CEO Conversations XXXXIII: Zhen Ding (4958 TT), Global Leader in the PCB Industry— Insights from Alex Lee, Founder of QIC, and Charles Shen, Chairman of Zhen Ding, Part 2

(Photo: TaiwanPlus)

This episode of CEO Conversations is edited and republished with permission from TaiwanPlus Point.

(To access the interview content from the previous section, please refer to “CEO Conversations XXXXII”)

Alex:

The audience may not be aware that while Zhen Ding was a latecomer in flexible printed circuits (FPC) and high-density interconnect (HDI) PCBs, it managed to achieve the top position in the world for FPC and has plans to lead in other products of the PCB industry. In the past 2-3 years, global investors who focus on Taiwan's PCB and high-tech industries have predominantly centered their attention on IC substrates. IC substrates are significantly different from traditional PCBs, as their level of precision is comparable to that of semiconductors. I distinctly remember visiting your company's IC substrate factory, and the experience felt similar to stepping into TSMC's fab. Undoubtedly, you have achieved success in every business you have committed to in the past. However, many people express skepticism regarding your IC substrate business due to high barriers to entry. What instills the confidence in you to undertake a venture that requires even greater talent and capital, and what assures you of success in this endeavor?

Charles:

I have been devoted to the PCB industry for 19 years, and it is fair to say that I have dedicated my heart and soul to it. Throughout these 19 years, I have never been late to work. I mention this because one of the fundamental aspects of decision-making by a leader is selflessness and leading by example, both of which I have adhered to. I have also guided my team with discipline, and consistently execute our business roadmap step by step. For IC substrates, Zhen Ding started the business in 2011, and by 2020, our accumulated investments in R&D had exceeded NT$6 billion. In 2016, D.J. Lee joined our team and later assumed the role of Zhen Ding's General Manager. He possesses the most extensive experience in building Ajinomoto Build-up Film (ABF) fabs within the industry, and his presence has truly enhanced our company's potential and further strengthened our team.

Over the years, we have recruited over 100 outstanding senior managers from the industry, and from 2011 until now, we have also trained more than 2,000 talents. Without them, I would not have had the courage to venture into the IC substrate business. I believe capital is not the most crucial factor for success in this business; it is talent. However, capital remains a critical factor. Unlike other industries, the PCB industry is capital-intensive. While this industry may not attract much attention, we have consistently been laying the foundation. If you examine the financial performance of all PCB companies, you will notice our company’s depreciation expenses are the highest. Last year, our depreciation expenses reached US$500 million, and this year, it is set to rise to US$550 million. This indicates that we have undertaken significant investments. While our revenue might not grow this year, our depreciation expenses will increase.

The reason for our continued investments is my belief that without investments, we will miss out on future growth opportunities. We began introducing the concept of “smart factory” into our fabs in 2017, and now we have implemented this concept into 8 of our fabs. In 2016, our consolidated revenue amounted to US$2.6 billion with over 42,000 employees. In 2022, we reached US$5.7 billion in revenue, experiencing a growth rate of 106% compared to 2016, while the number of employees increased by only 4%. This clearly illustrates our achievement in implementing smart manufacturing. The reason why I drive this smart manufacturing initiative is because this industry requires high precision, and manual handling is no longer adequate. Our smart factories are at the forefront of the industry. To pave the way for the future, I have committed to invest US$2 billion in the first phase of our IC substrate development. Without exceptional talents, I wouldn't dare to invest such a significant amount; I firmly believe that talent is the most crucial factor.

Alex:

I remember last year, when you presented Zhen Ding's IC substrate business plan to global investors, you stood out by outlining a long-term plan of 5-10 years instead of a short-term plan of 1-2 years. This greatly surprised the capital market, as it takes considerable courage for a newcomer in the IC substrate field to openly present a roadmap spanning 5 to 10 years. This is also different from your previous low-profile attitude. When you elaborate your IC substrate plan with global investors, recently the demand for ABF, particularly in the U.S., has been weaker, does this concern you? IC substrates require substantial capital and resources, and we are currently investing in this industry. Are you worried about short-term demand falling below expectations? How do you tackle such challenges?

