Industry Overview

15. INDEPENDENT MARKET RESEARCH REPORT 15. INDEPENDENT MARKET RESEARCH REPORT
o VITAL FACTOR CONSULTING Vital Factor Consulting Sdn. Bhd. (Company No: 266797-T) Creating Winning Business Solutions 75C & 77C Jalan 5522/19 Damansara Jaya 47400 Petaling Jaya Selangor Daru; Ehsan. Malaysia 29 February 2008 Tel (603) 7728 0248 Fax (603f 7728 7248 The Board ofDirectors www.vitalfactor.comHartalega Holdings Berhad Mezzanine Floor No. SA, Jalan Sri Semantan Satu Damansara Heights 50490 Kuala Lumpur
Dear SirslMadam Independent Assessment of the Latex Glove Industry in Malaysia The following is a summary of the Independent Assessment of the Latex Glove Industry in Malaysia prepared by Vital Factor Consulting Sdn Bhd for inclusion in the Prospectus of Hartalega Holdings Berhad (herein together with all its subsidiaries will be refelTed to as Hartalega Group or the Group) in relation to its proposed listing on the Main Board of Bursa Malaysia Securities Berhad. 1. BACKGROUND OF HARTALEGA GROUP • Hartalega Group is principally involved in the manufacturing of Latex Gloves comprising Natural Rubber and Nitrile Gloves.
• As the manufacture of Latex Examination Gloves accounted for 98.3% of the total Group revenue for the fmancial year ended 31 March 2007, the focus of this report will be on Latex Examination Gloves under the total umbrella of the Latex Glove Industry.
• For the fmancial year ended 3] March 2007, Hartalega Group’s revenue amounted to RM240.9 million.

2. INDUSTRY OVERVIEW • The Latex Glove Industry plays an important role in the Malaysian economy. This is substantiated as follows: Malaysia is currently the world leader in the production ofrubber gloves; In 2006, Malaysia maintained its position as the largest supplier of Latex Gloves to the United States, accounting for approximately RM2.1 billion of total exports of Latex Gloves; Export earnings from Latex Gloves registered an average armual growth rate of 14.4% between 2002 and 2006 reaching RM5.4 billion in 2006; According to MIDA, in 2006, there were 500 companies involved in the rubber products industry in Malaysia, of which approximately 21% (105 companies) were registered as manufacturers of Latex Gloves; Hartalega Holdings Berhad Latex Glove Industry 326 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Between January and September 2007, the export earnings from Latex Gloves increased by II.!% to reach RM4.9 billion compared to the same period in the previous year; In 2006, sales value of the manufacture of Rubber Gloves registered a growth of 28.5% to reach RM5.6 billion (based on 65 establishments); Between January and September 2007, sales value of the manufacture of Rubber Gloves registered a growth of 3.9% to reach RM4.2 billion compared to the same period in the previous year; Export earnings of Latex Gloves accounted for approximately 64.3% of the total export earnings generated from the Rubber Products Industry in 2006; According to MIDA, in 2006, capital investments within the Rubber Products Industry reached RM714.6 million of which approximately 48.7% of the total capital investment was approved for the production of industrial gloves, household gloves and examination gloves. (Source: Malaysian Industrial Development Authority, Department of Statistics Malaysia, Ministry of International Trade and Industry Malaysia and Ninth Malaysia Plan 2006 -2010, Economic Planning Unit, Prime Minister’s Department) • Latex Gloves is part ofthe Latex Products Industry as illustrated in the figure below:
Source: Malaysian Industrial Development Authority Figure 1 Structure of the Latex Products Industry • The Latex Glove Segment itself is further segmented as depicted in the figure below:
Figure 2 Structure ofthe Latex Glove Industry Hartalega Holdings Berhad Latex Glove Industry 327 15. Il.\’DEPENDENT MARKET RESEARCH REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Latex Gloves are made by dipping moulds in the shape of human hands into liquid latex and chemicals. Once hardened, the finished products are stripped off the mould and then packaged and sterilised.
• The defmitions ofthe various types ofLatex Gloves are as folIows:

Examination Gloves: Examination Gloves are divided medical grade and non-medical grade. Medical grade .Examination Gloves are extensively tested to meet stringent international standards, which are in accordance to the various regulations in different countries. Medical grade Examination Gloves are also known as Patient Examination Gloves. It is made of natural rubber, nitrile, vinyl or some other materials. The glove is a disposable item intended for single usage and is used in health care to prevent contamination between patients and medical examiners, nurses and other health care personnel. Surgical Gloves: Surgical Gloves are made from natural or synthetic rubber, which are mainly used by operating room personnel to prevent contamination between patients and medical and other health care personnel. Industrial Gloves: Industrial Gloves are heavy-duty gloves designed specificalIy for industrial usage. It is mainly used for protection against hazardous substances or chemicals, and protection against abrasion. Household Gloves: Household Gloves do not have to meet stringent requirements and are more for general household chores such as gardening, cooking, dish washing and cleaning. 3. VERTICAL STRUCTURE OF THE LATEX GLOVE INDUSTRY • The manufacturing of Latex Glove Industry can also be vertically extended to include upstream, midstream and downstream activities as folIows:
Rubber Plantation and Oil and Gas Production Latex Collection and Refining Upstream L ~ Processing of Manufacturing of Natural Rubber Latex Synthetic Rubber Latex I I Ml\nufactuJing’elf I<atex.Gloves.~-{ -L Distribution
_m{ 1 Figure 3 Vertical Structure of Latex Glove Industry Hartalega Holdings Berhad . Latex Glove Industry 328 IS. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Upstream • Upstream activities primarily involve the production and processing of the raw materials, including natural and synthetic rubber.
• In 2006, Malaysia produced 1.3 million tonnes of natural rubber. Between January and June in 2007, local production of natural rubber reached 590,100 tonnes. (Source: Malaysian Industrial Development Authority and Malaysian Rubber Board)
• Malaysia has a Synthetic Latex plant that started operations in Kluang. Johor in 2003.

