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Formosa Plastics Group

Wang Yung-ching's Living Legacy


Wang Yung-ching's Living Legacy


Although Taiwan's most influential entrepreneur Wang Yung-ching has passed away, he left behind a thriving petrochemical empire that will long outlive him. CommonWealth Magazine looks at his group's winning strategies.



Wang Yung-ching's Living Legacy

By Ching-Hsuan Huang
From CommonWealth Magazine (vol. 392 )

With revenues rising from NT$500 billion in 2000 to nearly NT$2 trillion in 2007, the Formosa Plastics Group is getting stronger with age. What is its winning strategy?

"As for strategy, the Formosa Plastics Group doesn't really have a specific strategy," says petrochemical industry expert Jia-Jeng Hou, an associate professor and dean of the R&D Office at National Chiayi University. 'They only have one real strategy, and that is a low-cost strategy.'

Yet much like the martial arts form Taiji Quan, the slow movements of Formosa Plastics Group (FPG) may seem haphazard, but in fact they employ a masterful use of the conglomerate's center of gravity that leaves opponents far behind and sets it apart.

FPG's Naphtha Cracker No. 6 clearly stands out as the key factor behind the revitalization of the 40-year-old group. It gave immediate impetus to the group's 'Big Four' subsidiaries by expanding the group's scale and integrating the upstream, intermediate and downstream sections of their petrochemical supply chain, thus lowering costs.

Standing on the grounds of the No. 6 naphtha cracker complex, you would never know that it once was in the Taiwan Strait. The reclaimed land extending into the waters beyond the coastal windbreak forest, planted to take the sting out of strong northeasterly winds, is now home to 61 factories and more than 1.4 million trees.

The Formosa Plastics Group invested NT$574.4 billion in the complex, the biggest single investment ever in the petrochemical industry. That investment has created annual output value of over NT$1 trillion, comparable to that of the entire Hsinchu Science Park. But it takes only 10,000 employees to achieve that production value, about one-tenth the number working in Taiwan's 'Silicon Valley.'

The park, built in four stages with the final stage completed last year, has been the catalyst of the group's extraordinary growth this decade. Group sales have soared over the past eight years, from NT$500 billion in 2000 to NT$1.996 trillion last year, just NT$3.4 billion away from the coveted NT$2 trillion barrier. Of that, the naphtha cracker complex accounted for NT$1.07 trillion, or 54 percent of the group's total revenues.

In the World's Top Ten

The Formosa Plastics Group has already become one of the world's 10 biggest petrochemical producers, and its ethylene production capacity, a key benchmark of naphtha cracker size, is 4.485 million tons, ranking sixth in the world.

Among petrochemical products, the group has the world's largest capacity for intermediate and downstream materials such as vinyl chloride monomer (VCM) and purified terephthalic acid (PTA). It ranks second in capacity for polyvinyl chloride (PVC) powder, styrene monomer (SM) and acrylic ester (AE), and is third in ethylene glycol and epoxy resin capacity.

This diversity helps Formosa Plastics fight a defensive battle against competitors and unpredictable business cycles.

'Twenty years ago, Formosa Plastics wanted to integrate upstream, to build a complete industrial park that would bring together upstream, intermediate and downstream companies. The goals and planning conceived 20 years ago are now gradually coming to fruition,' Jia-Jeng Hou observes. 'With the sixth naphtha cracker, Formosa Plastics consolidated its petrochemical empire.'

FPG relied on its Naptha Cracker No. 6 to build up its resistance to competition and ward off competitors.

"Formosa Plastics created structural obstacles, rather than strategic obstacles" ,says Ji-ren Lee, a professor of strategy and management at National Taiwan University. Such structural obstacles can only be created with large-scale operations and big capital.

According to Jia-Jeng Hou's analysis, with its Naptha Cracker No. 6, FPG aggressively used investment in production capacity to gain a "first mover advantage."

Getting the project off the ground was not easy. Beginning in 1973, Formosa Plastics Group founder Wang Yung-ching repeatedly appealed to the government to approve construction of a privately-funded naphtha cracker, but it wasn't until 1994 that the facilities, in Yunlin County's Mailiao, were formally given the go-ahead. Only after 21 years of effort did the group realize its dream of building a naphtha cracker complex that could weave together diverse upstream products.

"Most important to the company's victory was determination  the determination to create this complex," a senior Formosa Plastics Group executive said.

A World First

FPG's Naphtha Cracker No. 6 is the world's only fully integrated petrochemical refining complex, encompassing the most upstream function of refining crude oil, the intermediate production of ethylene, propylene and benzene, and the downstream manufacturing of VCM, SM, EG and PTA.

These factories at various stages of production in the Mailiao complex are connected by a network of pipes spanning 3,300 kilometers ? long enough to circle Taiwan more than three times.

Although the park has the appearance of a ghost town ?V its roads conspicuously devoid of freight trucks ?V there is plenty of activity, with materials pulsating through the piping network linking the plants. When When Formosa Petrochemical's massive Naphtha Cracker No. 2 wants to transfer ethylene to the Nan Ya Plastics ethylene glycol plant located just across the street, it sends the raw material over through a raised pipeline, saving costs and avoiding the high risks of transporting volatile petrochemical materials.

