Industry Overview

6. INDUSTRY OVERVIEW AND OUTLOOK 6. INDUSTRY OVERVIEW AND OUTLOOK

Decide with Confidence 23 I~AR 2011 Focus Lumber Berhad 11 th Floor, Wisrna Perindustrian Jalan Istiadat, Likas 88400 Kota Kinabalu Sabah Dear Sirs EXECUTIVE  SUMMARY  OF  THE  INDEPENDENT  MARKET  RESEARCH  REPORT  (“EXECUTIVE  SUMMARY”)  FOR  FOCUS  LUMBER BERHAD (“FOCUS LUMBER”)
This Executive Summary has been prepared for inclusion in the Prospectus to be dated n 6 APR 20’11 pursuant to the listing of Focus Lumber on the Main Market otl3ursa Malaysia Securities Berhad. This research is undertaken with the purpose of providing an overview of The Plywood Manufacturing Industry in Malaysia. The research methodology includes both primary research, involving in-depth interviews with pertinent companies, as well as secondary research such as reviewing press articles, periodicals, government literatures, in-house databases, Internet research and online databases. Dun & Bradstreet (D&B) Malaysia Sdn Bhd (“D&B Malaysia”) has prepared this Executive Summary in an independent and objective manner and has taken all reasonable consideration and care to ensure the accuracy and completeness of the Executive Summary. In addition, D&B Malaysia acknowledges that if there are significant changes affecting the contents of the Executive Summary after the issue of the Prospectus and before the issue of securities, then D&B Malaysia has an on-going obligation to either cause the Executive Summary to be updated for the changes and, where applicable, cause the Company to issue a Supplementary Prospectus, or withdraw our consent to the inclusion of the Executive Summary in the Prospectus. The Executive Summary is highlighted in the following sections. Yours faithfully, for an n behalf of RADSTREET (D&B) MALAYSIA SDN BHD
Managing Director 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d) II…
~_Decide with Confidence EXECUTIVE SUMMARY 1.1 THE GLOBAL ECONOMY The global economic recovery continued to strengthen at varying paces across regions in 2010, largely attributed to sustained fiscal stimulus and accommodative monetary policies worldwide. This was further supported by better economic performance in emerging economies, particularly China and India. In the first half of 2010, emerging and developing economies posted strong growth, supported by consumption and investment activities. Meanwhile, the major advanced economies grew at a moderate pace, despite large public debts and high unemployment. Lower consumer spending in the US and fiscal austerity measures in the euro areas affected by the sovereign debt crisis are likely to impact growth. However, strong growth in Asia, particularly China, India and the Association of South East Asian Nations’ economies as well as oil producing countries will provide the impetus for global growth. For 2010, world GDP growth is envisaged at 4.8%. Global trade volume rebounded quickly and is expected to record robust growth of 11.4% in 2010, after suffering a significant decline of 11% in 2009. The improved performance is due to a pick up in demand worldwide since the second half of 2009, supported by strong fiscal and monetary responses to mitigate the recession and stimulate growth as well as strong consensus to refrain from trade protectionism. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 82 6. INDUSTRY OVERVIEW AND OU·rLOOK (Cont’d)
Decide with Confidence Prospects for the global economy remain favourable in 2011 with continued improvements in global trade and investment, particularly in emerging and developing countries. In addition, enhanced post-crisis policy coordination, ongoing regulatory reform of the international financial system and efforts to further liberallse trade and investment are expected to facilitate private sector driven growth. However, challenges to the global growth momentum remain. These include the high level of public debt and unemployment rate as well as constrained bank lending in deVeloped economies and tightening of monetary policies in several emerging Asian economies to contain inflationary pressures. Global growth is projected at 4.2% while world trade is expected to expand by 7.0%. Table 1: Global Real GDP Growth, 2002-2011f
WorldGDP  3.1  4.0  5.3  4.8  4.9  5.2  3.0  -0.6  4.8  4.2  US  1.6  2.5  3.9  3.1  2.9  2.0  0.4  -2.6  3.0-3.5  3.5-4.2  Japan  0.3  1.4  2.7  1.9  2.2  2.4  -1.2  -5.2  2.6  2.0  Euro area *  0.9  0.8  2.0  1.5  2.8  2.4  0.6  -4.1  1.7  1.5
Notes: ‘* = Indicates member countries ifthe Euro area (AHstria, Belgium, C!Jprus, Finland, France, Germa1!J’ Greece, Ireland, ItalY, lJixembourg, Malta, Netherlands, Portuga~ Swvak Republic, Swvenia, Spain) e = estimate
f =jiJrecast Souree: Bank Net.ara Malaysia, Ministry ofFinance 6. INDUSTRY OVERVIEW AND OU’rLOOK (Cont’d)

