Tong Yang Group
Raymond Wu Ups the Ante in China
Despite lackluster returns, Tong Yang is determinedly pouring its resources into new factories in China, with a single goal in mind: rising to the status of Tier 1 supplier for the world’s top carmakers.
Raymond Wu Ups the Ante in ChinaBy Liang-Rong Chen
From CommonWealth Magazine (vol. 368 )
In an environment where quick profits are elusive, Tong Yang Group general manager Raymond Wu continues to pour money into China, quietly eyeing long-term business opportunities with huge potential.
As Tong Yang Group general manager Raymond Wu inspects the site of his new factory in Nanjing, his face is taut with tension. The factory that should have been producing at full capacity is idle, the only sign of activity the chilly wind rustling around it. The road leading to the building should be paved, but it is still nothing more than a pool of mud.
It's only when Wu spots his new electrostatic painting line that he brightens up. “This is state-of-the-art electrostatic painting equipment,” he says with genuine enthusiasm.
The Tainan-based Tong Yang Group is the largest automotive plastic parts supplier on either side of the Taiwan Strait, selling 3 million car bumpers a year. If the electrostatic painting process is properly controlled, the bumpers come out as smooth and shiny as a car panel. But the process is technically challenging, as one of Tong Yang's competitors in China found out when it invested a substantial sum in a turnkey electrostatic painting facility but was unable to operate it effectively.
It is Tong Yang's technical know-how that enables it to pull away from its Chinese rivals.
“What others cannot do, that's our ultimate lifeline,” says the 57-year-old Wu, who got started in the business learning from his father, Tong Yang founder Wu Song, more than 30 years ago.
Tong Yang's operations in China represent a major financial burden. It operates 17 factories there, in places as diverse as Harbin, Fuzhou and Chongqing, and has three top-of-the-line electrostatic painting units like the one in Nanjing, each costing between NT$200 million and NT$300 million. Over the past 10 years, the Tong Yang Group has expanded aggressively in China, partnering with Chinese auto companies to build a new factory every 18 months. But while it has invested a total of US$66 million (NT$2.5 billion) in its Chinese operations, Tong Yang lost NT$72 million last year there on lackluster sales of NT$3.95 billion.
At the end of 2006, Merrill Lynch issued a stunning “sell” recommendation for Taiwan-listed Tong Yang Industry Co. Ltd. shares, citing “underused production capacity in China” as the main reason.
Tong Yang's problems stem from slow returns on investment in an industry notorious for protracted design and development periods. A frustrated Wu explains that China's auto manufacturers have developed new models at a frantic pace over the past two years (2005 and 2006). During that time, Tong Yang has worked on nearly thirty new vehicles with top suppliers such as Toyota, Ford, and China's own Chery Automobile Co., Wu says, leaving its Taiwan-based development staff in utter disarray. But those efforts have yet to be rewarded as the new models have only recently begun hitting the market.
“Tong Yang is going through its hardest times right now,” Wu says.
Despite the challenges of slow returns, Wu has aggressively invested in China because he can fulfill a dream that cannot be realized in Taiwan: turning Tong Yang into a Tier 1 supplier for the world's leading automotive manufacturers. The upgrade in status is similar to that of an OEM (original equipment manufacturer) contractor becoming an ODM (original design manufacturer).
Tong Yang is modeling itself and its future course on multibillion-dollar global auto parts suppliers such as Denso Corporation of Japan, Delphi Corporation of the United States and the Bosch Group of Germany. These top suppliers have superior technical capabilities that can be used to develop new products in-house for auto manufacturers.
In an example of this trend, Tong Yang has two teams working with Ford on new car models, one in Germany and one with Ford subsidiary Mazda in Japan. They include two industrial designers who graduated from one of Taiwan's top engineering schools, National Cheng Kung University. The teams' role is to apply Tong Yang's manufacturing knowledge to the design of plastic car parts that are easy to produce for use in new models.
