SME heads reveal secrets to success
With limited resources, competing in the global market is much more intense and only a selected few succeed in becoming part of a global supply chain. Although they are not household names, Chang Sung Group and PPI Pyungwha are both SMEs that pioneered industries which barely existed in Korea and continued to find success as suppliers in the global market. As a result of this achievement, Chang Sung and PPI were among the four SMEs to receive this year’s Global Business Award from the Korean Academy of International Business earlier this month.
Established in 1980, Chang Sung’s main product is metal powder. They specialize in making powder out of copper, bronze, iron, silver, ceramic and other materials. The powder is later used to mold components or material in a wide variety of products including smartphones, ships and electric cars. Before Chang Sung launched their business, all metal powder in Korea was imported.
“[We’re] like a flour miller, we purchase metal materials, make them into powder and resell them to clients for various uses,” said CEO Bae Dong-hyun. “The essence is to maintain the material property after pulverization so that it will still have those properties after it’s mixed with other substances - this was our first technical achievement.”
The company’s expertise in metal powder served as the basis to develop products including magnetic cores, a key part of power supply components in all sorts of electronic devices that prevent electricity from flowing backward. Chang Sung’s magnetic powder cores have a 50 percent share of the global market and 60 percent of its entire sales come from exports. Microwave absorbers in smartphones and reactors used for electric cars and bioenergy generators are also components that Chang Sung has expanded into.
PPI Pyungwha is Korea’s leading manufacturer for polyvinyl chloride pipes. Also known as PVC pipes, this product is one of the most widely used pipes in buildings, both internally and externally. The company, which now has around 350 employees, has a dominant 60 percent share in the Korean PVC pipe market and exports to 60 countries.
PPI had a major R&D breakthrough in 2013: an upgraded PVC water pipe named Appiz. The product was devised to solve problems that frequently occurred in the cast-iron and ordinary PVC pipes that dominated the water pipe market. PVC pipes were easily damaged, incurring leaks, and cast-iron pipes, although stronger, rusted with time. A stronger form of plastic, Appiz does not rust and has five times the strength of cast-iron pipes.
The material is also superior in terms of durability. A research team in civil engineering from the University of Texas in Austin calculated that Appiz can last for 100 years, whereas cast-iron pipes or ordinary PVC pipes have life spans of merely two to three decades.
“I once read a World Health Organization report that said 80 percent of diseases in the human body come from poor quality water,” said PPI Pyungwha Chairman Lee Jong-ho. “The objective in developing Appiz was to come up with a healthy and durable water pipe that would reduce the government expenditure on regularly exchanging them.”
Appiz is now being supplied as water pipes for American Water, the leading U.S. water provider. It is also under preparation to register as a global norm for water pipes at the International Organization for Standardization (ISO). The ISO sets the global norm for national standards on industrial equipment and components at 162 countries worldwide.
The Korea JoongAng Daily held a panel discussion with the heads of these hidden pioneers on Nov. 8 to discuss their journeys from small local companies to global suppliers, as well as the reality and difficulties Korean SMEs face today. The session was moderated by Chae Myung-su, professor of marketing at Hankuk University of Foreign Studies and the president of the Korean Academy of International Business.
Q. Chae Myung-su: My first question goes to PPI Pyungwha. Your Appiz pipes were proven to last for 100 years. That’s an impressive record, but I imagine there would have been internal episodes along the journey to reach that level of quality?
A. Lee Jong-ho: Appiz took eight years of research to develop from 2005. The version that we reached in our fourth year was able to last for 50 years - nearly double that of cast-iron and PVC pipes, which last 20 to 30 years. Some wanted to stop there but I thought 50 years was too weak. It was only natural there was internal opposition because we were aiming to develop a pipe material with goals that had never been met before. R&D requires repeating tests on raw material, developing new molds and throwing them all out if they fail. There were many nights researchers didn’t go home for these experiments. Then the financial crisis blew in from the U.S. and our production had to be cut in half, not to mention we lost a lot of workers.
But above anything else, Appiz was a water pipe. I persuaded employees that we have to push development to the very end. It was a tough journey but the 100-year duration wouldn’t have been achieved in a different way. I’m still very thankful and sorry to the employees that followed my decision.
Chae: Chang Sung Group has walked a lonely road as well. The material industry is a realm where Korea has always been very weak. What are the problems you face in the industry?
