It takes a 10-minute drive up the hill behind the Chang Gung Memorial Hospital in Linkou to reach Nan Ya Plastics Corporation's Research & Development Center. Those expecting a modern glass high-rise with a high-ceilinged lobby will be disappointed. All one sees is a run-down two-story building.

In a laboratory on the first floor, there's an item that's even more startling to a visitor anticipating a modern facility: a foot-operated Singer sewing machine that dates back at least 30 years. Researchers still run it occasionally to sew little cloth sacks used in experiments.

About 10 paces behind the R&D Center, where the old PVC leather plant used to stand, one finally finds Nan Ya's new face ?V Nanya Technology Corporation's NT$80 billion 12-inch DRAM plant, completed only last year.

In that 10-pace distance is written the story of the transformation of a conventional plastics facility into a high-tech electronics factory.

At a Nan Ya Plastics' site in Shulin Township in northern Taiwan, its dyeing and finishing plant was razed and moved to China to make way for another Formosa Plastics Group (FPG) affiliate with the Nan Ya name, IC substrate maker Nan Ya Printed Circuit Board Corporation.

Where there were once plastics and textile plants, Nan Ya Plastics has now built factories producing higher value-added goods.

'Nan Ya has reinvented itself in recent years,' says Nan Ya Plastics executive administrator David Jsou. 'It has slowly changed its focus to two main sectors: electronics and petrochemicals.'

With those two interests, Nan Ya Plastics has become a two-headed giant. For most of the 50 years since the company was founded, 90 percent of its business, including that of its subsidiaries, came from processing plastics. Today, however, only 10 percent of its revenues are derived from plastics, while over 70 percent are generated by electronic and petrochemical product sales, both of which have gained in importance this decade.

Electronic product sales accounted for 42.4 percent of Nan Ya Plastics' total revenue in 2007, up from 32 percent in 2001, while petrochemical sales had a 28-percent share of company revenue in 2007, more than double the 11.9-percent share they held in 2001. Reflecting the success of this transformation, Nan Ya Plastics had its best year ever in 2007, with revenues of NT$228.7 billion and earnings per share (EPS) of NT$8.

Nan Ya Plastics also benefited last year from the strength of the petrochemical industry and an explosion at Saudi Arabia Basic Industries Corporation's (SABIC) ethylene glycol plant that sidelined 7 percent of world production and drove ethylene glycol prices up 96 percent year-on-year.(Table 1)

'To producers of ethylene glycol like Nan Ya Plastics and Oriental Union Chemical Corporation, 2007 was a banner year,' says Tseng Fan-ming, an industrial analyst at the Industrial Technology Research Institute's (ITRI) Industry & Technology Intelligence Services (ITIS) project.

As a result, Nan Ya Plastics' sales of petrochemical goods rose 77 percent in 2007, and petrochemical products accounted for 70 percent of the company's net operating income.

FPG's Most Diversified Company

Nan Ya Plastics' range is unique among FPG affiliates, spanning electronics, petrochemicals, polyester fibers and plastics, with more than 1,000 products on offer.

"Nan Ya Plastics has the most diversified operations of any company in the Formosa Plastics Group," said Sung-Yueh Shieh, the vice president of NanYa Plastics' R&D Center.

The company has become a giant among petrochemical exporters. Of the ethylene glycol it produces, 12 percent is channeled to its own production of polyester products, while the rest is exported, with 80 percent of its overseas sales going to China.

It has also made its presence felt in the electronics industry. Through its subsidiary Nanya Technology, in which it is the largest shareholder with a 37.8-percent stake, Nan Ya Plastics could count U.S. DRAM giant Micron Technology among its many competitors. But now Micron is also an ally.

On February 13, Micron CEO Steven Appleton visited Taipei to discuss a possible partnership with Nanya Technology to fight off low-cost competition from South Korea's Samsung Semiconductor. Less than three weeks later, on March 3, the two companies signed a letter of intent to jointly develop 50-nanometer and below DRAM technology and product designs.

By reinventing itself, Nan Ya Plastics' value-added has soared. In contrast to the single-digit operating profit margins earned from plastics products, electronic and petrochemical products consistently generate double-digit margins.

The new Nan Ya Plastics also thrust itself into the competitive panel display industry, worth trillions of Taiwan dollars. Shieh asserts that the new venture is a good fit for the company, with its polyester products capable of making fibers and film that have applications in the sector. The optical film developed by Nan Ya Plastics can be used to process the polarizing film, diffusion film and protective film needed to make LCD panels, and it commands a price two to three times higher than the packaging film that had been the company's traditional mainstay.

"We hope to become like America's 3M, Germany's Henkel and Japan's Hitachi Chemicals, by adding value to chemical materials and producing specialty chemicals," Shieh says.

Winston Wang's Blueprint for Nan Ya's Makeover

Looking back at Nan Ya Plastics' metamorphosis, many in the company credit Winston Wang, then an assistant manager in the company's Plastics 4th Division, for coming up with the blueprint for success.

Wang enjoyed research and had many ideas, and the group's development of the electronic materials business was carefully nurtured in his Plastics 4th Division. In the early 1990s, the media characterized the division as the Formosa Plastics Group's most dynamic creator of new products.

