Taiwan's Machinery Sector Recovers Steadily Despite Uncertain Future

Taiwan's machinery industry scored NT$145.89 billion (US$4.56 billion) in production value in the second quarter of this year, up 59.3% from a year earlier, according to statistics compiled by the government-backed Industry & Technology Intelligence Services Office (ITIS), which says the domestic machinery industry is recovering steadily from the global meltdown, but won't likely return to pre-crash peaks in 2008 until 2011.

Although the domestic machinery manufacturers are enjoying significant growth in orders and shipments in the first half of the year, the outlook for the fourth quarter is uncertain, a sentiment held by many due to often downbeat news of the economic recovery in the U.S. and Europe. In contrast strong demand for machinery has been coming from Asia and emerging nations, which will help the domestic machinery industry to challenge over 50% annual growth in production value in 2010. An industry insider believes the subsequent recovery in the U.S. and Europe will decide the duration of growth of the domestic machinery industry.

Production Status
The top-three categories with the largest growth in production value in the second quarter were electronics and semiconductor manufacturing equipment, metal-cutting machine tools, and bearings. The ITIS survey shows the makers of electronics and semiconductor manufacturing equipment scored NT$16.65 billion in second-quarter production value, for an annual growth of 130.6%, with the metal-cutting machine tool sector's production reaching NT$18.95 billion, up 96.8% year-on-year, and the bearings sector's production value totaling NT$2.33 billion, up 77.9%.

Imports & Exports
Taiwan exported NT$372.2 billion in machinery in the first half, up 41% year-on-year, with the whole-year export expected to total NT$742.57 billion in 2010, up 26.6% from last year.

Office automation equipment led in export value reaching NT$160.61 billion in the first half of 2010, up 40.3% from a year earlier, with utility equipment ranking second with NT$80.35 billion, up 31.2%, and metal-processing machinery trailing in third with NT$59.58 billion, up 46.6%.

With the global downturn subsiding since the beginning of the fourth quarter of 2009, Taiwan's domestic-demand has been recovering, with substantial growth in machinery imports in the first half, especially in transport, engines and industrial machinery.

The ITIS office says Taiwan imported NT$256.59 billion of machinery in the first half of 2010, up 33.9% from a year earlier. Office automation equipment led in import value totaling NT$71.62 billion in the first half, up 32.2% year-on-year, with other ordinary machinery being second with NT$70.97 billion, up 24.1%, and industrial machinery trailing in third place with NT$52.42 billion, up 42.9%.

Performance by Leaders
Good Friend International Holdings Inc., a subsidiary of the Taiwan-headquartered Fair Friend Group listed in Hong Kong and Taiwan, scored 581 million renminbi, or about NT$2.722 billion, in sales in the first half of 2010, up a whopping 71.25% from a year earlier. Good Friend is one of Taiwan's leading manufacturers of CNC (computerized numerically controlled) machine tools with major production based in China, attributing the major sales growth to its core business of CNC machine tools.

Founded in 1993 in Xiashan, Hangzhou, Jiangsu Province, China, Good Friend began mass production of CNC machine tools in 2000, becoming the world's largest machine-tool maker in terms of production volume in 2008 when the global machine-tool industry was impacted by the global financial crisis.

Good Friend mainly supplies CNC machine tools, forklifts and garage equipment, with CNC machine tools contributing to over 80% of its total sales. This maker sells 97% of output to China's domestic market, where 615 million renminbi worth of CNC machine tools were sold in 2009.

Good Friend chairman Jimmy Chu notes his company's production utilization rate in 2010 has reached 100%, with order visibility till the end of this year, affirming the outlook is very promising based on industry recovery worldwide.

China's rapid development of the automotive, infrastructural, and rolling stock segments will enable Good Friend to project annual sales to jump 80% to 90% year-on-year to reach over 800 million renminbi in 2010.

The company's gross profit margin slightly rose to 26.4% in the first half from 25.4% a year earlier. To solidify its market share in China, the company will continue to expand production capacity and enhance production efficiency. Given suitable opportunities, the company may further invest, engage in partnership, and merger and acquisition.

The Group says it will budget US$46.58 million to expand production capacity in both Taiwan and China by the end of this year, with seven subsidiaries to be listed in China within the next five years.

Also Expanding
The global recovery in the machinery industry is also motivating Hiwin Technologies Corp. to map out production expansions.

Hiwin, Taiwan's largest manufacturer of linear-motion components and devices, has begun second-stage expansion of its factory in the Taichung Precision Machinery Industrial Park since the end of June, which will be completed by the end of this year to raise capacity by over 30%.

To meet expansion, Hiwin has announced the hiring of 1,000-plus workers this year, a rare move for Taiwan's precision machinery sector over the past several years, with Goodway Machine Corp., Awea Mechantronic Co., Tongtai Machine & Tool Co., Victor Taichung Machinery Works Co. and Yeong Chin Machinery Industries Co., also planning to do the same.

The economic recovery has pushed Hiwin's capacity utilization rate to nearly 100%, forcing it to expand production. Company chairman Eric Y.T. Chuo says orders from home and abroad over the past few months have pushed production capacity of linear guides to full, and 95% for ball screws, both being core products.

Hiwin posted US$103.63 million in sales in 2009, down 36.54% year-on-year; but including that of subsidiaries, the Hiwin Group scored US$186.33 million in combined sales in 2009, down only 20% year-on-year from US$232.91 million. Chuo notes the group's combined sales will reach US$310.55 million in 2010.

The company's financial statement shows its July sales to be NT$688 million, up 125.7% year-on-year for an all-time record, with cumulative sales of NT$4.006 billion in the first seven months, up a whopping 157.6% from a year earlier. The company is the most profitable, listed machinery firm in Taiwan.

