The China Dilemma
Chinese Partners: A Blessing or a Curse?
The number of Chinese investors taking stakes in Taiwanese companies has risen dramatically in recent years. Have the deals helped the Taiwanese partners thrive or dealt them fatal blows?
Chinese Partners: A Blessing or a Curse?By Kuo-chen Lu
From CommonWealth Magazine (vol. 558 )
In downtown Taoyuan, a low-floor bus operating in near silence maneuvers through city streets. The vehicle is an electric bus from Shanghai.
A 45-year-old factory owned by Grape King Bio Ltd. in Chungli is involved in contract manufacturing for Kunming-based Yunnan Baiyao Group Co.
Further south in Taiwan in Pingtung County, the sun is shining on the Gaoping River, and work on the new CECK Auto Parts Co. factory nearby is proceeding at a rapid pace. The facility has a twin brother under construction over 2,000 kilometers away in Changchun in China's Jilin Province, where workers are also pushing hard to get the factory done on time.
Over the past three years, the number of Chinese companies with stakes in Taiwanese enterprises has risen dramatically, the Investment Commission under Taiwan's Ministry of Economic Affairs having approved more than 100 such deals over that time. These Chinese investors are on the prowl for key technologies in Taiwan, targeting domestic companies that have competitive technologies and flourishing markets for their products.
CommonWealth Magazine took a close look at some of these "Chinese partners" around Taiwan, starting with Shanghai-based SAIC Motor Corporation Ltd., which has a stake in Tangeng Advanced Vehicles Co.
Shanghai Electric Buses on Taoyuan Streets
It may surprise some that the best performing electric buses in Taiwan, seen in Taoyuan over the past six months, come from Shanghai. They were originally developed by Shanghai Sunwin Bus Corp., a subsidiary of SAIC, for the Shanghai World Expo in 2010.
Those buses in Taoyuan, assembled in Taiwan under the technical authorization of Shanghai Sunwin, have a failure rate of only 0.04 percent and a utilization rate of 99.8 percent, according to a recent survey on electric buses in Taiwan conducted by the Intelligent Transportation Society of Taiwan (ITS Taiwan). Shen Ta-wei (沈大維), an assistant manager at the society, said the buses performed the best of any electric buses in Taiwan over the past half year.
So who brought in these buses and their technology?
The answer: Tangeng Advanced Vehicles Co. When one walks into its headquarters, one is immediately immersed in the history of a venerable company and Taiwan's long-distance buses.
In its previous incarnation, the company was the vehicle division of Tang Eng Iron Works Co. that produced successive long-distance bus models including the Chung Hsing Express and the Kuo Kuang Express. With such a storied past, why would the company want to bring in Chinese partners?
In 2002, Tang Eng Iron Works Co. spun off and privatized its vehicle division into Tangeng Advanced Vehicles Co. That same year, it developed a partnership with AB Volvo to introduce Volvo buses into Taiwan.
In 2011, amid growing awareness of global warming and the need to save energy and reduce carbon emissions, Tangeng hoped to take the relationship a step further.
"We worked hard to introduce new-energy buses from Sweden into Taiwan, but in the end, Volvo gave England priority rights to its overseas authorization (for the vehicles)," recalls Tangeng Chairman Jonathan Ho.
So Ho turned his attention to a Chinese company that was part of the Volvo system – Shanghai Sunwin – which was a joint venture between SAIC and Volvo Bus Corp.
"China's attitude was completely different," Ho says, recalling that SAIC fully supported the partnership, licensing its subsidiary's best models to Tangeng for production in Taiwan and also agreeing to work with Tangeng in developing foreign markets.
Tangeng began by assembling Shanghai Sunwin's electric buses, which took to the road at the end of last year, from imported CKD (completely knocked down) part kits and has since also tried to make more components and sub-assemblies locally.
In July 2014, the two sides extended their partnership when SAIC took a stake in Tangeng not exceeding 20 percent of its shares. They positioned Taiwan as a production base and springboard into foreign markets, especially Southeast Asia, and invested NT$330 million in a plant in the Luzhu section (in Kaohsiung) of the Southern Taiwan Science Park. Ho says that with the support of SAIC's technology, Taiwan has the opportunity to break through the stranglehold Japanese and Korean bus models have in Taiwan's bus market.
That may be especially true after Taiwan's government announced a target of 10,000 electric buses on the country's roads in the coming 10 years, a potentially huge opportunity for Taiwan's electric bus industry.
But Tangeng has ambitions that go beyond relying on technology licensed from SAIC. Ho says the company's goal is to become a full-blown Taiwanese bus company that fully assembles its own products from locally made components.
Leveraging a Chinese Brand
Just down the road from Tangeng in the city of Chungli is a venerable 45-year-old company that had its 21-year-old unfulfilled "China dream" rekindled when a potential Chinese partner came knocking.
That company is Grape King Bio Ltd. In March this year, the well-known Yunnan Baiyao Group came calling, searching for a Taiwanese supplier of probiotics used in toothpaste.
