As market conditions deteriorated around the word last year, most companies in the office imaging space watched their revenue and profits tumble. In China, however, business at many third-party supply manufacturers and their trading companies was stronger than ever. It appears that the Chinese aftermarket industry continues to take market share from OEMs as well as from remanufacturers and other third-party supplies vendors in regions outside of China.
Hubei Dinglong Chemical, a publically traded specialty-chemical company listed on the Shenzhen Stock Exchange, is one example of a Chinese aftermarket company that’s currently thriving. The company, which makes toner and toner components and is a stakeholder in two of China’s largest toner cartridge producers, appears to have had a record year in 2015 in terms of revenue and profits. The firm is projected to continue to grow through 2018. Apex Technology, which supplies chips to the Chinese aftermarket and is also listed on the Shenzhen bourse, likewise saw its revenue and profits surge last year. In December 2015, Apex’s sister company, Zhuhai Seine Technology, which is also known as Ninestar, issued a press release saying it had produced a record 8.12 million ink cartridges during the month of November. The news is remarkable considering sales of inkjet hardware have declined for years and the installed base of inkjet machines continues to contract.
During the second half of last year, my company, Actionable Intelligence, did extensive research into the larger firms exporting consumables out of China. Our findings are consistent with news out of the People’s Republic noted above. Despite the move away from hardcopy in many of the world’s more established economies including those in the European Union and the United States, shipments of cartridges from Chinese third-party supplies vendors continues to grow.
But not all news out of China is good. Our research indicated that the overall growth of finished cartridge unit shipments exported from China is outpacing revenue growth. In certain categories, we even found that revenue is actually declining as shipments grow. Moreover, production costs are growing, which is putting downward pressure on already razor thin margins. Obviously, the situation is not sustainable. As a result, companies are developing new strategies to remain competitive and taking steps to ensure they are profitable. There are also signs that the domestic supplies industry in China is beginning to consolidate, a move that has the potential to change the competitive landscape around the world.
New Trends Are Emerging
With a history dating back to the 1980s, China’s aftermarket industry is well established and has been exporting product for decades. Starting with the production of ribbons for impact machines and growing to include ink and toner cartridges, the industry has proven it can adapt as markets and technologies evolve. Although the industry is now well established in China, change is in the air and I expect the pace of change will accelerate over the next couple of years.
Since the early days, the industry’s epicenter has been located in Zhuhai, a city of roughly 2 million people in the southern China province of Guangdong. As one of China’s first Special Economic Zones, Beijing has invested heavily in Zhuhai’s modern port, the only deep-water port on the western side of the Pearl River, as well as the city’s extensive rail system and network of colleges and universities. One of the world’s longest bridges is currently being constructed to link Hong Kong with Guangdong and Macau and it will have a terminus in Zhuhai. The city has also prospered thanks in part to various state-sponsored growth and developmental initiatives such as the Zhuhai Economic and Technological Development Zone, the Zhuhai National Hi-tech Industrial Development Zone, and others. With so many perks, firms from China’s third-party supplies vendors have flocked to Zhuhai and it is now home to some of China’s largest aftermarket players including Kolion, Mito, Print-Rite, Rich Imaging, Seine (aka Ninestar), Topjet, and many others.
Since the industry’s early days, other cities in addition to Zhuhai developed clusters of third-party supplies factories. Although these clusters don’t offer anything like the supports that Zhuhai provides, they do give some local firms competitive advantages. Clusters offer the critical mass required to attract raw-materials suppliers, equipment providers, and other enterprises that can support the local industry with the technical support and hand-holding factories need to be successful. Chinese firms also tend to form tight alliances and share assets, so being located in close proximity often promotes alliances.
As a result of clustering, some companies located outside of Zhuhai have grown to be among China’s largest consumables producers. Shanghai, for example, attracted some of the earliest third-party supplies vendors. Shanghai Baiyingmei Printer Consumables Co., which today markets toner cartridges under the PrinterMayin brand and also does business as Shanghai Zhuotai Printer Consumables, opened its factory in Shanghai in 1998. With its Vivicolor line, Shanghai Huatai Computer Consumable Co. came online in 2000 and was one of the larger inkjet remanufacturers to set up shop outside Zhuhai. In Shenzhen, firms like Printking Consumables and Sinobase Network Technology also began producing consumables during the opening years of the 21st century.
