2024 Week 30
2024 Week 30
Sunny Optical, TK Group, Chen Hsong, Tsugami Precision, Powermatic, Plover Bay Technologies, Vincent Medical, Ten Pao
Written on 29th July 2024
Manufacturing in China - from China + 1 to China + N?
One of the major learning I have from my last trip to China is that it is going to be really costly and is going to be almost impossible to replicate China’s supply chain within a short period of time. Like it or not, most stuffs are still going to continue to be manufactured in China.
The important phrase is “within a short period of time”. Given enough time, money and attention, my guess is that anything can be replicated but that risk is low.
The main risk or the axe that is hanging over all the factories are the Trump’s theoretical 60% Chinese tariff on all Chinese import.
déjà vu! That has happened before and what has transpired since?
During Trump’s last presidency, most manufacturer started the China + 1 strategy with most of them setting up plants in Vietnam.
Today, most of the Vietnam factories have remained small and idle. One reason is that Biden is not actively pursuing tariffs on manufactured goods from China, the other reason is that unlike low end manufacturing (like textile), slightly higher end manufacturing requires supply chain support which is currently non-existent in Vietnam.
But as Trump second presidency comes closer to reality, manufacturers are once again making all sorts of plans.
During my last trip I have heard China + N strategy.
Other than the usual of India, Mexico, Malaysia and Vietnam, I have known of manufacturers with plans to set up offshoots in Hungary and Japan . It seems that to avoid tariffs, Chinese manufacturers need multiple sites to fully utilise the various supply chain that could be co-created throughout the world.
So if all the manufacturers are planning on moving out of China and taking advantage of the various supply chains available, will China’s manufacturer die a slow death?
What is clear now is that the assemblies of the these products are already moving out of China. Foxconn is spending tons of money and time moving plants out of China and into place where there are abundant labours.
I will broadly divide the manufacturing into a few categories to help with my thinking process
parts manufacturing
capital equipment manufacturing
product/customer led manufacturing
specialised product manufacturing
1. Parts Manufacturing: Sunny Optical, TK Group - the windfall before the storm?
Since Trump is looking like he is going to win in the November election, would brands be ramping up their purchases of selected Chinese manufactured parts to ensure that they do not get hit with tariffs?
Is that the reason why we are seeing positive alerts from companies like Sunny Optical (Sunny) and TK Group (TK)?
So did the Sunny Optical share price react to that news? Share price has treaded lower since the positive profit alert on the 21st July.
Since phones have a fixed lifespan of around 7 years, it seems like there could be a handset replacement cycle going with handset lens sets sales growing year on year for Sunny.
As for TK which is also announced a rise in profit hardly budge when their positive result alert was announced on the 18th July.
So the market is pricing in a Trump win and a tariff for these companies and their products, but is there a really good way to replace these manufacturers who have become one of the best in their trade?
2. Capital Equipment Manufacturing: Chen Hsong, Tsugami Precision - the coming windfall?
While most of the part manufacturers are raking in the bucks, the manufacturers of capital equipment like Chen Hsong (plastic injection moulding) and Tsugami Precision (computer numerical control CNC machine tools) reported a weak end to their financial year with all reporting a drop in revenue.
Since most of their capital equipments manuafctured are sold in China, there is some expectation that sales to be weak for the coming year. Instead, I think there is a good chance that capital equipment sales may rise moderately in the coming FY because of the “two new” policies (两新政策).
The Chinese government is offering rebates on consumer goods and equipment goods. These rebates may encourage factories to upgrade their equipments. For high end manufacturers making the high end precision parts, they will be enticed to upgrade their factory equipments at the government’s expense. Though, the possibility of a slow end consumer demand may still dampen their capital equipment renewal cycle.
The wild card is the electric vehicle (ev) production and consumption. While there is an over excess production right now, the government could easily stimulate demand through more tax rebates for ev.
The capital expenditure upsides will come from the high end industries that the Chinese government is promoting like medical technology, industrial automation and robotics while the downsides will come from the Computers, Communications, and Consumer Electronics (3C).
3C will be slow for the Chinese economy but expect a bounce of 3C upgrading cycle in the west with Europe and US needing a refresh of their communication system which lead us to the next section.
3. Product/Customer led manufacturing: Powermatic, Plover Bay Technologies - having a blast of their time
There is a replacement cycle of communication equipment within the US and Europe so some of the companies like Powermatic (Power) and Plover Bay Technologies (Plover) are doing relatively well on their core router business.
With manufacturing sites away from China, Power - Malaysia and Plover - Taiwan, it seems that geo-politics is far away from them. As long as they remain in their niches, it seems like they could be benefitting from the assembled anywhere than China preference from the western countries.
4. Specialised product manufacturing: Vincent Medical, Ten Pao - where China + N is necessary
Vincent Medical (Vincent) is the Original Equipment Manufacturing (OEM) and Original Brand Manufacturing (OBM) for respiratory devices. They also manufacture disposable parts for Bayer both for China use and oversea usage. That meant that they may have to work on establishing plants in Mexico, Japan and Europe.
Ten Pao develops, manufacture, and sale of electric charging products for various customers in China and Europe.
Due to both of their customer profile, there is a need for them to have multiple bases. While they continue to scale up their manufacturing bases in China they need to simultaneously building up factories in other jurisdiction.
That is a tough order.
The upside for such a strategy is the ability to navigate the geo-politics but the cost for such a strategy is high and the reward may not be forthcoming.
Hope this is useful for you to think through the various type of manufacturers and their various growth and cost structure.