The company turned in profits in the first year of business and never recorded a loss in its 33 years of history. With the exception of the financial tsunami in 2009, its operating profits averaged steady growth of 10 percent to 15 percent a year, with its earnings per share topping NT$6 (US$0.18) in the most recent five years and continuing to hit new high.
Thanks to the firm’s bold innovation, Intel Corp. was able to expand its technology to new markets. The company’s support also provided a strong boost to Russia’s leading industrial personal computer manufacturer and distributor Prosoft Ltd. in creating new business opportunities.
Julien Berger, president and CEO of France-based Eurocomposant SA, also praised the firm for remaining at the forefront of trends, stating that “It is definitely the most powerful ally for system integrators.” Jeff Chen, former vice president of global operation of Stanley Black and Decker Inc., the world’s leading hand tool manufacturer, publicly commented that to him the firm “is one of only a few companies in Taiwan possessing global competitiveness in the future.”
These are the comments describing a low-key but brilliant technological company of Taiwan: Advantech Co. Ltd.
Despite its leading market share in the global industrial PC sector, Advantech has never been the most famous business compared with technological heavyweights such as Hon Hai Precision Ind. Co. Ltd., the biggest international original equipment manufacturer, and Taiwan Semiconductor Manufacturing Co. Ltd., the number one foundry in the world.
Customized, small-and-varied production helps secure 29 percent global market share
Despite its low profile, Advantech’s performance cannot be overlooked. In a long-term performance-based survey of Taiwan’s top 50 CEOSs published in the April issue of the Chinese-language version of Harvard Business Review, company Chairman K.C. Liu was among the top ten executives, alongside Terry Gou, Morris Chang, Jonney Shih, Tsai Ming-kai and Lin En-ping. While 90 percent of Taiwan’s technological manufacturing firms rely on mass production and scale economy, Advantech is the only exception that thrives on the large-variety-small-volume production model. Its innovative capabilities, great attentiveness to customers’ demands and service-oriented philosophy are the reasons behind the company’s leadership position with a 29 percent share of the global industrial PC sector.
In particular, when many technological OEMs are feeling the heat from the rise of mainland China’s red supply chains, when Acer Inc., AsusTek Computer Inc. and major PC OEMs are under pressure amidst a declining market, only a few technological firms such as Advantech can defy this negative trend and averaged a high gross margin of 40 percent in recent years.
With the Internet of Thing becoming the new big thing, Advantech, which started with assisting clients in production automation, has seized the opportunity and gained a foothold in the hottest industry. Its share price quickly surged from over NT$90 to more than NT$200; even Liu himself was accustomed to such a high level. What exactly are the secrets behind Advantech’s success?
In 1983, three engineers—C.K. Liu, Chaney Ho and Huang Yu-ming— left the electronic instrument testing department of the local branch of Hewlett-Packard Co. to start a business of their own.
When the trio was naming the startup, Liu had his mind set on two Chinese characters “yen,” meaning research and conveying strict professionalism, and “hua,” meaning Greater China. Together they formed the name of the company.
During its early years, Advantech produced “automation testing systems,” performing system and software testing on computers ready for delivery. As Taiwan’s industrial sector took off, the company quickly made its first fortune. Two years later, Advantech extended its reach to the industrial PC sector.
PCs are definitely no strange thing to the general public. But what is an industrial PC? As a matter of fact, with the exceptions of desktops for individual, office and household use, as well as notebooks and tablets, most computers are considered industrial PCs.
But industrial PCs are not used only in factories. They can also be found in cash registers, automatic teller machines, subway ticket readers, bank calling systems, electronic medical records, digital signage and game consoles. Numerous industrial PCs serve tens of thousands of people, impacting the public’s life 24 hours a day.
During the development of Taiwan’s electronics industry, the main stream sector shifted from semiconductors, mother boards, software and passive components, to integrated circuit design, electronic OEM services, solar energy and smart phones. Despite the fast changes, Advantech remains focused on its core competence for over 30 years, never bothered by the fact that most people have no idea of its obscure products.
Business philosophy: the hedgehog principle of three circles
“The secrets of Advantech’s success are inside these three circles,” Liu pointed to three intersecting circles displayed on the screen of his computer. Implemented by Liu since years ago, the management philosophy is the secret behind Advantech’s success.
