Unimicron technology Corporation Case analysis and recommendation Unimicron is a World leader in PCB and IC carrier. Their goal is to develop cutting edge products with advanced technology that fulfill customers’ current and future demands. However the question is has Unimicron done enough?

2011

Sanket Sao McMaster University

10/2/2011

Executive summary

Post 1990’s, the computing, telecom, and consumer electronics Industry was rigorously looking

to build smaller, faster, and cheaper products. The onus was primarily on component industry

to meet these demands. It was also a fast-changing and a highly competitive industry.

Unimicron surged to be a major player in component industry, especially in PCB and IC carrier

sales. However the question remains have Unimicron done enough?

After analysis, several key issues were found such as extreme focus on PCB and IC carriers only,

incorrect IT strategy etc. It’s also observed Unimicron hasn’t particularly concentrated on latest

innovation in component industry such as High Density Interconnect (HDI) PCB’s, which is

necessary for smaller consumer products such as Apple’s IPAD 2, Kindle Fire etc. Unimicron

made one of largest investment in IT investment in form of implementation of ORACLE’s

Enterprise Resource Planning (ERP) in 1998. Since then it continues to expand its IT horizons in

the field of computer-integrated manufacturing, and information infrastructure service. But

was this investment worth?

The Issues were analyzed and several alternatives to resolve issues were found (1) Broadening

of customer base (2) Implementation of SAP + Microsoft SQL Server (3) Expand HDI PCBs

capacity or (4) Focus in different sectors apart from computers and telecommunication. The

weighted mean calculation showed that option 3 was the best alternative and most cost

effective (Exhibit 3). According to this plan, the key issues identified with the current strategy

will be resolved probably by end of December 2012.

Table of Contents Executive summary ................................................................................................................................. 1

Introduction ............................................................................................................................................ 3

Key Issues Analysis .................................................................................................................................. 4

Small number of large customers ........................................................................................................ 4

Saturation in conventional PCB market ................................................................................................ 4

Critically dependent on less customizable Oracle’s ERP........................................................................ 5

Increase in pollution awareness in china and Taiwan ........................................................................... 6

Key Issue Matrix ...................................................................................................................................... 6

SWOT Analysis ......................................................................................................................................... 6

A. Strengths ..................................................................................................................................... 6

B. Weaknesses ................................................................................................................................. 7

C. Opportunities .............................................................................................................................. 7

D. Threats ........................................................................................................................................ 8

Porter' five forces for PCB/IC Industry ..................................................................................................... 8

A. Threat of New Entrants (Medium) ................................................................................................ 8

B. Power of Suppliers (low) .............................................................................................................. 8

C. Power of Buyers (Medium) .......................................................................................................... 9

D. Availability of Substitutes (High)................................................................................................... 9

E. Competitive Rivalry (High)............................................................................................................ 9

Alternatives and Recommendations ........................................................................................................ 9

A. Broadening of customer base..................................................................................................... 10

B. Implementation of SAP + Microsoft SQL Server .......................................................................... 10

C. Expand HDI Board capacity ........................................................................................................ 11

D. Focus in different sectors apart from computers, telecommunication ........................................ 11

Decision Matrix ..................................................................................................................................... 12

Implementation and action plan of plan C: Expand HDI Board capacity .................................................. 13

How/What needs to be done? ........................................................................................................... 15

Who should look after expanding business of HDI? ............................................................................ 15

Timeline and detailed Steps ............................................................................................................... 16

Consideration of cost & control issues for action plan............................................................................ 16

Plans for decreasing any negative impacts of selected alternatives ........................................................ 17

Contingency plan ................................................................................................................................... 17

Introduction

Unimicron Technology Corp., established in Taiwan, is one of the worldwide leading producer

of printed circuit board (PCB) and Integrated Circuit(IC) carriers, two critical components in the

development of several electronic products such as computers, cellular phones, digital cameras

etc. Unimicron is divided into 3 strategic business units (SBUs). The PCB division accounts for

78% of Unimicron’s annual revenue, the IC Carrier SBU accounts for 21%, while the remaining 1

% comes from IC Testing SBU. As per 2007 data, the consolidated revenue of the company was

NT$47.3 billion with pre-tax profit of NT$76.6 billion. Unimicron has phenomenal growth over

the past 15 years, where it grew from a small and unheard PCB manufacture to world’s 2nd

largest producer of PCB’s and IC carriers. TJ Tseng, Chairman of Unimicron Technology Corp,

attribute this success to a number of key factors such as Improvement in Management

effectiveness and the work environment, Establishment of TQM as the core of Operation,

Focused resources on Market-Promising R&D, choosing world-class customers and emphasizing

customer satisfaction, and IT at Unimicron. It has 14 sites in China and Taiwan. With excellent

research and development facilities, Unimicron has established its brand in PCB and IC Carriers.