Nan Ya Plastics first tested the waters of the electronics industry in 1983 by setting up an integrated circuit task force. After expanding into this new discipline, the company soon developed three upstream materials necessary in the production of circuit boards? copper clad laminates, epoxy resins and fiberglass cloth ? and is now the world's biggest supplier of all three materials, confirming Nan Ya Plastics' status as an electronics giant.

Yet the electronics business has also brought with it ups and downs for the company. Nanya Technology lost NT$9.3 billion last year, of which Nan Ya Plastics realized a NT$4.1 billion loss.

Just as critical to Nan Ya Plastics' transformation was the construction of the Formosa Plastics Group's Naphtha Cracker No. 6.

"That the company could transform itself into a petrochemical giant was mostly because of the No. 6 cracker's vertical integration," Jsou explains.

Once Naphtha Cracker No. 6 became operational, the Formosa Plastics Group created Formosa Petrochemical out of thin air to refine oil and crack naphtha. Formosa Petrochemical now supplies ethylene downstream to Nan Ya Plastics, which converts it into ethylene glycol. Nan Ya Plastics in turn supplies ethylene glycol as a key raw material for its downstream polyester division.

With the support of Formosa Petrochemical upstream in the supply chain, Nan Ya Plastics was able to integrate upwards and develop BPA (bisphenol A), a key material used to make epoxy resins.

With the capacity to produce BPA, epoxy resins, copper clad laminates and circuit boards, Nan Ya Plastics has turned its electronic products division into a vertically integrated operation.

Today, ethylene glycol and BPA are the company's two biggest petrochemical products, accounting for 69 percent of its petrochemical sales.(Table 2)

"The Formosa Plastics Group's practice has been to integrate vertically upstream. With plastics and chemicals at the root of most materials used in the electronics sector, upstream petrochemicals have been the strategic foundation for the group's diversified development," says Chen Kuan-rong, a long-time industry analyst at Grand Pacific Investment & Development Co., Ltd.

The Metamorphosis of a Mammoth

How did this elephant with revenues of over NT$200 billion reinvent itself with such ease?

In the electronics sector, where technology is in one day and out the next, the Formosa Plastics Group avoided spending big sums on technology. Instead, it entered into joint ventures to obtain technology and share costs.

Nanya Technology, for example, joined with Munich-based DRAM giant Qimonda AG to form Inotera Memories, the first time in the industry that a DRAM factory had been established through a joint venture. Qimonda financed two-thirds of the new venture's R&D costs, while Nan Ya Plastics footed the other third, with both sides contributing to production.

The company has also pushed to rationalize its operations by streamlining its workforce and using its personnel as efficiently as possible. Of the Formosa Plastics Group's "big four" ? Nan Ya Plastics, Formosa Plastics, Formosa Petrochemical, and Formosa Chemicals and Fiber Corp. ? Nan Ya Plastics has by far the most employees. Compared to Formosa Plastics' 4,800 employees, Formosa Chemicals and Fiber's 5,700 people, and Formosa Petrochemical's 3,800 employees, Nan Ya Plastics at its peak, when it was primarily a downstream plastics processor, had 18,000 people.

But as the importance of second- and third-step processing of plastics and fibers within the company's product mix declined, Nan Ya's manpower gradually fell as well, and as of the end of December 2007, 12,160 employees remained.

Increased human resources efficiency plus a transition to high value-added products have allowed Nan Ya to nearly half its salary expense ratio, from 11.6 percent in 2003 to its current level of only 6 percent.

Low Profile R&D Center

To enhance the value-added of its products and transition smoothly, Nan Ya Plastics has been helped by an asset that no other Formosa Plastics Group subsidiary has: an R&D center.

In the fiber industry, 'Far Eastern is probably the company with the best R&D capability. But Nan Ya Plastics does things quietly, without fanfare. It doesn't want others to know what it's up to,' observes one fiber industry expert.

The R&D Center has a strong integrative capability. Many problems that its business units have been unable to solve for years are turned over to the R&D Center.

"It's a never-ending process of making higher-value things. Only in this way can you differentiate yourself in the market," Shieh says.

When the company decided to invest in DRAMs, the R&D Center formed a group of 30 to 40 people to study the business. Then, six months later, that group expanded and branched off to become Nanya Technology.

Diversified Operations Bring a Change in Fortune

The petrochemical industry is expected to begin to decline in 2009, but even if a weak economy leads to supply exceeding demand in the ethylene glycol market, Nan Ya Plastics will not suffer a serious blow, Yuanta Investment Consulting predicts, as the diversity of materials it produces, many of them in the electronics sector, would pick up any slack in the ethylene glycol market. In fact, with the market for fiber products expected to expand in 2009, analysts forecast that the company's EPS next year will be NT$9 per share, higher than that expected for this year.

Insulated from the market cycles of individual products and empowered by its strong twin engines of growth ? electronics and petrochemical products ? "Nan Ya Plastics will definitely continue to grow", says David Jsou, reflecting his company's ambition. "If you don't grow, you're finished."

Translated from the Chinese by Luke Sabatier

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Chinese Version: 南亞　啟動雙引擎　脫胎換骨