Since the 1990s, Taiwan has gained worldwide fame as a high-tech manufacturer churning out computers, micro chips and gadgets. While that was happening, however, few noticed that this island of just 23 million was climbing its way to the top of a entirely different sector — flowers. By joining its rural past with cutting-edge technology, it has become one of the world's biggest flower exporters, and number one orchid exporter.

And it's not only Taiwan that has reaped the benefits. Taiwanese flower firms have also been giving mainland China's mass-produced flower business a hand. Now, with both sides of the Strait growing closer economically by the day, the time seems ripe for combining Taiwan's know-how with China's vast plantations to create a greater China flower superpower. But that might have to wait– Taiwan is aiming to move up the value chain into R&D, breeding and patenting its flower varieties, to increase profit margins and keep a technological step ahead of looming competition. In short, it wants to become for orchids and other flowers what Holland is for tulips.

The situation is indicative of the business barriers remaining between the two sides of the Strait, as well as Taiwan and China's sharply different business environments. To understand more, it's worth taking a brief look at the roots of Taiwan's flower business.

Early Shoots

The heartland of Taiwan's flower production is in the balmy, southwest plains and foothills south of the Tropic of Cancer, where the climate is ideal for horticulture. Here, Japanese colonizers established large-scale agriculture in the early 20th century, especially sugar and fruit plantations. When the Chinese Kuomintang took control of Taiwan from the retreating Japanese after the Second World War, state-run enterprises were put in charge of large-scale agricultural infrastructure left behind by the Japanese. Taisugar was one of the biggest such firms.

By the 1980s, however, Taiwan had moved into manufacturing for export and given up its economic dependence on agriculture. Wages and costs climbed rapidly too, and soon Taiwan was importing most of its sugar from cheaper locations. Looking around for new business, Taisugar hit upon an idea: Mass-produced flower production for export, with their sight set on the Japanese market. A large private firm got in the game, too, and a new agribusiness was born.

In the early 1990s, Taiwan's flower firms also began to go west, lured by China's rock-bottom land and labor costs. A handful of these firms set up shop near Kunming, in southwest China's Yunnan province. As with a surprising range of Chinese industries, the Taiwanese helped launch China's mass-produced flower business. Flowers had always been plentiful in that part of the country. But the Taiwanese introduced techniques for mass production, mproved infrastructure, and served as middlemen between Dutch, Japanese and American breeders and Chinese growers.

"Taiwan's businesses played an important role," says Chang Su-san, director general of the department of international affairs at Taiwan's Council of Agriculture. "They had the capital, and they brought technology and flower varieties."

However, difficulties soon set in as the Taiwanese struggled with China's red tape, a poor record of protecting breeders' rights, unreliable business partners and problematic local officials. Some Taiwanese horticulture firms — as well as Dutch and other foreign firms — pulled out of China, disillusioned.

Post-2000: The Golden Age

Taiwan's flower business has blossomed over this past decade with the emergence of two distinct, yet equally successful, business models. The first was Taiwan-based mass production for export, customized to the tastes and strict regulations of Japan, the U.S. and EU markets. The second was China-based production by Taiwanese firms for Chinese consumers.

In Taiwan, flower firms increasingly focused on quality, rather than just quantity. Helped by export-friendly government policies, private flower producers thrived by mass producing high-quality breeds, like "butterfly" orchids (phalaenopsis) and "boat" orchids (cymbidium).

The results have been eye-popping. Flower and flower seed exports have nearly tripled in value in the last decade, from US$48 million in 1999 to US$111 million in 2009, according to the Taiwan Floriculture Exports Association (TFEA). Orchids account for much of that boom — US$87 million of last year's exports were orchids, up from US$40 million in 2004, says the Taiwan Directorate General of Customs. Meanwhile, the Taiwan Orchid Growers Association (TOGA) points out that while orchids account for just 20% of Taiwan's flower exports by quantity, they are 80% of export value. In 2005, Taiwan became the world's top orchid exporting country, replacing Thailand — an honor it still holds.

