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Chenming General Manager Hu Baosheng: Breaking the price competition curse, technology is the only weapon

2014-08-29

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PC market, after the high-speed growth, gradually flatted out, is going toward the product plateau period. The post-PC era is in vogue, how to transition become the industry's most popular topic. In the process of transformation, the smaller the company is more sensitive to the situation. Also because of the small scale, it is easier to adjust and react faster. The original PC chassis supplier Chenming is the best case.

Chenming was established in 1976. It was a stamping tooling manufactory. In 1985, it got into the computer industry to catch the PC big growth train. However, the industry changes rapidly, Chenming also suffered setbacks. Such as Taiwanese slang "lesson learn from broken arm, makes a person even stronger", from the chassis stamping, Chenming seeks a breakthrough. Through the power of technology, it found a new frontier for the small supplier.

From the industrial development point of view, PC becomes a mature product. Due to the cost saving of the customers, there is a trend to consolidate orders. The top three ODM orders continued to increase the proportion shares. The same case also occurred in the component industry. This order consolidation also leads to the expansion of the large manufacturers. The same is true to the chassis industry, which Chenming belongs to. The metal chassis supplier Catcher Technology Corp. has invested more than NT$12 billion in the purchase of machinery and equipment capital expenditure between 2014 January and early August. It is a record high. As Catcher expanded into the capital machineries, the revenue is also pulled up. However, the small suppliers such as Chenming, cannot compete with it.
 
The cash balance of Catcher is NT$39.878 billion in the first quarter. Chenming only has NT$225 million. Both financial and capital cannot compete with Catcher, how to break through? In 2013, Chenming developed MIM (Metal Injection Molding) and NMT (Nano molding technology), has accounted for 50% of the company's revenue, same as the PC Chassis revenue. By tightly follow the thin trend of wearable devices and smart phones development, the proportion of relevant revenue is expected to increase. Chenming invested in MIM and NMT technologies for some time, the return started to grow. The general manager Hu Baosheng, who served in LiteOn, Seasonic, Sysgration, has personally participated in the Taiwanese manufactures at the great growth period of the PC era.

Hu Baosheng pointed out that the PC industry is highly competitive, the mainland supply chain is catching even faster. The size of Chenming is small, in order to survive, we must master the technical skills, and constantly improve, to stay in front of others. Hu Baosheng pointed out that in 2014, the motto of Chenming is "to build the technical Chenming", with the best technology and finest process, the customer orders will be endless. To rely solely on sales for business orders, things will never work out. The road of the Chenming transformation is still rugged, but the prospect of light can be expected. The following is the interview key notes of Hu Baosheng:
 
Q: In the Chenming shareholders meeting, the chairman referred to the success of the transition. What is the current direction of the Chenming transformation?
A: The core business of Chenming was metal stamping tooling, there is a certain basis and technical content for the metal process and related materials. In the recent years, Chenming is developing new technologies, and actively promote to customers. There are two major technologies, one is MIM (metal Powder injection), and the other one is NMT (Nano Molding Technology).
 
The two technologies are developed from the metal chassis processing technologies. Chenming is keeping the core technology as the basis, continue to develop new technology is to add value, and become the technology leader, and prevent competitor to catch up. Otherwise based on the scale of Chenming, it is easy to be submerged in the industry. Fortunately after years of promotion, customers have begun to accept the new process. The usage is expected to expand continually.

The chairman of the board of directors mentioned the success of the transition, mainly based on Chenming’ s current revenue structure. The revenue from the chassis has been reduced to 50%. The vast majority are server chassis, rather than PC chassis, currently PC chassis orders are from ASUS only, and majority are special chassis. Chenming General Manager Hu Baosheng: Breaking the price competition curse, technology is the only weapon No longer taking the mass production strategy. As for the other 50% of the revenue, 30% from MIM, and the other 20% from the NMT business. Chenming operation will maintain this proportion, but in the second half, MIM business will growth the fastest.

Q: Why is the MIM has the most obvious growth in the second half?
A: Let’s talk about MIM first, the characteristics of this method is, having the powder metallurgy and the plastic injection characteristics at the same time. With a high degree of mass production, high degree of freedom and high material freedom and other characteristics, it is suitable for manufacturing small components with complex shape, high precision and high-performance materials. It can reduce the process of forging process and cost of expenditure. The components produced by MIM is more robust, also with high degree of freedom in shape. It is ideal for the thin and small components require durability.

This feature is coincide with the popular wearable device. It is also the main reason of MIM demand pushed up. Each of the customers we are exposed are trying to develop wearable devices, and have to use MIM mechanical parts. The industry generally expect Apple iWatch (tentative name) came out, because Apple's indicative. For Apple and its CEO Tim Cook, there have to be innovative products, so Apple speculation should also promote wearable device. Moreover, Apple products have aura, even without advertising, their products usually have a large market.

As for the wearable products, our majority customer produce smart watches. Mainly because the MIM components are relatively fine, and the material is strong, wearable devices need long-term and frequent use of the parts. Such as watch buttons cannot use plastic material, watch strap buckles, as well as internal components are using MIM. The recent Chenming also design and manufacture watch casing, the entire casing are made with MIM process.

