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Taiwan's Largan Precision has provided camera lenses for every iPhone since the gadget debuted in 2007.   © Getty Images
Cover Story

'Stealth' companies steal the spotlight in this year's Asia300 ranking

Suppliers quietly build fortunes while consumer brands enjoy a spending boom

TAIPEI/MUMBAI/SHANGHAI -- They may not be household names, but the companies topping this year's Asia300 ranking show that you don't need to be famous to be successful.

"Stealth" companies like Largan Precision and Eclat Textile have built their fortunes behind the scenes, providing the products and services that allow the likes of Apple and Nike to dominate global markets. The ability of these suppliers to deliver solid growth, efficiency and stability places them high on the Nikkei Asian Review's annual ranking of the biggest and fastest-growing companies in Asia outside of Japan.

More well-known players also fared well, as Asia's robust consumption -- fueled by steadily rising incomes -- helped automakers, internet giants and food and drink makers place high in the ranking.

(Click here for a list of this year's top 100 Asia300 companies.)

“Designed by Apple in California Assembled in China.”

This short message carried on the back of all iPhone handsets gives no hint that many of the vital components inside are made by Taiwanese companies. High-end camera lenses produced by Largan Precision, metal casings from Catcher Technology and chips produced by Taiwan Semiconductor Manufacturing Co. (TSMC) make it possible for Apple to churn out iPhones.

Largan, the world’s leading camera lens supplier, has been a crucial part of the iPhone supply chain from the very start. It has provided lenses for every iPhone that has shipped since the gadget made its debut in 2007. Today, the company also supplies lenses to top Chinese smartphone assembler Huawei Technologies, including for the P20 Pro, its newly launched triple-camera phone.

Largan has now claimed the top position in the annual Asia300 ranking for two years running. The company scored well across all five metrics: five-year average growth of revenue and net profit, return on equity, net profit margin, and ratio of shareholders' equity to total assets. Its revenue and profit have grown by double digits over the past five years, and net profit margin reached almost 50% last year. ROE was over 30%, while leverage was kept very low -- shareholders' equity to assets was around 80%.

The company's camera lenses, composed of six layers of plastic, dominate the flagship smartphones in both the iOS and Android camps -- and Largan guards its proprietary technology fiercely. The company's 10 manufacturing sites are all located close to its headquarters in central Taiwan, making it one of the few Apple suppliers to maintain its production completely outside of mainland China.

Largan sees expansion as vital for its survival.

“Production capacity is the key element to maintain Largan’s competitiveness in the industry,” CEO Adam Lin told reporters after the company's annual general meeting on June 12.

Largan already boasts the world’s largest production capacity for smartphone camera lenses, but Lin is now eyeing a plot of land covering more than 130,000 sq. meters in central Taiwan for further expansion.

Catcher Technology, coming in 15th on the Asia300 ranking, specializes in metal casings for electronic devices and was the first Taiwanese company to mass produce casings using magnesium alloy. Catcher progressed into handling various other metal materials and eventually established a solid foothold in the iPhone and MacBook supply chains.

Apple's decision to redesign the iPhone with glass-backed casings and metal frames in 2017 raised doubts about Catcher's future. The company proved skeptics wrong, as it showed it could manufacture metal frames with glass covers. Last year was a record year for Catcher, which logged its highest-ever revenue of 93.29 billion New Taiwan dollars ($2.97 billion) and operating income of NT$33.43 billion.

"The change in casing design requires much more complicated techniques to make the metal frames supporting the glass back," Chairman Allen Horng told reporters at the earnings conference. "The importance of the use of metals will continue to grow." So far, that prediction seems accurate: Catcher's sales rose 40% on the year to NT$20.40 billion during the January-to-March quarter, while net profit jumped 75% to NT$3.65 billion.

The recent retirement of founder and Chairman Morris Chang comes at a delicate time for TSMC, the world's largest contract chipmaker. (Photo by Shinya Sawai) 

TSMC, the sole supplier of iPhone core processor chips since 2016, came in at No. 4 on the Asia300 ranking. In addition to its key place in the Apple supply chain, the company also plays a crucial role for nearly all of the world's chip developers, including Qualcomm, Nvidia, Broadcom, MediaTek and Huawei unit Hisilicon Technologies. Nvidia CEO Jensen Huang has called TSMC "the bedrock of the whole tech industry," and said he could not think of any "great company in the world that does not rely on TSMC."

