Formosa Chemicals & Fibre
From Textile Pygmy to Petrochemical Colossus
Since the completion of Naphtha Cracker No. 6, FCFC's petrochemical business has skyrocketed, with operating revenue this year ten times the figure for 1991. Who is behind this astounding metamorphosis?
From Textile Pygmy to Petrochemical ColossusBy Ching-Hsuan Huang
From CommonWealth Magazine (vol. 392 )
Within the span of a decade, Formosa Chemicals & Fibre Corp. (FCFC) has transformed itself from a humble weaving girl of the textile trade into a petrochemical starlet.
In 1991, FCFC's operating revenue stood at a modest NT$29.7 billion, more than 90 percent of which was concentrated in its chemical fiber business. Company shares were considered a straight-up textile play.
"FCFC's transformation has been the result of Naphtha Cracker No. 6," FCFC chairman William W. Wong once divulged to CommonWealth Magazine. Wong is also chairman of the Executive Board of Formosa Plastics Group (FPG), the parent company of FCFC.
FPG completed the first phase of its mammoth Naphtha Cracker No. 6 in 2003, the same year FCFC's operating revenue exceeded NT$100 billion for the first time, reaching NT$102.4 billion. By this time the FCFC's petrochemical business had also greatly expanded, accounting for 46 percent of operating revenues.(Table 1)
Last year, phase four of the naphtha cracker project was completed and FCFC's operating revenue eclipsed the NT$200 billion mark, reaching NT$240 billion, with petrochemical products accounting for 56 percent while the company's textile business shrank to just 13 percent.
And with projected revenue this year of 10 times that in 1991, FCFC is showing speedier growth than FPG's two crown jewels, Formosa Plastics Corp. and Nan Ya Plastics Corp.
"FCFC is now a major petrochemical player; it's no longer about textile fibers," says one senior FCFC executive.
Once the step into the petrochemical arena had been taken, the company's production capacity skyrocketed virtually overnight to levels not imagined during its former textile days.
It took FCFC 38 years to reach NT$100 billion in annual operating revenue. Since the completion of Naphtha Cracker No. 6, scaling the rungs to the next NT$100 billion, from NT$102.4 billion in 2003 to NT$240 billion in 2007, took five short years. With earnings per share (EPS) frequently surpassing NT$7 during that period, FCFC shares led the FPG pack.
EPS Surges to NT$8
'FCFC used to be like the wayward little brother within FPG, always being scolded for poor earnings performance,' a senior union official with long-term close links to FPG observes. With the arrival of top FPG gunslinger William W. Wong, things began to look up for the company.
In 2007 FCFC achieved an EPS of NT$8 ?V an all-time high for the company.
According to petrochemical and textile industry specialist Danny Ho of Yuanta Investment Consulting, in addition to the excellent performance of its core petrochemical business last year, the NT$8 EPS can also be attributed to FCFC's relatively small share capital of NT$55 billion. Thus, its profit return from Formosa Petrochemical Corp. has more bottom-line impact than that of Nan Ya Plastics Corp., for example, with its share capital of NT$76 billion.
FCFC has also been given the task of producing all products related to aromatic hydrocarbons (benzene and arenes) at the more than NT$570 billion Naphtha Cracker No. 6. Aromatic hydrocarbons are the end result of cracking naphtha and are considered a relatively upstream petrochemical raw material. The further upstream a company goes, the less competition will be encountered, and with that comes greater stability and greater production volume. Of all its products, FCFC has the greatest capacity for the production of aromatic hydrocarbons. With a current combined annual capacity of 3.5 million tons at its three plants, it ranks as the world's fourth largest.
Last year, with demand for aromatic hydrocarbons outstripping supply and business booming, FCFC's third plant, with a production capacity of 1.2 million tons, came online in timely fashion and propelled the company to all-time business performance highs.
While Nan Ya was allocated ethylene glycol (EG) production within the Naphtha Cracker No. 6 facilities, FCFC deftly secured production of purified terephthalic acid (PTA), which has a greater production volume, higher unit cost and greater variety of uses relative to EG. FCFC now boasts the world's largest production capacity for PTA.
