Industry Overview

6. INDUSTRY OVERVIEW 6. INDUSTRY OVERVIEW The Dufll Group is involved in the precision machining industry and the metal stamping industry, specially the HOD application market. Approximately 86% of the revenue of the Duru Group for the seven (7)~month period ended 31 July 2006 (FYE 31 December 2005 : 81 %) is derived from the HDD application market. Other notable application markets that the Group are involved in include industrial safety and sensor devices, and telecommunication devices. The performance of these market segments are mainly driven by product segments such as desktop and mobile computers, consumer electronics and mobile phone, which are dependent upon the overall global economy and the Malaysian economy. 6.1 OVERVIEW OF THE GLOBAL ECONOMY The global expansion was broad-based in the first half of 2006, with economic activities in most regions meeting or exceeding expectations. Nevertheless, inflationary concerns, tighter conditions in financial markets, and further increases in oil prices to new highs have highlighted the downside risks as the global economy enters the fourth year ofcurrent expansion. In the U.S.. a cooling housing market would continue to dampen private consumption and residential investment, but corporate investment should be supported by high capacity use and strong profitability. The expansion gathered momentum in the Euro area. Growth is increasingly being driven by domestic demand, particularly investment. Meanwhile, the Japanese economy continued to expand. The expansion remains well·foullded as private final domestic demand. the main driving force since 2005, has grown at a solid pace. Private fixed investment in particular continues to be buoyant, underpinned by robust profits and a turnaround in bank credit, while private consumption is increasing at a more moderate rate. Growth in China has continued to accelerate. A higher growth rate in China would elevate growth elsewhere in the region -especially in the Hong Kong Special Administrative Region, Indonesia, South Korea, the Philippines, Singapore, Malaysia and Thailand ~ given the strengthening intra-regional trade linkages. This favourable outlook depends on the view that inflationary pressures will be successfully contained with modest interest rate increases by major central banks, that the expansion in domestic demand will be better balanced across the advanced economies, that emerging and developing countries will largely avoid capacity bottlenecks. and that global financial market conditions will be more stable. More broadly in emerging markets, a return to calmer global financial conditions could foretell a resurgence of portfolio inflows. which could foster easy monetary conditions. a rebound in asset prices, and a further strengthening of domestic demand. In the advanced economies. the main upside potential would seem to be in business investment. gIven strong corporate profitability and rising capacity utilisation. The downside risks Ihat markets have been concerned over include a continued build-up of inflationary pressures In the advanced economies which could require a more aggressive monetary policy response to cool the growth momentum, particularly in the U.S. Clearly, there are risks in this direction coming Crom tightening capacity constraints and the continuing potential for high inflation to seep into price expectations and bolder wage demands. A related risk to the outlook comes from the continued potential for supply.side shocks in the oil market, which could give a further upward impetus to international oil prices. thus exacerbating inflationary pressures while cooling household demand. With spare capacity remaining at very low levels. supply concerns have played a growing role III pushing up oil prices. and a major disruption in a large producer or a further escalation of security concerns in the Middle East could well lead to another upward oil price spike. Over time, investments in new production and refining capacity both inside and outside the Organization of the Pctroleum Exporting Countries, diversification into altcrnative energy sources. and increased conservation efforts by consumers responding to price incentives should restore spare capacity to more comfonable levels, but the lags are lengthy. In particular. considerable uncertainty remains about the pace and extent of these responses. (Source: D&B Malaysia Report) 6. INDUSTRY OVERVIEW (Cont’d) 6.2 OVERVIEW OF THE MALAYSIAN ECONOMY Real GDP expanded by 5.2% in 2005, notwithstanding the persistent high crude oil prices and the cyclical downturn in the global electronics industry. The