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Conventional SMEs

Breaking the Growth Curse

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These two Taiwanese SMEs have been thriving for over 35 years. What have they done to break through the growth barrier and become world-class enterprises?

Breaking the Growth Curse

By Jui-Chen Liao
From CommonWealth Magazine (vol. 374 )

"The White Paper on Small and Medium Enterprise in Taiwan, 2006 reported that only 18.34% of enterprises operating in Taiwan in 2005 had been in business for more than 20 years, and that the average life span of Taiwanese SMEs was 13 years. But some small business owners in Taiwan have beaten the odds and sustained their profits over the long haul, even in conventional industries.

A Business Week survey conducted earlier this year suggested that conventional industries, rather than trendy emerging sectors, have grown the most rapidly in recent years, with some averaging profit growth of 90%. Two Taiwanese companies in the rubber and chemical industries are riding that wave and proving that there is still room for small businesses to grow and thrive.

Both Hsin Yung Chien Company and Lee Chang Yung Chemical Industry Corporation have registered compound annual after-tax net profit growth of more than 95% in the past three years and are among the few companies operating in conventional industries that were ranked amongTaiwan's 100 Top-Performing Enterprises by CommonWealth Magazine. Here’s how, over the past few decades, they started as small and medium enterprises, discovered their niches, and built businesses that have remained successful, growing into world-class operations.

Hsin Yung Chien Co.

Fighting Its Way to the Top Four

Entering the Nangang Industrial Park in Nantou County, one sees a new structure surrounded by old, motley factories, but it’s not a newly established company. It’s been around for 38 years producing rubber conveyor belts – Hsin Yung Chien Co., Ltd.

Founded in 1968, Hsin Yung Chien Co. began as a manufacturer of rubber shoe soles but within a few years, changed its focus to rubber conveyor belts. Today, the company is Taiwan’s largest, and the world’s seventh largest, rubber conveyor-belt producer. In 2006, it registered sales of NT$1.78 billion and EPS of NT$5.28, dazzling results that were largely the result of company chairman Chi-chin Lin’s slow, step-by-step diligence in building his business.

Chi-chin Lin partnered with machinery suppliers to jointly develop an automatic vulcanizer, raising production by 50% compared to conventional vulcanizers used by other companies.

Sporting a crewcut and speaking with a strong Taiwanese accent, Chairman Lin exclaims with plenty of confidence, “Our factory complex is pretty neat, isn’t it? Our employees come here to shoot their wedding pictures.” The plant grounds are full of green, landscaped with plenty of big trees and imposing rocks. The stylish, high-ceilinged lobby features a marble floor shiny as a mirror.

Lin had the company thrust upon him at a young age. When he was 25, his father suffered a cerebral hemorrhage while on a delivery run, and passed away. The young Lin never forgot his dying father’s request that he do his best to keep the company going, a request that compelled him to put in 16-hour days every day for a number of years to keep the company afloat at a time when financing was hard to come by.

In the first few years after he took over the company, Lin faced intense competition from big rivals who aggressively pursued and won the orders he was vying for. As a result, Lin changed his strategy. He decided to build up his strength by relying on piecemeal orders, rather than face off against the big suppliers.

“I had no choice but to move in when they were resting, like before 8 a.m. or after they got off work, and go visit customers,” Lin recalls with a bitter smile.

In 1990, Lin developed a five-year investment plan involving a phased reinvestment of profits that would overhaul his manufacturing facility and give Hsin Yung Chien a complete facelift. At the same time, he felt that if the company did not open new markets, it would eventually collapse. Unable to speak a word of English, Lin used another language, that of low prices and excellent quality, to persuade overseas buyers to place orders with him.

You Get Quality by Making It

To maintain high quality standards, Lin has delegated authority to his employees, making them independently responsible for the quality of their own work. He often tells them, “You get quality by making it, not inspecting it.”

At the urging of friends, Lin earned an MBA at Dominican University in the United States when he was 44. Deeply influenced by the century-old institution, Lin made some major strategic decisions when he returned to Taiwan. The first was to revamp the factory’s environment.

