After enjoying a bumper year in 2002, Taiwan's woodworking-machine industry faces many uncertainties that could adversely affect business through to the end of this year, with some insiders predicting a 10% to 15% export decline in the sector.

Last year Taiwan increased its exports of woodworking machinery by 17%. However, the conditions that drove last year's boom have largely evaporated, according to Bill Hung, chairman of the Taiwan Woodworking Machinery Association (TWMA).

The situation in Iraq and the SARS (severe acute respiratory syndrome) outbreak are currently the two biggest sources of concern in the industry, which has additionally been struggling under lackluster global demand. The island's makers also are under attack in the fast-growing mainland China market from European suppliers, who are redoubling their efforts there.

Hung notes that in the wake of the war in Iraq customers are still hesitant to buy, but is cautiously optimistic that the reconstruction work there could give the industry a much- needed shot in the arm. He also sees a glimmer of light emanating from the Taiwan and mainland China furniture-manufacturing industries, which have been expanding to meet increasing demand from U.S. companies contracting out production. Many furniture makers' plants, on both sides of the Taiwan Strait, rely heavily on machinery sourced from Taiwan.

In order to keep the industry on a growth track, the TWMA is helping member manufacturers tap new markets such as Vietnam, Russia, India, and South America. Southeast Asian nations and mainland China have been the major export destinations for Taiwan-made woodworking machines.

Taiwan is the world's third-largest supplier of woodworking machines, with exports amounting to US$660 million last year. The island now has around 280 woodworking- equipment suppliers and employs a total of 3,000 workers.

Hung says that Taiwan-made machines are as competitive as German and Italian models thanks to their easy maintenance and low cost- -about one-third the price of competing German and Italian offerings. Taiwanese producers are also more nimble than their German and Italian counterparts in responding to market shifts, Hung says, and are more adept at building tailor-made machines in small volumes.

Where they fall behind their European rivals is in tapping new markets. Hung attributes this weakness to Taiwan's lack of formal diplomatic ties with most of the world's countries, especially those with the largest markets. "Without official diplomatic relationships, our government has difficulty helping domestic manufacturers promote their products in these markets," he laments.

Routing the Competition

In addition to his post at the TWMA, Hung heads Boarke Machine Co., Ltd., a maker of sanding machines that has recently added computerized numerically controlled (CNC) routers to its line.

Established in 1988, Boarke is Taiwan's largest supplier of wood-surface polishing machines, generating an average revenue of NT$150 million (US$4.4 million) on sales of about 600 such machines a year. Hung states that his company's first-quarter sales this year fell by around 15% compared to the same period of last year. The drop has brought to a halt a steady rise in revenues, which climbed 20% in 2002 to over NT$200 million (US$5.7 million), due chiefly to strong demand from Taiwanese furniture manufacturers with facilities in mainland China.

CNC routers, Hung notes, command higher profit margins than sanding machines due to high entry barriers and limited market size, with far fewer competitors to contend with than in the overcrowded sanding-machine segment.

In the CNC-router market, Hung's company has aimed at building a few popular models and keeping sufficient inventory to shorten delivery times. He notes that existing suppliers usually build only upon receiving orders, ending up with higher production costs and with customers waiting significantly longer for delivery. "We expect our strategy to keep costs 20% lower than our rivals," Hung estimates.

Boarke plans to debut the CNC routers in September this year and begin shipping them next year. The company has projected to ship 12 of the machines in first year, with output rising 30% annually thereafter. According to this plan, CNC routers should account for about 15% of the company's sales next year.

In its core business of sanding/polishing equipment, Boarke has several technological achievements under its belt. The company has installed a gauge on its 52GM machine to precisely indicate the tension of its sanding belts and ensure consistent high-accuracy results. The 52GM also has a control system with two circuit loops, enabling it to continue working even when one of the loops burns out.

The company has also introduced a machine featuring a polishing tool that moves along both X and Y axes to sand boards with irregular surfaces.

