STEng – BT

ST Engg casts its eyes on China growth

Group’s China revenue may hit present US level within 5 years: CEO

IF chief executive Tan Pheng Hock is right, Singapore Technologies Engineering (STE) could see China contribute as much to group revenues within five years as the United States does now. This would be no mean feat, seeing as Mr Tan expects to sell more than US$1 billion worth of products and services in the US this year.

‘With what I want to do in China… in maybe five years, if I can, I will be like VTS,’ said Mr Tan in a recent interview, referring to the group’s US unit, Vision Technologies Systems.

Growth will come mainly from the aerospace and specialty vehicles units, where the group is planning to ramp up capacity and, in the longer term, from the electronics unit. Meanwhile, the marine division currently has no activities in China, but is looking to acquire or set up a shipyard soon.

STE has no defence-related sales in China because it does not want to jeopardise its relationship with the US military, a major customer, Mr Tan has previously noted.

While STE does not sub-categorise revenues from Asia because of the sensitivity attached to sales in Singapore, where the Ministry of Defence is a major customer, Mr Tan said Singapore and mainland China contribute the bulk of group sales in Asia, which reached $1.54 billion for the first half of 2007.

Operations in China started seven or eight years ago when the electronics division started designing intelligent buildings like the Shanghai Museum, but really started expanding only in 2004, when ST Aero formed a joint venture with China Eastern Airlines in the airframe maintenance market. Today, ‘China would have reached a few hundred million in revenues’, said Mr Tan.

‘The bottom line today is not significant. It is profitable but does not have a material impact on our bottom line,’ he said.

Today, the aerospace JV, called Shanghai Technologies Aerospace Company (Starco), is profitable, as are Beijing Zhonghuan Kinetics (BZK) and Guizhou Jonyang Kinetics (GJK), which were set up in 2003 and 2005 respectively to sell trucks, trailers and other specialised vehicles.

Increasing air travel in China is driving a ‘huge demand for aircraft’ and a ‘need for total aviation support’, said Mr Tan. Starco presently serves five Chinese low-cost carriers – Spring Airlines, Okay Airways, China United, United Eagle and Juneyao Airlines – as well as the larger Shanghai-based China Eastern. The work is still purely in airframe maintenance, but Mr Tan believes Starco – which is expanding its hangar facilities at Pudong International Airport to fit three more aircraft – can broaden sales into engine and component maintenance.

Meanwhile, the group will ‘pump money’ into GJK and BZK to upgrade production processes. The two units are now in ‘tier 3’, grouped with state-owned vehicle manufacturers, he said, but beneath the tier 2 manufacturers from Japan and Korea, and the tier 1 companies like Caterpillar and Kobelco. These high-end companies serve the major cities where massive highways are being built, while the likes of GJK serve ‘small inner cities’ and target ‘local community developments’.

As for electronics, growth will come from demand for mass rapid transport (MRT) farecard and communication systems, which STE helps to design. According to Mr Tan, many coastal cities are developing MRT systems, but the projects are not yet at the stage where STE can contribute, because the infrastructure and the train bodies are tendered out before work begins on the electronic systems.

Mr Tan also said that he is looking to acquire an established shipyard in China. Yards are busy and prices are high, but ‘if we don’t go in now, the market will keep going up’, he said. STE’s second option is to acquire a yard that is currently under construction, failing which it will consider building its own.

Another challenge is to find a local partner, which is important for success in China. The problem is that coastal cities tend to be expensive to do business in, and so rich that they may not need Singaporean investment, which means STE will have little bargaining power. ‘What China wants now is management skills and processes. Money is no issue and even technology is less of one because they can buy it. We need to look for places where people will want us, where a local partner can use our capabilities,’ he said.

Other things to consider include proximity to shipping routes, and weather – too far north, it gets cold and costs run higher.

But Mr Tan’s biggest question about China is whether to run the outfit under a strong brand and a single leader, just as VTS in the US is run by retired US general John Coburn, or as separate companies under distinct province heads.

In China, different provinces are like different countries – provinces compete for investment against each other – so a manager who has good relationships with people in one province might be a poor choice to lead the business in another province. ‘If the leader were Singaporean it would be less of an issue, which may mean each province needs a local head as opposed to our having a China head,’ Mr Tan said.

Related to this is whether to have a single ‘big’ MNC brand, or to be seen as ‘pieces’. ‘If you’re big, people will watch and question your movements. People might come talk to you, but remember I want to be outside the radar screen, to be able to choose who I want to acquire, rather than have to say ‘No’. I want to manage sensitively and grow in my own way,’ he said.

Coming from STE, that is a familiar refrain. They once said the same thing about their US operations.

Leave a Reply