Kenda Rubber Industrial
Return of the Tire Maker
After moving production to China in 1988, Kenda quickly became the third largest bicycle tire maker in the world. Yet last year they moved their car tire production back to Taiwan. Given the higher costs, why did they insist on returning home?
Return of the Tire MakerBy Elaine Huang
From CommonWealth Magazine (vol. 506 )
Kenda Rubber Industrial Co. Chairman Ying-ming Yang was not prepared to see his new plant in Taiwan get off to such a rocky start. "We had to make a decision," the industry veteran explains in recalling the situation three years ago.
Back then the United States imposed extra safeguard duties between 25 and 35 percent on imports of Chinese tires for a period of three years.
"We didn't know whether the extra tariffs would be extended after three years. There was a risk," recalls Yang, who had established a factory for passenger car tires in China a decade ago.
So the silver-haired Yang eventually decided to establish a PCR (passenger car radial) tire factory in Taiwan to escape the punitive tariffs.
Kenda started out as a bicycle tire maker. Yang, who is in his sixties, holds a master's degree in chemical engineering from Syracuse University in the United States. Having attended graduate school abroad makes him a rarity among Taiwanese industry leaders of his generation. Yang had just applied for a scholarship for doctoral studies and was preparing to start his PH.D. program when his father, company founder Yang Chin-pao, told him to return home to take the helm of the company.
Under his leadership Kenda set up a tire factory in China in 1988 and gradually grew to become the third largest bicycle tire maker in the world. Ten years ago, Yang began to use the profitable bicycle tire business to smoothly expand into the production of car tires, which generate higher revenue and higher profits.
In order to tap China's huge domestic demand, Kenda moved closer to where its markets are, establishing passenger car tire factories in Kunshan, Jiangsu Province and Tianjin, Shandong Province over the past ten years. Both factories churn out tens of thousands of tires per day. Moreover, Kenda is a supplier to Shanghai General Motors, a joint venture between U.S. carmaker General Motors and Shanghai Automotive Industry Corporation (Group).
"You need to produce 25,000 tires (per day) to reach economies of scale." As Yang explains, factories with a smaller daily output will not be profitable.
Kenda's corporate headquarters are located in Yuanlin in Taiwan's Jhanghua County. The bicycle and passenger car tire factories behind the office building are both running at full capacity. Yang has hammered out a clear strategy: His Taiwanese factories produce high-end bicycle tires with price tags of over NT$1,000 per piece, intended for high-end bicycles costing more than NT$100,000. The price for these tires manufactured in Taiwan is two to three times higher than those made in China, and even more expensive than some passenger car tires.
Small Output, Higher Costs
Still, the passenger car tire factory, which was relocated to Taiwan in May last year, is causing Yang considerable headache, despite his reputation as an astute entrepreneur.
A 50-minute drive away from the Yuanlin headquarters, Kenda has another production site in the Dajiang Industrial Park in Citong Township, Yunlin County. The factory there originally produced tires for special purpose vehicles and high speed motorcycles. After the U.S. imposed special safeguard duties on tires imported from China, Yang built a passenger car tire factory on a vacant plot of land next to the existing factory, with a daily capacity of 4,000 tires. The factory began operations in May last year. But it also began to test the wisdom of Yang's decision to return and set up shop in Taiwan.
First of all, a daily output of 4,000 tires is not enough to produce cost-efficiently. As a result, production in Taiwan is more expensive than in China.
Yang presently plans to double production from 4,000 to 8,000 tires per day by the end of the year for sale in the Taiwanese and U.S. markets. But even then the scale of the Taiwanese production line cannot compare with the 25,000 tires churned out by Chinese factories every day.
"The Taiwanese car market has a demand of more than 300,000 vehicles per year, whereas in China 200,000 to 300,000 units are sold of a single vehicle model. It's absolutely impossible to establish a large-scale tire factory in Taiwan, so it's only natural that procured material costs are higher," observes Chen Bor-Po, chairman of tire manufacturing equipment maker All Well Industry Co. Ltd.
What increases Yang's dilemma is that he opened an automobile tire factory in Taiwan mainly to avoid the special safeguard duties the United States imposed on China. But recently he heard that the duties, which will expire after three years at the end of September, might not be extended. If such is the case, his rationale for returning to Taiwan – a competitive advantage over China with its punitive 25- to 35-percent tariffs – would no longer be valid.
But with the investment well under way, Yang can no longer call it off. Kenda has poured NT$1.2 billion into the new production line to buy equipment worth tens of millions and has hired and trained 100 additional employees.
