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FB6703B Workshop Report

Topic: Running OEM Business in China

- Discussion on WKK Case

Site Visit: Wong’s Kong King (WKK), Dongguan, China

Date: May 15, 2013

Prepared by

Toa Charm

Doctor of Business Administration (candidate), City University of Hong Kong

June 5, 2013

Contact Information: toacharm@gmail.com Mobile: (852) 9469 8091

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Table of Contents

1. OEMs in China are Struggling ……………………………………… 3

2. Overview of WKK …………………………………………………….. 3

3. Key Success Factors and Core Competence Analysis ………………. 4

3.1 Trust and Relationship with Customers and Competitors

3.2 After-Sales Services Reliability and Capability of Handling High-End Products

3.3 Staff Retention and Management

3.4 Contingency Planning and Preventive Capability

3.5 Environmental Protection and CSR

4. Major Challenges and Recommendation ……………………………. 9

4.1 Growth and Diversification Strategy

4.2 Trust and Relationship with Key Customers and Competitors

4.3 Cost Management

4.4 IT Advantages

4.5 R&D and Innovation

5. Conclusion …………………………………………………………….. 12

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1. OEMs in China Are Struggling

China is still the world’s factory but the cost advantage over other countries is fading away.

Globalization was once giving a great advantage to countries like China and India as it

facilitated free trade across borders but it is now becoming a threat to them. Since China

joined the World Trade Organization, it has been enjoying the benefits from its export

industry. Many entrepreneurs in Hong Kong and mainland China took this opportunity

and established their OEM (Original Equipment Manufacturer) businesses in China. While

they have been enjoying this advantage in the last two decades, these OEMs in China are

now facing a number of tough challenges. They have a long list of challenges. It includes

increase in labor cost, transportation and logistics cost, oil and gas cost, property cost and

rent, pressure from labor laws and employee welfare, labor shortage, RMB inflation,

competition from other emerging countries, factories moving back to home countries,

factories moving to regions near customers in Europe and the US, sanction from developed

countries, pressure on environmental protection, pressure on human rights and so on.

Because of these challenges, many OEMs had already been out of business while others are

trying very hard to transform themselves to become ODM (Original Design Manufacturer)

and OBM (Original Brand Manufacturer) in domestic and foreign markets. Some OEMs

are also trying to diversify their businesses to other related or unrelated industries but the

success in these industries relies on a different set of core competence which these OEMs

seldom possess. We have seen some OEM companies transformed successfully while

many others have bankrupted or are expected to die soon.

2. Overview of WKK

Wong’s Kong King Holdings Ltd. (WKK) from Hong Kong is one of the successful OEM s

in the region. Mr. Senta Wong, WKK’s Chairman and CEO, founded the company in 1975

and it is now listed in Hong Kong Exchanges’ main board as well as Taiwan Securities

Market. WKK’s headquarters is in Hong Kong and has offices in main cities in China,

Taiwan, Japan and the United States.

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Mr. Wong is a veteran in the Electronic Manufacturing Services (EMS) industry and has

built two major businesses in this industry. While WKK is OEM/ODM in the EMS

industry, it is also a distributor of EMS machines and equipment to other OEM players.

Each one of these businesses roughly contributes 50% of his company’s revenue. It also

has some other smaller business such as travel services and distribution of health products.

We, as a group of Hong Kong CityU’s DBA and MBA students, visited WKK’s main

manufacturing plant in Dongguan China on May 15, 2013. Mr. Wong personally hosted us

with his management team and shared his valuable experience with us. We had chances to

look in every part of the factories and the staff dormitory and facilities. Mr. Wong also

gave us a briefing to share his belief and experience with us on how to start, develop and

manage his company.

In this report, I will discuss WKK’s key success factors and core competence, and their

major challenges and possible ways for resolving these challenges and sustaining their

success. These findings and recommendations could act as a reference for WKK as well as

other OEMs in China to help them formulate their company strategy to overcome the

current challenges and regain momentum for their growth.

