2007 Top 1,000 Enterprises
Manufacturing Matures, Looks Inward
As new products and new emerging markets fuel profit margins, Taiwan's manufacturing sector refocuses on internal management, and continues to consolidate.
Manufacturing Matures, Looks InwardBy Victoria Sun
From CommonWealth Magazine (vol. 371 )
Taiwan’s manufacturing sector saw steady revenue growth and an improved profit picture in 2006. Continuing the consolidation craze of 2005, the new catchwords for manufacturers last year were “private placement” and “capital reduction.” They reflect the sector’s mature environment that compelled companies to begin taking a closer look at their internal operations in search of greater profitability.
The revenues of Taiwan’s top 1,000 manufacturers grew by 13.4 percent in 2006 to NT$16.3 trillion, a growth rate that fell short of the 20 percent recorded in 2005.
Top 10 Dominate Top 1,000
Taiwan’s leading enterprise, Hon Hai Precision Co., Ltd., had an 8 percent share of the top 1,000’s revenues with sales of NT$1.3 trillion, breaking the NT$1 trillion barrier for the first time. The top 10 manufacturers accounted for nearly a third (32.5 percent) of the top 1,000’s revenues, a clear sign of the continuing consolidation and unrelenting dominance of the big players in the sector.
Another sign of the big getting bigger was that 32 companies made the NT$100 billion revenue club in 2006, up from 25 a year earlier.
Looking at individual industries, finished metal products, metal raw materials, electronics, and semiconductors all averaged over 20 percent growth, helped respectively by high steel prices and the introduction of new products to the market. The optoelectronics and computer sectors both grew by more than 17 percent.
For industries relying on domestic demand, however, the picture wasn’t nearly as upbeat. Revenues in the automotive and consumer electronics sectors fell by 20 percent and 26 percent, respectively.
“Those domestic-demand manufacturers that do not look outward are bound to decline,” said Victor Tsan, general director of the Institute for Information Industry’s Market Intelligence Center.
While the overall revenue growth of the top 1,000 manufacturers in 2006 lagged behind that of a year earlier, net profit margins on average improved last year to 6.5 percent from 5.3 percent in 2005. The semiconductor industry had a particularly strong showing, averaging a net margin of 14 percent that set a three-year high.
Growth at all points of the IC supply chain was strong, starting with upstream IC designers like MediaTek Inc., whose cell phone chipsets penetrated the China market, and who used analog IC technology transferred from the U.S. to gain a foothold in specific markets. Midstream Taiwanese contract manufacturers benefited from declining international capacity or product development problems abroad. Downstream IC packaging and testing suppliers had the best growth prospects as capacity at Taiwan’s 12-inch wafer foundries opened up.
Semiconductors, Non-metallic Minerals the Most Profitable
Of the 10 companies with the highest net profit margins among the top 1,000 manufacturers, four were in the semiconductor industry. Among them, Mosel Vitelic Ltd. led the top 1,000 with a 64 percent net margin. The other pacesetters from the semiconductor sector were Mediatek, Taiwan Semiconductor Manufacturing Co., and Inotera Memories Inc.
The non-metallic minerals sector, the major component of which is building materials, also had high margins last year because of the boom in the real estate market. In an industry that averaged 13 percent net margins, Goldsun Development & Construction led the way with a 63 percent rate of profitability.
There was a slight reshuffling of the top 10 manufacturers. AU Optronics’ 35 percent growth in revenues propelled it from 13th in the rankings to 8th, while Nan Ya Plastics Corporation was pushed from 9th to 11th.
The top 10 companies all had revenues exceeding NT$270 billion and impressive rates of growth. Aside from China Steel, which saw its revenues decline 1 percent, the remaining companies recorded revenue increases of at least 12 percent. Of them, Asustek Computer’s sales grew by 45 percent, Compal Electronics’ by 44 percent, and Hon Hai’s by 39 percent, with revenues rising by at least NT$100 billion at all three companies.
Engines of Growth: 3C, Emerging Markets
The major driving force for growth among Taiwan’s predominantly OEM manufacturers was the introduction of new products by international brands.
For Henry King, managing director of Goldman Sachs Group Inc. in Taiwan, the most interesting phenomenon was that hot products were introduced in every one of the so-called 3C markets (computers, communications and consumer electronics), and most of them were introduced at around the same time in the second half of the year.