“I wanted to build an open factory that would make the employees happy to come to work,” he said.

Lin also took steps to maintain a competitive edge over rivals. He joined with his machinery suppliers to develop an automated vulcanizer that increased production by 50% compared to the traditional vulcanizers being used by other Taiwanese conveyor manufacturers, while lowering the reject rate to 5%. The new machine also made it possible to make other specialty items, including waterbeds for dairy cattle and conveyors used in the logistics and aviation industries.

When the 7.3 magnitude Jiji earthquake of 1999 struck central Taiwan, Hsin Yung Chien’s facilities suffered major damage. But within a week, Lin overhauled his equipment and had the company up and running again.

“Chairman Lin is very ambitious, and he responds quickly to crises. That’s one of the main factors behind Hsin Yung Chien’s success,” says Yang Yih-cherng, president of the Taiwan Small Business Integrated Assistance Center.

Following the earthquake, Lin again adjusted his operating strategy, systematically classifying his product line and more closely monitoring shifts in market trends.

“I adjust my strategy based on the current market environment,” Lin explains. If, for example, Hsin Yung Chien’s only competition on a high-margin item comes from the United States, it won’t lower its pricing. On lower-margin products, pricing is determined by how busy the factory is.

“If more orders are needed to balance out production, then we lower prices. The initiative remains in Hsin Yung Chien’s hands,” Lin says.

Future Competitor Is India, Not China

Hsin Yung Chien’s production process is still its main advantage, Lin contends, but marketing is becoming increasingly important, which is why he believes that in the future English-speaking India and not China will be his biggest competitor.

“In China, they only know how to manufacture. They don’t know how to sell,” says Lin, who has not invested in China and still does all of his manufacturing in Taiwan.

Many ask Lin how Hsin Yung Chien survives without moving shop to China.

“If you only make the move for the cheap labor, then there’s no advantage to going to China, because wages there will eventually rise. What’s the point?” responds Lin.

Instead of moving west, Hsin Yung Chien has automated its equipment and processes to reduce manpower needs and keep labor costs in line.

“Last year, each one of our factory employees was responsible for NT$11 million in output value, which reflects our high level of automation. So why do we need to go to China?” Lin contends.

Hsin Yung Chien’s “HYC” brand has become well known around the world. The company exports 95% of its products, with 65% of its overseas sales going to markets in the Americas. Its biggest customer is Marubeni, one of the world’s largest trading companies. With an eye on the future, Lin is pursuing a two-pronged marketing strategy that offers product on an OEM basis while promoting the company’s branded products in emerging markets.

In more concrete terms, the company enters into partnerships with larger rivals if their broader sales networks help keep production lines busy, but it is also aggressively looking to expand distribution and recognition of its branded products in Indonesia, South Korea and Eastern Europe.

“Hsin Yung Chien must not just be able to manufacture, but also be able to sell,” Lin says.

Seemingly heeding the calligraphic scroll in his office that says, “Struggle toward the heavens,” Chi-chin Lin is making steady headway toward his goal of becoming one of the world’s four largest suppliers of rubber products.

Lee Chang Yung Chemical Industry Corporation

Riding R&D and Safety to Success

Entering Lee Chang Yung Chemical’s reception area, one immediately realizes that this is not your average company. The receptionist behind the counter is not the stereotypical pretty young face, but a 70-year-old woman. The wrinkles on her face reflecting the passage of time are testimony to the chemical enterprise’s history.

Founded in 1965, Lee Chang Yung Chemical now has production facilities around the world in places as diverse as the United States, Qatar, China and Kaohsiung, Taiwan. In 2006, group sales reached NT$37.9 billion, 17 times higher than the figure 17 years ago.

To compete with the big conglomerates, Bowei Lee is pushing to enhance the added value of his company’s products and pursue systematic cost management.

In recalling the bumpy road traveled by his company, Chairman Bowei Lee gets nostalgic. In 1992, a year after Lee took over as general manager, a young employee was killed in an industrial accident in one of the company’s plants. That had a major impact on the company’s new leader.

