Between the outbreak of severe acute respiratory syndrome (SARS) and higher steel prices charged by China Steel Corp. (CSC), Taiwan's biggest steel maker, Taiwan's hand-tool industry has had a tough year.

For some the impact has been keenly felt, as order delays and higher material costs take a toll on profit margins. Others, however, have succeeded in dodging the double blow through cost cutting and other countermeasures.

Despite the challenges faced by Taiwan's hand-tool industry, Kissinger Lin, the chairman of the Taiwan Hand Tool Manufacturers' Association (THTMA), is confident that things are not so bad. He notes that the SARS outbreak is a short-term factor and CSC's price hikes have still left the materials made locally cheaper than those available from elsewhere. The difference between the CSC and global steel price increases, he says, could even give Taiwan producers a cost advantage and help them win new orders overseas.

Already the relatively low cost of steel in Taiwan is encouraging local hand tool producers to shift production back to the island from mainland China, where steel prices have gone through the roof due to strong demand, Lin says.

Supporting his optimistic diagnosis, Lin notes that Taiwan's Jan.-May shipments of hand tools rose 15% over the comparable period of last year. He expects shipments in the segment to top NT$90 billion (US$2.6 billion at US$1:NT$35) by the end of this year, up from last year's NT$80 billion (US$2.3 billion).

Competing on Quality

Because of the recent surge in steel prices, Jhi Lung Tools Industry Corp. is struggling to keep its 2003 revenue on a par with the 2002 level. Company sales manager Sam Chen says that steel prices have risen by around 40% to 50% this year and now account for around 20% of his company's production costs.

Jhi Lung was founded in 1978 as a dedicated contract manufacturer of forged parts. Around three years later, the company branched into the production of pliers, which now account for 80% of total output.

The company has long depended on CSC for alloy steels such as chrome-vanadium steel. Like many other manufacturers in the line, Chen's company still prefers to use CSC steel despite the higher prices. "CSC's steel is still cheaper and more dependable in quality than imported steel," Chen explains.

Chen stresses his company will keep production at home in Taiwan and not import semi-finished products from mainland China and Vietnam. He says mainland Chinese manufacturers have emerged as a major threat to Taiwanese manufacturers like his company, but the mainland manufacturers have also earned a reputation for poor quality. "If we move production there, we will be labeled as a low-quality supplier and will have a hard time convincing buyers to pay a premium for our products," he says.

To distance itself from mainland Chinese suppliers, Chen's company has stressed quality and design. His company's products have met the quality standards drawn up by the American National Standard Institute (ANSI), Deutsches Institut fur Normung (DIN) and Japan Industrial Standards (JIS) Association.

To attract buyers, Chen's company has adopted a rule of making tools that are attractive, comfortable to hold, and focused on a particular function. "Making tools look attractive is one of Taiwan's advantages over mainland Chinese rivals. Buyers can easily tell the difference between Taiwan-made tools and mainland-made tools based on their appearance," Chen claims.

Jhi Lung specializes in making tools used for repair and maintenance work in the automotive, motorbike, farming machine, woodworking, metal and construction industries. The main materials used by the company in its products are chrome-molybdenum steel and chrome-vanadium steel, which Chen says is much more durable than carbon steel. The tools also come with PVC, PP, or TPR plastic grips.

Jhi Lung has spent around NT$1 million (US$29,00 at US$1:NT$35) on testing equipment used to analyze torque force, hardness and distortion tolerance. The company also has well-equipped production lines that can handle 80% of the processing work, leaving only electric plating and plastic injecting work to dedicated outside providers.

The company now cranks out 200,000 pliers in about 100 different models every month at its factory, which has a designed output capacity of 300,000 tools a month. The company keeps a large inventory of semi-finished products so that it can quickly respond to shifts in market demand.

Trimming Costs

Ting Wang Enterprise Co., Ltd., a 12-year-old dedicated manufacturer of hand tools and parts for pneumatic tools, has managed to insulate itself from higher steel costs by trimming expenses elsewhere.

According to factory manager J.M. Chen, much of the savings have been realized by replacing workers with automated machinery.

Over the last six years, Ting Wang has spent NT$5 million (US$145,000 at US$1:NT$35) to NT$10 million (US$285,000) annually on automated equipment and measurement instruments. The investment has paid off in better product quality and faster production, Chen says, adding that the company has reduced its defect ratio to barely 5% and trimmed its payroll by about a third.

These improvements are helping Ting Wang meet customer demands for high-quality and low-cost tools and parts. The company claims that it is now able to meet most of the world's quality standards, including ANSI, DIN and JIS.

In addition to production automation, Ting Wang has enhanced its manufacturing capability to give it better control over delivery time. "Delivery time has become a critical factor in winning orders," Chen says. "More and more customers are trying to reduce inventory levels, which means they need to get supplies quickly when their stocks are running low."

Ting Wang can guarantee delivery within 10 days to two weeks from the receipt of orders.

Another advantage for Ting Wang is the durability, attractiveness and pragmatic functions of its products--qualities that are especially important to buyers, Chen says.

The company's major lines include sliding T bars, extension bars, offset handles, speed handles, adapters, 3-way adapters, wrench sockets, bit sockets, spark-splug sockets, screwdriver sockets, bits, socket T bars, flexible handles and universal joints. These tools are designed for car repair and maintenance professionals and the construction industry, as well as for home users.

