Required Report - public distribution

**Date:** 2004/9/27

**GAIN Report Number:** TW4041

TW4041

**Taiwan**

**Fresh Deciduous Fruit**

**Apples**

**2004**

**Approved by:**

![](media/image1.wmf)Scott Sindelar, Chief, Agricultural Affairs

American Institute in Taiwan

**Prepared by:**

Jeff Miller, Reports and Marketing Officer

**Report Highlights:**

Fresh apple consumption in Taiwan remained steady during MY2003 at
around 115 thousand metric tons, although the composition of this supply
differed in significant ways from previous years. High U.S. prices and
crop quality concerns eroded U.S. market share to 43% of imports and bad
weather destroyed 2/3 of the small local crop. The slack was picked up
mostly by aggressive southern hemisphere producers Chile and New
Zealand, with Japan continuing to show a surprising resilience as a
fresh apple supplier to the island. Looking ahead, an improved U.S.
supply situation and proactive market support by U.S. suppliers can
support a U.S. recapture of market share above 50%.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Taipei \[TW1\]

\[TW\]

Executive Summary

While the apple remains by far the most important item in Taiwan's fruit
import profile, it faces plateauing demand as economic conditions hold
back liberal consumer spending and an increasing variety of fruits (both
imported and domestic) prize consumer dollars away from the traditional
stand-bys. A continued general preference among Taiwan importers for
U.S. apples (best taste, good appearance, stable quality) must be
tempered by an understanding that Taiwan is a market that calculates
profits very carefully. Improving supplier capabilities worldwide,
particularly in the southern hemisphere, promises to pressure U.S.
suppliers with increasing crop volumes and improved cold storage
capabilities. Given good U.S. crop conditions (i.e., sufficient export
volume with competitive pricing), it is not inconceivable that the U.S.
can regain sales worth 60% of the apple market over the coming several
years. However, U.S. apple sales slipped further below 50% of the import
apple market this year due to volume and quality difficulties with the
MY2003 crop coupled with good availability from the southern hemisphere
and Japan's success in introducing less common varieties onto the
market.

Production

An early season typhoon and heavy rains in the central island apple
growing areas during the 2003/2004 season slashed apple production by
65%, leaving the domestic market with few available domestically-grown
apples to sell. The overall impact on supply, however, was minimal due
to Taiwan's traditional reliance on imports for upwards of 90% of apples
consumed. Production is expected to regain 93% of its MY2002 production
this year. Longer term, apple production can be expected to continue
steady, mild declines in terms of acreage under cultivation/harvested.
As demonstrated with this past season, however, severe weather can cause
year on year crop volumes to vary tremendously. Given limited
cultivation, a relatively safe assumption is that, even during good
weather years, Taiwan's apple production will not exceed 10,000 mt.

Local apples represent a largely insignificant (\<10%) component of
total market consumption.

Local production is principally the *Star King* variety. Eighty-percent
of commercially-grown local apples are estimated as sold for fresh
consumption, with the remainder being used in prepared foods \--
processed typically not very far from the orchard.

Taiwan's apple growers face significant financial difficulties to make
crop operations earn a sustainable profit and continued contraction of
field acreage used for commercial production defines the long-term trend
for the industry. However, current sustained economic difficulties in
the economy at large will likely mitigate the move out of the industry
in the short term and the area harvested is not expected to change
significantly over the next 1\~2 years. Historically high unemployment
rates of 5 percent or more have resulted in a boost to agricultural
employment.

Consumption

Market demand for apples held relatively stable during MY2003 at around
115 thousand metric tons. The apple remains relatively resilient in
terms of consumption, even with the encroachment of different fruits and
varieties seen since Taiwan entered the WTO in 2002. In terms of
imports, apples continues to hold steady at between 30\~35% of all HS
category 08 imports (fruits and nuts) by volume and between 25\~30% by
value. This is not expected to change significantly over the coming 2\~3
year period.

![](media/image2.wmf){width="4.75in" height="2.755511811023622in"}Given
continued economic recovery, Taiwan is set to increase its consumption
of fresh apples by around 7% next year (to 123 thousand mt), with a real
possibility of breaking again the 130 thousand mt consumption level in
MY2005 or 2006.

