Consolidation is the hallmark of any mature industry and it’s been ongoing within the third-party supplies industry for years. At the opening of the 21st century, the North American industry began to experience extensive merger and acquisition activity and within 10 years only a few large players remained along with several dozen much smaller companies. The European industry has followed the same path. With more fragmented markets, however, M&A activity in the EMEA region has been slower and the results have been less profound than what we witnessed in the United States. The consolidation of the European industry is ongoing as leading firms in the region search for new investment partners or look to be acquired outright.
Until recently, the Chinese third-party supplies industry had resisted the “urge to merge,” but all that’s changing. Today, the third-party supplies industry in China is rife with M&A activity.
Chinese firms have gained access to the capital and other resources they need to get deals done and with many small companies available across the People’s Republic, consolidation is happening at a frenetic pace. As a result, the balance of power is shifting within the Inner Kingdom and impact on global markets promises to be huge. Moreover, these are early days for the consolidation of China’s industry and there is a way to go before the situation will stabilize.
Times Are a-Changin’
Compared to their counterparts in the West, the history of third-party supplies firms in China is unique. There was cooperation within the Chinese industry not seen in Europe and North America, which led to a proliferation of inter-connected companies. Small enterprises flourished by supplying finished cartridges to larger players, and the big firms leveraged their internal assets to supply the growing industry with raw materials like inks, toners, and empty shells. In certain instances, large firms further fueled the growing number of manufacturers by setting up joint ventures, which were often run independently, or by spinning off companies that began as internal operations. Some large firms have even acted as incubators to start-ups by providing access to white-box product and other resources as the small businesses grew large enough to build their own factories.
Trading companies also helped small companies to multiply and grow. Unlike in the West, where product was largely produced for domestic consumption (at least initially), most of the ink and toner cartridges produced in China were meant for exportation. With extensive international distribution and established dealer networks, smaller Chinese firms found they could successfully penetrate markets far from home by partnering with the right trading company. As trading companies grew, many established their own factories, but most continued to rely on their smaller partners when they needed specialty SKUs or additional manufacturing capacity.
As the ranks of workers in small and large factories began to swell, so did the importance of the third-party supplies industry to certain regions within China. Trade organizations and other quasi-governmental groups that work closely with state-run agencies sought to foster symbiotic relationships between companies to help the industry succeed. Regardless of size, many firms within China’s third-party supplies industry gained access to infrastructure like improved ports and highways and scientific and technical training for its workers.
After years of growth, today’s third-party supplies industry in China simply has too much capacity. My company, Actionable Intelligence, recently profiled the Top 25 third-party supplies manufacturers in China and found that unit shipment growth is already outpacing revenue growth as companies lower unit pricing to spark demand. At some firms, we found unit shipments were growing as revenue actually declined. Even with the support of wealthy stakeholders or the Chinese government, these conditions cannot continue for long. At some point, the industry will need to be streamlined and capacity limited. Conditions are perfect for the Chinese industry to consolidate.
Roll Up Another One
A growing number of Chinese firms from the supplies industry are going public and gaining access to capital to invest in assets. Hubei Dinglong Company, previously known as Hubei Dinglong Chemical, was one of the first public Chinese firms that I’m aware of to demonstrate a growth strategy through acquisition. Based in Wuhan in the central province of Hubei, the company manufactures various components for inks and toners including colorants and pigments as well as charge control agents and chemicals for applications outside of the digital imaging industry.
Hubei Dinglong is one of the first public Chinese companies in the third-party supplies industry to demonstrate a growth strategy through acquisition
Hubei Dinglong was listed on the Shenzhen Stock Exchange (stock code 300054) in 2010 and its share value has grown from CNY4.7 (USD0.70) to an all-time-high of CNY37.17 (USD5.57), which it recorded in June 2015. As of this writing, Reuters reported the company’s market capitalization was just over CNY12 billion (USD1.8 billion) and it appears to be using the capital to roll up some of China’s better known, second-tier supplies companies and emerge as the region’s largest toner cartridge manufacturer.
After establishing itself as a toner producer, Hubei Dinglong moved into the finished cartridge industry late in 2012 by taking a 20-percent stake in Mito Color Imaging Co. Investing a total of almost CNY145 million (approximately USD23 million), Hubei Dinglong completed the acquisition of Mito Color in October 2013. Established in 2003 in Zhuhai, a small city in Guangdong province that is home to many third-party supplies manufacturers, Mito Color has a good reputation for producing quality color cartridges. Through its subsidiary, Zhuhai Un-Tern Imaging Products, Mito Color is licensed to import empty cartridges into China so it doesn’t have to rely on newly-built infringing cores. Remanufacturing legitimate empty cores allows Mito Color to pursue Western markets where new-build cores could result in lawsuits. The company is said to have several large clients in the United States as well as in Europe and it is looking to further penetrate Western markets.
