News

EXECUTIVE Q&A: SVI SEEKS HIGH-MIX, LOW-VOLUME DOMINANCE

BackApr 29, 2011

SHAREINVESTOR

SVI Plc is a leading global provider of full turnkey box-build contract manufacturing services to the industrial and professional electronics sectors. The company has grown by building strong long-term partnerships with chosen strategic customers and suppliers. CEO Pongsak Lothongkam discusses the company's strategy and outlook.

Please explain SVI's business model.

SVI is a medium-sized electronics manufacturer and we focus on two segments: industrial products that account for 60% of revenue, with the remaining 40% high-end electronic products. We focus on these two segments because industrial products are a safer segment with a life cycle of eight to 10 years and industry growth of 8-10% annually.

SVI's product mix has changed tremendously in the past six years, with industrial control products now representing 60% of total revenue versus 20% in 2004.

Will this be the case going forward?
Yes. With up to US$500 million in revenues, industrial control products will likely remain at this percentage level going forward. SVI will expand into more high-volume telecom products, most likely for export to the US and Japan.

How much total revenue does SVI's largest customer account for?
Our revenues are well diversified, so no one customer accounts for more than 25% of our revenue. This i a key policy as in 2009 our third-largest customer experienced a revenue drop of 70%, but the impact was minimal to us. Today we have 14 customers and we aim for further growth.

Raw materials are SVI's largest cost.How do you ensure timely delivery?
Raw materials are 75-78% of our costs so we have to be clever about how we procure them as we grow. We set up an office in Taiwan to source supplies via China. China has the largest volume in the world for IT parts, so we want to tap that market to get volume prices.

What is SVI's current capacity utilisation?
We have expanded by buying a site at Bang Kadi in 2009 and we moved there in January 2011. Our capacity has grown fourfold in the past six months to 80,000 square metres, but we have not filled all the space yet because in this business you have to be prepared for two things:1. Your ability to provide your customers with more orders quickly, and 2. If we make an acquisition, we can shiftproduction quickly. Our potential with this new space is amazing because with SVI 2, which was 10,000 sq m, we earned $190 million. We have the potential to do far more with what we have today.We have machine capacity on 25% of the land, and that is running at full capacity today.

 

INDUSTRY:

How does SVI differentiate itself from its competition?
Typically our competitors are geographically closer to our customers than us, so our competitive advantage arises from costs, sourcing raw materials from Asia, and our reputation. We also have the capability to do high-mix, lowvolume business and we can ramp up production to higher levels. If you go to China most companies lose their intellectual property and companies in China will only do large orders, not highmix low-volume. Our reputation is now well established in Scandinavia so that we do not have to chase customers anymore; we have the ability to choose a new customer depending upon their market position. Also the trend in the industry now is that smaller companies are being acquired, so we have to project the image of a large company and with our new factory this is possible, giving the acquiring company confidence that SVI will be able to supply them.

 

FINANCIAL PERFORMANCE:

With SVI growing consistently at 20-30%per year for the past few years, is this creating a strain on the balance sheet?
No because we are net cash right now, and in this business it is very important to understand cash flows. We cannot grow more than 30-40% per year as it would place a lot of stress on the people, management and financials. If we grow too quickly and face slight delays,then we may end up going bankrupt,which is why we have strong financial discipline. This is why we have to wait until we achieve $500 million in revenues before entering the US market, where you need to build system levels. Once we have that revenue base and can achieve $40 million in cash flow per year, we will expand into new markets.

SVI has been able to keep its net profit margin at 9%. With continued growth can you maintain this level?
Yes, that is our target and we aim to maintain it annually. Our gross profit margin is a bit hard to read because we buy materials and it takes 6-9 months to manufacture products, and with the fluctuations in forex our gross margins may vary. But thankfully we are able to hedge against this.

 

MISCELLANEOUS:

What are the biggest risks facing your business today?
Last year my biggest worry was the baht appreciation, causing our margins to drop slightly, but we have been able to manage this. The political problems in Thailand are also a problem. These wouldn't hurt us in the short term but over the long term it projects a negative image of the country, hurting our ability to grow. In addition, Thailand's labour force is shrinking and with Vietnam growing strongly with a stable government and a cheaper currency, it is a fierce competitor.

Where do you see SVI in five years?
SVI will be at the top of the high-mix,low-volume companies, generating revenues above $500 million with 25%from the US,25% Scandinavia, and 50%elsewhere. The product mix will be evenly split between industrial products, highend electronics and high-volume electronic products.

 

The Executive Q&A Series is presented by ShareInvestor, Asia's leading financial internet media & technology company, and the largest investor relations network in the region with more than 400 listed clients.The interview is conducted by Pon Van Compernolle, vice-president of Merchant Partners. For more information, e-mail gancanapol@merchant.co.th or howard@shareinvestor.com or visit www.ThaiListedCompany.com