expansion was mainly private-sector driven and was underpinned by supportive macroeconomic policies and favourable financial conditions. Private consumer demand was sustained at a strong pace. In managing the economy. the public policy in 2005 focllsed 011 accelerating the shift towards higher value-added activities, strengthening the business environment to develop new sources of growth and enhancing competitiveness. The Malaysian economy is expected to strengthen further in 2006. Real GOP is projected to expand at a faster rate of around 5.8%, driven both by strengthening exports and resilient domestic demand. The growth is expected to be both broad-based and balanced, supported by expansions in all economic sectors. The global semiconductor upcycle, sustained global growth and higher prices for primary commodities are expected to have positive effects on exports, as well as private consumption and investment. Currenl indicators suggest that the upturn in the global semiconductor industry, which began in the second half of 2005, would gain further momentum in 2006. Malaysia is expected to benefit from this favourable development with a stronger growth in manufactured exports, particularly in computers and semiconductors. The Government is expected to continue to focus on strengthening the fiscal position, with the ultimate aim of supporting economic growth without compromising the long-term fiscal sustainability. In 2006, prices are projected to increase, driven largely by cost-push factors. Nevertheless, inflation is expected to remain at manageable levels during the year as both capacity expansion and productivity improvements in the domestic economy are anticipated to help contain price pressures. Monetary policy will, therefore, remain supportive of growth. While some downside risks remain, the strong macroeconomic fundamentals and diversified economic structure are expected to provide some degree of economic resi lience. The factors that supported domestic demand in 2005 are expected to continue to provide further stimulus in 2006. While private consumption is an important source of growth in domestic demand, private investment is projected to play an increasingly strong supportive role in sustaining economic growth over the longer term. In addition, a modest increase in public sector expenditure is expected with the implementation of the Ninth Malaysia Plan in 2006. Hence, this is expected to provide a further boost to economic growth in the course of the year. (Source: D&8 Malaysia Report)
6.3 OVERVIEW OF THE MANUFACTURING SECTOR IN MALAYSIA Value added or the manufacturing sector is expected to expand further, increasing 7.3% in 2006 (2005 : 5.1 %). with production in lhe export~oriented industries contributing 63.6% to total output. The robust performance of the manufacturing sector is based on higher output growth of 8.7% registered in the first six months of 2006 (January-June 2005 : 3.8%) and anticipated continued expansion in the second half. The strong growth during the period was due primarily to the double-digit growth registered by the export-oriented industries of electrical and electronic, petroleum products and textiles. While export-oriented industries grew by 10.9%. growth in the domestic·orientcd industries moderated to 5% (January-June 2005 1.9%; 6.9%). Sales value of the manufacturing sector also increased 8.9% to RM239.7 million (January-June 2005 : 14.1 %; RM220.2 million) during the same period, mainly due to the improvement in prices as well as higher output of some industries, including iron and steel; and petroleum which led to capacity utilisation sustained at above 80% during the first half of 2006. 6. INDUSTRY OVERVIEW (Conl’d) Export-oriented industries registered a significant gro\vth during the first half of 2006 follO\’\/ing the upturn in global demand for electrical and electronic products, particularly for semiconductors and other electronic products. Growth in global demand for semiconductors, which rebounded since the second half of 2005, expanded hy R.3%lin the first half of2006. This was reflected in the stronger book­to-bill (BTB) ratio of North-American-based semiconductor equipment and Japan’s chip-making devices industries. Meamvhile, development of cyber cities as \…..ell as rising levels of shared services and outsourcing (SSO) activities abo cuntribuled lo increasing domestic demand for electrical and electronic products, which is anticipated to expand by more than 7% for the whole year. (Source: F,conomir Rq)(jrI2006/2007, A/inistry t?fFinance) BACKGROUND AND STRUCTURE OF ENGINEERING SUPPORTING INDUSTRY Over the last three (3) decades. the engineering supporting industry experienced rapid development in tandem with the grm….. th of the manufacturing sector, and today remains a key contributor to Malaysia’s industrial and economic development. Precision machining and metal stamping activities are key sub-sectors of the broader engineering supporting industry. Other key sub·sectors are mould, tools and die, metal casting, metal surface treatment and heal treatment. Belov,: is an illustration of the key sub-sectors under the engineering support industry: Engineering Supporting Industry