Midstream • Midstream activities cover the manufacture of Latex Gloves.
• Hartalega Group is primarily involved in the manufacturing of Latex Gloves, which falls under the mid-stream activities of the vertical structure.

Downstream • Downstream activities include the distribution of Latex Gloves to end-users such as healthcare institutions, dental clinics and industrial users. 4. GOVERNMENT LEGISLATIONS, POLICIES AND INCENTIVES 4.1 Manufacturing Licence • Apart from the normal manufacturing licence and other industry-based permits, licences, standards and regulations, there are no material government laws, regulations and policies that may impede on Latex Glove manufacturers’ performance and growth within a free enterprise environment.
• Application of a manufacturing licence under the Industrial Coordination Act, 1975 is mandatory for companies with shareholders’ funds of RM2.5 million or above, or engaging 75 or more full-time employees (Source: Malaysian Industrial Development Authority).
• On 22 September 2006, Hartalega Sdn Bhd, a wholly owned subsidiary of Hartalega Group was issued a manufacturing licence from the Ministry of International Trade and Industry Malaysia to manufacture Latex Gloves.

4.2 Licence from the Malaysian Rubber Board Purchase Licence for Rubber • According to the Malaysian Rubber Board, any person involved in the buying or selling of rubber, or buying rubber for the manufacture of rubber products, is subjected to the Malaysian Rubber Board (Licensing) Regulations 1997. Hartalega Holdings Berhad Latex Glove Industry 329 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) o
4.3 4.4

VITAL FACTOR CONSULTING Creating Winning Business Solutions • Hartalega Sdn Bhd has obtained a licence from the Malaysian Rubber Board to buy rubber for the manufacture of rubber products. The licence is valid between I July 2007 and 30 June 2008, which is renewable on a yearly basis. The Group has submitted an application to the Malaysian Rubber Board for the renewal of this licence. Export Licence for Rubber Gloves • According to the Malaysian Rubber Board, any person involved in shipping rubber or exporting rubber gloves, is subject to the Malaysian Rubber Board (Licensing) Regulations 1997.
• Hartalega Sdn Bhd has obtained an export licence from the Malaysian Rubber Board that permits the company to export rubber gloves. The licence is valid between I February 2008 and 31 January 2009, which is renewable on a yearly basis.
Other Regulations
• In 2006, the Malaysian Rubber Board introduced a new ruling, whereby Malaysian made Natural Rubber Latex Gloves with a protein content of more than 400 microgram per gram (J.lglg) will be barred from export. This new ruling is not applicable for industrial and household gloves. (Source: Malaysian Rubber Board)
• The Malaysian Rubber Board has the authority to conduct surveillance visits and collect samples from manufacturers and traders of Latex Glove for testing using ASTM D5712:99 test method. This practice is to monitor and restrict the export ofLatex Gloves with protein content exceeding 400 J.lglg in Malaysia.
• According to the Malaysian Rubber Board (Licensing) Regulations 1997 and Malaysian Rubber Board (Licensing Amendment) Regulations 2002, the Malaysian Rubber Board may take punitive measures such as compound, charge in court, revocation and suspension of certificate if any of the manufacturers or traders of Latex Glove are found to be non-compliant.
• According to management, Hartalega Group complies with the requirements of protein content ofthe Malaysian Rubber Board.

Overseas Government Regulations • One of the areas of overseas Government regulations that are relevant to Latex Glove Manufacturers is the US Food and Drug Administration (FDA) to ensure that Quality Compliance is in accordance to the new FDA standard.
• Similarly, all Latex Gloves that are exported into the European Union must also comply with the Medical Devices Directive (EC Directive 93/42/EEC). This directive regulates the import of medical gloves into the European Union.
• Malaysian Latex Glove exporters must also have the appropriate quality management system certifications.

