Tong Lung Metal Industry Co., Ltd. Shares resumed trading on Taiwan's over-the-counter stock market on March 23 after nearly eight years of restructuring that began in 1998. "The trade resumption means the restructuring has been successfully carried out, " comments Chung-yu Wang, company chairman and chief executive officer (CEO).

Taiwan's then-No.1 door-lock maker was de-listed in 1998, when its former management team dominated by the founding Fang family appropriated several billion New Taiwan dollars from the company to pay for losses on personal investments. The family opened the business in 1954 as a manufacturer of lunch boxes, and shifted to lock production eight years later.

In 2001, a court ruled that the financially struggling lock maker needed to be restructured, and Wang, a former chairman of Taiwan's biggest steelmaker, China Steel Corp. (CSC), was assigned by a court to supervise the effort. Wang's trustworthy personality and the close supplier-customer relationship between CSC and Tong Lung convinced creditors to support him in his supervisory role in the case. Wang left CSC to work for Tong Lung as chairman in May 2001 and immediately began working to turn the lock company around.

Wang has never disappointed the company's creditors. He had reduced the debt to only NT$530 million (US$16.5 million at US$1:NT$32) at the end of last year from NT$6.3 billion (US$196.8 million) in 2001. The company's revenue has soared 58% from 2001, to NT$2.07 billion (US$64.6 million) last year. In the meantime, its operating income jumped 2.5 times to NT$330 million (US$10 million), its after-tax net income more than quadrupled to NT$383 million (US$11.9 million), and its earnings shot up 8.9 times to NT$5.28 per common share. The company's stock price rocketed to NT$50 per share on the day it was re-listed from the low of NT$5.57 it had before being de-listed in 2001.

Re-listing marked a major step in Wang's success in turning around Tong Lung. "Two years ago, creditors began congratulating me on what they called a successful turnaround when they saw the company had started making money and paying debt, " Wang recalls. "But I told them real success in this case would hinge on satisfying the four groups of people associated with the restructuring plan." In addition to creditors, Wang has pursued the goal of satisfying Tong Lung's employees, customers, and shareholders. "We have made employees feel confident and optimistic about the company, as well as offering satisfactory products to our customers. Now, we should offer shareholders a chance to make money, and the only way to do that is resuming share trading, " he stresses. His company will pay half of its earnings per share from operations in 2005 to shareholders as dividends.

The turnaround attempt got off to a very bumpy start. Tong Lung's creditors, which included banks as well as private investment organizations, were extremely divided as to whether to dispose of the company's loan collateral in order to recover as much of the outstanding debt as possible, or to support the company and restructure it. "Their opinions were very conflicting, " Wang recalls.

After winning trust from creditors, Wang had to find a way to fix the terrible financial situation the lock maker was faced with. In addition to the billions owed to creditors, the company also was confronted with a net worth of negative NT$3.2 billion (US$100 million). The huge financial mess scared many customers away from the company, leading to a 40% business loss, which ate into employees' confidence in Tong Lung. When production lines began to operate only two or three days a week, persistent rumors began that Tong Lung would soon be shuttered, and most of its employees began looking for part-time jobs when the production lines were idle.

In the darkest days of the restructuring, no computer vendor would sell the company a PC because of fears they would not be paid.

From the company's books, Wang learned that the Fang family had bought 13 Mercedes-Benz luxury sedans for the company's board of directors, giving it more Mercedes than any other company in Taiwan. All of them were sitting idle in garages after the company collapsed.

Another significant idle asset was an NT$3 million (US$94, 000) specialized truck for moving space capsules so that they could later be placed atop rockets. The Fang family bought the truck as a gift to woo a would-be customer in order to get a contract to produce its space-capsule locks. The truck is now placed at the main gate of Tong Lung's headquarters in Chiayi in central Taiwan to serve as a reminder of the company's financial fiasco.

Luring orders back was as hard as fixing the company's finances. Wang still remembers the bitterly cold, snowy days in the U.S. when he drove a long way with vice chairman P.C. Chen to visit buyers, even though it was during the Chinese New Year holidays. "We could only confer at cheap hotels to discuss marketing plans at night, " he recalls.