Metal Casting
In a technology drivr.;:l1 environment where smaller, finer and complex parts are becoming common, most of the engineering supporting activities have progressed into supplying a broad range of parts, components and services to meet the changing demand, particularly from the E&E sector. Coupled with advancements in manufacturing technologies due to rapid industrialisation and automation, the engineering supporting industry has also been successful in diversifying to other manufacturing sectors si.1Ch as automotive, engineering, industrial appliances, aerospace, defence and medical devices in vie\\” of the rapid development orthe country’s manufacturing sector and industrialisation. This presents growth opporlunities [or the cngim:ering supporling industry and has prompted companies within the sectors to manufacture high precision components and parts which require precise and accurate measurements. The expansion or the broad engineering supporting industry which covers all sub-seclors namely, mould and die, plating surface treatment, machining, metal stamping, heat treatment and die casting, is abo substantiated by an increase in the number and value of investment applications received. A total of 94 manufacturing projects were approved by the Malaysian Industrial Development Authority (“MIDA”) in the engineering support industry with a value of RM598.4 million in 2005 as compared to 115 projects approved VI”‘ith a value ofRM763.9 million in 2004. Of the 94 projects, 61 or 64.9% were new projects while the remainder are expansion or diversification projects. 6. INDUSTRY OVERVIEW (Conl’d) Precisioll Machining lndustry Machining is one of the major sub-sectors or the engineering supporting indusTry servicing the manufacturing sectors. It pro\’ides machined pan.s and components as well as machining services to the electrical and eJccrronics, machinery linu ….’tjuipmcnl (“M&E’·). medical and hcaJthcare, oil and gas, and telecommunication industries. There are two (2) main machining aCTiv1tie!’., namely, conventional machjning and precision machining. Connotional machining operations were traditionally dominated by backyard engineering workshops using simple gauging methods to measure the dimension of parts. Components produced from conventional machining are less complex and differ in terms of production process. types and sile~ and usually do not requirc high lochnicaJ kno\.\:ledge. Precision machining involves companies which havc staLC-uf-lhl: art CNC machining centres and ablc: to provide integrated machining lolerances from as low as I micron (0.001 mm) 10 5 microm (O.OO5mm) and turning diameters ranging from 550mm. The precision machining industry has e\lolved from a backyard industry of simple conventional machining activities back in the ~ly 19605 (Q the current highly advanced industry (hal utilises bolh automation and high-end machincric~. COlllpeLilion and rniniaturisation are amongst Ihe key driving factors lhat drive manufacturers to kecp up wiTh (he advances in machining to emphasise on continuous performance improvements. (Sol/rce: D&B Malaysia Report)

6.5 OVERVIEW OF THE MAJOR APPLICATION MARKETS 6.5.1 HDD Application Market A HDD is also known as rigid disk drivl:. Its primary function is for storing electronic information in various systems ranging from desktop PCs to consumer electronics. In general, the HDD cumcs ill various specifications such as size (3.5~jn<.:h. 2.5~inch. I.S-inch and l.O-inch). revolutions per minute (“rpm”) (5.400rpm. 7,200rpm. etc) and storage capacities (60GB, 80GB, JOOGR. 120f;H. ete). In 2005, the glohal HDD shipment surpassed 380 milliun units. The largest user of HDD in the global market is the consumer desktop PC market. Other appliealion markets for HDD include mohile computing. enterprise applications and con.