Small firms with big ideas but little cash are getting product to market thanks a new model of manufacturing based on high speed, low inventories
Early morning, Tianjin Port: containers stack up on waiting ships, loaded with goods which will take a couple of months to reach the end customer. Across town at the city’s airport, bulging cargo jets are being loaded under the watchful eyes of logistics chiefs from a dozen major manufacturers. Among them, tapping data into hand-held computers, are several executives from PCH International, a Sino-European supply chain company which turned the China sourcing model on its head by manufacturing high-end electronics for big name brands and shipping them directly to consumers around the world in record time. PCH claims to ship its clients’ online orders in as little as three days.
The idea of putting containers of computers and TVs on a boat and hoping they’ll arrive on time and intact to the clients’ warehouse is almost an alien concept to PCH founder and CEO, Liam Casey. Timeliness, high quality, and low inventory are the watchwords of Casey’s company, which has its Tianjin facility at Xin Gang Da Dao. Casey says thanks to his system of low inventories and fast shipments, small firms can quickly bring goods to market using relatively little capital.
PCH handles manufacturing and shipments in China for major consumer electronics firms, among them many of Silicon Valley’s best known names. In recent years the firm has been expanding into the telecom and medical devices business, which is why it built a 700-staff assembly and shipments centre in Tianjin.
Casey hopes to bring more business to the city through his firm’s Accelerator program, with PCH assisting small-scale Western firms to bring their patents and prototypes to reality. Through trusted contractors around China, PCH arranges design, manufacture and shipment of innovative electronics. PCH invests equity into the start-ups, explains Casey, but crucially he’s also able to manufacture otherwise-uneconomic quantities by pooling the various small firms’ orders into his network of manufacturers.
While the firm is privately owned, some of its investors suggest PCH’s business model is ahead of the curve: Li & Fung and Singapore government-run Tamasek have invested in the venture. Casey sees a huge scope to expand, particularly in personal health products. One such firm he’s working with is Lark Technologies which designed a unique silent alarm clock at its California corporate HQ before engaging PCH to help adjust the design and source the components for the alarm, which is worn on the user’s arm to monitor sleep patterns.
From the south coast of Ireland, Casey has become the biggest success story for Irish business in China. A Cork man, Casey set up privately held PCH (the name comes from Pacific Coast Highway, a tribute to Casey’s stint in California before he moved to Asia) after a 1996 trip to an electronics trade fair in Taiwan. His links to the US and an understanding of China’s contract manufacturing scene has since allowed him bridge the two and become one of the most admired figures in supply chain management, the process of getting goods from production line to customer.
PCH uses 1,000 suppliers and 100 manufacturers, trusted through years of cooperation, to make goods for a client base of Silicon Valley staples (among them, reportedly, Apple). “Clients like PCH because we work with them on design, on specifications,” explains Casey. “Ensuring the product is ready to specs and by launch date is key.”
Accelerator also allows PCH to take a sweeter share of the value chain in product development. This is something Casey has long aimed at, judging by his interviews with distinguished American economics writer James Fallows nearly five years ago. Fallows (who by chance met Casey at the breakfast room at the Four Points Sheraton hotel in Shenzhen, where he lives and greets visiting buyers) studied PCH's business model in the US-based Atlantic magazine, using it to define what he termed the smiley curve concept of supply chain: a smiley-face icon that runs from the beginning to the end of a product's creation and sale, with the high-value design and marketing activities at each end and the lower value (manufacturing, packaging) elements at the middle swoosh in the smiley. America's (and now PCH’s) place is at the two ends of the smiley, “and those are where the money is,” wrote Fallows.
High spirits and hard work are abbreviations for Casey’s character (his only lowlight of 2011 for PCH was “not having enough hours in the day to do all the business we want to do.”) But has economic stagnation in Western economies affected PCH’s business? The answer is a clear no: PCH, according to Casey, is focused on the hyper-growth categories of accessories for smartphones, eReaders and tablets “which saw phenomenal growth in the past two years…The recession in Western companies is a concern, but it has not affected our business.”
Another growth area for the coming years for PCH is medical devices. Casey has meanwhile been working with older clients in the IT hardware segment to get the ‘attach rate’ of their products up: IT brands want accessories such as a mouse or a bag that adds margin to a computer sale. Casey doesn’t divulge his client list – confidentiality means he’s legally compelled not to, in any case. But it’s clear even in a tough economy they’re doing well. PCH is “helping them to sell more products, reduce inventory and have a more efficient business model”.
As of next year, PCH will also be helping clients dispatch goods within China, rather than shipping to the US or Europe. Supplying the domestic market is not necessarily an easy progression: while it’s the same country, the logistics systems across China vary wildly which is why PCH’s big investment of 2011 was the acquisition of TNS Distribution, a logistics firm.
That deal was a highlight of 2011 for Casey: he sees TNS as “the perfect fit for the service offering we want to provide to our clients.” Casey’s priority for 2012 is organic growth, “focusing on the Chinese domestic market, and offering a sustainable supply chain for our clients.” Among the high profile clients taking advantage of this new China focus of PCH is fashion designer Orla Kiely, whose garments will be made, and retailed in China.
With a staff of 1,200 (up considerably from 800 in 2007), PCH’s financial success – revenues climbed 170% in 2010 to USD 413 million – say as much about the calibre of the firm as does of its investors and board of directors. USD 30 million brought in by Casey in 2011 came from among others Tamasek, the Singaporean government sovereign investment arm, and the Hong Kong-based Fung brothers whose Li & Fung remains the bellwether of China’s sourcing scene. Also joining PCH’s board of directors was Stanford University professor Hau Lee, considered by some the world’s foremost academic expert on supply chain management.
Though PCH doesn’t (and won’t) own its own factories, Casey is using new PCH funding for more space to pack and dispatch goods from his manufacturing partners. Casey thinks his supply chain model makes it ever-easier for start-ups to bring their products to market. But, he’d like to see banks keep up: “today transaction times are shorter and the amounts involved much smaller.” Yet while Chinese banks like Merchants Bank are far better at adapting to the new speed, international peer banks need to catch up in understanding the reduced risk in the supply chain and in coming up with new trade finance products.
Casey worries about his workers’ welfare, and he has an environmental side. His ‘triple bottom line’ concept makes social, environmental and economic factors PCH priorities. He also talks about the importance of treating people well. “A cradle to grave analysis of a product’s life span to reduce waste” means using environmentally friendly packaging materials and demanding standards of suppliers.
Casey offers good reasons why rising wages and costs won’t persuade him to join the manufacturers leaving Shenzhen and Tianjin for inland cities like Chongqing and Zhengzhou where wages are half local rates. “Other regions don’t have the raw materials or the logistics infrastructure or the skilled workforce. Yes, they may have cheaper wages but the products we make are high quality and need to be manufactured on time and to correct specifications.”
In fact, rising wages in China is a boon for PCH – it allows the firm to tap premium talent, including engineers, products designers, and management from overseas. After nearly two decades here, Casey doesn’t speak Chinese: “Businesspeople all speak the same language – we want to do business. The language you speak is not a factor in success.” Having to divide his time between a customer base in Silicon Valley, a production base in Shenzhen, and a customer service centre in Cork means Casey wasn’t present in Seoul to accept his new role as Asia Pacific Irish Business Forum patron. The words he sent to be read by the event’s organisers told of his company’s values: “passion, integrity and teamwork” – and how these values keep a company with 1,200 people of 16 nationalities in 10 locations in constant growth mode.