One of distinguish quality of Unimicron is the VIP-Class support for selected customers, making

long term relations. Majority of the customers of Unimicron always turn out to be long term

customers, because of such service. It also has specialized IC Testing SBU, which help customer

in testing and resolve their key challenges, adding value to customer.

Key Issues Analysis

Small number of large customers

Although Unimicron has achieved 2nd position in sales of PCB and IC, 80% of the revenue still

generated from top 10 customers. The industry itself has small number of buyers with large

scale orders. But losing any of the top customers will have a heavy impact on the revenue of

the firm. Moreover, to attain top position, Unimicron needs to further expand its market and

look beyond current set of customers.

Saturation in conventional PCB market

Though PCB continues to be the core component of any electronic circuit, the below graph

(Exhibit1) shows demand for conventional PCB sales has been constant. At the same time, HDI

& IC continues to grow rapidly. HDI’s are mainly used in smartphones, netbooks and other

compact devices such as IPAD2, Kindle Fire etc. With desktop market (require conventional

PCB) approaching towards stability, and smaller Tablets gaining future, Unimicron needs to

review their strategy as conventional PCB supplier and might need to focus on other products.

Exhibit 1: Growth of PCB vs. Flex/HDI/Carrier

0

5000

10000

15000

20000

25000

0

5000

10000

15000

20000

25000

30000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

PCB

Flex

Carrier

HDI

Unimicron is also not able to convert large revenues to large profits as shown in below graph

(Exhibit2). Many analysts believe this is primarily due to same reason.

Exhibit 2: Operating revenue of Unimicron vs. Net Income/Gross Profit %

Critically dependent on less customizable Oracle’s ERP

ORACLE was never successful in application software market mainly due to problems in

customization. Acquiring PeopleSoft Inc., a competitor product, was a part of the strategy to

overcome integration and customization issues. The below graph (Exhibit4) suggests the

dominant position of SAP and other product had as compared to substandard Oracle ERP. The

time and effort require for integration and customization is also high for Oracle ERP. Unimicron

has always been focused on long term but this decision raises several questions? Unimicron’s

core services are now dependent on it and it is getting impacted by use of old technology.

Exhibit 2: ERP Vendors Revenue per Sales & marketing Employee

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

2001 2002 2003 2004 2005 2006 2007 2008

OperatingRevenue (NT$million)Net Income(%)

Gross Profit(%)

Increase in pollution awareness in china and Taiwan

After a rapid increase in industry sector, Chinese government has become increasingly aware

about industrial pollution and its harmful effects. The chemicals such as lead, released from PCB

industries after several halogenated reaction have a hazardous impact on environment. This

might lead to fatal diseases such as lead-poising. Unimicron incurred heavy losses due to

environmental damages, causing impact on its profit.

Key Issue Matrix

SWOT Analysis

A. Strengths

1. Good grip on industry’s core product: 78% of Unimicron’s revenue comes from PCB,

which is the core component of any industry.

Importance

Urgency Low High

Low Increase in pollution awareness

in China and Taiwan

Critically dependent on Oracle’s

ERP

High Small number of large scale

customers

Saturation in Conventional PCB

market

Exhibit 3: Key issue matrix

2. Market-Promising Research and Development (R&D): Always concentrated on building

good quality products rather than traditional low quality and low precision products.

3. Effective talent management: Heavily focused on developing talent via methods such as

customized training and development plan, and use of personality analysis system.

4. High-class customer service: Selective customers are offered VIP-class service to attain

their full satisfaction from cross-functional team.

5. TQM as the core of the operation: Aimed to strengthen management and establish work-

teams with stronger customer service orientation.

