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Taiwan's Top 1000 Enterprises

Metamorphosing to Overcome Micro Margins


While revenues rise, profits are flagging. Yet some companies are transforming themselves, with strategies that transcend the high-volume, low-margin modus operandi of conventional Taiwanese industry.



Metamorphosing to Overcome Micro Margins

By Jau-Yi Wu
From CommonWealth Magazine (vol. 371 )

In 2006, what kind of scorecard did Taiwan’s top 1000 manufacturers, top 500 service enterprises, and top 100 financial firms turn in?

The answer is “pretty good.”

The three major industries recorded NT$26.6 trillion in consolidated revenues last year, marking a growth of 9.6 percent over 2005. Their average net profit margins of 5.4 percent were also an improvement over the previous year. Notably, 69 percent of companies recorded continued growth, with 53 enterprises joining the ranks of those with annual revenues of NT$100 billion or higher. (Table 1)

But looking further down the line, each of the three industries is distinguished by a unique set of circumstances. “Hot on the outside, cold on the inside” is the most apt description.

Manufacturing Sector Shines Brightest

Buoyed by the steady expansion of the global economy and the introduction of such new 3C products as Windows Vista and Wii in the second half of the year, the manufacturing sector achieved strong growth in both revenue and net profits, performing the best among the three major industries.

In the service and financial industries, largely limited to Taiwan’s domestic market, the hum was not as vibrant.

Last year Taiwanese private-sector consumption grew at a rate of just 1.5 percent, setting a new record low. The service industry experienced a resultant decline in turnovers, with 40 percent of companies failing to achieve revenue growth.

While managing 13.9 percent higher total turnover than the previous year, the financial sector averaged a mere two-percent net profit margin, due to the impact of credit- and cash-card debt. “Taiwan has too many banks, making it nearly impossible to turn a profit. Banks in other countries maintain a net profit margin of four to five percent,” relates Paul Lo, CEO of SinoPac Holdings.

Across all industries, the top 10 Taiwanese companies in terms of turnover in 2006 were HonHai Precision, Chinese Petroleum, Cathay Financial Holdings, ASUStek Computer, Quanta Computer, Formosa Petrochemicals, Taiwan Post, TaiPower, Compal Computer, and Nanshan Life. (Table 2)

Exceeding NT$1 trillion in revenues for the first time last year, HonHai Precision repeated as Taiwan’s top company. Crunching the numbers, HonHai’s turnover alone accounted for more than one-tenth of Taiwan’s entire GDP for the year.

If not size, let’s compare profitability.

The Top Ten Enterprises in terms of net profit for 2006 were: USMC, HonHai Precision, Nan Ya Plastics, Chunghwa Telecom, Formosa Petrochemicals, China Steel, UMC, Formosa Chemicals and Fibre, Formosa Plastics, and Powerchip Semiconductor. (Table 3)

Taiwan Semiconductor Manufacturing Company (TSMC), fresh off celebrating its twentieth anniversary, is the first company in the history of the Top 1000 survey to record net profits in excess of NT$100 billion. However, in terms of successful corporate groups, no one distinguished itself more than the Formosa Plastics Group, which took four of the top 10 places and tallied consolidated net profits of NT$159.27 billion.

Taiwanese Corporations’ ‘Inconvenient Truth?’

So it would appear from the look of things that Taiwanese corporations performed well in 2006.

However, stepping back to take a broader perspective, one finds that although the total revenue of Taiwan’s top 1000 manufacturing, 500 service industry, and 100 financial industry companies has indeed climbed steadily over the past decade, net profit margins have not followed suit. On the contrary, a crisis of steady decline has emerged. (Table 4)

Cheng-Mount Cheng, vice president and Asia Pacific economic market analyst for Citigroup, had barely sat down and glanced at the tables before he anxiously blurted, “To a certain degree, this situation reflects that the added value of Taiwanese corporations is shrinking.”

Taking the example of the electronic parts and components industry, an area of the information communication technology (ICT) sector in which Taiwan excels, the value-added ratio slid from 32 percent in 1999 to 17.1 percent in 2005. (Table 5)

What’s the story?

Shin-Horng Chen, director of the second research division of the Chung-Hua Institution for Economic Research, referenced “Moore’s Law” in an article, offering that the “bang for the buck” in the high-tech industry has remained low for quite some time. Consequently, it is difficult to effectively raise product unit price, even by taking higher-end product orders.

