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Taiwan's dynamic tea industry.

The decade of the 80's has seen quite dramatic changes take place in the Taiwanese tea industry. These changes have involved export substitution, with the emergence of a strong domestic market; a reversion of production back to the industry's origins - Wulong tea; and a relocation of the prime areas of production. Such changes are most easily grasped in a series of time-lapse graphical "snap shots".

For most of the post-war period, Taiwan exported between 80 and 90% of its tea production. In 1980, the figure was still only just short of 75%. The inverse of this has been the growth of the domestic market as production was diverted and a new phenomena manifested itself; declared imports. Figure 2 shows exports declining while production is relatively constant and imports, at very low levels, have begun.

Figure 3 shows, for the same period, the growth of the population, apparent consumption and per capita consumption. The reason for emphasizing the declared nature of imports is that, during our fieldwork on the island in April/May 1990, we were told that considerable quantities of mainland tea are now being smuggled into the country.

If this is the case, then tea consumption is expanding even faster than these figures indicate. Tea, like other agricultural products, is a prohibited import from the mainland. Indeed, this is the main form of protection given to the industry. But such protection is not entirely welcome.

During the 80's per capita consumption increased at over 10% per year - faster than the growth of GNP at 7.6% - implying that, currently, there is an income elasticity of demand well in excess of unity, indicating that tea is a superior good in Taiwan at the present time.

High income elasticities of demand for tea have been estimated for India by the World Bank for the period 1970-84. However, it is surprising that there should be similar high elasticities in the much higher income situation of Taiwan. On the assumption that there has not been a radical decline in the relative price of tea, the results suggest to us that there is a fundamental "change of taste" taking place in favor of tea rather than simply an income effect.

This conclusion comes from the fact that not only has there been an increase in the domestic market, but there appears also to have been a shift in the type of tea being produced and consumed. Unfortunately, there are no statistics for total production of tea by type. While exports accounted for 80 to 90% of production, this was not a problem but, with less than 30% now being exported, the situation is very different.

Our informants in the industry told us that the current breakdown of exports by type is a fair reflection of production varieties. If this is the case, then one of the major impacts of ths shift to the domestic market has been the switch to Wulong tea, the traditional and favored drink of the Taiwanese. This is to be seen in Figure 4.

The move into the domestic market was not simply a result of the increasing incomes and changing tastes in the country. The continuing appreciation of the New Taiwan dollar (NT$) against the US$ and the currencies of most tea exporters made the local market increasingly attractive to producers. Thus, in 1989, there were only NT$ 26.41 to the US$ compared to 36.01 : 1 in 1980. The December 1989 depreciation of the PRC renminbi by 21.2% resulted in further complaints and breast-beating by the Tea Manufacturers' Association in its monthly Tea Bulletin.

In addition to these adverse exchange rate moves, it would appear that Taiwan tea has been sold at a consistently higher price than its competitors. The relative premium for Taiwan tea is so large that it would not seem possible to explain it simply on quality grounds; it is likely that it also includes more final packaging into a higher value-added product than is the case for such competition as tea shipped from Shanghai.

An illustration of the effect of this differential is to be found in some recent import statistics. In 1989, the average unit value of fermented and semi-fermented tea imported into Taiwan in packs of less than 3 kilograms was US$ 7.70 while the same tea in packs exceeding 3 kg had a unit value of USS$1.72/kg.

Such higher value added content may help explain how it has been possible for the quantity of exports to decline over the last decade while the value of exports has increased substantially in real terms. This might also be explained by the fact that high valued Wulong tea forms an increasing proportion of tea exports.

Having noted the major shift out of exports into the domestic market, with little decline in output, it should not be thought that this has been without considerable disruption to the industry. Social disruption has occurred with the demise of some of the traditional tea villages as the industry has relocated. Many old tea shops, wholesalers and large scale manufacturers have had to close.

It appears that smuggling tea in from the mainland is causing major difficulties for established processors. Those who respect the law and don't deal in mainland tea are at a major disadvantage. Processors and retailers have been urging the government to reconsider the current ban and legalize mainland imports. It is significant that, of the legal imports of 565 tons in 1985, 95% was fermented and semi-fermented tea and only 5% green tea. By 1989, of the total 1,333 tons imported, 29 % was green tea. It is highly likely that this tea originated from the mainland.

However, all is not gloom. The growth of the domestic market has involved some vigorous and innovative marketing. The Ten Ren Tea Company, the largest in Taiwan, has been in the forefront of processing and selling onto the domestic market. Starting as peddlers (literally - with one bicycle), the two founding brothers opened the first of a chain of tea shops in 1961. In 1971 they had five shops and opened their first modern tea factory.

By 1975, the company had 10 shops and began to expand rapidly, so that, by 1987, it operated a chain of 42 directly managed stores. Further processing and packaging plants were commissioned in 1978, 1981 (two) and 1983. In 1979, the company opened its first overseas branch - in Los Angeles. Since then it has established a dozen more branches in San Francisco, New York, Chicago, Monterey, Toronto, Vancouver, Kobe, Tokyo and Penang. The focus of overseas marketing is among ethnic Chinese populations, but the company has plans for major expansion in Japan and the establishment of franchise stores in the U.S.

