To Revive Their Fortunes, Precision Engineering Firms Need to Diversify

A HANDFUL of Singapore-listed precision engineering companies have been stuck in a rut over the years, with the decline in hard disk drive manufacturing. But some are reinventing themselves by diversifying into new products and even industries.

Take Allied Technologies, for instance; after disposing of its metal stamping business in China late last year, the company obtained shareholders’ approval in March to diversify into e-commerce and related technologies such as e-payment systems and platforms.

It swiftly followed up with the new mandate by acquiring stakes in related companies such as event ticketing firm Asia Box Office, Software as a Service (SaaS) platform Activpass Holdings and China payments provider 8travelpay Intelligence & Technology (Shanghai) Co.

Miyoshi is another example of a precision manufacturer that started to diversify into next-generation technology – including electric cars in China through its investment in Core Power (Fujian) New Energy Automobile – hydroponics, as well as optoelectronics and surveillance solutions.

But unlike Allied Tech, it has chosen to retain its core competency in metal stamping by applying it to a different set of products – electric cars — which are seeing phenomenal global growth.

Will more precision engineering firms follow these examples to give their long-suffering shareholders fresh hopes at regaining their past glory? Shares of companies like Broadway Industrial Group, Cheung Woh Technologies, Metal Component Engineering and even Miyoshi and Allied Tech- despite their new initiatives – are in the red year-to-date as at Sept 3.

These companies are a shadow of their former selves since Singapore’s hard disk drive sector started to shrink around 2006, with the big global players shipping out their manufacturing activity to cheaper destinations such as China, India, Thailand and the Philippines.

In addition, demand for hard disk drives has waned due to increased usage of tablets and smartphones, which use solid-state drives. Global shipments of personal computers, which utilise hard disk drives, have been on the decline since peaking in 2011. The corollary is that thousands of workers in hard disk companies have lost their jobs amid an industry consolidation.

CIMB analyst William Tng noted that most precision engineering firms today still retain their legacy metal stamping and components manufacturing businesses, despite declining growth in this segment, even as they continue to explore new businesses.

For instance, Broadway Industrial Group disposed of its foam plastics solutions and flow control devices businesses in 2016 but continues to manufacture actuator arms and related assembled parts for hard disk drives. It returned to the black with a S$2 million profit for the first half of 2018, and said in its financial statement that it is “also actively looking for new business opportunities for the future growth of the group”.

It is not easy to find a good fit, which takes time and effort. Not only does a company need to find a suitable partner to enter into a new field with, it may also need to put up with a period of losses owing to the unfamiliarity of its new business.

A testament to this is Datapulse Technology. The company wasn’t a precision engineering firm per se but it used to manufacture media storage devices like compact discs, another product that is nearing extinction.

Hard Bewildering move

Datapulse has since diversified into the shampoo and hairspray business – a bewildering move which earned it the ire of a bloc of minority shareholders and nearly led to the ousting of its board members.

A strategic review by Ernst & Young made public in March this year said that this was not a sustainable business, although it had “the potential to improve its business viability by transforming its business into a value chain play by developing its distribution capability and its suite of brand assets and products”.

Thereafter, Datapulse expanded the hair care product manufacturing business into distribution as well.

Last month, Datapulse again announced yet another tangential move when it signed a letter of intent to buy a company that owns a mid-scale hotel in Kuala Lumpur, saying that this is part of the company’s efforts to diversify its core business operations into the hospitality industry, which it believes would have strong potential for growth.

The unfolding developments at Datapulse show that while moving into new businesses may enable a loss-making firm to temporarily improve its financial performance, a long-term plan and clear communication to shareholders are still needed.

Choosing what to diversify into while considering the company’s strength is the first hurdle. After that, the challenge is to remain committed to the new direction and to persevere through the initial adjustment period, instead of swiftly changing track when one thing doesn’t work to another that appears easier and with better prospects.

Source: The Business Times by LEE MEIXIAN, Sep 05, 2018

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