II. Literature Review
2.2. Asia Pacific Operational Center…
As many studies and statistic indicators show that the Asia-Pacific region will become the new center of gravity for global economic activities. Lots of enterprises hope to increase their investment in the region in order to play a role in the rapidly-growing Eastern Asian market. Chaug-Ing Hsu et al state that Taiwan government works hard for being Asia-Pacific regional operation center, thereby offering the firms to have advantages of transmission and more value-added services in the supply chain.16
Hence Taiwan government puts more and more emphasis on the development of the high-tech industry to keep the advantageous status in the market. Besides, the government encourages developing innovation technique and inspires private and foreign investments.
Many studies have shown that high tech products delivery by airlines is more efficient than by maritime and therefore the importance of air cargo. Some studies have discussed that the importance of the air cargo was resulted from an increasing competitive regional and global market (Chaug-Ing Hsu, 2005).
On the other hand, global market is essential for the high-tech industry to do the economies of scale. The need of economies scale is due to enormous investment done in product research, product development and product production by high tech industry. Thus, it is important to provide logistics services for high-tech firms so as to immediately, safely and conveniently deliver their goods to worldwide consumers. The prosperous high-tech industry development in Taiwan has induced the change of the industry structure along the west corridor of Taiwan.
Additionally, the Civil Aeronautics Administration of Ministry of Transportation and Communications is also helping to promote the Project for Developing Taiwan as an Asia-Pacific Regional Operations Center and Global Logistics Center. They have selected 450, 200 m² of land in the Specific District Plan for Taoyuan Cargo Park and Passenger Transit Park to promote the construction and development of an aviation city for Taoyuan International Airport.
Taiwan government is looking for private participation in their project. The plan of the government will be invest to build the basic public facilities, and encourage private organizations to invest operation warehouse and value-added logistics facilities, etc. The idea
16 Chaug-Ing Hsu et al, High Tech Firm’s Perception and Demand for Air Cargo Logistics Services, vol. 6, pp 2868-288, 2005.
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is develop a place where goods, business, personnel, capital and information can be accessed quickly and conveniently, in order to attract international and local enterprises to regard Taiwan as the base of the international market.17
2.2.1. Free Zone Trade
The Free Zone Trade are special zones that are “inside national territory but outside customs” that try to offer a good environment for transnational business operations by lowering barriers to the flow of goods, commerce and people. The Free Zone Trade tries to meet all the business needs for supply-chain management thereby strengthens users’
competitive advantage. In the table 11. Why choose Taiwan Free Zone, there is a comparison between the benefit that Mainland China free zone trade and Taiwan free zone trade can offer to enterprise and firm.
Table 11. Why choose Taiwan Free Zone
Source: Based on “Free Trade Zone Planning and the Research on Practices of the Relevant Countries”, Council for Economic Planning and Development.
17 http://www.taoyuan-airport.com/english/Publish.jsp?cnid=856
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Even though, Taiwan Trade Free Zone offers good benefit for investor as can appreciated in table 11. Why choose Taiwan Free Zone. Based on statistic of Mainland China government 83% of all the foreign investment firm are from Taiwan. In Table 12. Taiwan investment in Mainland China by Area (1991-2011) and Table 14. Taiwan investment in Mainland China by Industries (1991-2011) showed Taiwan investment in Mainland China by area and industries.
Table 12. Taiwan investment in Mainland China by Area (1991-2011) By Area Case Amount foreign direct investment since 2006. In the area of Kiangsu, it is possible to find the following Economic and Technological Development Zones such as Changzhou National Hi-Tech District, Kunshan Economic and Technological Development Zone, Nanjing Baixia Hi-Tech Industrial Zone, Nanjing Economic and Technological Development Zone, Nanjing New &
High-Tech Industry Development Zone, Nantong Economic & Technological Development Area, Lianyungang Economic & Technological Development Zone, Suzhou Industrial Park, Suzhou Hi-Tech Industrial Development Zone, Wuxi New District, Yixing Economic Development Zone, Zhangjiagang Free Trade Zone and Zhangjiagang Bonded Logistics Park and among others.