The apple is, far and away, the most heavily consumed imported fruit in
Taiwan. Only oranges, 96% of which are grown domestically, are consumed
in greater quantity. However, in terms of real growth, the apple is
losing ground to a host of other imported fruits, including grapes,
nectarines, cherries, and berries. If the Taiwan economy is able to get
on track with growth rates of 3\~5% apples should see a healthy boost in
demand, with the addition of another 10\~20 thousand mt per year in
imports certainly reasonable. However, due to the variety of imported
and domestic fruits now available, consumption of apples is not expected
to reach the highs seen in the late 1990s without some new factor or
factors changing the competitive picture (e.g., such as new positive
findings regarding the health benefits of apples).

Chart 2. Growth of Fruit Imports (1999: Base Year) Source: Taiwan
Customs

![](media/image3.wmf){width="8.15625in" height="4.09375in"}(please refer
to appendix for volume data used in this chart)

Nearly all fresh fruit imports, apples included, are consumed as fresh
produce. The Taiwan consumer's emphasis on both convenience and
freshness helps channel about half of all fresh apple sales through
traditional / neighborhood wet markets. Of the remainder, around 20% are
sold in small fruit shops and 10% by traveling vendors, with the rest
absorbed by grocery stores, hypermarkets and large hotel and restaurant
accounts. Warehouse grocers (hypermarkets) reportedly now account for
close to 11% of domestic fresh apple sales. Their increasing market
share has been gained principally at the expense of supermarket /
grocery chains, although hypermarkets are increasingly eating into
neighborhood wet markets as the convenience and pricing offered in
hypermarkets is winning business from Taiwan's small-scale retailer
communities (particularly in the Taipei metropolitan area) which
traditionally purchased produce in wet markets.

Fuji, with its sweet taste and firm texture, remains the overwhelmingly
favored variety - retaining slightly better than 80% of total retail
apple sales. The remainder is comprised largely of Gala, Pacific Rose,
Red Delicious, and Granny Smith. The former two are principally used to
fill gaps in supply of Fujis experienced during late season months.

Lacking the Western penchant for sweet snacks & desserts and blessed
with a rich variety of native fruits, the vast majority of Taiwanese
view fruit as an important part of the daily diet. Fruit is frequently
eaten as a snack as well as dessert and is the most common food prepared
to serve to visitors in the home or office.

The Taiwan consumers' preference for the apple over other fruit is
grounded in a number of factors, including appreciation of
nutritive/health benefits, relatively low price, a strong quality image,
attractive appearance, and relatively long shelf life. Furthermore, the
year-round availability of the apple is attractive to retailers, because
point-of-sale formats need not be rotated - as is necessary for fruits
available only at certain times of the year.

***Good \"Face Value\"***

> Two of the apple's popularity factors noted above, attractive
> appearance (red, round, shiny) and quality image, reflect consumer
> priorities which tend to be more uniquely Taiwanese (or Chinese) than
> others mentioned (which tend to be more universal). Unless bought
> solely for personal consumption, the color, size, and general
> appearance of fruit is typically quite important to the retail
> customer. Serving good-looking fruit to family, friends, or clients
> intimates good manners, generosity, and warmth. The \"best-looking\"
> fruit, often specially presented on store shelves or sold in gift
> packaging, fetches the highest prices. The most expensive apples on
> the market, Japan-grown Fujis, sell well at premiums of 100% or more
> over slightly smaller rivals because of their size and consumers'
> quality perceptions.

**[Seasonal Preferences]{.underline}**

While eaten year round, Taiwan consumers purchase significantly more
apples during the autumn and winter months - the prime production months
for northern hemisphere growers. Reasons for this include general
perception of the apple as a \"cool weather\" fruit and the
incorporation of apples into the many festivals held during this time of
the year.

The chart below illustrates the higher-than-average apple imports during
Taiwan's autumn & winter months recorded over the past two and a half
years.

Chart 3. Source: Taiwan Customs

![](media/image4.wmf){width="7.833333333333333in" height="3.125in"}

**Trade**

Trade in MY2004 is expected to rise slightly (3%) to 114 thousand metric
tons due to largely stable supply and demand factors.

Trade volumes are still well off the peak reached in MY1998 -- when a
combined economic boom and limited imported fruit supplies channeled
significant consumer buying power into apples. Today, Taiwan's
consumption of apples, in the 115 -- 130 thousand mt range, likely
represents a "floor" demand that will continue to hold unless
significant consumer preference changes (either for or against apples)
occur.

