Rising costs and the appreciation of the yuan are driving some manufacturers out of the Pearl River Delta, but Techtronic Industries is defying the trend.
The drill and power-tool maker has been building up its production base in Dongguan over the past three years despite the surge of some 77 per cent in wage costs in the area, and a 10 per cent appreciation of the yuan against the United States dollar.
Net profit for last year more than tripled from 2009 earnings to US$3.85 billion, on revenues that jumped more than 25 per cent over the same period. For the 2,000 or so foreign enterprises that have vanished from the delta manufacturing hub in Dongguan, Techtronic may be the perfect example of how innovation and technology made the difference between success and failure.
While its rivals responded to cost pressures and the appreciation of the yuan by moving to cheaper production centres and shifting their focus to the mainland's domestic market, Techtronic stuck to its business model of producing the bulk of its products in China and relying for its revenues on traditional markets like North America and Europe.
"If we were making low-cost and low value-added items, then perhaps it would make sense to lower labour costs. But our goods are highly sophisticated commodities, and when labour costs go up it affects us less than it would have on low-cost items," Techtronic executive director Stephen Pudwill said.
"I have a perfect supply chain now in China. If I moved to a place with lower labour costs, perhaps the costs to bring in components would be higher, I would need to build up a new supplier base, and the labour there may not be so stable."
The mainland market also held less appeal to the company than it did to its peers, he said. "We want to grow in a way that benefits the shareholders, not at the expense of profit," Pudwill said. "The mainland market has lower price points."
With the US economy back on track, Techtronic, which derives more than 70 per cent of its income from North America, is on investors' radars again. Most analysts are calling its shares a buy, with one target price at HK$22.23. The stock rose 2.6 per cent to HK$18.90 yesterday.
Growth in sales and earnings continued through the global financial crisis that hit the company's main markets. Pudwill said this was because of restructuring of debts and operations. In 2009 the group combined scattered production plants into one big factory campus in Dongguan, boosting productivity by 25 per cent by putting design, production and engineering facilities under the same roof.
That was all about boosting efficiency and innovation, said Pudwill - how to produce more powerful and smaller batteries; how to produce more output from the same floor area and less manpower; and how to boost scale in order to bargain for better prices from suppliers.
"In Europe, economies may be slowing, but we are taking up market share, so our growth outperformed the market," Pudwill said. "In North America, consumer confidence is improving, home sales are up, and unemployment is stabilising. We wanted a nice gradual improvement and this is what we've been seeing so far."
The group is now looking to expand into Latin American countries such as Chile, Brazil, Peru and Argentina; and Asian markets including South Korea, Taiwan, and Malaysia.
Chief financial officer Frank Chan said the group planned to inject up to US$120 million in capital expenditure this year to improve productivity and automation. It will also look into the chances of acquisitions, with cash flow at a record high of US$275 million.