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The Survivors are Kings

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The Survivors are Kings

Source:Kuo-Tai Liu

In the Pearl River Delta, the city of Dongguan is known as the “capital” of Taiwanese-invested businesses. A decade ago, Dongguan experienced an exodus of Taiwanese companies that were no longer competitive due to rising labor costs. But those who are still active in Dongguan today are well established in their niches and there to stay.

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The Survivors are Kings

By Kuo-chen Lu
From CommonWealth Magazine (vol. 623 )

Among China’s 293 prefecture-level cities, only Dongguan boasts a 289-meter-high, 68-story skyscraper. The Dongguan Global Trade Plaza, which is locally also known as the "Taiwan Business Association Tower,” epitomizes the influence and glory of the Taiwanese business community in their adopted “capital.” 

Over the past decade, the Taiwanese business community has gone through a brutal selection process, with only the fittest surviving. Ji Guanfen, deputy secretary general of the Taiwan Businessmen Association Dongguan, notes that the association had more than 7,500 members at its peak, while only around 2,000 remain today. City statistics, however, hold that the number of Taiwanese-invested businesses has stabilized at around 3,400-3,500 companies.

The rapid decline in the number of Taiwanese businesses reflects the destiny of two diametrically opposed business strategies: Transformation to grow a stronger foothold in China versus competing on cost. 

 “Many years ago, the Taiwanese entrepreneurs had the following attitude: Don’t buy land, and don’t build assets, because once Deng Xiaoping dies we will have to return home,” says Ji in describing the mindset during the early days of Chinese market reforms. Since Taiwanese businesspeople worried that China’s economic policy would change after Deng’s death, they were always mentally prepared to pack up and leave. However, thanks to the meteoric rise of the Chinese economy in the twenty years since Deng’s passing, Taiwanese companies have become integrated into this huge economy. 

The new slogan in Dongguan is “the survivors are kings.” This means that the Taiwanese businesses that are still operating in China have moved up the value chain through transformation, proving their mettle in a tough marketplace. 

One of these survivors is Dongguan Hirosawa Automotive Trim Co. Ltd., a manufacturer of decorative parts for car interiors. William Chuang, Hirosawa’s vice general manager for R&D, still remembers his first day at work many years ago when the company was still housed in a run-down factory shed with a leaking roof. "It was raining heavily outside, and inside the factory it was drizzling,” he recounts. In those days, an ordinary worker could be hired for a monthly wage of 400 renminbi. 

Today, Hirosawa counts among the city’s top 100 corporate taxpayers. Meanwhile, it has listed on the Taipei Exchange under the name Hiroca Holdings Ltd. The company counts among the most competitive ones in the field of surface treatment for car interiors, with a full-fledged product line ranging from steering wheels to airbag covers and consoles. It counts Japan’s three leading carmakers Toyota, Nissan and Honda among its customers, and has even followed them to overseas locations as far as Mexico. 

An increasing number of Taiwan-owned business in China follow the pattern of Hirosawa. Home and family are in Taiwan, factories in China and other countries abroad, while the corporate headquarters are based in Dongguan. 

Transformation Trick #1 – Automation

Over the past dozen years, the monthly wage of unskilled workers at Hirosawa has risen to 6,000 renminbi, whereas the price of a mid-class car fell from 250,000 renminbi to 150,000 renminbi during the same period. While workers become more expensive, product unit prices keep declining, squeezing profit margins from the cost and the sales sides. Consequently, companies are forced to transform. 

In 2014 Hirosawa decided to upgrade by replacing human workers with robots. This is the first recipe that Taiwanese business turn to to solve their current predicament. 

Hirosawa cut its workforce on the coating line, which has the most labor-intensive operations, in half. More than 200 robotic arms were procured for the entire factory. On the coating line, human workers appear only at the front and back end; they no longer need to handle paint sprayers and breathe in fumes. Instead they monitor machines and work in quality control. At peak times, the company employed 3,800 workers, of whom around 3,000 remain. The factory’s output has, nonetheless, increased 1.5 fold. 

Chiao Hong Shoes Co. Ltd. President Simon C.J. Kuo (second right) inspects a shoe factory with his son. Kuo is busy selling in China, building his own brands and preparing to hand the baton to his son.

Does it make sense economically to replace human workers with robots? Chuang has a clear-cut answer: “Robots basically become cheaper the longer you use them because their cost can be written off over time. In contrast, humans become more expensive over time because their wages go up every year.” 

Hirosawa Chairman Yu Che-ming, however, cautions that robots alone are not a panacea for surviving amid fierce competition. “When investing in robots, what I can do, my competitors can also do. You need to seize the opportunity when your rivals have not yet caught up. Hirosawa must take the next step very quickly by investing in upstream [products]; we need to control key parts and materials to be able to survive.”

Transformation Trick #2 –Domestic Sales

The second way to overcome harsh realities is to switch from export orientation to selling domestically. Selling to China’s sizable consumption-hungry middle class proves for many manufacturers more lucrative then selling around the globe. 

Dongguan Mayor Liang Weidong points out that a survey of some 1,000 Taiwan-owned businesses in the city found that 23.5 percent are planning to increase their investment or expand production. Thirty-six percent want to increase their R&D spending, while 42 percent say they plan to procure advanced equipment. As much as 38.9 percent aim to expand their domestic sales. 

