The ATV Industry in Taiwan - Assignment Example

Chapter 5 Analysis and Result 5 Introduction Having discussed the methodology and deciding the selection of the comparable two case companies, chapter presents an in-depth investigation of these organizations along with an overview of the ATV industry in Taiwan. There shall be a comprehensive analysis of these entities that will allow the researcher to put forth apt recommendations. 5.2 The ATV Industry in Taiwan The ATV industry in Taiwan has approximately a ten-year history. It originally comes as one of the diversified strategies for the Taiwanese motorcycle industry. The motorcycle industry has been developing for over half of a century in Taiwan. It has metamorphosed from an import-dependent industry to one that is 100% self-sufficient. Taiwan had once been the third-large motorcycle producing country in the world. However, since 1997, this advanced position in the global market has declined because of the rising involvements in China and Southeast Asia and saturated internal demand. Therefore, for survival these motorcycle manufacturers searched for new opportunities to effectively utilize their existing skills and resources (ITRI-IEK, 2004). Small ATV has relatively lower entry barriers for motorcycle manufacturers in terms of technology, especially engine. Thus, among up to 30 ATV manufacturers in Taiwan, majority are motorcycle or motorcycle components manufacturers, including Kuang-Yang and Her-Chee. In addition, reports also indicate that there is an advantage in terms of scope for Taiwan’s ATV manufacturers since two thirds of them (alog with component suppliers) are located in the middle-south of Taiwan, mostly in the Chiayi and Tainan areas (ITRI-IEK, 2004). The inner market is very limited so that exporting becomes the major activity. Due to the high level of urbanization and convenient transportation network of this country, ATVs in Taiwan are mainly used for recreation which constrains its development potential (Hot News, 2005). Since there is only about one thousand units per year for inner demand, almost all products are exported. The U.S., of course, is the biggest export market followed by Europe. In 2004, Taiwan exported over 200,000 ATVs capturing 15% of the market and dominating the international market for small ATVs (Hot News, 2005). However, this superior position is vacillant resulting from overwhelming price cutthroat in low horsepower models (under 250 c.c.) from China. Take the European market for instance, where Taiwan’s exports terrain vehicles (ATVs) are expected to suffer at least a 30% drop in volume and a 15% decline in price in 2006 due to fierce competition from underselling rivals in mainland China, reported by CENS (Taiwan Headlines, 2006). To cope with the challenges from China, Taiwanese manufacturers tend to be involved in producing large horsepower models. Dinli has spent a billion dollars obtaining the ATV department of the Cannondale, and got its mold and skills for 500.c.c. large model. Kwang-Yang and Her-Chee are preparing to invest more on R&D of large displacement models. Nonetheless, other small companies are still seriously threatened by rivals from China. In summary, investigating the whole ATV industry in Taiwan, a SWOT analysis may be drafted, as follows: Strengths: Matured motorcycle industry gives manufacturers lower entry barriers for participating in the ATV industry Scope economy which offers a complete and convenient supply chain for manufacturers located in the Middle-South of Taiwan. Weaknesses: Small domestic market Deficient technology for higher level products Lack of production of large displacement ATVs which has become popular in target markets Opportunities: Strong and growing worldwide market OEM/ ODM orders from foreign big brands Threats: Competition from China Environment and security issue with ATV 5.3 Case Analysis: Her-Chee 5.3.1 Background Her-Chee industrial Co., Ltd., founded in 1978 with NTD18 million capital (about 0.45 million Euro) and 65 employees, has been expending its scale as a company with NTD548 million and 250 employees so far. Located in the Chiayi county where many traditional industries of Taiwan gather, Her-Chee is a famous motorcycle manufacturer with its own brand “ADLY.” In 1990 its 50c.c “Elegant” scooter was homologated by Italy which made Her-Chee, “ADLY,” the first Taiwanese manufacturer entering the European market. In 1999, it introduced its first youth ATV to the international market and, again, has become not only the first company in Taiwan involved in the ATV industry but also the first enterprise in the world to comply with ATV-50 EEC 92/61 homologation. This allowed the use of ATV for on-road purposes (Her-Chee, 2006). Since the motorcycle industry seemed to be pessimistic, Her-Chee started to diversify its products to not only motorcycle but also ATV, go-kart and related components. The percentage distribution for main products is illustrated in Figure 5.1. Figure 5.1: Product Portion of Her-Chee Source: TSIA, 2004 Her-Chee enjoys a good reputation with its stable, high-quality products because it is firmly dedicated to research and development. These efforts have been acknowledged not only by homologations but is also attested to by its many awards. Its full technology and experience have also contributed to its competitive advantage as a player in ATV industry. Since Her-Chee successfully entered the ATV market, its profit gradually increased. The highest was in 2004 when it had profit of about 1700 million in total and the EPS (earnings per share) was up to NTD 3.82. Unfortunately, it is also obvious that the squeeze from China has indeed affected Her-Chee’s profit. In the first quarter of 2006, the company had only NTD153 million, dropping by 50% compared with NTD330 million the same quarter in the previous year (China Times, 2006). 