Manufacturers of auto lamps in Taiwan have been moving upmarket with higher-added-value products, and are being paid off in growing sales and profits.

This shift means a change in market focus away from low-end markets, such as Southeast Asia, the Middle East, mainland China, and Latin America, where low-performance lamps are popular but profits have been shaved thin by growing competition.

The new focus is on high-end markets. This is an expensive game, requiring manufacturers to shovel large amounts of money into the development of molds, the upgrading of mold-design capability, and the establishment of photometric testing. The expense has been worth it, however, as Taiwanese companies have become the world's best suppliers of lamps for all types of autos; they are especially adept at small-volume production, which gives them an advantage over manufacturers that concentrate on only a few mass-produced models, and makes them one-stop shops for buyers from all over the world.

High-Profit Remodel Lamps

The high-margin lamps that many Taiwanese manufacturers focus on these days are aimed at the United States and Europe, which insiders refer to as "A-class markets" because of their high quality requirements. These lamps are estimated to boost TYC Brothers Industrial Co.'s revenue to NT$6.5 billion (US$186 million at NT$35:US$1) this year, up from NT$5.6 billion (US$160 million) last year.

The company earned a pre-tax profit of NT$932 million (US$27 million) on those revenues last year, a huge 182.8% jump over 2001; post-tax profits amounted to NT$738 million (US$21 million), up 160%.

Lamps for remodeled cars will add an estimated US$20 million to TYC's revenues this year, a big increase from US$8 million in 2002. These lamps contribute only a small percentage to the firm's total revenues—around 5% last year and 10% this year—but their net margin is a very high 50% or so.

Aftermarket lamps accounted for 85% of the company's total auto-lamp output last year, and OEM (original equipment manufacturer) lamps made up the remaining 15%.

In addition to their high margins, comments TYC spokesman Eric Hsia, remodel lamps are attractive to the company because, with its capability for innovative design, TYC can completely manipulate demand. "Unlike remodel lamps," he explains, "OEM lamps are made to manufacturer specifications and aftermarket lamps are not much different, although they do usually have some small modifications. Remodel lamps are the only models that manufacturers can develop based completely on their own ideas."

Remodel lamps deserve high profit margins, Hsia says, because they integrate not only unique design concepts but also entail high manufacturing and marketing costs. "Also," he continues, "the high margins reflect the fact that remodel lamps also involve the highest risk and the smallest—and most elusive—market base."

The world's largest market for these lamps is the U.S., where several recent developments should serve to boost sales. Late last year the company's U.S. branch inked an agreement with Universal Studios for the supply of lamps for use in the moviemakers' films, as well as for the promotion of lamps used by Universal in all of the 3,000 Auto Zone outlets in the U.S.

Growing Insurance Firm Acceptance

The company has also achieved good deals for its aftermarket and contract-production lamps. Following approval by the Manufacturers' Qualification and Validation Program (MQVP), the Nationwide Mutual Insurance Co., the sixth-largest American insurer, recently allowed the use of TYC Brothers aftermarket lamps as replacement parts for its clients.

Hsia says other major American insurance firms, including Allstate Insurance and USAA, have now commissioned the Certified Automotive Parts Association (CAPA) to inspect TYC lamps and are expected to follow suit. "Those companies saw that Nationwide had attracted more people to buy its insurance with cheaper premiums," he explains. He goes on to claim that his company has snared 60% to 70% of the U.S. market for aftermarket lamps. More orders are expected to come from Keystone Auto Parts, which absorbs nearly half of TYC's sales to the U.S. and has recently acquired rival parts suppliers.

TYC began shipping its products to the U.S. and Europe in 1994, after two years of preparation. Those markets require SAE and DOT certification in the U.S. and E-mark and CE-Mark certification in Europe. The two markets now account for 60% and 15% of the company's revenues, respectively, while the share going to Southeast Asia, China, and Hong Kong has fallen to 11%.

Soaring sales in the so-called A-class markets prompted a TYC decision to go public in 1997, which has enabled it to raise capital needed for rapid expansion. The company now spends an average of NT$500 million (US$14 million) on new molds every year, and it has over10,000 sets of molds in stock. This store of molds, Hsia says, "helps us to always keep ahead of our rivals."

