Sales: NT$2.23 billion (US$82 million) (1995)
Stock Exchanges: Taiwan
SICs: 3676 Electronic Resistors; 3629 Electrical Industrial Apparatus, Not Elsewhere Classified; 3675 Electronic Capacitors; 3679 Electronic Components, Not Elsewhere Classified
With an estimated two percent share of the US$4 billion global market for electronic resistors, Taiwan’s Yageo Corporation has earned global attention as an aggressive competitor. Barely 20 years old, the company has grown quickly in a market traditionally dominated by the Japanese. In 1995, it was one of only four Taiwanese firms to make Forbes magazine’s list of the “100 Best Small Companies Outside of America.” Despite operating in a mature, highly competitive market, Yageo has managed to capture an increasing share of domestic and global sales in its category while maintaining high profit margins. By the mid-1990s, the company ranked as Taiwan’s largest independent producer of resistors, having garnered an estimated 18 percent of the domestic market. Sales quintupled from 1990 to 1995, and profits increased an estimated 13-fold, as the company sharpened its focus on high-margin products within the otherwise stagnant resistor market. Led by the Chen brothers, Wood (the company’s chairman) and Pierre (CEO), the company has earned its leading position in the Taiwanese market by using a potent combination of innovation and efficiency. After going public in 1993, the company’s young leaders looked to expand globally through acquisition.
Throughout its two-decade history, Yageo has been involved in the production of electronic resistors. These products are a key component of all electronic devices, from household appliances to computers. J. Ross of Hoare Govett Securities Ltd. has noted that “resistors are the most basic electronic component next to the circuit wire.” These tiny parts, which often measure less than one-fourth of a square inch and cost a fraction of a cent, adjust voltage and flow of current along a circuit. In a computer, for example, some parts, such as the hard disk drive, require relatively high current (low resistance), while other more sensitive functions, like microprocessors, cannot withstand high current and therefore require high resistance. An array of different resistors permit operation of these disparate components on the same circuit. A single cellular phone can contain 150 resistors, a notebook computer up to 250.
Yageo bridged two major phases in the evolution of Taiwan’s rapidly growing economy. While Taiwan’s was essentially an agrarian economy until the mid-1930s, a second phase, during which the island nation developed manufacturing and assembly operations, began to emerge and develop through the 1980s. Many of these second-phase businesses relied on Japanese technology, existing merely as manufacturing clones. Then, a third economic wave emerged in the 1980s, led by a group of patriotic, well-educated, and generally young businessmen. Instead of borrowing technology from others, these “third wave” enterprises came up with their own innovations.
Yageo founder Wood Chen was among this new breed of Taiwanese businessmen. After graduating from the National Cheng Kong University with a degree in electrical engineering, he went to work for Philips Electronics N.V.’s Taiwanese resistor division. He created Yageo in 1977 to manufacture the equipment needed in producing resistors. Younger brother Pierre joined Yageo in 1981, having graduated with a degree in computer science from Cheng Kong University the year before. The company would undertake production of the actual metal film resistor beginning in 1983.
The brothers were said to be motivated by “patriotism, as well as by personal ambition,” according to a 1995 Forbes article. For decades, Taiwan’s economy depended heavily on Japan, and to a lesser extent on the United States, for technology and components. But instead of relying upon Japanese technology, the Chens decided to develop their own processes. In 1986, they launched their own research and development effort, sending a team of researchers to California’s famed Silicon Valley to brainstorm with American engineers. Their creation of the vacuum sputtering coating machine (VSCM) and laser trimming system (LTS) in 1990 made Yageo the first resistor manufacturer in Taiwan to use internally-developed production methods. In fact, Yageo was the only manufacturer in the world to combine both technologies. This highly touted “technological self-sufficiency” gave Yageo the cost advantages it needed to compete with well-entrenched Japanese rivals. By 1995, the company’s strong financial commitment to research and development—which averaged from three percent to five percent of annual sales—had earned it three patents and five copyrights.
The Chens also took a unique approach to corporate culture, encouraging its workers to take the initiative. Toward that end, highly automated plants were designed to be more skill intensive than labor intensive, and the Yageo work force, whose average age was 30 and average work week was between 50 to 70 hours, was not required to punch a time clock. Moreover, manufacturing plants featured on-site exercise facilities and an audio/visual center. In short, the Chen brothers believed that such a progressive approach made for happier, more productive, and more efficient workers.
Diversification in 1980s
Yageo continued to design, manufacture, and sell the machinery necessary in producing resistors through the early 1990s and was one of the world’s few producers of high-tech laser trimming systems and vacuum sputtering coating machines. Although this segment of Yageo’s business had declined to about ten percent of annual sales by the mid-1990s, it continued to provide an element of vertical integration that gave the company a significant cost advantage over its competitors.