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Based on the statistic of the Civil Aeronautical Administration, approximately 40% of Taiwan investment firm are from electronic and computer related industries.
Table 13. Taiwan investment in Mainland China by Industries (1991-2011)
By Industries Case Amount Percentage
of Amount Electronic Parts and Components Manufacturing 2,640 22,363.12 20.17 Computers, Electronic and Optical Products
Manufacturing 2,737 15,631.20 14.1
Electrical Equipment Manufacturing 3,048 8,861.60 7.99
Fabricated Metal Products Manufacturing 2,586 5,647.16 5.09
Plastic Products Manufacturing 2,347 4,951.76 4.47
Chemical Material Manufacturing 812 4,404.55 3.97
Machinery and Equipment Manufacturing 1,986 4,606.69 4.16
Non-metallic Mineral Products Manufacturing 1,578 4,578.02 4.13
Wholesale and Retail Trade 2,436 5,599.97 5.05
Basic Metal Manufacturing 654 2,769.93 2.5
Food Manufacturing 2,333 2,680.94 2.42
Textiles Mills 1,108 2,141.31 1.93
Others 15,244 26,624.87 24.02
Total 39,509 110,861.10 100
Source: Civil Aeronautical Administration (1991-2011)
2.2.2. Taiwan Science Park
Taiwan Science Park is an industrial park established by the government. Inspired by Silicon Valley in the United States, where is a clustering of many technology industries; home to many of the world's largest technology corporations. There are three core parks: Hsinchu Science Park, Central Taiwan Science Park and Southern Taiwan Science Park, each having its own satellite industrial clusters.18 Hsinchu Science Park (HSP) is one of the world's most significant areas for semiconductor manufacturing. More than 400 high-tech companies mainly involved in the semiconductor, computer, telecommunication, and optoelectronics industries. Beside Hsinchu Science Park, Taiwan has the Southern Taiwan Science Park (STSP) that aim to cluster and establishing an optoelectronics technology hub in southern Taiwan.
18 http://www.taiwan.gov.tw/ct.asp?xItem=27510&ctNode=1906&mp=1001
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A third Science Park was developed among Taiwan’s regions. This industrial park was created to maintain the balance between Hsinchu Science Park, and Southern Taiwan Science Park. Then, Central Taiwan Science Park (CTSP) was established in 2003 and centered on the development of optoelectronics, ICs, precision machinery and biotechnology. Since then, the CTSP has captured latecomer advantages, including adopting the most up-to-date technologies and new management models, posting better performances than its predecessors in revenue growth, development and operating efficiency.
Figure 15. Taiwan Science Park Revenue
Source: National Science Council (2008)
As shown in figure 15, National Science Council reveals that Hsinchu Science Park is the Science Park that gained more revenue. According to 2008 statistics, Hsinchu Science Park gained US$31.98 bn, Southern Taiwan Science Park gained US$17.37bn and Central Taiwan Science Park gained US$9.08bn. In addition, according to National Science Council data, industries inside those Science Park that gained more revenue are Integrated Circuits, Optoelectronics, Computers and Peripherals, Precision machinery and among others.
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Hsinchu Science Park is one the Science Park that has the largest employment rate until the opener of Central Taiwan Science Park. As shown at figure 16. Taiwan Hsinchu, South and Central Science Park employment, before 2004, the Science Park that has the largest employment rate was Hsinchu Science Park, followed by South Taiwan Science Park.
However, with the opening of Central Taiwan Science Park, Hsinchu Science Park became the second largest Science Park with the highest employment rate.
Figure 16. Taiwan Hsinchu, South and Central Science Park employment
Source: Taiwan Science Park (1986-2011)
0 50000 100000 150000 200000 250000 300000 350000
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Hsinchu South Central
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2.3. Regulatory Policy and Carrier Operations
Airlines industries had been control by a lot of regulation policies. Some regulation tries to protect national industries from threat and competition but sometime entry restriction is due to political conflict. Some regulation governing airlines are fares, market entry and exit, capacity, service quality, among others. This means that carriers’ behavior is significantly influenced by Civil Aeronautical regulatory policies (Steven Morrison et al). Regulation limited the flexibility of fares, and entry into market.