Taiwan's stealth companies are not confined to tech players. Just like most iPhone users may have never heard of Largan despite using its lenses on a daily basis, many people may be wearing Eclat Textile without realizing it. The company makes high-end sportswear for everyone from Nike and Adidas to Ralph Lauren and Under Armour, as well as clothing for retailer brands like J.C. Penny and Sears.

Eclat's strategy for staying competitive is vertical integration. It not only churns out 7.5 million pieces of clothing a month, it also develops 3,000 new fabrics each year. This has allowed it to diversify its customer base and find new business in Europe, Australia and elsewhere. It now provides yoga apparel for Lululemon Athletica, and proprietary clothing brands for Amazon.

Early expansion into Vietnam and Cambodia, meanwhile, has made Eclat less vulnerable to the ongoing trade spat between Washington and Beijing. The Taiwanese company last year stopped producing in China, citing deteriorating investment conditions and surging labor costs.

That is not to say these Taiwanese stealth companies are immune from challenges. On top of slowing smartphone demand, Largan faces an emerging threat from Chinese rivals, including Sunny Optical Technology Group, which hopes to become an Apple supplier. It has already lost some orders for Huawei phones to Chinese players. Catcher’s largest competitors are key iPhone assemblers Hon Hai Precision Industry, better known as Foxconn Technology Group, and Pegatron. Both of these companies have metal casing subsidiaries and are using their group resources to secure bigger shares of the iPhone supply chain.

Eclat Textile makes fabrics for such names as Nike and Adidas, but the Taiwanese company faces competition from mainland rivals.    © Reuters

Eclat, meanwhile, faces competition from bigger Chinese rivals such as Shenzhou International Group Holdings, which also supplies Nike and Adidas.

"We target making premium sportswear and fabric materials, rather than focus on quantities of mass production," said Eclat Vice President Roger Lo. Having seen both its revenue and net profit slip in 2017, the company is intent on climbing further up the value chain and opening up new channels. "For 2018, we see growth across customers from e-commerce platforms," Lo said.

A different breed of stealth companies can be found in India, providing low-cost IT services to Western companies. While names such as HCL Technologies, Tata Consultancy Services, and Infosys may not ring a bell for most Americans, the names of their clients almost certainly do -- Walmart, General Electric, Volvo, and Rolls-Royce Holdings, to name a few. Even the U.S. Army and Navy make use of these Indian companies.

During the financial year that ended in March, HCL lost a major client -- Indian IT companies do not usually reveal the names of specific clients -- which took with it contracts worth $100 million. The company's small and midsize client numbers increased, however. HCL, ranked second, has also been growing through aggressive acquisitions and is expected to soon displace Wipro as India's third-largest IT player by revenue.

Tata Consultancy Services, ranked ninth, won 38 new contracts worth more than $100 million during the year, compared with 35 the previous year, including a record-setting $2.25 billion outsourcing contract from TV ratings measurement company Nielsen in December.

"Our deal flow, deal wins and the market outlook that we see gives us confidence that we are well-positioned to deliver on the trajectory of double-digit [revenue] growth," CEO Rajesh Gopinathan told reporters at a news conference in Mumbai in April.

Meanwhile Infosys, ranked 13th, won 20 new deals during the year worth more $100 million.

Indian companies pioneered the "delivery model" of IT services, in which complex projects are broken down into smaller tasks that can be carried out by a mix of consultants, some working on-site with the customer and others working at off-site locations. This allows them to keep costs low without sacrificing quality.

India also has one of the world's largest talent pools in science, technology, engineering and mathematics, or STEM, fields, and most of them speak English.

Like their Taiwanese peers, India's stealth companies scored well in all five metrics, but especially high in shareholders' equity, which was above 75% for HCL, Tata Consultancy Services and Infosys. ROE was 25% or more for all three.

HCL Technologies' office in Noida, outside New Delhi: The IT services company placed second in this year's Asia300 ranking.   © Reuters

This high accumulation of equity has spurred a slew of share buybacks since last year. HCL has spent 35 billion rupees ($510 million) to repurchase shares, while Infosys bought back up to 130 billion rupees worth of its own stock.

Tata Consultancy Services launched its second share buyback in June, proposing to spend up to 160 billion rupees.

“Capital allocation [by Indian IT companies] has got closer to global peers, which I think is a natural progression,” said Apurva Prasad, senior analyst at HDFC Securities.

However, rushing to buy back shares rather than investing in new technologies or acquisitions could impact future growth. “You have to look at it as an industry that is mature,” Prasad noted.

