12. SUMMARY O. INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT 12. SUMMARY O. INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT o VITAL FACTOR CONSULTING Vital Factor Consulting Sdn Bhd Creating Winning Business Solutions (Ccrnll<lny No.: 266797·T) 75C & 77C Jalan 5522/19 Damansara Jaya 47400 Petaling Jay-a2 February 2005 Selangor Darul Ehsan. Malaysia Tel: (603) 7728-0248 The Board ofDire<:lors Fax: (603) 7728-7248Evergreen Fibreboard Berhad Email: email@example.com PW 12, Paril Raja Industrial Estate Website: \’I\\oW,vitalfaGtor,oom 86400 Paril Raya Batu Pahat lahar Malaysia Dear SirsIMadaJn Assessment of the Reconstituted Wood-based Panel Board Industry The following is a sUlllITlary ofthe Independent Assessment of the Reconstituted Wood-based Panel Board Industry in Malaysia prepared by Vital Factor Consulting Sdn Bhd for indusion in the Prospectus of Evergreen Fibreboard Berhad (herein together with all its subsidiari!’s will be referred to as Evergr!’!’n Group) in relation to its proposed listing Oil the Main Board ofthe Bursa Malaysia Securilies Berhad. I. Background of Eveq:;reen Group • The prineipal activilies ofEvergreen Group are as follows: Manufacturing of Plain and Value-added Medium Density Fibreboard (MDF); Manufacruring of Plain and Value-added Particleboard; Manufacturing of Knocked-down Wooden Furniture. • For the fmaneial year ended 31 December 2003, the Group’s revenue amounted to RM250.7 million. 2. Overview of the Reconstitufed Wood-Based Panel Board Industry • Reconstituted Wood-based Panel Board sector falls under Ihe total umbrella of the Wood·Based Industry.
• Reconstituted Wood-based Panel Board Industry plays an important supporting role in the growth and development of the Wood-based Industry in Malaysia. This is subsUntiated by the following observations:
Malaysia is a major exporter of Reconstituted Wood-based Panel Board products to the world market whereby -in 2003, the export value of MDF alone reached RM978.6 million., making Malaysia lhe world’s lhird largest exporter ofMDF (Source: Malaysian Timber 11ldustry Board and Malaysian Industrial Development Authorily). Reconsliruled Wood-based Panel Board is u:garded as a promoted activity, which is ~ncouraged and supported by Government incenlives such as Pioneer Status. This is in line wilh the Government’s dforts for a focused and seleclive approach in the development of the Wood-Based Industry in ensuring that limited resources are utilised in the manufacture of high valueadded products. Evergreen Fibreboard Berhad Industry Assessmem 257 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING Cresting Winning Business Solutions Reconstituted Wood-based Panel Board is regarded as value-added products. This involves the conversion or recycling of low-grade wood based materials for example residue from wood mills, tree branches and chip waste to produce quality panel products. Providing variety in secondary products such as the different types of Reconstituted Wood-based Panel Board to increase the choke of working materials for end-product manufacturers. Undertaklng manufacturing of semi-finished products such as furniture componenls to increase efficiency in mass~productjon for end-product manufacture-rs as well as enabling furniture manufacrurers to focus on their core competencies. As the Reconstituted Wood-based Panel Board Industry is largely derived from plantation timber and residues produced by wood mills to produce fibre, it will provide a viable alternative in view of lhe growing shortage of tropical hardwood. • Reconstituted Wood-based Panel Board is also growing in usage and applications. Some of the diverse applications of Reconstituted Wood-based Panel Board include the following: building materials such as floor decking, wall lining, roof decking, wall cladding, doors; profiling such as architraves, skirtings, cornices, windows frames, door frames; furniture and furniture pans including office and household furniture, tables. shelving; decorative products such as kitchen bench tops and cabinets; household products such as toys, baby cots, picture frames; panelling and partitioning; flooring.
3. Industry Structure • The Reconstituted Wood-based Panel Board Industry is structured into the following sub-sectors: Reconstituted Wood-based Panel BO<lrd Industry
MDF -Medium Density Fibreboard HDF ~ High Density Fibreboard ass ~ Oriented Strand Board Figure I Industry Segmentation 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING Creilling Winning Business Solution, • The Reconstituted Wood-based Panel Board Indusrry comprises tbe following major
product categori~s: Medium Density Fibreboard (MDF); High Density Fibreboard (HDF); Particle Board; Wood Cement Board; Oriented Strand Board (OSB).
• Rfi:onstltufcd Wood-based Panel Board are products mainly made from wood reduced [0 particles, which range from large nakes to fibres, and bonded under heat and pressure with adhesives 10 produce flat, dense sneets.