In 1980, the company bought a ginseng farm in Wisconsin and has continued to develop herbal teas. Its stores in Taibei, while very western in advertising, color and panache, also cater to and encourage modern variations of traditional tea and ceremonies. The company is active in market research, the development of new blends, and has moved into the fast food business. Overseas operations and non-tea shop activities contribute about two thirds of total sales revenue, now exceeding US$ 350 million.

The Ten Ren Tea Co. is an exception in having a vertically integrated operation: it is reported that, in 1987, there were 5,278 tea "factories" in Taiwan. Of these, 4,414 were operated by farmers, 134 were factories only using purchased leaf, while 730 mixed purchased leaf with that produced by the factory owner.

The actual size distribution and throughput of the plants is likely to be highly skewed with the 150 factories registered by the Tea Manufacturers Association dominating the industry. However, home-based cottage industry processing with its reliance on family labor may well survive for many more years.

Trends and Prospects

Domestic tea consumption on Taiwan is fast approaching that of Japan: 0.89 kg per head as against 0.94 kg. Thus, it is possible that the local boom may be climaxing, although the per capita consumption of tea is Hong Kong (1.69 kg) is very encouraging. Certainly the Tea Research Station and the Agricultural Council (= Ministry) see the need for an industry wide development plan.

A major element of such a plan would be publicity directed towards primary and secondary schools, aiming to inform the younger generation of the health benefits of tea and promoting vacation excursions to tea growing areas. Government offices are also seen as a key target area for informative advertising.

On the product side, it is said that there is a great need for standardization and quality control (which may reflect a disguised form of trade protection for the industry) with less emphasis on high-priced "vintage" teas and more on standard grades for the average drinker.

The second major thrust of the proposed tea industry development plan is to reduce the costs of tea production at the farm and factory. Big changes have already occurred in the operations and location of the tea gardens of Taiwan. Tea growing in Taiwan was traditionally concentrated in the northwest counties of the island (Taibei, Taoyuan, Jilong, Xinzhu and Miaolo) - in and around Taibei city (see Map and Figure 5). These have been the areas of most rapid urbanization so that it is not surprising that tea has had to make way for factories, homes and highways.

Until the beginning of the 80's, the downward trend in the area in all these counties was the most notable feature. Since 1980 there has been a dramatic expansion in the tea area in the central highlands around the town of Nantou and the eastern counties of Yilan, Taidong, and Hualian. Together, these new areas have now overtaken the traditional producers.

It is surprising to find pioneering farming operations in a remote area at a time when the economic transformation of Taiwan has reached a stage when there is a steady decline in the absolute numbers of people engaged in farming. These farmers are specializing in a perennial crop that takes some years to mature and is a very long term investment.

Why are they doing this? Is it that they are just swapping the humidity and polluted atmosphere of the lowlands for a beautiful mountain climate? A 1986 farm survey in the mountainous tea district of Nantou in central Taiwan provides a simple answer: tea is a highly profitable crop. To understand this, it is important to recognize that, while a knowledge of average annual output and prices serves certain purposes, tea production in Taiwan is seasonal both in terms of output and the prices received. This is shown in Table 3, which also gives the contrast in prices between machine harvested and hand plucked tea. Table 3 gives prices for all teas, not just Wulong. Table 4 gives Department of Agriculture and Fisheries (DAF) survey results for two years, with values converted to US$, using a constant exchange rate of NT$ 36:1. The profit levels recorded by the survey are extraordinary by any horticultural standard. However, the DAF survey yields are substantially higher than the average yields for Nantou District given in Table 5.

Table : Table 3 Seasonal Production and Prices (1989) of Tea in Taiwan
 National Hill Green leaf prices
Season Harvest Period Crop Crop Hand Machine
 Plucked Harvested
 (%) (%) NT$/kg NT$/kg
Spring Mar to early May 29.5 30 100 13
Summer Late May - Aug 28.1 17 8
Autumn Late Aug - Oct 23.7 55 21 11
Winter Late Oct - Nov 18.7 15 170 21
Total or weighted average 100 100 71 13

Sources: Chiu, 1988 Table 5, p. 127; Field notes; Tea Bulletin 1990, p.99.

 1986 1989
Item per hectare Hand Machine Hand Machine
 Plucked Harvested Plucked Harvested
Yields (kg made tea) 1,566 2,300 995 1,580
 US$ US$ US$ US$
Cost of production 15,124 7,543 11,111 8,058
Gross returns 26,340 16,823 22,944 12,526
Net returns 11,216 9,280 11,833 4,468
Implied price/kg of leaf 3.74 1.63 5.12 1.76

The average prices of US$3.74 and 1.63 in 1986, US$5.12 and 1.76 per kg of green leaf in 1989 are high but well within the range of possibilities: the farmers we visited were receiving the equivalent US$4.67 per kg of green leaf at the beginning of May 1990. A factory owner tells us he would pay double this price for leaf produced in winter and in the earliest spring flush.

