CEO Conversations Installment IX: Ke-Zhang Wang, Chairman and President, Jinan Acetate Chemical (4763 TT), Part I

Source: Business Today Weekly

Planned Move into Egypt is a Long Way from Jinan Acetate’s Humble Beginnings 

Chairman Wang and I sit in Jinan Acetate’s spartan Taipei office, discussing the official notice that Jinan Acetate has just posted to the TWSE’s Market Observation Posting System (MOPS). As we sip tea and eat Sunny Hills Pineapple cakes, he reflects on the whirlwind developments of the past 20 years, saying, “In 2006, I was trying to convince the owners of a defunct acetate flake plant in Uzbekistan to restart their factory. I felt a great sense of accomplishment when they agreed, but even then I had no idea of the massive challenges that lay ahead. Now, our board has just approved the signing of an MOU for a framework agreement to build an Acetate tow factory in Egypt. The factory will eventually produce 10,000 tonnes of acetate tow per year and serve as our main production base for Africa and the Middle East. Jinan Acetate will no longer be a company with production in only China. We will soon be a producer of global scale. Our main partner in the venture is the Al Mansour International Distribution Company (AMIDC), the tobacco manufacturing and marketing arm of the Mansour Group. The Mansour Group is the largest private company in Egypt and has a close relationship with the Eastern Company, Egypt’s tobacco and cigarette Monopoly. AMIDC manufactures ‘Target’ brand cigarettes for Eastern. It also produces and distributes cigarettes for global Tier 1 cigarette titans BAT and Imperial within Egypt.” 

Chairman Wang continued, “While this joint venture will cement our position as the go-to tow producer in Egypt, a market with an annual demand of 8,000 tonnes of tow per year, the plant will also serve as our tow production base for all of Africa, which is one of the world’s fastest growing cigarette markets. While cigarette demand is likely to continue a slow decline in developed markets, this is not likely to be the case in Africa, a country with a young and growing population that has low and increasing levels of disposable income. In frontier markets such as Africa, cigarettes are an initial form of ‘luxury good’ that is affordable to all. In light of this, our relationship with Al Mansour takes on an even greater importance, as the company also produces and exports cigarettes within Africa and the Middle East via its Mansour Manufacturing Company in the Amreya Free Trade Zone.” 

Africa’s Demographics Make it An Attractive Market

A Lesson in Resourcefulness and Old School Pluck 

The story of Jinan Acetate is a lesson in resourcefulness and old school pluck. Its author is Mr. Ke-Zhang Wang, a chemical fiber engineer, and one of the co-founders of Taiwan’s Acelon (1466 TT). 

Among the main raw materials used in cigarettes, tobacco and cigarette paper are easily sourced. However, only a very few companies have the know-how to make acetate flakes and acetate tow, the key upstream materials used to make cigarette filters. This oligopoly structure allows industry leaders to ‘orchestrate’ annual production and distribution of cigarette filters, favoring the leading brands and only partially supporting emerging market brands. There are only six producers of acetate tow worldwide; and the industry leaders, of which there are four, are based in Europe, the US and Japan. China Tobacco is the fifth, and its capacity derives from joint ventures with industry leaders. Strictly speaking then, it is not an independent producer. 

This brings us to the sixth and final player, Jinan Acetate. Jinan Acetate is the industry’s fastest growing player, selling to more than 50 countries in the world. Its market niche lies in the burgeoning brands and cigarette monopolies in emerging and frontier markets who are underserved by the world’s top players. While Jinan Acetate has produced an enviable record of profitability and returns over the past several years, with it gross margin in excess of 30% for the past five quarters and ROE averaging above 20% over the past five years, it was not easy to enter into this oligopoly industry. During our interview, Chairman Ke-Zhang Wang shared the stories behind his success and his vision for Jinan Acetate’s future. 

A Quarter Century as an Entrepreneur in Northern China 

After graduating from the Chemical Fiber Engineering Department of National Taiwan University of Science and Technology, Chairman Wang first cut his teeth as a sales engineer at Multicom Machinery in Taiwan. In 1987, he and six friends founded Acelon Chemicals & Fiber, which listed in 1998. At the time, the Taiwan government had begun allowing Taiwanese companies to invest in Mainland China. As it happened, Chairman Wang accompanied his father to visit relatives in China in 1989, and the seeds of his eventual move to China were sown during that trip. 

In 1996, Jinan Juda Fiber, a joint venture between some of Acelon’s founders and a Jinan-based chemical fiber company, was about to start production. Recalls the Chairman, "At that point in time, Acelon had finally established itself and begun to produce healthy profits. All those years of late nights and worry about the company’s cash flow situation had ended, and we were about to go public. My business partners and I had decided to set up a plant in China, but none the other partners wanted to work so far away from home. So, I stepped forward. After paying my respects at my father’s burial site during the Tomb Sweeping Festival in 1996, I asked my brother and sister to take good care of my mother. I then struck out on my own to Jinan City in Shandong China, the hometown of Confucius and Mencius. At that time, my eldest daughter was six and my youngest daughter was two. I missed my two daughters terribly, and used to count down the days to each holiday when I could go home to visit them," says Chairman Wang. Under Chairman Wang’s leadership, Jinan Juda Fiber was at one point the largest Taiwanese-funded enterprise in Jinan. 