One reason to accelerate the deregulation is the development of hub and spoke route network, which feed traveler and cargo user by spoke routes into a major airport called HUB from which they can take connecting flight to their destinations.19 The criterion for adopting a hub and spoke route structure is based on the profit maximization behavior. The cost saving of this kind of network structure is result when economies of aircraft size are greater than the cost of rerouting traffic.
Even before deregulation, airlines employed some type of hub and spoke network. But although deregulation did not lead to the development of such operations and was not even necessary for their continued growth, deregulation can accelerated their use. In short, by eliminating entry restriction, deregulation gave carriers increased freedom and flexibility to restructure their network into effectives hub and spoke system. In the competitive environment encouraged by deregulation, the development of a hub and spoke route system has become an essential marketing tool.
Dennis Carlton et al state that passengers prefer single carrier services over having to change airlines in their midjourney. Because most city pair market are not large enough to support frequent direct service, carriers have developed hub and spoke networks to increase their ability to offer single carrier service to connecting passengers.
Hub and spoke network have also been used by carriers to protect and increase their market.
An airline with a well developed hub and spoke network can discourage potential competitors by increasing the scale of entry required to compete effectively at its hub city.
Another benefit of establishing a hub and spoke network can allows airlines to have a more effective entrant into new markets.
Public policy play a key role in rising the benefits of deregulation and maybe more important, in preventing any erosion of grow already achieved by airlines. Although
19 Steven Morrison et al, The Economic Effects of Airlines Deregulation, page 6.
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deregulation has not generated the optimal level of competition in every type of airline market, it has led to a considerable increase in airline competition with an attendant increase in welfare.
2.3.1. Cross Strait Policy
This research would focus on the effect of the Cross Strait Air Transportation Agreement signed between Mainland China and Taiwan. The Straits Exchange Foundation (SEF) and the Association for Relations across the Taiwan Strait (ARATS) were the entities that conduct the opening of Taiwan Strait direct air link negotiation. For the agreement, they discuss matter about the flight path, cross strait carriers, flight point, cross strait market demand, passenger and cargo flight, regular and charter flight, flight schedules, cooperation and communication way among cross strait parties, among others.
The purpose of the Cross Strait Air Transportation Agreement was to tries to help with the development of cross-strait economic and trade relations and ease contacts between both sides. Thus as in the direct flight agreement stated that if the demand for more cross strait activities is higher than the supply then according to the market demands more flight point and flight frequency would be opened.
Since the Cross Strait relation is a very sensitive topic, there were a lot of main concerns (Chang, 2006) among the population that worries about the socio-economic factors, maintain Taiwan national security and sovereign and the direct flight path between Mainland China and Taiwan (Mainland Affairs Council).
The Cross Strait agreement covers about future negotiation expansion for the introduction of more flight point at Mainland China; increase the frequency of flight across the strait, and among others issues that can enhance economy development. The Cross Strait Air Transportation Agreement also stated that expansion of more flight point, more flight frequency and/or improvement of direct flight agreement would be done according how the market demand evolves20. Therefore, the demand for more air service would be the one that can boost up more the air policy. The flexibility of connecting Mainland China and Taiwan has brought many economic benefits to airlines, carrier, shippers and others industries that with one ways or another they have been affected with the trade and economy growth in the region. The direct air policy allows the mobility of Mainland China and Taiwan people
20 Y.2 Y. Lau et al., The implications of the re-establishment of direct links across the Taiwan Strait on the aviation industries in Greater China, 2012.
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between the strait. The accessibility for sure has increase the tourism and sightseeing destination between both sides. However, Taiwan carriers look farther than only have access to Mainland China. Carriers are looking forward to destination like Europe route and America route.
