Taiwan Narrows the Quality Gap With Japan

After years of efforts at raising quality while keeping costs down, Taiwan's capacitor makers are beginning to see signs that once indomitable Japanese suppliers may no longer be so unassailable as they were in the past.

Many in the local industry are noting signs that international buyers may soon begin to shift some of their orders from Japanese suppliers to Taiwan, which is now almost on a par with that other island nation on quality and roundly beating them on price.



[left-20031023061.jpg] When Taiwan's electronic-capacitor industry was born around 30 years ago, local companies depended heavily on Japanese technology. Since then, they have gradually weaned themselves from this dependency by investing heavily in the development of new and cost-effective techniques.

Another change during this period has been the shift in focus from capacitors used in household appliances first to personal-computer capacitors and more recently to capacitors used in mobile gadgets such as notebook computers, handheld-computing systems and mobile phones. Each of these stages has been accompanied by technical breakthroughs and quality improvements.

In today's price-sensitive market, system-producing multinationals have begun to cast their eyes at Taiwanese capacitor suppliers. Some Taiwanese suppliers say they have received inquiries from these potential major customers.

Capacity to Succeed

Lelon Electronics Corp., founded in 1976, is among the Taiwanese capacitor suppliers that thinks global buyers of the electronics devices will shift orders from Japanese suppliers to those in Taiwan based on cost considerations. "It's a definite trend as cost has become the major concern among system makers," notes Peter Chang, special assistant to the company's president.

But when will the shift become more apparent? Chang believes that two conditions must first be met. "First, pressure on system-product assemblers from their customers to trim costs needs to increase. Second, domestic manufacturers need to meet the defect-free ratio required by assemblers."

Chang says that already some buyers that have long depended on Japan for their capacitors are starting to sound out the situation in Taiwan. "The number of recent inquiries has been steadily increasing," he says.

Currently the largest manufacturer of electrolytic capacitors in Taiwan, Lelon has several advantages over its local counterparts in the never-ending quest to lower costs and boost quality. His company has its own aluminum foil-forming factory and automated-equipment factory. It has opened three capacitor factories in mainland China and has been engaged in a partnership with Elan Co., Ltd., a world-leading supplier of electrolytic capacitors, since the 1980s. It also teamed up with Taiwan's government-backed Industrial Technology Research Institute (ITRI) in 1991 to hone its technological edge

By producing its own aluminum foils, the primary material used in capacitors, and equipment for making capacitors, Lelon can make capacitors at only 60% of the cost at Japanese suppliers, Chang says. He points out that materials alone can account for 70% of the manufacturing cost. Its mainland factories have further brought down production costs.

The company's Lelon Electronics (Huizhou) Corp. and Lelon Electronics (Suzhou) Corp. in the mainland are the world's largest producers of electrolytic capacitors, with a combined output of 550 million capacitors a month. Its joint venture with Elan in the mainland city of Wujiang specializes in the production of tantalum and chip-type capacitors.

While it has moved its production base to the mainland, Lelon retains its R&D and order-taking operations in Taiwan.

Elan has been contracting Lelon to build capacitors for it since the 1980s. The partnership was expanded with a 1994 joint venture in Malaysia. "This joint venture has allowed us to acquire many of Elan's techniques and laid the foundation of our technological advancements today," Chang says.

Lelon's partnership with ITRI has involved the development of capacitors for personal computers and peripherals, which have gradually replaced household-appliance capacitors as the company's main revenue earner.

With the technological assistance from Elan and ITRI, Lelon has ventured into the production of smaller, longer-lasting, more heat-resistant and higher-frequency capacitors, including radial lead, large CV snap-in terminal and surface mounting models, as well as solid capacitors and chip tantalum capacitors.

Chang notes that as the focus of the capacitor industry has shifted from household appliances to personal computers and peripherals, the standards for such devices have risen. "Capacitors for these new applications need to be smaller and resist higher temperatures since the devices they are fitted into are shrinking," he explains.

Rising to this challenge, Lelon currently supplies capacitors for use in cellphones, handheld computers, personal digital assistants, and other mobile devices. The company also makes capacitors for audio systems, TV sets, computers, computer peripherals and telecommunication devices.

Most of the capacitors made by Lelon today can resist temperatures ranging from 90 to 105 degrees centigrade. "In the past, the temperature requirement might be only 60 degrees," Chang notes.

