Top Glove Corp Bhd plans to rapidly ramp up capacity at its relatively new synthetic rubber glove manufacturing division in China to replicate the group's achievement in the natural rubber glove sector.
“We have just bought 30 acres in China for the expansion,” executive chairman Datuk Dr Lim Wee Chai told StarBiz at a meeting in his office in Klang recently.
This piece of land is about two hours by road from the group's existing plant near Shanghai. The inland location was chosen for the lower land price.
“We will build 80 (production) lines over the next four years; that will be 20 new lines a year,” Lim said.
At the end of this expansion programme, Top Glove will have 100 production lines in China, where it now has 20 lines.
All these lines will produce synthetic rubber gloves as opposed to the natural rubber gloves that Top Glove is generally identified with.
The group's entire output from its factories in Malaysia comprises natural rubber gloves for which latex is readily available in this region.
Top Glove has grown its earnings at a compounded annual growth rate of 40% over the last nine years. During that period, almost all its earnings came from the production of natural rubber gloves.
It was only from the year ended Aug 31, that synthetic rubber gloves figured significantly in the group's profitability. This division registered an operating profit of about RM9mil last year, contributing about 15% to group earnings.
Lim is targeting for his China operations to increase their contribution to about 20% of group earnings this year and about 25% next year.
This contribution is expected to increase because it is coming from a low base and the demand for synthetic rubber gloves is expanding at about 20% a year, which is faster than the 12% growth rate for natural rubber gloves.
Currently, the size of the synthetic rubber glove market is only about 30% of that of natural rubber gloves but over the years, both markets could reach about the same size should the former continue to grow at a faster pace.
Top Glove chose to locate its synthetic rubber glove factories in China because the labour cost is cheaper and some of the raw materials are sourced locally.
In this sector, however, the group is competing with other companies in China, unlike in latex gloves where it is up against multinational corporations (MNCs), which have progressively outsourced their requirements for gloves to original equipment manufacturers (OEM) like Top Glove.
This practice will be more difficult in the case of synthetic rubber gloves, where its competitors are also OEM players.
Lim was confident Top Glove could compete with other China-based manufacturers because it had an established global customer base – it sells its synthetic rubber gloves to the existing customers of its natural rubber gloves.
The group, he said, was not competing with its rivals in the domestic China market. “We're not selling the gloves in China. You don't want to sell in the China market. Don't even think of it,” he added.
On Top Glove's ability to compete with the other China-based manufacturers, Lim said: “We have proven we can compete. We are already profitable there.”
Its natural rubber glove division experienced a profit margin squeeze last year although it had periodically increased prices to keep pace with the higher latex prices. Profit margins are expected to recover once latex prices stabilise.
As for concerns the industry may be expanding faster than demand growth, Lim said that out of 50 glove makers in Malaysia, less than 10 are expanding their capacities. The rest are not expanding, and some may even close.
For this reason, supply is not going to run ahead of demand.
At the same time that Top Glove put in more lines of machinery, it scrapped 15 lines of old machinery this year, he added. Old machinery is not efficient, which is also the reason the company has rarely bought other glove companies.
These companies may have to shut down their factories and scrap the old machinery if they can't find buyers.
Meanwhile, Top Glove's management is targeting for yet another year of 40% growth in sales and earnings, which would lift its net profit to RM78mil, or earnings per share of 42 sen.
Investors have rewarded the company for its achievements and potential with a rich market capitalisation, which crossed RM1bil based on the share's closing at an all-time high of RM5.45 yesterday.
The group is starting out to grow its synthetic rubber glove division from a low base but it also means it has a lot of room to grow as it targets to be top in this sector as well.