RecOnstihlled Wood-based Pallel Boord is also sometimes referred to as composite board. MDF and HDF are composite boards or panels that are made of wood fibres. These con-posite boards call be routed, moulded, fUlished aod laminaled, nuking the boards the (deal raw material bases for mouldings and other types of internal joinery. MDF is mainly used in the Fumimre Industry and are largely interior produces, not suitable for outdoor use. Some ofthe applications ofMDF include kitchen bench topS, kitchen cabinets, shelves, flush doors. television cabinets, mouldings, cupboards, dmwers. office furniture. gante boards, picture frames, pedestals for tables and many others. 1lle thicker MDF is used for millwork applications including door frames. window frames, casings and turnings, and others. HDF is used for heavy-duty pu.rposes and are widely used for flooring. T11e manufacturing process of HDF involves signific1.\tlt pressure and ten~rature to compress the particles into a flat board which are higher in density con1’ared to MDF. Particle Board is also referred to as chipboard. These boards are panels composed of wood particles in the fonn of chips or shavings, bonded together wilh resin and compressed Ulto rigid sheets. Fine particles are usually laid at the swfaces of the panels 10 fonn dense layers, the less dense core comprised ofcoarse particles. Some of the applications of Particleboard include furniture. kitchen cabinets, floor underlay. shelves, television casings, partitions. ceilings and many others. Wood Cement Board are panels manufactured from wood strands bonded with cement. These panels are largely used as building materials for a wide range of applicatiOn<; including exterior and inlerior wall partitioning. flooring and underlay, roofing, peml3nenl shuttering for concrele forming systems and SOWld barriers. Oriented Strand Board are panels made with layers of precisionmanufactured wood strands, flakes or wafers sliced from small diameter, round wood logs thal are aligned or oriented. All these are formed inlo panels and. pressed with an eXlerior-type binder under heat and pressure. Oriented Strand Boards derive th~ir stTength from uninlenuplcd wood fibres. interwoven long strand or wafers, and Ihe degree oforienlation ofsurface layers strands. 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Conf’d) o VITAL FACTOR CONSULTING erutlng WinnIng aU!lln~ss Solutions Oriented Strand Boards ate used for strucfW’a1 sheathing for walls and roof, nooring, packaging and advertising display. 1be panels are highly Tesilient to impact and are lherefore suitable for lining of buildings such as indoor spons halls. Oriented Strand Boards aTe used to replace plywood in most applications. 4. Vertical Structure of the Reconstituted Wood-based Panel Board Industry
Manufacture 04 Reconstituted Wood-based Panel Board
Downslream Manufacture 04 Wooden FlFiture and Furniture Parts Manufacture of Other Wooden Pr()(fuG!s Distribu~on and Retail
Figure 2 Vertical Structure of the Reconstituted Wood-based Panel Board Industry • The manufacture of Recollstituted Wood-based Panel BOOTd can also be segmented into: upstream; midstream; downstream. Upstream • The upstream activities of the Reconstituted Wood-based Panel Board Industry essentially comprise natuTal forest, timber plantation and timber logging.
• The primary raw materials used in the manufacture of Reconstiruted Wood-based
Panel Board include the following: residue of branches from timber plant3!iM and natural forest; coarse industrial green in the forms of slabs, edgings. ofT-ellIS., peeler cores and veneer rejects; fine induslrial Wilsie namely, planner mill shavings and sawdust; wood cbips from machining dry wood; dry wood-based waste such as slabs, edgings and ofT-cuts from furniture manufacture. 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business SOllJl’ons Midstream • Midstream activities comprised the manufacturing of Reconstituted Wood-based Panel Board, including MDF.
• As at November 2003, there were approximately 10 MDF manufacturers.
• Mosl of these manufacturing plants are located in Peninsular Malaysia
Downstream • Downstream activities include: l1UIIufacture of finished fullliture and fullliture parts; manufacture ofother wooden products; sales through distributors or retailers.
• In 2003, Mal3ysian Industrial Development Authority reported thaI there were more than 2,000 companies manufacturing furniture in Malaysia. (Source: Malaysian Industrial Development Authority).
• For the manufacture of other wood products, this includes joinery and moulding products, parquet flooring, piclllre frames. doors. crates, speaker boxes, kitchen cabinets, interior fit-outs and building materials such as wall panels and partitions.
• Tilt: common distribution chalmels for downstream products are mainly: distributors; wholesalers; retailers.
S. Government Legislation. Policies and Incentives • Application ofa manufacturing licence under the Industrial Coordination Act, 1975 is mandatory for companies \\o1th shareholders’ funds of RM1.S mlilion or :;above or engaging 7S or more full-time employees (Source: Malaysian Industrial Development AuthoriryJ. Licensing orwood-b.ased Industry • All wood-based operations are required to obtain a number of Licences, Pemtits and Approvals from the State as well as the Federal Govenunent.
• As a Federal maner, the Malaysian Timber Industry Board is the authority responsible for the issuance of licences on wood-based activities under Wood-based Industries Enactment 1973 and Wood-based Industries Rules 1990 (Source: Ministry of PrimalJ’ J”dlu·trie~).