Lelon has also raised the bar in terms of durability. According to Chang, many of the company's capacitors, such as its large CV snap-in terminal models, can run continuously for 2,000 to 5,000 hours.

Achieving these numbers, Chang says, is mainly the result of the quality gains reaped by making all of the production materials and equipment in house. Although many other manufacturers in Taiwan have set up their own material factories, Chang notes that they fall short on technical ability due to their lack of alliances with Japanese suppliers. "Japan has the world's most advanced technology in this industry," he explains.

Today, Lelon claims a defect-free ratio of over 99%. It also has been awarded ISO9001, ISO9002, ISO14001 and QS9000 quality certificates.

Another factor contributing to Lelon's success, according to Chang, is the company's early entry into the international market. This, he says, has given Lelon a leg up on local, and even some international, competitors. Today, he states, Lelon is the world's fourth- or fifth-largest supplier of capacitors.

Around four years after its establishment, Lelon began exporting its products to overseas markets, which today account for 95% of the company's sales. According to Chang, many heavyweight multinationals such as Philips of Holland are among his company's customers. "The higher standards demanded in the international market keeps you on your toes to constantly improve," he says.

Chang says that the rigors of the international market have intensified as South Korean suppliers flood the market with cheap products. "They have also sniffed out that big capacitor buyers are likely to shift orders to low-cost manufacturers," Chang says.

Despite the intensifying competition, Chang remains hopeful that his company will increase revenue by rise 30% to NT$2.8 billion (US$80 million at US$1:NT$35) this year, with after-tax earnings anticipated to increase 20% to NT$280 million (US$8 million).

Division of Labor

Sales manager of Farad Electronics Co., Ltd., George Cheng, also expects international capacitor buyers to shift orders to Taiwan soon. But he thinks that most of the orders will be for technologically mature items, which Taiwan excels in making. High-performance products, he predicts, will still largely be the domain of Japanese suppliers.

Cheng also strikes a cautious note in surveying the changing competitive landscape his company and industry face. He notes that the South Koreans are beefing up their strength in markets coveted by Taiwan, and mainland Chinese suppliers are muscling into entry-level markets.

Still, Cheng predicts that his company will post a 20% revenue increase this year partly due to the planned rollout of devices using high-end surface mounting technology (SMT). The SMT-based capacitors, he says, are still beyond the technical ability of mainland Chinese factories.

In fact, Farad opened a factory in mainland China seven years ago to cut costs and stay close to its Taiwanese buyers, many of which have relocated across the Taiwan Strait. Currently, the mainland factory generates half of the company's revenue, which has averaged around NT$200 million (US$5.7 million) in each of the past few years. The mainland factory expanded production three years ago to cope with rising demands from local customers there.

Cheng's company, founded in 1972, has specialized in film-type capacitors including polyester, metallized polyester, metallized polypropylene, polypropylene and wireless/block capacitors. Most of its capacitors are designed for use in power-switching units, such as inverters and adapters for household appliances, computers, and computer peripherals. The company's Taiwan factory and mainland factory jointly turn out 21 million capacitors a month.

Answering the industry's call for lighter and smaller capacitors, Farad has pulled out all the stops to slim down the plastic film enclosing its capacitors. The company has developed devices with films of only three to five microns in thickness, depending on customers' needs. "Material and equipment ability are key to achieving smaller sizes," Cheng notes.

Farad has steadily developed its own production techniques since its establishment 30-some years ago. This self-dependence has helped the company confine the defect ratio of its output to within 0.001%.

While Cheng admits that South Korea is a potent challenger to Taiwan in the capacitor market, he remains confident that local suppliers still have some advantages over their rivals to the north. "Our products are much lesser expensive than theirs since our plants are in mainland China. Our production mode is also more flexible," he says.

Strong Competitor

Strong Capacitor Co. has also felt that many international buyers of capacitors are beginning to shift orders from Japan to Taiwan. The company's sales representative, Celin Chen, concludes that most of the shifted demand is for urgent delivery and small volume orders. "Usually, Japanese suppliers are reluctant to take orders that are not big enough to keep their production lines running at scale of economy or that require a short delivery time," she says.

In order to stay competitive against mainland rivals, Strong now accepts orders for as few as 1,000 capacitors and guarantees delivery of the devices seven days after receiving orders. In the past, Chen notes, the company accepted orders for at least 10,000 devices and promised delivery in 10 days.