“At the time, I didn’t know how to make things right with his parents,” Lee says as his eyes redden over the memory of the tragedy. From that point on, Lee started to make safety and the environment top priorities. To ensure the safety of every employee on their way to and from work, Lee Chang Yung Chemical not only placed a high degree of importance on internal factory safety issues but also asked traffic police to give employees driver safety instructions.

“Every year, I also ask each employee to recommend two ways that the company can improve its environmental and safety practices,” says Lee, who feels that when it comes to safety and the environment, talk is not enough. In his mind, working hard to realize goals is what’s needed.

Making Money from Safety

Stressing safety has become a crucial competitive edge for the company. In recent years, profit margins in the petrochemical industry have narrowed as competition has intensified, which means that “if another company’s factory explodes, it’s the time for us to make a lot of money,” Lee says laughingly. But he is serious when he asserts, “If safety and environmental issues are taken care of, they can also be money-makers.”

A possible threat to Lee Chang Yung Chemical is the trend among both Taiwanese and foreign petrochemical groups of consolidating supply chains to improve competitiveness, but Lee does not act the least bit concerned. He believes that the company’s emphasis on enhancing the value of its product line through research and development and making rational use of its expenditures is the key to fighting off the big conglomerates.

“Focusing on R&D capability is definitely the way for Lee Chang Yung Chemical to stay ahead of the market and an important factor in competing with other companies,” says Chang Chih-chia, an analyst with Capital Securities. “It’s especially true when competing with products from China. If your products are not upgraded, then there’s no differentiation between your items and those from China.”

Lee Chang Yung Chemical is fully aware of the challenge, and has set up an R&D center in Kaohsiung that is dedicated to adding value to its product line.

Within the company’s product line, electronic grade chemicals are the stars of tomorrow. Ninety percent of the company’s customers for these chemicals are prominent domestic TFT-LCD suppliers, including AU Optronics, Chi Mei Optoelectronics and Chunghwa Picture Tubes. The chemicals are used primarily in cleaning panels and components, and help lower reject rates and protect production machinery.

Lee Chang Yung Chemical has also carved opportunities where on the surface none existed. The company for example offers a solution to manufacturers who have long been confounded by how to deal with chemical waste.

“Initially, if they don’t want to use our products, I tell them I’ll help them dispose of their waste,” says Lee, who then treats the waste and turns it into products he can resell. This practice of “recycling and reuse” has created many niches for the company.

Aside from upgrading its products, Lee Chung Yang Chemical’s pursuit of systematic cost management has given it another competitive edge. In the past, Lee would often call his plant managers at night to discuss the feasibility of overcoming production bottlenecks and double production.

“I would ask them ‘where are the problems? Tell me so we can discuss them together,’” Lee says. In the end, they found that nothing is impossible, and for the past few years, the company’s output has risen dramatically while costs have remained at a manageable level.

When Lee bought Taiwan Polypropylene last year, he felt little concern about the usual post-merger problems that have plagued many new alliances. He believes that acquisitions of other companies are positive steps for the company.

“I really like the Twin Plan, which is to take the numbers of two different factories and compare them,” says Lee, who hopes the benchmarking exercise will help identify areas of improvement that can contribute to growth.

“No companies are perfect,” Lee says. “You have to continually take a hard look at yourself if you want your business to get better.”

To stay ahead of the market in the future, Lee Chang Yung Chemical is adjusting its main focus to alternative energy products, specifically targeting the government’s initiative to promote the use of LPG (liquid petroleum gas) in taxis. It plans to build an LPG facility in Taitung County to take advantage of this opportunity.

At the same time, Lee acknowledges that his company needs to get bigger in this era of globalization to be able to attract the best talent and maintain its competitiveness.

“We hope that the market share of every one of our products ranks among the world’s top three, and we also need to constantly improve so that we can survive in this age of globalization,” Lee says.

Despite being a multinational company for the past 10 or so years, Lee Chang Yung Chemical still hungers for more. Leaning on its innovation and R&D prowess, it fully expects to one day transform itself into a “world-class enterprise.”

Translated from the Chinese by Luke Sabatier


Chinese Version: 中小企業如何打破成長魔咒?

Keywords:

好友人數