One of the Taiwanese manufacturers targeting China’s domestic market is Chiao Hong Shoes Co. Ltd. Company President Simon C.J. Kuo, who doubles as chairman of the Taiwan Footwear Manufacturers Association, says it is the key for survival. “Those who remain in Dongguan now are kings. Those who can stay all manage to make money. In the past, the rule was, the bigger a factory the better, but now it is the opposite; the bigger the factory the heavier the pressure. Also, exporting is not as good as selling domestically.” Kuo was among the first manufacturers of flip-flops and sandals in Taiwan. Legions of shoe manufacturers have learned from him. 

Dongguan Hirosawa Automotive Trim Co. Ltd. Chairman Yu Che-ming (second right) built his company from scratch. Today the manufacturer of decorative parts for car interiors counts among the top 100 corporate taxpayers in Dongguan. 

Stanley Yang, president of the board at Dongguan Fu Shang Environmental Materials Co. Ltd., a manufacturer of bio-degradable plastics, observes that many former Chiao Hong Shoes employees who started their own businesses now run bigger companies than Kuo. The veteran among the sandal makers, however, insists on going for quality instead of quantity. The popular Californian handmade shoe brand Sanuk, and lifestyle sports footwear brands Skechers and A&F all count among Chiao Hong’s customers. 

Unlike the lion’s share of sports shoe makers, Chiao Hong Shoes manages to continue to produce in Dongguan because the production process for sandals and flip-flops only has a few steps that are not labor-intensive. 

Using its own materials, the company follows two strategies in China. The first is Chiao Hong Shoes’ own snow boot brand ROCKYBEAR, which is sold via electronic commerce platforms in China. Once they sold a record 18,000 pairs in three days. Kuo makes as much profit from the sale of one pair of ROCKYBEAR shoes as from ten pairs of shoes manufactured under contract for foreign brands for export. 

The second strategy is contract manufacturing for Chinese brands sold in the domestic market. While Americans buy an average eight pairs of shoes per year, and Japanese buy an average 5.7 pairs, Chinese presently buy only three, which means there is a great deal of room for sales growth. Therefore, Chiao Hong Shoes not only sells its own brands in China, it also produces for popular local footwear labels such as Anta Sports and Fila, gradually boosting its market share in China. 

How does Kuo deal with competition from footwear makers who produce at even lower cost in Southeast Asia and India and also sell their shoes in China? Kuo believes that exploiting the advantage of localized production is important. His company is currently experimenting with customization via the internet. Consumers can select materials for their favorite shoe models online and even have their name printed on them. Thanks to localized production with a focus on smaller quantities for the benefit of greater product diversity, Dongguan will continue to be the capital of the footwear industry. 

Transformation Trick #3 – Nurturing the Next Generation

The third challenge that Taiwanese entrepreneurs in Dongguan face is also the toughest. It is neither cost nor the market, but the upcoming retirement wave of the founder generation. The members of the younger generation, usually born in Taiwan and educated abroad, differ a lot from their fathers in terms of socialization and ideas. They are now returning to Dongguan to take over the family business. 

Against this backdrop, the idea of mutual collaboration is gaining ground in Dongguan. Business associations that bring together young Taiwanese entrepreneurs are currently mushrooming in the city. 

On May 17, such an association was founded in Houjie, a township in Dongguan. As many as 112 Taiwanese second-generation business leaders from Houjie are expected to join. 

It is the sixth local young entrepreneurs association. However, given that 32 towns and villages belong to Dongguan City, the degree of organized networking among the business successor-generation is still quite low. 

Most youth entrepreneur association leaders agree that Taiwanese businesspeople in China are not united enough due to mutual competition, and few are willing to become part of local society. For instance, when Dongguan City promoted the replacement of workers with robots through a subsidy program, most Taiwanese businesses refrained from filing applications because they were afraid that if they took the subsidies they would one day have to pay for it. 

In contrast, Chinese-owned companies actively took advantage of the policy. Lee Hsueh-ming, head of the Taiwanese young entrepreneurs’ association in Tangxia, discovered during factory visits that the Chinese entrepreneurs have been quick to introduce robots. “Others have changed machinery and equipment very fast, switching to machines that can produce 10,000 units in an hour while we remain at 5,000 to 6,000 pieces,” notes Lee. He believes that the Taiwanese business community should be more actively investing in smart functions and apply if subsidies are offered. Lee thinks entrepreneurs need to understand “how to get close with the government while keeping their distance from politics.” 

The first generation of Taiwanese entrepreneurs in Dongguan built the monumental Global Trade Plaza. The second generation, however, is less interested in prestige projects than in improving networking and mutual support within the Taiwanese business community. They hope to pool funds to assist each other financially and eventually set up their own bank. They are also considering setting up a human resources platform or a joint procurement and exchange platform for mutual collaboration and greater influence through concerted action. 

 These second-generation entrepreneurs who grew up in Taiwan and studied in the United States and Europe still return to Dongguan to take their family businesses to a higher plane, with headquarters in Dongguan and factories all over China and overseas. Like their fathers, they immerse themselves in hard work in Dongguan, showing that Dongguan has become a second home for Taiwanese entrepreneurs, and that Taiwanese businesses will continue to play a significant role in the transformation of the Greater Pearl River Delta.

Translated from the Chinese by Susanne Ganz


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