Hartalega Holdings Berhad Latex Glove Industry 330 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’dj Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Each of these countries have their own standards whereby exporters of Latex Gloves need to conform to, for example medical gloves are covered under European standards EN455, EN556-1 and ENI 041 which are equivalent to the ASTM (American Society for Testing and Materials) standard used in the United Slates.
• Manufacturers of Latex Gloves who are exporting to these countries must continue to demonstrate that their gloves comply with the relevant standards by performing quality control checks.
• Non-compliance to these relevant standards will result in the detainment of entry of products into the country. In the United States, the FDA place exporters on Import Alert if they are found to be non-compliant. Exporters who have been placed on Import Alert by the FDA will have their shipments detained and their gloves will only be admitted to the US subject to presentation ofevidence ofcompliance. Requirements for evidence ofcompliance will depend on the Detention Level prescribed by the FDA. Once exporters are removed from the FDA Import Alert list, they will revert to normal practice of random checking without detention.

4.5 Government Incentives • As part of the Malaysian Government’s intention to nurture the growth and development of the manufacturing industry, the Govemment provides the following incentives for eligible companies:
Pioneer Status; Investment Tax Allowance; Reinvestment Allowance.

• The production of Latex products including Surgical Gloves and Safety/Special Function Gloves are listed as a promoted activity/product eligible for consideration either for Pioneer Status or Investment Tax Allowance under the Promotion of Investment Act 1986.
• Some of the benefits of the respective incentives include:

Pioneer Status An eligible company for Pioneer Status will enjoys a 5-year partial exemption from the payment of income tax; Investment Tax Allowance An eligible company for Investment Tax Allowance gets an allowance of 60% on its qualifYing capital expenditure (such as factory, plant, machinery or other equipment used for approved project), which are incurred within five years from the date of the first qualifYing capital expenditure. Harta/ega Ho/dings Berhad Latex G/ove Industry 331 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Reinvestment Allowance All manufacturing companies that have been in operation for at least 12 months which have incurred qualifying capital expenditure to expand production capacity, modernise and upgrade production facilities, diversify into related products, and automate its production facilities, can obtain a Reinvestment Allowance. (Source: Malaysian Industrial Development Authority) • Hartalega Sdn Bhd, a wholly owned subsidiary within the Harta1ega Group, is currently enjoying the Reinvestment Allowance incentive. 4.6 Trademarks • Under the Trade Marks Act 1976 and Trade Marks Regulations 1997, all trademarks have to be registered before a trademark can be adopted in relation to any goods or services. (Source: Trade Marks Act /976 and Regulations. and Patents Act /983 and Regulations)
• The registration of trademarks is valid for a period of ten years and may be renewed thereafter.
• Hartalega Group has taken steps to protect the trademark of its brands in Malaysia and overseas. The Group has registered its trademark for the following brand names as stated below:

Trade  Next Renewal  Description of Goods under  Trademark  Countries  mark No.  Date  . Class  Trademark  BIO-FLEX  Mexico  196358  15 April 2014  10  Latex examination and surgical gloves  LOWPRO  Japan  4009382  6 June 2017  10  Gloves for medical purposes  PHARMATEX  Germany  2053432  3J October 2012  10  Surgical gloves and latex examination gloves  Italy  FI92e/8  3 November 2012  10  Gloves for medical and surgical use  Japan  4002777  23 May 2017  IO  Gloves for medical purposes  Switzerland  401.364  29 October 2012  10  Gloves for surgical and medical purposes including latex examination gloves  Australia  969344  9 September 2013  10  Medical Examination Gloves  New Zealand  701187  9 September 2013  10  Medical Examination Gloves  Dental apparatus; gloves for  ELASTIK  European Community  5203823  30 June 2016  10  massage; gloves for medical purposes; surgical apparatus  and instruments
Figure 4 Hartalega Group’s Registered Trademarks in Malaysia and Overseas Hartalega Holdings Berhad Latex Glove Industry 332 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • In addition, the Group has submitted applications for the following trademarks, which are still pending approval: Tr;ld~R1ark  .. .¢IlUl!tti~s  ClliSs •  1)~s.~l:rl!ti6!i!if Gi!Qi!$,un~erTta(lllll1~tk .  INNOVA  Malaysia  10  Disposable examination gloves; disposable protective gloves for medical purposes; gloves for massage; gloves for dental use; gloves for medical use; etc  PHARMATEX  Malaysia  10  Disposable examination gloves; disposable protectivc gloves for medical purposes; gloves for massage; gloves for dental use; gloves for medical use; etc  A device shaped like a Globe (Hartalega’s logo)  Malaysia  10  Disposable examination gloves; disposable protective gloves for medical purposes; gloves for massage; gloves for dental use; gloves for medical use; etc
Figure 5 Hartalega Group’s Trademarks in Malaysia and Overseas Pending Approval 4.7 Patents and Patent Licence Agreement 4.7.1 Patents • Hartalega Group has filed patents with the authorities for the following machinery and systems, and processes: Countrv  ADDlication No.  FiliD2 Date  Invention  Status  Malaysia  PI 2004 2773″  12 July 2004  The Arrangement and Method of Assembling Former Holders”  Pending Approval  peT””  PCT/SG20051000227*  I I July 2005  China  200580030535.2  12 March 2007  India  1084IDelNP/2007  8 February 2007  Indonesia  WOO 2007 00424  8 February 2007  Vietnam  1-2007-00307  12 February 2007  Malaysia  PI 2005 4989″  25 October 2005  Glove Remover#  Malaysia  PI 20064405″”  31 October 2006  Gloves Singulator  Thailand  0701004109″”  17 August 2007
“Patents werepreviouslyfiledunderAHEAutomation SdnBhd. the Group’smachinefabricator. AHEAutomation Sdn Bhd subsequently assigned the patent to Sentinel Engineering Sdn Bhd. a wholly owned subsidiary ofHartalega Group. “” Patent Cooperation Treaty (PCT) allows filing of “international” patent application to protect an invention simultaneously in several countries. As at 1 October 2006. there were 133 countries that adhered to the peT. ~ Also known as Double Former Dipping Line; #Also known as Robotic Glove Stripping System ~~ Patents were filed under Sentinel Engineering (M) Sdn Bhd, a wholly owned subsidiary ofHartalega Group. Figure 6 HartaIega Group’s Filed Patents in Malaysia and Overseas Harlalega Holdings Berhad Latex Glove Industry 333 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions

4.7.2 Patent Licence Agreement • The Group, through its subsidiary, Hartalega Sdn Bhd has entered into a patent licence agreement with Microflex Corporation on 20 June 2007 whereby Hartalega Sdn Bhd has the rights to make, use, distribute, sell and offer to sell Elastic High Stress Retention Nitrile Examination Gloves to customers that have obtained the expressed written consent of Microflex Corporation. As part of the agreement, Hartalega Sdn Bhd is required to pay royalties at the rate ofUSDO.60 per 1,000 gloves sold.
• It is also stated in the patent licence agreement that Microflex Corporation shall not license third parties the rights to make and sell the Elastic High Stress Retention Nitrile Examination Gloves without prior agreement from Hartalega Sdn Bhd.

 

 

4.8 ENVIRONMENTAL REGULATIONS Disposal of Scheduled Wastes • The Government regulations for the disposal of scheduled waste and sludge resulting from manufacturing processes falls under the Environmental Quality (Scheduled Wastes) Regulations 1989 (Source: Environmental Quality Act and Regulations).
• Wastes from Latex Glove manufacturing, like all manufacturing wastes, ifnot treated and disposed properly would pollute the environment, especially the waterways in the case of Latex Glove manufacturing.
• Scheduled waste created during the production of Latex Gloves is categorised under Scheduled Waste from Specific Sources in the Environmental Quality Regulation 1989. This includes latex effluent, rubber or latex sludge containing organic solvents or heavy metals from the following sources:
Rubber or latex sludge containing heavy metals from the wastewater treatment system ofrubber products manufacturing plant; Rubber or latex sludge containing organic solvents from rubber products manufacturing plant; Latex effluent from rubber products manufacturing plants.

• The management has appointed Kualiti Alam Sdn Bhd to dispose the scheduled waste produced during the manufacturing process.

Clean Air • Any installation of equipment, plant or facility for the purpose of heating or generating power that is rated to consume pulverised fuel or any solid fuel at 30 kilogram or more per hour, or any liquid or gaseous at 15 kilogram or more per hour, have to obtain approval from the Department ofEnvironment. Hartalega Holdings Berhad Latex Glove Industry 334 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Hartalega Sdn Bhd, a wholly owned subsidiary within the Group, has obtained approval
from the Department of Environment for the installation of the following equipment: 7 units of thermal oil heaters; 3 units of Biomass heaters (Biomass Heaters); 2 units ofscrubbers.
• According to management, Hartalega Group complies with the requirements of the Department of Environment for the emission of ashes from its Biomass heaters.
• In addition, Hartalega Sdn Bhd has also obtained approval from the Department of Environment for the installation of the following equipment at the Group’s 4th manufacturing plant:

4 units ofchimneys; 4 units of scrubbers. Discharge of Effluent • According to the Department of Environment, any discharge of effluent has to comply with the parameters required under the Regulation of Environmental Quality (Sewage and Industrial Effluents) Regulations 1979.
• Hartalega Group has installed three in-house wastewater treatment systems to ensure that the discharged water is adequately treated.
• According to management, the treated water is also sent to an independent third party for testing on a regular basis, to ensure that the discharged water is adequately treated based on the Department of Environment’s requirements and standards.

5. SUPPLY Local Production • Between 2002 and 2006, sales value of the manufacture of Rubber Gloves increased at an average annual rate of 17.1 %. In 2006, sales value of the manufacture of Rubber Gloves registered a growth of 28.5% to reach RM5.6 billion (based on 65 establishments). Between January and September 2007, sales value of the manufacture of Rubber Gloves increased by 3.9% to reach RM4.2 billion compared to the same period in the previous year.
• Between 2002 and 2006, production quantity of Rubber Gloves registered an average annual growth rate of 13.9%. In 2006, the production quantity of Rubber Gloves increased by 7.0% to reach 20.5 billion pairs (based on 65 establishments). Between January and September 2007, production quantity of Rubber Gloves increased by 2.8% to reach 15.5 billion pairs compared to the same period in the previous year.

