Nam Tai Electronics, Inc.

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Nam Tai Electronics, Inc.

15/F., China Merchants Tower
Shun Tak Centre
168-200 Connaught Road Central
Hong Kong
Telephone: (852) 2341-0273
Fax: (852) 2263-1223
Web site: http://www.namtai.com

Public Company
Incorporated: 1975
Employees: 4,274
Sales: $406.3 million (2003)
Stock Exchanges: New York
Ticker Symbol: NTE
NAIC: 334412 Printed Circuit Board Manufacturing; 334111 Electronic Computer Manufacturing; 334419 Other Electronic Component Manufacturing

From its early days as a simple calculator manufacturer, Nam Tai Electronics, Inc. has developed into a supplier of components for a variety of large electronics companies. Since its founding in 1975, the company's business has grown as more and more manufacturers have begun outsourcing parts of the production process. Nam Tai's major customers, so-called "original equipment manufacturers" (OEMs) like Epson Precision, Texas Instruments, Canon, and Hitachi, retain responsibility for brand name promotion, product design, and marketing, while Nam Tai supplies components and subassemblies from its plant in Shenzhen, China. The company's major products include liquid crystal display monitors (LCDs) and radiofrequency modules for mobile phones, as well as LCD panels for a variety of other electronic products, flexible printed circuit assemblies, and finished products such as calculators, personal digital assistants, and electronic dictionaries. Although the company's manufacturing activities take place in southern China, Nam Tai was founded in Hong Kong, is incorporated in the British Virgin Islands, is traded on the New York Stock Exchange, has affiliated administrative offices in Vancouver, and counts many transplants from the Japanese electronics industry among its top executives.

Making Calculators for Hong Kong and China: 1975–87

Nam Tai got its start in Hong Kong in 1975, when M.K. Koo founded a trading company that marketed calculators and other consumer goods from Taiwan, South Korea, and Japan to Hong Kong customers. A successor company, Nam Tai Electronics Company Limited, was founded in 1978. Calculator sales proved successful, so Koo took steps to ensure the quality, supply, and cost of his product by starting his own manufacturing facilities in Hong Kong. From the beginning, Koo recruited executives from the Japanese electronics industry to take advantage of their experience with the precision and efficiency of Japanese manufacturing methods.

Manufacturing soon became the company's focus. In 1980 production moved to the People's Republic of China to take advantage of lower labor and material costs and was established subsequently in Shenzhen in southern China. Sales of calculators and other consumer products in Hong Kong and China grew substantially in the early 1980s. Nam Tai also began exporting calculators to Europe, Canada, and eventually to the United States. In November 1983 the company went through a reorganization. Nam Tai Management Services Limited, or NT Management, was formed under Hong Kong law as a holding company for various operating subsidiaries. The company's sales volume grew dramatically to $53 million in 1985, helped along by China's "open door" economic policy. In 1986, however, China suddenly restricted imports because of a shortage of foreign currency reserves. Nam Tai was hit hard: sales fell by 50 percent, pushing the company to find ways to lessen its dependence on the Chinese market. Before 1985, calculators accounted for nearly all of Nam Tai's sales volume, but by the fiscal year ending March 1987 calculator sales were down to 81 percent of total sales. The company was diversifying into products such as digital thermometers, electronic blood pressure meters, electronic scales, and typewriters.

Another major restructuring occurred in August 1987 when Nam Tai Electronics, Inc. was incorporated in the British Virgin Islands as a holding company for Hong Kong-based NT Management, the previous parent company for Nam Tai. The Virgin Islands was chosen to facilitate share trading, since it did not tax and subsidiaries. The following year Nam Tai went public on the NASDAQ, after unsuccessful attempts to gain a listing on the Hong Kong stock market.

Sales Growth and Product Expansions in the Early 1990s

Nam Tai's sales grew steadily through the early 1990s, from $70.8 million in 1993 to $121.2 million in 1995. Calculators remained the company's main product through most of the decade. Hand-held consumer electronics such as personal organizers, electronic dictionaries, and spell checkers also accounted for a portion of sales. The company developed a supply relationship with large-volume original equipment manufacturers such as Texas Instruments and Sharp Corporation.

In 1992 Nam Tai established a second plant, Zastron Plastic & Metal Products Ltd., in Shenzhen. The Zastron factory made metal and plastic parts for Nam Tai's use as well as for other customers. At the same time, Nam Tai was exploring the possibilities for an international manufacturing base. In 1993 the company opened a plant in Vancouver to make blood pressure monitors. During the early 1990s, many people from Hong Kong and Taiwan were moving to Canada, partly in anticipation of the 1997 transfer of Hong Kong from Britain to China. Nam Tai founder Koo lived in Vancouver for several years and established administrative offices there. After the Vancouver plant was up and running, employing about 50 people, Koo considered expanding into Mexico as well. The company, however, failed to reach agreement with a minority shareholder over a planned share offering and the plans were abandoned. The Vancouver factory was wound up after a few years as well; the Canadian subsidiary was sold to management in 1999 and continued to provide investor relations services to Nam Tai as a separate company. Subsequent manufacturing expansions remained focused in China.