Our research found that the trend toward joining existing clusters is changing. More recent entrants into the industry that have enjoyed fast growth have shunned key cities like Shenzhen, Shanghai, and Zhuhai. Despite the advantages clusters may provide, there is also a downside. In most aftermarket production centers including Zhuhai, wage growth is a big factor in the ongoing growth of fixed costs. An article published in the Economist magazine last year reported that since 2001, “hourly manufacturing wages in China have risen by an average of 12 percent a year.” In areas where groups of factories are manufacturing cartridges, skilled laborers can be lured away from an employer for the right price. The practice is common when rival factories look to ramp up production as orders grow. In addition to wage inflation found in manufacturing centers, defections make the labor force unstable and firms are constantly at risk of losing key employees, including senior managers, to the competition.
While Zhuhai will remain the undisputed “capital” of the Chinese aftermarket industry for years to come, new factories are popping up in other areas. For example, Kingway Image, one of China’s fastest growing aftermarket firms, established itself in Zhongshan, a small Guangdong city not too far from Zhuhai—but far enough. Aster Graphics, another fast-growing newcomer, is also headquartered in Zhongshan but its factory is in far-off Xinyu, a city in Jiangxi province almost 1,000 kilometers away from Zhuhai. It seems that the Chinese government is also trying to entice manufacturers to move into new areas like the port city of Beihai in the southern province of Guangxi. Speed Infotech Holdings, a veteran aftermarket firm in operation almost 15 years with an established plant in Shanghai, opened a factory in Beihai in 2014. We understand the government granted the firm a license to import ink and toner cores for the factory as an incentive to expand operations out of Shanghai. It also appears that small start-up consumables firms are establishing themselves in Beihai.
China-Made Raw Materials
In the late 1990s, as Chinese factories began to crank out ink and toner cartridges, raw materials vendors from around the world including companies from England, Germany, Japan, South Korea, the U.S., as well as from other countries began doing business in China. They brought the industry inks, toners, drums, chips, and other cartridge components as well as industrial machines such as jet mills, laboratory apparatus, and other equipment. Many of these highly engineered products were not available from Chinese suppliers, and if they were, the domestic stuff was inferior. Although imported raw materials and equipment was synonymous with high quality, it also came with a big price tag. Knowing they could grab the foreigners’ market if they could compete on price, Chinese firms quickly began producing their own raw materials and manufacturing equipment. Today, only few foreign-made products are used to manufacture finished ink and toner cartridges in China.
As the industry grew, it was increasingly supported by regional bulk ink and toner manufacturers. Shenzhen, for example, became home to such Chinese ink producers as Inkbank and Trendvision. Established in 2005, Comet Chem set up its toner plant in Zengcheng on the outskirts of Guangzhou. Thanks to investments made by the giant state-run enterprise, China Ship Building, Handan, a small city in the interior province of Hebei, is also an important toner and OPC drum production center. Handan is home to the toner and drum maker PhotoC, a subsidiary of China Ship Building which supplies many large aftermarket factories with toners and drums. Dinglong Chemical, which I noted earlier, also produces tons of toner in the city of Hubei for the domestic industry and it exports toner worldwide. The company also makes certain specialty chemicals used in the production of toner, like charge-control agents and colorants, and these products are popular both home and abroad.
Home Grown’s Alright With Me
Once importing tens of millions of dollars worth of bulk inks and toners along with chips and other components for producing finished cartridges, China is now a major exporter of these goods. This sea change in the global market is the result of investments made by various third-party supplies vendors to develop raw materials internally. Regardless if a factory used foreign or domestic suppliers, it could almost always reduce production costs if it could rely on its home-grown materials. Through strategic alliances, some factories began sharing raw materials made in-house, while others leveraged their capabilities to launch new lines of business. Some of these businesses have been wildly successful and today are important sources of revenue for the parent company.
