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Taiwan’s Domestic Consumption

A Lopsided Liftoff

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A Lopsided Liftoff

Source:CW

Robust at the top but anemic at the bottom, Taiwan’s rebound in domestic consumption resembles a bird with a lame wing – vigorously flapping, but failing to fly high in the sky.

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A Lopsided Liftoff

By Jerry Lai
From CommonWealth Magazine (vol. 439 )

In 2010 Taiwan's sluggish economy is expected to gain some speed. But since domestic consumption will not recover across the board, the recovery will be too unbalanced to fuel an economic takeoff.

At the end of last year, Steve Day, president of the Wang Steak restaurant chain, confidently predicted that there was "no need to worry." Originally, Day feared that his business would be affected by the financial crisis. But to everyone's surprise, sales grew in 2009, with growth even surpassing the average growth rate of the past few years.

However, not everyone in the restaurant business can breathe a sigh of relief like Day. He believes his steak house chain is doing well, despite the economic gloom, because crisis-hit customers are making more conscious choices. "Consumers used to eat whatever came their way. Now they pick and choose, and they've selected us," the restaurateur says with pride.

Government statistics show that turnover in wholesale and retail sales markedly rose in the fourth quarter of 2009 (Table 1), indicating that consumption is on the road to recovery. But a closer look at the figures reveals that there is a vast gap in spending between wealthier and poorer consumer groups.

GDP expert Tsai Hung-kun, who is in charge of national statistics at the Directorate General of Budget, Accounting and Statistics (DGBAS), originally anticipated that the typhoon disaster of last August and the ensuing swine flu epidemic would adversely affect consumption. But contrary to expectations, consumption, particularly of luxury goods, did not suffer at all.

Crystal Lee, marketing manager at market research firm Eastern Online, believes that this phenomenon is due to the recent recovery in the stock markets. By the third and fourth quarter of last year, most investors had recouped their losses from the previous market crash or even begun to post gains. As a result, consumption gathered steam. In particular, the affluent with relatively high stock market investments can be expected to take the lead in splashing out on luxury items as the stock markets rebound, Lee assesses.

V-Shaped Recovery in the Luxury Goods Industry

Lee Pei-fen, secretary general of the Association of Service Industries, points out that year-end sales are a leading indicator as to where consumption will go in the following year. She notes that Taiwan's department stores registered between 15 and 30 percent growth in turnover during the year-end sales campaigns.

K. J. Lee, president of Pacific Sogo Department Stores, reveals that year-end sales at the Sogo stores were 26 percent up year-on-year and that luxury brands such as Chanel were doing even better, with average growth rates of more than 30 percent. He notes that, aside from budgeted purchases of everyday commodities, revenue growth from the year-end sales in 2009 mainly stemmed from luxury brand items. This shows that, as in the past, consumption is clearly concentrated among a well-heeled minority clientele, Lee says.

As Tsai observes, limousines and cosmetics posted the strongest growth rates among imported goods.

Even the hypermarket RT-Mart, which emphasizes "permanently low prices," registered the fastest growth among its high-priced products. Margery Ho, RT-Mart's public relations officer, notes that growth was strong for alcoholic beverages and large household appliances in the second half of last year. Sales of whisky, for example, soared 30 percent compared to the previous year. Taking advantage of this trend, the hypermarket is planning to import more alcoholic beverages this year, with an emphasis on sparkling wines.

Job openings posted at Taiwan's largest online recruitment network 104 Job Bank in December 2009 indicate that the retail industry is vigorously leading the way toward a V-shaped recovery. The job bank had 12,000 job openings listed in December, some 35 percent more than in December 2008.

The most marked rise in job openings was in the luxury goods industry with brands such as Hermes, Tiffany, Gucci, Loewe and Louis Vuitton looking for store managers, trainees and marketing staff.

In contrast, consumption among the poorer sectors of the population does not yet show signs of recovery. Last year, the fast food chain McDonald's slashed prices for its breakfast and lunch set menus, not just for short-term campaigns, but for the long run. In the past, upgrading to a set menu had required payment of an additional NT$10. The price for Happy Meals for kids, which had never before been sold at a discount, was lowered to NT$69 to boost consumption.

Steven Yang Chia-yan, head of macroeconomics research at the Taiwan Institute of Economic Research, warns that the good times with unemployment rates under 3 percent are over. After the burst of the technology bubble, it will be difficult to contain unemployment below 4 percent. "In the future, we may very well see a period of 5 to 6 percent unemployment that lasts for a long time," Yang predicts.

