Sumitomo Orders ATV Tires From Hwa Fong

Taiwan's Hwa Fong Rubber Ind. Co., which makes rubber tires under the "Duro" brand, reported recently that its Thailand plant had won an order from Sumitomo of Japan for the supply of 750,000 all-terrain-vehicle (ATV) tires annually.

Hwa Fong's chairman, Steven Chang, is touting this order (deliveries of which are to begin in April) as a major achievement in its new ATV-tire business. The order is big enough, in fact, to occupy all of the capacity of the company's second plant in Taiwan, prompting plans to double its capacity at an additional cost of NT$400 million to NT$500 million (US$12.7-15.8 million at NT$31.6:US$1). Work on the expansion project is expected to start by the end of the year.



The company is benefiting from the expertise of more than 10 Japanese technicians that Sumitomo has sent to Thailand to help out with production processes, product development, technology, quality control, and management.

Hwa Fong is not the only Taiwan tire company that is boosting production capacity in Thailand. A major rival, Cheng Shin Rubber Ind. Co. (which markets under the "Maxxis" brand), plans to pour 2 billion baht into an enlargement of its plant there. This will enable the facility to fill part of the company's order for the delivery of radial passenger car tires to General Motors beginning in 2006.

Besides expanding production in Thailand, Hwa Fong also plans to spend US$8 million on a new passenger car radial tire line at a plant in Suzhou, in mainland China's Jiangsu Province. The new line is to start producing next year.

In recent years Chang has been leading his company in the simultaneous development of the original equipment manufacturing (OEM) and own-brand manufacturing (OBM) businesses. The chairman says that success in this double-barreled mode of operation depends on achieving a balance between the two types of operation. (The firm's current balance in its bicycle-tire production, for example, is 40% OEM and 60% OBM.)

Both types of manufacturing are necessary, Chang stresses, because stable OEM sales reflect strong manufacturing and management capabilities, and assure continuing revenue growth. Revenues totaled NT$6.02 billion (US$191 million) last year, and are expected to increase in 2005.

Profits are thin in the OEM business because of stiff competition, but Chang insists that he will never give up the quest for more OEM orders from big international brands because "If Hwa Fong doesn't strive for such orders, our competitors will." In addition, he explains, his margins on this business are relatively high because his company handles both materials and finished products. In addition, OEM orders sometimes involve large production volumes and thus help avoid the problem of excess capacity.

Another advantage of the OEM business, Chang adds, is that it enables Hwa Fong to gain know-how and experience, and to accumulate the technical skills needed for future expansion.

In Thailand, the company is adjusting its domestic/export sales ratio from the previous 20/80 to achieve 40/60 this year. This is expected to boost the company's share of Thailand's original equipment market for motorcycle tires to about 50%, from the original 40%, according to the firm's president, Lai Kung-yang. (The big rival there is Inoue Rubber of Japan, which also has a share of about 50%.)

Lai points out that Hwa Fong's first Thai plant has become an original equipment supplier to Japanese powered two-wheeler (PTW) brands such as Honda, Yamaha, Suzuki, and Kawasaki. About 75% of the plant's production is sold on an original equipment basis, while the other 25% bears the firm's own brand.

The Suzhou plant's domestic/export sales ratio will also be adjusted, Lai says, from the current 30/70 to 50/50.

This year, the president reports, Hwa Fong will strive to boost the export ratio of its radial tires for passenger cars, light trucks, and buses.

Taiwan Tire Makers?Deployment in Thailand
Company	Major Product*	Daily Capacity	Investment
Cheng Shin	PCR tires	6,000 (12,000 by 2005 year-end)	Poured 2 billion baht into plant expansion and plans to elevate daily capacity to 24,000 PCR tires.
Hwa Fong	PTW, bicycle tires	7,500 PTW tires (10,000 near future), ultimately 30,000 bicycle tires.	Will invest additional NT$400 million to NT$500 million to expand second Thailand plant and boost daily ATV-tire capacity to 5,000 units.

*: Already mass-produced.