Investing in Taiwan's Industrial Upgrading
"In its first two years, a factory is in the process of adjusting equipment. It gets ready to turn a profit in its third or fourth year. When establishing a factory you need at least five or ten years' time to turn profitable and earn back your investment," notes Chang Chung-ming, vice president of Taichung-based bicycle maker Ming Cycle Industrial Co. Ltd. Ming Cycle buys tires from Kenda for its Strida brand folding bike. Two years ago Ming Cycle set up two production lines in Taiping Township in Taichung and recruited 30 more employees to boost exports.
After 40 years in the industry, Yang clearly knows what Taiwan holds in store.
"Assuming that the safeguard duties won't continue, I would still return to Taiwan and invest here. For one thing, costs keep rising in China. But more importantly, it's not so good if we place our entire production in China. We have kept our R&D center for bicycle and motorbike tires in Taiwan all along, but we didn't have automobile tires. I always felt that something was missing," Yang explains.
Kenda's financial statements show that although the factories in Yuanlin and Yunlin maintained a workforce of right around 1,300 people over the past decade, revenue grew by 5 percent annually. In other words, per capita output at the Taiwanese factories kept rising because they produce high-end products. Similarly, while their revenue accounts for just 20 percent of the group's total revenue, they generate 35 percent of the company's profit.
A tour of the automobile tire production line in Yunlin shows that Yang is firmly resolved to make his investment worthwhile by making it profitable.
From raw materials to finished tire, the manufacturing process takes about four hours, involving a dozen different stages of production. "It's estimated that a daily output of 4,000 tires is not enough – you're sure to lose money. But we were able to break even at a daily output of 3,000 tires," declares Kenda manager Huang Hsi-chin. Huang, who used to work in R&D before being transferred to the passenger car tire factory, is proud of the factory's successful shift to high added-value production.
Has Kenda ever considered fully automating production by using robots? Huang has done the math. A single tire building machine costs NT$18 million. A highly automated production line can be operated by a single technician who costs the company a monthly salary of NT$50,000. But if all production is fully automated at once, Kenda will have to invest NT$50 million.
Therefore, the company decided to first buy a tire building machine for automobile tires which is used alongside the existing equipment on the old production lines. The strategy is to break even by achieving the highest efficiency in operations with the most economical investment in factory facilities.
"At a car tire factory, workers account for about 10 percent of total cost, just half of the labor costs at a bicycle tire factory, because there is a high degree of automation. I feel you can still make tires in Taiwan," concludes Yang, who has shrewdly weighed his options. Yang's view is validated by other Taiwanese tire makers such as Cheng Shin Rubber Industry, Federal Tire, and Nankang Rubber Tire, which all still produce in Taiwan.
But isn't the biggest problem for returning Taiwanese companies, aside from the scarcity of affordable land, that workers are hard to find?
"The labor shortage certainly gives us a headache," admits Huang. "We have a 10-percent job vacancy rate." In a bid to fill the vacant posts, Kenda has even raised technician salaries to between NT$45,000 and NT$50,000, far above the typical worker wage in the conventional industries.
Further efforts focus on improving the working environment.
In summer, temperatures inside the factories get stifling hot. Moreover, sulfur vapors are released into the air when the raw rubber tires are vulcanized during the production process, creating an unpleasant odor that deters many young people from working in tire manufacturing.
Kenda has spent some NT$10 million for ventilation equipment in the production line in order to lower the temperature inside the plant and reduce odors.
"We hope to retain workers with a good environment and satisfying salaries," Huang asserts. New workers need to be trained for at least half a year, which adds to hidden costs. Given that Taiwan advertises itself as a maker of high-end products, the quality and skills of its workforce are becoming ever more important.
"I am convinced that the influx of returning Taiwanese companies will be able to trigger further upgrading in the manufacturing industry," states Yang with optimism that remains unbroken despite his rather bumpy ride since returning to Taiwan. Kenda's Taiwan-made tires will face stiff price competition should the U.S. scrap its punitive tariffs on Chinese tires. For industry veteran Ying-ming Yang, the message is clear: Kenda must set high goals for itself, and become an even stronger player.
Translated from the Chinese by Susanne Ganz
Kenda Rubber Industrial
Chairman: Ying-ming Yang
President: Hung-der Chang
2011 revenue: NT$27.79 billion
2011 net profit after tax: NT$3.02 billion
2011 EPS: NT$4.38