12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Conf’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • The registration of the following wood-based operJtions with the Malaysian Timber Industry Board is mandatory under the Malaysia Timber Industry Board Enactment 1913 and Wood-based Industries Rules 1990:
export of timber or carry on business as an exporter; carry on business as OJ jeny operator; carry on the business of grading timber; carry on business as a supplier or timber processor, for the purpose of export trade.
• Wood-based manufacturers are required to apply for a licenc.e to site, constmct, erect,
establish, operate or maintain a wood-based operation. Such operations include; Sawmills, plywood mills, veneer mills and blockboard miJls; Woodworking mills, furniture mills and wood moulding mills; Fibreboard mills, chipboard mills and pulp mills; Mobile sawmills; Otarcoal kilns.
• At the state level, the main governing body is the Forestry Departmellt of the respective states.
• As such, :MDF and Particle Board manufacturers located in Johor are governed by the Johor Wood-Based Industries Rules 1986 or the rules, which were lawfully fixed at the latest d:lte by the Johor Forestry Department.
• For exports of wood products, the Malaysian Timber Industry Board is the starutory body responsible for the issuance of export licences.
Atomic Energy Licensing • TIle licensing of Alomic Energy is governed by the Atomic Energy Licensing Act 1984 (Act 304). The objecti…-e oftbe Act is to mainly provide for the regulation and control of.nomicenergy and fortheestablishmentofstandardson liability for nucleardamage.
• 11le regulations gazt:ned under lhe Alontic Energy Lice-nsing Act 1984 (Act 304)
include: Radiation ProtecCion (Licensing) Regulations 1986; Radiation Protection (Transportation) Regulations 1986; Radiation Protection (Basic Safety Standards) Regulations 1988.
• In line with Section 3 of the Atomic Energy Licensing Act 1984 (Act 304), the Alomic Energy Licensing Board (AELB) was established under the Prime Minister’s Department on 1 February 1985. The AELB acts as che enforcement and licensing body for the implementation of the Act.
• On 27 October 1990, AELB was placed under the Ministry of Science, Technology and the EnvirOM1ent,
• Radiation and x-ray gauging activities requiring licence include: bore hole logging; thickness measurement; density measurement; level measurement; moisture measurement;
12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VIT AL FACTOR CONSULTING Creating Winning Business SOlutions tracer-f101radiflo measurement; calibration sources; analysis; sterilization; quality assurance; research.
(Source: Atomic Energy Licensing Board) Government Incentives • The major incentives for companies investing ill the manufacturing sector are the: Pioneer Status; Investment Tax. Allowance; Reinvestment Allowance.
• Eligibility for either the Pioneer SlalUs or Investment Tax Allowance will be detennined according to the priorities termed as “promoted activities’ or “promoted products”. In addition, lhe level of value-added, Ieclmology and industrial linkages will also be laken into consideration.
• In line with the Government’s int~nlion to promole the gro’\\1h and development of the Wood-based Industry, the manufacture of the following wood and wood-based products are regarded as promoted activities eligible for Pioneer Status and Investment Tax Allowance:
reconstituted wood-based panel boards or products; wooden solid or other specialised function doors or wooden solid windows; multi-ply parquet; wooden furniture or parts; insulation for cryogenic vessels; all wooden products except sawn limber, veneer and plain plywood.
• Eligible manufacturers producing for the export lTL’lrkel may also apply for Drawback of Sales Tax on Materials Used in Manufacture. According 10 section 29 of the Sales Tax Act 1972, all duty-paid goods used as materials for the manufacture of other goods which are subsequently exported, are eligible for Drawback ofth~ Sales Tax in full.
• Other inc~lltives available for eligible manufaclUrers include: Training Incentives such as the HWl131l Resource Development Fund; Incentives for Research and Development; TariffRelated InceDlives such as:
Double Deduction for Promotion of Exports; Exel11ltion from Import Duty and $ales Tax on Machinery and Equipmem; Exelll’tion from Import DUlY and Sales Tax on Spares and Consumables.
(Source: Malaysian Industrial Development Authoriry) 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o
VITAL FACTOR CONSULTING C.aaling Winning Business Solutions 6. Environmental R~uJations • Some of the main environmental issues faced by co”””anie.s involved in the manufacture
ofRecOflstituted Wood-based Panel Board include: Disposal ofbulk waste comprising timber materials; Control ofchimney smoke emissions from burning wood for the boiler; Wastewater from the boiler containing wood-based sludge.
• The Department of Environment has specified that the installation of boiler for the heating of water or other liquid in premises must obtain prior written approval by the Director General of the Department of Environment.
• The prescribed pennissible limits of concentration of air impurities or smoke· emission, resulting from burning wood lor the boiler, is regulated under the Environmental Quality Act 1974 and EnvirOlUnental Quality (Clean Air) Regulations 1978.
• The disposal of any sludge from wastewater treatment system falls under the Environmental Quality (Scheduled Wasles) Regulalions 1989.
(Sollrce: Ellvjronmelllal Quality Act and Regulations) 7, Supply and Suppl~ Dependencies Supply • According 10 the Department of Stalistics, the production of MDF is categorised undcr the Plywood, Hardboard and Particleboard Mills sector.