PTA is a key raw material in the production of polyester fiber, a mainstay of Nan Ya's business ?V each ton of polyester fiber produced requires 0.86 tons of PTA but just 0.36 tons of EG.
"PTA production should actually be on the polyester side of things; so logically it should have been awarded to Nan Ya, but they gave it to FCFC,' says Yuanta's Danny Ho. 'But if it had all been awarded to Nan Ya, their share capitalization could have swelled to more than NT$100 billion," he explains.
"They [FCFC people] have quite an air of self-satisfaction out and about these days," says one unaffiliated industry insider.
But the sprightly William Wong runs a tight ship. It is almost as if FCFC has issued a gag order on employees. Amidst a generally nervous atmosphere, personnel have been uniformly unwilling to talk. Even the corporate spokesperson has been loath to speak, forever engaged in meetings when reporters called. Last year, company president F.Y. Hong himself took up the role of official spokesman.
Upstream Raw Materials Open Up Downstream Opportunities
The end result of the movement from textiles toward upstream vertical integration has been "the ongoing enlargement of the downstream," with continuous horizontal outgrowths of new businesses.
As one top FCFC executive explains, with the overall enterprise engaged in such a huge business and each company responsible for one aspect, 'you definitely want to use up your portion of the raw material, so you continue moving downstream.'
Beginning with the aromatic hydrocarbon upstream raw materials obtained through its Naphtha Cracker No. 6 production, FCFC adroitly developed downstream styrene monomer (SM) production, followed by further downstream production of polystyrene (PS) and acrylonitrile butadiene styrene (ABS), all of which are raw materials for the plastic housings of various electronic and electrical devices.
As a single sprout grows into a mighty tree, these plastics products have grown as a proportion of total FCFC operating revenue from 12 percent in 1991 to 28 percent last year.
Compared with its downstream plastic products business for which it has the upstream raw material in hand, FCFC's textile-related businesses, such as nylon production, for which there is no FPG supplier of the key upstream raw material caprolactum (CPL), have not experienced comparable expansion.
"Without the CPL it needs for its nylon production in hand, FCFC did not put a whole lot of effort into this nylon area, so Li Peng Enterprise was able to surpass them in nylon,' one synthetic fiber industry insider says. 'They put their real effort into products for which they have the upstream raw materials in hand."
Following the transformation of FCFC, its textile business income didn't actually decline; rather, the company shifted the focus of its production.
With FCFC seeking to increase the ratio of its petrochemical and plastics business, its textile fibers business, conversely, was in rapid decline in terms of volume, yet its textile income did not decline apace. In 1991, FCFC's operating revenue from its textile businesses was NT$27.2 billion, while last year it stood at NT$32.4 billion.
"FCFC's textile business has declined in volume, but income has not fallen, because we're making a number of relatively higher-end things," one top FCFC executive explains.
Middle and Low-end Goods Move to Vietnam As Taiwan has continued to develop higher-end goods, middle- and lower-level production has moved to Vietnam.
In 2003 FCFC, Nan Ya and Formosa Taffeta Co., Ltd. jointly invested in establishing Hung Nghiep Formosa in Vietnam, an investment project that included construction of two power plants, a yarn spinning plant, a polyester plant, 600 fabric weaving machines, dying equipment for two million yards of fabric and a facility for the production of 43,000 tons of plastic sheeting annually, creating a vertically integrated textile monolith, from the upstream polyester raw materials to downstream yarns and fabrics.
"FCFC hopes to locate its textile center in Vietnam, reducing its presence in Taiwan and leaving the high value-added things for [production in] Taiwan," a company executive says.
At the end of last year, FCFC passed an investment plan that would move its relatively higher value-added nylon polymer and yarn production to Vietnam, which would create a self-sustaining nylon plant there.
Wong, who longs to be free to play golf and only occasionally has time to slip off to the traditional market for a plate of his favorite stinky tofu, has already shown what he's capable of, given his current place at the head of the Formosa Plastics Group Executive Board. What will cement Wong's legacy is precisely his advancement of FCFC, the future of which now appears even more unstoppable.
Translated from the Chinese by Brian Kennedy
Chinese Version: 台化 紡織娘成石化巨人