A difficult MY2003 growing season in the United States weighed heavily
on the competitiveness of U.S. suppliers in Taiwan, with U.S. share of
market falling to an unprecedented (for recent decades) 43 percent of
imports. Improving infrastructure and a good season for southern
hemisphere suppliers, particularly from Chile, allowed select countries
to steam forward and take share away from suppliers facing MY2003
crop/supply difficulties (mostly the United States and Australia).
Chile, New Zealand, and Japan advanced to show significant market share
gains (see chart below).

While Chile and New Zealand continue to focus on supplying the Taiwan
market with traditional apple varieties, Japan is having some success at
introducing less common varieties into the market to maintain its
"premium" image and justify higher prices to consumers.

With the Taiwan fresh apple consumption "pie" looking set to remain at
about the same size for the coming few years and the market open to all
major producers (with the important exception of China), importers have
a broad choice of suppliers and countries from which to choose. How the
"pie" is divvied up from year to year may vary significantly based on
supplier prices, seasonal product quality, and availability.

In general, Taiwan buyers express a continued preference for U.S.-origin
Fuji apples due to factors including long-term relationships, responsive
suppliers, and stable, high product quality. However, as *return on
investment* remains the top priority for fruit buyers, apple importers
have shown themselves more than willing to shift purchase orders to
other competing supplier countries when cost factors run against U.S.
exporters. High relative U.S. crop prices in recent years have opened
the door to sales from other northern hemisphere growers (mostly in
Japan and Korea). At the consumer level, Japanese apples have received
mixed to positive reviews (generally good taste, relatively small size,
average appearance, competitive price), although the strong marketing
value of "made in Japan" should ensure that country a growing share of
overall consumption through the coming several years. Korean apples,
while typically priced at a discount to U.S. and Japanese apples have,
to date, been supplied with inconsistent quality and average appearance
and sweetness. Therefore, growth of the market share for Korean
suppliers has fallen behind other competitors.

In terms of northern hemisphere suppliers, the U.S. is expected to
remain the dominant player through the coming years with a total market
share of between 50 and 60%. Japan will probably hold steady with a
14\~16% market share over the coming two years, while Chile and New
Zealand may either add to or lose market share, depending on the
quality, price, and availability of U.S. supplies.

![](media/image5.wmf){width="7.666666666666667in" height="4.875in"}
Chart 4. Source: Taiwan Customs

Taiwan's 2002 entry into the WTO eliminated previous quota restrictions
on all countries formerly approved to export to the island under quota
(Chile, New Zealand, Australia, Japan, South Africa, Argentina, and the
European Union) and removed a previous ban on apple imports from South
Korea. China remains prohibited from exporting fresh apples to Taiwan.

Taiwan currently applies a 20% tariff on apple imports, down
significantly from the 50% tariff applied prior to January 2002. Taiwan
Customs assesses tariff due on a shipment based on a region-specific
reference price rather than invoiced value.

**[General Phytosanitary Requirements]{.underline}**

Taiwan currently bans or subjects to pest-free certification
requirements imports of apples from countries with the following pests:
(1) Mediterranean fruit fly, (2) Peach fruit fly, (3) Codling moth, (4)
Apple maggot, (5) Mexican fruit fly, (6) Plum curculio, (7) Queensland
fruit fly, (8) South American fruit fly, and (9) Western Flower Thrips.
Phytosanitary certificates are required stating that apples are free
from (3), (4) (5), (6), and (9).

In August 2003, the U.S. and Taiwan agreed on a new systems approach
quarantine work plan for apples that requires improved pre-screening in
the packing shed, while also putting in place a system of graduated
penalties for detection of codling moth. The new work plan will ensure
against the type of disruption that U.S. apple exports faced in MY 2002
after the detection of two codling moths.

Taiwan defines maximum residue levels (MRLs) for around 60 chemicals.
Shipments are checked on a random basis. Taiwan's Department of Health
(DOH) is currently reviewing current permitted chemicals and MRLs for
each. The Agricultural Affairs Section at the American Institute in
Taiwan and U.S. industry have worked to ensure that all pesticide and
other chemicals of concern to U.S. industry are permitted under
temporary arrangement during the review period as well as to see that
chemicals and residue levels will be defined in such a way as to not
become a trade barrier to U.S. suppliers. The DOH review process is
expected to run several years during which formal announcement of new
MRLs will be made.