Wang and Chen started finding support from professional managers by convincing the Fang family to completely step away from the company. Chen was formerly an investment manager at HSBC Bank Asia, which took Chen's advice to buy a 75% stake in Tong Lung in order to dominate the restructuring plan. In addition, the two executives have set up an enterprise resource planning (ERP) system at the company to boost operational efficiency. "By setting up a professional management system, we have eradicated financial "black holes" in personnel and procurement, making our operation transparent, " Wang notes.

During the Fang family's management, the family decided and controlled everything from management personnel to procurements to budget. "We have created an enterprise culture that puts professional managers in charge of decision-making, " Wang adds.

According to case studies by some business schools in Taiwan, putting big money into unfamiliar non-core business areas, as well as corruption, mostly led to the Fang family's near-destruction of the company. The family's members embezzled company money and used it to speculate in stocks, foreign currencies, and real estate. They even used corporate funds to gamble at casinos.

Renewed Emphasis on Core Business Areas

Wang made sure to put a stop to all extra-curricular activities at Tong Lung. "The company now does not have any non-core businesses, " Wang stresses. Instead, the CEO has focused on enlarging Tong Lung's core business turf by seeking to create higher value. Last year, grade 1 and grade 2 locks accounted for a combined 51% of the company's revenue, with grade 3 products filling the remaining 49%. A grade 1 lock is two times the price of a grade 3, while a grade 2 lock is about 1.5 times the price of a grade 3. "The two high-value locks were the major force driving up our earnings last year, " Wang comments. His company is now reported to be the No.1 supplier of grade 1 and grade 2 locks in Asia.

Tong Lung builds grade 1 and grade 2 locks entirely according to customers' contract orders, while a part of the company's grade 3 locks go to market under the company's "EZSET, " "POSSE, " and "LUCKY" own brands. Since the beginning of the restructuring, Wang has boosted manufacturing of contract products to account for 70% of Tong Lung's total output from the previous 30%, as part of his strategy to lure back orders in the short term. "It's hard for us to go head-to-head with big players in the brand-name lock market because spending a lot on advertising and marketing is beyond our financial capability. So we need to enter into alliances with big-name players, " he emphasizes.

Taiwan Securities, the underwriter of Tong Lung's stock, estimates the company's sales will increase 28.2% over last year to NT$2.66 billion (US$83 million) this year, mostly because the company's low own-brand percentage poses no threat to its OEM-order customers, who will likely increase their orders with Tong Lung.

The securities firm believes that the world's big lock names will increase outsourcing to Asian suppliers because of high production costs in the areas where they are headquartered. Taiwanese suppliers, the securities firm's studies show, should be the primary beneficiaries of this outsourcing trend thanks to their nimble division-of-labor operating model, their mature manufacturing techniques, and high R&D capabilities.

Value will increasingly come from electronics embedded in the company's locks as a result of the vision Wang has drawn up for the company's future, which consists of transforming Tong Lung into a home-security system supplier from a pure lock manufacturer. "We are developing locks that can wirelessly alert the owner and the nearest police station when someone is entering a home without permission. Also, locking systems that can open or close windows to ventilate a room as soon as smoke is detected by a fire alarm are on the drawing board, " Wang notes. Tong Lung is also working on a burglarproof window system costing about US$200 per set.

Wang's goal of pursuing the high value-added sector of the lock business depends on continuing to add to company's more than 140 patents on file in Taiwan, the U.S., Canada, and mainland China, all of which were generated by Tong Lung's 75-specialist R&D department. "I appreciate our colleagues very much. Most of them have been willing to stay with us to go through the hard times. Their mature experience is one of the company's most important assets, " the company executive says.

The R&D team does its work with efficient Catia and Pro-E 3-dimensional development software. Their designs are then converted into products at the company's factory in Chiayi, southern Taiwan, which has integrated-production capability that spans everything from mold development to applying product finishes.

A swarm of orders has pushed up the company's sales for the first two months of this year by 97% to NT$494 million (US$15.4 million) from one year ago. The new orders have also strained Tong Lung's production lines. To cope with new orders, the company opened a factory at Subic Bay in the Philippines in January, and also plans to open a facility in mainland China.

This year, the company will clear the remaining NT$530 million the Fang family owed creditors, and will also shrink the company's asset-liability ratio to just 30% from the previous 47%. "From the current ratio, you can say the company has already regained its place as the darling of banks, " Wang says.