Our conclusion is that prime explanation for the relative profitability of specialist tea farmers relates to the extraordinary high prices that the farmers receive for their leaf. By way of comparison, small-holder farmers in Kenya in 1985/86 received an average of US$0.27 per kg of green leaf and about $2.00 per kg of made tea on the London auctions.

While the types of tea produced are different (Wulong versus black tea), the comparison is useful because Kenyan smallholder teas are among the best sold on the London market. This contrast and the export price comparisons above indicate the serious implications for Taiwanese tea farmers from opening up the domestic market to international competition.

The aggregate effect of the overall decline in the total area, the rapid decline in traditional counties, and the expansion into new areas have not led to a decline in output because there has been a fairly consistent trend toward the improved yields illustrated in Figure 6.

It is noticeable, however, that yields (which are based on the harvested area rather than the total area) have flucutated around the 1,000 kg/ha level over the last decade. This is hardly surprising given the 2-3 year lag between planting and the commencement of yields, and also the 6-10 year lag before the achievement of fully mature yields.

These average yield levels are good by Chinese mainland standards: Taiwan's gross yields exceed those of all the major tea producing provinces. However, making the grand assumption that the statistics are equally reliable, the rates of increase in yields on the mainland are very much greater than in Taiwan (because of the lower initial base), so there is some catching up taking place.

Average yields levels in China and Taiwan are very low by international standards and compared to what is achieved on experimental stations, State farms and on better farms. We have seen fields in Taiwan yielding four times the national average. Likewise, the DAF survey (Table 4) shows very respectable yields in the new mountain areas. In other words, there is still enormous scope for improvement in average tea yields in Taiwan.

Table 5 gives the county level yields for 1976 and 1989. In general, yields in the older, declining areas have increased while those in the new areas have not shown any improvement. In addition to the reasons suggested above, it is likely that, where there has been any choice in the old areas, lower yeilding fields have been removed before higher yielding ones, thus raising average yields.

The implication is that there are likely to be substantial yield increases over the next few years - especially as much of the new planting is of clonal cuttings of varieties released by the Taiwan Tea Research Experiment Station since 1981. By 1986, only about 1,000 hectares had been planted to the new varieties and the most rapid expansion of new plantings has occurred since then (see Figure 5).

The shift in location is not simply into more remote areas but away from the undulating hills of the northwest into the central and eastern mountains. Production is, in other words, moving from lowlands to highlands - from sea level to altitudes of up to 2,000 meters. This has implications for both the quantity and quality of production. In general, the highlands are somewhat lower yielding, but produce excellent teas. The mountainous areas are also faced with high transport costs.

The tea industry of Taiwan presents a case of an export industry which has experienced phases of rapid growth, relative stability and dramatic decline. The recent downturn in exports has seen a rapid switch to the domestic market. Thus, while the area under tea has declined by about one third from its peak level, output has been maintained, and the domestic market has been increasing at about 10% per annum - exceeding the rate of growth in incomes.

The current high income elasticity of demand for tea estimated for this high income country suggest a fundamental change in tastes has been taking place. Thus, the explanation for the decline in exports is not simply a change in comparative advantage.

Taiwan is the second major tea exporter to make this transition - Japan (with 6 times the population and nearly 5 times the tea output) was the first, ceasing serious exports in 1960. India may well be the third such exporter. As with so many other indicators of growth in Taiwan, the significance of this transformation lies in the rapidity of the change: domestic consumption has moved from low levels to be now similar to that of Japan.

Taiwan provides an opportunity to look down a "time telescope" towards mainland China. There is the possibility that Taiwan's experience is a precursor of what could happen to the enormous tea industry on the mainland. If incomes there continue to rise, the current very low levels of tea consumption could increase significantly.

Even if output continues its rapid expansion and China does re-establish itself as the larges tea producer in the world, there is a strong likelihood that domestic consumption increases will force the government to reassess its export policy and allow more tea to remain on the domestic market. In doing so, it will follow Taiwan and India.

For Taiwanese tea producers, the most worrying aspect of the industry must be the extraordinary prices that farmers obtain for their tea. To date, farmers have been protected from competition from the mainland by the ban on trade in agricultural commodites. With moves towards the "normalization" of political relations, the easing of restrictions in agricultural trade must be considered. This may result in the import and repacking of mainland tea, as the Japanese did before them. The Taiwanese have already established tea factories in neighboring mainland provinces. However, Taiwan will probably continue to emulate Japan and ensure that this culturally significant industry is never fully transformed into a pure importer. Rather, local production will retain an important share of the domestic market - especially for the best of the Wulong teas - for, like Japan, Taiwan can now afford this modest luxury.

PHOTO : Map 1 Tea Distribution in Taiwan


PHOTO : Figure 3 Note that per capita consumption is in 10 gram units. POPULATION & TEA CONSUMPTION



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Title Annotation:part 2
Author:Etherington, Dan M.; Forster, Keith
Publication:Tea & Coffee Trade Journal
Date:Feb 1, 1991
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