MIRDC's Message: Taiwan Hand Tool Manufacturers Must Work Together in Facing Market Challenges

For several reasons Taiwanese manufacturers of hand tools face increasing global competition. Among them are the mounting debt crisis in Europe, a slowdown in global economic growth, and the upcoming FTA (free trade agreement) between EU and South Korea. In addressing this situation, MIRDC (Metal Industries Research & Development Centre), a leading R&D body on the island, held a forum on October 21 at Taiwan's hand tool manufacturing base in Taichung City to shed light on future challenges awaiting local manufacturers.

The forum was organized by the Department of Industrial Technology (DoIT, part of the Ministry of Economic Affairs) and in association with MIRDC and the Taiwan Hand Tool Manufacturers' Association (THTMA). In attendance were both business owners and corporate managers. And in the initial session MIRDC's industrial analyst Arthur Hsu spoke on how the industry can sustain its development during a period of growing global challenges.

In his address Hsu said that the industry has an integrated supply chain in which hundreds of small and medium-sized companies are engaged in production, surface and heat treatment, and packaging and distribution. And the majority of them are located in Taiwan's central region across Taichung and Changhua. Hsu also said that this well-developed manufacturing network allows insiders to maintain better production flexibility and efficiency, which has been demonstrated both by its large-sized brands known worldwide and by the industry's distinct profile.

Another reason the industry has been able to sustain its competitiveness over recent decades has been the stable supply of high-quality raw materials from local suppliers. As an example, Hsu said that Taiwanese manufacturers have access to high-quality steel alloys and plastic pellets from such locally based, leading global suppliers as China Steel Corp., Formosa Plastic Corp., and Chi Mei Enterprise Co., Ltd. Along with the hand tool manufacturers' accumulated know-how about manufacturing and global quality standards, access to these materials has distinguished the industry from emerging rivals.

An export-driven industry, in 2010 it produced NT$58.296 billion worth of various hand tools, 92.56% of them for exports. Hsu said considering that the industry's growth is dependent on what happens in the market in Europe and the U.S., which together consume over 60% of Taiwan-made hand tools every year, its manufacturers must devise original strategies to achieve sustainable growth.

Depending on China
While market demand has slowed significantly in developed countries, both the success of the Chinese market and the implementation of the cross-strait ECFA (Economic Cooperation Framework Agreement) in early 2011 have provided the industry with a good opportunity for continued future growth.

Hsu said that the steady increase in imports in recent years is a reflection of the fast-growing market demand in China. He also said that in 2010 Taiwan imported NT$12.805 billion of hand tools, which represents a 2006-2010 compound annual growth rate of 10.55%, with Taiwan, Germany, and Japan as the three biggest sources. Large-sized global brands are also optimistic about the market's growth potential, especially considering that China has become the world's largest car manufacturer. Hsu said “Stanley Work and Snap-On, for example, predicted in 2009 that China would soon rank along with the U.S., Japan, Europe, and India as among the world's top five markets of auto repair tools.”

Taiwanese manufacturers have been enjoying a growing business opportunity in China. And the best proof of this is THTMA's statistic compilation that shows the industry's exports to China increased by 51% from NT$4.599 billion in 2009 to over NT$6.97 billion in 2010. This momentum has continued in 2011, as evidenced by the fact that the industry's export revenue in the first five months of this year already totaled NT$3.928 billion, a 53% increase over the NT$2.565 billion recorded during the same period last year.

ECFA is also doing its part to promote growth in the industry. It has been contributing to the growth of export revenue of the five hand tool categories which are included in China's tariff cuts, specifically wrenches, hammers, screwdrivers, pliers, and other drilling, tapping, and threading tools. And according to THTMA's statistics, this contribution amounted to US$12.988 million in the first half of 2011, a 41% increase from the US$9.188 million a year earlier. Hsu said considering that these five tool categories commanded a 20.42% share of the industry's overall exports to China in 2010, the preferential economic treatment will help Taiwanese manufacturers not only save an estimated NT$72 million on tariffs in the bilateral trade for the whole year, but will also make the products more price competitive in the country.