The most stunning success has been with prized "butterfly" orchids. Exports of butterfly orchids earned Taiwan US$62 million last year — accounting for 70% of orchid export value and 56% of overall flower and flower seed export value. "For butterfly orchids, no one can compete with Taiwan," says Chen Hou-yu, TFEA's secretary general. WHY?

Japan was the original target market for flower exports. But in the past few years, exports to the U.S. have also boomed. The U.S. overtook Japan to become Taiwan's number one export market for orchids in 2008, according to TOGA. Taiwan grabbed U.S. market share by adhering to the U.S. government's strict import standards. U.S. agricultural officials now regularly inspect Taiwan's greenhouses to ensure they meet American regulations.

Conspicuously, however, Taiwan doesn't export much to China. One reason? It's difficult to compete on price with China-based producers. "We don't export much the mainland because it's too expensive," says TFEA's Chen. "Taiwanese companies have already gone to the mainland to produce for that market."

Exporting into China is also not feasible thanks to trade restrictions. One recent exception are "dancing lady" orchids, which will soon be allowed into China from Taiwan and hope to find markets in Shanghai and other wealthier parts of the country. Other flowers still face export bans or steep tariffs.

Some Taiwan flower producers are happy with those limits. That's because tariff reduction in most cases would have to happen on both sides of the Strait, leaving Taiwan to face a flood of cheap Chinese flower imports. "We're afraid that Chinese imports could come to Taiwan," says Chen. "Their prices are much lower. We can't compete with them. So what would happen to our farmers?"

A China Focus

The Dahan Group is an example of a Taiwanese firm that helped launch China's mass-produced flower business. The company was among the first to enter China in 1990. "China was closed internationally for many years, and we were one of the pioneer companies to invest in China's horticulture business," recalls Liu Bang-shein, Dahan's managing director. He says the firm had to introduce nearly everything needed for mass production in China, serving as middlemen for foreign suppliers and breeders.

The Chinese government gave his firm a license to import supplies such as greenhouses, fertilizer and potting soil. Dahan launched seminars to educate Chinese growers. Its first business exported bonsai plants from China to Europe. But when a strong global breeders' rights protection regime began to take effect in the 1990s, China's export market shriveled up. Now, Dahan focuses on China's domestic market, where profit margins are typically between 35% and 50% — and as much as 70% on high-end specialty plants. All of its production is in China.

Liu says demand in China is booming. For now, it's the government-run organizations, hotels, conference centers and restaurants that are buying most of the flowers. But Liu hopes more individual Chinese consumers will soon start buying flowers. "Step by step, people are putting flowers in their homes," says Liu. "The market is expanding, and if family consumption increases too, the situation would be fantastic."

According to a recent documentary aired on China's state-run CCTV, the country's total flower market is worth about US$10 billion. Liu says flower consumption is rising 20% to 30% a year in China, in contrast to other markets in the region like Japan, where consumption is flat or decreasing slightly.

Taiwanese firms have an edge in tapping that market. "Many foreigners want to operate in China," says Liu. "But since we're Taiwanese, we share the same language and background, and now we have 30 years of experience in China, a team of growers and nationwide distribution — that's not easy to accumulate."

Dahan is Asia's largest company for poinsettias, says Liu, producing four million cuttings a year — 20% of China's overall production and 65% of "legal" production — that is, plants produced under license, with royalties paid to breeders. He estimates that 70% of China's poinsettia production is illegal.

So far, China's own exports are scant, due to relatively heavy red tape and poor breeders' rights. "Many people think Taiwanese businessmen are going to the mainland to use it as an export platform," says Richard Lin, TOGA's secretary general. "But in the flower market, that's not the case."

Taiwanese firms tend to stay focused on selling low-end flowers for mass production in China, says Lin. "They're scared that if they introduce new breeds to China, they won't have a way to control them." Such rights — also called "variety rights" — are a concern for his firm. His plantations and offices in China have high employee turnover at Dahan's Chinese plantations and offices, and because of low staff loyalty, there's concern that anyone leaving could take high-end breeds or fertilizer formulas with them.

For that reason, Dahan is planning to set up an R&D center and a fertilizer manufacturing site next year in Taiwan, where breeders' rights are better protected, says Liu. "If we want to develop our own products, we need better protection." What's more, with the warming of cross-strait ties, it's easier for staff to commute back and forth for training.