Hung's company has recently extended the applications of its polishing machines to electronic devices, shoes, and kitchen-counter tops as part of its continuous efforts to expand its sources of revenue.

Around 90% of Boarke's machines are used by woodworking factories and the remaining 10% are sold to plants in other industries. Mainland China and Southeast Asia absorb over half of the machines made by the ISO9002-certified enterprise.

Cutting Out a Piece of the Mainland Market

Yang Wei-jen, Anderson Group's general manager for manufacturing, is concerned more about the increasing presence of German equipment suppliers in mainland China than about the effects of the Iraq war or SARS. The group is increasingly dependent on the burgeoning mainland market, which has been absorbing about half of Anderson's output this year, up from last year's 20%, says Yang.

Yang attributes the increasing importance of the mainland market to the decision of several American furniture producers to close their U.S. plants and contract production to Asian manufacturers, particularly in mainland China.

However, the lures of the mainland market have piqued the interest of German equipment suppliers. Many German woodworking- equipment suppliers are enhancing their presence in the mainland by opening production facilities there. They have vowed to supply German-quality machines at prices affordable to mainland buyers, raising fears among Taiwanese manufacturers, including Anderson. "German brands have won a high degree of loyalty in the mainland due to their world-leading quality," Yang notes.

The GM says that Taiwan's equipment suppliers still have a few aces up their sleeves in competing with their powerful German rivals. Language is one, since Taiwanese companies can, he claims, better produce Chinese-text operating manuals and explain to mainland buyers how their machines work without the need for translators. Taiwanese machine makers are also working to improve after-sales service, Yang says.

Anderson has opened one factory and five sales outlets in the mainland and plans to attend more trade shows there to expand its market share across the Taiwan Strait.

The publicly held Anderson is Taiwan's largest supplier of automated routers. It estimates its 2002 revenue at around NT$2.2 billion (US$63 million), a 20% gain over the year earlier.

Even the SARS epidemic, which has hit the mainland the hardest, has not shaken Yang's confidence in the mainland market. In a recent visit to his company's customers in the mainland, he noted that the five-star hotel he stayed at was still bustling with businesspeople. "SARS," he observes, "will affect meetings in the mainland, but not business-promotion activities."

Despite the surging demand in the mainland for woodworking machines, Yang admits that profit margins there will fall as competition intensifies. "Mainland buyers are in a stronger bargaining position than suppliers due to their large procurement volumes," he says.

Since its establishment in 1972, Anderson has been seeking to become a technologically self- sufficient company. In 1980, the company became a dealer for Homag, the top German manufacturer of woodworking machines, and also acquired technology from the German supplier. It later began developing its own CNC machines and shipping them to Europe and North America. Today, it has R&D offices in Germany, the United States, mainland China, and Taiwan.

Anderson's high-end models can turn at 24,000 rotations per minute, and Yang states that only two seconds are needed for tool changes, enabling the processing of 100 meters of workpieces per minute. Equipped with optical scales, these machines have a margin of error of just 0.03mm to 1.5 microns, depending on the model.

In addition to its woodworking-machinery line, Anderson supplies machines for processing plastic parts for cars and motorbikes, interior- use airplane parts, and printed circuit boards (PCBs). Europe is the major market for its plastic-parts machines, while the U.S. absorbs most of its airplane-parts machines. The PCB machines are sold mostly in Taiwan.

Yang points out that non-woodworking machines are expected to account for a growing share of its revenue over the next few years. Currently, PCB machines contribute around 20% of the company's sales and plastic-parts machines for 5% to 10%.

Anderson has also expanded into the original- equipment manufacturing (OEM) market this year; talks are now in progress regarding the building of small machines on an OEM basis for a German brand-name supplier. "Usually, big-name suppliers are not competitive in making smaller machines for dedicated uses," Yang says. Currently, over 95% of the company's machines carry its own brand name, "ANDI."

Yang is optimistic about his company's prospects this year, noting that his company has a full order backlog through July.