5.3.2 Europe Market Entry Strategy Although a limited domestic market is the main factor compelling Her-Chee to enter foreign markets, it is also the board chair, Mr. Chin-Chang, Chen, that has insight and ambition to go outside of the island. He insists that “do, and do the best,” and with the assiduous and earnest characteristics of traditional Taiwanese SME (small and medium-sized enterprise) managers, he implements this philosophy on doing international business. Limited by environment, Taiwanese industries seldom develop globally known brands. Instead, OEM (Original Equipment Manufacturing) and ODM (Original Design Manufacturing) have been generally adopted by most companies for a long time because they present lower risk and yet offer stable profits. Hong-Hai is an example. This most profitable company in Taiwan which OEM/ODM various kinds of products for international brands without its own still boasts of substantial profit. However, some industries or companies have started with OBM (Original Brand Manufacturing). This is an attempt to earn more profit from the added value that brands can yield. To expand into the international market, Her-Chee adopted a twofold strategy: OEM/ODM and its own brand at the same time. First, with its good-quality product and exceptional customer service, it has successfully won a low displacement model OEM/ODM orders from two famous brands in North America, Bombardier and Arctic Cat, since 2001. As a strategic-alliance partner for these big international branding manufacturers, Her-Chee offers its relatively cheaper products, and through these interactions with famous brands it can acquire international business experience and skills. Perhaps, it may even share parts of their distribution channels. At the same time, Her-Chee markets its own brand “ADLY” in both Europe and North America by coordinating with agents as direct exporting. To assess its market strategies in Europe, the 4 Ps should be discussed. Firstly, Europe is a major market which comprises about 60% of Her-Chee’s product volume (Elike, 2005). The products contain various types and horsepower models from the 50 c.c. youth model to the 300 c.c. utility model, the biggest model of Her-Chee to date. The introduction of the 300 c.c. model matches the market demand for large displacement ATVs and once made Her-Chee the only manufacturer who had this product line when other competitors such as Kwang-Yang and Dinli were more interested in models larger than 500 c.c.. Nevertheless, surveys have suggested that sales of larger than 500 c.c. models have a 3~9% increase. It is necessary for Her-Chee to develop higher level displacement products to keep its market share. About price, Chinese manufacturers get such overwhelming advantage in small models that Her-Chee never tries to compete in price. Therefore, Her-Chee can only leverage through product differentiation. However, Her-Chee thinks that product, compared with promotion, is the more difficult issue to cope with. On the contrary, to promote a Taiwanese brand in the global market is a big challenge (Hot News, 2004). Although Her-Chee is aggressively participating in various motorcycle and ATV exhibitions, there are still some limits to operating a Taiwanese brand. This is due to the fact that Taiwan’s international status is not explicitly defined and most of the products for export are OEM/ODM items. To promote it as a well recognized brand is one of the company’s goals. 5.4 Case Analysis: Kwang-Yang 5.4.1 Background With NTD5800 million real capitals, Kwang-Yang Motor Co., Ltd., was founded in 1963. It has become a large-scale enterprise (LSE) having over 2700 employees and aggressively involving in high level of internationalization. So far the head office is located in Kao-Hsiung, responsible for main commercial activities and global business conduction. Three plants are also located in Taiwan while there are oversea branches in China and Indonesia. Changzhou and Hunan Kinlon Kwang Yang Motor Co.,Ltd are two joint ventures in China. On the other hand, Hoalam KYMCO Motor Corporation in Indonesia is the first government acknowledged foreign sole venture company. At the first stage of company operations, it is dependent on big Japanese motor manufacturer, Honda, to offer related technology. But Kwang-Yang finally recognized that R&D is the lifeblood for the industry. Since the 1980’s it has never invested lower than 5% of its profit on research and development. In recent years, the R&D investment even rose up to 8% (Career, 2006). In 1992, it ended its relationship with Honda and started to market its own brand “KYMCO,” but not until 2001 did Kwang-Yang extend business to other power-related products including ATV. Motorcycle and ATV, with other businesses such as scooter, engine, or components, among others, have made Kwang-Yang a global supplier of power-driven products, as its enterprise mission announced. Its first ATV model, 150c.c. MXer, was officially announced and exported in 2002. Since then, although motorcycle is still Kwang-Yang’s major business, ATV has been gradually playing an important part. 5.4.2 Europe Market Entry Strategy The reason that Kwang-Yang adopted a business diversification strategy and transferred to ATV and other power products is the same as that of Her-Chee. It is primarily due to the small domestic motorcycle market and severe competition from China. Kwang-Yang also chose direct export as the mode for entry into the European market, although it usually invests aggressively in markets outside of Europe. In fact, Kwang-Yang has expended its product based on six categories with different strategies (Table 5.1). With more resources (i.e. capital and human resources) and the ambition to be an international brand for power-driven products, it concentrates on marketing its own brand “KYMCO” in the ATV business. Table 5.1 Diversification of Kwang-Yang Category Development Strategy Motorcycle OBM: Global life-purposed