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~_Decide with Confidence 1.2 THE MALAYSIAN ECONOMY The Malaysian economy is projected to expand between 5% and 6% in 2011, mainly driven by domestic demand and supported by a favourable external sector. The strong economic fundamentals will continue to propel the growth momentum of domestic demand. Private investment activity, which turned positive in 2010, is envisaged to contribute significandy to economic growth. Private consumption is expected to strengthen in view oflow unemployment and increasing disposable household income. Growth prospects are also premised on firm prices of major commodities, which will spur rural household spending in 2011. With the private sector spearheading growth, public expenditure is expected to moderate, reflecting the government’s commitment towards prudent fiscal management. On the supply side, growth is expected to be broad-based with positive contribution from all sectors in the economy, with the services sector remaining the major contributor to GDP. The manufacturing sector is expected to expand in line with strong investment and co~sumption activities. The agriculture sector is projected to increase, supported by higher output and firm prices of commodities. In addition, the mining sector is envisaged to grow, on account of higher natural gas production. The construction sector is also expected to grow stronger with the expansion of non-residential properties and the revival of residential construction activities as well as acceleration of major civil engineering projects. Table 2: Annual Change in Real GDP by Sector, 2002-2011£ (2000 prices)
GDP  5.4  5.8  6.8  5.0  5.8  6.2  4.6  -1.7  7.0  5.0-6.0  Agriculture  2.9  6.0  4.7  2.6  5.4  1.4  4.0  0.4  3.4  4.5  Manufacturing  4.1  9.2  9.6  5.3  7.1  3.1  1.3  -9.4  10.8  6.7  Mining  4.4  6.1  4.1  -1.3  -2.7  2.0  -0.8  -3.8  1.0  2.9  Construction  2.3  1.8  -0.9  -1.8  -0.5  4.7  2.1  5.8  4.9  4.4  Services  5.8  4.2  6.4  6.7  7.3  9.6  7.2  2.6  6.5  5.3
6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)

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~_Decide with Confidence Notes: e = estimate f= forecast
Source: Bank Ne,gara Ma/a?,sia, Ministry, o[Finance 1.3 THE MANUFACTURING SECTOR IN MALAYSIA Value added of the manufacturing sector is expected to expand further by 6.7% in 2011, in tandem with better economic conditions. The export-oriented industries are projected to grow at a steady pace, supported by strong intra-regional trade. The electrical and electronics (“E&E”) and machinery and equipment industries are envisaged to lead growth. Domestic­oriented industries are expected to expand in line with resilient consumer spending and sustained business confidence. The outlook for the construction-related materials industry is encouraging with the civil engineering segment expected to benefit from various infrastructure projects outlined in the Tenth Malaysia Plan 2011-2015 (“10MP”).
1.4 THE AGRICULTURE SECTOR IN MALAYSIA The agriculture sector is expected to grow by 4.5% in 2011. The production of crude palm oil is anticipated to increase following higher yields of fresh fruit bunches due to increased matured areas, particularly in Sabah and Sarawak. Both livestock and fishing will continue to record favourable growth, following the implementation of high impact projects. The special focus on high value agricultural activities during the 10MP period such as swiftlet farming, aquaculture, ornamental fish, herbs and spices as well as downstream activities for palm oil and rubber are projected to further spur growth of the sector. 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
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~_Decide with Confidence 1.5 INTRODUCTION TO THE WOOD-BASED INDUSTRY IN MALAYSIA The tropical rain forest of Malaysia is one of the most complex and rich ecosystems in the world. It is home to an estimated 3,000 species, out of which only about 400 species are subjected to commercial harvesting. The forests are being managed on a sustainable basis, taking into consideration species and genetic conservation, economic use, wildlife protection and maintenance of soil stability, among other things. The wood-based industry in Malaysia is. characterised by primary processed wood products comprising logging, sawnmilling and plywood manufacturing, and a smaller, albeit expanding domain of secondary processed wood products such as moulding, furniture and reconstituted wood-based panel manufacturing. Further downstream tertiary processing industries include timber treatment, the prefabrication of wooden houses, and parquet manufacture. Logging activities are considered as part of the agriculture sector, while the sawnmilling, plywood, moulding, furniture and reconstituted wood-based panel manufacturing activities fall under the manufacturing sector. As indicated in the value chain below obtained from the National Timber Industry Policy 2009­2020 published by the Malaysian Timber Industry Board (“MTIB”); being principally involved in manufacturing veneer and plywood, Focus Lumber is a primary processor of wood products. The present industry structure indicates that industry players are more inclined towards primary processing activities, which wou).d generate quick returns rather than venturing into higher value added manufacturing activities that provides slower but higher returns. In 2008, approximately .. 60% of wood-based exports were from primary processed products such as sawntimber and plywood while higher value added secondary processed products contributed the remaining 40%, mainly from activities in the furniture industry. The government hopes to have the industry structure reversed by the year 2020, that is, wood-based exports from primary processed products accounting for 40%, and secondary processed products the remaining 60%. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 6. INDUSTRY OVERVIEW AND OU”rLOOK (Cont’d)
Decide with Confidence Figure 1: Value Chain ofWood-Based Industry in Malaysia
SOllrte:MT1B Wood-based panel products can be classified into various categories based on the physical configuration ofthe wood used to make the products and they are as follows: • natural wood panels, characterised largely by the wood species used, ofwhich there are o veneer,
o plywood, and
o laminated veneer lumber.

Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
Decide with Confidence • reconstituted wood panels, manufactured from different types of wood waste bonded together with resins or other binding substances and pressed together to form panels such as o particleboard, o oriented strand board (“OSB”), and

o fibreboard (hardboard, medium density fibreboard (“MDF”) and insulation board) .

Veneer is produced as a thin sheet of wood of uniform thickness by peeling or slicing logs. Plywood is produced by gluing and compressing together, three (3) or more sheets of veneer, with the grain of alternate sheets usually laid crosswise. Laminated veneer lumber is an engineered wood product that uses multiple layers of veneer assembled with adhesives. Similar to plywood, thin sheets of wood are sandwiched on top of each other, held together with super­strong glue. Reconstituted wood panel products are produced by processes involving pressure, adhesives and binders. The laminated products produced in this industry may have layers of materials other than wood. OSB is an engineered structural-use panel manufactured from thin wood strands bonded together with waterproof resin under heat and pressure. It is used extensively for roof, wall and floor sheathing in residential commercial construction. Particleboard is typically made in three (3) layers. The face of the particle board consists of fine wood particles, and the core is made up of coarser materials. The smooth face presents a better surface for laminating, overlaying, painting and veneering. Particleboard is readily made from a variety of agriculture residues. The term fibreboard includes hardboard, MDF and insulation board. Several things differentiate fibreboard from particleboard, most notably the physical configuration of the material. As wood is fibrous by nature, fibreboard exploits the inherent strength of wood to a greater extent than does particleboard. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
Decide with Confidence Nonnally, a distinction can be made between structural panels, which are used in building constructions (such as concrete fonnwork, exterior siding and panelling, sheeting, roofing and £looring), and industrial panels, used in various industrial applications, especially furniture production, joinery, packaging, transport and audio-visual industries. Each type of wood panel has its own specific applications, constraints and price structure. Figure 2: Classification ofWood-Based Panels Products
SOllrce: D&B Malaysia Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d) ~_…118
Decide with Confidence 1.6 OVERVIEW OF THE PLYWOOD MANUFACTURING INDUSTRY IN MALAYSIA The plywood manufacturing industry began to emerge in the latter half of the sixties in a bold move to follow the success of the sawmilling activities, and it expanded rapidly in the seventies, due to the government’s prolific agriculture-conversion land programmes that rendered an unprecedented volume of logs available to the industry. In 2008, there were 53 mills in West Malaysia, 63 mills in Sabah and 53 mills in Sarawak, accounting for a total of 169 plywood/veneer processing mills in the country. Most of the plywood mills in Sabah and Sarawak are export-oriented, while the plywood mills in West Malaysia supply mainly to local consumers such as wooden furniture factories. Plywood comes in different grades depending on the quality of surfaces and the type of adhesive. It can be made from either hardwood or softwood logs. Softwood plywood (also called coniferous plywood) is mosdy produced in North America and Europe. Most hardwood plywood is tropical plywood, but some is also produced in temperate zones. It is also possible to produce plywood with a softwood core and a hardwood face and back. Softwood is a generic term used for wood derived from conifers. The term softwood designates wood from gymnosperm trees (plants that produce seeds with no covering). Softwood trees generally have needle-shaped leaves. On the other hand, the term hardwood designates wood from broad-leaved (mosdy deciduous) or angiosperm trees (plants that produce seeds with some sort of covering). In general, hardwood trees have broad leaves. Hardwood is often, but not necessarily, a harder and denser wood than softwood. Sarawak is the main producer and exporter of plywood in Malaysia. The plywood manufacturing industry has diversified into the production of high value added plywood overlain with printed paper and polyester plywood, and plywood for concrete formwork and marine applications. Malaysian plywood manufacturers are able to meet international standards such as the Japan Agricultural Standards, British Standards, Harmonised European Standards (European Norms) and International Hardwood Products Association Standards (for the US market). 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
Decide with Confidence Veneer sheets are thin sheets of wood of uniform thickness (usually not exceeding 5 millimetres) that are peeled, rotary cut, sliced or sawn for use in plywood, furniture etc. There are two (2) main types ofveneer sheets: • plywood veneers, which are generally produced by a peeling process from the more common species of wood and used for plywood production (therefore, in statistics, the
production of these veneers is not counted separately); and
• decorative veneers, which are produced by slicing or sometimes by sawing finer, highly grained woods and are used mainly in the furniture and wood panelling industries. Decorative or fancy veneer is normally produced by small, specialised mills in thinner sheets than plywood veneer.