Harta/ega Ho/dings Berhad Latex G/ove Industry 335 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Between 2002 and 2006, sales value of the manufacture of Examination Gloves, a sub­sector of Rubber Gloves, grew at an average annual rate of 18.! %. In 2006, sales value of the manufacture of Examination Gloves increased by 21.6% to reach RM3.6 billion (based on 45 establishments). Between January and September 2007, sales value of the manufacture of Examination Gloves increased by 14.0% to reach RM3.0 billion compared to the same period in the previous year.
• Between 2002 and 2006, production quantity of Examination Gloves grew at an average annual rate of 15.8%. In 2006, production quantity of Examination Gloves increased by 12.2% to reach 18.9 billion pairs (based on 45 establishments). Between January and September 2007, production quantity of Examination Gloves increased by 6.5% to reach
14.7 billion pairs compared to the same period in the previous year.
• Between 2002 and 2006, sales value of the manufacture of Surgical Gloves, a sub-sector of Rubber Gloves, grew at an average annual rate of 6.6%. In 2006, sales value of the manufacture of Surgical Gloves increased by 5.4% to reach RM687.3 million (based on II establishments). Between January and September in 2007, sales value of the manufacture of Surgical Gloves declined by 2.9% to reach RM492.8 million compared to the same period in the previous year.
• Between 2002 and 2006, the production quantity of Surgical Gloves increased at an average annual rate of 2.9%. In 2006, the production quantity of Surgical Gloves declined by 3.5% to reach 764 miIrion pairs (based on 11 establishments). Between January and September 2007, production quantity of Surgical Gloves increased by 12.9% to reach 641 billion pairs compared to the same period in the previous year.
• Between 2002 and 2006, sales value of the manufacture of Other Gloves (including Household and Industrial gloves), a sub-sector of Rubber Gloves, grew at an average annual rate of 18.8%. In 2006, sales value of the manufacture of Other Gloves increased by 54.8% to reach RMl.I billion (based on 25 establishments). Between January and September 2007, sales value of the manufacture of Other Gloves decreased by 3.4% to reach RM774.7 million compared to the same period in the previous year.
• Between 2002 and 2006, production quantity of Other Gloves (including Household and Industrial Gloves) declined at an average annual rate of 3.0%. In 2006, production quantity of Other Gloves declined by 42.!% which amounted to 891 million pairs (based on 25 establishments). Between January and September 2007, production quantity of Other Gloves increased by 4.6% to reach 687 billion pairs compared to the same period in the previous year.

Import • Between 2002 and 2006, total import value of Rubber Gloves increased at an average annual rate of 38.6%. In 2006, the total import value of Rubber Gloves increased by 428.4% to reach approximately RMI 12.6 million. Between January and September 2007, total import value of Rubber Gloves decreased by 9.2% to reach RM70.6 million compared to the same period in the previous year. Hartalega Holdings Berhad Latex Glove Industry 336 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Between 2002 and 2006, the total import quantity of Rubber Gloves increased at an average annual rate of 49.6%. In 2006, import quantity of Rubber Gloves increased by 712.3% to reach 544.5 million pairs. Between January and September 2007, import quantity of Rubber Gloves decreased by 23.4% to reach 310.4 million pairs compared to the same period in the previous year.
• Between 2002 and 2006, import value of Surgical Gloves, a sub-sector of Rubber Gloves increased at an average annual rate of 160.7%. In 2006, the import value of Surgical Gloves, a sub-sector of Rubber Gloves increased by 538.7% to reach RM62.7 million. Between January and September 2007, total import value of Surgical Gloves, a sub-sector of Rubber Gloves, decreased by 27.0% to reach approximately RM31.8 million compared to the same period in the previous year.
• Between 2002 and 2006, import value of Other Gloves increased at an average annual rate of 14.4%. In 2006, the import value of Other Gloves, a sub-sector of Rubber G~oves, increased by 334.2% to reach RM49.9 million. Between January and September 2007, total import value of Other Gloves, a sub-sector of Rubber Gloves, increased by 13.5% to reach RM38.9 million compared to the same period in the previous year.
• Between 2002 and 2006, import quantity of Other Gloves increased at an average annual rate of 29.5%. In 2006, the import quantity of Other Gloves, a sub-sector of Rubber Gloves, increased by 375.2% to approximately 256.6 million pairs. Between January and September 2007, the import quantity of Other Gloves, a sub-sector of Rubber Gloves, decreased by 3.6% to reach approximately 189.0 million pairs compared to the same period in the previous year.

(Source: Department ofStatistics) 6. SUPPLY DEPENDENCIES • The main supply dependencies for the manufacturing of Latex Gloves Industry are: Natural rubber latex; Synthetic latex.
• The bulk of the natural rubber latex is available from local supply. In 2006, local production of natural rubber reached 1.3 million tonnes. Between January and June 2007, local production of natural rubber reached 590,100 tonnes.
• Malaysia also imports natural rubber from overseas. In 2006, Malaysia imported 521,669 tonnes of natural rubber mainly from ASEAN countries.
• As for synthetic latex, Malaysia has one synthetic latex plant that started operations In 2003. Most ofthe synthetic latex used is imported from a number of overseas countries.
• In Malaysia, natural rubber accounted for 80% of total Latex Gloves, whilst synthetic rubber accounted for the remainder 20%.