• As there is no specific data available on local production ofMDF, data on Plywood, Hardboard and Particleboard Mills is llsed to provide an indication ofperfonnance in the Reconstituted Wood-based Panel Board Industry.
• Sales value of Plywood, Hardboard and Particleboard Mills decl~d at an average annual rate of 0.3% from 1999 to 2003. In 2003, sales value increased by 4.6% to RM6.3 billion over the previolls year.
However, between January and September of 2004, sales value of Plywood, Hardboard and Particleboard Mills (including MOP) increased by 26.6% to reach RM5.8 billion compared to the same period in 2003;
• Between 1999 and 2003, sales value of Particleboard grew at an average :mnual rate of 3.70/0. In 2003, sales value decreased by 6.90/” 10 RM785.J million.
However, between January and October of 2004, sales value of particlcboard increased by 3.8% 10 RM684.8 million cOl~ed to the same period in 2003.
• Between 1999 and 2003, produclion quantity of Particleboard grew at an average annual rate of 3.9%. In 2003, production quantity decreased by 18..5% to 1.1 million cubic metres.
Between January and October of 2004, production quantity of particleboard decreased by approximately 10.0% to 941,000 cubic metres compared to the same period in 2003. 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING C’1l9ting Winning Business SOlutions Supply Dependencies • The major raw materials required for the manufacturing of MDF are primarily: wood fibres; urea resin.
• Other raw malerials used include wax emulsion, hardener and olher addilives.
• Generally, the raw wood fibres used in Ihe manufacturing of MDF can be of any type or species and in almost any mixlure such as low grade wood species, branches, small diameler Irees, hardwood, sol’hvood, mill waste and forestry waste chips. As such, there is a high recovery rate of the raw materials.
• As Rubberwood logs constilute major raw materials for the production of MDF. the availability of rubber plantations and replantation areas is vital to the supply chain for the Reconstituted Wood-based Panel Industry.
• The supply of rubberwood logs is almost exclusively from rubber plantation and replantation areas in Malaysia. Import of rubberwood logs and processed rubberwood is minimal.
• Between t999 and 2003, total acreage of rubber plantation decreased at an average annual rate of2.7% (Note: 2003 figures are estimates only). Over the past five years, total acreage of rubber plantation declined from 1.5 million hectares in 1999 to an estimated L3 million hectares in 2003.
• The areas replanted with rubber in Malaysia increased at an average rale of 1.0010 per annum from 1999 10 2003 (NQte: 1003 figures are estimates only). Replanling increased from 1.30 million hectares in 1999 to 1.35 million hectares in 2003 (Nole: 2003 jigure.f are estimates only).
• In 2003, the areas that are replanted ….<jlh rubber registered an increase of l.5% over the previous year (Note: 1003figures are i?$tr’mafes only).
• As the production of MDF primarily can use a variety of raw materials such as wood shavings, sawdust in addition to wood fibres, manufacturers can use any type of plantation logs as raw materials.
• The other major raw material used in the production ofMDF is resin.
• Resin is used to bind the wood fibres together before undergoing heat and pressure to fonn a flat dense sheet.
• Malaysia is a local producer of urea with an approved capacity of 600,000 tonnes per amtum.
• In addition to local sources, Malaysia also imports urea resin from countries including Singapore, Taiwan, Indonesia, Italy, Turkey, Sweden and Olners. In 2003, Malaysia imports approximately RM26.1 million ofurea resin
(SOljree: Ministry of Primary Indus/ries. Deporl1nent of Statistics and Malaysia Industrial fJel.’elopment Authority). 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o
VITAL FACTOR CONSULTING Creating Winniog 8usiness Solutions 8. Demand llnd Demand Dependencie$ Demand • Demand for MDF and Particleboard is dependent on the following markets: Local market demand; Overseas in terms of export market demand.
• However export market demand for MDF and Particleboard predominates. Follo\.\-ing are some of the export market trends for MDF and Particleboard:
BeN’eell 1999 and 2003, export value of MOF grew at an average annual rate of 7.3%. In 2003, export value of MOF increased by 12.9″10 compared 10 the previous year. In 2003, export value of MOF reached RM978.6 million. Between 1999 and 2003, export quanliry of MDF grew al an average annual rate of 8.1%. In 2003. export quantity of MOF increased by 12.5% compared to 2002. In 2003, export quantity of MDF reached approximately 1.2 million cubic metres. Between 1999 and 2003, the export value of Particleboard and similar board or wood or other ligneous materials, whether or not agglomerated with resins or other orgllnic binding substances, declined at an average annual rate of 2.7%. However, in 2003, the export value increased by 21.9% to reach RM 139.2 million. (Source: Department ofStatistics Malaysia) Demand Dependencies • Some of the major usage and applications of MDF and Particleboard include the following: building interiors including architectunll features such as columns and archways, partitions, wall and ceiling panelling, doors, base material for laminated and veneered wood products for flooring and wall panelling, and others; profiling, joinery and millwork applications including furniture mouldings, joinery, skirting, architecDlral mouldings, decorative doors, pillars, architraves, window and door components such as frames, sills, stiles, rails, louver blades and panelling. flooring pieces, finger joints and veneer-wrapped mouldings, door stops, door jambs casings and others; household products including picture frames, toys, game boards, cots, hifidelity speaker boxes, shoe heels, snooker tables and others; furniture and fixtures including kitchen bench tops, kitchen cabinets, office and household furniture, shelves, cOII1’uter stands, television casings, built-in furniture, dining sets, bedroom sets, backers of cupboards and drawers, display cabinets and olbers automolives including interior parts of autornotives. 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) a
VITAL FACTOR CONSULTING C.ealing Winning Business SOlutions 9. Competitive Nature :lind Intensity • Operators in the Reconstituted Panels Industry including the manufacturing of MDF face normal competitive conditions. As with most free enterprise environments, competition is based on qualiry of products and services, cost competitiveness, prompt delivery schedules, manufacturing capabilities as well as customer convemence.
