US embassy cable - 05TAIPEI4230

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004230 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PASS AIT/W 
COMMERCE FOR ITA/MAC/ASIA MBMORGAN CABLE BOX 4431 
 
E.O. 12958: DECL: 10/18/2015 
TAGS: ECON, EINV, CH, TW 
SUBJECT: TAIWAN RETAILERS FOCUSED ON PRC MARKET 
 
REF: A. TAIPEI 136 
 
     B. TAIPEI 3122 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.4 d 
 
Summary 
------- 
 
1. (C) Taiwan's economic ties with the PRC increasingly 
extend beyond manufacturing, and Taiwan retail activity in 
the Mainland is growing rapidly.  The members of Taiwan's 
Association for Chain Store and Franchise Promotion (ACFP) 
count 26,000 stores, restaurants, entertainment facilities 
and other retail establishments in Taiwan.  The same firms 
currently have more than 10,000 establishments in the PRC, 
the vast majority created in the last three years. 
Franchises and joint ventures are the most common structure 
for Taiwan retail activity in the Mainland, and Taiwan 
firms are active across a range of retail products.  This 
kind of activity does not have much effect on Taiwan's 
trade and investment figures, but it may be having a 
widespread and profound impact on people's lives in both 
areas and on attitudes towards the opposite side of the 
Strait.  End summary. 
 
More than 10,000 Stores and Restaurants in the PRC 
--------------------------------------------- ----- 
 
2. (U) Taiwan's manufacturers have invested large sums in 
the Mainland, making the PRC the production base for many 
of Taiwan's most important industries.  The first wave of 
investment consisted mainly of labor-intensive goods, such 
as textiles, toys, and other plastic products.  High tech 
industries soon followed.  Today, at least 70 percent of 
the IT hardware produced by Taiwan firms is made in the 
PRC.  Other capital-intensive industries, such as 
petrochemicals, steel and cement manufacturing, have also 
increased investment in the Mainland (refs A and B). 
 
3. (U) However, Taiwan's economic ties with the Mainland 
extend beyond manufacturing.  One sector that receives 
little attention is retail trade.  The degree of these 
activities is not captured in most cross-Strait economic 
statistics.  The expansion of Taiwan retail franchises in 
the PRC does not have much impact on investment statistics 
because the owner/operators often use funds obtained 
locally.  Through June 2005, cumulative figures for 
approved Taiwan investment in the PRC showed that wholesale 
and retail trade accounted for only 1.8 percent of 
investment.  Data for the first half of the year showed a 
similar proportion.  Because many of the goods these stores 
sell are produced in the PRC, the effect on trade is also 
small.  Nevertheless, Taiwan's franchises and chain stores 
have been rapidly expanding their activities in the 
Mainland. 
 
4. (C) Taiwan's Association for Chain Store and Franchise 
Promotion (ACFP) has 250 member firms.  Together they 
account for a total of 26,000 stores, restaurants, 
entertainment facilities and other retail establishments in 
Taiwan.  ACFP Secretary General Beryl Lee told AIT/T that 
the members currently have over 10,000 establishments in 
the PRC, the vast majority created in the last three years. 
Lee predicted that by the end of the year stores in the PRC 
would top 12,000.  Lee said that so far Taiwan's 
franchisers and chain stores had been most successful at 
penetrating PRC markets with fast food outlets, department 
stores, convenience stores, and book stores.  Lee believes 
that ACFP's members have focused more on northern and 
central coastal areas of China.  She said that Taiwan firms 
had been less active in southern China with the exception 
of Guangzhou and Shenzhen.  Taiwan firms have most 
frequently used joint ventures and franchise agreements to 
enter the Mainland retail market.  Some of the successful 
franchises that Lee mentioned included Ordifen, which has 
more than 1,000 women's undergarment stores in the PRC, and 
Yon Ho with more than 100 breakfast fast food 
establishments. 
 