(Source: Department of Statistics, Malaysian Industrial Development Authority and Malaysian Rubber Board) Hartalega Holdings Berhad Latex Glove Industry 337 15. INDEPENDENT MARKET RESEARCH REPORT (Coltt’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • In addition, the manufacturing of Latex Gloves also uses chemicals and fuel materials.
• Following is an analysis of the local production and import of Natural Rubber and Synthetic Latex.

Local Production of Natural Rubber • Between 2002 and 2006, production of Natural Rubber registered an average annual growth rate of 9.6%. In 2006, production of Natural Rubber increased by 14.0%, to 1.3 million tonnes. Between January and June 2007, production of Natural Rubber amounted to 590, I00 tonnes.
• Between 2002 and 2006, the sales value of Rubber Remilling and Rubber Latex Processing increased at an average annual rate of 31.5%. In 2006, sales value of Rubber Remilling and Rubber Latex Processing increased by 59.2% to reach approximately RM8.6 billion. Between January and September in 2007, sales value of Rubber Remilling and Rubber Latex Processing increased by 3.1% to reach approximately RM6.7 billion compared to the same period in the previous year.
• Between 2002 and 2006, production quantity of Processed Latex decreased at an average annual rate of 1.4%. In 2006, the production quantity of Processed Latex increased by 17.3% to reach 183,400 tonnes. Between January and September in 2007, the production quantity of Processed Latex declined by 2.6% to reach 135,865 tonnes compared to the same period in the previous year.

Imports of Natural Rubber • Between 2002 and 2006, import quantity of Natural Rubber increased at an average annual rate of 3.4%. In 2006, import quantity of Natural Rubber increased by 13.0% to reach 521,669 tonnes. Between January and June in 2007, import quantity of Natural Rubber amounted to 257,959 tonnes.
• Between January and June in 2007, Thailand remained the largest source of import of Natural Rubber, which accounted for 76.8% of Malaysia’s total imports of Natural Rubber in terms of quantity. This was followed by Vietnam, Philippines, Myanmar, Indonesia, Cambodia, India and other countries.
• Between 2002 and 2006, the import value of Natural Rubber Latex increased at an average annual rate of 16.6%. In 2006, import value of Natural Rubber Latex increased by 17.4%, to reach RMI.3 billion. Between January and September 2007, import value ofNatural Rubber Latex decreased by 0.3% to reach RM982.5 million.

Imports of Synthetic Latex • Between 2002 and 2006, the import value of Synthetic Rubber increased at an average annual rate of23.3%. In 2006, the import value of Synthetic Rubber increased by 33.0%, to reach approximately RM 1.1 billion. Between January and September 2007, the import value of Synthetic Rubber increased by 9.7% to reach RM888.0 million compared to the same period in the previous year. Harta/ega Holdings Berhad Latex Glove Industry 338 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Between 2002 and 2006, the import value of Other Synthetic Latex decreased at an average annual rate of 1.2%. In 2006, import value of Other Synthetic Latex used for the manufacturing of Nitrile Gloves increased by 43.8% to reach RMlO704 million. Between January and September 2007, the import value of Other Synthetic Latex used for the manufacturing of Nitrile Gloves increased by 40.0% to reach approximately RMIII.O million compared to the same period in previous year.
• In 2006, Japan, Taiwan and the Unites States were the major sources of imports for Other Synthetic Latex of the type used for the manufacturing of Nitrile Gloves. Japan, Taiwan and the United States accounted for 50.7%, 16.9% and 16.2% of total imports under this category. Other import countries include United Kingdom, Germany, Belgium, Singapore, Hong Kong and others. Between January and September 2007, Japan, Taiwan and the United States accounted for 45.0%, 16.9% and 15.9% of total imports under this category. Other import countries include United Kingdom, Germany, Italy and others.

(Source: Department ofStatistics and Malaysian Rubber Board) 7. DEMAND-EXPORTS • The demand for Malaysia’s Latex Gloves comes predominantly from the export markets.
• Between 2002 and 2006, the total export value of Rubber Gloves increased at an average annual rate of 14.4%. In 2006, the total export value of Rubber Gloves increased by 19.5% to reach approximately RM5.4 billion. Between January and September 2007, the total export value of Rubber Gloves increased by 11.1 % to reach approximately RM4.9 billion compared to the same period in the previous year.
• Between 2002 and 2006, the total export quantity of Rubber Gloves grew at an average annual rate of 16.1%. In 2006, export quantity of Rubber Gloves increased by 0.5% to reach 36.8 billion pairs. Between January and September 2007, export quantity of Rubber Gloves increased by 15.3% to reach 34.4 billion pairs compared to the same period in the previous year.
• Between 2002 and 2006, export value of Surgical Gloves, a sub-sector of Rubber Gloves, increased at an average annual rate of 3.2%. In 2006, export value of Surgical Gloves increased by 7.3% to reach RM758.4 million. Between January and September 2007, export value of Surgical Gloves increased by 1.2% to reach RM583.5 million compared to the same period in the previous year.
• Between 2002 and 2006, the export quantity of Surgical Gloves declined at an average annual rate of 7.7%. In 2006, export quantity of Surgical Gloves increased by 9.5% to 104 billion pairs. Between January and September 2007, export quantity of Surgical Gloves increased by 11.6% to reach approximately 1.2 billion pairs compared to the same period in the previous year.