Charles:

When discussing with my management team, I often emphasize that leaders should wear three sets of glasses to examine the company's strategic development. The first set is like a microscope for observing the short term, the second set is like a magnifying glass for analyzing the mid-term, and the third set is like binoculars for envisioning the long term. As a leader, you need to wear all three pairs of glasses simultaneously, balancing the short term and the long term. If you cannot navigate the short term, there's no point in discussing the long term. Our short-term and long-term prospects are very robust. Our revenue and profitability over the past few years have been stable, allowing me to confidently lay out a comprehensive roadmap for the mid and long term.

In 2006, I declared my ambition to become the world's number one, and by 2014, we had reached second place. In 2017, we achieved the world's top position, and we have held that position for 6 consecutive years. It is not an easy feat for others to surpass us, and I am confident about that. We aim to become one of the global top 5 companies in the IC substrate market in 2030. Considering the projected production volumes by that time, Zhen Ding will at most be among the top five in the world, still not ranking as the world's number one. I believe this signifies that we have substantial room for growth.

If we take a look at the evolution from 1G to 2G, 3G, 4G, and to today's 5G, we can observe how products have evolved. In the 4G era, the primary application was smartphones, which did not require ABF substrates. That was why during the 4G era, there was good demand for Bismaleimide Triazine (BT) substrates, but the demand for ABF was not as favorable. However, as we entered the 5G era, applications such as high-performance computing (HPC), edge computing, artificial intelligence (AI), ChatGPT, and electric vehicles (EV) have emerged, creating the demand for higher speed and more advanced products. Therefore, I believe everyone would agree that the biggest trends for the next 5 to 10 years are centered around these areas.

From AI to HPC servers, EV, and low-earth orbit satellites, these applications require substantial volumes and high layer-counts ABF substrates. They will occupy a significant amount of production capacity. As a result, I am focusing more on the mid to long-term development of the IC substrate industry. While the current situation might involve high inventory in the short term, the long-term outlook suggests that demand will pick up. Furthermore, building a factory is not a process that matures in less than three to five years. It takes at least three years to construct a factory and install the equipment, and then followed by customer certification. As a result, it takes 3-5 years for a new factory to enter mass production.

Alex:

Of course, the demand for IC substrates appears promising in the long run. However, in the short term, there is an imbalance in supply and demand for ABF due to factors such as inflation and the rising inventory levels, particularly in the United States or other Western countries. I believe Zhen Ding has long-term plans in place, but I am curious to know if you have any short-term strategies or measures to address this threat. How do you view this situation and what are your thoughts on dealing with it in the short term?

Charles:

I believe newcomers are bound to face these challenges. I remember back in 2006, I said I wanted to become the world's number one. Many people told me, “Charles, this is a saturated market. How could you be the world's number one?” At that time, I decided to purchase 500 drilling machines despite the skepticism. When My decision was based on my past experiences and a careful analysis of the potential market growth. My strategy was focused on the mid to long term, rather than the short term. As you also mentioned, everyone knows that in the next five to ten years, whether in AI, EV, or HPC, there will be a substantial demand for ABF. That is why I have consistently emphasized the long term over the short term. Instead of being concerned about the production volumes for tomorrow, I am more focused on what we need to achieve in the next 5-10 years. This is a vast market, and even by 2030, the best I can achieve is being among the top five globally.

Alex:

Apart from the potential supply-demand imbalance related to ABF, we would also like to address a widely discussed global issue lately – geopolitical concerns. I understand that many industries, including the PCB industry, are gradually shifting their production sites away from Mainland China or even Taiwan due to geopolitical considerations, a trend commonly referred to as the “Move Out of Greater China Policy.” I am aware that you hold a different perspective. Could you share your thoughts on the relocation of production sites for the entire PCB industry?