3. Key Success Factors and Core Competence Analysis

3.1 Trust and Relationship with Customers and Competitors

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John Kay, one of the academic gurus in core competence, said that reputation is one of the

top 3 core competence that a successful company should have. WKK demonstrated it as a

live example. Mr. Wong has built a long-term relationship with his suppliers from Japan

and the US. This relationship is so deep and solid. Mr Wong said, “Most of my customers

have been with us for a long time and some of them have been with us for more than 30

years. Our competitors cannot steal our customers simply because of our firmly-built

relationship with these customers.” Mr. Wong also converted his relationship and trust

mindset to become his company’s culture. All his leaders in the company have also been

nurtured with this important culture. From Porter’s Five Forces viewpoint, this long-term

relationship with their key customers has increased these customers’ switching cost to other

suppliers, protected them from rival competition and established a strong entry barrier for

new challengers to enter the market. WKK’s customers in the US have been regulated and

monitored very tightly by their auditors. These auditors not only look at these US

companies but also their suppliers. WKK cannot be an exception to that. The auditors will

come to WKK in China to look at not just the company but down to individual staff level

in terms of financials, environment, human rights, etc. WKK has put serious effort to

ensure the compliance with these rules so that they won’t fail to their customers. Now,

WKK is ready for any challenges from these auditors and regulators from the US, Japan

and other developed countries. It becomes another core competence of WKK.

WKK has not just built trust with their customers but also competitors. WKK has also

established an excellent relationship with their OEM competitors. These OEM competitors

are in fact their customers in their distribution business where they bought EMS machines

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from WKK. WKK has been managing this “Co-opetition” relationship well. WKK has

separated their OEM and distribution businesses into two independent units. They are able

to build the trust to their distribution customers that they will not steal away any OEM

business from them. Established integrity and good reputation in the industry play a key

role here and WKK has possessed these great attributes.

3.2 After-Sales Services Reliability and Capability of Handling High-End Products

Apart from OEM business, WKK has a substantial business on distributing EMS machines

and equipment to OEM companies in Asia Pacific. They distribute not just low-end

machines and equipment but also high-end complicated products. Their customers need

very reliable and around-the-clock after-sales services from their distributors in order to

make their own factories effectively and efficiently running all the time. WKK distribution

arm has demonstrated that they can do it consistently. Reputation and good WOM (Word-

of-Mouth) has brought more and more customers to WKK.

3.3 Staff Retention and Management

We might have an impression that labors in a traditional OEM company will be treated

quite bad and their staff turnover is very high. It is in general the case in many OEMs in

China but WKK has managed this differently. “We Value Our People” is one of the four

statements in their Business Philosophy. One key indicator can tell it all. Most of the

OEMs in China are very panic after every Chinese New Year because they are afraid that

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their staff will stay in their home village and will not come back to work in their factories.

In the last few years, this trend is getting even more serious. The return rate of WKK’s

staff after the Chinese New Year has been over 97% on average. It came down to 94%

last year but it is still a very impressive accomplishment. Mr. Wong said that while many

OEM companies face staff shortage, WKK has never had this kind of problem. The ability

to retain workers is definitely one of WKK’s core competences. How have they done it?

First, WKK provides dormitory for not only their staff but also their family. Mr. Wong told

their staff, “A company cannot just focus on making big bucks, it needs to take care of our

staff and their families”. They only pay fair salary to their workers but do offer a lot of

tangible and intangible benefits and services to them. They offer psychological counseling

to their workers. Most of these staff work far away from home and cannot have normal

social and family lives. Also, 80% of their staff is female and young as well. Most of

them cannot find their second half easily in the factory environment. That may bring them

quite a number of psychological issues and they need help to perform efficiently and live

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happily. Other benefits that their workers can enjoy are staff canteen, in-house medical

services, low-price grocery store, ATM and automatic machine for wiring money back

home, TV rooms, theatre, gym, basketball and football courts, etc. They also encourage

their staff to participate in voluntary charity activities and more staff are joining it now. All

these arrangements raise their staff’s loyalty and sense of belongings. Not only they will

stay in the company, they will also refer their village’s friends and relatives to work for this

company. It helps fill up the needs of new bloods after the existing staff have got married

and returned home.