<iurner electronics a<:; follows: Desklop PC Thl.: dc~ktop PC mark.el is the largest users of HOD. /\s the HOD is an integral pan of Ihe desktop PC, demand for HDD sIems From new PCs i\S well a:’t from upgrade and replacement markcls. Most desklop PC” utilise the 3.5-inch HDD for storin~ cJ~ctroni(,;’ data. In addition to the internal HDD, there is also the external HOD market which cater to users who require large data sf,oring or badHlp capacitief:. HDD manufacturers usuaJly supplies HDD to Original Equipment Manufacturers (”’OEMs”) such a.’S Ddl Inc., Hewlett Packard Company. Lcnovo Group Ltd and Ace.r Co. Lld .. as well as various: PC distributors and relaile-rs. Mobile Computers Mobile computers are primarily laptops which hCl…·C bccumc more mainstream in recent years as they have become more affordable and eater to a wider range of customers. Laptops utilise smaller size disk drives of 2.5·inch to loS-inch as compared to the 3.S·inch HDD or <.ksk.lop Pes for data storage. The HDD for the laptop is required to spin slower (Iowe.r rpm) as it needs to be more energy efficient. Apart from the laptop, other mooile computing devices include personal digital assistaJlts (“PDAs”). handheld cumputt:rs as well as lablet computers. Illost of which utilise a HDD for data stontge. Ii:nterprise Computing Enterprise computing generally refers to nelworks and other computing needs implemented throughout a large corporation. Therefore. the HOD for enterprise compuling refers to small-computer-systems­inlerface (“SCSI”) ilnd serial advanced technology anachment (“SATA”)-based 1100 ured in work.stations. sc-rvcrs. and storage networks. HDD made for this segment are-generally more robust due (0 the faster spin rdtes (higher rpm) and much larger storage capacities. Examples of usage of HOD in (his lIegment include clustering applicatiom for databaSl,;’s. scienlific computing and electronic mail.

6. INDUSTRY OVERVIEW (Cont’d) Consumer Electronics The use of HDD in consumer electronic products has grown in recent years as the storage and playback of music, pictures and video becomes more popular amongst consumers. Currently, it is onc of the fastest growing segments in the HDD industry. Today, a wide range of consumer electronics utilise HDD including Digital Video Recorders (“DVRs”), digital cameras, digital music players (“MP3 players”) and video game consoles. As such, HOD manufacturers will be serving consumer electronics manufacturers like Sony, JVC, Panasonic. Sanyo, Pioneer, etc. The three (3) largest users of HDD in the consumer electronics market are DVRs and digital cameras (storage and playback of digital TV and picture content), MP3 players (storage and playback of audio contem), and game consoles. Type of End·Producls based on HOD’s Size (Form Factor)
Soum: D&B Malqyslo Report A majority of the world’s HDD are manufactured by a handful of multinational companies. namely Seagate, Western Digital. Maxtor, HOST, Toshiba, Samsung and Fujitsu Ltd. Seagate, Western Digital and Maxtor are independent HDD manufacturers (core business is focused on HDD) while, for HGST, Toshiba, Samsung and Fujitsu Ltd. the manufacture of HDD is only but a segment of their business interests. In 2005, the four (4) major HDD manufacturers are Seagate, HOST, Western Digital and Maxtor. In May 2006, Seagate announced that it has completed its acquisition of Maxtor. With the acquisition, Seagate will be the undisputed largest HDD manufacturer in the world in terms of sales and number of units shipped. In 2005. the top four (4) HDD manufacturers, namely, Seagate. HOST, Western Digital and Maxtor generated about USD20 billion in sales. (Source: D&B Malaysia Re/Jon) 6.5.2 Other Applications Market Industrial Safety and Sensor Devices Apan from the HDD market, the precision machining industry also offers products and services to the sensor devices market. With the minialUrisation of the sensor devices over the years. the precision machining industry moved in tandem to produce parts and components thaI are smaller in size and dimension. and more precise. The parts and components produced for the assembly of sensor devices are required to be of the highest quality and reliability to meet the stringent requirements set by global manufacturers such as First Technology pIc and Honeywell International. These MNCs offer a wide range of sensor producls for various application markets (gas sensing, automotive sensor, medical devices. etc). Telecommunication Devices -Mobile Phone HDD Market The precision machining industry plays a key role in the production of mobile phones as a mobile phone comprises various metal and plastic components/parts. Due to lhe intense competition between glohal mobile phone manufacturers, stringent standards are a norm in the manufacture of mobile phon~s. Hence, the parts and componcnls produced must meet the set standards.

