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

Building a better moat through vertical integration

With only a handful of acetate flake producers supplying the global acetate tow industry, Chairman Wang felt that if he did not integrate vertically into the production of the key raw material input acetate flakes, the long-term risks to his business would be too great. As he says, “Only by integrating vertically and developing our own acetate flake production capability could we truly ensure that our industry position was secure. We also knew that if we could make acetate flakes in-house, we would be able to extend our cost advantage and achieve higher profit margins.” 

Chairman Wang added, “Acetate flake has a broad set of applications outside of acetate tow. In particular, plastic optical frames are made from plastic grade acetate flakes. As the raw materials for acetate flake are wood pulp and cotton pulp, which are different from general petrochemical plastics, they are less prone to cause allergic reactions when coming in contact with human skin.” 

Industry alliances figured strongly into the shareholder structure of Acetek Material (China), the entity which produces Jinan Acetate’s acetate flakes. Jinan Acetate still holds the lion’s share of the company (80%) and is the controlling shareholder, but Chairman Wang also invited acetate granules producer and buyer of plastic grade acetate flakes Thy Glory Limited (12% stake) and acetic anhydride supplier Yankuang Lunan Chemical (8% stake) to join the venture. Adding Thy Glory as an equity partner also helped open the market for high-end optical frames to Jinan Acetate, because of Thy Glory Limited’s connections in the eyewear industry. 

Chairman Wang’s eyebrows furrow and a pained expression crosses over his face as he recalls the difficulty of the acetate flake plant’s early days, “We began production in mid-June 2017, but were not able to consistently produce high quality product as quickly as we had imagined. This troubled me, as the expected benefits of vertical integration didn’t materialize right away. Then, in October of that year, the price of acetic anhydride, one of the key raw materials for acetate flake, rose sharply due to an explosion that disabled Eastman's acetic anhydride plant. Under the effects of this double whammy, our acetate flake manufacturing costs increased dramatically, and it took several months for prices to return to more normal levels. Furthermore, it wasn’t until 2019 that we were able to achieve stable production yields for high quality acetate flake.” 

With those difficulties conquered, Jinan Acetate has been reaping the benefits – for the past 5 straight quarters the company’s gross margin has exceeded 30%, leading to record high levels of profitability. Says Chairman Wang, “About 70% of the flakes we produce are tow grade, and we are now 100% self-sufficient in the production of fiber grade flakes for acetate tows. The balance of our flake production is plastic grade, for which the production process is more time consuming and the quality requirements higher. That being said, the selling price is also higher than fiber grade flakes. Our end market for plastic grade flakes is split between Wenzhou-based producers of affordable plastic optical frames and Italian producers that supply the branded luxury eyewear market. Through our relationship with Thy Glory, we were able to form a strategic alliance with LA/ES, a key supplier of acetate plates to Luxottica and Safilo, who manufacture the majority of the world’s high-end eyewear for luxury brands such as Gucci, LVMH, etc. 

Building in a cost advantage from the bottom up 

In addition to focusing on product quality, maintaining a cost advantage is a core area of emphasis for Chairman Wang. As he describes it, “All of our production facilities are located in China, so we have a labor cost advantage relative our overseas peers. However, we actually use very little labor. The entire company employs less than 500 people, and direct labor accounts for less than 5% of manufacturing costs. If you come to visit our factory, you may find that you can walk for long periods of time without seeing another human being. Most of our employees are recruited locally in Jinan, not from rural areas. And, thanks to that practice of local hiring, the COVID-19 pandemic has not had much impact on our operations. However, I need to clarify that low labor costs are not the main reason for our lower production costs." 

So, then what is the reason behind Jinan Acetate’s low production costs? Looking around Jinan Acetate’s Taipei office can indeed reveal some clues. Jinan Acetate’s office is hidden in the alleys of the famous ‘Eastern District’ in the heart of Taipei City, and it is also Chairman Wang’s former family home. Although this building doesn’t look new, the office layout is simple and tidy. Taking off one’s shoes in the hallway and changing into flip flops that have been thoughtfully set out in the entry way, visitors get that comfortable ‘back home’ feeling upon entering the office. In the conference room, you can’t help but notice a small cotton baby’s shirt, displayed in an ornamental frame. This shirt was sewn for Chairman Wang by his mother when he was an infant. If you look further, examining the corporate structure chart of Jinan Acetate, you’ll notice that the HK holding company for Jinan Acetate’s China-based manufacturing assets is called, “My Parents Living Technology Limited.” 