Continuous Improvements and Steady Benefits
Hsu said that despite increases in market share, partly due to ECFA and partly due to shared language and culture, Taiwanese manufacturers must continue to improve their production, R&D, and marketing capabilities if they hope to achieve consistent growth. And the main reason for this necessity is an increase in local competition.

According to MIRDC's survey findings, the huge growth potential of China's hand tool industry is evident in the fact that the country exported NT$111.001 billion worth of hand tools in 2010, almost as much as its record high of NT$110.041 billion in 2008. These results represent a compound annual growth rate of 7.16% from 2006 through 2010.

“Taiwanese manufacturers must work closer together on joint production and move quickly toward ODM (original design manufacturing) so that they can compete more effectively with local rivals in China,” Hsu said. Hsu also said that manufacturers should learn from the eco-friendly, carbon-reduction trend by making themselves carbon footprint verified or ISO-14067 certificated. And this requires more dedicated efforts to develop talents, upgrade technologies, automate production, and optimize processes that will increase the industry's capabilities.

Although some insiders believe that China is an ideal marketplace for the industry to develop its OBM (original brand manufacturing) business, Hsu said that most Taiwanese manufacturers are less likely to market their own-brand products independently. He said that instead “it is more reasonable and effective for them to take advantage of local existing distribution channels owned by other Taiwanese enterprises, like the box-type wholesaler RT-Mart, and first build brand recognition with local consumers.” According to Hsu, branding in the smaller segments, such as hair styling and care tools, is also a possibility for Taiwanese manufacturers.

Hsu said in exploring the Chinese market the industry will benefit by developing sound, distinct manufacturer brand images instead of making consumer brands, since Taiwanese manufacturers have been known worldwide for their commitment to quality and production efficiency and flexibility. Hsu also said that Taiwanese manufacturers should serve as production arms for European and American brands in carving out profits in the market.

Although the global market has favored Chinese rivals in the underselling of DIY-caliber tools, ECFA has been effective in opening the Chinese market, which will make future growth possible for Taiwanese manufacturers as long as they continue to expand their cooperation with each other on joint development of the market. Hsu said that manufacturers must become more competitive to boost global profiles.

Korea-EU FTA will have a minimum impact
Although the FTA between South Korea and EU has worried insiders who focus on European markets, Hsu said that the agreement is expected to have a minimum impact on Taiwan's hand tool industry in the next few years.

Compared to Taiwan's hand tool industry that is export-driven, the industry in South Korea has become increasingly focused on its domestic market in recent years. According to MIRDC's report, the industry's imports increased to about NT$6.791 billion in 2010, at a compound annual growth rate of 8.34% from 2006 through 2010, while export revenue sagged to only NT$3.518 billion, a 5.03% drop during the same period.

According to Hsu, EU tariffs on 37 types of Korean hand tools, including varieties of hammers, screwdrivers, home improvement tools, clamps, tool sets, saw blades, and scissors have been cut to zero since the FTA went into effect in early 2011. But in the short-term the tariff cuts won't favor Korean competitors, largely due to the fact that Taiwan-made hand tools command a ten times larger share of the EU market than the same Korean products. In citing MIRDC's survey findings, Hsu said that in 2010 Taiwan exported US$550 million worth of hand tools to the EU market, while South Korea exported around US$40-50 million.

Hsu said that the main reason for Taiwan's advantage over Korea in the EU bloc is pricing. Korean-made hand tools are produced at high costs and therefore are less competitive than competing Taiwanese models. “The huge gap between the two exporters in market share will be almost impossible to narrow in the near future,” he said. “Most of Taiwan's hand tools will continue to outsell those of Korea despite the FTA, and this does not include wrenches, pliers, and other high-end tools of steel that command dominating shares in the market.”

