Introduction:
The challenges and opportunities of one representative cast iron company in the north east region of Japan are considered in the following case study. The company produces cast iron cookware, tea pots, kettles and a small line of home décor items. They have made some small steps to internationalize, and have made an executive decision to attempt to gain more market share and increase revenues by further expanding their cookware presence in the Taiwan market. The research and analysis below examine the homewares market in Taiwan as compared to Japan, and the particular company’s core competencies and competitive
advantages within the competitive landscape. The analysis is based on competitive research, market data, and multiple interviews with executive leadership and onsite research at the foundry in Iwate. The study concludes with recommendations on how the company can best leverage strengths and overcome challenges to succeed in this growing market.
Note on privacy: The company name has been redacted at their request for anonymity and because of the sensitive nature of the information shared within. The company will be referred to by the alias of “Genjuro” for the purposes of this research.
Taiwan market overview
Taiwan, a small island nation 180km east of China, has a population of 23.5 million people spread out over a land area of 36,000 km2. This includes 3.2 million children ages 0-14, 17.4 million adults ages 15-64, and 2.9 million people age 65 or older. In 2017, the GDP is
$535,543 billion USD. The GDP per capita PPP is $47,790. The GDP per capita PPP rank for Taiwan is 22 internationally, higher than Japan which is ranked at 30. Although the
population is aging, spending power is high with a relatively wealthy, well-educated citizenry.
Analysts predict that consumer purchasing power will increase in 2017 compared to 2016, thanks to low and stable inflation. Business Monitor International forecasts that inflation will increase slightly to 1.6% year-over-year by the end of 2017, from 1.4% year-over-year recorded in 2016. Consumer outlook is showing improvement after a decline in 2014-2015, with year-over-year growth expected to be at 2.5% by 2018 (BMI Research 2017).
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Figure 1.1: Consumer outlook expected to stabilize and improve by 2018.
Source: BMI Research (2017, April) Taiwan Consumer & Retail Report Q3 2017
Low unemployment will also support consumption for the remainder of 2017. The
unemployment rate is forecast to be 4.0% over 2017, which is below Taiwan’s average rate of 4.4% between 2000 and 2014. According to data from Taiwan Directorate General of Budget Accounting & Statistics, monthly unemployment rates have been declining marginally since April 2016, averaging at just below 4.0%. Favorable labor market conditions will boost wage growth which will then have positive spill-over effects on consumption. According to forecasts, the average annual real wage growth for the whole economy will return to positive territory over 2017 at 1.5% up from a decline of 0.3 % in 2016 and well above the country's average annual rate of -0.1% between 2000 and 2014.
Rising real wages help to increase non-essential spending. This spending is forecast to grow by 3.8% over 2017 (BMI Research 2017).
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Figure 1.2: Positive real wage growth supports increased consumption
Source: BMI Research (2017, April) Taiwan Consumer & Retail Report Q3 2017
Real household spending in Taiwan contracted by 4.4% in 2016 after holding stable at around 2.5% growth from 2013 to 2015. However, analysts anticipate a recovery in 2017 to 1.8%
growth, with the trend towards improvement accelerating in 2018. A stronger Taiwanese dollar and improved economic growth are the main factors predicted to support the recovery in real household spending growth. BMI forecasts growth to increase to 2.0% over 2017, up from 1.4% over 2016. The Taiwan dollar has appreciated more than 7 percent against the U.S. dollar so far this year as Taiwan's central bank scaled back its foreign exchange interventions so that Taiwan would be removed from a U.S. watch list for currency manipulation (Kao 2017).
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Figure 1.3: Household spending is expected to recover in 2017 after a contraction in 2016.
Source: BMI Research (2017, April) Taiwan Consumer & Retail Report Q3 2017
By regional standards, Taiwan has high disposable incomes and a strong demand for
premium products, factors which support an increase in consumer spending. Total household spending actually declined from 2015 to 2016 from $203.74 to $194.64 billion USD, largely due to a 5% devaluation of NTD against the USD in August 2016. However, a stabilizing exchange rate will likely lead to increase in growth from 2017 onwards. Household spending is predicted to rise from $206.2 in 2017 to $265.3 billion USD in 2021, as household
spending (in USD terms) is projected to grow by a compound annual growth rate (CAGR) of 6.4% over 2016-2021. Combined with low inflation, this will drive spending per capita from NTD 277,474 in 2017 to NTD 334,750 in 2021 (BMI Research 2017).