B. Weaknesses

1. Less product-diversified portfolio.

2. Extreme focus on long term, leading to lose of opportunity. For eg: Investing in lucrative

Chinese market was delayed; luckily they got smooth entry due to 2001 internet bubble.

3. Underutilization of IT facilities, a strategic disadvantage.

4. Not able to increase profits from increase in sales constantly.

C. Opportunities

1. There has been consistent growth in PC notebooks, netbooks and Smartphones and

trend continues for future as well, providing opportunity to capture these markets.

2. Can capitalize on growth in automation in sectors such as Automotive, industrial and

military sectors can produce high demand for PCB’s and

3. Expansion in use of IT to strengthen internal and external integration.

D. Threats

1. Weak economy or product environment.

2. Failure to keep up with technology.

3. Loss of any of 10 critical customers.

4. Increase in Environmental damage expenses.

5. Saturation in conventional PCB’s market.

Porter' five forces for PCB/IC Industry

A. Threat of New Entrants (Medium)

Components Industry is a fast-changing, highly competitive, leaving high scope for new

entrants with innovative products.

However, high cost for industry setup because of its requirement of good Research and

Development (R&D) facilities makes setting new firm difficult.

Majority of customers are large organization, hence brand name is essential.

B. Power of Suppliers (low)

PCB and IC carriers, level-2 products, primarily require IC substrate\wafer and Laminate

as level-1 raw materials, which has lots of suppliers.

The Asia region is dominated my suppliers hence suppliers doesn’t have much power.

C. Power of Buyers (Medium)

Most of the current industry's key segments are dominated by a small number of large

players. This means that buyers have little bargaining power.

However with expansion of PCB in Automotive, Industry etc., a new market of potential

buyers is evolving and several evolving firms are ready to meet this growing demand.

D. Availability of Substitutes (High)

PCB and IC are the core products for any Electronic Circuit, hence demand for such

product would always remain.

However new products such as HDI PCB’s and flexible PCB’s that are smaller and faster,

are always a threat to conventional model.

E. Competitive Rivalry (High)

The industry is marked by intense rivalries between individual companies.

There is always pressure on producers to come up with something better, faster and

cheaper than what redefined the state-of-the-art only a few months before. The same

pressure extends to chip makers, foundries, design labs and distributors – everyone

connected to the business. The result is an industry that continually produces cutting-

edge technology while riding volatile business conditions.

Alternatives and Recommendations

A. Broadening of customer base

To further increase their revenues/profit, Unimicron should expand its customer base. The VIP-class

service is still provided to top 10 customers from whom Unimicron yields 80% of their revenue.

Currently, Unimicron is ranked 1st worldwide in PCB suppliers, and 2nd worldwide in PCB/IC carriers

producers. However, to attain top position overall, Unimicron needs to broaden its customer base.

Advantages:

o Increase in further revenue and possibly profits.

o Minimize the risk of losing any of their top customers.

Disadvantage:

o Existing customers might have some reservations about the quality of service being offered.

B. Implementation of SAP + Microsoft SQL Server

Implementing SAP technology will provide flexible customization tailor to the needs of the

Unimicron. The customizations achieved through SAP are much more compliant with the

Information Technology Infrastructure Library (ITIL). Moreover, this also gives the option to select

other cheaper database products where database requirements are not critical. Currently, Microsoft

SQL Server 2005, a low cost database engine (approximately 10 times than Oracle 10g), meets the

needs of industry software’s and is much more compatible with SAP.

Advantages:

o More flexible customizations.

o Low cost as compared to current IT cost.

Disadvantages:

o Migration from current ERP system and database can be time consuming.

o Migration will call several technical challenges.

C. Expand HDI Board capacity

According to graph (Exhibit 1), we can clearly see the demand for conventional PCB’s has been

stable. On the other hand, HDI and flex have a steep growth rate. Thus investing in HDI, considering

its future demands, is a lucrative option. Flex, also known as flexible printed circuits, is generally

used at the start of the product design and no bulk orders expected after research stage.

Advantages:

o Will lead to product diversification.

o Minimize risk for product obsolete as per porter’s force of substitute.

Disadvantage:

o Can affect its existing brand in PCB leader.