A further rise in joblessness cannot be excluded this year, due to merger-related redundancies and the effects of the Economic Cooperation Framework Agreement that Taiwan plans to sign with its giant neighbor China. As a result, Taiwan's economic research institutes are not optimistic that private consumption will pick up substantively, and forecast that growth will not exceed a moderate 2 percent.

Extra Value Is Key in the Lackluster Low-end Market

The restaurant industry has been hardest hit, as cash-strapped consumers are opting to eat at home.

Eastern Online research found that over the past decade there was a steady increase in the ratio of people who dined out. But last year that trend reversed for the first time, which means that the restaurant business is suffering as consumers tighten their belts. (Table 3)

However, just as demand for restaurant meals is plummeting, more restaurants are opening, intensifying the already harsh competition. Finance Ministry figures show that some 3,200 new restaurants opened in Taiwan last year, bringing the total to almost 100,000 restaurants.

Against this backdrop not only was fast food giant McDonald's forced to cut prices three times in a row and launch a NT$49 breakfast meal, but, as Crystal Lee points out, traditional breakfast shops and streetside stalls "were even worse off, because they had no choice but to cut their prices to an even cheaper NT$30."

Amid such cutthroat competition many restaurants are being crowded out. Crystal Lee observes that as discretionary spending is stagnating, fewer consumers are making impulse purchases, and more are comparing prices. Even the well established restaurant chain Outback Steakhouse is trying to lure diners with a 32-percent discount special for NT$299. The restaurant chain Friday's is also issuing discount vouchers for NT$299.

Dismal Car Market Back to 2007 Levels

Last year the car market served as one of the pillars of domestic consumption, but this year uncertainties are looming large.

Car sales have traditionally accounted for a big chunk of domestic consumption. That was also the case last year when sales were initially dismal but eventually soared to new highs near year-end. Last January the number of newly registered cars stood at a historic low of 18,000 automobiles. But a commodity tax cut of NT$30,000 on purchases of autos with engine sizes of 2000 cc or less subsequently boosted car sales, with Taiwanese automakers ramping up production in the second half of the year. In December more than 40,000 cars were sold.

Tsai of the DGBAS admits that his agency underestimated the car market in its forecasts last year. A total of 72,000 cars were newly registered in the third quarter of last year, a 46-percent year-on-year rise. Car sales last year contributed 0.5 percentage points to Taiwan's overall economic growth. With the tax cut due to expire at year end, domestic sales of new vehicles grew a whopping 162.8 percent year-on-year in December to 44,977 cars. The auto industry is estimated to have contributed 1 percentage point to fourth-quarter economic growth.

But automakers' expectations are much more conservative for this year. Hotai Motor spokesman Steven Yang notes that the car owner ratio is already high in Taiwan. First-time car buyers account for just 20 percent of purchases. Therefore, Yang feels that the extra money arising from stock market investments or salary increases cannot necessarily be counted on to flow into the car market.

If auto distributors turn conservative, hundreds of people, working at domestic automakers and their suppliers, will be affected too. This year automakers are more cautious about refilling their car part inventories, and by the second quarter of this year workers will probably not need to work overtime anymore as production slows down.

The real estate market is also expected to play an important role in propping up domestic consumption this year. It is generally expected that Taiwanese businesses in China will repatriate capital to Taiwan for investment in the housing market. Stanley Su, director of research at Taiwan's largest real estate agency, Sinyi Real Estate, views these newly rich, who have made their fortunes in China, as a welcome new clientele.

"That's a new segment, a market that did not exist before," Su says with confidence. Su does not rule out that the traditional high season for the property market, usually in late March and early April, may move forward this year to the Lunar New Year in mid-February when tens of thousands of Taiwanese businessmen return from China for family reunions.

The annual growth of Taiwan's M1b, a measure of money supply, surged 28.62 percent in November, hitting a 20-year high. Su believes this indicates that capital is flowing back to Taiwan rapidly, providing strong momentum for the real estate market.

But he predicts that despite such ample liquidity the market will not be as volatile as in 2009. As real estate prices are high, the number of potential buyers is limited, Su points out. He expects transactions to focus more and more on property in city centers.

All in all, domestic consumption is expected to be at best lukewarm this year, which should not come as a surprise given that while the wealthy are splashing out on hot luxury goods, those with empty pockets are giving consumption the cold shoulder.

Translated from the Chinese by Susanne Ganz

Keywords:

好友人數