The reason why the margins are better has to do with a lot of different things. Here's a quick list of things I can think of that influence this:
1. Hong Kong used to be the toy capital of the world. They have lots of infrastructure and readily available necessities for plastics, electronics and sheet metal. What this means for Deswell is that they can get the best equipment locally, best prices for plastic resin, best steel & components for injection molds, best technical support for equipment purchased.
2. Very low burden labor rate, retention and work ethic of workers. In China there's a pretty much a never ending supply of qualified help (especially for general labor). Most of the workers come from all over China and Deswell has an obligation to help take care of their basic necessities. It's sort of a campus environment where the workers all live in dorms furnished by Deswell, cafeteria services and access to medical care. It is very structured atmosphere where all of the workers have specific work, lunch & break hours. It's highly efficient and the average worker insists to work overtime. By providing a good working atmosphere, allowing the workers to work overtime and paying a better than average salary, Deswell is able to select only the best workers and retain them. There's very little turn-over, which means they don't have to worry having to retrain people all of the time.
3. When Deswell had their IPO, they did exactly what they said they would do an invest it in facilities expansion and equipment purchases. They were able to complement their equipment line with a lot of state-of-the-art equipment like screaming fast surface mount pick & place machines for electronics, precision computer numerically controlled (CNC) metal fabricating equipment, etc. This help cut the scrap rate way down, bring up yields, create faster turns for tooling and production, decreased the chances of having to do rework.
4. Plastic resin and electronics are less expensive in China.
There are a lot of different reasons for this, but here's a couple of quick examples. Hong Kong is a free port and has stable, continual access to plastic resins. A lot of chips and other components are already made in the same vicinity of Hong Kong. My limited experience is that electronic parts are about cheaper over there (I've seen 15% savings in one instance). Deswell also has a lot of low cost space to store materials when they see buying opportunities for things like ABS plastic resin.
5. Very low tax rates and incentives in China for doing business. Deswell has an excellent relationship with the local municipalities because they bring in lots of business. The tax savings and extra revenue allows them to invest in better equipment & facilities, etc.
In regards to Kwanasia, they have a couple of advantages I feel will help preserve their margins:
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1. They have a good mix of product they manufacture. There are a few strategic products they make that are long term designs - ones that have been around for a while. If you're a manufacture that's working on something like PC hardware that has a life of a few years and goes away, it can kind of tough to get comfortable with the design and find qualified sources for parts. By taking on products that have long term staying power, they can find the best supplies for parts, negotiate the best prices and improve the yield over time.
2. They have some of the fastest machines for placing parts. They have over 10 machines, but 3 in particular are very fast. These 3 machines alone can collectively place 1400 electronic surface mount components per minute. The process is 100% automated and practically fool-proof.
3. Management has an extensive background in electronics. One of the toughest things to maintain quality in is printed circuit boards. Their management has specific background in this and ensures that they have the best sources. They know what to look for and qualify it.
4. Kwanasia has extensive in-circuit test capabilities. More capability than I've ever seen anywhere else. In-circuit test refers to testing equipment that utilizes a bed of gold-plated probes. The probes are spring loaded and contact hundreds to thousands of contact points on a printed circuit board to ensure it is acceptable. It's usually done at a bare board level to ensure quality of the circuit board, then again after it's populated to ensure all the parts were installed correctly. This means that they are giving themselves the best opportunity to ship good product and find out what things have a tendency to be problems (a.k.a. continuous improvement process).
5. Behringer, Behringer, Behringer! I got a chance to meet Mr. Uli Behringer once and wow! I call him the human dynamo and I mean that in the best regard. I once took the initiative to surf the net and try to find any test drives of Behinger's studio equipment. What I was able to find that Behringer has a loyal following of customers that swear by his equipment. It of course has that German-engineering mystique, but the real underlying theme is uncommon value - basically studio grade equipment at a low price. It's my observation that these are products sold all over the world and have lasting value and are not going away soon. This allows Kwanasia to get real good at it. Kwanasia also acquired Kwanta which makes them very unique. Not very many electronics companies have sheet metal fabricating ability. Behringer's stuff has lots of metal parts and provides Kwanasia with an added edge to improve margins by not having to buy this external to their organization.
-J |