Q: MIM mostly used in the more sophisticated components, what is the reason to use MIM to make watch casing?
A: The watch casing produced with MIM is relatively harder, and the surface finish is finer than forged products, because the injection molding process. The sintered surface has higher density with sintering process. The surface finish will not have too much sand holes when competing to the casting or forging process. So with MIM, the surface treatment is easier. In addition, the use of MIM can be a one-piece processing. It is more convenient for assembling. For example, there is a smart watch from a US customer. The original process is using forging to produce the casing, but which is panful to the system assembly manufacture because the watch is very fine and difficult to assembly. By using MIM produced casing, no assembling is needed. The only process is fastening the screws onto the casing. Regardless of labor costs, assembling speed are more efficient.

However, the problem with MIM process is that the smaller the component is, the easier to produce. Mainly because the product shrinkage is very high in the process. The shrinkage rate is up to 70%, and easily leads to product deformation. The larger of the component, the greater is the deformation of the product. Fortunately Chenming has the stamping knowhow, components can be repaired with stamping process. The product reshaping is the strength of Chenming. Because of this strength, even the current yield rate is low, the customers still willing to partner with Chenming in the research and development to refine the process.

In fact, if this time partner with the customer to develop smart watch casing project can be successful, it will also provide Chenming a new business opportunity, that is the production of traditional watch casing. Watch industry and related supply chain is much different from the consumer electronics industry. The biggest difference is that the rapid changes in the consumer electronics industry, the relevant supply chain response is faster. If we can cut in, will have the opportunity to compete with the traditional watch manufacturers.

Q: What is the current competition in MIM industry?
A: MIM is not a new technology, but the application in the consumer electronics products still need to be improved. Mainly because the MIM production cost is relatively high, and the supply chain is less familiar with this application. The technology from the United States and Europe began to prevail, but the global consumer electronics manufacturing is in the East Asia. The companies with the largest production capacity are, Li, Ka-shing family owned Chungnam watch Co. Itd, and Taiwan Foxconn. Chenming is planning to set up a continuous furnace, then become the third largest manufacturer.

There is a MIM continuous furnace, 12 individual furnaces; MIM capacity utilization in the first half of the year is 50%. The second half of the production capacity will be fully loaded. So in the beginning of the year we decided to setup a continuous furnace by the end of the year. It has the capacity as 10 individual furnaces. Then the total capacity will be increased by 80%. The number of individual furnace will be increased. As the meaning of capital investment is to enable profit. If there is no order, we will not actively set up production line. We will be extra cautious about the market acceptance. 
 
Chungnam and Foxconn are the leaders in the MIM industry, but Chungnam is mainly produce small parts, especially like the watch category of products. As mentioned above, the watch industry is relatively conservative, and with relatively slow response. Chenming established its business with consumer electronics, faster response is it’s strong. In order for Chungnam to complete with orders, the company culture must change, which is not easy. As for Foxconn, MIM production capacity are even not enough to support their own products. Also because of the large scale of the business group, MIM business revenue is difficult to be highlighted. It impacts the morale and ambition of their employees. It is a disadvantage to its business development.

The MIM production capacity and technology of the mainland competitors are catching up very fast. The fastest way is to hunt our employees. They are often hired by mainland manufacturers, but because of the technical power is rooted in the whole team. Even if the mainland manufacturers to hunt, they cannot get the whole team. Although it takes time for the Mainland MIM competitors to catch up, Chenming must be careful and continue to develop the more difficult technology, so that others cannot catch up.
 
Q: As the mainland supply chain in the NB continued to catch up with Taiwan manufacturers, what is your point of view for the competition situation?
A: The speed of the mainland to catch up is really fast, but the implementation capability is still not as good as the Taiwan manufactures. Therefore the majority of Apply products known for high-quality and high-precision, will still produce by the Taiwanese suppliers, rather than mainland manufacturers. Labor increase is an issue that all the supply chains in the mainland need to face. Therefore the starting point of this competition is the same. We should prepare ourselves to enhance the technical skills. Which is the core power of the Chenming competitiveness.

I joined Chenming in 2013 as general manager, the most important thing is to enhance the company's technology. Do not chase for something everyone is doing, but pick up what others are not working on. To take CNC machine for example, after being highly lavage by Apple, the CNC is everywhere in Chain. Chenming does not need to buy CNC machine. As proverb, why buy a cow just for the milk? We should concentrate all resources on a technically profitable business.

In the past, the production of components may be more try and error way, through continuous attempts to find a solution, but like MIM and other metallurgical technology, should not take this approach. It should be calculated, not try several times then produce. Chenming also hired a new chief technology officer Shen Tianhong, his expertise is in the MIM. In the future Chenming will emphasize on the basic theories. It is happy that the Chenming staffs are very resistant to gymnastics. Perhaps because they are in the hardware manufacturing business, and can withstand the brackets. Now can make MIM watch casing is a technical breakthrough.
 
I told Chenming colleagues, do not rush to pick up a business order, the priority is to produce quality products. Improve the yield rate, rather than counting on orders. In fact, the electronics industry is difficult to predict. Do not expect to receive order every day, because the customers also cannot make the decision on the orders. The order quantity is determined by the consumers.

What I ask is to do things well, to improve the yield rate, with the best quality. Secondly, be able to do more than the others. For those others cannot do, but you can do, then there is a chance. It has been a long time since Chenming did a massive consumer products. After all, the size of Chenming compared with other competitors is not large. Its bargain power is relatively small in terms of price cutting for large orders. It should not be the Chenming strengths. Even for the PC related server chassis, Chenming mainly picks on the high-end models.