As mentioned at chapter 1, before the signing of the direct air link there was unusual charter flight only during special Chinese festival season. At that time, only 5 Mainland China airports and 1 airport at Taiwan were opened for cross strait charter flight. After the signing of the Cross Strait Air Transportation Agreement, 17 Mainland China airports and all the airports at Taiwan were opened for cross strait activities. Below in table 14, table shows the time and which flight points were opened to Cross Strait activities. As the cross strait market demand increase the opening of more airport point at Mainland China was negotiated in order to provide response to community and aviation industries. The second signing of air link agreement allowed the opening of 6 more new Mainland China airports.
Table 14. Cross Strait Air Transportation Agreement Stage
Flight Point Mainland China Taiwan
(before 2008)
Source: The implications of the re-establishment of direct links across the Taiwan Strait on the aviation industries in Greater China (2012)
The Cross Strait direct flight agreement helps to boost the exchange of cargo. As shown in table 15. Cross Strait Cargo Traffic by Airlines, 6 Taiwanese airlines join the cargo traffic. Daily Air is one of the few that has not yet penetrated the Cross Strait direct flight business.
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Table 15. Cross Strait Cargo Traffic by Airlines
Item China Airline 327,753 2,046,390,593 2,905,360,010 70.44
Mandarin Airline 10,330 2,983,765 11,217,003 26.60
Eva Air 300,917 1,820,450,559 2,212,835,961 82.27
Far Eastern Air Transport 121 - - -
TransAsia Airway 8,661 2,834,468 14,650,722 19.35
Uni Air 12,501 9,523,018 18,668,782 51.01
Daily Air - - - -
Accumulative Total 660,283 3,882,182,403 5,162,732,478 75.20 Source: Civil Aeronautics Administration (2012)
On 2012, according to Civil Aeronautics Administration, those airlines move a total of 600,283 tonnage of cargo where the airline that move more cargo is China Airline, Eva Air, Uni Air, Mandarin Ailine, TransAsia Airway, and Far Eatern Air Transportat; 327,753 tonnages, 300,917 tonnages, 12,501 tonnages, 10,330 tonnages, 8,661 tonnages, and 121 tonnages, respectively.
However in term of load factor, the airline that sale more cargo space s Eva Air, China Airline, Uni Air, Mandarin Airline, TransAsia Airway, and Far Eastern Air Transport; 82.27%, 70.44%, 51.01%, 26.60%, 19.35%, respectively.
However, after the signing of the Cross Strait Air Policy not only cargo traffic gains welfare also passenger flight join the benefits. As shown in figure 17. International passenger numbers and cross-Strait passenger numbers at Taiwanese airports, many tourist and business people are using the direct flight. The figure compares the number of international and cross strait passenger Taiwanese airport handle between 2009 and 2011.
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Figure 17. International passenger numbers and cross-Strait passenger numbers at Taiwanese airports: Sep-2009 to Jul-2011
Source: CAPA- Centre for Aviation
Table 16. Cross Strait market share between Taiwanese national airlines Taiwan National Airlines 2010 2011
China Airlines 55 51.8
Eva Air 31.2 33.3
TransAsia Airway 6.2
14.9
Mandarin Airlines 5.3
Uni Air 2.3
Far Eastern Air 0
Daily Air 0 0
Source: Civil Aeronautics Administration (2010-2011)
As the theory of air liberalization suggest that without restriction between countries, airlines business would boost. A clear example that we have is with the opening of Taiwan Strait direct flight, aviation industries at Taiwan experiment new air services that connect Mainland China with Taiwan after more than fifty years.
Taiwan has in totaled seven national airlines however only five airlines are doing direct flight between the Taiwan Strait where the two biggest airlines are China Airlines and Eva Air.
China Airlines is an airlines owned by the government and Eva air is owned totally by the
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private sector. Following on the tables below, the Cross Strait Direct Flight Routes and Airlines would be presented:
Table 17. Cross Strait Direct Flight Routes and Airlines-Taiwan airlines
Source: Civil Aeronautics Administration (updates until 2012/3/15)
Taiwanese Airlines that are doing Cross Strait flight are: China Airlines, Eva Air, TransAsia Airway, Mandarin Airlines and Uni Airways as shown on table 17, what route and by which airport each Taiwan airlines have connect each cross strait route.