3.4 Contingency Planning and Preventive Capability

WKK has also done a good job to plan forward. Another statement in their Business

Philosophy is “Plan and Act Ahead”. WKK had built their own power station, fire

station, waste water treatment plant, scanners for testing human temperature, etc. to ensure

that they are prepared for any unexpected risks. Their OEM customers are very demanding

in getting their products on time. WKK needs to make sure that they can deliver the

products to their customers on time without any disturbance, such as, discontinuity of

electricity, large scale of virus attack like SARS, etc. They have done all necessary

contingency to prevent all these from happening. For instance, they could maintain the

same level of productivity and delivery to their customers during the period of SARS.

3.5 Environmental Protection and CSR

WKK is a role model for manufacturers in China in terms of environment protection.

From light, power, water, washing machine to paper, WKK has done a number of things to

ensure that they are environmental friendly. For instance, the roof of the staff dormitory

has been installed solar energy plate to act as one of the power supplies for the dormitory.

All these efforts not only protect the environment, but also bring cost savings to WKK.

WKK also does lots of CSR activities for the communities in Hong Kong and China. They

also won a number of charity awards. Mr. Wong also encourages secondary school and

university students locally in Hong Kong and China as well as foreigners to visit their

company to learn more. All these CSR activities not only provide good education and

benefits to the communities, but also bring a positive image on WKK to these people.

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These individuals might be WKK’s employees, partners, customers or even competitors in

the future. This positive image generates a good will and WOM for WKK and will help

strike a positive ecosystem for them in the long run.

4. Major Challenges and Recommendations

4.1 Growth and Diversification Strategy

OEM/ODM in EMS industry and distribution of EMS machines and equipment to OEM are

two major businesses of WKK. Mr. Wong determines to focus on OEM/ODM instead of

transforming to OBM so that the long-term relationship with key customers can be

successfully sustained. I agree with Mr. Wong’s strategy because OBM takes a different

set of talents, core competence and resources to win from OEM/ODM. However, the

threats of OEM mentioned in the section 1 plus the negative side of the macro environment,

such as economy slowdown in the West and the political tension between China and Japan,

WKK should consider more options to minimize the risks and don’t put everything on a

single basket while WKK has enough capitals and resources to do so. If not OBM, what

growth strategy that WKK should adopt for future development and ensure sustainability?

Key considerations for diversification is that the new growth areas should be leveraging on

the core competence of WKK established in the past and a deep investigation on its value

chain and supply chain from a global perspective. My recommendation is as follows:

- Leveraging on the distribution networks and after-sales services capabilities in Asia,

WKK could identify more high-quality high-margin products and gain their

distributorship and services representatives in the region.

- Leveraging on WKK’s experience in developing, managing and growing OEM, WKK

could offer consulting and implementation services to other OEMs in the region.

Many OEMs are being set up in emerging countries like India, Vietnam, Thailand, etc.

They need this expertise and experience.

- A number of EMS OEMs in the world including China are taking different paths from

WKK. They are transforming themselves to be OBM. They will focus resources on

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OBM. It will not be cost effective for these OBM to do OEM anymore. WKK could

get these OBMs to be their customers and provide OEM services to them.

- Economy of scale is one of the most powerful entry barriers for new challengers and

also gives a good bargaining position for suppliers like WKK towards their customers.

WKK could leverage on their financial advantages from two listed markets in Hong

Kong and Taiwan to acquire relevant and quality EMS OEM companies and

distributors of EMS machines and equipment in the world so that their economy of

scale and even economy of scope can be increased to their advantage.