 

1.7 PRODUCT DEFINITION Plywood is a flat panel built up of sheets of veneer called plies, united under pressure by a bonding agent to create a panel with an adhesive bond between the piles. Plywood can be made from either softwood or hardwood. It is always constructed with an odd numbers of layers with the grain direction of adjacent layers oriented perpendicular to one another. Cross-laminating layers of wood veneer actually improve upon the inherent structural advantages of wood by distributing along-the-grain strength in both directions. Since the layers can consist of a single ply or of two (2) or more plies laminated such that their grains are parallel, a panel can contain an odd or even number of plies. The outside plies are called faces or back plies; the inner plies are called cores or centres; and the plies with grains perpendicular to that of the face are called crossbands. The core could be either wood veneer or other materials such as oil palm veneer. Broadly speaking, two (2) classes of plywood are available for end users in the market, covered by separate standards: 6. INDUSTRY OVERVIEW AND OU·rLOOK (Cont’d)

 

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~_Decide with Confidence • construction and industrial; and
• hardwood and decorative.

1.8 PRODUCT SUBSTITUTES There are a few substitutes to plywood, which is traded as a commodity item in the market, particularly in the construction industry. There is little product differentiation for tropical wood­based products such as plywood and as a result, prices have not been able to achieve a level which commensurate to its value as a scarce natural resource. Consumers of tropical timber may shift to other alternative materials when the supply of timber is restricted or prices increase dramatically. Plywood made from hardwood also faces competition from plywood derived from softwood in the global market. For various reasons, many common construction materials are used as plywood substitutes. Some are significantly less expensive than plywood; while others are more suitable because of their decorative appearance and weather-resistant qualities. Improvements in product technology may increase the prospects for substitution. Direct wood-substitutes include OSB, particleboard and fibreboard. Non-wood substitutes such as concrete and steel can be used for flooring and other housing components as low-cost wood has become scarce. While some of these types of wood-based panels have specialised end-uses, many are functional substitutes. At least for some applications, processors can shift from one type to another, if and when the price is right. For example, OSB, while competing most strongly with sawnwood, is challenging structural grade (thick) plywood within the construction industry, while MDF is competing mainly with particleboard, but also with thin plywood, in furniture production. OSB has also steadily eroded softwood plywood’s share of the floor­sheathing market, particularly in the US. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)

 

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~_Decide with Confidence Notwithstanding all these substitutes, plywood has the following attributes which are not met by the above substitute products. Plywood is a highly stable panel. When exposed to moisture or high humidity, plywood is up to seven (7) times more resistant to thickness swell than substitute wood-based panels. Plywood also returns to its original dimensions when it dries. Plywood is stronger than substitute wood-based panels in the four (4) important engineering strength properties of bending, tension, compression, and planar shear and plywood weighs up to 40% less than substitute wood-based panels of equivalent thickness. In addition, plywood has properties such as a highly impact-resistant panel and continues to perform even when wet. Plywood is also recommended for its good screw holding capacity. 1.9 DIFFERING SEGMENTS Some common applications for hardwood plywood include chairs, kitchen and bathroom cabinets, tables, lamps, wall plaques, wall panels, chests, computer furniture, and television and stereo cabinets. The applications of plywood can be broadly categorised into four (4) market segments: • Construction, such as concrete formwork and shuttering, working platforms of scaffoldings, lining and panelling of houses and roof elements, wood-based construction and facades, and flooring;
• Furniture;
• Transport; and
• Packaging.

 

