Top 1000 Manufacturers
High Profits, Wild Growth
Taiwan's manufacturing sector had combined sales of NT$24 trillion in 2010 and net profits rose 78 percent. How did it deliver such scintillating results?
High Profits, Wild GrowthBy Ching-Hsuan Huang
From CommonWealth Magazine (vol. 471 )
Over the past year, a worldwide craze for everything Apple and ballooning cotton prices spawned incredible growth among Taiwan's manufacturers, allowing many to set historic milestones.
1. Massive Net Profit Growth
In 2010, sales at Taiwan's top 1,000 manufacturers bounced back with a vengeance from the economic downturn of 2009, growing 27.6 percent to a record-high NT$24.6 trillion.
1. Profits rose even more spectacularly. The Commonwealth Magazine Top 1,000 manufacturers had combined net profits of NT$1.26 trillion in 2010, 78 percent higher than a year earlier. In other words, Taiwan's companies did not finish the year with bloated figures reflecting high revenues but low profits, as has been the case in the past. They actually found themselves with money in their pockets.
2. Hon Hai Joins US$100-billion Club
Hon Hai Precision Industry Co., known in China as the Foxconn Technology Group, benefited from the huge success of Apple's iPhone and iPad. The strong sales of the "double i's" helped Hon Hai's consolidated revenues grow by more than 50 percent in 2010 to NT$2.997 trillion, making it the first Taiwanese company to break the US$100 billion sales barrier.
But hidden behind the robust results are potential concerns for future profitability. Hon Hai's net operating margin, which stood at 4.26 percent in 2009, fell to 2.87 percent in 2010. Daniel Chang, an analyst at Macquarie Capital Securities Ltd.'s Taiwan branch, attributes the smaller margin in part to logistical issues. As Hon Hai moved its assembly plants into western China last year, key component suppliers did not follow. Without a "cluster effect," Chang says, the company's transportation costs rose and transit times were lengthened. At the same time, continuing wage increases in China and changes in the structure of the country's labor market also contributed to higher costs and expenses.
As a result, Hon Hai was no longer in a position where it could continue distributing big stock and cash dividends and dilute shareholder capital as it had done in the past. Needing to retain earnings to strengthen its cash position and prepare itself for a future of high uncertainty and low growth, Hon Hai angered investors by deciding to distribute a combined cash and stock dividend of only NT$1.5 per share, the lowest dividend yield in 20 years.
3. TSMC Sets Corporate Profit Record
Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chip maker, posted after-tax profits of over NT$160 billion, the highest of any company in Taiwan's history and nearly as high as the profits of the top nine manufacturers on the CommonWealth Magazine survey list combined.
4. Chemical Fiber Companies Rise from Trough
Sharp rises in global cotton prices spurred Taiwan's chemical fiber sector to its best performance in years. Of the 55 companies from the sector in the top 1,000, all of them except for apparel makers registered double-digit growth.
"The chemical fiber sector was incredibly good last year," says Danny Ho, an analyst with Yuanta Securities Investment Consulting who specializes in cotton and petrochemical businesses. "Cotton was an important catalyst."
At the annual meeting of the World Trade Organization (WTO) in 2005, Brazil accused the American government of illegally subsidizing cotton farmers, which they claimed had caused heavy losses to Brazilian cotton farmers and its cotton textile industry. Consequently, the WTO demanded that the United States eliminate its subsidies within three years, which enabled cotton prices to gradually return to "reasonably" high levels.
Then last year, major cotton producer India set restrictions on cotton exports, and floods ravaged crops in other cotton-growing countries. This combustible mix of political and natural factors pushed the average price of cotton from the typical US$0.40 to US$0.60 per pound to nearly US$2.00 per pound, the highest in 140 years, by the end of the year.
Chemical Fibers Given New Life
Because natural cotton and chemical fibers are highly substitutable, Taiwanese chemical fiber makers in the top 1,000 were resurrected in 2010. Following the rise of China's textile fiber sector in the 1990s, Taiwan's chemical fiber volume began a steady decline in 1998 that reached bottom in 2008. But in 2010, the sector's output reached 3.1 million tons, returning to pre-1998 levels.