D. Focus in different sectors apart from computers, telecommunication

Exhibit4 (below) shows other sectors such as consumer electronics, Military/Aerospace, Industrial

and automotive electronics, hold 47.7% market share of PCB. Some analysts also predict growth of

PCB in such sectors such as automotive. Hence, it’s a clear case to capture majority of 47.7%.

Advantage:

o More diversification in sectors will minimize the impact of slow growth of any sector.

o Has the potential to increase market capitalization.

Disadvantage:

o Current sectors might get impacted.

Exhibit 4: Worldwide market share of PCB in 2007

Decision Matrix

Alternatives

Criteria Weighting A B C D

Small number of large scale customers 0.2 4 2 3 4

Saturation in Conventional PCB market 0.4 3 2 4 2

Critically dependent on Oracle’s ERP 0.3 2 4 2 3

Increase in pollution awareness 0.1 1 2 1 1

Total score 1.0 2.7 2.6 2.9 2.6

(Note: 1 is least helpful to resolve the issue and 4 is most helpful)

From the above table it can be seen that alternative C has the highest value at 2.9 and hence

will be the recommended plan of action. Alternative A is close while Alternative B and D got low

scores and hence not the ideal choice.

Implementation and action plan of plan C: Expand HDI Board capacity

Like any other company, Unimicron’s aim is to maximize the profit keeping good business growth. To

implement the action plan of increasing investment in HDI, we need to first understand the key

parameters driving any company’s stock prices in component industry:

NO Drivers Impact Measured by

1 Market share gains Drives revenue and earnings increases Units shipped vs. competition

2

Higher

margins/profits

Absorption of higher fixed costs

contributes to lower unit costs

Manufacturing process

efficiencies

3

Latest innovation

and competition

Stimulates greater enthusiasm for end

products and support

Increase in Innovative product’s

sales

Unimicron has always been focused on driver 1(market share gains), but not on others. In this

action plan, we will demonstrate how Driver 3 can make a difference both in terms of

increasing higher margins, and gaining market share and new customers.

What is HDI?

High density interconnects (HDI) are defined as substrates or boards with a higher wiring

density per unit area than conventional printed circuit boards (PCB). The key advantage is that

the board is very thin and light. It is also faster because reduced track-length of boards

improves signal integrity. Typical uses are in portable and ultraportable notebooks and mobile

devices including smartphones.

Why only HDI?

1. According to International data corporation (IDC) (Exhibit5), Netbooks accounted for 9%,

but this was up from essentially zero in 2007. Much of the conversation surrounding the

migration of notebook PCBs to HDI has centred on the desire for smaller form factors. At

the high end of the market (>USD1,500), Apple (followed by Dell) has driven enthusiasm for

“thin and light” notebooks. HDI boards enable notebook makers to pack in more processing

power and functionality in a smaller space, permitting notebook makers to pack more

features into the same amount of space.

According to World Bank data(Exhibit5), the worldwide mobile growth has experienced

continuous growth and is expected to rise further with the growth of smartphone.

Exhibit 5: Global notebook sales (2008) & Worldwide mobile subscriber growth [Source HSBC, World Bank, IDC]

Unimicron’s major competitors such as Samsung and Ibiden have strong hold in HDI. Tripod, a

venture started in 1998, is specialized in HDI PCB's and has already started to capture majority of the

HDI market as shown below.

Exhibit 6: Top PCB maker 2007 [Source: N.T. Information Ltd.]

4,037,241,879.00

0.00

1,000,000,000.00

2,000,000,000.00

3,000,000,000.00

4,000,000,000.00

5,000,000,000.00

2001 2002 2003 2004 2005 2006 2007 2008

Worldwide Mobile Subscriptions Growth

How/What needs to be done?

Unimicron has currently 14 major manufacturing sites in China and Taiwan. Conventional electronics

manufacturing technologies for conventional PCB and HDI have various processing limitations, lower

manufacturing yields, higher-production costs and limited flexibility. Moreover, the high quality

demands for HDI’s limits the rapid expansion of HDI to a certain level. The Raw materials for both HDI’s

and PCB remains same, primarily crude oil, copper and organic dielectric.

Unlike the semiconductor or other electronics component segments, there is no “standard”

approach to manufacturing Conventional or HDI PCBs. The required equipment in a factory depends on

the targeted application, as well as each vendor’s design philosophy. Hence, it is recommended to

convert some or part of the conventional PCB manufacturing sites to the HDI PCBs manufacturing sites.