With the opening of direct flight, new competitors are entering the market as some airlines of Mainland China.
Taiwan Airlines Routes
China Airlines Taoyuan Pudong, Beijing, Guangzhou, Shenzhen, Qingdao, Wuhan, Chengdu, Xi’an, Dalian, Sanya, Wuxi, Haikou, Nanchang
SongShan Hongqiao
Taichung Chongqing, Nanchang
Kaohsiung Pudong, Beijing, Shenzhen, Chongqing Eva Air Taoyuan Pudong, Beijing, Hangzhou, Guangzhou,
Zhengzhou, Jinan, Tianjin, Chengdu SongShan Hongqiao
Kaohsiung Pudong, Ningbo, Guangzhou TransAsia Airways Taoyuan Changsha
SongShan Pudong and Hongqiao, Hefei, Wuhan, Tianjin, Chongqing, Fuzhou, Hangzhou
Taichung Pudong, Xiamen, Fuzhou Kaohsiung Fuzhou, Xiamen
Mandarin Airlines Taoyuan Shenyang, Changsha, Nanjing, Ningbo, Xiamen, Zhengzhou
Taichung Fuzhou, Hangzhou, Ningbo Kaohsiung Hangzhou, Xiamen
Uni Airways Taoyuan Shenzhen, Ningbo, Qingdao, Dalian, Chongqing, Nanjing, Fuzhou
SongShan Xiamen
Taichung Xiamen, Shenzhen, Hangzhou, Ningbo, Nanjing Kaohsiung Hangzhou, Fuzhou, Qingdao
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Table 18. Cross Strait Direct Flight Routes and Airlines-Mainland China airlines
Source: Civil Aeronautics Administration (updates until 2012/3/15)
Mainland China Airlines that are doing Cross Strait flight are: Air China, China Eastern Airlines, China Southern Airlines, Hainan Airlines, Xiamen Airlines, Shandong Airlines, Sichuan Airlines and Shenzhen Airlines as shown on table 18, what route and by which airport each Mainland China airlines have connected each cross strait route. Another interesting data about Mainland China air transportation is that the country protects their countries flag carriers and has their airport classified into national, regional and local airport based on their connectivity to others airports (C.C. Lin). After the signing of direct air policy, Taiwanese airlines and carriers are only able to touch Mainland China international airport but airport that is opened for Cross Strait activities. Otherwise, airlines and carriers need to find some Chinese airlines or carriers to help them connect with others regions inside Mainland China. Thus, it is common to observed cooperation agreement as alliance and code sharing between some Mainland China and Taiwan airlines. This kind of cooperation agreements helps airlines to find more opportunities, route connection, more market share and productivity to their business.
China Airlines Routes
Air China Taoyuan Pudong, Hangzhou, Beijing, Tianjin, Chongqing, Chengdu
SongShan Hongqiao China Eastern
Airlines
Taoyuan Pudong, Nanjing, Ningbo, Kunming, Xi'an, Qingdao, Hefei, Wuhan, Nanchang, Taiyuan, Shijiazhuang
SongShan Hongqiao China Southern
Airlines
Taoyuan Pudong, Guangzhou, Shenzhen, Shenyang, Wuhan, Changsha, Zhengzhou, Changchun, Dalian,
Guiyang, Nanning, Harbin, Guilin
Hainan Airlines Taoyuan Beijing, Guangzhou, Haikou, Dalian, Xi'an Xiamen Airlines Taoyuan Xiamen, Fuzhou, Changsha, Hangzhou
SongShan Xiamen, Fuzhou Taichung Xiamen
Kaohsiung Xiamen, Fuzhou Shandong Airlines Taoyuan Yantai, Qingdao, Jinan Sichuan Airlines Taoyuan Kunming
SongShan Chengdu, Chongqing Shenzhen Airlines Taoyuan Shenzhen, Shenyang
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The planning of airlines network is a very sensitive issues that each airlines companies need to elaborate according to their business goal, objective and strategy they want to target.
The planning of airlines network is a very sensitive issues that each airlines companies need to elaborate according to their business goal, objective and strategy they want to target.