Pou Chen Corporation

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Pou Chen Corporation

2 Fu Kung Rd.
Fu Hsing Hsiang
Changhwa Hsien,
Taiwan
Telephone: +886 04 2769 5147
Fax: +886 04 2768 0577
Web site: http://www.pouchen.com.tw

Public Company
Incorporated: 1969
Employees: 289,250
Sales: TWD 150.8 billion ($3.15 billion) (2005)
Stock Exchanges: Taiwan
Ticker Symbol: 9904
NAIC: 316219 Other Footwear Manufacturing; 316213 Men's Footwear (Except Athletic) Manufacturing; 316214 Women's Footwear (Except Athletic) Manufacturing

Pou Chen Corporation is a Taiwan-based holding company representing the world's largest OEM/ODM (original equipment manufacture/original design manufacture) footwear design, manufacturing, and distribution group. While Pou Chen itself concentrates on research and development and design activities for the footwear industry, its main subsidiary, Hong Kong Hang Seng Index-listed Yue Yuen Industrial (Holdings) Ltd., oversees the group's footwear production. Pou Chen and Yue Yuen are the manufacturing force behind nine of the world's top ten sports shoe brands, including Nike, adidas, Asics, Puma, New Balance, and Reebok. The company also produces boots, work boots, and shoes for brands such as Timberland, Rockport, Doc Marten, Clarks, and many others. The company produces nearly 190 million pairs of shoes per year, or apporximately one in every six pairs of shoes sold each year, with almost 290,000 employees working at some 350 production lines in China, Vietnam, and Indonesia, as well as at a small number of production units in its Taiwan home base. The company also operates a smaller production unit, Solar Link, for New Balance in the United States.

In addition to shoe production, Pou Chen has branched out into distribution, establishing a 600-strong retail store network in mainland China, where it sells its customers' shoe brands. The company expects to expand its retail chain to 1,000 stores in the near future. Caught up in scandals involving labor conditions at many of its factories, Pou Chen transferred its production operations to its Yue Yuen unit in the early 2000s. Since then, the company has targeted growth beyond the footwear market, establishing operations for the production of LCD displays and related high-tech products. Both Pou Chen and Yue Yuen are dominated by the founding Tsai family, who launched the company in 1969. Pou Chen is listed on the Taiwan Stock Exchange, and Yue Yuen is listed on the Hong Kong Stock Exchange. Nai Fang Tsai is Pou Chen's chairman of the board. In 2005, the company's sales topped TWD 150 billion ($3.15 billion), roughly four times the size of its nearest competitor, fellow Taiwanese producer Feng Tay Enterprises Co.

FROM RAGS TO SHOES IN 1969

Pou Chen was founded in Changwha (alternatively Chang Hwa), Taiwan, by Tsai Chi Jiu and his three brothers as a manufacturer of footwear for the export market. The Tsais came from a family of fabric weavers; Tsai Chi Jiu himself went to Taichung Normal University, where he studied art design. Tsai then began a career as an art teacher for an elementary school. At night, however, Tsai moonlighted as freelance designer for local shoemakers, both as a colorist and as shoe designer. By 1969, Tsai had decided to found his own footwear companies, and together with his brothers launched Pou Chen Corporation.

Pou Chen initially produced plastic shoes; by 1973, the company also had begun shipping plastic sandals. The booming Taiwanese export market, which was rapidly replacing Japan as a global source of cheaply produced goods, enabled the company to achieve strong growth, and by 1974, the company had bought the Fu Hsing Industrial Estate in Changwha and begun preparations for a new factory complex there. By 1976, the company had launched production of plastic casual shoes, which were complemented a year later by the production of boots. During this period, Pou Chen also began developing its contacts with the international footwear market, and increasingly began to take on OEM (original equipment manufacture) and ODM (original design manufacture) contracts from a number of international footwear brands.

The completion of the Fu Hsing factory in 1978 enabled Pou Chen to begin manufacturing a new type of shoe that was to change its destiny. The late 1970s had seen the appearance of a new generation of sports shoe. More technically oriented than their predecessors, the new sneaker types revolutionized the footwear industry, and launched a number of new brand names, including Nike, Reebok, adidas, Puma, and New Balance, on an international level. Pou Chen launched production of sports shoes in 1978, signing on New Balance as one of its first customers.

Pou Chen's true breakthrough came in 1980, when the company signed a contract with adidas, already one of the world's top athletic shoe brands. The adidas contract not only provided the company with a strong revenue source, it also built the group's reputation among the global footwear industry. In this way, Pou Chen rapidly built up partnerships with many, if not most, of the major athletic shoe brands in the world.

Pou Chen expanded its production capacity, as well as its client list, in 1984, with the acquisition of rival Pou Yun Industrial Company. Two years later, the company completed a new extension of the Fu Hsing site, adding an additional factory complex.

