Claw Machines and Entrepreneurship in Taiwan

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Visitors and residents of Taiwan may have noticed as of late, that since some time ago “claw machine arcades” have boomed like blossoming flower buds after a rain shower.

They’ve suddenly appeared within every nook and cranny, on every street and around every corner. As these claw machine arcades filled up every usable space from shopping districts surrounding universities and night markets to premium commercial areas in eastern Taipei, temporarily occupied idle, empty real estate were given some value in an otherwise slow moving economy.

From statistics gathered by the Ministry of Economic Affairs on for-profit businesses, from 2014 to 2017 Taiwan’s claw machine arcades rose rapidly from 347 venues to 2,859. Within three years, the number of stores had greatly expanded by 8.2 times. Taiwan’s news media called this type of “micro-cost, micro-profit” business model the “dead end economy.”

But according to the same statistics from the Ministry of Economic Affairs, in 2017 after the explosion in the number of claw machine arcades, the growth in demand has slowed down in comparison to the growth in supply. Although the overall value of the market still made a breakthrough of NT$1.17 billion, a growth of 147 percent when compared to 2016, the average individual store sales figure had slid by 20 percent, hitting a new low in recent years.

Can the “dead end economy” now dominated by claw machine arcades really become a new form of business model that could rekindle smaller, more localized business areas? Or could it be yet another popular fad of “micro-enterprises,” that are commodified and on the cusp of yet another error-fraught, short-term bubble such as the Portuguese egg tart fad of years past or hotels that only catered to Chinese tourists?

A popular side hustle

When claw machines first reached Taiwan’s shores from Japan in the ’90’s, the machines were mainly found in video game centers. The reason why the market for claw machine arcades exploded in the last few years is a new business model. Traditionally, investors of video game centers bore the risk for the real estate, machines, and operations; but the recent wave of arcades consist of people who only invest in the space, the “landlord,” and people who only own and operate the machine, the “operators.” In other words, a landlord would rent the space and pay for the utilities, and then sublease to individual operators to place their machines in the space. Under this system, landlords are only responsible for collecting rent, and the operators have much lower barrier to entry and risk, which made operating claw machines a popular “side hustle” in Taiwan’s stagnant wage economy.

Another reason that claw machines have taken hold everywhere is the result of adjustments to the law. In the past, since there was uncertainty to winning prizes from these claw machines, they were once considered the same as slot machines and other gambling rigs. After 2000, the Ministry of Economic Affairs established the Video Game Industry Management Ordinance and re-categorized claw machines as an “electronic game,” which were allowed but must be legally placed in a licensed, regulated video game center.

However, after store owners negotiated with the Ministry of Economic Affairs, new consumer models for new-style claw machines have set up a “prize-winning guarantee,” where the price is stated openly. Players are guaranteed to win something once the player inserts a predetermined amount of money. In other words, the claw machines have effectively become a vending machine, which allows them to escape the aforementioned regulations.

Entrepreneurship gone awry

Meanwhile, the current administration has enthusiastically promoted a slew of policies focusing on industrial innovation and entrepreneurship. The administration hopes that by optimizing the investment environment for startup businesses, domestic innovation and entrepreneurship will drive economic growth and upgrade industrial technology. To do this, the administration decided on the number of newly established companies and their capital investment amounts as key performance indicators.

According to statistics from the Taiwan Institute of Economics’ FINDIT platform which compiles government plans, local accelerators, domestic and foreign competitions, and news reports, as of 2017 the number of Taiwan’s startup companies was 3,495. These companies were mainly in the information technology and application space (698 companies, 20% of all firms); internet applications (494 companies, 14%) and life consumer products and services (387 companies; 11%). With government support, the number of recent domestic startups appears to continue to have strong growth.

Most of these new startups are highly risky. It is not easy for them to earn profit, and it is difficult to get objective estimates on corporation value. They often need a long time to cultivate their products and undergo market testing, only after which can these new ventures be judged on their actual value to the overall economy. The current policy uses competitions, pitch contests, grant applications, or early stage investments from national development funds to seed individual startups, as well as amendment relevant laws such as the corporate laws, foreign professional laborers laws and industrial innovation laws, to incentivize more startup activity.

But if in the implementation of this policy the administration overly focuses on the number of new companies, the size of investments, or the number of so-called “unicorns” (a company that hasn’t been established for a full 10 years, whose estimated value is more than USD $100 million) as the key indicators, there is a risk of stressing quantity over quality and distorting the original aim of encouraging industrial upgrade and economic growth.

Investment in startups and innovation is indeed important, but heavy-handed involvement by the government with too narrow a focus on particular aspects of the market could lead to the creation of new bubbles, such as the claw machine arcades fad popping up at a storefront near you.

(Feature photo from Wikipedia)