Hartalega Holdings Berhad Latex Glove Industry 339 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q
8.
9.

VITAL FACTOR CONSULTING Creating Winning Business Solutions • Between 2002 and 2006, the export value of Other Gloves, a sub-sector of Rubber Gloves, increased at an average annual rate of 16.9%. In 2006, export value of Other Gloves increased by 21.8% to reach RM4.6 billion. Between January and September 2007, export value of Other Gloves increased by 13.2% to reach RM3.8 billion compared to the same period in the previous year.
• Between 2002 and 2006, export quantity of Other Gloves grew at an average annual rate of 18.1 %. In 2006, export quantity of Other Gloves increased by 0.4% to reach 35.3 billion pairs. Between January and September 2007, export quantity of Other Gloves increased by 15.0% to reach 29.8 billion pairs compared to the same period in the previous year.

(Source: Department ofStatistics) DEMAND DEPENDENCIES • In 2006, the total export value of Latex Gloves amounted to RM5.4 billion. Between January and September 2007, the total export value of Latex Gloves amounted to RM4.9 billion.
• In 2006, the total export value of Latex Gloves amounted to RM5.4 billion. Malaysia’s largest export market is the United States, which represented 38.8% oftolal exports in rubber gloves in 2006. This is followed by Germany, United Kingdom and Japan, which accounted for 6.3%,6.2% and 5.1% of total exports by value respectively.
• Between January and September 2007, the United States are the largest export market representing 35.9% of Malaysia’s total exports in Rubber Gloves. This is followed by Germany, United Kingdom and Japan which accounted for 8.1 %, 6.2% and 5.0% respectively.

(Source: Department afStatistics) COMPETITIVE NATURE AND INTENSITY • The Latex Glove Industry operates under normal competitive conditions. Competition among Latex Glove manufacturers is global in nature as virtually all of them service the export markets exclusively.
• As with most free enterprise environments, competition is based on a number of factors,
including: Quality of products and services Cost competitiveness Prompt delivery schedules Manufacturing capabilities and capacities

• Competition in the Latex Glove Industry comes from two perspectives: Competition among Malaysian manufacturers as Malaysia has developed a reputation as a major producer of Latex Gloves that can meet international standards;

Hartalega Holdings Berhad Latex Glove Industry 340 15. INDEPENDENT MARKET RESEARCH REPORT (Collt’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Competition among other countries, especially Thailand, China and Indonesia. • Competition among Latex Glove manufacturers is predicated by the following factors: In 2006, there were 105 manufacturers of gloves registered with the Malaysian Industrial Development Authority. These operators range from large multinationals and local operators to medium and smaller sized local manufacturers. (Source: Malaysian Industrial Developmenl Authority) Competition from Thailand and Indonesia whereby these two countries are the top two largest producers of Natural Latex. The abundance ofraw materials and lower labour costs provide manufacturers in Thailand and Indonesia with some cost advantage. • However, competition within the Latex Glove Industry can be moderated by the following factors: Manufacturers with a high degree of integration and value-adding in terms of compounding, research and development (R&D) on product improvements and enhancement, and process improvement are likely to enjoy competitive advantages such as lower cost of production, better end-to-end quality control, and faster turnaround time. Manufacturers with in-house R&D capabilities are likely to face moderate competition. Part of R&D is also in the in-house compounding of the Latex formulation whereby different additives such as stabilisers, dispersants, and other specialised additives would provide additional characteristics and properties to the Latex Glove. As an example, specialised additives such as lanolin can be used as an emollient and conditioning agent for smoothing and hydrating dry irritated hands, and act as a barrier protection. In addition, the ability to meet other desired properties such as tensile strength, tear and puncture resistance, elongation, tactility, softness, donning properties and good intermittent resistance to chemicals are also the result of in-house compounding and formulation. R&D is also critical in facilitating the development of new or improved range of Latex Gloves to address growth opportunities. Manufacturers with the in-house R&D capabilities are able to produce a different range of Latex Gloves using different types of synthetic materials including acrylonitrile-butadiene copolymer, plasticised polyvinyl chloride, neoprene, and polyisoprene. As an example, using polyisoprene in compound formulation would result in a Synthetic Glove that is able to emulate the desired characteristics of Natural Rubber, including strength and barrier, elasticity, softness and provide additional comfort to the user. Manufacturers that are able to produce a range of Natural Rubber and Synthetic Latex Gloves would be in a better position to meet a wider range of customers’ needs. Competitive pressure for such manufacturers are somewhat moderated. Harlalega Holdings Berhad Lalex Glove Induslry 341 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Manufacturers with their own in-house brands are also able to differentiate themselves from other competitors and provide a competitive edge to compete effectively in this industry. 10. PLAYERS IN THE INDUSTRY • Some ofthe manufacturers include (listed in alphabetical order): Adventa Berhad Alliance Rubber Products Sdn Bhd Ansell Group APL Industries Berhad* Brightway Holdings Sdn Bhd Comfort Rubber Gloves Industries Sdn Bhd Dragon Star Sdn Bhd GMP Medicare Sdn Bhd Green Prospect Sdn Bhd Hartalega Sdn Bhd (a wholly owned subsidiary within the Hartalega Group) Koon Seng Sdn Bhd Kossan Rubber Industries Berhad Latexx Partners Bhd Marigold Industrial (M) Sdn Bhd MRG Industries Sdn Bhd Regent Hospital Products Sdn Bhd Seal Polymer Industries Berhad* Smart Glove Corporation Sdn Bhd Supermax Corporation Bhd Top Glove Corporation Bhd WRP Asia Pacific Sdn Bhd YTY Industries Sdn Bhd Note: The above list of players is not exhaustive and only represents some of the manufacturers of Latex Gloves in Malaysia. *Seal Polymer Industries Berhad is a subsidiary while APL Industries Berhad is an associate company ofSupermax Corporation Berhad (Source: Secondary and Primary Market Research undertaken by Vital Factor Consulting Sdn Bhd) 11. BARRIERS TO ENTRY 11.1 Government Regulations • There are no onerous licences, permits or regulations that form a major barrier to entry to the Latex Glove Industry.
• Nevertheless, operators within the Latex Glove Industry must comply with various standards, specifications and certifications of Malaysia and various overseas countries before their products are allowed to be exported from Malaysia or imported into overseas countries