• Generally, competition among operators in the Manufacture of MDF is moderate to high. This is substantiated by the follov.’ing factors:
Facton: that Moderate Competition As at November 2003, there were approximately to manufacturers of MDF in Malaysia. The small nUITJlxr of o~rators in lhis industry moderates the competitive intensity. This is primarily due to the high barriers of entry into the industry in lenTIS of capital sel·Up requirements. MDF has diverse applications whereby Ihey are more superior in temL’i of ease of\>.’Orking with the material, COsl con..,elitiveness, and the ability to add value 10 the malerial especially through the laminarion of a top sheet. As such, its versatility creates prtference over olner competing alternatives. Manufacturers are in a com~titive poSition if they can meet the following: confonn to intenKItional quality standards including meeting acceptable international standards for formaldehyde emission; meel the requirements :;llld specifications of customers; ability to satisfy large volume orders. • This \\ill somewhat moderate the corq>etitive intensity for such manufacturers. Factors that Increase Competition As MDF are primarily export-oriented, Malaysia faces significant competition from overseas countries. Overseas competition increases the competitive intensity for operators in the industry. MDF compete ‘kith other types of wood-based materials for example., high density fibreboard, …..ood cement board, oriented strand board,. laminaloo board, panicle board and sawn timber. MDF also COtfl)Cles with Glher nonwood based material for example, plastic, melal and glass. All these alternatives increase the compelitive pressure for MDF nullufacturers. 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) a VITAL FACTOR CONSULTING C.ealing Winning Business SolullollS 10. Key PI3)·ers In The Industry’ • The key players in the rnanufacmring ofMDF in Malaysia include the following: Merbok Hilir Berhad; Evergreen Fibreboard Berhad; Dongwha Fibrebo<lrd Sdn Bhd; Hume Fibreboard Sdn BM; Robin Resources (MDF) Sdn Bhd; Guthrie MDF Sdn Dhd; Daiken Sarawak Sdn Bhd: Samling Fibre Board 5wI Bhd; Segamat Panel Boards Sdn Bhd. Note__ Merbok HiliI’ Berhad includes Merbok MDF Sdn End and Takeuchi MDF Sdn EM Dong-who Fibreboard Sdn Slid rccclllly took O’o’er Golden Hope Fibreboard Sdn Shd. (Source: Primary Market Research undertaken by Yital Factor Consulting Sdn Bhd) 11. Harriers to Entry • Barriers to entry into the Reconstituted Wood-based Panel Board Industry are moderate to high.
• This is mainly substantiated by that there are relatively few number of manufacrnrers in the industry. As at November 2003, operators m the Reconstirnted Wood-based Panel Board Industry comprised the following:
10 MDF manufacturers; 7 particleboard manufactmers; 6 wocxl cement board manufacturers.
• The main barriers to entry into the Reconstituted Wood*based Panel Board Industry
are: Government policies; capital set-up costs; technical skills; track record. Government Policies • Apart from the normal manufacturing licence and other wood-based industry and export licences, there are no other specific Govenunent regulations and policies governing the entry ofmanufaclUrers of Reconstituted Wood-based Panel Board
• A manufacrurjng licence is only required by companies with 75 or more employees or companies with it share capital of MH.S million or more
(Source: Malaysian Industrial Development Aurhorityj. 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING Cre~ting Winning Business Solutions Capital SetMup Cosis • Capital set-up coSt for the manuf(lcturc of Reconstituted Wood Panel Boards is high.
• Following are the capital set-up requirements for a small and medium sized
manufacturing planl: seuing·up a small sized MDF manufacturing plAllt would cost between RM60 million and R.M70 million (excluding land and building). At this level of entry, the capilCll investment is for one basic, full line of MDF production, which “”ill l;ener.ue an alUlUal output of 60,000 cubic metres of MDF per annum. setting-up a medium sized MOr: mallufacturing plant would cost between RMI20 million and RM150 million (excluding land and building). At this level of entry, tile capilal inveslll1Cnt is for one full line of MDF production which will generate an arulUal output of 100,000 cubic metres of MDF per annum. (Source: Evergreen Group Bel’had). • Capi131 costs will start to escalate for larger operations.