Charles:

The PCB industry might be different from other industries, as its supply chain is quite extensive. It is challenging to survive without a complete supply chain. Currently, aside from geopolitical considerations, Mainland China offers the most favorable production conditions. When assessing investment in production sites, excluding geopolitics, I often consider four factors. First, government services and efficiency. Second, infrastructure, especially transportation, which is crucial for the industry. The other two infrastructure focuses are water and electricity. Particularly, in many developing countries, water and electricity supply can be quite unstable, posing significant pressures for high-end IC substrates or other products. Third, the supply chain. We currently have a supply chain with over three hundred partners. Due to environmental considerations, aspects like manufacturing and water recycling need to be addressed, but not every country is equally proactive in facing these challenges. Lastly, unlike the assembly industry that could start operation after one week of machine installation, our industry requires highly skilled talents.

In summary, the four key factors are: government services and efficiency, infrastructure, supply chain, and talents. However, due to geopolitical considerations, customers are pushing me to make a decision to relocate my production sites. I am certain that I must do so. While shifting the production base will undoubtedly result in financial losses, I will attempt to do so. Nevertheless, I still want to emphasize that the geopolitical factor can change at any time, and in the long run, I believe that Mainland China and Taiwan remain the best production bases for the PCB industry.

Alex:

I recall in our earlier discussion, you mentioned the topic of environmental protection, which falls under the broader framework of ESG. About a month ago, my colleague and I attended your supplier conference. We were impressed by the magnificent new headquarters, but truth be told, what left the deepest impression on me was when I visited Avary’s factory. We crossed the Maozhou River, and right next to it was Avary’s PCB factory. Different from traditional PCB factories that are typically associated with significant pollution, I saw there were over a dozen people paddling canoes on the river.

This inevitably brings to my mind the great mission you mentioned about environmental protection and ESG. I wonder if we could take a high-level perspective to understand how you began setting high standards in an industry that others perceived as highly polluting Could you share with us the driving force behind your determination and the direction you aim to pursue in this regard?

Charles:

This mindset may stem from my upbringing. I grew up in a farming family. When I was a child, whenever my mother told me that we had no food for lunch, I would go to the ditch to catch fish. When I first started my career in a stable job at a bank in Taipei, I never considered myself to have a high status. I told myself that after retirement, I could return home, live off my pension, and farm the land, catching fish from the ditch to sustain myself. However, when I eventually went back, as Taiwan's industrial development had progressed rapidly, the water sources have been polluted. I made a firm commitment to myself that if I were to run a business one day, environmental protection must be a priority. As a result, when I took over the role of Chairman of Zhen Ding, I made environmental protection our top priority. It goes beyond just our public image; it's about corporate social responsibility (CSR). We have only one planet, and our present and future generations depend on it. This is my original intention.

Many people, including our largest shareholder, questioned why I dedicated so much to environmental protection efforts instead of solely focusing on generating profits. However, I had a clear understanding in my mind. In our factories, with so many factory pipelines and systems in place, if we did not plan and organize them properly from the outset, we would never be able to achieve it later on. Thus, establishing a strong foundation in the early stages was extremely important, and this required investments. That said, Zhen Ding has invested an accumulated amount of over US$320 million in environmental protection. Some may claim that this amount of money would have been sufficient to establish several companies. Nevertheless, each year, we still allocate at least US$50 million to maintain our operations and sustain our ecosystem.

Moreover, with the increasing focus on carbon-related issues and carbon taxes, the regulations are becoming even stricter. For instance, our water recycling rate has already reached approximately 50%, which is high compared to the industry average. We are currently evaluating the possibility of raising our target to 60% by 2025. The price of one ton of saline water is about RMB4, yet when aiming to achieve a 60% water recycling rate, the treatment cost for one ton of water could increase to around RMB16-18. However, I believe this is a social responsibility, one that I am committed to and consider necessary.