Volume wasn't all that rebounded. The profitability of Taiwan's chemical fiber textile makers also jumped dramatically. In 2009, the average margin of textile and apparel makers in the top 1,000 was 0.04 percent, no better than breaking even. But in 2010, their margin rose to 7.1 percent.
"Last year, our profit was NT$3.1 billion pre-tax and NT2.6 billion after tax, the highest in the factory's 56 years," says Tainan Spinning Co., Ltd. vice chairman and president Hou Po-ming with a glowing smile, unable to remember when the textile industry had it so good.
Raw material suppliers within the industry's supply chain, such as Formosa Chemicals & Fibre Corporation, China American Petrochemical Co., Ltd., and Nan Ya Plastics Corporation, also had banner years, with revenues growing at least 30 percent.
The factors behind record high revenues and after-tax net profits among the top 1,000 companies last year provide some insight into the directions and dynamics of potential growth in 2011.
The Year of the Tablet and Smartphones
The tablet whirlwind set off by Apple's iPad and the vigorous development of smartphones led to sales of nearly 300 million units of mobile devices last year, a boon not only for the makers of the devices but also for the semiconductors that go into them.
Tablet PCs and smartphones use more chips than traditional notebook computers, driving strong growth in the semiconductor sector. According to IT research firm Gartner, 2010 was the best year in the history of semiconductors, and the market will continue to grow in 2011.
Based on the top 1,000 survey, Taiwan's semiconductor sector experienced sales growth of 37.5 percent, in line with the boom around the globe.
Among the leading companies, TSMC rode the tablet PC and smartphone trend to sales growth of nearly 42 percent, returning it to the top 10 in the category after a three-year absence. TSMC chairman Morris Chang boasted at an investor conference on April 28 that every iPhone Apple sells contributes US$7 to TSMC revenues.
When Apple launched the iPad last year, it was also declaring the return of "product power," forcing brand vendors to focus more on product design and R&D. Macquarie's Chang believes the trend has left Taiwan's ODM manufactures squeezed out by brand vendors and EMS (electronics manufacturing services) providers, narrowing their room for survival. "The trend is for brand vendors to invest in R&D. They are increasingly less willing to rely on ODMs."
Aside from Apple, other big brands with R&D and design prowess, such as HTC Corp. and Asustek Computer Inc., have in fact benefited from the emergence of the new business environment Apple created.
The tablet PC launched by Asustek in late March, called "Transformer," has a detachable keyboard dock that can turn the tablet into a full-fledged notebook. Of the more than 100 tablet models on the market, the Transformer is the only one to clearly differentiate itself from the iPad, giving it excellent market appeal.
One senior computer hardware analyst for a foreign company suggests that in the past, PCs built according to the highly standardized architecture of Wintel (Microsoft and Intel) left little room for innovation or product differentiation, and brand manufacturers did not need their own R&D teams to make them. "But Wintel is no longer leading the mainstream, and now, from what we've seen with smartphones, successful vendors are all relying on in-house design. That's the only way you can have control over time-to-market and product differentiation."
That was particularly evident at the Global Mobile Awards ceremony held in Barcelona in February, when HTC was named "Device Manufacturer of the Year." It was no coincidence that HTC was one of Taiwan's hottest companies in 2010, with revenues nearly doubling to NT$278.8 billion. Its momentum has continued into the first quarter of this year, when it set record highs for revenues, profits, and EPS. Its market capitalization of NT$1.006 trillion even surpassed that of the gigantic Hon Hai.
Economic and corporate growth peaked last year, but 2011 should still be strong. An anticipated increase in demand for the reconstruction of Japan in the wake of the Tohoku earthquake, as well as a diversion of orders to Taiwan, and the widely held view that the smartphone and tablet PC markets are ready to move into overdrive have emboldened Taiwanese manufacturers to step up investment. Not only is this wave lifting upstream semiconductor suppliers and downstream assembly plants, but capital expenditure among flat panel and touch-screen makers is also expected to exceed NT$260 billion this year, a new record.
For Taiwan's top manufacturers, 2011 is looking like another exciting year.
Translated from the Chinese by Luke Sabatier