Despite their relatively small share of TYC sales at the present time, China and India are expected to become major engines for the company's contract production growth in the future. More than 10 Chinese carmakers sent the company orders worth a total of NT$330 million (US$9.4 million) last year, and prospects are good for continuing expansion. "India and the mainland are the only two auto markets in the world that are reporting double-digit annual growth rates now," Hsia explains.

The mainland alone is expected to contribute NT$800 million (US$23 million) to TYC's earnings this year. And the company is manufacturing as well as marketing there; it set up its first mainland factory (in Zhejiang Province) in 1995 to supply lamps to a Taiwan-invested motor-scooter maker there, and quickly moved to tap the burgeoning Chinese auto market.

Expanding Success

This effort has been so successful that the Zhejiang factory is being expanded, and TYC recently opened another factory in the northeastern Chinese city of Harbin.

Outside of China, TYC has signed up Ford Motor of South Africa; Federal Mogul, Visteon, and International Truck & Engine of the U.S.; Magnetti Marelli of Italy and the United Kingdom; Mako of Turkey; Bosch of Germany; Saipa, Khodro, and Karman Khodro of Iran; Triumph of the U.K.; Federal Motor of Indonesia; and KYMCO of Taiwan.

Retail marketing of non-lamp lines such as rearview mirrors, radiators, fan motors, and condensers will also contribute substantially to the company's revenues this year. Retailing, which Hsia says is part of the company's plan of becoming Taiwan's biggest one-stop-shop supplier of auto parts, now accounts for around 10% of total revenues. Products are moved through some 80 retail outlets around the world. A recently formed strategic-alliance pact with the Siemens Group of Germany allows TYC to sell its parts under the "Siemens TYC" brand, and this is expected to boost retail sales by up to 500%.

They company has 110 R&D engineers, fully one-tenth of its total work force, who are currently using the latest computerized tooling machines and computer-aided design/manufacturing (CAD/CAM) systems to develop high-intensity discharge (HID) lamps. The company believes that these lamps, which have a longer service life and a brighter light than halogen lamps, will take increasing market share from halogen models in the near future.

Going Upmarket

Like TYC, Depo Auto Parts Ind. Co., Taiwan's second-largest auto-lamp supplier by value, is also concentrating on "A-class" lamps and expects these products to help boost its sales to NT$4.5 billion (US$128 million) this year, up from NT$3.9 billion (US$110 million) in 2002.

Revenues have soared since the company moved into the American and European markets four years ago, reports Depo sales manager Y.L. Hu, rising from NT$2 billion (US$57 million) in 2000, NT$2.8 billion (US$80 million) in 2001, and NT$3.9 billion (US$111 million) in 2002. In the first quarter of 2003, Hu continues, "Strong demand from the U.S. and Europe pushed our revenue up 100%."

Those two major markets accounted for 60% of total sales in 2002, and the ratio is expected to grow to 70% this year.

The company decided to enter the "A-class" market after making a major technological breakthrough by cooperating with an Italian auto-lamp maker in 1989. These high-end products were given the brand name "Depo" to differentiate them from the lower-end "Lucid" brand that had been in use since the firm's establishment in 1977.

Depo obtained CAPA and MQVP certification before moving into the high-margin markets. "In our first year in the U.S. market," Hu says, "we offered 50 models of lamps there. In the second year we provided 250 models; this posed a big threat to TYC Brothers, because nobody else could develop so many molds in a year." Today, Depo has 1,200 molds for making U.S-bound lamps.

The company has spent around NT$500 million (US$14 million) on the development of molds annually over the past several years, and it now has more than 10,000 sets available. This, Hu claims, makes Depo "the auto-lamp supplier with the largest number of molds in the world."

A number of American insurance companies have shown trust in Depo products by allowing them to be used as replacement parts for clients' cars. Hu is confident that this market will continue expanding as more insurance providers become willing to accept the use of high-quality, less-expensive aftermarket lamps.

Hu reports that aftermarket lamps account for 97% of his sales. Depo also began making remodeling lamps around 10 years ago, but until three or four years ago produced only simple models. Now this situation has changed, and the company has developed 50 sets of molds for remodeling lamps annually during the past three years.