Mito Color operates as an independent subsidiary and in the opening months of 2014, it acquired 51 percent of Zhuhai Kolion Technology. Founded in 2004 to manufacture compatibles for use in Samsung machines, Kolion Tech is another established player in China. Today, the firm claims to manufacture consumables for over 1,000 printers and copiers. It has connections to the Hong Kong-based distributor Jet Rise and Sinobase Network Technology, a cartridge producer in Shenzhen. Like Mito Color, Kolion Tech is licensed to import empties. Executives for Mito have indicated that they plan to grow Kolion Tech’s production of black cartridges as Mito focuses on color SKUs. While the majority of its business is in monochrome remanufactured and compatibles cartridges, it seems likely its selection of color cartridges will grow thanks to its new partner.
More, More, More
As the Shenzhen stock market began to grow, so did Hubei Dinglong’s disposable capital. Rumors began circulating that the firm was about to go on a shopping spree early in the summer of 2015 when stock prices on the Shenzhen Stock Exchange reached their high-water mark. Despite some decline in its share price, Hubei Dinglong announced it would make several key acquisitions in the autumn of 2015 and suspended trading of its stock while it restructured its assets. At the start of this year, reports came out of China that the company spent between $125 million to $155 million to acquire Hangzhou Qijie Technology Co., Ltd., which markets chips for inkjet cartridges under the Chipjet brand along with the chemical color toner manufacturer Ningbo Flexitone New Material Co. Hubei Dinglong also acquired Shenzhen Chaojun Technology Co., Ltd., a manufacturer of plastic injection molded gears and other components.
In addition to strengthening its components business with its newly acquired chips, parts, and chemical toner assets, Hubei Dinglong also purchased the veteran toner compatibles manufacturer Retech Technology International for an undisclosed amount. Established in Shenzhen in 2001, Retech markets new-build monochrome and color toner cartridges for a range of office equipment, including printers and copiers. The company is said to have more than 1,000 domestic dealers as well as large export customers including Russia’s NV Print.
According to our research, by adding Retech, Hubei Dinglong jumps to the top of the list of China’s largest toner cartridge manufacturers in terms of revenue. Through its strategic M&A activity, Hubei Dinglong now has a broad product portfolio that allows it to pursue various markets both foreign and domestic with mono and color compatibles and remanufactured cartridges available at a range of price points. Vertically integrated with toner, chip, and component assets as well as with licenses to import empties, Hubei Dinglong can offer its finished cartridge companies access to low cost raw materials along with technical expertise and distribution networks inside and outside of China.
It appears that investors in China like the strategy. Although shares continued to trade well below the high achieved in June 2015, share prices had improved by over 85 percent over the past 12-month period. As of this writing, shares were trading at near their 52-week high of CNY26.54 (USD3.98).
The Mouse That Roared
The most well-known company in the Chinese third-party supplies today is undoubtedly Apex Technology. Once familiar only to industry insiders, the Zhuhai-based chip maker was launched out of obscurity in April 2016 when it grabbed headlines as part of a consortium of Chinese investors seeking to acquire Lexmark International. Founded as the exclusive chip supplier to one of China’s largest third-party supplies manufacturers, Apex Microelectronics was spun off its parent, Ninestar Technology (also known as Zhuhai Seine Technology Co., Ltd.), in 2004. After the spin-off, Apex quickly became a leading chip supplier to the domestic Chinese aftermarket industry and then to third-party supply companies worldwide. By 2007, the company was producing up to 10 million chips per month.
Apex’s sister company Ninestar occupies a new sprawling factory in Zhuhai, China
Like Hubei Dinglong, Apex is a public company with shares trading on the Shenzhen Stock Exchange (stock code 002180). It had a market cap of CNY31.7 billion (USD4.7 billion) as of this writing. Rather than participating in an initial public offering, Apex went public by leveraging its acquisition of Zhuhai Wanlida Electric Co., an electrical equipment manufacturer listed on the Shenzhen Stock Exchange in 2007. Prior to Apex’s ownership, the share price fell to a low of CNY2.73 (USD0.41) in 2008 and reached a high of CNY40.73 (USD6.10) when the Shenzhen peaked in June 2015, which was after Apex’s 2014 Wanlida acquisition.
Unlike Hubei Dinglong’s domestic “roll-up” program, Apex seems to be looking to grow outside of the People’s Republic and to do it in a grand fashion. The firm’s first large purchase was the May 2015 acquisition of its main rival, Sanford, NC-based Static Control Components. At the time, Reuters reported the U.S. firm was acquired through a “$63 million cash deal.” The acquisition was thought to have more than doubled Apex’s annual revenue. During the fiscal year ending December 31, 2014, Bloomberg Business reported Apex’s revenue totaled CNY478.1 million (USD71.74 million). Reports out of China including one on the Chinese-language site www.cnstock.com, indicated that Static Control’s total revenue in 2014 was approximately $194 million down about 18 percent from $237 million in 2013. In addition to eliminating its largest competitor’s business, Apex gained a greater foot print in North and South America.