“In the past, all we did was produce products based on drawings sent to us by the car manufacturers,” Tong Yang assistant manager Fang-hua Hsu says in explaining how the company's operations have evolved.
Sharpened by global competition
The most recent edition of the Economist commented on the dramatic growth shown by the British economy in recent years. It attributed the growth to globalization, which sharpened the UK through competition. This argument is also applicable to Tong Yang, which now has two identities. Aside from being known as a contractor to 24 automotive suppliers in Taiwan and China, it is recognized as the world's largest supplier of aftermarket auto parts.
Such dominance is the result of Raymond Wu and his brother, Tong Yang deputy general manager Wu Yung-hsiang, traveling around the world for the past 20 to 30 years and fighting off challengers from Italy and Spain. In the United States, Europe and even Africa or the Middle East, if consumers need to change a car bumper or panel and want to save money by buying from someone other than the original manufacturer, there is a 60% to 70% chance they'll be buying Tong Yang.
Tong Yang occupies a monopolistic position in the global aftermarket, earning impressive gross margins of nearly 50%, which overwhelmingly offset the company's losses in China. In 2006, Tong Yang Industry had revenues of NT$23.6 billion and earnings per share of NT$1.85.
Tong Yang has used reverse engineering over the years in its replacement part business, developing more than 1,000 body parts for European, American and Japanese car models. The company amassed valuable experience in the process, gaining vertical integration capability by mastering everything from model design to mould development. This is the main reason for Tong Yang's seamless transition into designing for world-class car suppliers.
The Tong Yang Group headquarters in Tainan City ships 1,000 containers around the world every month from a factory whose scale is on a par with Taiwan's full vehicle assembly plants. This southern giant of the car industry has also become a study model for academics specializing in business management.
Ming-tien Tsai, an associate professor in National Cheng Kung University's Department of Business Administration, has long tried to invite his good friend Raymond Wu to teach a class with him. Last September, Wu finally accepted and led a team of Tong Yang executives in joining with Tsai in teaching a course on “Tong Yang's global planning and management.” This may have been the first example ever of a Taiwanese company launching a course at a university.
The Tong Yang delegation, composed of Raymond Wu, two deputy general managers and five assistant managers, took turns lecturing their students on operation strategies in the aftermarket and OEM market, as well as human resource management. The students loved the presentations.
“No large enterprise has ever spoken so frankly and openly before,” Tsai says.
Through the program, Tsai got a glimpse of Tong Yang's unique management style. He contends that Tong Yang's contracting and aftermarket businesses actually complement each other. Even though the aftermarket business is high volume and high profit, it does not yield the technical know-how and experience that can be accumulated when acting as an OEM for a carmaker. And car companies knew this was an important factor for Tong Yang.
“The car factories take advantage of what they perceive is your weakness. You can join their supply chain but they will offer very low prices. If you don't do the business, you will have a tough time making an impact in the aftermarket,” Tsai observes.
Aftermarket the Ultimate Target
With the rapid growth in China's enterprises, Tong Yang's OEM sales there grew to nearly 30% of its total revenues last year. Raymond Wu believes they could overtake the company's aftermarket sales within a few years as China's automotive production capacity comes on line, which would mean the group's total revenues would reach NT$40 billion to NT$50 billion a year.
“But according to my plan, aftermarket sales will begin to climb,” Wu says.
Tong Yang's main target remains the future aftermarket for China's more than 10 million vehicles. Wu Yung-hsiang made his name by conquering the United States' aftermarket a few years ago, and he has already begun to lead his troops into all of China's provinces to open distribution channels there.
“The aftermarket is what keeps me going,” Raymond Wu remarks, before emotionally spitting out a swear word. He then suggests: “You can write that, but don't write it too clearly.”
Translated from the Chinese by Luke Sabatier
Chinese Version: 台南東陽吳永茂的野心