find another way to trim costs. So he installed a computer system designed to streamline financial and sales operations in Manila.

Even so, Wang says he will eventu­ally have to move low-end production to the mainland. Labor is not the only rea­son. “We need a production base for mainland sales,” Wang says. “China has 300 million children. The local market will be big in the future. We want to set up a base for that.”

Wang believes local toy makers can survive, but doing so requires transforming the business in three areas. First, manufacturers must move basic opera­tions overseas; then, they must upgrade their products and improve their marketing. To meet the last two goals, TTMA cre­ated an information database on which association members can call up informa­tion (in Chinese) on local and interna­tional industry news. This year, TTMA will begin training researchers to use computer­-aided design.

Even with help, these changes are difficult, especially for Taiwan’s small to medium-sized toy makers. But Wang stresses that toy makers don’t have much choice in the matter. “Even companies that have factories overseas find they still face pressure to reduce manufacturing and management costs,” Wang says. “If you don’t continue with R&D to develop more value-added products, you cannot compete over the long term.”