As audacious a move as it was for Apex to gobble up its larger rival, the Static Control acquisition is nothing compared to Apex’s bid to take over Lexmark. Less than a year after the Static Control merger, a consortium of Chinese investors led by Apex, PAG Asia Capital, and Legend Capital announced plans on April 19, 2016 to acquire the printer OEM. The group proposed an all-cash transaction valued at $40.50 per share or $3.6 billion, a premium well over Lexmark’s market cap at the time of about $2.2 billion. Although the deal is still under regulatory review, Lexmark’s board unanimously approved the acquisition and the company said that the vast majority also gave a thumbs-up to the purchase. Apex investors also seem to like the deal and share prices had nearly doubled year-on-year as of this writing. The sale is expected to be approved by the end of 2016.
In addition to the high-profile M&A activity that Apex has initiated in the United States, Ninestar, which continues to hold 68.7 percent of Apex’s voting shares, is rumored to have made its own major acquisition in China—perhaps more than one. Since the recession, many major third-party supplies vendors have moved away from ink cartridges as the consumer market has declined, but not Ninestar. After falling behind its largest Chinese competitor, Zhuhai National Resources & Jingjie Imaging Products, Ninestar’s ink cartridge business rallied last year and clawed back enough global market share to make Ninestar the number one Chinese ink cartridge manufacturer in 2015 in terms of revenue. Late in 2015, we began to hear persistent rumors that Ninestar acquired National Resources’ ink cartridge business. Many that I’ve spoken with in China say the acquisition of National Resources is a done deal and rumors are now circulating that Ninestar has acquired other rival ink cartridge firms. Although the firm may now be the largest third-party ink cartridge manufacturer in the world, Ninestar has remained tight-lipped.
Expect More M&A Action
Other Chinese companies appear to be looking to replicate the success enjoyed by Hubei Dinglong and Apex. In August, I learned that Suzhou Goldengreen Technologies (SGT), China’s largest OPC drum manufacturer, was raising capital through its initial public offering (IPO) on the Shenzhen Stock Exchange. Last year, SGT took a majority stake in the retail refilling shop franchiser, Cartridge World. Presumably, SGT felt that it could supply the hundreds of Cartridge World stores around the globe with drums as the shop franchisees remanufacture toner cartridges. With a market cap of CNY6.57 billion (USD985.90 million), SGT is the poor relation compared to Hubei Dinglong and Apex. Regardless, I think the firm has the potential to make some key acquisitions within China, where it’s currently a buyer’s market for those looking to snap up a third-party supplies company or two. With its Cartridge World stores, SGT has a ready-made channel for any finished cartridges it can bring to market.
While publicly traded firms have deep pockets and can purchase larger assets, there are closely held companies that are also growing through acquisition. Print-Rite makes a great example. Years ago, Print-Rite acquired Nukote’s ICMI toner manufacturing assets in Zhuhai to vertically integrate its toner cartridge operations. More recently, the firm purchased the manufacturing assets of a Xerox toner plant in the U.S. and moved it to Zhuhai. That factory opened in 2011 and Print-Rite claims that it is now the largest toner facility in China. In addition to the toner manufacturing assets, in 2010 Print-Rite bought the assets of what was once Germany’s premier OPC manufacturer, AEG, which allows the firm to market toners and drums that have been “tuned” to work in concert with each other. Over the past five years, Print-Rite’s toner and drum business has become an important source of revenue for the firm.
Although it will be limited, there may also be opportunities for non-Chinese firms looking to purchase third-party supplies firms in China. That’s what happened to Huatai Computer Consumable, a well-established ink cartridge refiller that opened in Shanghai in 2000. Also known as Menston Limited, the company markets supplies under the Vivi Color brand. In November 2014, Gradum International Limited, the Hong Kong subsidiary of Digital Revolution BV, which is based in the Netherlands and hosts ecommerce sites across Europe, acquired the Huatai Computer Consumable company. Presumably, other Western firms with assets in Hong Kong and other major Chinese cities may seek to follow Digital Revolution’s example.
Larger, more efficiently run third-party supplies vendors resulting from the consolidation of the Chinese aftermarket industry are destined to impact markets around the world. In the end, however, I don’t see one large giant firm emerging from the East, like we saw with Clover in the U.S. Rather I think several large vendors will ultimately dominate the Chinese industry. These firms will have the wherewithal to manage complex supplies chains and meet the demands of large, multi-national channel partners. As I noted above, however, these are still earlier days so it will be a while before we reach anything like stasis. Which firms will be the big winners is anyone’s guess. But firms such as Hubei Dinglong, Apex and Ninestar have already disrupted the hierarchy in the Chinese industry and other firms will undoubtedly emerge over the next year or two that will further rearrange the pecking order.