Says Chairman Wang, "Many of our peers outsource the design and construction of plant and plant equipment to external vendors, resulting in substantially higher plant construction costs. When building our first plant, it was necessary to outsource certain parts of the construction and design process. However, I asked myself and my employees to observe the construction and installation process closely. Upon completion, we even disassembled then reassembled some of the equipment ourselves to gain familiarity with it. Now we are able to draw blueprints and engineering drawings ourselves when a part fails or when we decide to build a new production line. We send these designs to subcontract component manufacturers, and then do the assembly ourselves. The result is that our plant construction and maintenance costs are at least 50% lower than our peers.” 

According to Chairman Wang, this attention to detail and emphasis on cost-effectiveness was a lasting gift from his father, “My father often said that the best is yet to come. This traditional idea of diligence and thrift means that as long as you work hard, you will have a better day tomorrow.” These teachings of his parents engendered a strong work ethic in Chairman Wang, and have been a key enabling factor for the success he has enjoyed in China over the past 25 years. Says the Chairman, “Our cost advantage derives from our proprietary plant and equipment design capability, and we have low exposure to rising labor costs.” 

A Quarter Century as an Entrepreneur in China 

The knowledge that Chairman Wang has accumulated over the past 25 years of doing business in China is an important asset for Jinan Acetate. Alex Lee, CEO of QIC, says, "Chairman Wang thoroughly understands the interaction of politics and business in China, and he is often able to get a helping hand from the government in times of need. Few Taiwanese companies have been able to achieve this." 

Chairman Wang shared three "unspoken rules" that Taiwanese companies in China should understand. “First of all, when dealing with grass-roots civil servants, you cannot hold on to the belief that you should be able to do what you would like to do when your actions have been ‘righteous and just.’ On the contrary, such an attitude will frequently become an obstacle to achieving your aims. Chinese civil servants will try their best to help businesses get established, so that these businesses can contribute to the economy by making profits from overseas and providing job opportunities. We should also consider this and help these grass-roots civil servants accomplish their missions. Secondly, it is important to get into the "relationship network". In Chinese society, people care about which organization and which province or city you are from, they decide whether you are one of their own based on these considerations. Taiwanese companies in China need to connect into the network in the region where they are located. If this is accomplished, they can become part of the larger network. The final point is that Taiwanese companies cannot get too close nor too far away from China government officials. The key is to do your business well, so that you will be appreciated by some true friends. China’s political arena is the realm of senior officials, and if your accomplishments are noticed and appreciated by them, you will get a lot of unexpected help, which is vital to business development in China.” 

Widening the Moat 

Although Jinan Acetate has benefited from the pro-growth policies of the local Jinan government and of China’s Central Government, Chairman Wang believes that continuous enhancement of its core competitive advantages is the key to sustainable growth. “At the moment, we are working hard in three main areas,” says Chairman Wang, “Further vertical integration, new product development and establishing new plants overseas.” 

Regarding Jinan Acetate’s overseas expansion, the company is currently working on a framework agreement to build an 8,000 to 10,000 tonnes per year acetate tow JV factory in Egypt together with Egypt’s largest private business enterprise, the Al Monsour Group. For more detail, please see Part I of our CEO Conversation with Chairman Wang here. 

In May, Jinan Acetate announced that they will integrate further upstream into the production of acetic anhydride. The company expects to invest roughly NT$210m to build 60,000 tonnes of capacity, of which an initial 35,000 will be used internally. Says Chairman Wang, “Based on a baseline spot price of $5,250 RMB per tonne for Acetic Anhydride, we estimate we can reduce our cost of production by 4-5%. More importantly, it will greatly reduce the effect of acetic anhydride spot price movements on our bottom line.” 

Chairman Wang is particularly optimistic about opportunities for Jinan Acetate to develop environmentally friendly products for new applications, saying: “Cellulose-acetate-based products can be engineered to decompose into carbon dioxide and water after being introduced into a compost or processed in a specific environment. The EU requires that by 2025, all cigarette filters sold in the EU must naturally disintegrate within 45 days after use. There are also many business opportunities in applications such as cosmetics, food packaging materials and agricultural films. We recently received an order from a Korean hair gloss producer for biodegradable spherical cellulose acetate particles. The particles reflect light in a way that makes the users’ hair look more natural. The most exciting part about this is that our product will replace microplastic particles that are non-biodegradable and harmful to the environment. Shipments are set to begin next year; and while we expect modest revenues at first, this is only one of many areas where we see opportunities to expand the scope of application for our products."

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