Dahan currently works mostly with Japanese, European and U.S. breeders to introduce new varieties. Eventually, it hopes to do more of its own varieties. "For now, it's cooperation, but maybe in 10 years, there will be a little cooperation, and a little competition," says Liu.

The Orchid King

Another way to consider the trajectory of Taiwan's flower business is to consider Parker Wu. Fascinated from an early age with flowers, Wu was the first Taiwanese producer to head to Yunnan province, in 1989, to take advantage of the mainland's cheaper land and labor costs, and Yunnan's accommodating climate. When he arrived, the Chinese only grew native flower varieties in small quantities to sell at local markets. He helped build the requisite infrastructure, establish a flower auction at a site outside Kunming and at one time was the co-manager of China's largest orchid plantation. He also helped organize a large flower show in Kunming for several years running, in cooperation with the local government. "I introduced new varieties and brought different skills and technologies [to China], and set up labs for large-scale cloning and production," says Wu. But he withdrew from China in 2002, he says, citing red tape and other "government policies."

Wu originally planned to produce flowers for export. But to export from China, firms need certification. Such paperwork was only available from the central government in Beijing, and was time-consuming to obtain — leading some Chinese firms to cut corners with fake certificates, says Wu. "In Taiwan, you only need three days to take care of the paperwork and ship out plants," says Wu. "In the mainland, it took three weeks."

Producing in the mainland has other trade-offs, says Wu. Production costs may be lower than in Taiwan, but Taiwan-produced flowers fetch higher prices due to their reputation for quality. "A plant from Taiwan sells in the U.S. for US$5, from China US$3," says Wu. And China's business environment can spring surprises, he says, carefully avoiding going into specifics. "Growing orchids can take five years from seeds to finished plants, and during those years, we may encounter many different kinds of problems," he says. "It's a high-risk business."

Instead, he now runs an international marketing and development firm in Tainan County in southern Taiwan. He develops orchid breeds for local growers and regularly attends international flower conventions to promote Taiwan's orchids, partnering with 250 growers. He takes a small cut of the orders he gets on the road.

He's also opening a leisure farm for tourists to view orchids, sip orchid tea, nibble orchid cookies, and buy a range of plants and gifts, such as dining trays and coasters with pressed dried orchards. Such farms are a growing trend in Taiwan, and Wu says he expects the margins to be better than the orchid-growing business. In fact, he's considering a return to China to open such a leisure farm, perhaps near Shanghai or on Hainan Island. He reckons business conditions have improved in China since he left, and will continue to improve as China aligns itself with global business standards.

Future Growth

Taiwan may be raking in money from its flower exports, but the incumbents are also looking over its shoulder. New firms have crowded into the market, and China is fast becoming a flower power in its own right. That's why Taiwan's firms want to move up the value chain, in search of better margins and ensure they stay a step ahead of the Chinese.

Currently, Taiwan is a "contract" manufacturer in the U.S. market. It exports small plants or cuttings to the U.S., where clients finish the final stages of production and sell the flowers under American brand names. Wu says that could change if the Chinese and Taiwanese governments established a zero-tariff, value-added export zone so Taiwan's firms could set up cross-strait production lines. That would enable the firms to keep their R&D and headquarters in Taiwan, and do the first part of production (say, the initial 18 to 36 months) in lower-cost China before shipping the plants to Taiwan for final production, branding, packaging and export. Dutch flower exporters use a similar model, says Wu. But for now, cross-strait trade barriers make that business model impossible. Most flower imports from China are banned; others face a 35% import tariff, says Wu.

He also reckons Taiwan's government should help set up an auction, similar to what's done in Yunnan province or Holland, to improve how Taiwan's producers connect with global buyers. "Taiwan could be the Holland of Asia, but we need the government to work with us on changing some policies." For its part, TOGA says it's "working hard" on the auction idea.

"We've got to move fast or China might take our place," says Wu. "China will one day become like Taiwan — and export and do their own varieties. I'm worried that if we don't change our policies, Taiwan's orchid business may one day be destroyed."  For now, however, Taiwan's firms are thriving both on their native soil, and in China's fertile new market.