The approach was inspired by the bestseller “Good to Great” from 15 years ago. According to the book’s author Jim Collins, a company needs to follow the hedgehog philosophy and focus on the center of the three intersecting circles: vision of passion and commitment, corporate core competence and growth engine that drives business operations.
“This chart is a must in all company orientations and training for outstanding employees. If you have been with Advantech for more than five years, you will definitely have heard me talking about this chart many times already,” Liu said, adding that the three circles are literally part of the corporate DNA.
The first circle: a common vision
Beginning in 1983, Advantech holds a vision-building meeting every five years on average. Led by Liu himself and attended by all executives, the meeting defines the corporate focus for the following period. After its announcement, the vision charts the course for all future operations.
To date, Advantech has set eight visions. Liu still remembers the first vision—IEE488 Professional, a highly specialized interface enabling the computer to control a piece of equipment.
“When we were still a startup, no one really paid much attention to us. IEE488 was a great move. When our clients saw the product, they immediately realized that we were experts in the business and contacted us,” Liu said. He added that while most people had no idea of IEE488, the clients did. It also demonstrated to them that Advantech was committed only to this extremely specialized business and nothing else.
This vision statement is always displayed next to Advantech’s corporate logo. The first five visions were all technology-oriented, but the one for 2002-2006 was adjusted to focus on customer-orientation.
The latest vision of Champion of a Smart Earth was formulated in 2010, reflecting the company’s entirely trend-orientated approach in anticipation of the exponential growth of the IoT. Advantech’s vision changes with time, and the eight different visions bore testament to the company’s growth.
“When it comes to corporate vision, I truly believe in altruism and passion.” Liu accentuated the word “truly” and his belief that that vision should take priority over profits.
The second circle: Focus on the niche that makes you the best in the world
The second circle describes the second secret of Advantech’s success—pushing its limit in an extremely narrow business field and committing itself to delivering the best products. Industrial PCs are inherently geared toward niche markets. Since they are used in every aspect of one’s daily life, these products are predestined to serve specific market needs.
While Advantech’s products are used in fields spanning transportation, medical services, retailing and agriculture, among others, the company’s leading customer contributes to less than 2 percent of its total annual sales, with each single order carrying several hundred sets at most. “Our customers are highly diversified, so are our products,” company Chief Technology Officer Allan Yang said. But Advantech can provide their products for six to seven years long. “Small business is more important than big ones,” he said. The Advantech model has created a “super long tail” of steady profitability.
According to a case study on Advantech by Yu Chwo-ming, professor of business administration at National Chengchi University, technological leadership and continuous development of distribution channels through services are the key to maintaining a company’s edge in its core competence. “Advantech has achieved both tasks. The company is a textbook niche player,” Yu said.
Advantech is one of only a few technological firms offering superior services. In a special publication celebrating Advantech’s 30th anniversary, Xie Bing, general manager of greater China at Texas Instruments Inc., shared how Advantech makes customers its top priority.
A client demanded that Advantech complete a project in a very short period. Hard pressed for time, Advantech quickly assembled a circuit board based on just a few circuits provided by TI, and sent a team to Houston to conduct testing. For what normally took two to three weeks to accomplish, Advantech did it in just two days.
“This proves that Advantech engineers possess not just superior R&D capabilities,” Xie said. “They are also fully committed to delivering what their customers need.”
Product differentiation, favorable pricing and customer-orientation— these are the keys that helped Advantech trounce Germany’s Kontron AG in 2008, the industry leader at the time.
The third circle: Copy the success model
The third circle represents Advantech’s growth model—to be the best in a certain niche market, copy the success model to another niche market and keep repeating the same approach.
“It’s like the continuous reproduction of amoebas,” Liu said, who began championing the “Amoeba Management” philosophy of Japan’s business guru Kazuo Inamori 10 years ago. Amoebas are single-celled organisms that are constantly dividing themselves. The same principle can be applied to a company that needs to reproduce many business divisions.
Pursuing the amoeba management philosophy, Advantech has 45 divisions, with each one of them committed to becoming the best in a certain niche market and at least one-third of them No. 1 in the world.