Seeking a competitive edge, vertical integration has always been an important part of Print-Rite’s business strategy. The company has successfully leveraged its internal capacity to manufacture raw materials and these products are key to Print-Rite’s future growth. When impact ribbons were Print-Rite’s main products, it began making ribbons and it continued to invest in vertical integration as it transitioned to non-impact printing. It established the Neojet Apollojet ink plant in Zhuhai in 2002, which now produces a range of bulk inks for desktop, wide-format, and industrial applications. Print-Rite set up ICMI China and began producing toner in 2004. In 2010, Print-Rite acquired certain assets of the defunct German firm AEG Photoconductor including its OPC-drum plant in Shanghai. By purchasing toner manufacturing assets from Xerox in 2011, Print-Rite expanded the capacity of its ICMI operation to make it one of China’s largest toner manufacturers. The company also markets chips and other components.
Print-Rite is the only Chinese firm we know of to be fully vertically integrated with both ink and toner assets. According to our research, Print-Rite now generates nearly half its revenue from the sale of bulk ink and toner combined with drums and components. Revenue from raw materials have supplanted revenue from finished ink cartridges, which were once the firm’s leading products but offer very thin margins.
Plenty of other firms are currently leveraging their vertical integration investments to market important product lines. Perhaps the best-known is Apex Microelectronics Company, which has grown to be the world’s largest supplier of aftermarket chips. Initially, Apex’s origins were unclear but any mystery has now been made clear. Originally, it was set up internally at Ninestar (now Seine) to supply Ninestar with chips. Apex was spun off and began marketing chips under its own brand in 2004. Located in Zhuhai, the company grew quickly. As noted earlier, today Apex is listed on the Shenzhen Stock Exchange under stock code 002180. According to Bloomberg, the firm’s market capitalization is approximately 26 billion yuan—or about $4 billion. While we don’t yet know its 2015 financials, in 2014 Apex’s revenue totaled 478.1 million yuan ($73.7 million). Apex grabbed headlines in May 2015 when it acquired rival U.S. chip manufacturer Static Control Components for a reported $63 million. With the acquisition, Apex now commands over 80 percent of the global market for third-party cartridge chips.
In addition to selling Apex-branded chips, like Print-Rite, Seine also markets its own bulk inks under the MyInks brand, which was established in 2001. Various other large third-party consumables manufacturers are also marketing their products, including such firms as Kingway, National Resources, and Topjet. By leveraging their injection-molding assets, leading supplies vendors such as Dejian Computer Outside Equipment, Huiwei Corporation, and Jialianxin Imaging offer new cores to the Chinese aftermarket. This line of business is now central to Huiwei’s overall business, which now generates most of its revenue by producing and marketing new cores, and provides incremental revenue to the other two firms.
Trading Companies: A Uniting Force
Unlike aftermarket companies catering to more established markets like those in the U.S. and Europe, the Chinese aftermarket industry has yet to experience much consolidation. The fact that third-party supplies vendors in China have resisted the urge to merge is curious given the savings that consolidated companies enjoy after reaching certain economies of scale. In our research, we found that while many firms continue to operate obsessively as independent entities, certain companies have forged strong alliances that do not exist in established markets. In some cases, certain firms appear to be unrelated but are actually joined at the hip.
Uniting around certain trading companies have helped some companies in the Chinese aftermarket enjoy the benefits of a merger while remaining independent. Among the largest and most established trading companies are Zhuhai-based Ourway Image Co. and Orink Infotech International, which has offices in Shanghai and in Hong Kong. The companies have allowed their suppliers to form tight alliances that blur the lines between independent companies and merged organizations.
Chinamate Technology was founded in 2007 and quickly became a supplier to Ourway. Chinamate then developed a strong relationship with Kingway Image, which also supplied ink cartridges to Ourway. According to our sources, Chinamate now markets bulk inks produced by Kingway as it continues to distribute a range of finished products through the Ourway distribution organization. In a recent complaint filed by Epson with the U.S. International Trade Commission, Chinamate was named as one of the Kingway Group Respondents, which also included Ourway. Combined, Chinamate and Kingway are among the Top 5 Chinese aftermarket firms in terms of revenue.