6. INDUSTRY OVERVIEW (Con/’d) Computer Peripherals The healthy and burgeoning PC market has spawned a villrant computer peripherals market in Malaysia as well as globally. Locally, the establishment of manufacturing facilities by global players like Dell Inc. NEe Corporation, Samsung, BenQ Technologies, and Fujitsu Ltd. have helped to develop the local computer peripherals market. Manufacturers of computer peripherals have benefited from the establishment of companies that produce components and parts such as motherboards, cables. power supply units. connectors, printed circuit board assemblies. casings. plastic moulded parts. precision metal stamped machined parts, etc. (Source: D&B Malaysia Report) 6.6 INDUSTRY GROWTH DRIVERS 6.6.1 Market Performance For HDD According to the DepaI1mem of Statistics, the Malaysian disk drive parts industry recorded sales of RM3.2 billion in 2005. The trade in storage devices including HDD approximated USDSs.4 billion in 2005. The top exporter of slOrage devices were Singapore. China and Thailand. Malaysia exported RM7.4 billion worth of storage devices in the same year. In 2005. the top four (4) HDD manufacturers, namely. Seagate. HGST. Western Digital and Maxtor. generated about USD20 billion in sales. accounting for more than 70% of the global HDD industry revenue. (Source: D&B MalayJia Report)
6.6.2 Ke}’ Industry Growth Drivers Desktop and Mobile Computers The desktop and mobile computers segment. comprising mainly 3.s~inch to 2.S-inch drives. will continue make up the biggest segment of the global HDD market. Sales of PCs grew to surpass the 200 million mark in 2005. driven by affordable desktops and laptops. The demand for HDD will continue to be strongly driven by the increasing proliferation of pes in the household and commercial segments as a result of anticipated demand for the storage of digital photos, videos and on~demand TV shows. Mobile computers such as laptop computers are also expected to contribute appreciably to the demand for HOD as wider laptop selections and affordability drive adoption. The expected growth in demand for HDD¥based products from various application markets will indirectly creale demand for components and parts from the precision machining industry. Another key driver for computer purchases is the Internet. Internet users are growing on a daily basis. In developed countries such as the U.S. and the United Kingdom. the Internet penetration rate approximated 66% in 2005. Consumer Electronics Another key driver of future HDD growth will be the consumer electronics segment. This segment will include HDD made for consumer electronic devices such as portable music players, video cameras. game consoles and portable media players. It is becoming increasingly commonplace for consumers to carry their entertainment and personal data around, demonstrating an insatiable appetite for storing music, photos. videos and other personal documents. The popularity of, and the increasing demand for HDO~enabled consumer electronic devices is expected to drive demand for. HDD and is anticipated to eventually account for approximately 40% of all HOD shipments by 2008. The attractiveness of this market segment has prompted Japanese electronics maker. Fujitsu, to begin producing the 1.8·inch HDD used in most HDD~dependent consumer electronics. Other major players in this segment include Toshiba. Seagate and Samsung. 6. INDUSTRY OVERVIEW (ConI’d) Mobile Phones Globally, the mobile phone market is dominated by major manufacturers such as Nokia AB, Motorola Incorporated and Samsung Electronics. In 2005, worldwide sales of mobile phones totalled more than 800 million units, recording an annual growth rate of approximately 21%. The introduction of new models, price competitiveness, new technology and the healthy replacement market are amongst the key industry growth drivers for the continuous growth of the global mobile phone market. Worldwide cellular connections. having hit the 2.5 billion mark in September 2006. are expected to reach 3 billion connections by the end of 2007. Between 2001 and 2005. sales of mobile phones in Malaysia recorded a compounded annual growth rate of 13.1%. in 2005, the sales value of mobile phones increased by 11.0% to RM9.1 billion compared to RM8.2 billion in the previous year. The increase in sales may be caused by the reduction in the price of mobile phones and the affordability of mobile telecommunication services. As of the second quaner of 2006, there are approximately 21.5 million mobile phone