Bae Dong-hyun: Profitability is a big issue. Components or material manufacturers provide products to bigger companies. We too supply for big names like Samsung Electronics or Hyundai Motor. For them, reducing costs is a major issue and an important factor in selecting suppliers. Even for a brand like Samsung’s Galaxy Note, the supplier for the same component is chosen anew every time a new version is released. If we lose a client after a new bid, the investments we made to establish the manufacturing facility for this particular component would immediately shift to losses.
The market situation we face today is tough too. A major reason is the influx of Chinese companies that are capable of undercutting the bids. We have no choice but to call for a lower price in order to have a chance against them.
China itself is also a big market but the government there is making efforts to keep the supply chain inside its borders, which means Korean companies are losing ground there.
And because the speed of technology development is so fast nowadays, suppliers like us have to keep in line with the pace and continue changing from the inside, developing new revenue sources. But as an SME, it’s not easy to prepare all the money that goes into the process, not to mention there are more and more regulations to cope with as well.
Chae: What was your breakthrough in entering the global supply chain? Do you have any future plans to strengthen that stance in the future?
Lee: We first received support from the Korea Trade-Investment Promotion Agency. For competitive SMEs that lack resources to find a sales network overseas, one small achievement easily leads to another. Kotra has offices in many countries and they helped us find buyers overseas.
For now, the plan is to focus on the U.S. alongside American Water. The U.S. has old pipes underground which need to be exchanged and this market amounts to 1,100 trillion won ($1 trillion). I recently met with the company’s senior executives and agreed to establish a logistics center there from which we could sell our products. A manufacturing facility is also part of the plan, which we think will take around 2 years. We are currently looking for where to build this facility.
Bae: Chang Sung started at a closer point in Japan where we established a local branch in 1984. Japan was one of the most difficult markets to enter in the world due to their high standards. From here, we expanded to Europe, the U.S. and China, where we entered a little more aggressively by setting up offices and factories. We operate over 20 regional offices worldwide.
So far, our most successful product in the global market is magnetic powder cores. But as I said, the competition is fierce, which means we have to keep developing more advanced products. The item I’m looking forward to is reactors, which is one step higher up the supply chain from magnetic cores. Every electric vehicle made by Hyundai uses our reactors.
Another future growth engine of ours is the electromagnetic wave absorber. We possess technology to make the metal powder that does this job. Now, they are mainly used in smartphones but I’m sure it’ll become bigger with the rise of automotive cars because they prevent the confusion of electric signals inside vehicles. If they flow in the wrong directions, the car will move in a way it shouldn’t.
We supply for Tesla as well but I’m waiting for manufacturers with more brand power like Benz and BMW to really step into the market. We’re developing technology with an aim to supply for them as well in the future but it’s doesn’t seem easy. It takes money to establish production facilities, not to mention passing the verification process is extremely difficult. In short, we’re internally boosting technology in order to reap the profits when the right time comes.
Chae: Both Chang Sung and PPI are now stable enough to grow out of the title of a “small” enterprise. What is your biggest concern regarding the company’s management at the current stage?
Lee: A business may be comprised of a lot of things but at the end of the day, it’s the people working for it that keep the company going. That’s where my biggest concern lies. It’s true that a lot more of our manufacturing process is automated than in the past and there are always people who had careers in other companies applying for a manager-level job in PPI. But what I believe becomes the basis of a strong company is new employees that start their careers here fresh out of college and move up the ladder while accumulating deep knowledge in both the industry and the company.
However, the reality is that college graduates don’t voluntarily look for a job at an SME. Major companies may have advantages in welfare or payments, but I truly believe SMEs are better to develop one’s job capacity and show off potential.
Bae: I totally agree. One of my biggest wishes is to see a college graduate start a career at Chang Sung and grow to rise as the company’s senior executive or CEO. In fact, our construction department is in the process of hiring.
We launched the construction and land development business in 2009. From 9 billion won in 2010, sales jumped to over 172 billion won last year - which accounted for half of Chang Sung Group’s entire sales.
Employees need to work at sites to understand the job but most young people today avoid physically difficult tasks and I see a lot of them dropping out in the first six months with hopes to enter a bigger company.
Chae: I frequently talk to people working in local SMEs and one thing I often hear is that that government support should be based on a firm understanding of the company and its history. That would be a good starting point from which governments can devise SME policies that actually cater to companies' specific needs.
On the whole, government support should move toward creating an easier environment for local SMEs to do business. A common request I hear from SME heads is that they need a networking platform where companies can meet potential buyers. Another thing the government could add to that is providing high quality information [on foreign markets]. Once these are provided, competitive SMEs will voluntarily start entering foreign markets even if they are not pushed to do so.
BY SONG KYOUNG-SON [firstname.lastname@example.org]