In 1994 the first of a series of leadership changes occurred at Nam Tai. Tadao Murakami took over the president's job from Koo and became CEO a year later; Koo remained chairman. The company further expanded its product line and technological capabilities in the mid-1990s. Nam Tai reached an agreement with Sharp Corporation in 1994 to make a personal organizer with address book, schedule, and calculator functions. The introduction of the advanced product caused some losses as employees adjusted to new manufacturing techniques. Nam Tai was working to stay on the cutting edge of manufacturing technology by introducing new surface mount technologies such as "tape automated bonding" and "outer lead bonding." In 1996 Nam Tai opened a new facility in Shenzhen, doubling total manufacturing capacity. That year the company also set up a research and development subsidiary known as Shenzhen Namtek Co., Ltd. Namtek's role was to develop software for consumer electronics and help Nam Tai keep pace with ever more sophisticated product designs. The subsidiary employed a few dozen software engineers and posted its first profit in 1998.

A Bumpier Ride in the Late 1990s

The late 1990s brought some conflicts, missteps, and more leadership changes. A struggling Chinese company known as Tele-Art owed Nam Tai about $800,000 and Nam Tai filed to have it liquidated in 1997. A British Virgin Islands court awarded Nam Tai $34 million in damages in 2002. According to Nam Tai allegations, however, the Bank of China colluded with the auditing firm PriceWaterhouseCoopers to fabricate debts and artificially strip Tele-Art of assets before any funds could be paid out to creditors such as Nam Tai. Nam Tai filed suit against the Bank of China and PriceWaterhouseCoopers in 2003.

In 1998 Shigeru Takizawa replaced Murakami as president and CEO. Takizawa was a former senior fellow at the Japanese firm Toshiba and had had an advisory relationship with Nam Tai for more than 20 years. Murakami became chairman and Koo remained on the board and in an executive position. That year Nam Tai also made its first move into the telecommunications market when it paid $16 million for a 20 percent share in Group Sense Ltd. of Hong Kong. The company produced telecommunications products as well as educational electronics such as Chinese dictionaries and translators. Nam Tai sold the stake in 2000.

The Asian economic crisis also hit in 1998. Nam Tai's customers slowed their orders and put pressure on for lower prices, but the company rode out the crisis as the trend toward outsourcing at electronics companies continued. The company's sales zigzagged from a high of $132.9 million in 1997 to $101.6 million in 1998 to $145.1 million in 1999. In the fall of 1998 Nam Tai made an ill-fated acquisition when it bought a majority stake in Albatronics, a struggling electronics group. About five months later serious debt problems were uncovered at the company; Albatronics posted a $700 million loss for 1999 after profits of $10 million to $20 million in previous years. Serious cash flow problems and a dearth of orders did not inspire much hope, so Nam Tai closed the company and wrote it off at the end of 1999 after attempts at debt restructuring fell through.

Expansion Through Additions and Acquisitions in the New Millennium

In 1999 Nam Tai took steps that further distanced itself from its reliance on calculator sales. Early in the year it bought a Korean maker of cordless telephones, which brought with it a research and development facility and several licenses for mobile phone service in Europe. On that basis, Nam Tai established Nam Tai Telecom Co. Ltd. in August 1999. The new subsidiary set up production lines in Shenzhen to address the growing demand for mobile phone components such as LCD modules. It also manufactured end products such as cordless phones and family radio systems. Other new product developments in 1999 included an agreement to make palm-sized computers for Legend, China's largest PC maker, and a joint venture with Toshiba Battery Co. to design and manufacture rechargeable lithium battery packs for mobile phones.

Company Perspectives:

For over 10 years, our vision has been to become the world's leading China-based contract manufacturer of sophisticated handheld communication/computing devices and their key components. This vision has been a consistent, long-term strategic goal, executed upon in carefully planned stages.

As electronic products grew more complex, Nam Tai implemented advanced manufacturing techniques necessary to meet the demands of the latest product designs. One such technology was chip on glass, or COG, a process that connected integrated circuit chips directly to LCD display panels without the usual wire bonding. The COG technique made for lighter, more efficient products. The company experienced higher defect rates when the unfamiliar COG process was first introduced in 1999. But by late 2000 the difficulties were surmounted, for the most part, and the company was planning expansion to make room for more COG production lines.