• Smaller manufacru.rers will find i\ difficult \0 compete with larger manufacmrers that have the advantage ofeconomies of sctlle. In addition, Itlrger manufacturers are also in a stronger position to meet the expon market requirements for a higher volume of production.
• Thus, the high capital sel·up cosl even for a smalJ sized rrumufacruring plant will pose as a barrier 10 eony for new entrants.
Technical Skills and Knowledge • The level of tedmical skills and knowledge required in the manufacturing of Reconstituted Wood-based Panel Board is moderate to high.
• The main technical skills and knowledge are required in the following areas: research and development; production processes.
• Manufachlrers that continually conduct research and development on existing products as well as new products or applications are in a stronger position to address opportunities and compete effectively in the global market. Some examples of resellrch and development is in the following:
ability to produce MDF th:.’lt has a lower emission of formaldehyde cOI11’ared 10 the current 10 to 30 milligrams of formaldehyde emission per 100 grams of dried fibre. This type of fibrebo3rd will be targeted at countries including Japan and Europe. the usage ofdifferenl types ofrecycled raw m..lIerials to prodllce MDF. new applications such as high moisrure resistance MDF. 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) c VITAL FACTOR CONSULTING Creating Winning Business Solutions • Other areas of technical skills and knowledge is in the production process and some of this includes the following: the control of temperature and the moisture level of resinated fibres to control the thickness ofthe finished fibreboard; the control of the supply of raw materials is also critical to achieve consistency in the quality ofthe finished fibreboard. One such example is the blending of chips, sawdust and wood shavings which must adhere to a ratio to ensure consistency in the panel quality. Sawdust and wood shavings is used as part of the supply of raw materials to help control moisture content and fibre size distribution. optimising pressing operation through improvements in processes. • Manufacturers that have the technical skills are more likely to achieve the following: reduce their cost of production; attain higher product quality; attain higher productivity; better able to meet customers’ specifications and requirements; provide a wider range of products to help customers address areas of growth and opportunities.
• As such, barriers to entry may be moderate at its most basic, but ability to sustain the business would require a higher level of skills and expertise.
Track Record • Track record also forms one of the barriers to entry for new entrants. It is unlikely that a new entrant without any track record “viII be able to compete effectively in the global market for Reconstituted Wood-based Panel Board Industry.
• It will take some time for a new entrant to be established in the market before customers are willing to take them on as a supplier.
• As such, track record would pose barriers to entry for new entrants, which would fmd it difficult to gain irrunediate access into the market.
12. Industry Outlook • The outlook for the Reconstituted Wood-based Panel Board Industry is dependent on the following: Local Production Sales value ofPlywood, Hardboard and Particleboard Mills (including MDF) declined at an average annual rate of 0.3% from 1999 to 2003. In 2003, sales value increased by 4.6% to RM6.3 billion over the previous; However, between January and September of 2004, sales value of Plywood, Hardboard and Particleboard Mills (including :MDF) increased by 26.6% to reach RM5.8 billion compared to the same period in 2003; 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Between 1999 and 2003, sales value of Particleboard grew at an average alUlUal rate of 3.7%. In 2003, sales value decreased by 6.9% to RM785.1 million; However, between January and October of 2004, sales value of particleboard increased by 3.8% to RM684.8 million compared to the same period in 2003. Bet\veen 1999 and 2003, production quantity of Particleboard grew at an average annual rate of3.9%. In 2003, production quantity decreased by 18.5% to 1.1 million cubic metres. Between January and October of 2004, production quantity of Particleboard decreased by approximately 10.0% to 941,000 cubic metres compared to the same period in 2003. (Source: Department ofStatistics Malaysia). Exports Between 1999 and 2003, export value of Medium Density Fibreboard (MDF) grew at an average annual rate of 7.3%. In 2003, export value of MDF increased by 12.9% to reach RM978.6 million. Between 1999 and 2003, export quantity ofMDF grew at an average annual rate of 8.1%. In 2003, export quantity of MDF increased by 12.5%, amounting to approximately 1.2 million cubic metres. Between 1999 and 2003, the export value of Particleboard and similar board or wood or other ligneous materials, whether or not agglomerated with resins or other organic binding substances, declined at an average annual rate of 2.6%. However, in 2003, the export value increased by 22.7% to reach RM139.2 million. (Source: Malaysian Timher Industry Board and Department of Statistics Malaysia) End-User Industry Sectors The perfonnances ofsome ofthe end-user industries for MDF are as follows: Between 1999 and 2003, the sales value of FlUlliture and Fixtures grew at an average annual rate of 7,4%. In 2003, sales value increased by 10.1% to approximately RM4.0 billion; Between 1999 and 2003, the Construction Industry grew at an average annual rate of 1.6%. In 2003, the Construction Industry recorded gro\\’ih of 2.1%; Between 1999 and 2003, the sales value ofPlllning Mills, Window and Door Mills and Joinery Works declined at an average annual rate of0.4%. However, in 2003, the sales value increased by 3.8% to RM1 I billion over the previous year (Source: Bank Negara Malaysia and Department ofStatistics Malaysia). 12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 13. Threats and Risk Analysis Availability of Rubberwood • Rubbef\vood is the main raw materials for the manufacturing of MDF. However the production ofMDF uses ‘by-parts’ ofrubberwood namely the branches and smaller diameter rubberwood logs that cannot be used by the millers.