As a sub-sector, spending on household goods declined from NTD 190.13 billion in 2015 to NTD 183.08 billion in 2016. However, home and garden tools are expected to see among the strongest growth in the sub-sector, increasing from NTD 6.02 billion in 2016 to NTD 7.49 billion in 2021. Greater dynamism in the real estate market will be a key driver for this growth, as the government is under pressure to make houses more affordable for younger generations. As more young people are able to afford homes, greater spending is expected in this segment (BMI Research 2017).
5 Homewares market in Taiwan
The homewares market in Taiwan saw annual retail value growth of 1% to reach NTD18.8 billion in 2016. By contrast, Japan, though a larger market, saw a decline of 0.4% in 2015, the most recent year for which statistics are available (Euromonitor 2017). The category of homewares includes cooking utensils, dishes, tableware, cutlery, drinkware, pots and pans, and other small articles used in a home. Items must be new when sold to the consumer. A spate of food safety scandals in recent years (Wall Street Journal 2014) prompted consumers to purchase more new homewares made from better materials or to replace older products.
Within the category of homewares, stove top cookware recorded retail value growth of 1% in 2016, a recovery from 8% value decline in 2015. The slow economy restrained consumers from greater investments in general in the category of home and garden, but stove top cookware benefited due to its low outlay costs while also helping consumers see an
improvement in their daily life. Although many consumers already replaced their cookware after food safety scandals in 2012-2014, manufacturers, especially of international imported brands have continued to promote products aimed at a healthy lifestyle.
In 2016, some producers of high-end cookware brands including Le Creuset and Staub expanded into Carrefour with only 400 to 500 units across the country. Each year Le Creuset has had its own brand days in Taipei, Taichung and Kaosiung with deeper discounts of up to 70% off, and this kind of promotion attracted many consumers from other cities. However, market share of Le Creuset has remained essentially flat at 1.9% since 2012 (Euromonitor 2017). Overall, according to analyst reports, cookware which is made of materials that consumers trust and which is perceived to be healthy will be an increasingly important factor in customers’ purchasing decisions.
International Industry Analysis
The homewares market in Taiwan may have opportunities for new entrants, especially those that are focused on healthy cooking. But how challenging is it for a foreign entrant to
internationalize in the industry? Michael Porter’s Five Forces framework provides a useful tool to analyze the international industry potential. This model helps clarify the profit
potential of the industry as a whole and aids firms in considering how to position themselves to gain and sustain competitive advantage (Porter 1980). The stronger the five forces, the
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lower the industry’s profit potential —making the industry less attractive for competitors.
The reverse is also true: the weaker the five forces, the greater the industry’s profit potential
—making the industry more attractive. For an existing firm competing for advantage in an established industry, the company should be positioned in a way that relaxes the constraints of strong forces and leverages weak forces (Rothaermel 2014).
The five competitive forces in Porter’s model are:
1. Threat of entry: The risk that potential competitors will enter the industry.
2. Threat of substitutes: Substitutes meet the same basic needs as the industry’s product but in a different way. Firms must consider products or services available from outside the given industry that may come close to meeting the needs of current customers.
3. Power of suppliers: How much pressure that industry suppliers can exert on an industry’s profit potential
4. Power of buyers: The inverse of supplier power, the power of buyers concerns the pressure an industry’s customers can put on the producer’s margins by demanding a lower price or higher product quality.
5. Rivalry among existing competitors: The intensity with which companies within the same industry compete for market share and profitability. The other four forces all exert pressure on this rivalry, as seen in the figure below.
Figure 1.4: Porter’s Five Forces Model. Source: Michael E. Porter, “The five competitive forces that shape strategy,” Harvard Business Review, January 2008.