subscribers in Malaysia. Other Precision Macbining Market Opportunities Apart from the demand for complex and cost-efficient high quality parts from HDD manufacrures, the precision machining industry also offers products and services to a number of application markets for holh the domestic and international markets. Noticeably, the precision machining industry has expanded to include the manufacturing of components and parts for high technology industries such as the defence and aerospace industries. This is, in part. driven by improvements in Malaysia’s manufacturing capabilities to cater for such industries which demand premium quality. high precision and product consistency. Engineering supporting companies involved with high precision technology are able to take advantage of their manufacturing competencies to diversify their activities to broad range of application markets and take advantage of export market opportunities to provide globally competitive products and services. (Source; D&B Malaysia Report) INDUSTRY OUTLOOK AND PROSPECTS The future prospects of the HDD industry remain positive and filled with exciting opportunities. The four largest HOD manufacturers in the world, nam~ly Seagate. HOST, Western Digital and MaXlOr recorded sterling results in 2005. collectively registering US020 billion in revenue vis-~-vis USDI7.3 billion in 2004. These four (4) companies represenr more than 70% of the global HOD industry revenue. The global HDD shipment surpassed 380 million units in 2005 and is anticipaled to grow 10 an estimated 550 million units by 2008. The HOD has become a central. enabling technology for an increasingly wide range of products and applications. HDD. which has extended their adoption beyond traditional computing to include portable music players, video cameras. game consoles, portable media players, PDAs and media servers, are fundamentally changing the way people store. use and retrieve information. Strong demand from consumer electronics devices have provide new impetus for sustained growth. Additionally. these new applications are being created by a diverse customer base, requiring a wide range of storage products 10 meet their needs, as well as the traditiontll customers and applications that are driving new opportunities in traditional markets for storage. Future potential application markets thaI will require storage being targeted by the HDD manufacturers include mobile phones. automobiles. digital home devices. handheld entenainmenr systems and other devices that will enable the consumer to take their information with them everywhere and share it with anyone. (Source; D&B M{llay.~ia Report) 6. INDUSTRY OVERVIEW (Conl’d) 6.8 INDUSTRY PLAYERS, MARKET POSITION AND SHARE HOD manufacturers source HDD components from a handful of suppliers only. They are very stringent in their selection of component and parts suppliers as quality, reliability and delivery time arc crucial in this competitive market. The production volume allocation for the component or pan is determined on a quarterly basis. Quality and cost are two primary determinants for an increase in production allocation for a given quaner from its existing qualified suppliers. The closest competitors to the Dufu Group for the supply of HOD disk spacers and clamps to Seagate and Western Digital are estimated to be: • Disk Precision Industries Pte Ltd (“‘OP”) of Singapore, and Glohal Primax of China (for Scagale); and • otion VTec Berhad of Malaysia and DP (for Western Digital). (Source: D&.B Malaysia R,purt) To the best of the knowledge of the DireclOrs of Dufu, the Oufu Group is one of the lap suppliers of HOD disk spacers and clamps globally. However, based on the yearly cumulative production orders from the Group’s customers and their customers’ command of global HDD market shares. the Group estimates that it commanded approximately 20-30% market share of the worldwide HOD disk spacers and clamps requirements. 