Taiwan’s New Strength: Industrial PCs
Ennoconn – Beating the Goliaths of the Industry
Through mergers and acquisitions, strategic alliances and dedicated factories, the electronic manufacturing service provider Ennoconn Corp., a subsidiary of Hong Hai, has reinvented itself as a maker of customized industrial computers.
Ennoconn – Beating the Goliaths of the IndustryBy Kuo-chen Lu, Elaine Huang
From CommonWealth Magazine (vol. 581 )
Transforming from an electronics mass-producer with razor-thin margins into a hidden champion of the lucrative industrial computer industry has long been a goal of Taiwan’s five consumer electronics giants (Hon Hai, Quanta, Compal, Asustek and Wistron.) Over the years, all of them have tried, but not a single one succeeded. It seemed as if the personal computer and notebook makers were under an unbreakable spell that prevented them from entering the industrial computer sector.
Eventually, however, Hon Hai managed to undo the spell by buying a stake in Ennoconn, which originally belonged to Taiwanese industrial PC maker Portwell Inc. In the four years since, the company has posted annual revenue growth in excess of 40%. With revenue expected to top NT$10 billion this year, Ennoconn is on its way to surpass Adlink Technology Inc. to become Taiwan's second largest industrial PC maker behind industry leader Advantech Co. Ltd.
Ennoconn leapfrogged into the top league of Taiwan's industrial computer industry so fast that Advantech Chairman and CEO K.C. Liu publicly hailed the company at Advantech’s annual shareholders meeting for marrying Hon Hai’s manufacturing prowess with its own strengths. Liu, also known as the father of Taiwan’s IPC industry, said the resulting contract manufacturing opportunities represented a terrific business model.
Why was Hon Hai able to reverse the spell and create an IPC goose that lays golden eggs? Our story unveils the entire Ennoconn model.
In an exclusive interview with CommonWealth Magazine, the key figures in the Ennoconn story, Ennoconn Chairman Aven Lou and Ennoconn President Steve Chu, give us the inside story. The duo originally belonged to the Hon Hai Group, whose strength is electronic manufacturing services. Over the past four years, the two executives had to change their mindsets completely in order to establish production and operating models that fit the IPC industry.
How is that a challenge? Both PCs and IPCs are categorized in the “computer” family. Does the "I" in IPC make such a big difference?
Alfred Wang, head of the machinery & systems division at the Industrial Economics and Knowledge Center (IEK), notes that personal computers and notebooks are mass-produced consumer products that are manufactured in quantities of tens or hundreds of thousands, so that production lines rarely need to be converted for another product. However, more typical for industrial personal computers is high-mix, low-volume production, since such products are highly customized. A single order might be for only a few dozen computers of the same model. As a result, several production line changeovers might be necessary within a single day.
The new beginning put a lot of pressure on everyone. Early on, it was a totally different ball game as output and efficiency were dismal in comparison to what the two were used to. Lou recalls that revenue shrank to less than 10 percent of what the company had racked up before, indicating that industrial computers were more than 10 times more complex than notebooks.
Changing employees’ mindsets proved the most difficult. Chu notes, “In the very beginning they resisted vehemently, [complaining] why so difficult, why so much? Before, when we produced notebooks, we probably did not reconfigure a production line (to produce another product) for a whole year. But now they had to retool the line four or five times a day. On top of that, the complexity of the different types of devices was very high, more than 100 times higher than for the notebooks that we made in the past.”
Frequent production line changeovers can lead to declining quality and a rising error rate. In order to bring down the error rate, Lou and Chu spent four months on site at the factory. The top executives held meetings with line workers, group leaders, line leaders and engineers to discuss where the possible pitfalls were during the changeovers and how the situation could be improved. After the root of a problem had been identified, the employees' training was changed accordingly.
During these four months, the duo sacrificed productivity to adjust quality and establish a system. The goal was to rely entirely on systems management for configuring the production line, switching products and deciding which parts and components to use, as human memory alone is not foolproof. Chu points out that "even those who were still not able to do the job did not get an opportunity to make any mistakes."
Ennoconn’s training factory also enjoyed the full support of its parent company, Hon Hai. Lou reveals that in order to support the company’s transformation into an IPC manufacturer, Hon Hai provided priority training on manufacturing platforms, environments, systems and staff training. At the same time, Hon Hai’s quality committee was on stand-by to offer assistance whenever the situation required.
In the end, it took Lou and Chu almost a year’s time before the production line met their expectations. Chu observes that the five major PC makers failed to get a foothold in the IPC industry because, as large companies with revenue worth hundreds of billions or even a trillion Taiwan new dollars, they were not willing to put much effort into supporting their in-house IPC departments or subsidiaries in doing business worth just several million Taiwan new dollars.
Ennoconn’s second feat was to change the business model of the IPC industry. After being listed on the Taiwan Stock Exchange last year, Ennoconn went on a buying spree, acquiring Goldtek Technology Co. Ltd. and Caswell Inc. Along with its own subsidiaries EnnoMech and Asiatek, Ennoconn is now not so much a single company as a group of allies fighting side by side.
Why is the company using this approach? Chu explains that despite Ennoconn’s ambition to enter the entire IPC field. instead of doing everything by itself, the company will look for dedicated teams and other companies for strategic partnerships. Ennoconn will provide the funding to grow these companies into bigger ones and does not rule out buying up good foreign companies.
This was not only crucial for the rapid growth of Ennoconn’s turnover, it also signifies a business model shift. By combining Hon Hai's manufacturing prowess with acquisitions and alliances with other companies, Ennoconn quickly added new production lines, each of which with its own strengths. In the end, Ennoconn grew rapidly thanks to additional revenue from its subsidiaries. “There is no need to rely on yourself for everything; you can also grow by teaming up with each other," notes Chu.
The chairman of another IPC company who requested anonymity points out that Ennoconn’s gross profit is very low by industry standards at around 17 percent, given that competitors such as Advantech and Adlink boast gross profits above 40 percent. The fact that Ennoconn still posted a net profit of 11 percent shows that the company does not invest enough in R&D and global services, the industry insider says. Since Ennoconn transplanted Hon Hai’s EMS (electronic manufacturing services) business model to the IPC industry, it will likely run into bottlenecks in the future, he predicts.
Is there reason to be concerned about the new competition from the Hon Hai Group? Engel Wu, chairman and CEO of IPC maker Protech Systems Co. Ltd., isn’t worried. “Industrial computers are a very vast field. Every player should be clearly aware that if Hon Hai enters the industry today, then Compal may follow tomorrow. Asustek has also bought Aaeon Technology Inc., so to a certain degree [competitive pressure] can hardly be avoided. It is important that you know where your own company is headed in terms of core competitiveness and business strategy,” Wu says.
Industry peers’opinions are divided over the Hon Hai Group's foray into the IPC business. Lou and Chu, for their part, believe that the IPC industry is already on the verge of a crisis: First, there are too many companies producing the same products, which means they will squeeze out each other in the medium and long term. Second, China's IPC makers are rising as well.
Against this backdrop, Ennoconn does not necessarily want to take a controlling stake in other companies but is ready to forge alliances or offer guidance and assistance. The company hopes to prevent cutthroat price competition in Taiwan’s IPC industry that would harm everyone involved. Instead, Ennoconn is pushing for swift integration and alliances to strengthen the local industry through cooperation for its joint entry into the international market.
Translated from the Chinese by Susanne Ganz