In the 1980s Yageo shifted its focus from manufacturing production equipment to producing the resistors themselves. The company started out making thin-film resistors, a commodity-type component used in such low-tech goods as electronic toys and audio equipment. Over two-thirds of Yageo’s production capacity was devoted to these relatively cheap devices throughout the 1980s.
Late in the decade, however, when the market for thin-film resistors began to mature and profit margins eroded, the company began to shift its focus to higher margin thick-film resistors. Although the name would indicate otherwise, thick-film resistors were actually smaller than thin-film resistors and were also made according to more stringent standards. Consequently, thick-film resistors, while more expensive, were in high demand for use in the ever-widening array of such highly standardized miniature devices as notebook computers and cellular phones. By 1993, thick-film resistors constituted over 60 percent of Yageo’s resistor sales.
This strategy proved profitable. While the overall resistor market posted anemic average annual growth of 1.5 percent from 1989 to 1993, the thick-film segment was estimated to have grown at over 5.4 percent annually from 1991 through 1994.
The 1990s and Beyond
Yageo worked to maintain its success by shifting to even higher margin niche resistors in the mid-1990s. In 1995, for example, the company started making high-tech chip array resistors, which featured four resistors on each chip and commanded 70 percent gross profit margins. Chip-array resistors are a fairly closely defined niche market, however, being created specifically for laptop computers.
At the same time, Pierre Chen concentrated on efficiency, reducing operating expenses from 16 percent of sales in 1992 to nine percent of sales by 1995. He increased production capacity with a new plant in Taiwan in 1995 and added a fourth shift at the company’s existing plant. By the end of 1996, Yageo expected to manufacture over 3.5 billion resistors each month. The company also hopped on the just-in-time (JIT) inventory bandwagon, setting up a specialized warehouse in 1995. The new system was expected to speed order fulfillment from about one month to less than a week.
In a 1995 interview with Forbes’s Andrew Tanzer, CEO Pierre Chen predicted that the family company would break into the thick-film resistors’ global top three. Acquisition promised to be a key vehicle for growth. By way of preparation, the Chens sold all but 35 percent of their company to the public on the Taiwan Stock Exchange in 1993. The following year, they spent $3 million of the proceeds to acquire ASJ Ptd. Ltd., a Singapore manufacturer of resistors. Yageo hoped to triple ASJ’s production capacity from 1994 to 1995 by applying its own efficient methods. As of late 1995, Pierre Chen expected to spend another $200 million in cash on acquisition candidates in Europe and the United States, as well as in Japan. By that time, the company had purchased minority positions in Capital Securities Corp., Hotung Venture Capital Corp., WK Technology Fund, Golden Friend Corp., and MAG Technology.
Day after day, Yageo is on the alert for challenges. Yageo has been able to stay abreast of competitors thanks to superb manufacturing capability, self-sufficient technologies, well-rounded service, and excellent quality. No longer dependent on “blessings” from Japanese giants, Yageo has secured a competitive edge that challenges rivals all over the world.
Yageo’s sales nearly quadrupled in the early 1990s, from NT$419 million in 1990 to an estimated NT$1.61 billion by 1994. Net income multiplied more than sevenfold during that same period, from NT$54 million to NT$407.1 million. In 1995, net income was expected to increase to NT$701 million (US$50 million) on revenues of NT$2.1 billion (US$94 million).
As of 1995, Yageo’s home market remained its most important, constituting more than half annual sales. Most of the company’s exports were shipped to Asia (primarily Hong Kong and Singapore), a slightly smaller proportion went to North America, and the remainder were sent to Europe. Hoare Govett Securities analyst J. Ross expected Yageo to come out on top of a consolidation of Taiwan’s fragmented resistor industry in the late 1990s. He also predicted that the company’s domestic market share would grow from 18 percent in 1994 to at least 34.4 percent by 1997, and that its share of global resistor sales would top five percent by that time.
With its young, energetic leadership; dedication to research and development; significant acquisition bankroll; and emphasis on high-margin products, Yageo appeared poised to achieve its growth and profitability goals into the 21st century.
WK Technology Fund; MAG Technology Co., Ltd.; Teapo Electronic Corporation; Chilisin Electronics Corporation; Scan Technology (Singapore) Pte. Ltd.
Ross, J., “Yageo Corp., Company Report (Hoare Govett Securities Ltd.),” INVESTEXT, February 13, 1995.
Tanzer, Andrew, “‘Every Day We Punch the Market’,” Forbes, November 6, 1995, pp. 256–57.
—April Dougal Gasbarre