6.9 COMPETITION One of the major challenges fal:ed by manufacturers is price competition. With compelition from low­cost producing countries coupled with rising raw material cost, CUSLOmers expect to pay minimal price resulting in price battles amongst the lower-end machining operators. Companies invest in automation and muhi-axis machining 10 counter the global market competitiveness. In Malaysia alone. there are approximately 170 companies that provide specialised precision machining services and general supporting machine services to meet the demand of the local manufacturing industry. However. barriers to entry such as long-term relationship and manufacturing capacity would restrict or reduce the rate of new companies to enler into the HDD components market. Globally. the HOD industry is a highly compelitive market. Consolidation between the major players in the market (HGST and Internalional Business Machines Corporation~ Seagate and Maxtor) in the market over the past few years has resulted in a larger playing field for component suppliers. However. competition between these HDD components suppliers is inlensified as these players have to compete for contracts from only a handful of cuslomers. Price and quality differentiation have resulted in the need for HDD manufacturers to souree components and parts from suppliers which are able to provide the high quality producls, high volume and timely delivery. (Source: D&B Malay.(ia Repnrr; 6.10 BARRIERS TO ENTRY A successful company involved in the manufacture of HDD components and parts is required to meet the production cycles, and maintain the quality requiremcms of the HOD manufacturers. As competition in the HDD industry is rcllected by volume-to-market (mass production to meet demand). reliability (stable and zero failure) and time-Io-market (introduction of new HOD). HOD manufacturers require their suppliers to set the same operational standards as they do. The HOD industry has been around for marc than two decades and is currently dominated by only a handful of MNCs. Having preferred suppliers as part of their supply chain management are practice norms. 6. INDUSTRY OVERVIEW (Conl’d) Current suppliers are viewed more as strategic panners due to the role they play in a HOD manufacturer’s operations. For example. a long-term supplier to a HDD manufacturer would be very familiar with the requjremems of that manufacturer and work very closely with the manufacturer to design, develop and produce (;omponents. Hence. a new player entering the HDD components and parts market can only be achieved if the HOD manufacturer (0 is looking to expand the number of component suppliers. or (ii) has terminated or is looking to terminate the relationship with one of its current suppliers. In addition, there are vital considerations for potential entrants. Amongst them arc: HOD component suppliers looking to get a foothold into the HDD component market are required to go through stringent component testing and trial periods (ranging from six months to one year); The supplier’s manufacturing capacity may not be sufficient to meet the HDD manufacturer’s production allocation requirements; The supplier must be capable of manufacturing products to meet stringent cleanliness requirements and has an in-house laboratory to suppon process monitoring and product certification; and Substantial investments required for the acquisition of machinery and subsequent constant upgrade for a high level of quality and precision manufacturing process. (Source: D&8 Malaysia Report) 6.1l RELEVANT LAWS AND REGULATIONS GOVERNING THE INDUSTRY AND PECULIARITIES OF THE INDUSTRY Apart from the normal manufacturing licence, there are no material government laws, regulations and policies governing the engineering supporting industry in Malaysia. The Board of Directors of Dufu is not aware of any specific material peculiarity in the said industry. 6.12 DEMAND AND SUPPLY CONDITIONS The demand and supply conditions of HDD components are directly driven by the dcmand and supply conditions of HDD. Demand for HDD is determined by the end-application markets. Traditionally, demand for HDD is highly correlated with the demand for desktop pes, laptops and, enterprise level servers and storage devices. However, the growing use of HDD for storage in consumcr electronic devices such as portable music players, DVD recorders, digital video recorders. and portable media players has added a new growth dimension for HDD. The future demand for HDD globally is seen to be bright. driven by the new and replacement desktop PC, laptop. consumer electronics markel and enterprisc server markets. In general, the supply of HDD comes from a handful of manufacturers. Consolidation of the HOD induslry over the past few years has further reduced the number of HDD manufacturers in the world. The top four (4) manufacturers. namely Seagate, HGST. Western Digital and MaXim, represent more than 70% of the global HOD industry revenue. The global HDD shipment surpassed 380 million units in 2005 and is anticipated to grow to an estimated 550 million units by 2008. (Sol/ree: D&B Malaysia