**[The China Factor in Competition in the Taiwan Apple
Market]{.underline}**

Private investment has been flowing from Taiwan into China to develop
Fuji apple production - particularly into Shandong province, China's
major deciduous fruit farming area. As the world's largest producer of
apples, China, and its potential to export large quantities of cheap,
good quality apples to Taiwan now that both are in the WTO, is of
concern to many apple exporters.

The entry of Chinese apples into Taiwan presently hinges on Taiwan's
certification of China's phytosanitary controls in apple growing areas
and handling processes. Certification will not happen until the two
sides agree to negotiate how such certification is to be done. Continued
uneasy political relations between the two sides of the Taiwan Strait
give no indication as to when such negotiations may start. Therefore,
industry believes it highly unlikely that Chinese apples will arrive in
the market before 2006. However, presuming that Chinese apples will
eventually be permitted in, some in industry believe that the United
States can still retain its position as leading apple supplier to the
island. Factors in support of this opinion include:

\(1\) ***Quality***. While China has cultivated apples for centuries,
the Fuji apple - in greatest demand and still fetching premiums in
international markets - is a relative newcomer. Experience and time is
required to develop not only the technical infrastructure (such as
proper storage, handling/packing, & transportation facilities) but also
the expertise to cultivate, select, grade, package, and deliver the
premium Fuji apples in the manner which Taiwan distributors and
consumers expect. Apples from China smuggled into Taiwan and sold on the
market in 1997 & 1998 elicited significant curiosity from consumers but
reportedly failed to impress with their appearance, taste, or price.

\(2\) ***Price***. Industry watchers report that, when China exports its
highest quality apples, quoted prices have not been significantly
different from those quoted by U.S. suppliers. Factors for such may
include continued limited high-quality supply from growers, high
non-labor-related production costs, and the fact that investment in new
Fuji cultivation in China comes principally from small-scale domestic,
Taiwan, and other investors interested (at least in the near term) to
\"meet\" market prices in order to recoup investment costs.

\(3\) ***Season***. China's apple season is similar to that of
Washington State. Apples from other growing regions in the U.S., such as
California, should face less direct competition in Taiwan from China
growers.

\(4\) ***Domestic Consumption***. China's own blossoming domestic demand
for high quality apples may meet or even exceed domestic production
capacity, leaving less for export - even as production volume expands.
Also, Taiwan investors in Chinese orchards are reportedly most
interested to develop domestic PRC market sales.

\(5\) ***Phytosanitary Controls.*** Taiwan's strict controls on codling
moth in apples will likely be difficult for Chinese growers and packers
to meet. Even if the two quarantine services can eventually reach
agreement on a quarantine work plan, there is some doubt as to China's
capability to ship pest-free fruit.

**Prices & Marketing**

Since 1998, the apple industry in Taiwan has faced a downward pricing
curve as stagnant or decreasing demand is being met by increasing
volumes available for import. With most producing countries supplying
apples here, Taiwan continues to be a \"buyers' market\" with demand
influenced significantly by supplier marketing and pricing strategies.
Prices between and within apple varieties vary greatly based on seasonal
consumption variations, supplier country-of-origin, supplier pricing
competition, and so on. The current market bears little resemblance to
that of a decade ago, when Fuji apples were available in extremely
limited quantities and suppliers could demand, and receive, high
premiums on sales.

As mentioned earlier in this report, the apple symbolizes many positive
things to the Taiwan consumer. When purchased as a gift or to serve to
others, the country of origin, size, appearance, and taste remain as
important as price in the consumer's decision to buy. Therefore, to
maintain its dominant position - particularly against \"new\"
competitors such as Japan, Korea and (eventually) China - U.S. suppliers
are recommended to continue working closely with Taiwan importers,
distributors, and retailers to reinforce the strong positive image that
U.S. apples presently enjoy in Taiwan to ensure continued consumer
loyalty to U.S.-origin apples.

**Statistics**

![](media/image6.wmf){width="7.745669291338583in"
height="3.411811023622047in"}![](media/image7.wmf){width="3.3161417322834645in"
height="2.201968503937008in"}![](media/image8.wmf){width="3.3610236220472443in"
height="3.7188976377952754in"}

![](media/image9.wmf){width="7.329861111111111in"
height="2.9444444444444446in"}

Data for Chart on page 4.