Twenty years ago, the Chinese company was a distributor of printers for major technology OEMs like Brother, Epson and Citizen. Today, Kongyue has morphed into an electronics manufacturing services provider and original device manufacturer-one of the many former associates with which Western OEMs now must compete, both on their home turf and in the Chinese market. It's a story that has unfolded time and again in Asia: The distributor or sales partner becomes a contract manufacturer, dabbles in design, sets up an ODM unit and ends up jostling for shelf space with its former customers.

Kongyue's story is likely to become even more interesting and its business operations more complicated in the future. Half of its estimated $100 million revenue comes from dot-matrix printers, but Kongyue is exploring other printer products. The other half of its sales is split among printed-circuit board assembly, car audio, point-of-sale systems and LCD projectors. Its major customers include Epson, Oki, SKI and Lenovo.

After gaining a foothold in the EMS market by making products for Japanese OEMs, Kongyue has graduated into the ODM space to compete with Taiwanese rivals in higher-margin sectors. And like the OEMs of old, Kongyue has adopted a vertical structure to become an end-to-end supplier of basic components.

"We are an EMS provider with an ODM element," said C.T. Yeo, chief operations officer at Kongyue. "However, our ODM activities may increase over time, because customers want us to take on more responsibilities."

Will this vertical structure pose problems down the road for Kongyue, as it did for Western companies that have since divested noncore manufacturing assets? Kongyue executives believe they can avoid a similar fate by remaining a contractor-whether as an ODM or an EMS provider-and spreading costs among a wide group of customers.

"We provide a value proposition in four steps: design, localized parts-and-components procurement, inventory management and quality manufacturing services," said Yeo.

Today, Kongyue has rubber, metal and parts factories, along with an industrial-park facility where it does pc board fabrication and assembly and plastic injection. A lens factory in Shanghai services the optical-electronics sector, combining with all the other operations to enable much more than low-cost-labor assembly.

A few challenges
Tougher challenges loom, not just for Kongyue but for the entire Chinese electronics manufacturing industry. Kongyue executives believe China's focus on lower labor cost as a competitive factor is shortsighted and even self-destructive, since it introduces a dog-eat-dog mentality into an already cutthroat market.

Kongyue encourages OEMs to control costs by localizing as much of the supply chain as possible, including design activities.

That's a strategy strongly endorsed by Mark Zetter, president of consulting firm Venture Outsource. Zetter believes outsourcing to a low-cost region alone can reduce manufacturing costs by up to 5 percent. If the contractor delivers design-for-manufacturability (DFM), cost savings rise to 9 percent. Add in vertical integration at the EMS provider, and the savings could shoot up to 14 percent, Zetter said during a recent Web presentation.

Another problem plaguing China's EMS market is intense competition for talent. Analysts estimate electronics manufacturing in China will surge 28 percent in 2005, putting pressure on manufacturers to staff their facilities.

Guangdong province faces a labor shortage this year for the first time. Electronics assembly operations have increased wages 20 percent over the past year to attract labor from northern China. But the shortage of skilled technicians is even more severe, with vacancies as high as 70 percent, according to the provincial Labor Administration Bureau.

For Kongyue, pressing concerns include convincing OEMs seeking immediate savings to wait patiently for the longer-term, but higher, savings DFM can bring.

Moreover, despite its success with Japanese companies, Kongyue has been unable to crack the North American and European markets. "We are seeking U.S. and European midsize OEMs with high-mix and low- to midvolume product portfolios that want to outsource to China," said Tim Lin, vice president of sales and marketing. "We can help them to develop in China, because we have an established sales and distribution network."

Michael Liu is based in Beijing and can be reached at mliu@china-outlook.com.

--