How does one copy success? “While our business divisions have different product lines, they operate under the same key performance indices and management logics,” Liu said. The approach Advantech adopts in creating a new division is similar to that of Starbucks when it opens a new store: different location but similar store decor and staff.
Turn a small business into a big market to defy the challenge of the red supply chains
Advantech’s diversification strategy is both multifaceted and focused, and the company constantly engages in market segmentations. Together these small businesses helped Advantech become No. 1 in the world.
“Therefore, the red supply chains have no impact on Advantech,” Liu said. While Mainland Chinese firms bank on scale economy and price competition, Advantech withstands the red tide with its small but varied production.
As a long-term champion of “Good to Great,” Liu also applied the flywheel effect discussed in the book’s final chapter, which explains how a great business initiates rapid growth.
According to Liu, the flywheel effect is accelerated by technology through measures like investment, mergers and acquisitions, business incubation and industry-academia collaboration. This inspired Advantech, which attaches great importance to proprietary R&D, to begin pursuing M&A.
Beginning in 2010, Advantech acquired industrial PC producers DLoG GmbH of Germany, Innocore Gaming of the U.K. and ACA Digital Corp. In 2013, it purchased LNC Technology Co. Ltd. and expanded its reach in the field of robotics. Advantech also spent NT$3.3 billion last year taking over B plus B SmartWorx Inc. of the U.S. Through the latest transaction, Advantech obtained both new customers in North America and exceptional international talents.
In terms of industry-academia collaboration, Advantech donated NT$1 million each to the business schools of National Taiwan University and National Chengchi University to sponsor their case studies for five consecutive years, a rare move by Taiwan's high-tech companies.
An entrepreneurship competition sponsored by Advantech for nearly 17 years, the TiC100 serves as a collaboration platform for academia, businesses and the market place. Working with National Chiao Tung University, Advantech made huge investment in setting up the IoT and Intelligent Systems Research Center to promote sector cooperation.
“Advantech is among the business leaders in promoting industry-academia cooperation,” Yu said, who doubles as an independent director of the company.
A learning organization
“As Advantech can no longer find any company in Taiwan to imitate, we must find our own way,” Ho said. In addition, between 2007 and 2013 Advantech spent several millions NT dollars on services by consulting firms such as IBM to enhance its international management capabilities, showing that the company is a learning organization.
“Liu is an entrepreneur and thinker,” said Chen Hui-yuan, former vice president of IBM Global Business Services, adding that Liu is constantly racking his brains. Always with a notebook at hand, Liu will write down everything that crosses his mind and discuss it with co-workers.
Advantech’s 1,000-plus salespeople around the world serve as the company’s eyes and ears, so that it can get a grasp of market developments and pinpoint the exact products that will set the pace for the next market place. “This capability is absent in the OEM sector,” Ho said.
With a leader of superior learning abilities and the company’s keen sensitivity to external changes, Advantech is always ready for organizational restructuring. “We are constantly changing, even to the point that it makes us look like a hyperactive child,” Ho said.
Because of these accumulated efforts, as well as the surge of smart cities and the IoT, Advantech’s share price skyrocketed from below NT$100 in between 2008 and 2012, to the range of NT$200 and NT$230 this year, an increase of 230 percent over four years.
“The rising share prices reflect investors’ improving evaluations of Advantech,” an executive of CTBC Securities Co. Ltd. said. “This is because Advantech has seized the right trend.”
Advantech can be seen as the first IoT company in Taiwan. According to Ray Yang, a deputy division director with Industrial Economics and Knowledge Center, Advantech will be among the first businesses to benefit in the IoT business-to-business and smart city business-to-government markets. Furthermore, Advantech is not doing this for itself only, but has been the cheerleader of the local sector, advocating partnerships among the firms so that they can reach the top of the industry together.
“I am committed to this mission,” Liu said. When the IoT becomes the industry main stream, Advantech will lead its midstream and downstream business partners on the road to success. It will assume an assisting role, similar to Eucommia in the Chinese herbal medicine. “We are doing this out of altruistic passion.” (E) [By Chiu Li-yen / tr. by TT]