For Example, Star Bookstore... 
------------------------------ 
 
5. (C) Star Bookstore is another franchise that is 
expanding rapidly in the PRC.  Currently, the firm has 500 
establishments in Taiwan, 100 in the PRC, and another 100 
stores distributed among other areas with large numbers of 
ethnic Chinese.  Star Bookstore's primary source of revenue 
is book rentals.  In addition, it is developing a line of 
women's accessories under the "Starfly" brand name that are 
sold in the bookstores as well as in separate dedicated 
franchise stores.  Vice President for Public Affairs Karen 
Yang told AIT/T that the franchise start-up fees in the PRC 
at NTD 600,000 (about USD 18,000) are about half of those 
in Taiwan and include the costs of interior fixtures, 
information systems hardware and software.  Afterwards, the 
firm collects ten percent of the franchise's profits every 
month.  She said that initially most of the franchise 
stores in the Mainland were owned by Taiwan investors. 
However, about half of new stores are now being built by 
Mainlanders. 
 
I-Stone Jewelry... 
------------------ 
 
6. (C) I-Stone started out as a manufacturer of semi- 
precious jewelry and moved its factory from Taiwan to 
Guangzhou in 1991.  The firm did not have any of its own 
retail outlets until 2000.  According to I-Stone President 
Stoney Su, the firm now has approximately 700 franchise 
stores in the PRC.  It does not have its own retail outlets 
in Taiwan.  Its target is to have 2,000 stores in the 
Mainland in 2008.  I-Stone does not charge any initial fees 
to establish a franchise store or charge royalties. 
Instead, its franchise agreements commit the franchisee to 
exclusively sell products made by I-Stone.  The parent firm 
has a large advertising budget for China and provides 
consulting services to franchisees on management and 
interior store design.  Su told us that because of the 
structure of its franchise agreements nearly all of the 
franchisees are Mainland Chinese.  Su believes that because 
they are more familiar with local conditions, especially 
the legal system, Mainland investors run the franchises 
more effectively than Taiwan investors. 
 
Easy Way Soft Drinks... 
----------------------- 
 
7. (C) Easy Way is a soft drink outlet franchise.  It has 
about 500 franchise establishments in Taiwan, 20 in the 
United States and a few in Australia.  In the PRC, there 
are currently more than 90 Easy Way establishments, mostly 
in the Guangzhou area.  In Taiwan, most of the outlets are 
take-out stands, but in China most are restaurants with 
seating.  Initially all of the franchise operators were 
Taiwan investors, but the number of Mainland franchisees is 
increasing. 
 
Uni-President Group (Starbucks) 
------------------------------- 
 
8. (C) Large Taiwan enterprises have also been active in 
penetrating the Mainland retail market.  President Group, 
which owns the 7-Eleven franchise in Taiwan, was unable to 
secure those franchise rights for the PRC.  Those rights 
were instead claimed by Ito Yokado the franchise owner in 
Japan, which also has a majority stake in 7-Eleven Inc., 
the U.S. firm that owns the 7-Eleven brand.  However, Uni- 
President has been active in the Mainland's retail market 
in other ways.  The firm has a joint venture with Starbucks 
that owns 66 Starbucks outlets in the Shanghai area.  In 
addition, Uni-President has three joint venture 
hypermarkets with France's Carrefour.  It also has ten 
Cosmed drug and cosmetic stores in the PRC, building on its 
Taiwan chain. 
 
Comment - Small Investment, Deep Impact 
--------------------------------------- 
 
9. (C) Manufacturing investment and trade in electronics 
goods and components dominate the picture when you look at 
cross-Strait macro-economic data.  Even after a more 
thorough look, the figures might not fully show the degree 
of cross-Strait economic integration and the rapid rate at 
which the two economies are becoming more tightly bound. 
The amount of Taiwan retail activity in the Mainland is one 
aspect of the cross-Strait relationship that might escape 
notice at first.  Nevertheless, if the members of Taiwan's 
ACFP are a representative sample, Taiwan chain stores and 
franchises have nearly 40 percent as many establishments in 
the Mainland as they have in Taiwan, and this percentage 
will almost certainly rise rapidly in coming years. 
10. (C) Taiwan retailers view the PRC market as their best 
opportunity for growth.  With growing numbers of Mainland 
investors establishing Taiwan franchises, more and more PRC 
retailers will depend on economic ties to Taiwan. 
Furthermore, PRC consumers will increasingly seek out 
Taiwan brand products, Taiwan marketing and advertising 
specialists will be more focused on Mainland trends, and 
PRC preferences could begin to have a stronger effect on 
products and consumption habits in Taiwan.  This type of 
activity may not require the level of financial commitment 
that building a factory does, but it could have a more 
widespread and profound impact on the lives of more 
individuals on either side of the Strait and their views of 
the opposite side.  End comment. 
PAAL