More importantly, although Taiwan leads the world in manufacturing process technology for electronics and semiconductors, it lags behind advanced industrial countries in certain high-end technology. The resulting inability to exercise control over key component manufacturing technology necessitates reliance on imports and causes a heavy trade deficit in technology.

“The Taiwanese electronics industry’s OEM model in recent years has largely been based on boosting volume, while added value and earnings surplus have been diluted,” observes Chen.

And that happens to be Taiwanese industry’s Achilles’ heal.

Professor Lee Ji-ren of the Department of International Business at National Taiwan University (NTU) approaches the situation from a management perspective. He says that Taiwanese companies are reluctant to change and are prone to falling into competence traps. However, whenever he suggests to industry captains ways in which they can make changes, the executives invariably ask, “Well, Professor, is anyone doing it this way now? Has it worked for them?”

The reason is that many Taiwanese companies are under heavy and constant pressure to increase business performance, causing them to rely on basic management skills and established models of success to handle today’s complex and rapidly changing environment. This inevitably forces them to resort to the old method of chasing growth by increasing volume.

“It’s gotten to the point where change is not an option,” states Lee emphatically.

What is “value?” What can Taiwanese companies do to increase value? The biggest winners among the survey of Taiwan’s Top 1000 Enterprises for 2006 appear to offer some clues in response to these questions.

Instilled with the entrepreneurial vitality, emphasis on flexibility, rapid response and cost reduction that have been the hallmarks of Taiwanese industry, a group of Taiwanese businesses is undergoing a transformation. They are the “corporations of tomorrow,” those that “have a heightened sense of crisis at all times, create value through integration and innovation, and place particular emphasis on sustained operation.”

Value Creation 1: Heavy R&D Investment

Delta Electronics, the world’s number one power supply company, improved value creation through continued investment in research and development, honing its competitive strength.

Delta’s revenue increased by 30 percent in 2006, yet net profit growth was even more startling, reaching 50 percent. Delta vice chairman and CEO, Yancey Hai, relates that the momentum for this kind of growth can be traced back three years, when the company began an inside-out transformation. Secondly, he cites continued investment in new products and new business. Delta has especially distinguished itself in the areas of solar power cells and cold cathode fluorescent lamps (CCFL), both of which yield margins of more than 30 percent, firmly placing the company among the players in these two growth product sectors.


Delta has long invested heavily in research and development, and is actively partnering with such prestigious academic institutions in Taiwan and abroad as National Taiwan University, National Cheng Kung University, Tsinghua University in Beijing, and the Massachusetts Institute of Technology to develop future technologies. “Curiosity is an important component of Delta’s corporate culture. This is helpful in the development of a young corporation,” relates Professor Huang Chung-hsing of NTU’s Graduate Institute of Business Administration.

Value Creation 2: Favoring Management over Assets

Creating value is further derived from a new operational modality that emphasizes management over assets.

The past mode of all-out pursuit of size and volume is no longer a workable model for tomorrow’s corporations; rather, the new archetype is an innovative business model that emphasizes profitability.

The Grand Formosa Regent Hotel, Taiwan’s top hotel and one of the 50 most profitable businesses in the island’s service industry, initially made a name for itself by renting out its basement-level duty free shop. Subsequently, upon demonstrating its formidable competitiveness in the restaurant field, it built on the core competitiveness of its central kitchen by collaborating with the department store industry to open four restaurants, including Wasabi and Bando 8, along with three food and beverage-related sub-brands. Collectively, these ventures contributed NT$200 million in revenues for the hotel last year.

The Grand Formosa Regent serves as a prime example of managing physical space to developing an intangible brand. Rather than narrowly pursuing maximum yield on room space, hotel chairman Steven Pan has sought profitability through innovative gastronomic culture.

And now the Regent is poised to make a splash in China. Having acquired the rights to Domino’s Pizza, the world’s second-largest pizza brand, the management group is looking to utilize its capacity for rapid replication to dive into the restaurant chain market on both sides of the strait.

D-Link, ranked sixty-fourth among the top 1000 manufacturers and the top network connection brand among home business and small- and medium-sized enterprises, is girding up for the future with an innovative operational model.

D-Link continues to record over 50 percent profit growth in spite of minimal revenue growth. Ken Kao, chairman and CEO, plainly asserts, “We make money through management.”

A compact black device has appeared recently on Kao’s office desktop. In Ken Kao’s words, the D-Link 2.0 Internet phone, introduced early this year, is “the product that will set the course for D-Link’s next 20 years.”