Once the Chinese company had a chance to see Grape King Bio up close, it discovered that the Taiwanese biotechnology company was producing functional beverages (beverages purporting to offer health benefits) and products featuring lactobacillus (lactic-acid-forming bacteria that help break down food), and ganoderma lucidum and Antrodia camphorata (both fungi widely used in Chinese medicine). The Taiwanese representatives of Yunnan Baiyao reported back to headquarters that the cooperation between the two companies could be extended to more products.
Before any formal partnership was clinched, however, Yunnan Baiyao insisted that the two sides first get to know each other better and then discuss business.
For Grape King Bio's executive vice president Andrew Tseng, who got his master's and doctorate degrees in England and worked there for a few years before returning to Taiwan, it was a different way of doing business. He first met with Ma Xin (馬馨), the director of Yunnan Baiyao's overseas division, in Taipei and then made a reciprocal visit to Yunnan province. It was the first time he had ever applied for the "Taiwan Compatriot Entry Permit" Taiwanese need to travel to China.
Once the two sides got comfortable with each other and found their interests were aligned, they began discussing a partnership. Yunnan Baiyao was interested in MIT (Made in Taiwan) and wanted Grape King Bio to make Yunnan Baiyao-brand products to be sold in China on an OEM and ODM basis. The next step was to buy raw materials from each other and represent each other's products in their domestic markets, while also collaborating on sales campaigns overseas.
The proposed partnership left many institutional investors with holdings of Grape King Bio shares puzzled, wondering why the company, which already had an established brand name, needed to serve as a contract manufacturer for Yunnan Baiyao. They were concerned that Grape King Bio's gross margins would tumble.
In fact, the company invested over US$10 million in 1993 to found Shanghai Grape King Enterprises Corp., hoping to build its brand in China. But it has endured hardships in trying to make inroads into that country's market. Branding has not been profitable and its Shanghai plant has been underutilized, making a tie-up with Yunnan Baiyao more palatable.
There are potential concerns that Yunnan Baiyao, with annual revenue 10 times as high as that of Grape King Bio, is so big that it will simply swallow up its Taiwanese partner, but Tseng is not worried.
"Our R&D and manufacturing are all in Taiwan. These are the most important things," Tseng says, also citing the lure of China's big market.
In Tseng's eyes, if even one of Grape King Bio's products were to become a hit there, it would be huge, considering that Yunnan Baiyao alone sells RMB2 billion in toothpaste and RMB1 billion in adhesive bandages a year.
Just as importantly, Grape King Bio is currently highly dependent on Taiwan because it lacks a presence in overseas markets. In contrast, Yunnan Baiyao has a highly visible brand in Chinese-speaking communities around the world, and its willingness to help Grape King Bio expand overseas has given the Taiwanese company greater confidence in its ability to tap into future markets.
A First: Parallel Cross-strait Factories
Moving to Taiwan's southernmost industrial park, the Pingtung Export Processing Zone, workers are rushing to complete CECK Auto Parts' R&D building and factory. It will be the first company in Taiwan to produce advanced high-strength steel structural automotive parts.
The project is part of another milestone: building factories simultaneously in Taiwan and China. CECK Auto Parts is a joint venture of four investors. One of the joint venture partners, China-based Changchun Engley Automobile Industry, is Taiwanese-invested, and the three others – China Steel Corp., K.S. Terminals Inc. and Chang Yee Steel (B.V.I.) Co. – are all Taiwan-based enterprises. Yet Taiwan's Investment Commission considers CECK to have mainland Chinese investment.
The reason is that Changchun Engley President Lin Chi-pin (林啟彬) has operated in China for more than two decades and his companies have been part of China's automotive supply chain for much of that time. He has also joined with Chinese carmakers to form three joint ventures. That background led Taiwanese authorities to bill Changchun Engley as "Chinese investment."
That has not diminished Lin's thirst for the project, dating back to two years ago when he visited China Steel looking for advanced high-strength steel technology. This modern material promises to make cars structurally lighter and thinner despite being stronger than steel used in submarines.
CECK president Liou Horng-yih says the highest strength sheet steel can attain through commonly applied cold-rolled technology is 980 mpa (a measure of force per unit). The new technology, however, first heats the steel to a temperature of 930 degrees Celsius, then rolls it using a mold that brings the temperature down. The result is automotive structural steel, used for parts such as the bumper beam, that packs a strength of 1,500 mpa.
The advanced steel's properties are especially attractive because the United States and the European Union are setting increasingly tight standards for automotive fuel consumption. Every 10 percent reduction in a car's weight can reduce fuel consumption by at least 6-8 percent, meaning that the new steel, which will reduce the weight of key structural components by 30 percent without sacrificing strength, could pay huge dividends in the future.
China Steel can produce this advanced steel, so why would it need a "Chinese" partner?