powered products ATV OBM: Supplier of entertainment products Engine ODM: Provide regional-required service Power Equipment OEM/ODM: General powered products and conformed technical service Mobility Scooter OEM/ODM: Electrical powered products and conformed technical service Parts OEM: General powered components and conformed technical service Adapted from KYMCO GLOBAL, 2006 Kwang-Yang has the most complete product lines compared with other Taiwanese manufacturers. It has had basic 50~250c.c models and has invested over NT$100 million (US$3.13 million) in R&D intending to develop improved 300c.c and 500c.c models. The large 500c.c model has been marketed since 2005 and the new 300c.c models for sport and utility have been announced this year (2006). Furthermore, in 2005, in order to keep its leading position among all Taiwanese manufacturers in the European market and positively cope with price competition arising from Chinese competitors, Kwang-Yang implemented a price-cutting strategy in many of its products. The price of models under 150c.c lowered to 400~500 Euro and for 200c.c. models it lowered to 500~600 Euro. In order to enter new European markets such as Sweden, it has to compete with the average price in these new markets which is 5% lower than those in France, Germany and Italy. These price strategies successfully increased KYMCO’s sale and have compressed profit of other companies, including Her-Chee. So far, KYMCO has an 8~10% market share in Europe. Spain, in particular, accounts for 50% of this figure. Europe comprises 80% of Kwang-Yang’s product unit sales. Hence, for many years, Kwang-Yang has been dedicated to promote in European markets. Firstly, it has established a strong international marketing network in cooperation with its European agents. Kwang-Yang has channels in 22 countries of Europe and is still finding partners especially in Czech and Slovakia. Moreover, it also actively participates in the global community. Kwang-Yang has joined various motorcycle and ATV exhibitions for many years, and the influential ones include motorcycle shows in Cologne and Munich, Germany, and in Milan, Italy. Finally, Kwang-Yang also participates in European ATV associations. It is one of the premier members of All-Terrain Vehicle Europe Association (ATVEA) 5.5 CECTEK China Engine Corp. in Taoyuan, Taiwan, is a joint venture in which major stakes are held by the government of Taiwan, and the Yulon Group - Taiwans biggest automobile manufacturer, which markets Nissan and Mitsubishi models on the island. Founded in 1995, the company has NTD1700 million capital and 220 employees, designing and producing engines to support the Taiwanese home-grown automotive industry. It cooperates with the Industrial Technology Research Institute in the research and development field, and has already created two types of engines (1.2~1.4L and 2.0~2.2L) successfully (CECTEK, 2006). In addition, its outstanding product-quality control allows CEC to be authorized by many international certifications, such as ISO 9001, ISO 14001 and TS 16949. Even though it has no experience in the ATV industry nor in international business, CEC desires to yeild competitive edge in this new field relying on its superior engine technology. After analyzing the company’s official documents and combining these with information from the industrial environment, a SWOT analysis may be put forth: Strengths: Familiarity with large displacement engine design and manufacturing Already has the necessary hardware equipments Reliability and outstanding product quality Weaknesses: Absence of experience as an assembly manufacturer Absence of experience in foreign markets, with the European market in particular Relatively inflexible internal management procedure Opportunities: Highly potential in entering in the European market Market demands for large displacement models which Chinese and other Taiwanese competitors hardly produce Related regulations about pollution and safety are getting increasingly stringent, which call for more technical development Threats: Competition from first-line Taiwanese manufacturers Price challenge from Chinese companies Fast changing market situation 5.6 Summary An overview of the ATV industry in Taiwan, its internal strengths and weaknesses, and external environmental conditions were analyzed. The development of motorcycle manufacturing deserves merit in terms of technology. Relying on this advantage, nevertheless, Taiwanese manufacturers have to seek different solutions and strategies to cope with market difficulties. Her-Chee and Kwang-Yang, the two companies chosen, serve as good examples on how the Taiwanese ATV industry plays a role in the international market. Some key comparisons of the two companies are shown as Table 5.2. CECTEK starts to operate within the ATV business. As a new player who is involved with an export dependent industry, its lack of international business experience can be fatal. However, it has superior technology in engine design which can make CECTEK a strong competitor to other existing companies. Table 5.2 Key Comparison of Two Case Companies Her-Chee Kwang-Yang Owned Brand ADLY KYMCO Business Type OEM/ODM, OBM Only OBM in ATV business Market Entry Mode Choice Worldwide direct exporting Highly internationalized, but only engaging in direct export in Europe Product Strategy 50~250cc./large model: 300cc 50~250cc/ large models: 300cc and 500cc Price Strategy None actively price-cutting in order to keep high gross profit Actively engages in price competition as a protective strategy in order to keep or expand markets and dispel Chinese competitors Promotion Strategy Mainly relying on personal selling and its agents; participating in exhibitions Aggressive promotions combining sports marketing(e.g. hosting races), global community participation (joining associations and exhibitions), advertising and e-marketing all together Read More