However, the long-term effects of the agreement can be viewed as a latent threat to Taiwan's hand tool industry, especially considering that European nations have been cutting spending. Hsu said that the industry must urge the government to begin talks with EU over WTO NAMA (Non-Agricultural Market Access) negotiations as soon as possible. He said that this strategy of seeking priority tariff cuts on hot-selling tools should consolidate the industry's top market position.

“We can't ignore Korea's influence on the worldwide automotive market, which will continue to grow in the EU bloc due to the FTA and might undermine Taiwan's future exports of auto repair tools,” Hsu said. “So in its efforts to upmarket, the industry should continue developing synergies and honing its R&D capabilities.”

Other Market Trends
Hsu also said there are several growing market trends in the world that in the short term will affect the development of Taiwan's hand tool industry.

The diversity of distribution channels of hand tools in the U.S. has increased in recent years, since local consumers can now buy hand tools not only in traditional hardware retail store chains such as Home Depot, Lowe's, and ACE, but also in wholesale and department stores like Wal-Mart and Sears. Hsu said this means that Taiwanese manufacturers will have more opportunities of accessing the market. But, he said, it also means that manufacturers will likely face fierce underselling competition from emerging rivals.

Hsu said another noteworthy fact has been the joining of global large-sized hardware distributors in worldwide competition. He also said that Australia-based Bunning Warehouse, the largest hardware distributor of hand tools and building materials in the southern hemisphere, has increased the promotion of its own brand by marketing cheaper products. According to Hsu, this will make room for other products on its display shelves and limit the effectiveness of related suppliers.

Bright Prospects for 2011
Despite the slowdown in global economic growth, Hsu said that the industry is still likely to keep growing in 2011. He said an important factor in this optimism is that United Nations, the International Momentary Fund, and the World Bank have forecast a 3.1%, 4.4%, and 3.3% growth rate, respectively, for the global GDP in 2011. According to Hsu, the industry's production value will grow 3.1% and reach a record high of NT$60 billion in 2011.

Production Value of Taiwan's Hand Tool Industry By Category Value Unit: NT$1 million
Year	2006	2007	2008	2009	2010
Garden Tools	3598	3468	3309	2074	3443
Saws	931	875	905	665	816
Pliers	2519	2507	2591	2084	2643
Wrenches	11477	12582	12756	9338	11997
Other Drilling, Tapping and Treading Tools	30379	33074	32990	24568	31492
Hand Tool Sets	3048	3581	3340	2648	3572
Total	51952	56087	55890	42277	53963

Source: MIRDC

China and Taiwan's Export Value of Hand Tools by Quarter Value Unit: US$1 million
Quarter	2009		2010				2011
	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
China	794.77	770.5	767.69	979.68	1061.63	1020.84	941.08	1772.84
Growth Rate	19.90%	-3.10%	-0.36%	27.61%	8.36%	-3.84%	-7.82%	88.38%
Taiwan	330.48	347.96	393.51	462.05	498.60	434.75	459.65	515.17
Growth Rate	11.40%	5.30%	13.09%	17.42%	7.91%	-12.81%	5.72%	12.07%

Source: MIRDC

Export Value of Taiwan's Hand Tools (on China's Tariff Cuts Starting in 2011) Value Unit: NT$1 million
Category	2006	2007	2008	2009	2010
Pliers, Tweezers and Similar Tools	146	199	189	135	202
Wrenches and Adjustable Wrenches	37	89	42	56	71
Hammers	43	55	41	24	33
Screwdrivers	110	125	169	135	184
Other Drilling, Threading, and Tapping Tools	98	83	100	86	209
Total	435	551	542	435	699
Contribution Rate of Taiwan's Overall Exports to China	16.18%	16.94%	17.95%	16.83%	20.42%
Contribution Rate of China's Overall Imports	5.00%	5.06%	4.52%	4.52%	5.00%
Taiwan's Total Exports to China (value)	2687	3254	3021	2584	3422
China's Total Import Value	8698	10898	11990	9627	13971

Source: MIRDC