In few countries is foreign trade more important than in Taiwan. It was recently reported that the value of Taiwan's exports is approximately 52 per cent of the gross national product. Looking at this another way, over one-half of the income of all individuals, business firms and the government results from foreign trade. In comparison, U.S. exports of merchandise average only 4 per cent of that country's GNP.
Taiwan's success in economic development has been truly impressive. From 1964 to 1973, Taiwan achieved economic growth averaging 8.7 per cent annually. Growth of over 10 per cent was achieved in all but three years. The lowest figure for that period was 8.6 per cent in 1966, and an outstanding 12.3 per cent was scored in 1973.
Foreign trade plays a pivotal role in plans for economic development of Taiwan. The island has few resources; its prime asset is a diligent and skilled population. Mineral resources are limited. Much of the land is mountainous and not suitable for agriculture. In spite of these drawbacks, Taiwan is essentially self-sufficient in food production and has one of the highest labor productivity levels in Asia. Propelling productivity increases and economic growth in Taiwan have been the hard-working and enterprising people, land reform and agricultural improvements, large scale U.S. financial and technical aid until 1965, and a systematic industrialization and export promotion drive. Also tremendously beneficial to economic growth has been political, economic and social stability and the resultant favorable foreign investment climate.
The express purpose of industrialization and economic growth in Taiwan is a better life for the Chinese people. At current prices, per capita income was only US$130 in 1961. By 1971, income had grown to US$364, and in the next three years per capita income doubled to US$697 in 1974.
In the past, Taiwan has penetrated foreign markets by making established products and offering them at low prices. There has been a substantial and receptive market for bicycles, textiles and garments, and television and radio sets assembled in Taiwan. With prices for Taiwan-made products considerably lower than those in competing countries, there has been little need for marketing or selling.
The cost of labor in Taiwan historically has been about one-twentieth of that in the United States and less than one-tenth of that in Japan. Products made in Taiwan have typically been those requiring large labor inputs. But as Taiwan achieves its goal of income growth and a higher standard of living, this labor cost advantage is shrinking.
Between 1961 and 1971, the cost of labor increased over 200 per cent. Between 1973 and 1974, moreover, labor rates increased by an in credible 50 per cent. Although Taiwan's labor rate is still far less than that in its two major markets of Japan and the United States, the significance of the cost difference between Taiwan's products and domestically produced products is rapidly declining. Also, Taiwan is experiencing increasing competition from other developing countries with still lower costs, such as Indonesia, South Korea and South American and African countries.
A second factor which reduces the ability of Taiwan to compete in world markets on a low price basis is the worldwide increase in transportation costs. In the last six months of 1974, ocean transportation freight rates increased by more than 60 per cent, precipitated by the energy crisis and resultant increase in fuel costs. This came on the heels of a steady series of more modest rate increases in the previous periods. Taiwan products must bear these increased freight costs not only on the finished product exported to foreign markets, but also on the raw materials which must be imported for their manufacture.
Taiwan's successful growth strategy of low prices is being outmoded. A new strategy must be developed and implemented quickly.
Taiwan industry will be hampered during the next decade by certain managerial and conceptual legacies from the strategy of competing in foreign markets on a low price basis. These legacies include a labor intensive industrial structure, a possibly unfavorable world image in markets for Taiwan products, production-oriented versus marketing-oriented management philosophy, and little marketing experience and expertise.
Because of the rapidly increasing cost of labor, it is essential that the labor input of production be decreased in relation to the capital input. With greater use of labor saving equipment and machinery, Taiwan industry will be less susceptible to higher labor costs. The government is cognizant of this problem and is taking appropriate steps to encourage changes in the industrial structure.
The goal is to raise the ratio of capital-intensive and technology-intensive industries from 31.6 per cent to 45 per cent in 1984. Formation of largescale operations will be encouraged to facilitate increasing economies of scale. With increased production from large scale, mass production operations, it will be more important than ever to develop foreign markets.
The quality of Taiwan products has not always been as good as might be desired. Under the pressure of increased wage rates and transportation costs, industry will be tempted to compensate by lowering quality still further. Even when quality is acceptable by international standards, a low price strategy can result in an image of low quality in the consumer's mind. This is because buyers often regard price as an indicator of quality. By pursuing a low price strategy in foreign trade, Taiwan may unintentionally and perhaps unfairly develop an international reputation for poor product quality. This further underscores the need for a new marketing strategy.
All industrialized and developing countries undergo an evolution of business management philosophy. The earliest orientation of business firms could be described as a production orientation. The central problem to be solved by firms with this orientation is to begin production and to increase productivity and output. This philosophy was typical in the United States beginning with the Industrial Revolution in the 1850s and lasting until about 1880. This appears to be the orientation in Taiwan business management.