Alex:

This brings us to another related topic about the goal that you have established. When speaking to global investors, you have mentioned that ESG is an important priority, but what you truly want to emphasize is the combination of ESG + EPS. Not many corporate leaders integrate these two aspects, as they tend to view them as separate factors. There are even those who merely pay lip service to ESG. In Western countries, many perceive this as a method to mitigate future risks, which requires investment. As you mentioned, you have invested US$320 million in environmental protection. I believe that combining ESG with EPS has presented a significant challenge. Could you please share with us how you have achieved this and how you have successfully integrated these two aspects to solidify your position in the PCB industry?

Charles:

I believe ESG is something that all humans must collectively work on. However, companies would face a very practical challenge: when a company is not profitable, it becomes challenging to prioritize ESG. Therefore, I have always held the belief that achieving ESG goals must be built upon a foundation of profitability; that is my logic. Although profitability may not be achieved at the start of a business, it is crucial to lay a strong foundation. Once the foundation is established, in addition to diligently managing the business, environmental protection must also be prioritized. The environmental efforts I am currently undertaking can be seen through my mobile app. I can monitor any data at any time and even allow the government to monitor all my data, providing a level of transparency necessary for these actions. This is what I strive to achieve.

A key customer even highlighted us in their global supplier sustainability report, specifically noting that we are a supplier with advanced environmental awareness and initiatives. This is particularly true in water stewardship, where we have achieved Platinum-level certification from the Alliance for Water Stewardship (AWS) international standard. Additionally, for zero landfilling of waste materials, Zhen Ding has also received Platinum-level certification. To drive these initiatives and reach our ESG goals, we have established numerous objectives, including reducing energy consumption and water usage. I believe that it is important for companies not only to innovate in terms of products but also to innovate in the realm of ESG. We have invested significant resources in this aspect. I often emphasize that businesses are ultimately a part of the society, and fulfilling social responsibilities is essential.

Alex:

You hold a prominent position in the global PCB industry and are at the forefront of the entire industry. If we take a telescopic view of the PCB industry's future, could you please share what you envision for this industry? Looking ahead, while we have a goal of achieving a 10% market share, do you believe it is possible to surpass this threshold in the long run? Could you please share your insights on the future development of the PCB industry?

Charles:

In the early days of PCB production, wastewater could be easily dumped. However, with the increasing focus on environmental protection and ESG standards, many smaller companies are struggling to survive because they did not prioritize environmental protection. As a result, I believe top players in the industry will continue to consolidate the market. For example, the Maozhou River you mentioned previously used to emit a foul odor, but thanks to the government's efforts, it has transformed into a clear river where people can now paddle and swim in it. That said, I was determined that no matter where I made investments, environmental protection had to be a priority. Meeting the government's high standards was a must, and under no circumstances would wastewater be discharged into rivers. I was committed to channeling it into the government's sewage treatment facility.

Hence, when selecting a manufacturing site, I always ensure that there is a nearby government-operated sewage treatment facility where I can discharge wastewater. This is because no matter how thorough the treatment process, there will inevitably be some residuals left. In terms of Chemical Oxygen Demand (COD), while the Shenzhen government might require a limit of 160 mg/L, I can achieve levels as low as 40- 50 mg/L. Even though these levels do not pose a threat to human health, there are still residues remaining.

I believe we have all met the government's high standards, and this is what we must do. We have also contributed to environmental efforts alongside the government. For instance, I began requiring my factories to conduct environmental testing within a one-kilometer radius back in 2010. This is because without conducting these tests, pollution from others might be attributed to me. We have a lot of data that the government can refer to. In fact, I believe that environmental preservation is a collective responsibility that we all must fulfill.

Alex:

If it is accurate to say that these environmental considerations within the PCB industry could potentially be crucial factors in deciding whether a company can achieve sustainable development and gain a competitive edge over other competitors?

Charles:

While the impact might not be deeply felt in the short term, I truly believe that this holds great importance in the long run. Just think about it: in many developed countries, this industry has been phased out because they did not prioritize environmental considerations. I firmly believe that by addressing these issues adequately, even in developed countries, survival is attainable.