Report) 6. INDUSTRY OVER”lEW (Con/’d) 6.13 SUBSTITUTE PRODUCTS AND SERVICES There an: no appropriate Sl1bSlitute materials for the manufacture of HDD components such 3S clamps and spacers. Various types of metal are used because of their inherent strength, hardness, durabilily and he’lL lransfer ability. Engineering pla:stil: or composite paris could act as substitutes to metal components and fUmed parts in other application mark.ets slJch as consumer electronics. Plastic parts which replace metal turned pans are used in general electrical and ck-.:tronics applications such as home appliances and audio/video products. (Source: D&B Malay… ia R~/Xm; THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEf7f BLANK 7. FUTURE PLANS AND STRATEGIES OF THE GROUP FUTURE PLANS AND STRATEGIES OF THE GROUP The Managem~nt has medium to long-term plans to strengthen its position and aggressively seek new business vcntwes to capture a larger market share and broaden its revenue potential. Such plans are 10 be achieved throllgh the following strategies: (i) New Customer Acquisition The Dufu Group is currently working on securing projects with new customers. This is in~ljne with the Group’s objectives of diversifying its revenue streams, reducing its dependence on the HDD industry and increasing profit margins. The Group is likely to work on new projects of potential customers from various application markets/industries such as metal and plastic ports, metal port, sensor and safety, plastic injection moulds and stamped brackets. (ii) Expansion of Production Facilities In view of the expected increase in production orders, the Group has budgeted RM7 million for the purchase of machinery over the next 3 years. The Dufu Group is building a new building for warehousing and production purposes beside the existing factory compound. The warehouse wi II be used lo consolidate all chemical, material and finished good stores under one roof. This is expected to increase the Group’s production area, improve logistics and inventory control functions. The relocation will free up floor space in the l.::xisting facility and allow further production expansion in the precision machining, stamping and auto~lathe divisions. The new warehouse will also contain store offices and inspection rooms for the Incoming Qualily Control (“lQC”) Department. The warehouse is estimated to be completed by the first quarter of 2007. (iii) Setting Up of Sales and Cuslomer Support Office The Dufu Group plans to set up a sales and customer service office in the U.S. in 2007. This is to create a visible presence, provide better support to its US~based clientele, and explore new customer acquisitions. THE RESTOF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 7, FUTURE PLANS AND STRATEGIES OF THE GROUP (Cont’d) 7,2 PROSPECTS OF THE GROUP IN LIGHT OF THE INDUSTRY OUTLOOK AND THE GROUP’S FUTURE PLANS The Directors are confident of the prospects of the Group in light of the following: (i) Positive Industry Outlook The global HDD market is a multi-billion dollar industry. The future prospects of the HDD industry remain positive and filled with exciting opportunities. The global HOD shipment surpassed 380 million units in 2005 and is anticipated to grow to an estimated 550 million units by 2008. The key industry growth driver of the HDD market, namely, the desktop and mobile computer segment will continue to be strongly driven by the increasing proliferation of PCs in the household and commercial segments. By being one of the premier players providing support services La the global HDD market, the Duru Group is well-positioned to capitalise the next wave of growth. (ii) Competitive Strengths The Group enjoys competiti ve strengths such as proven track record, long term relationship/strategic partnership with leading MNC customers, quality assurance, timely delivery, manufacturing capability, experienced management team and focus on customer service. (iii) Medium to Long-Term Plans and Strategies The Group will continue to focus on product quality and customer service. The Management believes that with the Duru Group’s existing medium to long-term plans and strategies (such as improvement of production capacity, production efficiency, and active panicipation in customers’ design and development process) W strengthen its position and aggressively seek new business ventures, the Group is poised for further development and growth. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK


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