Because of access to this upstream naphtha cracker, Formosa Plastics Group subsidiaries can produce many high value-added petrochemical materials. For example, Formosa Chemicals & Fibre Corp. converts raw material from the naphtha cracker into aromatic hydrocarbons and then PTA, while Nan Ya Plastics uses ethylene to make ethylene glycol, and Formosa Plastics processes ethylene into downstream VCM.

These companies now all rank in the top three in the world in production of these materials. Traditional plastics and textile specialists Nan Ya Plastics and Formosa Chemicals & Fibre have both emerged as high-margin petrochemical giants.

Their bottom lines reflect the magnitude of their transformation. Nan Ya Plastics, Formosa Chemicals & Fibre, and Formosa Plastics had combined income of NT$345 billion between 2004 and 2006, eclipsing the NT$269.5 billion they had earned in the previous 10 years (1994-2003).

The irony is that Naphtha Cracker No. 6, which was delayed for 20 years before finally finding a home in Mailiao, was built during an era when the petrochemical market was at its weakest and has now been completed at a time when petrochemicals are at their strongest.

"The timing of the groundbreaking of Naphtha Cracker No. 6 was really perfect," says Danny Ho, an industry specialist with Yuanta Investment Consulting who has followed the petrochemical sector for 15 years. "Their production capacity took off just when prices were peaking."

Production from the naphtha cracker's first three stages gradually came on line between 2001 and 2004, when the industry was slumping and factory building costs were at their cheapest. But the market began turning around in 2004 and has unexpectedly remained strong for five years up to the present day.

The main factors behind the boom are huge worldwide demand and delays in new factory construction by potential competitor Iran.

"Places like China and India with their huge markets abruptly gobbled up any surplus capacity there was. So beginning in 2004 to this year 2008, the market has stayed strong. The market has never stayed strong like this for so long at any time in history," observes Formosa Plastics chairman C.T. Lee.

Winning Strategy

The Formosa Plastics Group has left state-run oil giant CPC Corp., Taiwan, far behind. Its winning edge is the result of its planning, cost structure, and uncanny timing in building its plants and starting up production.

Formosa Petrochemical's oil refinery within the No. 6 complex illustrates its edge over its state-run rival. During the initial design phase of the plant, the Formosa Plastics Group decided to buy the most advanced equipment that could process the lowest quality crude oil into high quality gasoline and diesel. With international crude prices soaring to well above US$100 a barrel, the difference per barrel between the highest- and lowest-quality crude has reached as high as US$13, providing enormous savings for a company like Formosa Petrochemical that refines 540,000 barrels of crude a day. In contrast, CPC's older refining equipment can only process more expensive high-grade crude.

Timing was also crucial. When the group launched the project in 1994, an investment of around NT$100 billion was needed for the oil refinery's equipment. Today, if CPC wanted to invest in the same equipment purchased by the Formosa Plastics Group, it would cost the state-run refiner more than NT$200 billion. CPC has tried to contract out the purchasing of new equipment in recent years, but because of the booming demand for commodities and skyrocketing steel prices, nobody has been willing to take on the job.

"Sometimes it's not a question of capital, human resources or land, but rather the opportune introduction of production equipment. The lowering of costs has created a change in the competitive environment," Danny Ho says.

Naphtha Cracker No. 6's integration of various stages in the supply chain was also a defensive strategy against boom-or-bust business cycles. With upstream, intermediate, and downstream factories all clustered in the Mailiao complex, the group has a diversified and broad product range. When some items are in down cycles, others are there to balance out the losses, shielding the group from the risk of a downturn in any one product.

The Limits and Challenges of Growth

The Formosa Plastics Group has already integrated its operations as far upstream as it can go, gaining powerful cost and supply chain advantages in the process. But it has yet to take the final, difficult and critical step necessary for full vertical integration, which the world's top five petrochemical conglomerates ? British Petroleum, BASF of Germany, Shell of the Netherlands, and U.S.-based Dow Chemical and Exxon-Mobil ? have all achieved: owning a stake in its own source of crude oil. And this deficiency could rock the group's competitiveness.

Another challenge facing the Formosa Plastics Group is finding a successor to petrochemicals as the catalyst for another huge corporate breakthrough. The steel complex the group has already decided to build in Vietnam's Ha Tinh province could be the answer. The US$6.1 billion facilities will start production in 2011 at the earliest.

Also, within FPG's corporate structure of hard manufacturing, some unconventional forms of 'soft power' have arisen in recent years.

Formosa Biomedical Technology, built single-handedly by FPG General Administrative Office executive vice president Sandy RY Wang, and Chang Gung Biotechnology, led by FPG vice chairwoman Susan Wang, are clearly a departure from the group's core competencies. But they are still able to draw on the research and medical resources of Chang Gung University and Chang Gung Memorial Hospital, and the group clearly hopes to replicate the success of German giant Bayer, which gained prominence as a big pharmaceutical outfit after making its mark in petrochemicals.

At present, however, the annual revenue of the two companies amounts to just over NT$1 billion, barely noticeable in a group with total sales approaching NT$2 trillion.

How to grow the two businesses, Jia-Jeng Hou suggests, "is a problem for management's next generation to think about."

Translated from the Chinese by Luke Sabatier

Chinese Version: 六輕 打通台塑成長血脈