Hiwin recently landed orders for balls screws for China's government-run rapid transit system. In addition, the company will begin shipping industrial robots built with driver devices produced by its subsidiary—Mega-F, which will help generate more revenues.

Back to Pre-crisis levels
With influx of orders and rising profit margin, some listed machinery firms in Taiwan have turned profitable with earnings back to pre-crisis levels.

The domestic machinery manufacturers will likely see buoyant profitability in the third quarter of this year, driven by backlogged orders throughout the end of this year.

An institutional investor predicts Hiwin will challenge a historic high of NT$6 in earnings per share in 2010.

Of the domestic listed machinery firms, Hiwin Technologies Corp., Fu Chun Shin Machinery Manufacture Co. and Kao Fong Machinery Co. all saw earnings hit historic highs in the first half.

Hiwin posted NT$2.34 in after-tax EPS in the first half, up over 28-fold. With successful development and introduction of niche machinery models, Fu Chun Shin registered NT$1.54 in after-tax EPS in the first half.

Shieh Yieh Machinery Industry Co., a leading manufacturer of presses in Taiwan, saw consolidated sales total NT$951 million in the second quarter, up 76% from the preceding quarter. The company posted NT$47 million in after-tax earnings in the first half, compared to an operating loss of NT$101 million in the corresponding period of last year.

Shieh Yieh registered NT$180 million in July sales, hitting the highest monthly record since the beginning of this year, and expects to see continual growth in sales in both August and September, driven by NT$1 billion of orders received.

Full Production Lines
Focused on plastics injection molding machines, Fu Chun Shin has over NT$770 million of backlogged orders through the end of this year, believing its gross profit margin will remain at 25% in the third quarter or the same as the preceding quarter.

Kao Fong posted NT$49 million in after-tax earnings in the first half, compared to a loss of NT$29 million a year earlier, with NT$0.59 in after-tax EPS in the first half of this year.

The company notes it has over NT$350 million in received orders, with order visibility throughout the end of November, and expects monthly sales to hit a historic high in September.

Export Hub for Machine Tools
Due to steady economic growth contrasting many parts of the West, Asia has become a hub of machine tool exports globally. For instance, Taiwan saw exports of machine tools to China and India double year-on-year in the first half, with exports to Indonesia, Malaysia and Brazil in the first half also growing significantly. And orders from the U.S. and Europe will likely start to flood into Taiwan in the fourth quarter. The ITIS says Taiwan's export of machine tools in 2010 will recover to 80% of that in 2008.

Trend-bucker

China has become the worlds' largest machine-tool manufacturer, considering it was the only one to see growth in both production and export values in 2009 when the rest of the global industry was mired in the financial crisis. The nation's machine tool industry cranked out 401.4 billion renminbi in production value in 2009, up 16.1% year-on-year.

China is also the world's largest importer of machine tools, with sophisticated imports as CNC controlling systems, key components and parts for medium- and high-tier machine tools fueling its economic development.

Brighter Outlook
China has increasingly been buying imported machine tools since the beginning of the second quarter of this year, as part of its expanding public investments, with such investments to benefit Taiwan's manufacturers of machine tools and electronic and semiconductor manufacturing equipment. In addition, rising labor wages in China is forcing China's manufacturers to increasingly adopt automation equipment to offset higher costs, which will also benefit Taiwan's machinery industry in the future.

The ITIS says Taiwan's machinery industry will see overall production value total NT$145.55 billion in the third quarter of this year, up 41.5% from a year earlier, with the production value for 2010 estimated at NT$573.8 billion, for an annual growth of 42.1%.

Production Values for Taiwan's Machinery Industry in H1, 2010 Unit: NT$1 million
Machinery categories	H1, 2010	YoY Growth (%)	2010(estimated)	Annual Change (%)
Metal-cutting machine tools	35,002.3	68.0	74,909.2	70.6
Metal-forming machine tools	7,633.8	53.0	16,274.7	59.2
Agricultural machinery	1,913.6	-3.5	3,849.1	5.0
Civil engineering and mining machinery	296.9	18.8	598.3	28.0
Food & beverage processing machinery	2,663.0	25.4	5,489.7	16.4
Sewing machinery	4,069.9	63.4	8,461.8	51.0
Textile machinery	8,179.3	59.1	17,105.8	37.1
Woodworking machinery	4,902.1	58	10,612.4	39.1
Chemical processing machinery	8,615.0	11	17,545.2	8.1
Rubber and plastic processing machinery	16,230.7	39.1	34,248.4	28.7
Electronic and semiconductor manufacturing machinery	30,355.8	97.2	64,577.2	91.5
Papermaking and processing machinery	2,010.8	12.0	4,318.8	3.0
Printing machinery	4,107.8	52.8	8,622.9	35.3
Air compressors	3,619.9	64.7	7,227.8	37.7
Hydraulic pumps	4,118.4	53.5	8,470.1	40.7
Valves	10,972.7	23.5	22,564.1	17.1
Bearings	4,379.8	71.6	9,942.1	43.4
Mechanical transmission equipment	1,713.7	19.5	3,498.8	23.7
Conveyors and handling equipment	12,478.3	13.2	26,316.7	17.6
Office automation equipment	4,112.1	69.5	8,288.6	50.3
Packaging machinery	2,386.2	28.3	4,957.6	18.9
Central air-conditioning equipment and freezers	3,399.9	23.7	6,928.8	16.3
Boilers & Heaters	7,836.8	20.6	16,658.0	6.9
Others	92,200.7	55.1	193,386.9	43.6
Total	273,199.8	50.1	573,853.0	42.1
Source: Industry & Technology Intelligence Services Office (ITIS), Ministry of Economic Affairs