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Innotek's restructuring sets path to success
INNOTEK, the China-based precision metal components manufacturer, is battling a slowdown in domestic car sales and some turbulence as Japanese copier makers shift production out to South-east Asia.
But the Singapore-listed company has never been in a better position to ride out the industry headwinds, and is pressing ahead with its multi-year restructuring plan.
Neal Chandaria, non-executive chairman of Innotek, told The Business Times earlier this month: "About four years ago, we took the decision to bring in a local team to understand the local situation. That's Mr Lou and his team, and that has made a significant difference to the company going forward."
In November 2015, Mr Chandaria persuaded Lou Yiliang, an entrepreneur with decades of experience working with Japanese and Chinese electronics giants, to join Innotek as executive director.
The Chandaria family controls Innotek through a 37.04 per cent stake. The family business, Comcraft, also owns 1.95 per cent of Innotek. The Chandarias migrated from Gujarat, India to Kenya about 100 years ago, where they built Comcraft.
"We (Comcraft) have a small joint venture with Mr Lou in Anhui, that's how we started our relationship," Mr Chandaria said. "And we like his approach, we like his style, we like his relationship-building so we were able to convince him to look at Innotek and take the challenge to see if it can be turned around.
"We had management earlier which I think since they were not local, they found it challenging to do the restructuring required in China."
Mr Lou took over a loss-making company that had fallen behind the competition in its mould-making and machining capabilities. It also had rising labour costs to deal with.
He quickly got to work, starting Innotek on an automation journey and incentivising workers to deliver better results.
Mr Chandaria said: "Significant investment has been made in automation, which is twofold. It improves costs, of course, but it also improves the consistency and quality of what we produce.
"I would say we have reached quite a good level in terms of our cost-cutting, productivity and efficiency. We will continue to do that."
He added: "Where we still have a lot of work to do is to increase our topline, increase our growth, increase our new projects, customers.
"With a lot of new programmes that we're now getting, that will happen."
Innotek makes metal components that go into three main categories of goods - automotives, printers and copiers, and consumer electronics like TV bezels.
"I would say it's been a deliberate decision to focus more on the automotives now, because they are much longer-term programmes. And generally, because of the quality requirements, it's business we think we can sustain," Mr Chandaria said.
The qualification process to supply to global automotive systems suppliers like Continental and Bosch normally takes one or two years.
But once the requirements are met, mass production can stretch over three to five years for each programme, Mr Chandaria said. That beats electronics programmes, which are tied to much shorter product life cycles that would last maybe one year.
Under Mr Lou's watch, Innotek is working on many new automotive programmes, Mr Chandaria said, though the ramp-ups have been hit by factors beyond their control.
He said: "There's been phenomenal growth in the last decade in China's auto sector, but in the last one year, the sector has been slowing down, which of course has impacted us.
"But the sector is the largest in the world, and we are just a very small player, so we think that this will be overcome and we will definitely grow in the long term."
Printers and copiers
Where Innotek is gaining ground, against the odds, is in the printer and copier space.
It counts many of the biggest Japanese companies as customers, from Canon to Ricoh to Konica Minolta.
Over the last few years, these companies have been consolidating their presence in China and cutting out lower-quality suppliers, Mr Chandaria said.
"Our delivery, our customer service, the level of precision that we are able to reach and supply, these are definitely all areas where we are better than many of our competitors," he said.
"So, we are seeing that we are getting a bigger share of the market. So even though the market continues to decline in China, we are hit, but not as significantly as the whole industry."
Mr Lou's efforts to step up customer engagement have also helped, Mr Chandaria said. "We have always had relationships with Japanese customers but I would say he's been able to strengthen those relationships."
Innotek has also responded to supply chain shifts by following one of its core Japanese customers into Thailand, where it recently set up its first metal stamping facility outside China.
The facility is in the trial production phase, and full production will start ramping up over the next six to 12 months, Mr Chandaria said.
Then the plan is to get more work from other customers over time, he said. "Besides the customer that we have set up for, there are many other customers (in the office automation segment) that are active in Thailand… Thailand is also an important automotive producer, so we think some of our customers in the automotive sector will also be interested."
Skin in the game
In July last year, Mr Lou put more skin in the game, forking out S$5.6 million to hike his stake in Innotek from 5.26 per cent to 11.48 per cent.
The team turned the company around in 2016 and Innotek made a net profit of S$7.7 million in the first half of 2019, up 32.6 per cent from the same period a year earlier, even as revenue fell 10.7 per cent.
With the house now in order, Innotek is more actively seeking out acquisition opportunities, Mr Chandaria said.
Innotek hasn't made any acquisitions in a long time, though such moves have played a huge part in its history.
Back in 1997, Innotek was a disk drive component manufacturer known as Magnecomp, when it ventured into metal stamping by buying another company, Mansfield. It later divested the disk drive component business.
The Chandaria family was there at the founding of Magnecomp in the eighties. Once it went public in 1998, the family took a back seat.
Mr Chandaria said: "Generally, we feel that they (public companies) should be independent, professionally managed. Innotek was an example where we had to come and make sure that things are back on track. But we continue to feel that this business has potential."
Another company that the Chandarias have links to is Venture Corp.
Venture, Singapore's most successful electronics manufacturing services firm, was a reverse takeover of two contract manufacturing businesses that the family built, Mr Chandaria recalled. "One was in Singapore, called Multitech. The other was in Malaysia, called Technocom. And Mr Wong (Ngit Liong, Venture's future CEO), after he left HP was working with another company in Johor. We suggested he join us - this must have been in the early eighties. He came on and built the business from there.
"Venture was not doing well, had a lot of issues but beautiful facilities, lots of money invested. We were doing quite well but you know, (it was a) very tightly run business. And (in 1989) we reached an agreement whereby we didn't want to lose the tax losses that Venture had - if we had taken over Venture, the tax losses would have been lost - so Venture took us over and we became the largest shareholder and our team took over."
Multitech and Technocom remain subsidiaries of Venture today, and the Chandaria family remains a very small shareholder in the parent.