Seeking Entry into an Attractive Oligopoly Market 

Given his success at Jinan Juda Fiber, we wondered why Chairman Wang would leave the firm. He explains, “At the time, it became evident to me the chemical fiber industry in China, and in particular the nylon yarn market, was about to change from a blue ocean market into a red ocean market, due to excessive investment in new production capacity. However, my business partners saw it differently. So, I decided it was time to strike out on my own. I set up Jinan Acetate Chemical in 1999, initially producing nylon fiber, while seeking opportunities to transform and upgrade the business.” 

“My entry into the acetate tow industry happened almost by chance,” says Chairman Wang. “I was visiting the Mexico production compound of a large, diversified chemical fiber producer to discuss other business. As I was touring the plant facilities, we passed by the company’s acetate tow production facility. Intrigued, I did some research into the market and discovered that it had an oligopoly structure, with only four companies supplying the bulk of global demand – Celanese, Eastman, Solvay (now Rhodia), and Daicel. These producers give supply priority to the Tier 1 tobacco and cigarette companies in Europe, America, China and Japan, and allocate their swing capacity to smaller tobacco companies in emerging countries. Producers in emerging market have to get by with the ‘leftover’ supply, making it difficult to plan production or to expand. Realizing that the production processes of nylon textured yarn and acetate tow were similar, I sensed that there was a market opportunity to be exploited. So, I began looking for ways to enter the market.” 

So began a great experiment…but there must have been times when Chairman Wang questioned the wisdom of this “worth a try” venture. As he recalls, “We ended up burning through RMB 200 million in just three years, at a time when the nylon textured yarn business was producing only RMB 20 million in profit a year. But, that was only one of the barriers to entry. Our most pressing need was to find a way to source acetate flakes, which account for roughly 90% of raw material cost. At the time, acetate flake and acetate tow were produced mainly by the four major suppliers to the Tier 1 brands. I discovered, however, that a Soviet era acetate flake plant existed in Uzbekistan. It had fallen into disrepair following the collapse of the Soviet Union. After much effort, we were able to convince the owners to resume production, though Jinan Acetate was responsible for sourcing and shipping key upstream input wood pulp, from Norway to Uzbekistan. This resulted in an elongated supply line, with lead times as long as six months. Transportation issues and frequent raw material shortages were a constant challenge in Jinan Acetate’s early years, until China’s Wuliangye Group obtained Italian technology, and by 2012 became a stable source of flake supply. This was a major breakthrough for us.” 

A Textile Producer Learns that the ‘Feel’ of a Tow is a Paramount Consideration 

Another major challenge was producing tows that were appropriate for cigarettes. Chairman Wang and his team did not initially realize how important the tow is to the smoker’s enjoyment of a cigarette. Says Chairman Wang, “As it is the part that goes in the smokers’ mouth, the feel of the tows texture to the smoker as they take ‘drags’ on the cigarette is an important tactile part of the experience of smoking. And each cigarette company has their own standards and methods of evaluating tow suppliers. These include how smoothly the smoke flows through the filter, how the filter feels when grasped by the smokers’ fingers, how quickly it softens in the smokers’ mouth and to what extent it can endure a bite. It took more than 700 days for our technical team to produce a tow material that felt just right in the smokers’ mouth, and that is only one of many parameters!” After researching competitors' products, the team found that an acetate yarn with 27 twists per centimeter of length produced the proper combination of elasticity and rigidity. All told, it took four full years from the time Chairman Wang made the decision to produce cellulose acetate in 2005 for the company to produce a tow material that met industry standards. 

From that point on, Chairman Wang turned his attention to building the customer base and finding ways to obtain sticky orders through industry alliances. A major breakthrough for Jinan Acetate came in 2008, when Macrifer became a major shareholder in Jinan Acetate. GlobalFilters, the largest cigarette filter manufacturer in South America, and Tabacalera Hernandarias (TH), a top five cigarette brand in South America, are all under the Macrifer Group. The Macrifer Group is not only a major customer of Jinan Acetate, but has also helped the company expand its market share in South America. 

In the Middle of Every Difficulty Lies an Opportunity 

Jinan Acetate’s peers are all multinational companies from Europe, America and Japan that possess an absolute advantage in scale and financial resources over Jinan Acetate. Chairman Wang, however, has been adept at leveraging his industry niche as a truly independent producer. Says Chairman Wang, "In the middle of every difficulty lies opportunity. The global tobacco industry is not a high-growth industry. But, our market share is only about 1.8%. By partnering with our major customers in emerging market countries, we are able to gain stickiness in our customer base and to grow together with our clients. Additionally, the tier-1 tobacco companies are starting to see the advantages of cooperating with us in the world’s emerging and frontier markets. From our perspective, there is considerable room for growth. However, at the same time, we must continue to invest in technology, maintain our cost competitiveness, and ensure sufficient production capacity. We have set a goal of doubling our market share in the next 3-5 years.” 

One breakthrough came this year, as Jinan Acetate shipped 2,000 tonnes of tow grade acetate flake to China Tobacco from May to August. Says Chairman Wang, “The China Tobacco order resulted from our continuous marketing efforts over a period of many years. And the timing could not have been better, coming during a year in which COVID-19 resulted in reduced orders of plastic grade acetate flakes for eyewear applications.” The order and its timing are symbolic of how Chairman Wang has continuously cultivated new opportunities for this company, which was created from scratch, but now has now firmly established itself as a key player in this oligopoly market. 

If you would like to arrange a meeting with Acetek’s Ke-Zhang Wang, please contact yvonnehuang@qtumic.com