In the computer sector, Microsoft came out with its new software package Vista. In the communications sector, Apple with its iPhone jumped into the fiercely competitive cell phone wars. And in consumer electronics, the new Xbox launched in the first half of the year, and the Wii and PS3 came to market in the second half. All of these new products directly pushed the revenues of Asus and Hon Hai higher.
Another engine of growth last year was the rise of emerging markets.
“The world can no longer ignore the needs of emerging markets. They can compensate for the slowdown seen in West,” King suggests.
Trends seem to favor greater growth in these untapped markets, where prices for consumer electronics are declining and personal income is growing. Income levels will soon be high enough to meet those prices, enabling demand to gradually spring up.
With slow growth in the West influencing the procurement expenditures of large multinationals, small and medium enterprises and consumers have become the main engines of economic growth. King cites the changing fortunes of big computer companies to illustrate the point. Hewlett-Packard and Acer, the fastest growing suppliers of personal computers, have recorded far more impressive results than Dell, which primarily targets corporate customers.
In markets where consumers are the driving force, however, seasonal swings in demand are particularly noticeable and have tested the production flexibility of Taiwan’s manufacturers. Generally speaking, buyers often make the bulk of their purchases in the first half of the year and then wait until the end of the year to spend unused budgets. Consumers often concentrate their purchases around special seasons, such as Christmas in the West and summer in China.
The Hon Hai Effect
These vagaries of seasonal demand can leave Taiwan’s contract manufacturers with too much idle capacity during slow months and then too little capacity during peak season.
“So you have to produce other items to match your capacity. Big companies will only do better because of this, while small enterprises may not be able to improvise as easily,” King believes.
Aside from the positive impact of the introduction of new products and strength of emerging markets, 2006 was also characterized by the continuation of the merger craze that featured prominently in 2005. The trend toward upstream and downstream suppliers merging and companies from different industries creating partnerships, dubbed the “Hon Hai Effect,” continued to ferment.
“Last year, Taiwan had around 250 mergers,” said Wen C. Ko, chairman of WK Tech. Fund.
What was different last year, however, is that many mergers failed or never materialized, the most notorious example being BenQ’s 2005 acquisition of Siemens AG’s handset unit, which lost NT$36.7 billion in the year after the takeover. In another example, Asus and Gigabyte discussed a merger but the talks fell through.
“Pulling off mergers today is a lot more difficult than in the past,” McKinsey & Company Taiwan managing partner Sarena Lin observed. She suggested that where local enterprises had once seen mergers as a way to enhance revenue growth, they now were looking for improved profitability. The conceptual model has also evolved, with the vertical organizational structure preferred in the past giving way to a horizontal one today, making integration far more challenging.
The vertical integration between upstream and downstream companies so commonly seen in the past was a straightforward proposition, because the two enterprises in question had usually done business together for a long period. A merger was simply a case of transferring shares. In today’s environment favoring horizontal integration, however, potential suitors have to analyze companies’ future growth strategies and search for competencies that they lack. They may end up acquiring major competitors or enterprises operating in industries they know nothing about to complement their own capabilities.
“Our data shows that 60 percent of mergers end in failure,” Lin said, a reflection of the risks involved in today’s merger environment.
Profiting from Introspection
Aside from a spate of mergers and acquisitions, private placements and capital reductions also made last year’s economic headlines.
“I think it’s a negative trend,” HSBC board member Wang Wan-li says without hesitation. “It means the industry is mature and there’s no growth.”
Some enterprises facing mature industries have expanded into new ventures, but many more have decided to turn inward and take a more critical look at their own businesses, strengthening their internal operations and management.
“They re-evaluate every detail of their operating processes,” said John C. Chang, president of Nomura Research Institute Taipei. Chang observed that this system of improving by making incremental changes on a daily basis is similar to the “Toyota way,” developed in Japan in the face of economic stagnation
After this year of introspection for many of Taiwan’s top 1,000 manufacturers, they figure to produce even better results in 2007 as new products and new markets emerge to keep demand strong.
Translated by Luke Sabatier
Chinese Version: 轉折內省走向成熟產業