“Will D-Link be a manufacturer or a service company in the future? The answer isn’t that important as long as the consumers are happy,” says Kao. The D-Link 2.0 is his own pet project, yet he stresses, “Manufacturing and service will be tied together in the future. Concentrating exclusively on hardware provides minimal added value, so you have to sell service, which is where the value lies.”

Value Creation 3: From ‘Made in Taiwan’ to ‘Served by Taiwan’

The curse on Taiwanese corporations used to be that their acumen at production and efficiency left them with cutthroat pricing as their only competitive means, preventing them from establishing world-class brands.

Acer’s transition over a number of years has finally proven that the added value of branding can also be created by Taiwanese companies.

In first-quarter computer brand performance rankings, Acer displaced Lenovo to rank third in the world behind only Dell and HP. Even more impressive is that, among the top four computer brands last year, only HP and Acer showed growing in sales.

Acer founder Stan Shih recently opined, “When the world is flat, only positioning yourself in the role of ‘integrator’ gives you decent future prospects.” Today’s Acer is essentially an integrator of resources concentrating on sales channels and branding, to the extent that it is even outsourcing R&D. The company continued to record revenue growth in 2006, reaching NT$369.1 billion, placing it second in the service industry.

Capacity for integration is also exemplified in conventional industry upgrading.

Flying Tigers

A five-story white building stands tall against the hills of Taichung’s Dadu Township in the Central Taiwan Science-Based Industrial Park. This is the seat of operations for Johnson Health Tech, the world’s fifth-largest fitness equipment brand.

Ever since the company was getting its start in OEM manufacturing, a question lingered in Johnson chairman Peter Lo’s head.

“I’d been working hard, producing good quality products, but why wasn’t I making any money?” He recalls clearly how the money would come in one way and go straight out the other (in payments to overseas parts and components vendors), until eventually net profits shrank to just one or two percent. Johnson scraped by in that fashion for well over a decade.

Then, with the acquisition of a foreign brand in 1996, Johnson rapidly began mapping out original brand territory. Little known to outsiders, it simultaneously began efforts to secure critical technology while training its own electrical engineering and control panel experts. Today, Johnson has over 400 staff members conducting research and development in Taiwan, China, and the US.

“Running a factory is the most difficult enterprise. I’ve done all that. Now that the brand has had its coming-out, the sky’s the limit,” Luo says with a chuckle. That laugh punctuates steady annual net profit margins of over 30 percent in recent years.

“We’re seeing marketing channels build upon two decades of manufacturing capacity,” relates Tunghai University sociology professor Chen Chieh-hsuan, adding, “It’s a kind of metamorphosis.”

Chen Ming-kun, association professor at National Taipei University of Technology’s Graduate Institute of Automation Technology and Management, observes that corporations like Acer and Johnson have proceeded by developing a certain level of manufacturing capacity before pursuing added value through service, sales-channel operation, or branding. “Like a band of flying tigers,” he offers.

“Over the next decade, if Taiwan can create a more international environment and cross-strait tensions ease a bit, it is impossible to predict or imagine just how many great products and companies this little island will be able to produce,” says Wen Ko, chairman of WK Technology Fund. Ko, who has witnessed the steady ascension of Taiwanese technology on the world stage since 1977, emphatically states, “The world needs Taiwan more and more.”

CommonWealth Magazine’s Top 1000 Survey – Methodology

CommonWealthMagazine’s Survey of Taiwan’s Top 1000 Enterprises ranks the 1000 largest and most influential companies in the Taiwanese manufacturing, service, and financial sectors. The statistics we detail represent a year’s worth of hard work by these companies.

Beginning in 2005 the Financial Supervisory Commission required that corporations prepare consolidated financial reports in line with the revised Seventh Communiqué. Seven hundred fifty-five (755) of the 1000 manufacturers in this survey prepared consolidated reports, as did 239 of the 500 service-sector companies, and 36 of the 100 financial-sector companies.

CommonWealthMagazine’s Survey of Taiwan’s Top 1000 Enterprises arranges rankings according to consolidated financial reports, chiefly in order to more faithfully reflect the actual circumstances of these corporations.

For the overview table, companies are ranked for the years 2004 through 2006, based on statistics given in consolidated or independent financial reports.

Subsidiary companies were counted in the survey if they were not overseas subsidiaries or did not belong to financial holding companies. In order to prevent overlapping of company and subsidiary statistics in consolidated reports, we eliminated each repeated figure one at a time. For instance, the figures repeated due to consolidation were eliminated from the total revenues listed in the “Overall Score.”

Translated by David Toman