Into the second half of the 1980s, however, Pou Chen found itself struggling to maintain a competitive edge amid the rising worth of the Taiwanese dollar, and the rising wages of its workforce. The first signs of a shift in manufacturing in mainland China had begun to be seen by then; yet Pou Chen was restricted from a direct entry into the mainland market by Taiwanese law.

Instead, in 1988, Tsai Chi Jen, one of Tsai Chi Jiu's brothers, moved to Hong Kong to establish a new company, called Yue Yuen Industrial Holdings. This company provided Pou Chen with a conduit into the mainland Chinese market. Backed by a major manufacturing contract for Reebok, Yue Yuen opened its first manufacturing plant in China, in Zhuhai, in 1988. The company also began production of private-label footwear for the department store market in the United States. Over the next three years, Yue Yuen set up three more factories in China, in Dongguan, Zhuhai, and Zhongshan. This expansion enabled Pou Chen to transfer an increasing proportion of its production from Taiwan to the mainland into the early 1990s.

COMPANY PERSPECTIVES

Corporate Strategy: Expand horizontally. Grow vertically. Pursue business opportunities in China. Develop logistics services. Establish synergistic joint ventures. Reach critical mass and leverage it to achieve position as lead manufacturing partner for industry players.

INTERNATIONAL EXPANSION THROUGH THE END OF THE 20TH CENTURY

Through the 1990s, Pou Chen continued to expand its number of production sites in mainland China. By the mid-2000s, the number of Chinese production lines operated by the company in China neared 160, representing more than half of the company's total production. Many of the company's factories in China were established as joint ventures, arranged through a network of investment companies and shell companies registered in the British Virgin Islands. To this mix, Pou Chen added its own directly controlled manufacturing joint venture after the Taiwanese relaxed the island state's foreign investment rules. This allowed Pou Chen to form a 55-45 joint venture with Yue Yuen, called Pou Yuen Industrial, to begin manufacturing in China in 1992. In that year, Yue Yuen was listed on the Hong Kong Stock Exchange.

Pou Yuen Industrial also provided a vehicle for the expansion of Pou Chen's industrial infrastructure beyond the Chinese market. The company targeted Indonesia, by then emerging as a new low-cost production center, establishing its first shoe factory there in 1993. Pou Chen and Yue Yuen next teamed up to enter another new market, Vietnam, in 1994. The company quickly began building up its presence in both countries. By the mid-2000s, Pou Chen's and Yue Yuen's holdings reached 72 production lines and 51 production lines in Vietnam and Indonesia, respectively.

Pou Chen continued to transfer its production outside of Taiwan through the 1990s. By the beginning of the 2000s, the company operated just eight production units in Taiwan, in large part to supply the local footwear market. Pou Chen also had transferred its 55 percent of Pou Yuen Industrial to Yue Yuen, in a share swap deal that gave Pou Chen majority control of the Hong Kong-based company. Both companies continued to be controlled by the Tsai family.

Also during the 1990s, Pou Chen began constructing a vertically integrated operation. On the one hand, the company entered the production of raw materials and shoe components. This was accomplished through the creation of an array of more than 60 subsidiaries, including a number of joint ventures, such as its 50 percent stake in natural leather producer Prime Asia, and a 45 percent stake in split leather producer Cohen, both based in China. The company also established a technical partnership with Kuraray in Japan for the production of high-quality, polyurethane-based synthetic leather. That company, Megatrade, remained a 100 percent subsidiary of Pou Chen.

At the same time as it built its upstream wing, Pou Chen turned toward the downstream side as well. In 1994, the company, in partnership with Yue Yuen, established its first retail operations in China. The company began building up a network of retail stores and in-store counters in the mainland, and by the mid-2000s had opened some 600 stores. These stores were stocked with the branded shoes Pou Chen manufactured for its customers.

EXPLORING NEW MARKETS IN THE NEW CENTURY

Pou Chen found itself at the center of controversy in the late 1990s, however, as the often appalling working conditions at factories under the company's control sparked a wide-ranging scandal throughout much of the global manufacturing market. The resulting controversy, which centered especially around Nike (estimated to account for as much as 53 percent of Pou Chen's sales), contributed to a slowdown in the market into the early 2000s. In part in response to the growing backlash against Asian-produced goods, Pou Chen made the unusual move of establishing a manufacturing subsidiary in the United States. That company, called Solar Link, was dedicated exclusively to the production (chiefly the assembly) of New Balance shoes for the U.S. market.