• Any decline in the supply of raw materials used may impact on the manufacturers of Reconstituted Wood-based Panel Board that use rubberwood.
• Bet\veen 1999 and 2003, total acreage of rubber plantation decreased at an average annual rate of2.7% (Note: 2003 figures are estimates only).
• The planted area in Malaysia is dominated by smallholding sector. The income obtained by smallholders is relatively low resulting from low volume of rubberwood harvested and low latex price in the world market. This has reduced the invesnnent undertaken by smallholders in rubber forest plantation.
(Source: Ministry ofPrimary Industries) • In addition, the conversion of rubber plantations to oil pahn plantations, housing and other commercial uses, has aggravated the declining supply ofrubberwood. Mitigating Factors • Even though the average arumal rate of total acreage of rubber plantation declined between 1999 and 2003, the areas that are replanted \\1th rubber in Malaysia registered an average gro\’;ih rate of 1.0% per annum during the same period (Note: 2003 figures are estimates only) (Source: Ministry of Primary Industrie5).
• In the event of a shortage in the supply of rubberwood, other alternative materials such as off-cuts, shaving and sawdust in addition to other types of plantation wood may be utilised for the production ofMDF.
Threats of Substitute Products
• There are various different types of substitutes for Reconstituted Wood-based Panel Board Industry.
• Wood-based substitutes such as solid timber, bamboo, rattan and plywood, as well as non-wood substitutes such as vinyl, concrete, granite, marble and metals, compete with Reconstituted Wood-based Panel Board in terms of similar applications and enduser sectors.
12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solulions Mitigating Factors • Reconstituted Wood-based Panel Board including MDF is the new substitute product for solid wood, plywood and other wood based materials. Reconstituted Wood-based Panel Board such as MOF has many of the mechanical and physical characteristics of solid wood but without the natural faults.
• As such, although there are many substiolte products for MDF, the major advantages of Reconstituted Wood-based Panel Board over many of these substihtte products are as follows:
low cost, as the production of Reconstiruted Wood-based Panel Board utilises wood waste, small·diameter logs and mahtre trees from wood processing mills; more environmentally friendly as mainly plantation wood is utilised as raw materials compared with tropical hardwood-based alternatives; highly versatile in applications. • In fact, the following Reconstituted Wood-based Panel Board would represent a closer substitute and higher threat 10 Olher wood-based substinlles: Chipboard and Particleboard provide some cost advantages over Plywood for similar applications; MDF is fast becoming the material of choice for kitchen cabinets and cupboards due to its many superior qualities over Ply.vooci, such as moldability; Oriented Strand Board (OSB) has technical properties similar to ply.vood. OSB is a product developed in North America and has been produced and marketed as an alternative to softwood plywood. OSB can be used to replace plywood ill most applications such as sheathing panels for walls, roofs and floors. Timber Certification • Certification of timber products is becoming increasingly imponanl in Europe and North Amenca. Wood-based producing markets that do POt provide a credible certification system are likely to face bans on timber trade in the Europe and North American markets.
• In situations where markets constitute Sb”ong consumer preferences for certified products, certification is viewed as a powerful means of raising foresl management performance. As relevant bodies such as the Foresl Stewardship Council (FSC) and World Wildlife Fund (WWF) achieve the status of sole certification system, it will create a monopoly position in timber certification in Europe. Hence, the certified members will ultimately be committed to purchase and sell only certified timber products as well as setting their ovm targets and timetable for trading certified timber products.
12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING Crealing Winning BusineS$ SOlul;OnS Mitigating Factors • In response to the requirement for certified or ‘green’ timber by major export markets, particularly European countries, Malaysia itsl:’lf has come up with its own certification system to provide a credible alternative to the FSC certification system and to counter the effect oflhe system in Europe and North America.
• The Malaysian Timber CertifIcation Council (MTCC) is the organisation lhat plans and operates a voluntary national timber certification scheme to provide assurance to buyers of Malaysian timber products that have been sourced from sustainably managed forests.
• The standards of the national timber certification being used by MTCC are in accordance with the Malaysian Criteria Indicators, Activities alK! Standards of Perfonnance for Forest Management Certification. This is based on the standards used under the Malaysia-Netherlands cooperation programme in timber certification.
• MTCC also issues Chain-of-Custody (CoC) to local manufacfUrers and exporters who have intcrest in registcring their wood-products. Betweell 14 December 2001 and 12 April 2002, 26 wood-based manufacturers and exporters have been awarded with CoC cenific:uion on various scope of wood-products manufacturing (Source: Malaysian Timber Certification Council).
