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A Bumper Year Goes Bust

Top 1000 Manufacturing Enterprises

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In 2007 Taiwanese manufacturing rocketed with record revenues and profits, but plummeted in the final quarter, hit by the U.S. mortgage crisis and global inflation. How will it steel itself against a continuing string of challenges?

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Top 1000 Manufacturing Enterprises

By Ching-hsuan Huang
From CommonWealth Magazine (vol. 396 )

In 2007 the manufacturing industry resembled a cruise ship sailing under blue skies, its passengers full of excitement as they embark on a joyful journey to their dream destination. But three quarters into the trip, the leisure cruise turns into a nightmare, as the ship hits an iceberg. What originally seems like minor damage turns out to be a gaping hole, causing the liner to quickly sink.

"Last year was very special, because we could see Taiwan's entire industry and economy turn from boom to bust within a year," says Kevin Chang, head of research at Yuanta Securities.

A Year of Heyday and Decline

The industry saw its heyday as business results hit record highs, with total revenues surpassing NT$20 trillion for the first time (Table 1) and profits hitting NT$1.35 trillion.

Even if calculations are based on consolidated financial statements, which means that numerous transactions between parent companies and their affiliates are eliminated, revenues and profits in 2007 still stand at historic highs.

The manufacturing sector entered a steep decline in the fourth quarter of last year as the economy ran into several icebergs - the U.S. sub-prime mortgage crisis, inflation, natural disasters (snow storms in China and flooding in Australia) and rising manufacturing costs in China.

Last year's record total turnover can largely be attributed to the new stars of the high-tech industry known as the "4i" – Vista, Wii, Wimax and iPhone - while strong demand and supply shortfalls for raw materials made conventional industries boom as they cashed in on rising product prices.

Thanks to soaring oil prices, the petrochemical industry posted total revenues of more than NT$2.8 trillion, coming in second only to the computer industry, which is led by Hon Hai Precision Industry, Taiwan's largest private enterprise. In terms of average profits, the petrochemical industry took the top spot of all 33 industries surveyed, with NT$10.75 billion.

And within the petrochemical industry, the three flagships of the Formosa Plastics Group – Formosa Plastics, Nan Ya Plastics, and Formosa Chemicals & Fiber – alone account for 40 percent of industry revenues and 70 percent of profits. The main reasons for the group's rising revenues are synergies from its No. 6 naphtha cracker and disparities in demand and supply for its products.

Formosa Plastics chairman Lee Chih-tsuen observes that massive demand from the large markets of China and India has been drying up global supplies. On the supply side, China and Iran may account for as much as 85 percent of global oil output expansion. But Iran in particular has experienced constant delays in a number of projects.

Moreover, as prices for petrochemical raw materials keep going up, large producers have been able to unload most of their additional costs onto downstream manufacturers, so that their profits have continued to grow. "Amid this horribly frightening situation, the petrochemical industry had a bumper year," concludes Tseng Fan-ming, analyst at Industry & Technology Intelligence Services (ITIS) under the Ministry of Economic Affairs.

Formosa Plastics boss Lee thinks that the industry will still do well this year. "This year will be still okay, but in 2009 we will see an oversupply," he predicts. In 2008, the petrochemical industry can still be expected to post growth.

Another rapidly growing industry is optoelectronics, which enjoyed the second highest average growth rates in the manufacturing sector. The five biggest panel makers – AU Optronics (AUO), Chi Mei Optoelectronics, Chunghwa Picture Tubes, Innolux Display, and HannStar Display – posted combined revenues of more than NT$130 billion, and accounted for an astonishing 83 percent of total industry profits.

"Last year the panel makers did best among the high-tech industries. They made big money," says Wang Wan-li, head of research at HSBC Securities (Taiwan). The panel industry, with its pronounced business cycle fluctuations, began to take off in the third quarter of last year. But as Wang explains, business improved due to other factors as well. "What really helped the panel makers to boost business last year was controlling their capacity utilization rate. The companies have learned to exert self-discipline."

Like the petrochemical industry, the panel makers will see an even better performance this year. "This industry did not yet see its peak last year. There are still opportunities," believes AUO vice chairman and CEO Chen Hsuan-bin.

TSMC Drops from the Top Ten

If we look at the rise and fall of individual companies, the biggest change in the Top Ten is the absence of Taiwan's benchmark enterprise, the world's largest contract chipmaker Taiwan Semiconductor Manufacturing Company (TSMC). TSMC's performance paled in comparison to the 30 to 60-percent growth posted by current Top Ten companies such as AUO, Chi-Mei Corporation, Quanta Computer and Asustek Computer (table 2). The chipmaker failed to make it into the Top Ten because it posted revenue growth of a meager 1.6 percent, while its profits decreased by 13.6 percent.

At the fourth quarter institutional investors conference in 2007, TSMC president and CEO Rick Tsai admitted that global macroeconomic concerns triggered by the U.S. mortgage crisis will continue to depress demand in 2008.

DRAM makers were the worst hit in the semiconductor industry, as the sector remained in the doldrums for the entire year, charting losses. DRAM makers had ramped up production in anticipation of a big bounce in PC sales, due to the introduction of the new operating system Windows Vista. When the expected sales boost failed to materialize, they were unable to halt their increased output in time. The resulting glut in memory chips caused prices to collapse, so that prices were quoted below cost.

The four companies among Taiwan's Top 1000 Enterprises that piled up the highest losses were all DRAM makers – namely Nanya Technology, Powerchip Semiconductor, ProMos Technologies, and Winbond Electronics. Together they lost a whopping NT$37.9 billion.

Investment guru Warren Buffett once said, "You only find out who is swimming naked when the tide goes out."

The industries that have hit icebergs won't be able to quickly repair their damaged hulls to resume smooth sailing. And it is not just the semiconductor industry finding it difficult to see light at the end of the tunnel. Faced with waning purchasing power and rising production costs, Taiwan's entire manufacturing sector will be put to the test to meet these challenges well prepared and standing upright as before.

Translated  by Susanne Ganz


Chinese Version: 由盛轉衰 重新出發

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