Required Report - public distribution

**Date:** 2006/9/10

**GAIN Report Number:** TW6035

TW6032

**Taiwan**

**Fresh Deciduous Fruit**

**Annual**

**2006**

**Approved by:**

![](media/image1.wmf)Keith Schneller, Director, ATO

American Institute in Taiwan

**Prepared by:**

Jeff Miller, Reports and Marketing Officer

**Report Highlights:**

The significant absence of a phytosanitary closure of the Taiwan market
to US apples was largely behind the 13,000 mt (27%) boost in US fresh
apple exports to this market in MY2005. Supply stability can easily add
another 10\~15K mt annually to US orders in the coming 2\~3 years,
although, under current economic and marketing conditions, demand for
fresh apples is expected to remain steady at 130\~140K mt per year --
with the US share anticipated to stabilize at around 50 percent. Further
expansion of US apple exports is possible with focused marketing /
promotion efforts (e.g., successful domestic promotion of increased
fruit / vegetable consumption; US suppliers consider selecting and
promoting "new to market" varieties (as Japan has done in recent
years)).

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Taipei ATO \[TW2\]

\[TW\]

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 traditional
stand-bys. Volumes are anticipated to remain in the 135\~145K mt range
through the next several years.

A continued general preference among Taiwan importers for US 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 US suppliers with
increasing crop volumes and improved cold storage capabilities.

The significant absence of phytosanitary-induced disruptions of US apple
imports during MY 2005 brought welcome relief to both exporters and
importers, and infused cautious stability into a market that, since
2002, has been regularly hit by temporary suspensions of US apple
imports during peak sales months. This return to "normalcy" was
reflected in a sharp rise in exports from the United States that
outpaced an already significant upswing in demand and consumption.
Stability in supply (e.g., through further amelioration / resolution of
codling moth problem) is believed to be worth 10\~15K mt in added demand
for US apples each year - essential to US suppliers reclaiming a 50
percent share of total imported volume.

Apples from China (PRC) remain absent from the market due to the lack of
a phytosanitary protocol on apples (as well as most fresh fruit and
vegetables) between the two economies. This situation makes Taiwan a
particularly important export market for deciduous fruit exporters in
northern hemisphere countries like the US, Japan and Korea.

Production

Even prior to accession to the World Trade Organization (WTO) in 2002,
Taiwan's annual apple crop, grown in orchards set in Taiwan's temperate
central mountain range, was not significant (10\~15K mt per year). Since
WTO accession and market liberalization, cropland has been steadily
taken out of production, so that in MY2005 less than 7,000 mt of fresh
apples were harvested. At its best, local production is currently able
to supply only some 5% of domestic demand, making the impact of annual
fluctuations in local crop yields on imports insignificant. The industry
is likely to continue slowly contracting due to high production costs
and labor retention problems.

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.

**Marketing**

Relatively high prices for produce during MY2005, the result of poor
domestic crop conditions (typhoon damage in southern growing areas), was
a principal driver behind increased domestic demand for imported fruit
(of which apples comprise the largest component). Apple imports rose by
17K mt last year. With produce prices once again high and quality
problems with certain other imported seasonal fruit more pronounced this
year, apples have an opportunity to advance in volume still further in
MY2006. 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.

Again, given stable prices and the reliable presence of US suppliers in
the market during the fall and early winter months, Taiwan is expected
to continue to raise its apple consumption to 140-thousand mt
consumption level in MY2006.

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,
cherries, and berries (see chart below). 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 or an expansion of
fruit consumption in general).

Chart 1. Source: Taiwan Customs

![](media/image2.wmf){width="6.499305555555556in"
height="3.4618055555555554in"}

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.

While countries like the United States, Chile and New Zealand continue
to focus on supplying the Taiwan market with traditional (read "Fuji")
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.

**[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.

![](media/image3.wmf){width="7.5in" height="3.325in"}Chart 2. Source:
Taiwan Customs

**Trade**

Trade in MY2006 is expected to remain relatively stable at roughly 130K
mt, reflecting stability in supply and demand factors. US suppliers
remain vulnerable to coddling moth detections in imported fruit and the
resultant temporary closing of the market to all US fresh apple supplies
after a third detection during the season (the so-called "three strikes"
system). This has encouraged importers to both diversify their supplies
away from the United States (despite the quality factors). Winners in
this have included Japan and, remarkably, Canada, which has historically
had a difficult time selling into Taiwan due to both sizing and taste
issues.

Chart 3. Source: Taiwan Customs

![](media/image4.wmf){width="7.0in" height="6.372916666666667in"}

Again, a resolution of coddling moth concerns among the trade, either
through more successful screening at the production end or a reworking
of how Taiwan authorities respond to detections, can increase the US
share of the market over a 2 to 3 year period by another 25\~35K mt
(largely at the expense of Japan and early season southern hemisphere).

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 -- 130K mt range, likely represents a
"floor" demand that will continue to hold unless significant consumer
preference changes (either for or against apples) occur.

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, while Taiwan buyers *do* express a continued preference for
U.S.-origin Fuji apples due to factors including long-term
relationships, responsive suppliers, and stable, high product quality,
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). 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%. A good Japan crop in MY2005 combined with
their continued diversification into unique varieties and large sizes.
Japanese exports rose by nearly 70%, further shriveling Korea's share of
the market (due to widespread market concerns with Korean apple quality)
and stealing some of the thunder from other northern hemisphere
suppliers. Japanese suppliers have de-emphasized traditional Fuji
production in favor of targeting new to market varieties that capture
consumer attention and also fit into the "good face value" category
(large sizes, bright colors, consistent quality).

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, permitting three codling moth
detections in the course of routine inspections in Taiwan before the
market is shut down to suppliers from the affected country and
investigations are made.

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 during the coming 2\~3 year period. However, presuming that
Chinese apples will eventually be permitted in, some in the 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/image5.wmf){width="6.775in" height="3.834722222222222in"}

![](media/image6.wmf){width="3.5708661417322833in"
height="3.7188976377952754in"}![](media/image7.wmf){width="3.3610236220472443in"
height="3.7188976377952754in"}

![](media/image8.wmf){width="6.381889763779528in"
height="2.8161417322834645in"}![](media/image9.wmf){width="3.777165354330709in"
height="3.7188976377952754in"}![](media/image10.wmf){width="3.4043307086614174in"
height="3.7188976377952754in"}