Motor maker that reversed expectations

Article from Financial Times

By Peter Marsh
Published: September 28 2004

Inavast sprawl of inter-linked factory buildings in southern China, 25,000 people are toiling to turn out tiny electric motors that are used in a variety of consumer and industrial products worldwide. Their labour underlines how the trend towards outsourcing in production - seized on by western manufacturers in the past 10 years - makes very little sense for many manufacturers in China's fast expanding economy.

The depth of manufacturing activity within the plant network in Shajing - run by Johnson Electric, the Hong Kong company - is so extensive that its workers even make small washers, in volumes running at 2bn a year, rather than follow the accepted route of buying such cheap and standardised components from outside groups.

Johnson, which last year had sales of $1bn (£550m), has several small production facilities internationally, partly reflecting its global presence; 70 per cent of its sales are outside Asia. However, with the Shajing complex employing nearly four-fifths of Johnson's workforce, it is by a long way the company's biggest manufacturing operation.

Johnson's "do-it-yourself" approach is driven largely by two factors. First, China has relatively few small, technically advanced suppliers that are in a position to make components to the company's exacting requirements. Second, low labour costs at Shajing provide little incentive for Johnson to look for cheaper or more efficient subcontractors.

"The secret in our business is to make as many components as we can; if we bought them from outside, we would end up paying a lot more," says Jim Dick, Johnson's head of strategic marketing.

As well as making washers and magnets for assembly in the final product, the factory network - including extensive dormitories in which most workers live and sleep - produces a wide variety of components. In many western factories, the job of making the essential tools used in the fabrication of such parts has been outsourced. At Shajing, 440 people are employed in tool-making.

The nerve centre of the operation is a five-storey building that houses 5,000 workers responsible for the 25 to 35 manual assembly steps to make a motor. Finished devices, selling for about $1 each, end up in products from vacuum cleaners to factory equipment.

Since the cost of employing the factory workers is very low - wages plus related costs come to roughly Rnb1,000 (£83) a month per person - these expenses account for only about 5 per cent of production costs at Shajing. Materials expenses comprise most of the rest.

The Hong Kong company routinely casts around for suppliers that can provide raw materials at a lower cost. However, there is a limit to which it can beat down prices of materials that are largely sold as commodities. The skewed nature of the plant's cost structure provides little reason for Johnson to look closely at ways to reduce production costs by measures that are not linked to the wages of employees, such as by new assembly techniques or by automating tasks.

Even so, Mr Dick says, Johnson goes to some lengths to buy modern, highly accurate machines from well-known Japanese or European machine tool makers to cut costs of its various in-house production steps. But the plant investment bill is, as in the case of factory labour costs, again much smaller than that for factory materials. "I don't want to tell you the actual figure but [investment] costs are a lot lower than you might think," says Mr Dick.

One way for Johnson to improve its margins is by improving its market share in a highly competitive market for small motors estimated to be worth some $10bn a year. The rivalry in this business - and the low prices of most of Johnson's products - is responsible for the company's gross margins being slightly less than 30 per cent. That is not particularly high by the standards of top-ranking production companies.

Other leading suppliers of small motors include Mabuchi Motor of Japan - which disputes the number-one spot in the industry with Johnson - Bosch of Germany and France's Valeo. Mr Dick estimates that the Hong Kong company has increased its share of the market in recent years to slightly less than 10 per cent in value but only roughly 7 per cent by volume. Part of its success has come from its partnerships with customers such as Japan's Canon and

Philips of the Netherlands, for which it designs specialist motors for office machines and consumer electronics products.

To meet its customers' requirements for "tailored" motors, Johnson has 1,000 engineers worldwide - including in two centres in the US and Italy - to talk to customers about their needs. "We see this as being an essential part of what we do," says Mr Dick. The market for small motors is estimated to be expanding at 5-10 per cent a year in volume, driven by growing demand for miniature components, as well as for new gadgets that need electrically powered propulsion, such as electric seat adjusters in cars.

Even helped by a growing market, a substantial global presence and a strong accent on design, Johnson may need to change some aspects of its business model if it is to continue to increase efficiencies and profitability. It could, for instance, reduce its exposure to raw materials markets by cultivating more small and specialised component suppliers for some of its production work, leaving it to concentrate on satisfying its customers. Assuming China's economy continues to thrive, more such companies are likely to spring up in the next few years - helping groups such as Johnson to move in the right direction.