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Nico Steel forges ahead with new higher-margin strategy
A STRATEGY shift to focus on products that command higher margins on lower volumes has borne fruit for metals supplier Nico Steel, as its net profit recently soared to US$121,000 for the half-year ended Aug 31, up from US$1,000 a year ago.
This is the result of efforts over the past few years to phase out its lower-value-add processing services of producing commercial metal materials for hard disk manufacturers, and focus instead on customised solutions, executive director and president Danny Tan told The Business Times.
"It is always our philosophy to keep innovating and offering higher- value-add solutions to meet the evolving requirements of our customers," he said.
Steven Tang, Nico Steel's executive director who heads the marketing and product innovation division, noted that the old business of selling low-value-add metal materials to hard disk manufacturers yielded low margins for the company, since the processing services they provided were commonly available.
Mr Tan added that Nico Steel struggled to compete with the domestic players in China on high production volumes. As a result, it decided to focus instead on creating value for clients with its customised solutions.
"We are also mindful of the shorter product lifecycles of electronic devices and therefore, we focus on high-mix low-volume products to achieve meaningful revenue growth with relatively better gross margins," said Mr Tan. "We prefer to maintain a broad customer base and offer them a wide range of metal material products and services."
Nico Steel has been actively signing new contracts for its customised metal solutions and proprietary metal alloys. Its latest set of contracts announced on Dec 3 involves supplying about 22 tonnes per month of aluminium alloy materials to two customers.
This new focus has also required adopting a new strategy to win customers: the company has to engage electronic device brands early on in the product development stage, about 1 to 11/2 years ahead of official product launches, Mr Tan said.
The company proposes and develops metal solutions to meet the clients' requirements for their products. If its solution is chosen, the company then becomes either the sole or alternate supplier of metal materials for that electronic device.
Although this new strategy does pose some risks if the clients' end- products do not sell well, Mr Tan said Nico Steel manages the risk by working on multiple projects concurrently, so as not to be overly dependent on individual customers.
"At any one time, we are working on more than 20 projects for our customers that are at various stages of their product development process," he said, adding that there have been many instances in which clients chose to continue using Nico Steel's metal solutions for the next models and series of the initial projects.
In addition, not all of Nico Steel's projects involve products that have yet to be launched; the company also works on devices or product series which are already being mass produced.
Today, it holds 12 patents on technological processes and 18 registered trademarks for its proprietary brand of metal materials, and the company expects demand for its customised solutions to continue growing.
Mr Tang said: "The limitations of conventional metal materials (have) brought about better market reception of innovative metal alloys and customised solutions as technology advances and consumer expectations rise."
For example, each new electronic device is expected to be lighter and slimmer than the last, and perform better, too. Shielding solutions therefore have to be upgraded and customised to meet specific demands for weight, strength, heat dissipation, electromagnetic interference and aesthetic appeal in new products, said Mr Tang.
Nico Steel is also exploring potential applications for its metal materials outside the electronic device market. For instance, it has introduced a proprietary copper alloy to replace more expensive copper strips in electrical transformer devices. Other potential applications for its existing solutions include electric vehicle battery housing, vacuum chamber plates and shielding materials for medical devices.
Mr Tan said that the strategy shift did take a toll on revenue and earnings in the past few years, but the worst should be over as the company bottomed out in the last financial year ended Feb 28, 2018.
He noted that the company expects to maintain its annual capital expenditure of between US$1 million to US$2 million under the new strategy, although operating expenses may increase as it outfits its production facilities in China with more equipment, machinery and manpower to support higher production volumes.
It plans to continue improving its solutions through R&D collaborations and to both pursue new customers and broaden its portfolio with existing customers.
"We believe that Nico Steel is at the forefront of the metal alloy materials industry," said Mr Tan. "We are well-positioned to support and supply innovative metal alloys and customised solutions to electronic devices manufacturers to resolve their challenges in metal materials resulting from the evolving requirements of the end-consumers."