1.10 PAST PERFORMANCE Sales of plywood and veneer sheets accounted for a large proportion of total sales of wood-based products in Malaysia during the period between 2005 and 2009. Although ex-factory sales of plywood and veneer sheets decreased in 2009, they still accounted for nearly half of the total sales of wood-based products in the same year, in Malaysia. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
Decide with Confidence Table 3: Ex-Factory Sales of Plywood and Veneer Sheets
1.11 OVERVIEW OF PLYWOOD MARKET IN THE US South-eastern US is rich in forest resources and therefore, has an abundance of wood-based establishments ‘in the country. The production of plywood in the US is dominated by softwood and hence, the market for hardwood is dominated by imports. The US is the largest market for plywood in the world. The largest market in the US is the industrial sector, including applications such as furniture frames, truck trailer linings, RV floors, agricultural bins, packaging containers and pallets. In the construction industry, plywood is used for flooring, stair treads, risers, soffits, wall and roof sheathing, skirting and doors. Unlike softwood plywood, which has been losing market share to OSB in the structural panel market, demand for hardwood plywood has been relatively strong and increasing during normal times. The increase in demand has been fuelled by past robust construction activities that, in return, have stimulated demand for flooring, cabinets and wall panels. However, virtually all of the increase in US demand for hardwood plywood has been supplied by imports. Due to the various price points, lower cost plywood is usually used as under layment or backs of cabinet cases; while high-grade plywood might be used in exposed faces for the fronts and sides of cabinets. The principal products used in the furniture industry are particleboard and MDF, followed by plywood. 6. INDUSTRY OVERVIEW AND OU·rLOOK (Cont’d)
Decide with Confidence Rising housing starts in 2010 will be tied increasingly to the government’s housing stimulus program; and a decline in housing stocks will be needed before any significant demand rise can occur. It is forecasted that housing starts would amount to 716,000 and 1.1 million units in 2010 and 2011, respectively, representing strong growths. This is attributed to strong demographics, solid net immigration and replacement of homes past their economic lifespan. Other factors include cheaper home prices and attractive mortgage rates. RVs, also known as motor homes, motor vans and camper vans, are also a source of demand for plywood, utilised in ceilings, wall panels and furniture. At a minimal, a RV typically contains beds, a table, food preparation and storage areas. Larger models include full bathrooms, refrigerators, living areas, master bedrooms, etc. RVs are intended for everything from brief leisure activities such as vacations and camping, to full-time living, for which they are often parked in special trailer parks. The RV market is recovering from one of the worst years ever in 2009, with indications of a robust increase in unit shipments in 2010 due to pent-up demand. This is also assisted by improving credit availability, job security and consumer confidence.
201lf 2010r 2009 2008 2007 2006 2005 2004 2003 2002 2001  1,059 716 564 900 1,342 1,812 2,032 1,950 1,854 1,711 1,601  47.9 26.9 -37.3 -32.9 -25.9 -10.8 4.2 5.2 8.4 6.9  259.6 239.9 165.7 237.0 353.4 390.5 384.4 370.1 320.8 311.0 256.8  8.2 44.8 -30.1 -32.9 -9.5 1.6 3.9 15.4 3.2 21.1
Note: f= forecast 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
Decide with Confidence SOHr&e: NationalAssociation ofHome Builders, Indiana University Bioomin.gton, Recreation Vehicle IndHstry Association Table 5: Production and Conswnption ofPlywood in the US (‘000 cubic metres)
SOHm: International Tropical Timber Ozaniration 1.12 INDUSTRY PLAYERS AND COMPETITION There are 11 major players in the plywood manufacturing industry that compete with Focus Lumber in the market. However, some of the major players are not direcdy comparable to Focus Lumber as they are involved in many other business activities, besides plywood manufacturing. On a group basis, Focus Lumber managed to rank number two (2) in terms of profit before tax (”PBT”) margin for the latest financial year ended (“FYE”), based on the latest publicly available audited financial statements. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 6. INDUSTRY OVERVIEW AND OUTLOOK (Cant’d)
Decide with Confidence Table 6: Financial Indicators of Majoi’ Players (RM ‘000) for the latest FYE ~£~4;J~~;:i{~~t~&2:;~~~~!:~~~~~~1~;~~I~!i~~~¥~J Ta Ann Holdings Bhd 31/12/09 666,635.2 96,189.3 14.4 Focus Lumber Bhd 31/12/10 120,378.2 10,792.6 8.9 Eksons Corporation Bhd 31/03/10 279,149.3 24,504.1 8.8 Jid Fu Plywood Sdn Bhd 31/12/09 53,711.4 4,576.4 8.5 Subur Tiasa Holdings Bhd 31/07/10 679,853.1 46,332.3 6.8 Jaya Tiasa Holdings Bhd 30/04/10 746,001.0 40,036.0 5.4 KPS Consortium Bhd 31/12/09 311,541.9 9,416.6 3.0 Fu Yee Corporation Sdn Bhd 31/12/09 69,197.7 1,848.8 2.7 Lingui Developments Bhd 30/06/10 1,441,977.0 15,058.0 1.0 Veracity Corporation Sdn Bhd 28/02/10 61,241.9 403.7 0.7 Cymao Holdings Bhd 31/12/09 124,160.0 -5,790.3 N.A. Golden Pharos Bhd 31/12/09 83,733.0 -12,622.0 N.A.
Note: N. A. =Not Applicable Source:BursaMalaysia, CompaniesCommisswnofMalaysiaandmanat.ementofFot:1lsLimberBhd
1.13 MARKET SHARE AND POSITIONING Based on the latest statistics from MlTI, sales of plywood and veneer sheets in Malaysia amounted to RM6.2 billion in 2009. As Focus Lumber registered revenues of RMl02.3 million in 2009, it commanded a market share of 1.7% in the same year. In terms of export of plywood from Malaysia, Focus Lumber managed to record an export market share of 1.6% in 2009. However, for the state of Sabah alone, Focus Lumber achieved an export market share of 6.4% in 2009. For the US market, Focus Lumber attained a share of 23.9% for the imports of plywood, veneered panels and similar laminated wood from Malaysia, in 2009. 6. INDUSTRY OVERVIEW AND OU·rLOOK (Cont’d)