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Five Forces Model Applied to Japanese Cast Iron Cookware in Taiwan Threats of New Entrants (Barriers to Entry):
How likely is it that potential new competitors will enter the market? Capital requirements in this industry are low, in that only a relatively small factory would be needed to start
operations. Raw materials are fairly easy to obtain, in terms of iron ore imported from Australia. Industry-related knowledge is high in the particular region of northern Japan known for cast iron. Around Iwate it would be possible to hire employees familiar with the process of cast iron making. An additional factor is that currently brand recognition among Japanese cookware companies is low in Taiwan.
These factors would suggest that the strength of this force is weak, and a new competitor could emerge from Japan. However, the most significant barrier to entry is history. There is a more than 900-year-old legacy of making cast iron in the Iwate region, and every company has been making cast iron cookware (and other cast iron items) for many generations. It’s very unlikely that a new entrant would emerge; any threat of new entrants in Taiwan would come from existing cast iron cookware companies in the region.
Force strength: Moderate.
Substitutes:
Can cast iron cookware be replaced by substitutes? In almost all cases, yes. The quality of the cookware would likely be lower, and there would be other drawbacks to using cheaper
materials such as health concerns and poor heat conductivity. However, low-cost kitchenware is readily available from numerous other foreign and domestic brands in materials such as copper, aluminum, stainless steel, and those with a non-stick or Teflon coating. The cost of switching is low, and for some customers a cheaper substitute may offer an attractive price-performance trade off.
Force strength: High.
8 Buyer Power:
Buyers for cookware are very diffuse. Individual consumers have low buyer power. Even restaurants would likely only buy a dozen pots and pans at most, making their buyer power similarly low. Department stores in Taiwan have higher buyer power, taking 20-30% of revenue in Taiwan, however there are multiple channels in addition to department stores for brands to pursue.
Force strength: Low
Supplier Power:
The primary supply for cast iron cookware is iron, imported from Australia. As a commodity item, the suppliers in this case would have almost no power.
Force strength: Low
Rivalry Among Existing Competitors:
Among competitors from Japan, the main source of competition is Yanagi, a cast iron brand with exquisite design and a recognizable aesthetic. Iwachu is another Japanese competitor, with very low brand recognition and a focus more on teaware than cooking items. Among international competitors, there are several established brands that compete in the cast iron space including Le Creuset, a well-known French company, and Staub, which is distributed by Zwilling, a German partner with a strong local network. The American company Lodge is also available in Taiwan through a local distributor. Taku is a Taiwanese cast iron brand with its own distribution through its exclusive retail outlet and department stores. Substitute products in different materials, as mentioned above, are also widely available.
Although there are several established competitors, overall brand recognition is low. Some brands are not even identified on store shelves, and are just grouped under a general heading of Nambu Tekki. This force is also weakened by the low cost of exit. By using a local distributor and keeping production located elsewhere, a firm can fairly easily stop selling in Taiwan which helps to mitigate its risk.
Force strength: Moderate
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To assess the overall internationalization potential of the industry, a numerical value is assigned to each of the five forces:
Force Strength Value Assigned
Low 1
Moderate 2
High 3
Figure 1.5: Values assigned to force strengths
The following figure applies the rubric above to the industry internationalization potential of cast iron cookware in Taiwan:
Force Strength Value
Threat of entry Moderate 2
Substitutes High 3
Buyer power Low 1
Supplier power Low 1
Rivalry among existing competitors Moderate 2
Average Low-Moderate 1.8
Figure 1.6: Industry internationalization potential of cookware in Taiwan through the Five Forces framework.
As can be seen in the figure above, the combined strength of the five forces is Low-Moderate.
The strongest force against the internationalization potential of the industry here is
substitution, as cast iron cookware products can be replaced with other, similar pots and pans made of different materials. Overall, the industry has some challenges, not just from
substitution but from existing competitors and the potential for new entrants into the space.
However, for a small-sized firm the profit potential is still high while the risk is mitigated by the low cost of exit, and the fact that brand recognition is so low overall for cast iron
cookware that no major competitor currently dominates the fractured Taiwan market.
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