HONG KONG (Oct. 19, 3:30 p.m. ET) — Amid the drumbeat of challenges for Chinese manufacturing — wages rising more than 15 percent a year, weak markets in Europe and North America and a strengthening Chinese yuan — it's easy to forget that some companies seem to find ways to make it work.
Injection molder Eva Precision Industrial Holdings, which built its business making precision plastic and metal components for Japanese office equipment makers, is diversifying into China's domestic auto market and looking at technology upgrades to keep competitive.
This summer the Hong Kong stock market-listed firm bought a metal stamping factory in Chongqing, where it plans to add plastic production in time, and it is looking seriously at metal and plastic factories in the central Chinese city of Wuhan, all of it aimed at China's auto sector.
Eva Chairman Zhang Hwo Jie and Chief Financial Officer Francis Wong sat for an interview in the company's Hong Kong office in mid-September, to talk about how they're handling an economy that's causing some of China's less efficient plastics factories severe problems.
Eva's not been entirely immune. Earnings growth slowed after the Japanese earthquake in March, but it managed to hit record sales and profits in 2010 as Japanese companies like Kyocera and Canon look for cost-savings in their supply chains.
The company has 300 Japanese-made Sumitomo and Toshiba injection presses in its China factories, and said it expects growth to continue as its customers recover from the March crisis.
The reason for Eva's growth, Zhang said, is a focus on highly-engineered precision parts for the Japanese industry, which account for 85 percent of its annual sales of HK$1.7 billion (US$218.4 million). It also wants to upgrade into more technology-intensive markets.
“In general the renminbi appreciation and the rising labor cost is really a big challenge to the manufacturers in China,” said Zhang. “In order to solve this problem, we took a number of steps. First we target higher-end products, because if you are targeting a high-end product, you have more pricing power.”
“Every year we upgrade our technology,” he said. “We also try to reduce the cost. We are starting to use a lot of production automation. We use a lot of robotic arms and high-technology to reduce the number of people.”
Wong said the automation push only started last year, with about 25 percent of its production covered now with robotic arms and other machinery.
Eva said it intends to expand that to all of its production lines, and has upgraded its workforce, increasing the number of engineers from 1,100 in 2009 to 1,600 last year, among its 5,000 employees.
The company does not see China's manufacturing zones in the Pearl River Delta around Guangzhou and the Yangtze River Delta around Shanghai as being low-cost any longer, but as giving the right balance of skilled labor and cost for precision manufacturing, Wong said.
“If you are still a labor intensive business, it is very difficult to locate in the Pearl River Delta,” Wong said. “But if you target higher-end products, you need a lot of good engineers. It is an advantage to stage in the Pearl River Delta and the Yangtze River Delta. If you need a very high quality engineer, this is the place where you can find a lot.”
Long term, the company would like to reduce reliance on office automation equipment, which now makes up 70 percent of sales.
Zhang said what it wants to build from the OA market, where it specializes in components like gears for professional machines rather than cheaper home-office models, and use those skills to make precision automotive components, along with consumer electronics parts.
In the office equipment market, it's a Tier 1 supplier selling modules directly to firms like Canon. Its long-term goal is to become a Tier 1 in automotive, although that could take years to accomplish, Wong said.
The target, Zhang said, is import substitution, replacing parts currently made by foreign suppliers. It's the same strategy Eva followed in office equipment, where it slowly supplanted Japanese injection molders and other suppliers, he said.
“Within the car, we will produce something that was previously produced by the foreigners, rather than compete with the domestic Chinese in the low-end market,” said Zhang, who was named a “Young Industrialist of the Year” in 2008 by the Federation of Hong Kong Industries.
Only about 10 percent of Eva's business now is in the auto market, but the company plans significant investment in Chongqing and, if it proceeds with preliminary plans, in Wuhan as well, Zhang said.
It opened a new factory in South China's Zhongshan city late last year, partially for automotive customers, and plans to open another Shenzhen factory later this year.
Chinese media reported in June that the firm planned a 1 billion Chinese yuan investment (US$156 million) in Wuhan, but Wong said that came from information the Wuhan government put on its website after talking with Eva.
He said several times in the interview that Eva has not made any final decisions about Wuhan. Both Chongqing and Wuhan are major vehicle production centers in China.
The push west into the auto market is not to save labor costs, but for market diversification, Wong said. About 40 percent of its production now is for China's domestic market, up from 20 percent in 2008, the company said.
Eva, which was named by the magazine Forbes (Asia) to its 2007 “Best Under a Billion” list, believes its use of only Japanese molding equipment can help it in the global auto business.
It has looked at Chinese-made injection presses, and while it believes they are improving, plans call for continuing to buy Japanese, Wong said.
“We have been thinking about the possibility of buying local Chinese machines in the past but not at this stage,” Wong said. “They have made a lot of improvements. In the past they can only produce not very high-end products but now they start doing automobiles. You can see the progress.”
“The Japanese companies do not require us to buy Japanese machines — we can buy Chinese machines of our free will, but not at this stage,” he said. “Maybe some years later, if we are able to buy [them] we will be very happy because they are cheaper.”
By focusing on technology and meeting the requirements of its global customers, it can find opportunities with a China manufacturing base, even with rising costs, Wong said.
Eva started in 1993 as a metal parts fabricator, but has developed since then into supplying components critical to both functioning and product development – the precision molds needed to make parts like dependable and quiet plastic gears in the inside of high-volume office copiers.
“In the OA business, when we started in the 1990s, to be honest, most of the molds were imported from Japan,” said Wong. “The China guy was only responsible for making components. But now, our customers ask us to manufacture molds on a large scale. So we can see the progress.”