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Table 7: Focus Lumber’s Share in Certain Market Indicators (%) Source:MJTLMTIB, USDepartllJentofCommerceandmanagementofFoCl/sumber The plywood manufacturing industry is a fairly competitive industry. Hence, industry players need to differentiate themselves in terms of service, pricing, track record, technical knowhow and value added services. The market for plywood is not saturated at present. There is a constant demand generated by the various end-user industries. As the world undergoes an expansion in population, with the corresponding increases in the number of residential buildings and changes in lifestyle, demand for plywood is anticipated to increase in tandem, both on a per capita basis and on an absolute value basis. Market saturation occurs when the market is no longer generating demand for an industry’s products. 1.14 GOVERNMENT LEGISLATIONS, POLICIES AND INCENTIVES 1.14.1 Legislations The legislative framework is defined in the National Forestry Act 1984 and the Wood-Based Industries Act 1984. The National Forestry Act was amended in 1993 to include more stringent penalties for certain forest offences, particularly illegal logging. Provision was also made for the police and armed forces to enforce the act. The National Forestry Act 1984 is adopted for implementation by all the states and is complemented by relevant laws dealing with land and water conservation, environmental quality, wildlife protection, the management of national parks, biodiversity conservation, and the rights ofindigenous communities. Dun & Bradstreet (D&B) Malaysia SOO Bhd © 2011 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
Decide with Confidence The forestry departments are responsible for the planning, management and administration of forest resources. The Forestry Department Headquarters, Peninsula Malaysia, is responsible for forestry industry planning, forest management, forest development and operational studies, the provision of technical advice and services, and staff training. The state forestry departments in Peninsula Malaysia and Sabah are responsible for the administration, management and development of forest resources, the regulation of forest harvesting, the collection of forest revenue, and the planning and coordination of the development of wood-based industries in their respective states. In Sarawak, these functions are carried out by the Sarawak Forestry Corporation, while the Forestry Department is vested with regulatory functions. Apart from the forestry departments, there are a number of specialised institutions such as the Forest Research Institute of Malaysia, MTIB, the Malaysian Timber Certification Council, and university forestry faculties. Forest Research Institute of Malaysia (“PRIM”), which is under the Ministry of Natural Resources and Environment, promotes sustainable management and optimal use of forest resources by generating knowledge and technology through research, development and application. Among others, it provides data, standards and guidelines for managing natural forests on a sustainable basis. It also focuses on the development of forest-based industries. Lastly, it is also involved in creating new planting material through genetic engineering. Hence, FRIM is more involved in the upstream sector of the wood-based industry. On the other hand, MTIB is a statutory body accredited to the Ministry of Plantation Industries and Commodities. It is responsible for initiating development of the various segments of the timber industry and providing technical, marketing and other forms of assistance to ensure their continued growth within a rapidly industrialising Malaysian economy. Hence, MTIB is more involved with the downstream sector of the wood-base industry. 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
Decide with Confidence 1.14.2 Policies To date, the government has meted out an array of policies to support, develop and promote the wood-based industry, including plywood manufacturing. These include the establishment of the MTIB to regulate the timber industry, the Forestry Department to oversee the timber resources, and the Malaysian Timber Certification Council to develop a national timber certification scheme. The objective of the Malaysian Timber Certification Scheme which is operated by the Malaysian Timber Certification Council is to provide independent assessments of forest management practices in Malaysia as well as to meet the demand for certified timber products. In other words, timber certification is a market-linked tool to promote and encourage sustainable forest management, as well as to provide an assurance to buyers that the timber products they buy come from sustainably managed forests. Under the federal constitution, land use falls within the jurisdiction of the various states. Each state is empowered to enact laws, formulate its forest policy and manage its forests. The National Forestry Act 1984 establishes the general rules on forestry and each state is empowered to enact laws and regulations in line with those rules. The federal government.also provides advice and technical assistance, maintains experimental stations and funds research and training. The National Forestry Council, established in 1971, serves as a forum for coordination between the federal and state governments to discuss and resolve problems and issues relating to forest policy, administration and management, including the determination of the annual timber harvest. There is a commitment in the national forestry policy that sufficient land strategically located throughout the country is to be dedicated as permanent forest estate; the permanent forests be managed in accordance with the principles of sound forest management; and the efficient harvesting and utilisation of forest products and the development of forest industries be promoted. 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
Decide with Confidence The wood-based industry in Malaysia is faced with many challenges in the coming decade and beyond. It is especially apparent in the area of raw materials, skilled manpower, use of cutting­edge technologies, growing demand for wood-based products from sustainable timber sources in order to protect the environment and health, and to brace for competition from emerging wood-based exporters such as China and Vietnam. In this context, the National Timber Industry Policy 2009-2020 (”NATIP”), which was launched in 2009, provides the direction for the wood-based industry in Malaysia up to the year 2020 in order that it remains sustainable and competitive in a challenging global environment. The NATIP outlines strategic thrusts that will spearhead development of the wood-based industry: • Provides the policy direction for the wood-based industry in Malaysia;
• Ensure synergistic development of the upstream and downstream activities in the wood­based industry; and
• Enhance the industry’s competitiveness to meet the challenges of globalisation and liberalisation.