KEY DATES

1969:: Tsai Chi Liu and his three brothers establish Pou Chen, a factory for producing plastic footwear in Taiwan.
1980:: The company receives a breakthrough contract to produce sports shoes for adidas.
1988:: The Tsai family establishes Yue Yuen Industrial in Hong Kong in order to expand production to mainland China.
1992:: Yue Yuen goes public on the Hong Kong Stock Exchange; both Pou Chen and Yue Yuen establish the Pou Yuen Industrial joint venture in China.
1993:: The first production plant in Indonesia opens.
1994:: Production in Vietnam is launched.
1996:: Yue Yuen acquires full control of Pou Yuen.
2002:: Pou Chen transfers its production operations to Yue Yuen.
2003:: Pou Chen enters the high-technology sector, launching a backlight production joint venture; Yue Yuen enters sportswear production with the purchase of the majority of Pro Kingtex.
2006:: Yue Yuen announces plans to build a new footwear factory in Indonesia with a production capacity of 3.5 million pairs per year.

The continued controversy surrounding the company's labor practices, as well as the undervaluing of especially Yue Yuen's stock due to the complexity of the two companies' organization, led Pou Chen to launch a streamlining drive in the early 2000s. By 2002, Pou Chen had transferred nearly all of its footwear production units to Yue Yuen, at the same time tightening its control over the Hong Kong-based company. The addition of Pou Chen's nearly 70 production subsidiaries helped boost Yue Yuen's status as well, and in 2003 the company was added to the Hong Kong Stock Exchange's blue chip Hang Seng Index.

Yue Yuen continued to grow into the middle of the decade. In 2003, for example, the company extended its product range to the sportswear sector with the purchase of majority control of Pro Kingtex. The following year, the company acquired a 31 percent stake in sports apparel manufacturer Eagle Nice (International) Holdings. The company increased its shareholding in that company to 45 percent in 2005. By then, Yue Yuen also had entered the manufacture of sports bags, backpacks, and related accessories when it acquired Prosperous Industrial Holdings Ltd. At the end of 2005, Yue Yuen expanded again, this time through a joint venture partnership with Golden Chang Group for the production of work, safety, and casual footwear. Yue Yuen also continued developing its wholesale and retail networks in China, gaining the exclusive distribution rights in that country for brands such as Converse, ASICS, Hush Puppy, and Coleman.

The streamlined Pou Chen, in the meantime, in addition to acting as Yue Yuen's holding company, overseeing functions such as human resources and other administrative services, had refocused itself around the research, development, and design of footwear for its major branded and other customers. Yet Tsai Chi Jiu sought new horizons for Pou Chen. Recognizing that future growth prospects for its footwear operation remained limited (the company by then represented some one in six of every pair of shoes sold in the world) Tsai Chi Jiu sought to diversify the company into the high-technology sector. In 2003, for example, the company formed a joint venture with K-Bridge Electronics in Taiwan to manufacture backlight modules and light guide panels at a production plant in Dong-guan, China. The following year, Pou Chen added a new joint venture with Quanta Computer to produce LCD monitors.

Observers were somewhat skeptical of Pou Chen's new high-tech interest, particularly because of the company's relatively late entry into the sector. Nonetheless, the company's diversification remained backed by its role as a powerhouse footwear producer in a market already worth more than $20 billion per year in the middle of the 2000s. Pou Chen, through its majority control of Yue Yuen, continued to reinforce its position in that market. In March 2006, for example, the company announced plans to build a major new factory in Indonesia, with a production capacity of more than 3.5 million pairs of shoes per year. Pou Chen expected to remain the new century's footwear leader.

PRINCIPAL SUBSIDIARIES

Global Brands Manufacture Ltd.; Yue Yuen Industrial (Holdings) Corporation (Hong Kong); Chiya Vietnam Enterprise (51%); Dah-Chen Shoe Materials Ltd. (Vietnam; 51%); Forearn Company Ltd. (British Virgin Islands); Friendsole Limited (Hong Kong); Fu Tai Company Limited; P.T. Nikomas Gemilang (Indonesia); P.T. Pou Chen Indonesia; P.T. Sukespermata Indonusa (Indonesia); P.T. Variadhana Citraselaras (Indonesia); Pou Chen Vietnam Enterprise Ltd.; Pou Chien Chemical (Holdings) (British Virgin Islands); Pou Chien Chemical Company (Taiwan); Pou Sung Vietnam Industrial; Pou Yuen Industrial (Hong Kong); Pou Yuen International Limited (British Virgin Islands); Pou Yuen Marketing Company (British Virgin Islands); Pou Yuen Vietnam Enterprise Ltd.; Solar Link International Inc. (U.S.A.); Yue Yuen Industrial Limited (Hong Kong).

PRINCIPAL COMPETITORS

Feng Tay Enterprises Co.; Shanghai Leather Corporation; Korindo Group, PT; Hardaya Aneka Shoe Industry, PT; Omzest Business Division; Hyosung Corporation; C and J Clark International Ltd.; Binh Tien Imex Corporation Private Ltd.; Garuda Indawa, PT.