With the completion of an expansion project at Depo's headquarters factory in Changhua, Taiwan this summer, lamps made on contract are expected to account for 5% of total sales this year. Within Taiwan, these products go into Suzuki, Nissan, and Formosa automobiles; in mainland China, they are installed in Mazdas, Toyotas, and Isuzus. Part of the expanded capacity will also be used to turn out aftermarket lamps.

In addition to the headquarters factory, Depo has another in central Taiwan and two more in the southern part of the island. A plant was opened in Shanghai four years ago to supply lamps to mainland Chinese carmakers; a second factory is planned for the mainland, this one dedicated to the aftermarket and contract-production business. Yet another plant is planned for Southeast Asia to serve customers in that region.

Like many other auto-lamp makers in Taiwan, Depo is developing HID lamps; Hu, however, feels that success in this effort depends on the development of ballasts that will keep costs down. Currently, ballasts have to be sourced from such big brands as Osram and Philips.

A Strategic Switch Pays Off

Another major local supplier of auto lamps, Sonar Auto Parts Co., entered the remodeling lamp market at a relatively early date but is now feeling increased competitive pressure from big players such as TYC and Depo, says general manager Milton Yang. The company switched its emphasis to remodel lamps six years ago in response to growing competition in the aftermarket field; these products now account for 70% of total sales, and Yang claims that Sonar is Taiwan's second-largest supplier in the line.

The general manager says that his company spends an average of NT$200 million (US$5.7 million) on mold development every year, but declines to divulge the amount of revenues that support that spending.

Yang notes that young drivers are the biggest buyers of remodel lamps, and that fashionable, relatively low-priced models have to be designed to attract them. However, he laments, the need for fashionable styling increases the difficulty of mold development and makes remodel lamps more expensive to produce than aftermarket and contract-production items. Sonar hopes to hold manufacturing costs down through outsourcing to manufacturers and testing-service providers.

The company enjoys ISO9002 certification and operates two factories in northern Taiwan as well as a third one in the south. These facilities are equipped with computerized production equipment, chrome-application vacuum chambers, photometric laboratories, plastic-injection machines, three-dimension coordinate-measuring instruments, and automated glue/seal testing machines. The company's engineers can develop a new mold in just four months.

Sonar sells its remodel lamps through professional shops, parts stores, and performance-tuning garages. The main market is the U.S., followed by Europe; Sonar products have been shipped to almost all of the world's major markets, with the exception of mainland China. There, Yang explains, counterfeiting is too big a problem.

From Garden to Autos

The Jenn Feng Group, traditionally a maker of power and garden tools along with fog lights, will begin volume production of HID auto lamps in the middle of this year and expects the share of these products in total revenue (NT$3.2 billion, or US$91 million, last year) to soar. Last year, the share was just 17%.

Jenn Feng has spent around US$7 million to build a plant for the production of HID bulbs and ballasts, reports the group's CEO, David Jong, who claims that it is the first in the world to go into the production of HID fog lights. He hopes to gain a dominant position as a supplier of these products by controlling most of the required technology; the company has already obtained three relevant patents, and has applied for four more.

Unlike Osram's and Philips' 35W lamps, Jenn Feng's consume only 25 watts of power; they are also smaller in size, at 38mm thick. This is the thickness of halogen fog lights, making Jenn Feng's HID models easy to install on cars of all types.

Jong says that HID bulbs have three times the brightness of halogen bulbs while consuming just half the energy. They have an average service life of over 2,500 hours, thanks to the lack of filaments to burn out, and they produce a light that is close to daylight. "With these advantages," Jong comments, "we expect HID lamps to carry prices 20 times those of halogen lamps."

Jenn Feng's HID-lamp factory has a design capacity of 80,000 bulbs per month, together with ballasts; in the initial stage, actual output will be 30,000 to 50,000 units a month. "Most of the bulbs we make in the initial stage will go into our own lamps," Jong says. "Later on, we will contact leading contract suppliers of lamps to carmakers about using our HID fog bulbs." The company's finished lamps will be sold to carmakers and the remodeling market (under the "MAXTEL" brand) instead of the low-end replacement market where the firm sells its halogen lamps. "It's time for us to upgrade and add more value to our lamps," Jong comments.

Jong is optimistic about his prospects in this new market, estimating that Taiwan alone has a market for contract and aftermarket lamps that is worth NT$300 million (US$8.6 million). However, the main target market for these new lamps will be Europe, which is the world's largest consumer of fog lamps.