Recent global developments regarding the protection of human health and environment have led to the demand for sustainable timber and environmentally-friendly products. It is therefore important to ensure that wood-based products manufactured are from sources that are legal and sustainable. Globally, there is a growing demand for such product certification arising from concerns on quality, health, safety and the environment. 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)

 

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~_Decide with Confidence 1.14.3 Incentives The government has provided various incentives as well as the supporting infrastructure to stimulate the growth of the wood-based industry. A comprehensive package of fiscal and financial policies has been put into place to cater for the activities of the wood-based industry. Fiscal policies are in the form of incentives while financial policies refer to financing facilities and grants. The objectives of these incentives are to enhance the ability of manufacturers, particularly the small and medium-sized enterprises, to improve the efficiency of their operations and increase export capabilities. These activities include moving up the value chain in manufacturing, promoting exports, increasing research and development (“R&D’,) activities, promoting further investments in forest plantations and upgrading human resource development. Assistance in the form of incentives is provided for manufacturing activities which include biomass development, waste recycling, and acquisition of technology and foreign expertise. Incentives are also provided for the promotion of exports, market development and brand promotion. Tax incentives, both direct and indirect, are provided under the Promotion of Investments Act 1986, Income Tax 1967, Customs Act 1967, Sales Tax Act 1972, Excise Act 1976 and Free Zones Act 1990. The direct tax incentives grant either partial or total relief from income tax payments for a specified period, while indirect tax incentives come in the form of exemptions from import duty, sales tax and excise duty. A company undertaking forest plantation projects is given full tax exemption for either five (5) or 10 years of assessment. In addition, tax deduction is given to the investing company equivalent to the amount of investments made in the subsidiary company to initiate forest plantation activities. Alternatively, the company may opt for “Group Relief’ which allows a company undertaking forest plantation activities to offset the losses incurred from the profits of another company within the same group. However, the minimum area for a plantation has to be 50 hectares and planting has to be taken on a sustainable basis. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
Decide with Confidence 1.15 DEMAND AND SUPPLY CONDITIONS Malaysia has emphasised the use of sustainable public and private forest plantation growth to supplement the supply of industrial roundwood for its wood-based industry. The harvesting of forest resources is controlled by concessions issued to private companies by the various state governments. Currently, the supply of raw materials is derived from three (3) forested land areas, namely pennanent forest estates, state land and alienated land. Due to reduced state land forests and alienated land, forest plantation programmes will be expected to fill the vacuum. The policy on the ban of exports of logs implemented by several timber producing countries would further affect the supply of raw materials. This, together with the increasing competition in the global market would result in a lower supply of raw materials for the domestic market. Hence, the plywood manufacturing industry would have to adjust its operations to the limited supply of both domestic and imported timber resources. In addition, due to recent global developments for legal and environmentally-friendly products, local plywood manl:lfacturers sourcing raw materials from overseas need to ascertain that they are obtained from legal and sustainable sources so as to ensure that their exports in turn will not be affected by global concerns on these issues. In recent years there has been a shift in some international tropical timber markets from the threat of bans and boycotts against tropical timber to calls for certification and labelling. Forest certification is a way of verifying whether a particular forest area is well managed and, through labelling, of assuring consumers that in purchasing labelled wood products they are supporting sustainable forest management. In addition, there is also growing global demand for product certification arising from concerns for quality, safety and health. Such concerns have resulted in specific technical requirements to meet certain standards by importing countries. The regulatory requirements by Japan for imports of plywood as well as the need for Conjormite Europeenne (CE marking) by Europe are such examples. 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
Decide with Confidence To ensure sustainable supply of raw materials, the government has introduced various measures such as sustainable forest management and forest plantation programmes. The supply of logs to the domestic market is to be given priority in order to ensure that there is an adequate supply of logs for local manufacturers. The plywood manufacturing industry is also encouraged to maximise wood recovery rates through improvements in current processing techniques, including further utilisation of wood residues. Other measures include increased utilisation of .smaller diameter logs from oil palm trunks, plantation timber species and imported softwood logs. While product technology may increase the prospects of substitution of raw materials, the decline in the supply and increasing prices of tropical logs would provide the incentive to further stimulate the development of the industry by using alternative raw materials, which are readily available and the supply more reliable. Although the government has provided financial support and incentives to promote investments in forest plantation projects, investors are still reluctant to invest due to the long gestation periods and slower returns from these projects. Investors also have to apply to the state governments for the lease of land and generally, this process takes a relatively long period of time. Collectively, these factors have resulted in relatively low level of investments in forest plantations. Rubberwood logs are generally obtained as a by-product of rubber trees from agricultural rubber estates, which were established for the production of latex. However, they can also be obtained from rubber tree plantations which grow trees solely for the production of logs. It is anticipated that rubberwood logs would become more significant in the future as a log production species rather than a by-product of trees grown for latex. Imported timber currently supplements the raw materials needed by the domestic wood-based industry. Logs, sawntimber and plywood are imported from countries such as New Zealand, Australia, Canada, the US and Myanmar. In the case of plywood manufacturing, pine logs are also imported to be processed. The increased demand for wood-based products in the global market has led Malaysia to increase its imports of such woods. 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d) ~_…
•Decide with Confidence 1.16 INDUSTRY’S RELIANCE ON AND VULNERABILITY TO IMPORTS The wood-based industry is highly dependent on imported technology. Local machineries, which are non-heavy types, are mainly utilised in simpler applications, while machines for higher technology requirements are imported. Although there is a gradual shift in preference for lower cost machinery made in China, instead of European-made. machinery, factors such as cost, precision, reliability, consistency, durability and maintenance are the main ones that determine as to which make of machinery is to be purchased. Although the plywood manufacturing industry in the peninsula is beginning to lose its lustre primarily due to the shortage in the supply of logs, the industry remains viable in the East Malaysian states of Sabah and Sarawak. Also, the productivity of plywood mills in the peninsula remains lower than those of their counterparts in East Malaysia. This is attributed to a combination of factors such as insufficient investments in the latest technologies, escalating production cost and depleting wood supply. In general, the supply oflogs is on a reducing trend due to a number of reasons such as follows: • moves to sustainable forest management;
• reduction or completion of conversion forest programmes;
• production and/or export controls; and
• moves to reduce/eliminate illegal trade in logs.