JmplemenUiltlon of AseaD Free Trade Area (AFTA) • With the implementation of AFTA through COnTInon Effective Preferential Tariff (CEPT), the reduction of import duties to 0% to 5% on a wide range of products may makes imports very competitive: against locally manufactured products.
• CEPT is the mechanism by which tariffs on goods traded within the Asean region. which meet a 40% Ase;)n content requirement, are subjected to a reduction ofthe abovementioned range oftaritTby 2003 (2006 for Vietnam, 2008 for Laos and Myanmar).
• Efforts to bring about greater trade Iiberalisation through WTO, the setting up of regional blocs and bilateral arrangements between countries require the Wood-based Industry to be vigilant on the market opportunities as well as achieve greater efficiency.
Mitigating Factors • As Reconstituted Wood-based Panel Board is an export onenled industry, AFfA and WTO would have minimal impact on nl:lnufacturers. In fact, AFTA would provide opporhmities for export-oriellted Malaysian manufacfUrers of Reconstituted Woodbased Panel Board penetrale or address other Asian markets.
• In addition, fibreboard is subjected to import duties ranging from 5% to 15%, which is higher than the general AFTA CEPT Tilte. This offers some form of protection against ~rts ofFibreboard into Malaysia.
• In 2003. the major export markets ofMDF were China artd Jap::10 (Source: Malaysian Timber Industry Board).
12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Cont’d) o VITAL FACTOR CONSULTING Creilting Winning Business Solution’ FJuctuation in Prices of Rubberwood Logs • As rubberwood log is a comroodity, the cost ofsourcing this conunodity as raw material for the production of MDF is subjected to fluctuations in prices. In some situations, increases in the price of raw materials are nol easily passed onto the user. This could irqJact on the margin or alternatively, if the increase in cost is passed onto the user, the manufacturer may not be price competitive.
• Within a year, prices of rubberwood logs may also fluctuate due to seasonality whereby during the rainy season, the slowdo’Wn in felling activities may contribute 10 a shortage in supply.
Mitigating Factors • As this raw material is a commodity and there-fore subjecled 10 price fluctuations, all manufacturers that use this material are equally affected
• However between 1999 and 2003, prices of rubberwood logs only increased at an average rate of 3.l1’/o per annum. Over Ihe five-year period, prices of rubberwood logs have only increased frOI11 RM90 per cubic metre in 199910 RMI05 per cubic metre in 2003 (Source: Malaysia” Timber I”dustry Board)
• As me production of MDF mainly uses the ‘by-pans’ of rubberwood, namely the branches, operators that manufacture MDF lire not dire<:t1y affected by the price fluctuations.
Exposure-to Foreign Exchange Fluctuations • The industry is also vulnerable to flucNations in foreign exchange. TIris applies to the import of raw materials, semi-fmishcd and ftnished products. Similarly operators thai manufacture products for overseas markets will also be affected by foreign exchange fluctuations.
• An lUtfavourable foreign exchange movement against the Ringgit would impact on the operating cost and profitability of operators in lite Reconstituted Wood-based Panel Board Industry.
Mitigating Fadors • The curren! pegging of the Ringgit to the United Slates’ Dollar (USD) has helped significantly ill stabilising the Ringgit against the USD. As mosl imports are quoted in usn, this has helped stabilise prices and enabled Reconstituted Wood-based Panel Board operators that import raw malerials, semi·finished or finished products to bener plan their business operalions.
• However, Malaysia’s current fixed currency regime m3Y change at any time and may have a direct impact on operators.
12. SUMMARY OF INDEPENDENT BUSINESS AND MARKET RESEARCH CONSULTANTS’ REPORT (Conf’d) o VITAL FACTOR CONSULTING C’eating Winning BullMBn Solutions 14. Market Size and Shan. • In 2003, the market size based on production of MDF in Malaysia was estimated at
J.5 mUllan cubic metres (Source: Primary Market Research undertaken by Viral Factor Consulting Sdn Bhd).
• In 2003, Evergreen Fibreboard Berhad’s market share of MDF in Malaysia was approximately 16-/•.
JS. Market Ranking • Based on production, Evergreen Fibreboard Berhad ranked second among manufacturers within the MDF Industry in Malaysia in 2003. Vital Factor Consulting Sdn Bhd has prepared Ihis report in an independent and objective manner and has Iaken aU reasonable consideration and care to ensure the accuracy and completeness of the report. II is our opinion that the report represents a true and fair assessment of the industry within the limitations of, among olhers, secondary statistics and infonnation, and primary market research. Our assessment is for the overall industry and may nol necessarily reflect the individual perfomlance oCany company. We do not take any r~sponsibilities for the d~cisions or actions of readers of this document. This report should not be laken as a recommendation to buy or not to buy the shares ofany company. YOlU”S sincerely
Wong Wai Ling Director Vital Factor Consulting Sdn Bhd