Orink Infotech is a key shareholder in Zhuhai National Resources & Jingjie Imaging Products Co., a leading producer of compatible ink cartridges, and the toner compatibles manufacturer Zhuhai Rich Imaging Technology Co. Although National Resources and Rich Imaging appear to be separate operations, after reviewing certain documents on the trading platform Alibaba.com, we discovered that National Resources and Rich Imaging operate out of the same campus. Apparently the offices for National Resources occupy the first three floors of a building in Zhuhai’s Qingwan Industrial Zone, and the Rich Imaging offices are on floors three through five. The two firms also appear to have shared management. Like Ourway and its suppliers, National Resources along with Rich Imaging and Orink has a history of being named in legal actions by such OEMs as Canon, Epson, and HP either individually or as a group.
Urge To Merge…Finally?
It appears that the Chinese industry is now in the process of consolidating and growing through M&A deals. Apex’s purchase of Static Control noted earlier is only one example. In October 2013, Hubei Dinglong Chemical completed its nearly RMB145-million (approximately USD23 million) acquisition of Mito Color Imaging, a color toner cartridge remanufacturer in Zhuhai. In 2014, Mito acquired a controlling stake in Zhuhai Kolion Technology, which markets remanufactured and compatible toner cartridges for monochrome and color devices. Mito and Kolion also have relationships with many well-known players in the Chinese aftermarket. Kolion, for example, is a supplier to the Hong Kong-based trading company Jet Rise, and has a strategic alliance with the Sinobase Network in Shenzhen. Mito also has a sourcing and supplier partnership with Zhuhai Un-Tern Imaging Products Company.
In addition to rolling up parts of Zhuhai’s toner cartridge industry, Hubei Dinglong is expanding its toner production capacity as well as its ability to market key cartridge components including chips. In a deal valued at between $125 million and $150 million, Hubei Dinglong recently acquired Hangzhou Qijie Technology Co., which makes inkjet cartridge chips, and the chemical color toner manufacturer Ningbo Flexitone New Material Co. Dinglong also purchased Shenzhen Chaojun Technology Co., a manufacturer of plastic injection molded gears and other components. Dinglong announced its intent to make these latest acquisitions last fall and suspended trading of its stock while it restructured its assets. On January 28, Reuters reported that the chemical firm’s net profit for 2015 is forecasted to increase to between RMB154.5 million ($23.7 million) and RMB174.7 million ($26.8 million), an increase of 15 to 30 percent compared to a net profit of 134.4 million ($20.6 million) in 2014.
The rumor mill in China is running at high speed these days and spewing out lots of M&A stories. One of the most persistent rumors floating around over the past couple of months is that Dinglong will purchase the Shenzhen-based compatible toner cartridge maker Retech Technology International. In fact, many sources in China insist the deal is done along with the chemical firm’s purchase of a key Chinese chip producer, Hangzhou Chip-Jet Technology. So far, Dinglong has said nothing about either deal but both would make sense. Purchasing Retech would give Hubei Dinglong the ability to push into emerging markets where patent protections are not enforced with a full portfolio of cheap compatibles that the Shenzhen cartridge maker is known for. Products from Mito and Kolion are a bit too pricey for emerging markets. Acquiring Chip-Jet will allow Dinglong to compete better with Apex, which has strengthened its toner and component offerings with the purchase of Static Control. It would also allow Dinglong to strengthen its position against Print-Rite’s toner and chip.
Another rumor that continues to circulate is that Seine will purchase Zhuhai National Resources & Jingjie Imaging Products Co. Like Dinglong’s rumored M&A bids, sources in China indicate that the Seine deal is all but done. I think that this move would also make perfect sense. Seine is currently China’s number one producer of ink cartridges and National Resources is a close second. Seine has managed to grow its ink cartridge business organically for the past couple of years and the press release I mentioned at the start of this article underscores the fact that it is producing more ink consumables. If the company were to acquire its rival, Seine would emerge as the 800-pound gorilla in the ink cartridge space worldwide.
There can be no doubt that China’s aftermarket industry will experience more consolidation in the near term. It seems nearly impossible for the industry to remain as fragmented as it has. The only question is who will wed who and which firms will be left behind.