By the time the new millennium arrived, electronic components for communication devices—in particular LCD modules for cell phones, PDAs, and digital cameras—had surpassed calculators as the leading revenue generators for Nam Tai. In 1998, calculators still accounted for 61 percent of sales, but by 2000 calculators accounted for significantly less than half of sales, and were grouped in with other finished consumer goods produced by Nam Tai such as digital camera accessories for cell phones. A pair of acquisitions in the fall of 2000 broadened Nam Tai's involvement in the manufacture of consumer electronics. First, the company acquired a 5 percent stake in TCL Mobile, a branch of the Chinese statecontrolled phone company involved in the manufacture and distribution of cell phones on the digital standard. Second, Nam Tai bought the J.I.C. Group (BVI) Limited for $32.8 million in cash and shares. J.I.C. had been making transformers and LCD panels since 1983. The acquisition added 2,400 employees to Nam Tai and pushed the company's net revenue to $234 million in 2001.

Nam Tai added another 180,000 square feet of manufacturing space to its existing 310,000 feet in 2000. Construction also was underway on a 138,000-square-foot expansion, finished in 2002, which included two floors of clean rooms for COG production technology. The year 2001 brought another management shuffle: president and CEO Takizawa became chairman-of the board, the former chairman Murakami moved to an executive position, and Toshiaki Ogi, who like Takizawa came from Toshiba, became CEO. Joseph Li became president; he was a cofounder of J.I.C., Nam Tai's newest subsidiary. The following year Li also took over the CEO position and Murakami was put back in the post of chairman. In other developments in 2002, Nam Tai listed J.I.C. Technology on the Hong Kong stock exchange by way of a reverse merger into the failed Albatronics subsidiary. Nam Tai retained 94 percent control of J.I.C.

Nam Tai moved its primary listing from the NASDAQ to the New York Stock Exchange in January 2003. A secondary offering was planned for that spring but was postponed due to repercussions of an outbreak of the SARS respiratory illness, which hit the area around Nam Tai's Shenzhen factories particularly hard. Later in the year, however, the company announced plans to spin off three major subsidiaries—Zastron Electronic, Namtai Electronic, and Shenzhen Namtek—on the Hong Kong exchange. "The aim of the listings is more of enhancing corporate governance and brand recognition in the mainland than raising funds," founder M.K. Koo told the South China Morning Post.

Production continued to expand and advance in 2003. That fall the company began construction of a $40 million five-story facility to meet demand for high-end telecommunications products. Nam Tai had a new agreement to provide LCD modules and radio frequency modules to JCT Wireless Technology Company, a Hong Kong-based maker of wireless application software for cell phones. The agreement came after Nam Tai paid $10 million to acquire 25 percent of JCT's parent company earlier in the year. Nam Tai also invested $4.2 million in a new assembly line to make flexible printed circuits, which it had formerly purchased from other companies for use in LCDs. With strong technological capabilities and broadening manufacturing expertise, Nam Tai was beginning to make cell phones and other products in "semiknockdown" form: this meant that Nam Tai took care of all but the last few steps in making a product for an original equipment manufacturer. The product was shipped in an incomplete state in order to take advantage of lower tax rates for unfinished products. As it looked into 2004 and beyond, Nam Tai planned to apply its well-developed production capabilities and a proactive acquisition strategy to capture more market share in electronic components manufacturing and begin to tap China's cell phone market and other developing markets.

Key Dates:

1975:: M.K. Koo founds a calculator trading company in Hong Kong.
1980:: Manufacturing commences in China.
1985:: Dramatic sales growth is achieved due to calculator sales in China.
1986:: Restricting of trade with China pushes Nam Tai to diversify.
1988:: Nam Tai goes public on the NASDAQ.
1992:: Zastron Plastic & Metal Products is established in Shenzhen.
1996:: A new factory is completed in Shenzhen, doubling capacity.
1999:: Nam Tai Telecom is established to make cell phone components.
2000:: The company acquires J.I.C. Group, manufacturer of LCD panels.
2002:: The company completes expansion incorporating the latest manufacturing technology.

Principal Subsidiaries

J.I.C. Technology Company Limited (94%); Nam Tai Group Management Limited; Nam Tai Telecom (Hong Kong) Company Limited; Namtai Electronic (Shenzhen) Co., Ltd.; Shenzhen Namtek Company Limited; Zastron Electronic (Shenzhen) Co. Ltd.

Principal Competitors

Celestica, Inc.; Flextronics International Ltd.; Hon Hai Precision Industry Co., Ltd.; Jabil Circuit, Inc.; Sanmina-SCI Corporation; Solectron Corporation; Kinpo Electronics, Inc.; Inventec Co. Ltd.