Jer-ren Yang, a professor in National Taiwan University's Department of Materials Science and Engineering, says the technology behind hot-rolled advanced high-strength steel is not that uncommon internationally and has been mass-produced for many years. The real challenge, he explains, is quickly developing a market for it.
There are currently only three companies, all foreign-invested, that can produce this advanced automotive steel in China, according to CECK's Liou. They are the Gestamp Group from Spain, Magna International Inc. from Canada and the Benteler Group from Germany.
That exclusive club will soon get bigger, however, as 30 new production lines have been completed in China and another 20 are under construction, and some expect the number to eventually exceed 100 in the future.
Seeing a surge in competition on the horizon, CECK knew it had to entrench itself in China's Tier One automotive supply chain before the new Chinese production facilities came on line if it hoped to establish an unassailable position in the market.
To achieve the goal, it had to find a strong partner – Changchun Engley. Then it recruited K.S. Terminals and its progressive die technology and Chang Yee Steel and its expertise in steel processing, giving it three partners destined to play different roles in the venture.
Developed in Taiwan, Consumed in China
Wang Shin-chin, the vice president of China Steel's Technology Division, says Changchun Engley has worked with Chinese vehicle maker FAW Group Corporation for more than 20 years and is a Tier One supplier to Changchun-based FAW-Volkswagen Automotive Co.
The participation of Changchun Engley in the venture has enabled CECK to quickly make inroads into the FAW supply chain. Because of Changchun Engley's tight relationships with many Chinese automakers, CECK was able to submit its steel materials to the FAW Group for certification even before beginning production, in effect building its plant and going through the certification process at the same time.
In a country where it usually takes suppliers three to five years to gain the certification needed to enter China's supply chain, CECK's ability to pursue certification as its factory is being built is practically unheard of.
Rejecting Chinese Investment
In central Taiwan, a battle set off by potential Chinese investment in which the Chinese wanted access to a key Taiwanese technology and the Taiwanese wanted access to China's supply chain came to an end just recently.
After its plan to sell a stake in the company to China Xinzhi Motor Co. was blocked, Taichung-based Fukuta Electric & Machinery Co. completed a transfer of shares to new shareholder China Steel on the morning of Oct. 6, leaving the Chang family that owns Fukuta Electric NT$352 million richer. But when Fukuta Electric general manager Gordon Chang met with CommonWealth Magazine reporters that same afternoon, his face was the picture of exhaustion, evincing not even the slightest trace of happiness from completing the deal.
He slowly began to recount the story of how Xinzhi Motor almost became one of his company's shareholders.
For the past three years, venture capitalists, private fund managers and other institutional investors have descended on Fukuta Electric, urging the Chang family to sell shares in the company for two reasons: 1) Fukuta Electric had been wholly owned by the Chang family since it was founded and 2) its sales were growing with the expansion of Tesla, one of its main customers, putting it in the spotlight.
Family members were split over the direction of their company's operations, but in the end they decided to sell a stake and bring strategic investors into their company. Chang says the decision was made with two objectives in mind – to create value for shareholders and improve selling prices; and to have the new shareholders help Fukuta Electric create value, resulting in the company's total value being greater than the sum of its parts.
It was under these circumstances that China's Xinzhi Motor opened the door to cooperation.
Xinzhi Motor is the leading supplier of starter motors to China's automotive industry, but it lacked the technology needed to make starter motors for electric cars.
Chang saw China as the world's biggest electric car market in the future and Xinzhi Motor as a potential partner that could open the door to China's automotive supply chain for Fukuta Electric. In addition, Xinzhi Motor was willing to use a relatively high price to buy a stake in Fukuta Electric. Its offer of NT$72 a share to buy no more than 20 percent of the company's shares was more than 30 percent higher than the price per share China Steel eventually paid.
In the end, Xinzhi Motor's acquisition bid was rejected by the Investment Commission. Fukuta Electric is Tesla's exclusive supplier of induction motors, and the Investment Commission feared that Chinese participation in the company would provide a serious threat to Taiwan's technological lead.
Chang was not thrilled with the decision, thinking it would be better to let the partner take what technology it could and just stay a step ahead of it rather than trying to prevent a technology outflow.
"This year, Tesla announced that it would allow others in the industry to make use of 200 of its patents. It wasn't afraid of others copying them; it was only afraid that the market wasn't big enough," Chang says.
Chang believes that China Steel's acquisition of a stake will benefit Fukuta Electric in the long-term, but he felt that a partnership with Xinzhi Motor would have been helpful in entering China's market. All he can do now, he says, is face reality.
As more potential Chinese partners come knocking on their doors, Taiwanese enterprises have plenty to think about. These Chinese investors may be willing to inject capital, place orders and even help tap overseas markets, but there is also the risk that they could make off with key technologies and customers. Before entering into a partnership with mainland interests, Taiwanese companies need to clearly weigh whether such alliances will be a blessing or a curse.
Translated from the Chinese by Luke Sabatier