To make its tools more durable, Ting Wang recently began using 6140 chrome-vanadium steel and chrome-molybdenum steel.

Several years ago, the company opened a customer-service office to offer product details and gather info on customers' needs. "This is a very important mechanism for a manufacturer like us offering built-to-order products. Many of our customers have continued to contract us because of this service," Chen says.

Looking ahead, Chen hopes to expand the share of original design manufacturing (ODM) products made by his company and eventually develop own-brand products. He admits that a long road lies ahead before these ambitions can be realized, but notes that the higher margins will make the effort worthwhile.

For the time being, Ting Wang has no plans to move production to mainland China, despite the allure of low production costs there. Chen notes that Taiwanese manufacturers are more threatening to his company than the emerging corps of mainland rivals. "Most of the mainland manufacturers are still making DIY-type tools, while a large number of manufacturers in Taiwan have moved into production of professional tools," he says.

Chen's company has also felt the impact of SARS, which contributed to a 20% to 30% falloff in orders during the May-June period this year compared with the same period of last year. "Many of our overseas customers canceled procurement meetings with us because of the disease," Chen notes. The half-year beginning in May is usually the peak season for Ting Wang.

Over the past few years, Chen's company has had average monthly revenue of around NT$30 million (US$860,000).

SARS-proof

Neither SARS nor higher steel prices has hurt Lee Way Hand Tool's business, which amounted to US$80 million last year, thanks to its well-developed operations overseas.

Established in 1965 in Taiwan, the company has offices in North America to deal with buyers there. "During the SARS outbreak our U.S. offices represented us in taking orders. We set up a videoconferencing system to communicate with customers," says Lee Way's vice president, Joseph Chou.

Lee Way has also adopted the management principles of Danaher Corp., which was acquired by the company's U.S. branch in 1997. "Our production efficiency has improved by at least 40% by trimming unnecessary procedures and improving workmanship since we began using the management system," says Chou.

Danaher is a world-leading supplier of hand tools for mechanics, sold under such leading brands as Matco, Sears Craftsman, AllenTM, KD Tools, Holo-Krome, NAPA and SATA.

The efficiency gains from using the Danahar system have helped Lee Way offset higher steel prices, which accounts for one-third to one-fourth of the company's production costs.

Chou's company is a major supplier of non-professional hand tools to Danaher. Chou analyzes that the U.S. is the world's largest market for non-professional tools, importing about US$900 million worth of such tools every year.

Although it specializes in tools for home users, Lee Way is noted for the professional quality of its products, which exceed DIN and ANSI standards, according to Chen. It also has a strong record of innovative designs. "Every year, we introduces two to three patented tools," Chou notes. One of his company's best-known patented tools is the "GearWrench", which Chou claims is Taiwan's first 72-ratchet gear wrench with a box end that can work in five-degree angle sweeps. "Most ratchets need room for at least 30-degree angle movement," Chou says. The tool's ratcheting box end comes with the company's patented SurfaceDrive configuration that virtually eliminates the possibility of rounding fasteners.

"In a competitive market, tool makers need to constantly present innovative products. Otherwise they will be phased out of the market," Chou says.

Attractive packaging is another point that Lee Way emphasizes on its tools. "Tool buyers are generally attracted by appealing packages or cases," Chou explains. The company's sockets, wrenches and ratchets are hung on uniquely designed tags. Its "Try-It" tag allow users to try twisting the tool in either direction on a simulated nut fixed on the tag.

Chou's company also supplies own-brand tools, though such products only account for a minor portion of its total output and are mostly sold to South America.

Chou notes that mainland China and India, with their lower production costs and steadily improving quality, are two rising competitors for Taiwan. He thinks the mainland's manufacturers have worked hard to upgrade, though their design capability is far behind that of their Taiwanese counterparts.

In order to tap the lower production costs in mainland China, Danaher opened a factory in Shanghai in 1992 to produce professional tools sold under the "SATA" brand to the mainland, Middle East, Eastern European and Southeast Asian markets. The SATA tools are the first Danaher tools made in mainland China to come with a lifetime warranty.

Competing on Quality

Like Lee Way, William Tools Co., Ltd. Has largely succeeded in insulating its business against the adverse impacts of SARS and steel price issues, according to company chairman William Chiang.

Chiang says his business has expanded by around 20% in the first half of 2003 over the comparable period of last year--a feat he attributes to his company's dedication to making high-quality products.

According to Chiang, William Tool's ratchet handles are made according to quality standards that are even stricter than those set by international organizations. His company's handle for 1/4-inch diameter sockets can resist eight kilograms of torque per meter, its 3/8-inch diameter sockets handle can resist 30 kilograms of torque, and its bar for 1/2-inch sockets can handle 70 kilograms of torque. All of these torque resistance levels are 30% higher than international standards, Chiang claims.

Confident of its product quality, William Tool offers a lifetime warranty on its tools, Chiang says.

William Tools produces around 400,000 ratchet handles a year, 15% of which are sold under the company's "WTOOLS" brand. Around 50% to 60% of the company's output is exported to Europe and 30% is sold to the United States. Most of the handles are designed for use in car repair stores.

The company has specialized in the production of professional ratchet handles since Chiang founded the company four years ago. Chiang notes that professional-class ratchet handles can command up to four times the price of non-professional models.

A graduate of the National Taipei Institute of Technology, Chiang has stressed design innovation in the development of his company. Over the past four years, his company has rolled out seven new products and won over 10 patents.