To some extent, this is already being followed by Unimicron. Going further, a separate manufacturing

unit dedicated to HDI should be established. It is also recommended laser technologies such as CO2 and

UV-DPS for manufacturing of HDI PCBs. These lasers use photochemical ablation to produce high quality

HDIS, increased processing time and decreased throughput lead to higher processing costs.

Who should look after expanding business of HDI?

Currently, Unimicron is divided into 3 strategic business unit(SBU). IC Carrier SBU headed by Chia Pin Lee

(2) PCB SBU headed by Steve Chiang and (3) IC Test SBU, headed by David Chiou

Current HDI PCB’s is managed by PCB SBU, however we recommend to have new HDI SBU

considering current PCB SBU as very large business to manage as one entity. From sales to

manufacturing, a new team dedicated to HDI customers should be formed. If not, at least a cross

functional specialized team within PCB unit should be formed to provide VIP-Class service to HDI.

Timeline and detailed Steps

Consideration of cost & control issues for action plan

The below graph (Exhibit7) demonstrates the difference in cost structure for HDI and conventional PCB.

As labor accounts for a large proportion (10-15%) for both conventional and HDI, it is recommend to

setup new manufacturing unit in China due to cheap labor availability. It is more cost efficient to focus

on one application. If a factory is used for multiple purposes, it is very difficult to optimize its capacity to

avoid bottlenecks. However, it would be a big risk to start a new plant for HDI PCBs directly without

trying on a smaller scale. HDI boards potentially introduce significant added cost to a current business

model, with razor-thin margins as demonstrated in Exhibit7. We can also see that given the smaller

relative sizes, HDI boards can be cost-competitive with conventional PCBs.

Exhibit 7: Comparison of PCB Unit costs and Comparison of conventional PCB and HDI cost [Source HSBC, Nomura]

Plans for decreasing any negative impacts of selected alternatives

Focusing on HDI PCBs can affect the leading market position of Unimicron in PCBs. While focusing on

this plan, Unimicron might also face scenario where it has to choose between current PCB production

line and HDI production line. However, Unimicron 3 plants in China already meet the industry-standard,

leaving 20-30% scope for expansion in all these sites. This space is good to start a pilot project for HDI

facilities and hence, not directly impacting current setup. This project should be reviewed frequently

and based on the results, the expansion should progress.

Contingency plan

There can be 2 scenarios where this plan might fail. First, New technology competing HDI PCBs. Second,

Demand for HDI PCBs doesn’t turn out as estimated. As per the steps of the plan (conveyed in timeline

too), we already recommended to start with small manufacturing unit within current plant. This would

be a sort of Pilot project to access the feasibility of plan and to tackle any unknown variable in following

the action plan. This pilot project would start immediately and based on the results accessed each

quarter, the further expansion can be controlled. By July 2010, I believe Unimicron would be in better

position to decide whether to go for new plant or not.

References

Company information: o http://www.unimicron.com/en/about01.htm o http://www.digitimes.com/news/a20110930PD204.html o http://www.nomuranow.com/research/globalresearchportal/GetPub.aspx?pid=318448

PCB Industry Information:

o http://www.investopedia.com o http://www.investopedia.com/features/industryhandbook/semiconductor.asp#axzz1Zk

RYwJgU o http://pcdandf.com/cms/magazine/95/3930 o http://www.frost.com/prod/servlet/report-brochure.pag?id=A854-01-00-00-00

McMaster Internal sources:

o Factiva o Business Source database

Company financial information:

o https://mm.jpmorgan.com/stp/t/c.do?i=FE327-2&u=a_p*d_448558.pdf*h_-2bvp1o4%0D%0A

o http://search.worldbank.org/data?qterm=mobile&language=EN o http://research.hsbc.com o http://www.nomuranow.com/research/globalresearchportal/GetPub.aspx?pid=318448

PCB/IC technical information:

o http://scholar.google.com o http://www.coherent.com o https://publications.theseus.fi/bitstream/handle/10024/31508/Market%20strategy%20

study%20Case%20of%20Univertical%20by%20Hua1.pdf?sequence=2