6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)

 

 

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~_Decide with Confidence 1.17 PROSPECTS AND OUTLOOK OF THE INDUSTRY The government aims to make Malaysia a major producer of high value-added, wood-based products in the world market. The wood-based products industry has long been an important segment of the country’s manufacturing sector. It has undergone major changes over the past decades, with downstream processing activities and higher value added activities becoming increasingly important. The wood-based industry is a major contributor to value added, export earnings and employment in the manufacturing sector. It has extensive linkages with the primary sector, principally tropical hardwood timber and rubberwood, and forward linkages to the metals, and machinery and equipment industries. From being a major supplier of plywood, the industry has progressed to become a major exporter of MDF and rubberwood furniture. The growth of the plywood manufacturing industry in Malaysia is dependent on demand in the foreign markets. In return, the demand for hardwood plywood remains strong in the global market. due to its widespread usage in many application markets. There is a wider diversity of end uses for hardwood plywood, as compared to softwood plywood. A major portion of plywood used is in the construction industry and construction spending depends on the general state of the economy. As the size of the Malaysian market for plywood is relatively small given the number of plywood manufacturers in the country, it is more important to possess the ability to penetrate the larger overseas markets. The opportunities are vast in the overseas markets, especially in North America, Europe and Japan.
6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)

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~_Decide with Confidence In particular, both the building industry and RV industries in the US use hardwood plywood with a thickness of less than 0.25 inch. As veneer as thin as 0.01 inch is utilised in thin hardwood plywood, the wet production process is used, in which the face and back veneers are laid up and pressed without prior drying. As more labour is required to handle thin veneers, it is not cost effective for plywood marlUfacturers in the US to make thin plywood. Smooth, knot­free logs from both Malaysia and Indonesia are well-suited for thin plywood and as a result, give these countries a competitive advantage. RV manufacturers use thin plywood for its strength, light weight and flexibility, which allows it to conform to interior contours. It is usually laminated with printed paper for interior applications or with fibre· glass and aluminium for exterior walls. The market trend is also towards thinner panels, as both manufacturers and consumers of hardwood plywood seek to reduce costs. Hence, Focus Lumber Bhd is in a position to capitalise on these attributes.

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