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Top 500 Service Enterprises

Bouncing Back

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Bouncing Back

Source:flickr@Thomas Galvez,CC-BY-2.0

After a dismal performance in 2009, Taiwan's service industry delivered a robust rebound in 2010, with bright performances in shipping, tourism and retail sales. Can it sustain the momentum?

Bouncing Back

By Chao-yen Lu
From CommonWealth Magazine (vol. 471 )

With revenues and profit margins exceeding the levels posted before the financial crisis, the overall performance of the Top 500 service enterprises shows that Taiwan's service sector has stepped out of the shadow of the financial meltdown and has truly started experiencing tangible recovery.

Last year the Top 500 service enterprises posted total revenue of NT$8.39 trillion, scoring a growth rate of 12 percent, the highest growth since the financial crisis, even surpassing the 3.4 percent posted before the crisis hit in 2007.

In 2010 the ratio of companies reporting revenue increases to companies reporting revenue declines stood at 8:2, compared to a ratio of 4:6 in 2009.

Revenues continued to grow and profits also kept climbing up. The average profit margin stood at 4.1 percent, more than the 3.1 percent registered before the onset of the financial crisis in 2007. Total net income increased 57.7 percent over the previous year, reaching the NT$344.7 billion mark.

One of the major changes within the Top Ten was the rise of WPG Holdings. Asia's No. 1 electronics distributor soared to number seven in the rankings, squeezing out telecommunications giant Chunghwa Telecom.

Rising labor costs in China make survival tough for small- and medium-sized IC distributors. On top of that, industry consolidation, such as the buyout of Yosun Group by WPG Holdings last year, has raised competitive hurdles.

"The big are getting bigger and the strong stronger. This trend is becoming more obvious," notes Cliff Yuan, WPG Holdings vice president and spokesman. When WPG founded its holding company in 2005, it had a market share of just 9 percent, but to date it has grabbed more than 20 percent of the market, cementing its position as the leading electronics vendor in Asia.

Shipping Stages Sharp Turnaround

Eight out of the twenty most profitable companies last year in Taiwan's service sector were shipping companies and agents. Bulk shipper China Steel Express, U-Ming Marine Transport and forwarder Hoping Industrial Port Corporation led the pack. China Steel Express stood out with a remarkable profit margin of 82.2 percent.

Shipping and shipping services, the industries that suffered the largest decline in revenue in 2009, staged a sharp turnaround, posting average revenue growth of 30.7 percent and ranking 4th among all service industries.

H.H. Tai, professor at the Department of Shipping and Transportation Management of National Kaohsiung Marine University, attributes this rapid recovery to several factors. When the world economy went downhill in 2009, the big shipping companies cancelled many routes or served them at a lower speed to save costs. At the same time they cancelled or postponed orders for new vessels. When demand began to gradually pick up last year, the shipping companies did not immediately revive their original service routes and sailing schedules, which had a stabilizing effect on market supply and demand as well as shipping capacity.

"The flexible and cautious strategies that the shipping companies took during the recession in 2009 laid the foundation for last year's boom. It's not a short-lived spurt in economic activity, but a true boom," Tai declares with confidence.

Another industry that is going strong is air transportation, with the second highest revenue growth, of 36.5 percent on average. The industry profited from an increasing number of direct flights between China and Taiwan and comparatively reasonable fuel prices in 2010. Taiwan's two largest airlines China Airlines and Eva Air both posted historic high revenues and growth rates of around 40 percent last year. Eva Air's revenue topped NT$100 billion for the first time.

Tourism and Hospitality Double Profits

The tourism and hospitality industries registered stable growth last year with the average profit margin doubling from 3.8 percent in 2009 to 7.8 percent last year. Taiwan's Tourism Bureau estimates that travelers made 120 million person trips in Taiwan in 2010, exceeding the 110 million person trips in 2007 prior to the global financial crisis.

Last year the number of foreign visitors reached a historic high of 5 million. The number of visitors from China, the largest source of foreign tourists in Taiwan, even increased 75 percent over 2009.

As a result hotels did good business. In Taipei City's tourist hotels, the average occupancy rate rose from 70.9 percent in 2009 to 75.3 percent last year, according to Tourism Bureau statistics.

Formosa International Hotels chairman Steven Pan recalls how Taiwan saw its first tourism boom about 20 years ago when the Japanese started to travel abroad en masse. Today, with rising numbers of Chinese package tourists and the government planning to allow individual travelers from China to visit Taiwan, the island is set for a second tourism boom, Pan predicts.

Wang Steak Group and hamburger chain MOS Burger began to trade as emerging stocks this year, boosting market sentiment for the hospitality industry. Thanks to an expanding number of outlets in the Chinese market, the Wang Steak Group and MOS Burger last year posted revenue growth of 35.8 percent and 16.2 percent, respectively.

The department store, wholesale and retail sales industry, usually seen as driven by domestic consumption, also had some reason to celebrate.

President Chain Store, which runs 7-Eleven convenience stores on Taiwan, last year raked in record revenue of NT$169.9 billion, up 14.6 percent from the previous year. Company president Hsu Chung-jen believes that one of the main growth drivers was the 7net online shopping website, which successfully attracted customers who previously shopped at only large-scale brick-and-mortar retail outlets.

Hot Sales at Online Retailing Platforms

Online shopping platforms registered the highest revenue increases within the department store, wholesale and retail sales industry. Taiwan's oldest online shopping website, PChome Online, boosted revenue by 27.6 percent last year. When its spin-off Pchomestore listed on the over-the-counter market on April 6, the company's shares became the top-selling stock on that trading day, changing investors' rather hesitant attitude toward online companies overnight.

Online book vendor books.com.tw, which registered 32.6 percent revenue growth in 2010, deleted the word "bookstore" from its Chinese name at the beginning of this year, underscoring its expansion into non-bookstore segments. The website currently sells a wide selection of goods including cosmetics, toys, electronics and clothing.

But even if the economy is on the road to recovery, the possibility of another financial crisis cannot be completely ruled out. Companies don't dare to let down their guard yet.

Yang Ming Marine Transport chairman Lu Fenghai points out that unemployment is still high in Europe and North America. At the same time, the United States has not solved its debt problem, and supply and demand remain out of sync in most industries. For example, an oversupply of bulk shipping already exists, so the future development of that market is fraught with uncertainties, Lu warns.

Pan expects double-digit growth for the tourism sector this year, but also warns that while the pie gets bigger, competition for a piece of it will grow fiercer. "Supply will also grow at double-digit rates, meaning that we will still have an oversupply of hotel rooms," he predicts.

Another important indicator to watch this year is the price of oil, because it will be decisive for the profitability of land, sea and air transportation. For industries that are driven by domestic consumption such as tourism, hospitality, department stores, and wholesale and retail sales, rising inflation could squeeze profit margins.

The growth of Taiwan's service industry last year shows that the market has returned to normal. But enterprises must not let up on corporate vigilance and risk control if they want to create another boom.

Translated from the Chinese by Susanne Ganz

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