Next, a financial orientation becomes dominant, as business firms recognize that major profit opportunities result from increasing the size of businesses to achieve scale economies. Typical during this period is the rationalizing of the industrial structure through mergers and consolidations. This orientation was prevalent in the United States from about 1880 until 1920 and evidently is the developmental stage that government policies will encourage in Taiwan during the next decade.
Later, business firms turn to a sales orientation as economic problem changes from a shortage of productive capacity to a shortage of customers. Firms define their major problem as finding ways to increase demand in existing markets or finding new markets. Advertising, more salesmen, brands and packaging, and market research are important tools utilized during this stage. In the United States, this stage lasted from the boom years of the 1920s until 1955, with time out for the Great Depression of the 1930s, World War II and the Korean War. Only a few business firms in Taiwan are in this stage of development.
The final stage is customer orientation. After the Korean War, the industrialized and developing countries of the world embarked on a period of unprecedented economic expansion lasting until the recession of 1974. In the United States, sales and promotion expertise rapidly caught up with production capabilities. Firms began to devote more time and energy to determining exactly what products were wanted and needed. In such an environment, market research is conducted to determine customers' preferences before decisions on products and product lines are made. This is the meaning of customer orientation.
In the United States, the industrialization process and natural evolution of management philosophy from production to customer orientation took place during a 100-year period. In Taiwan, rapid industrialization has taken place during a 10-year period. Management philosophy has not adapted so quickly. It is essential for the future success of Taiwan's industry in world markets that management philosophy also change quickly from the present production orientation to customer orientation. The current strategy of competing on a low price basis has essentially insulated Taiwan producers from their customers. Products are often sold through trading companies, or are produced under the brand name of mass merchandising retailers. Producers have not had the opportunity to develop marketing expertise in serving world markets.
A new strategy is required so that Taiwan can achieve its growth potential. Taiwan firms must compete in world markets against experienced, well-organized, much larger and better funded firms. Ten U.S. firms have sales which are greater than the entire GNP of Taiwan. Taiwan firms are like a small army faced with a larger and stronger force in the latter's territory - a strategy of direct attack is not wise. Taiwan's plan of attack must make it possible to compete with overwhelmingly powerful competitors. Military principles which are useful for this analysis are:
- Principle of the objective. Every operation must be directed toward a clearly defined, decisive, and attainable objective.
- Principle of coordination. Unity of leadership should exist along with
consistency of action. - Principle of mass. Combat power must be
concentrated at the critical time and place for a decisive purpose.
- Principle of the offensive. The leader must exercise initiative, set the pace and
exploit enemy weakness.
- Principle of surprise. Surprise results from meeting the enemy at a time, and in a
manner for which he is not prepared.
Principle of the Objective. Every operation must be directed toward a clearly defined, decisive and attainable objective. An army must clearly know for what objectives it is fighting. If it does not, it will be impossible to coordinate action, and morale will be poor. Firms also must have a clear plan of action in order to provide a focus for their efforts.
The prime objective of a firm must be to produce satisfied customers, that is, to be customer oriented. With the older production and sales orientations, firms start their planning with existing products, and then attempt to find markets for those products. With the customer-oriented concept, firms start with the firm's existing and potential customers and their needs. It then plans a coordinated set of products and programs to serve those needs, and it earns profits as a result of satisfying those needs better than any other firm. The objective of customer satisfaction is the guideline in organizing and directing the activities of the firm.
Principle of Coordination. Unity of leadership should exist along with consistency of action. From a business standpoint, this means that the various departments in the firm must recognize that the actions they take may have a profound effect on the ability of the firm to create and satisfy customers. When manufacturing makes what is easy for them to produce without regard to customer preferences, when an inventory manager holds finished goods inventories to a bare minimum without regard to customer service, when the traffic department insists on using slow, cheap freight instead of reliable on-time delivery, customer satisfaction is bound to be adversely affected. All activities in production, engineering, finance and marketing, must be devoted to deter mining the customer's wants and then to satisfying them.
Principle of Mass. Combat power must be concentrated at the critical time and place for a decisive purpose. Just as a small army would not be wise to attack a large army simultaneously on all fronts, neither should a small firm compete with a strong well-organized competitor in that firm's mass market. However, by concentrating all of the resources of the firm in a limited area, hopefully where the competition is weakest, a significant breakthrough can take place.
Any mass market for a product is made up of many types of customers. When a firm examines a particular market, it becomes obvious that it is far from homogeneous. In fact, it is made up of many different groups of customers, called customer or market segments. For example, within the wrist watch market, there are many customer groups (segments) with quite different needs. Businessmen might view a wrist watch as a piece of jewelry or place a high value on accuracy. On the other hand, scuba divers would require a watch that was waterproof, able to withstand great pressure and embodied an alarm to warn the diver it was time to surface. To a third segment of the market, low cost and durability might be the major considerations.
