Outlook for Taiwan's Machine Tool Industry Remains Uncertain

FTAs between S. Korea and USA, EU and India work against Taiwanese makers

While Taiwan's machine-tool sector achieved Jan.-Oct. 2012 some US$3.59 billion in exports, a 9.2% increase year on year, the 2013 outlook for the industry is uncertain on several fronts.

J.C. Wang, president of the Taiwan Association of Machinery Industry (TAMI), notes that the depreciating Japanese yen against the U.S. dollar provides Japanese machine manufacturers an edge in exchange rate, which may prompt them to reduce orders to Taiwanese suppliers' plants in Thailand, Indonesia and Malaysia. Moreover, South Korean rivals wield an advantage over Taiwanese manufacturers in the European Union, United States and India after having signed reciprocal Free Trade Agreements.

In spite of the export surge in 2012 for Taiwan's machine-tool industry, the sector did not fare well in the year, due to the higher NT-dollar-to-greenback rate. Manufacturers say that the NT dollar-to-greenback rate surged to 29.2:1 in the fourth quarter of 2012 from 29.5:1 in the first half, hence diluting 2012 earnings in core business.

Taiwan Takisawa Co., Ltd. had pre-tax profit of NT$134 million (US$4.6 million), or NT$1.89 per share, during the Jan.-Nov. period of 2012, which could have been NT$152 million (US$5.2 million) without impacts as losses in foreign exchange and core business in November.

The company reported pre-tax loss of NT$11 million (US$379,000) in November due to loss of NT$3.62 million (US$124,000) in core business and NT$7 million (US$241,000) in foreign exchange loss, bringing total forex loss exceeding NT$10 million (US$344,000) during the Jan.-Nov. period.

Low-margin Exports

Company executives blame core business loss in November mostly on increased rushed shipment of low-margin printed-circuit-board (PCB) boring machines and delayed shipment of high-margin lathes. However they predict the company to benefit from cost-efficient purchases of ball screws and linear guideways from NSK and THK of Japan thanks to the depreciating yen, whose gains will not be reaped until the first quarter of 2013, though quite sure that the company's sales in December 2012 will be profitable.

Victor Taichung Machinery Works Co., Ltd. President Bert Huang points out that the appreciating NT dollar ate away much of profit in 2012, and that the worst time for Taiwan's machine-tool industry have gone, with 2013, by and large, to be better than 2012.

Huang says that many factors look to favor Taiwan's machine tool sector in the New Year. First and foremost, China's new leadership will introduce new stimulus packages this or next quarter to boost the world's No.2 economy, also Taiwan's biggest market for machine tools. Next, American President Barack Obama is encouraging overseas American manufacturers to return home to set up shop, which may spark orders for Taiwanese machine tool makers. More business may also come from the seemingly improving European sovereignty debt issue, as well as steadily growing Association of Southeast Asia Nation (ASEAN) economies.

Cutting Cost

Executives of Tongtai Machine & Tool Co., Ltd. say that the company posted around NT$40 million (US$1.3 million) in foreign exchange loss last year, which should have reduced gross margin on core business earnings of NT$300 million (US$10.3 million) to below 23% had it not pared production cost on ball screws and linear guideways.

Kao Fong Machinery Co., Ltd. achieved around NT$30 million (US$1 million) in core business sales, one tenth of which being foreign exchange losses.

In 2012, Goodway Machine Corp. had foreign exchange loss of NT$30-40 million (US$1.03-1.37 million) and core business earnings of NT$400 million (US$13.7 million). Such loss and thin return-on-reinvestment reduced the company's 2012 pre-tax earnings relative to 2011 levels.

AWEA Mechantronic Co., Ltd., Goodway's subsidiary, had earnings of around NT$300 million (US$10.3 million) in 2012, but reported loss of NT$30 million (US$1.03 million) in foreign exchange.

Falcon Machine Tools Co., Ltd. remained profitable in the first three quarters of 2012, but racked up losses in foreign exchange of around NT$7-8 million (US$241,000-275,000) by the end of last year.

According to TAMI, the island's equipment suppliers have begun receiving orders for first-quarter delivery, but most being short-term or rush orders that may not significantly contribute to revenue this year.

The association says the European sovereignty debt crisis and weak global economy were the two major obstacles to sales of Taiwan's machine-tool industry last year. Its statistics show that cutting machines constituted the major share of Taiwan's Jan.-Oct. 2012 exports with revenue of US$3.02 billion, up 12.3% year on year. Forming tools came second with revenue of US$575 million, down 4.8% from the previous year.

In the Jan.-Oct. period of last year, China and Hong Kong remained the largest export destination for Taiwan's machine tools, together absorbing 35.7%, or US$1.2 billion, of Taiwan exports, down 2.1% from the same period of 2011. The United States was the No.2 market, importing 12.3% of Taiwan exports of US$442 million, a spike of 68% year on year. Thailand absorbed 6.3% of Taiwan exports of US$226 million, a surge of 59.8% year on year, becoming the third-largest market for the Taiwan industry.

Taiwan's Top-10 Machine Tool Makers and Jan.-Nov. 2012 Revenue

Company	Nov. Revenue	YoY Change	Jan.-Nov. Revenue	YoY change
Tongtai	NT$ 363M	-31.47%	NT$4.2bn	-31.50%
Victor Taichung	NT$ 303M	-38.32%	NT$4.5bn	-21.95%
Anderson	NT$ 147M	-47.23%	NT$2.2bn	-15.74%
AWEA	NT$ 271M	-25.40%	NT$3.1bn	9.85%
Roundtop	NT$ 64M	-40.07%	NT$1.1bn	2.88%
Goodway	NT$ 194M	10.90%	NT$2.5bn	14.27%
Kao Fong	NT$ 107M	-18.75%	NT$1.2bn	-16.73%
Falcon	NT$ 122M	-34.23%	NT$1.5bn	-7.53%
Shieh Yih	NT$ 119M	-21.75%	NT$1.7bn	-19.93%
Taiwan Takisawa	NT$208M	-24.58%	NT$2.3bn	-14.85%

Source: the companies