4.2 Trust and Relationship with Key Customers and Competitors

WKK’s success depends very much on the trust built with their key customers and

competitors. While Mr. Wong has a very solid and deep relationship with the senior

leaders of these customers and competitors, his managers and next generation of leaders

might not be able to sustain this key core competence. Though Mr. Wong emphases on

building the trust culture in his company, it’s not easy to cascade it down to the key leaders

in the company in a long run. My recommendation is as follows:

- Continue to lead by example by Mr. Wong and his core leaders to implant the trust

culture into every staff’s DNA

- Offer incentives, awards and open recognition to reward those staff who proved their

accomplishment and capabilities in the trust and relationship building areas

- Set up suitable policies and performance measurement to monitor if key managers are

doing fine on the trust and relationship-building areas

- Provide continuous training on building and sustaining trust, loyalty and relationship

4.3 Cost Management

OEMs in China are facing serious pressure on the increase in various kinds of costs as

mentioned in the section 1. While WKK is doing well in managing these, it is inevitable

getting more pressure from their customers, suppliers, competitors and staff. In order to

minimize the costs and risks, WKK could consider to find alternative locations to build

their plants. Countries like India, Vietnam, Thailand are possible candidates. While their

infrastructure, supply chains including procurement and raw materials supply, skills

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maturity might not be as good as China, they will be getting more mature in the coming

years. Also, they have much less aging problems like China. WKK’s workers are mostly

young girls from the villages. In the coming 10 years, the aging issue in China will limit

the supply of these young workers to WKK and many other factories in China. From all

these perspectives, finding some alternative locations in the world to build plants might be a

wise move. WKK can also do distribution business in these regions and provide

consultancy services to OEMs there as mentioned in the section 4.2. These will further

justify their investment in these countries.

4.4 Information Technology (IT) Advantages

IT is very important in these days but IT does not mean just automation. WKK has done

basic automation by IT. WKK has ERP installed and is planning to move to a world-class

ERP system – SAP. Operation efficiency and productivity are being embedded with IT to

improve the whole company. Sensors are being used in shop floors to indicate targets and

performance. All these IT initiatives are good but not yet enough. While WKK has built

its core competence and can now comfortably beat its competitors, these advantages might

be fading away if they are not watching out the latest technologies. How to become a smart

factory and a smart enterprise is very important for WKK’s future in the 21st Century?

Being an IT-savvy manufacturer can outperform many others in the industry.

Here are some of the areas in IT that WKK could consider to take up:

- Knowledge Management is a system to capture staff experience and knowledge, and

share them effectively to other staff .

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- Business Intelligence and Big Data is a system to integrate and analyze all internal

and external data to provide insights for senior executives, business and operations

leaders to know what happened, why happened, what will happen, and what the best

could happen. It will tremendously increase the decision making and predictive

capability of the whole company.

- Internet of Things is a breakthrough in internet to connect not just people and people

but also people and anything. For instance, a headset cannot talk to a person now but

it can in the future. The headset can communicate with and answer any questions from

the users on who has used it before, what are their feedback, how to use it, etc.

- Cloud Computing is an effective and cheaper way to run bigger applications and

make use of bigger set of data for our in-house use.

4.5 R&D and Innovation

Though WKK is not doing OBM, it doesn’t mean that innovation is not important.

Innovation is not just for products but also services, processes and business models.

Internet changes many companies and consumers on what we need, how we work and how

we think. New business models like Facebook, Google, Groupons, etc. , come every day.

WKK needs to build innovative culture and capabilities in order to sustain its success in the

future. It is not just a R&D department but also training, process, incentives, policies to

recruit, develop and retain innovative talents. WKK can also consider to partner with

universities in HK, China, Japan and US to open up a research, knowledge and consulting

center to nurture talents and innovation for the company as well as for the whole EMS

industry in China as well as Asia.

5. Conclusion

All in all, WKK is in a leadership position in its market. However, there are a number of

excellent opportunities for them to grow as well as a number of serious challenges for them

to resolve. In order to sustain their success, I have given a number of recommendations to

WKK based on the visit to their plant in Dongguan on May 15, 2013. More in-depth

study on WKK is needed to provide deeper and more feasible proposals. Thank you!