Because of the diversity of market segments, there are opportunities for smaller firms to prosper without directly confronting a powerful competitor. By selecting a target market for which a satisfactory product does not exist, the finn can bring its resources to bear and satisfy customers.
To identify market segments in which opportunities exist, it is necessary to conduct market research. Several excellent sources of information are available in Taiwan. The China External Trade Development Council has an excellent library containing information and statistics about customers in many countries. The U.S. Information Service and U.S. Trade Center have extensive materials describing the American market.
Several good texts on multinational marketing are available. These books provide background information and details of market research methods. They are also helpful in pointing out differences in customer preferences in major markets of the world. Included are John Fayerweather, International Marketing (Englewood Cliffs, N.J.:Prentice-Hall, Inc., 1965); Gordon E. Niracle and Gerald S. Albaum, International Marketing Management (Homewood, 111.: Richard D. Irwin. Inc., 1970); and Vern Terpstra, International Marketing (New York: Holt, Rinehart and Winston, 1972).
Nestle's makes 40 varieties of instant coffee to suit differences in world tastes. A popular drink in Taiwan, asparagus juice, would not appeal to most Americans. The color green is popular in Ireland but is considered bad luck in Malaysia. Blue is a feminine color in Holland but goes with boy babies in the United States. The most popular sized bottles of shampoo in the United States have little market in England, where smaller, individual-use sizes are preferred. The best selling skis in Japan, where practicality is admired, were a marketing failure in the United States, where emphasis is on excitement, daring and courage. Americans prefer styling which is simpler and less ornate than that liked by Chinese. Pork, popular in Asia and the West, is forbidden by the religions of Israel and the Arab countries.
The best way to learn about market opportunities is through personal observation. This can be accomplished on a limited basis with visits to foreign markets by trade missions and study groups. Japanese businessmen have learned more about opportunities in United States through such visits.
To understand the markets in which Taiwan products are sold, it is necessary to be actively and personally involved in planning market activities and sales. With the prevalent method of selling through trading companies or under retailers' private brand names, Taiwan producers are insulated from the market.
When Yamaha first began selling motorcycles in the United States, two Japanese managers were sent to America and four salesmen and a secretary were hired locally. From this small beginning 10 years ago, Yamaha sold nearly a half million motorcycles and such other products as pianos, organs, skis and electronic equipment in the United States in 1974. The managers were able to gain first hand information about the preferences of American consumers.
This method of entering foreign markets is not expensive. Even more economical would be a coalition of related manufacturers. For example, a group of automobile accessory producers could band together to form a trading subsidiary in a foreign market. The subsidiary could offer a full line of products. Fixed costs would be spread over a number of firms, reducing the selling cost for each firm. The profit ordinarily made by a trading company would be earned by the selling firms. Important information about the market would be learned through direct involvement.
Principle of the Offensive. The leader must exercise initiative, set the pace and exploit enemy weakness. An army does not win the war by waiting and reacting to attacks of the enemy. In the long run, a firm cannot succeed by duplicating existing products and reacting to the competitive actions of rival firms. In order to grow and prosper, it is necessary for firms to take the initiative in spotting market opportunities and developing the required products and programs. Success in world marketing is unlikely to come to paper tigers.
The current strategy of Taiwan firms is to produce for already established products, as in the case of bicycles and television sets, and as a result of lower labor costs, sell their products in foreign markets at lower cost. However, the major hope of Taiwan firms to improve their position in competition with powerful rivals lies not in a strategy of product imitation but in one of product differentiation. The underdog firm must take the offensive in searching for areas in which it can achieve an advantage over its competition by serving a specific market segment very well. Militarily speaking, it must avoid an all-out frontal war in the places where the enemy is strongest, but must concentrate its forces where the enemy is weakest.
Consider the success of the U.S. Time Company's Timex watch, a low cost and durable product designed for a segment of the market which was being neglected by the major watch companies. Control Data Corporation succeeded by developing a better scientific computer, satisfying a market segment ignored by IBM, which concentrated on business computers. Japanese firms were astute in capturing the U.S. market segment that desired high quality and expensive photographic equipment which was not being supplied by Kodak. Japanese firms also captured the market segment which wanted small, reliable and economical automobiles that were not being made by Detroit manufacturers. These firms succeeded not by imitating existing products, but by developing new products or marketing methods tailored to specific target markets, and by doing a superior job of satisfying buyers.