Chen is careful, however, to note that speed does not mean haste. "We never comprise on quality," she says, noting that strong guarantees its products to be 100% defect free. Eight countries have awarded quality approvals to Strong Capacitor. The company has also received the 2000 version of the ISO9001 and ISO9002.

Strong was established in 1985 to make film capacitors and power relays. Every month, the company turns out 50 million various film-type capacitors, including inductive polyester film/foil, non-inductive polyester film/foil, and dipped metallized polyester film capacitors, at its Taiwan and mainland Chinese factories.

According to Chen, the company's 400-employee mainland factory now contributes half of her company's annual revenue, which has averaged around NT$200 million (US$5.7 million) over the past few years. All of the output of the mainland factory is sold to the domestic market.

At the company's main factory in Taiwan, overseas orders account for 80% of the revenue. Chen expects exports to account for a rising share of the factory's output as more and more Taiwanese manufacturers move offshore. In the long run, however, the Taiwan plant will likely focus only on R&D, sales and procurement, she says.

Computer manufacturers, manufacturers of asymmetrical digital subscriber line devices and electronic ballast are among the company's major customers. In the computer segment, it counts BenQ Corp. and Compal Electronics Inc. among its heavyweight clients.

Like many other Taiwanese manufacturers in this line, Strong Capacitor has depended on its own production techniques since its establishment. In recent years, the company unveiled devices that can resist temperatures up to 105 degrees centigrade and have film coverings only 2.2 microns thick. It is now developing high-margin devices that come in power specifications of over 2,000 volts.

Shining on Europe

While Shiny Space Enterprise Co., Ltd. Has not yet wooed orders away from Japanese suppliers, it has made major inroads in Europe after first foraying into that market late last year.

"Europe now accounts for one-fifth of our revenue, with much of that coming from Italy," says F.S. Shao, Shiny Space's president. The company's annual revenue has averaged NT$200 million (US$5.7 million at US$1:NT$35) over the past few years, with output amounting to over 100 million capacitors a month.

Italy is now added to the company's other main markets, Taiwan, mainland China, Thailand and the United States.

Radial-lead multi-layer ceramic capacitors are the major products that Shiny Space ships to Italy. Such devices are coated with flame retardant epoxy and are widely used in personal computers, data processing systems, telecommunication systems, switching power supplies, instruments, and industrial control units.

Shao attributes her company's success in tapping the Italian market to the high quality and low cost of its products. The company's radial-lead MLC capacitors are built to international standards, have a maximum capacitance of 22uF, and last for up to 1,000 hours of use.

The radial-lead capacitor is a cousin of Shiny Space's axial-lead MLC capacitors. The company developed the two types of MLC capacitor in the 1980s, making it one of the first producers of such devices in Taiwan.

According to Shao, multi-layer ceramic capacitors are more difficult to make than traditional ceramic capacitors and thus command higher prices.

Another breakthrough for Chien's company came in 1997, when Shiny Space debuted its X1-class metallized polypropylene (MPP) film capacitor. "This class of MPP capacitor is subject to the strictest safety standards in existence for capacitors," Shao says.

MMP-film capacitors, Shao notes, are mostly used in household appliances and thus need to meet strict safety standards. Her company's X1-class MMP-film capacitor has won eight safety approvals, including UL, VDE, CSA and SEV. The capacitor is an ideal device for use in line bypass, antenna coupling, across-the-line and spark killer circuits, switching power supplies, business machines, household appliances, and other devices where safety requirements are high.

According to Shiny Space, the X1-class device can withstand over-voltage of 4KV, significantly higher than the 2.5KV of X2-class models. It is also as small as X2-class devices and cheaper as well, the company claims.

Since its establishment in 1976, Shiny Space has consistently worked to improve quality. This effort was rewarded in 1998 with the earning of its ISO9002 certificate. The company's high quality has won the trust of heavyweight electronics manufacturers in Taiwan, including Tatung Corp., Matsushita Electric (Taiwan) and Wyse Technology.

Although many Taiwanese capacitor makers have moved their production to mainland China in order to compete on cost, Shao says that his company is committed to producing in Taiwan in order to ensure high quality standards. "The mainland companies have certainly delivered a heavy blow to the sales and profits of Taiwanese manufacturers. But in the long run, they will not be able to compete with us because we have much better quality," he concludes.