Alex:

I believe this is something that if not done today, you will deeply regret it in the future. It will also become increasingly costly. This will likely become one of your key competitive advantages or entry barriers in the future.

Charles:

So that is why I said in 2000, the world’s top 30 PCB manufacturers collectively accounted for around 35% of the global market share. Now, it has reached 68%, illustrating that the top players in the industry will continue to consolidate the market. I have been closely monitoring the PCB industry, and the total number of PCB manufacturers has not increased; it might even be decreasing. Therefore, I believe the 10% market share you mentioned earlier is a midterm goal, definitely not a long-term goal.

Alex:

I believe this provides significant insights for investors who have been observing the high-tech industry for the long term, especially those in the PCB industry. The industry is not as fragmented as people might think; in fact, it is gradually consolidating and concentrating among the top players.

I have one final question that I would like to ask for your advice on. It seems like your career and personal life have achieved a high level of fulfillment by general standards. Many young people today face a society filled with challenges. Of course, when you were young, the economic environment was different from now, presenting different challenges as well. In closing, if you could share a few words of wisdom with your younger self or with young people today, what would you say?

Charles:

I would tell myself this: “This is perhaps one of the most challenging eras, but it is also potentially the best era—it all depends on your attitude.” Even when I was young and doing less favorable tasks at home, I remained optimistic. “Facing this society, while you certainly need a strong foundation of knowledge and expertise, you must also have common sense," is a piece of advice I often share with young people. That's why, despite not having much time for reading every day in the past, I now spend at least two hours reading daily, constantly absorbing information ever since I started my career.

In addition, you must possess the ability to communicate with the world effectively. In other words, you need to be well-prepared in terms of your language proficiency and the ability to deal with various international relationships. Moreover, you must hold yourself accountable and maintain a self-responsible attitude. This is also why I emphasize the importance of lifelong learning. Do not think that once you graduate from school, you can relax and have no worries. That is not the case. After you start your career, cooperation and communication are crucial. That is the reason why I have always treated my suppliers with kindness. In the future, whether as an individual or a corporation, you need to cooperate with others in the supply chain. You cannot succeed on your own without working with others. Overall, effective communication is the best way to solve problems.

Lastly, I would like to say, “Life is full of ups and downs, with rough patches often making up the majority.” Throughout your lifetime, you will encounter numerous challenges. The key is to have the courage to face challenges and embrace failure. If you approach life with pessimism, you won't last long. However, if you remain optimistic, failure becomes an opportunity for growth and learning. I have relied on optimism to tackle all the problems I have encountered in life. Maintain faith, be resilient, and embrace my life principles of honesty, kindness, diligence, embracing challenges, and building resilience.

Alex:

That's wonderful to hear. I think these insights are not only valuable for young people but for everyone as life guidance. I want to express my gratitude to you for taking the time out of your busy schedule to share your thoughts with us on Taiwan Talks. On behalf of the Taiwan Talks team and all our viewers, we thank you for your participation.

Charles:

At the age of 72, this is indeed my first television interview. It is not that I have been avoiding these opportunities, but there are two factors involved. Firstly, my work schedule is demanding. Secondly, I want a platform that can provide an honest and down-to-earth coverage of the contributions this industry makes to the world and the entire society, rather than just focusing on my company. This is the kind of value I am looking for.

If you would like to arrange a meeting with Zhen Ding, please contact yvonnehuang@qtumic.com.

The QIC team consists of experienced finance industry professionals that have worked in major sell-side and buy-side companies. We leverage our industry knowledge and relationships with institutional investors to assist companies and investors to achieve effective two-way communication to enhance shareholder value. QIC also has many years of experience in corporate access services. We plan, schedule and execute tailor-made roadshows and targeted investor events for high-quality corporate clients. QIC does not provide execution services and is thus considered MiFID II-exempt by institutional investors, who welcome QIC’s services and access to senior management of quality companies.

Taiwan Talks interview link: https://youtu.be/mPcpsBoxa3Q