Wiring firm eyes short cut to car parts industry
Solartech International Holdings plans to diversify from its core business of making wiring for white goods into car parts manufacturing in the mainland in an attempt to boost weak company profits.
The Hong Kong-listed firm plans to make a short cut into China's car parts industry by acquiring a Brazilian manufacturer with a track record in that field.
Solartech would build a factory in the mainland to produce wire harnesses for cars, said finance director Ronald Lau Man-tak. The plant, which the firm hopes to start production by year-end, would be near a large production base for well-known international car brands.
'We can bring the track record of the Brazilian firm back to China and say to the car industry: 'Let me in,'' Mr Lau said.
Solartech announced plans on April 17 to buy Brascabos, a Brazilian manufacturer of power cords and wire harnesses, for US$10 million from US white goods giant Whirlpool.
Brascabos has an annual turnover of US$40 million, consisting mainly of power cords and wire harnesses for Whirlpool's appliances and US$5 million of wire harnesses for several international car brands.
'By [next year] we expect car parts will make significant contributions to our profits and revenue,' said Mr Lau. He said the gross margin on automotive wire harnesses was more than 50 per cent.
For the interim period to December last year, Solartech's overall gross margin was 8.9 per cent on turnover of $1.05 billion and net profit of $31.58 million. Its gross margin was 7.7 per cent for the fiscal year to June last year on turnover of $2.06 billion and a net loss of $61.14 million.
Mr Lau said a major cause of Solartech's slim profit margins was soaring copper prices which had jumped to more than US$7,000 per tonne now from US$2,000 in 2002.
China's young car parts industry supplies a small portion of its production to car manufacturers globally. But Citigroup analyst Charles Cheung said mainland parts producers were starting to obtain significant orders to supply car manufacturers.
'The last two years were the beginning of China's auto parts industry, and this year is its coming of age,' he said.
A white goods company executive said: 'A lot of car components are imported into China, so it's a good idea to make them in the mainland. Solartech's idea is the right one, but the execution can be complicated.'
But he warned: 'Big car companies are very good at squeezing their suppliers. Unless Solartech has outstanding products, it's not going to be easy to have high profit margins.'