Boring Into Higher Margin Markets

Like other Taiwanese woodworking- machinery producers in Taiwan, Mike Liu, chairman of boring-machine maker Young Machinery Co., has felt the impact of the Teutonic challenge in the mainland market, which his company depends on for the majority of its revenue.

Despite the intense competition from major German players, however, Liu is confident that small and nimble companies like his can outmaneuver bigger rivals through more flexible pricing and faster responses to fickle market demands.

Young increased its revenue by around 80% last year, but Liu is cautious in his expectations for this year. "The first quarter was fairly unremarkable. If we don't see a pickup in activity through the second quarter, we can hardly expect a turnaround this year," he says.

To add more value to its products, Young recently introduced CNC boring machines. Nevertheless, sales of such models have been limited due to their higher cost, which has dampened interest in mainland China--Young's main market. Liu estimates that its CNC machines are 30% to 40% more costly than manually operated boring models.

Young has of late been heavily promoting its LU-5T3VOA CNC horizontal/vertical-boring machine. This machine can bore 100 holes in eight seconds and process workpieces in lengths from 250mm to 2500mm and in widths from 300mm to 900mm. The model also comes with a high-precision pneumatic angle- fixing system and an automatic feed system. The machine is also CE approved, attesting to its quality.

Young makes about 100 stand-alone machines per month and can also supply whole-plant solutions, Liu says.

The company has opened seven sales outlets in mainland China, five of which are located in the northern part of the country. By focusing on the northern region, the company hopes to avoid the intense competition in the south, where many Taiwanese equipment suppliers compete for orders from furniture producers there.

DIY King

Unlike commercial machinery makers, which have felt the impact of SARS and the war in Iraq, Rexon Industrial Corp., Ltd., Taiwan's largest supplier of home-use woodworking machines, has largely succeeded in escaping the industry's downturn.

Y.L. Lin, a vice president of Rexon's management division, notes that the home-use machinery market generally moves inversely to the industrial-equipment market. "When the global economy goes down, consumers usually tend to buy machines to fix their furniture and house rather than buy new ones," he says.

Lin expects Rexon's revenue to rise around 20% this year, to NT$5.5 billion (US$157 million) and climb to NT$7 billion (US$200 million) next year. He says Sears, a big American retailer, has pledged to order US$80 million worth of tools from the company by the end of this year, an increase from last year's US$60 million. Orders secured from British retailers including B&Q, Screwfix, and Focus are estimated at six million pounds (US$9 million at US$1.5:1 pound), compared with last year's 2.9 million pounds and 1.25 pounds quoted in 2001.

Rexon rolls out seven new woodworking models on average every year. This year, the company will introduce portable models, ending its long dedication to tabletop and floor-type machines. The company makes the motors for its machines at a plant installed with sophisticated processing equipment, including an NT$100 million (US$2.8 million) Italian-made machine for making motor bearings.

Although Rexon moved the production of its drilling machines to mainland China several years ago, these machines are still powered by motors made at the Taiwan factory.

Since 1995, Rexon has ended ties with most of its contracted importers and now exports directly to retailers. "Importers usually shop for prices and ignore quality, which means they have little loyalty to buyers," Lin says.

Rexon currently has supplier contracts with several major retailers, including Germany's OBI and Bauhaus, Canada's Canadian Tire and Sears Canada, the U.S.A.'s Sears, Lowe's, and Home Depot, and France's Castorama and Leroy Merlin.

Sears in the U.S. has recognized Rexon as a "Partner in Progress" for three consecutive years in light of the Taiwanese company's excellent performance in supplying innovative products, satisfying customer demands, and offering profit-maximization products.

In 1995, with orders from these powerful retailers soaring, Rexon went public to raise capital to expand production and set up an efficient logistics-management system. Last year, the company spent around NT$70 million (US$2 million) to install an enterprise- resource planning (ERP) system and product- lifecycle management system. "These on-line logistics-management systems allow us to closely control inventory backlogs at our customers and deliver products just in time," Lin explains. Rexon has warehouses in Germany, France, Britain, and the United States to shorten delivery times.