Taiwan firms must take the offensive in marketing under their own brand names, and must proudly and prominently identify products as being "Made in Taiwan, Republic of China." The author was quite surprised to learn that Taiwan sold almost 1 million bicycles in the United States in 1974. He could not recall ever seeing a bicycle identified as being made in Taiwan. It was later determined that virtually all Taiwan-made bicycles sold in the U.S. bear an American retailer's brand. The Republic of China gets no benefit of identification with the product. Sony and Panasonic (National) are familiar brand names in America for Japanese television sets. Half of the television sets sold in the United States under American brand names are produced in Taiwan. Yet the fact that Taiwan can produce TV sets is unknown to most Americans. The identification with Taiwan is lost by using an American brand name.
Taiwan brands should be promoted with pride and should be carefully selected to be compatible with the foreign market. For example, "Darkie" brand toothpaste would be considered a racial slight by Negro people in the United States. Most Chinese firm names are difficult for Westerners to pronounce, although a few such as Tatung would made good brand names. Certain names which have cultural significance in China would also be associated favorably with the Republic of China by people in the United States. For example, "Formosa," "China," "Cathay," "Orient," "Mandarin," "Phoenix," and "Dragon" would make good brand names. Others, such as "High Class," "Lucky," "Long Life," "Prosperity" and ''Today'' have no cultural significance in the United States.
In order to establish a quantity image, it is important to provide for adequate repair service and the availability of spare parts. Volkswagen gained a large share of the U.S. auto market by establishing a good service network and advertising it. British auto makers failed to provide parts and after-sales service, and sales declined. The Japanese also stressed service capability and captured a significant share of the markets in which they compete.
With adroit promotion of brand names and careful attention to quality and promotion of a quality and service image, it is possible for Taiwan manufacturers to charge a fair but not necessarily low price for their products. Manufacturers should be careful not to charge too low a price. Low price and low quality are often assumed to be one and the same. Future profits of Taiwan industry must be gained through identification of profitable market segments, and production of good quality, fairly priced products that satisfy the needs of these segments better than products of other firms.
Principle of Surprise. Surprise results from meeting a competitor at a time and in a place and manner for which he is not prepared. It is difficult to dislodge a well-entrenched and fortified enemy. The smaller firm will not be able to mount a frontal attack. Having less money, it must strike suddenly and substantially before the strong firm realizes what is happening.
For example, Pepsi-Cola faced the problem of competing against Coca-Cola, the giant which dominated the American soft drink industry. The cola market consisted of two major segments, the "on-premises" market where cola was sold by the glass and the "take-home" market for bottled cola. Pepsi-Cola decided not to compete strongly with Coca-Cola in the "on-premises" market where Coke was exceptionally strong. Pepsi singled out 25 cities where Coca-Cola bottled sales were not high and advertised heavily in those markets. This surprise and concentrated campaign paid off handsomely.
The principle of surprise is necessary in introducing a new product to an identified market segment. The first firm to enter a market usually has a substantial advantage. It is necessary to have a marketing plan to introduce the product swiftly. This is necessary to establish customer preference and carve out a market share before the competition can react. For example, Maclean's toothpaste won a profitable segment of the market by reintroducing the "white teeth" appeal to the market segment that cared more about tooth color than tooth condition. Maclean's was firmly entrenched in this market before the dominant firms in the industry were able to get competing products on the market. Mazda's Japanese rotary-engined automobile burst on the American market, catching the Detroit auto makers completely by surprise. Mazda was able to establish a comfortable market share with no fear of retaliation. American producers were technologically years away from getting a rotary engine automobile on the market.
In summary, Taiwan firms are advised to follow proven military principles in order to succeed in world markets against rival firms that are stronger and better established. Taiwan firms must adopt the customer oriented objective of first identifying customer needs and then designing and producing products to fulfill those needs better than any other firm. All departments and employees of the firm must coordinate their efforts to develop satisfied customers.
The resources of the firm must be massed and concentrated on the weaknesses of rival firms. The firm must identify and serve market segments which are neglected by strong competitors. Market research is required to learn about customers and their needs, and to identify profitable opportunities to serve these market segments. Taiwan firms must gain experience by carrying out their own marketing. They must lessen their reliance on foreign trading companies and stop producing under retailer's brand names that insulate them from markets.
Taiwan firms must take the offensive in developing new products to serve target markets. They must market these products under their own brand names and build world awareness of products marked "Made in Taiwan, Republic of China." If quality is high, fair and not low prices can be charged. Marketing plans must be well worked out and directed to preserve the element of surprise. A product can be introduced and a market share established before competing firms can react and meet the challenge.
Taiwan producers must be flexible in adapting to changing economic conditions and adopt a new marketing strategy. The old strategy of competing on a low price basis has served its purpose of establishing Taiwan among the industrial nations. If Taiwan industry shifts gears and moves on to the strategy now required, the next 10 years will be as profitable and exciting as the last. (Condensed from Industry of Free China.)