Walsin Technology Corp.'s decision last week to acquire a 22% equity stake in rival Pan Overseas Electronic Co. Ltd. will create a supplier large enough to challenge Taiwan's leading passives maker, Yageo Corp., in multilayer ceramic chip capacitors (MLCCs).
Walsin, Taoyuan, Taiwan, expects to purchase about $23 million worth of stock in Pan Overseas, based on the Taipei company's closing price on the Taiwan stock exchange late last week.
The companies will leverage each other's product lines, as well as share procurement, production, and sales channels to lower costs in a cutthroat market.
"The partnership will allow both of our product lines to be more complete and provide one-stop shopping," said Walsin's president, Peter Chu. "We'll also do joint procurement, cutting costs significantly."
Walsin, which counts Intel Corp. and Sony Corp. among its customers, expects its alliance with Pan Overseas to widen its appeal to OEMs and EMS providers seeking to reduce their supplier base.
Other than MLCCs, the product lines of the two companies don't overlap. Walsin's products include varistors, resistors, positive temperature coefficient resistors, inductors, and RF components. Pan Overseas carries chip varistors, transistors, diodes, ceramic filters, and DC/AC inverters.
Walsin and Pan Overseas have a combined monthly production capacity of 6.2 billion MLCCs. Yageo's capacity stands at a bit more than 6.2 billion units a month, said a Yageo spokeswoman.
Though the combined product lines and available production capacity of Walsin and Pan Overseas stack up favorably against Yageo's, their revenue still falls short.
Walsin's 2002 revenue was $137 million, while Pan Overseas' revenue, which has not yet been released for 2002, is believed to be roughly half that. Yageo, by contrast, recorded revenue last year of $253 million.
Although many passives suppliers forecast flat growth this year and watched prices erode as much as 5% a quarter, Walsin expects its 2003 revenue to grow 30% as it expands capacity. But margins will remain under pressure because of the industry's slow recovery, said Ting-chu Lee, Walsin's director of finance.
To improve margins, Walsin plans to increase production of high-end products and reduce sales of commodity products to 50% from 70% of revenue, according to Lee.
Yageo has already started to supply higher-end products such as Bluetooth antennas, and said it will address falling margins by producing in lower-cost regions. Yageo will move manufacturing to a new plant in Suzhou, China, once demand picks up, according to the spokeswoman.
Walsin, Pan Overseas, and Yageo combine for a 12% share of the global passives market, according to analysts. But Taiwanese passives suppliers are still dwarfed by larger companies elsewhere in Asia.
Yageo last year did not qualify as one of the top five global suppliers of MLCCs either in shipments or revenue, according to Dennis Zogbi, an analyst at the Paumanok Group, Cary, N.C.
Citing Walsin's limited global presence, larger Asian suppliers said the company's acquisition of Pan Overseas won't affect prices, which they argue are already as low as they can go.
"Walsin won't drive down prices any further, but won't help prices stabilize either," said Bill Glass, director of sales at San Jose-based Samsung EM America, the U.S. sales arm of Samsung Electro-Mechanics Co. Ltd.
Allan Cole, chief executive of U.S. subsidiary Yageo America Inc., Addison, Texas, agreed. "The industry doesn't see Walsin much in North America. I don't know if they have sufficient presence to be on a global company's preferred supplier list."
Walsin has tried to expand geographically by striking a strategic partnership in April 2001 with BCcomponents, the former passive components business of Royal Philips Electronics of the Netherlands. BCcomponents was purchased in December by Vishay Intertechnology Inc., Malvern, Pa.