International -- Intl' Business: TAIWAN
FROM NOODLES TO YOU NAME IT (int'l edition)
Just two years ago, C.Y. Kao, chief executive of President Enterprises Corp., Taiwan's premier food company, faced a dilemma. Rising labor costs and fierce competition in Taiwan's food industry were slicing his company's profit margin even as sales of its instant noodles and beverages were slowing. What to do? Kao launched an ambitious diversification campaign.
It's already paying off. With a slew of new ventures in industries ranging from power generation to financial services to computer hardware, President is setting itself up to become a diversified regional--and eventually global--heavyweight (table). As an established player in the food business, President also expects to continue expanding in China, where it has already invested $175 million and now boasts 15 factories. Says Charlie Chen, president of Seagram Taiwan, which distributes juice and alcoholic beverages through President: "The company is well organized to sustain long-term growth, even considering instability in China." Analysts expect the group to earn $130 million on sales of $1.1 billion this year, and President's goal is to increase profits 10% annually for the next five years.
POWER PLAY. President, which Kao founded in 1967 to make animal feed and noodles, is moving quickly into high technology. It recently scooped up the remaining 49% of Wang Laboratories Inc.'s unit in Taiwan, after buying an initial stake two years ago, when Wang was deep in the red. Now named President Technology, the company makes monitors, motherboards, and software--and turns a profit.
Mature businesses, such as utilities, also are attracting President. In another key strategic alliance, the company is setting up a 70%-30% joint venture with Atlanta-based Southern Electric International Inc. to build and operate a $1.5 billion oil-fired power plant on Taiwan's east coast. With Taiwan just opening up its power-generation sector to private operators, President was one of the first to seize the initiative. If the venture succeeds, it will consider bidding on similar projects in China.
Kao has a good start in forming a group of financial-services companies. In April, he created a life insurance company with U.S.-based Eagle Star Life to serve Taiwan and China. In addition, President already owns a private bank and a top securities company in Taiwan.
Even with its push into new areas, however, President will keep food as its core business. In the U.S., President Baking is known for its Famous Amos chocolate-chip cookies and Girl Scout cookies. In Taiwan, President produces, packages, and sells its own food as well as distributing major brand-name products, ranging from Budweiser beer to Frito-Lay snacks. The company has built its Taiwan franchise of 7-Eleven convenience stores into the third-largest network of its kind in the world, with more than 1,000 stores. Last year, the company sold 41% of its 7-Eleven shares to bolster profit margins and provide cash for its new ventures. The company earned $180 million in the sell-off, lifting last year's operating earnings 157%, to $270 million.
With Taiwan's food market saturated, President is building its mainland China food business as fast as possible. The recent deterioration in relations between Taiwan and China over President Lee Teng-hui's visit to the U.S. could slow down the drive. But the company hopes to build five more plants in China by next year and aims to add an additional two to three per year after that. "Our similar tastes, language, and culture make President more effective marketers and managers in China than Americans, Europeans, or Japanese," Kao argues. He is banking on that uniform "Chineseness" to drive President's China growth as living standards rise.
Ties to top Chinese leaders haven't hurt, either. Company sources say some executives have direct access to Communist Party General Secretary Jiang Zemin. They add that President serves as a useful public-relations tool for a Communist leadership that claims sovereignty over Taiwan, because its Chinese brand name means "unification." Acknowledges Kao, who isn't short on political instinct even though he received only six years of education: "If you're going to invest, then you need to have an understanding with the top government leadership."
Despite President's tremendous growth, some worry that the 66-year-old Kao is spreading himself too thin and taking the company too far from its home industry and market. But Kao isn't concerned. "An enterprise needs to look at the long term, not just the half-year or one-year outlook," he argues. By the turn of the century, he says, President's ventures in China will generate 15% of the company's profits. Add that growth to its other new ventures, and President figures to one day be a full-fledged multinational.
CEO KAO'S AMBITIONS
COMPUTER HARDWARE Acquired Wang Laboratories unit in Taiwan to produce monitors and motherboards
FINANCIAL SERVICES Established a life insurance company with Eagle Star Life to serve Taiwan and China
FOOD Plans to add at least five more production plants to 15 already operating in China
POWER Teamed up with Southern Electric International to build a $1.5 billion oil-fired power plant in Taiwan
DATA: BUSINESS WEEKBy John Winzenburg in Taipei