by winston » Sat Aug 02, 2014 4:57 am
not vested
Kossan looks past oversupply fears BY JOHN LOH
July 5, 2015
DATUK Lim Kuang Sia, who founded Kossan Rubber Industries Bhd some 35 years ago, isn’t a fan of how “glut” has been used to describe the rubber glove sector.
“I don’t believe there is an oversupply,” he tells StarBizWeek.
According to Lim, the managing director and chief executive officer of Kossan, Malaysia’s second-largest rubber glove maker by production capacity, domestic glove players aren’t biting off more than they can chew.
“The new capacity will come onstream in stages, not overnight. We will grow with demand,” says the affable Lim.
“The current global market for rubber gloves is 170 billion pieces a year. We are supplying to the world. Is consumption getting smaller? What my competitors do is not under my control. The point is, in this growing market, do we have an edge over our competitors?”
He also dismisses talk of a price war brewing among Malaysia’s hyper-competitive glove producers, namely, the “big four” of Kossan, Top Glove Corp Bhd, Supermax Corp Bhd and Hartalega Holdings Bhd.
Malaysian glove players dominate about over 60% of global output and have kept a lead over rivals in Thailand, Indonesia and China due to advances in technology and relatively cheap production costs.
Kossan’s total installed capacity stands at 22 billion pieces of gloves, up from 16 billion pieces last year. The group is on track to double its total production capacity to 35 billion pieces of gloves by 2017 and nitrile production to 14 billion by 2015, which will see it unseat Hartalega and Top Glove as the top two producers of nitrile gloves.
Kossan is targeting a product mix of 80% nitrile and 20% natural rubber gloves by 2016 from 60:40 currently. But it is hardly the only one with plans to ramp up its nitrile capacity, fuelling concerns that the industry could be hit by a surfeit of gloves.
Glove producers are rushing to fulfil demand for nitrile-based gloves made from butadiene, a type of petrochemical, as synthetic rubber gloves typically enjoy higher pre-tax margins of 22%-25%% compared to 10%-12% for natural rubber gloves.
Analysts say local glove manufacturers posted disappointing volumes and margins in the January-to-March quarter on the back of weaker sales and depressed margins.
Of the four glove makers, only Kossan saw its core earnings improve 8%, according to AllianceDBS Research. Their share prices fell in tandem.
Hartalega, Supermax and Top Glove have shed 12.17%, 21.3% and 18.65% of their values, respectively, since the beginning of the year, as opposed to a 1% gain for the benchmark FTSE Bursa Malaysia KL Composite Index.
Kossan is down 8.33% year-to-date based on yesterday’s close of RM3.96, giving it a market capitalisation of RM2.53bil. The stock went from laggard to outperformer last year, surging 112.81% in the second half after investors warmed to its growth potential.
Rising costs
Overall sales volumes for the big four glove manufacturers slid 4% year-on-year in the three months to March, says AllianceDBS Research.
The problem seems to have been particularly acute for domestic producers – Sempermed, their biggest competitor in Thailand, posted a double-digit growth in sales volumes during the same period.
Even so, Lim thinks the gulf between the Malaysian glove makers and their Thai, Indonesian or Chinese counterparts remains wide. “Labour in China and Thailand is no longer cheap, while Indonesia lags in terms of technology. Malaysia has raw materials and technology in its favour.”
He expresses confidence that domestic glove players can wean themselves off the largesse of national subsidies on petrol, electricity and gas, and still be competitive.
“Malaysia is not alone in facing rising costs. We should worry about our productivity instead,” he says.
Since last year, manufacturers have had to contend with cost pressures from the minimum wage and double-digit increases in gas and electricity tariffs.
Lim, however, remains undaunted. “I can’t be sitting here waiting. We are in the midst of optimising our consumption of raw materials and automating production,” he points out.
In a bid to refine its processes, the group is building new machines with faster output and revamping old lines to manufacture higher-margin products. A team is also looking into implementing Six Sigma, the efficient manufacturing concept popularised by General Electric’s Jack Welch.
Despite the various headwinds, Lim does not expect Kossan’s margins for its core rubber glove segment to dip into single-digit territory from around 15% as at end-2013.
“A 10% margin is what I would consider sustainable, especially given our large volume,” he explains.
Genesis
Lim, who studied chemical engineering in Singapore and then London, worked as a chemist upon his return to Malaysia.
He quit a year later to start a business selling cutless bearings, a type of technical rubber product (TRP), to the marine industry.
Lim made back his RM100,000 investment in the first year. That was circa 1979. Kossan has not turned in a loss since.
When the United States experienced a spike in demand for rubber gloves in the 1980s because of the HIV-AIDS outbreak, expanding into glove-making seemed a natural choice for Kossan.
So Lim travelled to Taiwan, which was then a leader in manufacturing examination gloves, and imported the technology and equipment to Malaysia. The rest is history.
Kossan is today Malaysia’s largest producer of TRP, accounting for 12% of group sales.
Its TRP division had last year secured a job to supply 2,000 pieces of seismic bearings to the newly opened second Penang bridge to help prevent earthquakes.
Although sales of rubber gloves number in the hundreds of billions, Lim stresses that for Kossan, at least, “it’s not a volume game”.
“If I have to compete on price, then I’m not interested. I will not put fillers or rubbish into my gloves to sell them cheap. That will just erode their barrier quality.
“It is unacceptable to me. Gloves must protect people,” explains Lim, who has a 51.22% stake in Kossan.
Glove tycoon
In the 1980s, Lim recalls buying his first laptop for close to RM13,000, a clunky machine with a speed of eight hertz. Their modern incarnations cost a few thousand ringgit and come with much better computing power. “This is how we should use technology to make things not only better, but more affordable,” Lim says.
He bristles at the suggestion that he is a “rubber glove tycoon”. “I don’t like that sort of statement. Success is temporary – if you get comfortable. You may be No. 1 today. It doesn’t mean you will be No. 1 tomorrow.
“But you could also be small today and big tomorrow. The market is cyclical,” Lim observes.
Instead of the day-to-day operations, which he leaves to his managers, Lim says he spends most of his time studying global trends and charting Kossan’s future direction.
His goal is to build a company that can “run on autopilot”, which means it has solid systems and can keep on driving itself.
“Once this is in place, no one is indispensable. We won’t go kaput just because we lose a few key staff,” he quips.
The gregarious 62-year-old says he is sometimes asked if he is tired.
“My reply is no. And they tell me, ‘Lim, you’re so big now’. I don’t feel that way. In my mind, there is so much we can still do.
“I’m a technical man and I like challenges. The more difficult it is, the more I have the fighting spirit.”
Source: The Star
It's all about "how much you made when you were right" & "how little you lost when you were wrong"