The sector is also facing new challenges: the transition to high value cloud- and digital-based technology, uncertainty around U.S. immigration law under President Donald Trump, and subdued demand in the American market.

"We see the shift from labor to technology arbitrage, which [is] driving unprecedented change," said DD Mishra, research director at Gartner. "We see cutthroat competition keeping the top line and bottom line under pressure. The changing regulations in the U.S. are creating pressure to evolve and reinvent."

Buoyed by spending

Among those benefiting from Asia's growing consumption are automakers in China and India.

Guangzhou Automobile Group, ranked 12th, and Maruti Suzuki India, at 20th, both scored high in revenue and net profit growth, recording double-digit expansion. GAC sold 2 million units last year, over half of which were Honda- or Toyota-branded cars assembled under separate 50-50 joint ventures with the two Japanese automakers. Maruti Suzuki has been the top car brand in India for years, selling models adopted from its long-term Japanese partner Suzuki.

State-owned Airports of Thailand, which operates all of the country's major airports, benefited from the influx of tourists, especially from China, as well as the more recent trend of Thais traveling abroad. Nomura analyst Marcin Spiewak maintains a buy rating on the company and views it as the top pick in the country’s transport space. While the growth of tourist arrivals, including those entering Thailand via land, has been slowing lately, he believes this will have less of an impact given the higher demand for outbound air travel.

Vinamilk, which controls more than half of Vietnam's dairy market, recently attracted more than $1 billion in investment from Jardine Matheson Holdings.   © Reuters

Vietnam's largest dairy product manufacturer Vietnam Dairy Products, or Vinamilk, was ranked 16th, thanks largely to its 44% ROE, which was the sixth highest among all Asia300 companies. Jardine Cycle and Carriage, the Singapore-listed arm of Jardine Matheson Holdings, paid $1.16 billion to acquire a 10% stake in the Vinamilk last November, as part of its “strategy of investing in market-leading companies in Southeast Asia.” The dairy company controls around 58% of the fast-growing Vietnamese market, which is home to 93 million people.

Kweichow Moutai, a distiller of baijiu, a type of Chinese traditional hard liquor, climbed in the ranking thanks to rising consumption and growing demand for baijiu at receptions -- the drink is often used to toast business deals. A reputation as the “state liquor” and its extremely low production cost were additional tailwinds. Even though it is based in one of the poorest provinces in the country, it logged 58.2 billion yuan ($8.8 billion) in revenue, a 50% increase from the year before.

Moutai has enjoyed a special standing among baijiu brands ever since Premier Zhou Enlai served it to U.S. President Richard Nixon and Japanese Prime Minister Kakuei Tanaka, respectively, at official dinners in 1972.

The top three Chinese internet conglomerates -- Tencent Holdings, Alibaba Group Holding, and Baidu -- all placed within the top 30. Having benefited from a vast domestic market virtually sealed off to overseas rivals, they are now turning their attention abroad, especially to Southeast Asia.

Hong Kong property developers, traditional powerhouses in the region, continued to fare well amid rising residential prices and steady growth in commercial activities in the financial hub. High net profit margin helped boost the rankings of CK Asset Holdings and Henderson Land Development, long led by the two richest tycoons in the territory, Li Ka-shing and Lee Shau-kee.

Combined net profit for 282 Asia300 companies for which continuous data over the last decade is available increased 21.1% to $518.93 billion, a record high. According to the latest compilation of analyst outlooks by QUICK-FactSet, a further rise of 13.5% is expected for the current financial year.

However, Steven Cochrane, chief Asia Pacific economist at Moody’s Analytics, told the Nikkei Asian Review that rate hikes by the U.S. Federal Reserve have "already put pressure on Asia, and then we have tariff policy on top of that. It’s almost a double whammy.” President Donald Trump's trade war will not only “slow down the pace of global growth,” he added, it will “certainly hit countries that both export a lot and export a lot of intermediary goods that go into global production processes.”

The stock market has been sending out negative signals: 215 of the 325 companies that make up the Asia300 index were down during the first six months of this year, and the index dropped by 7%, more than the 2% decline of the Nikkei Stock Average in Japan and the Dow Jones Industrial Average in the U.S. The market capitalization of the 325 Asia300 companies fell 7%, or $600 billion, during the period.

Nikkei staff writers Cheng Ting-fang and Lauly Li in Taipei and Rosemary Marandi in Mumbai contributed to this story.

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