Hartalega Holdings Berhad Latex Glove Industry 342 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 11.2 Capital and Set-up Costs • The barriers to entry into the manufacture of Latex Gloves based on capital requirements are high.
• The capital cost of starting-up a small sized manufacturing plant for Latex Gloves would be approximately RMl8 million (excluding land and building). This would incorporate a 5·line machinery capable of producing approximately 600 million pieces of gloves per year. With this capital set-up cost, the operation will be highly manual with limited automation.
• As Latex Gloves are low priced disposable items, having a consistently high volume of orders is important for operators to achieve economies of scale and maintain profitability in this industry. Capital costs would start to escalate for larger operations to enable greater economies of scale.
• As such, smaller manufacturers would also find it difficult to compete with larger manufacturers that have the benefits of economies of scale.

11.3 Technical Skills and Knowledge • There is a certain level of technical expertise and experience required in the manufacture of Latex Gloves particularly in obtaining the required product properties. This is to meet the customer’s requirements and specifications.
• These requirements would form some barriers to entry for new entrants into the industry. Some of the areas where technical skills and experience are required include:

The formulation of the different types of Latex compounds from the raw materials to achieve the different specifications and properties of Latex Glove for example, thickness, strength, viral penetration, resistance to chemical and solvents, elasticity, and resistance to tearing and abrasion. Increasing the efficiency and productivity while maintaining high standards of quality by continually improving on the manufacturing processes. • As such, the technical skills required during the production process would pose some barriers to entry for new entrants into the Latex Glove Industry. 11.4 Track Record • Track record also fonns one of the barriers to entry for new entrants. It is unlikely that a new entrant without any track record will be able to compete effectively in the global market for Latex Gloves.
• It will take some time for a new entrant to be established in the market before principals or customers are willing to take them on as a supplier.
• As such, track record would pose a barrier to entry for new entrants, which would fmd it difficult to gain immediate access into various markets.

Harta/ega Holdings Berhad Latex G/ove Industry 343 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q
11.5 12. VITAL FACTOR CONSULTING Creating Winning Business Solutions Product Quality • As Latex Gloves including Examination Gloves and Surgical Gloves are widely used by medical examiners and operating room personnel to prevent contamination between patients and the health care personnel, the quality of Latex Gloves is critical to the end-user industry sectors.
• As such, manufacturers that have stringent quality assurance programmes in place including ISO accreditation and compliance to various country specific and international standards are important factors in securing sales orders.
• New entrants into the industry would take time to develop the quality required to meet the various standards and accreditations.

INDUSTRY OUTLOOK • The outlook of the Latex Glove Industry in Malaysia is favourable. The following factors and observations support a favourable prognosis of the industry: Local Production Between 2002 and 2006, sales value of the manufacture of Rubber Gloves increased at an average annual rate of 17.1 %. In 2006, sales value of the manufacture of Rubber Gloves registered a growth of 28.5% to reach RM5.6 billion (based on 65 establishments). Between January and September 2007, sales value ofthe manufacture of Rubber Gloves increased by 3.9% to reach RM4.2 billion compared to the same period in the pervious year. Between 2002 and 2006, the production quantity of Rubber Gloves registered an average annual growth rate of 13.9%. In 2006, the production quantity of Rubber Gloves increased by 7.0% to reach 20.5 billion pairs (based on 65 establishments). Between January and September 2007, the production quantity of Rubber Gloves increased by 2.8% to reach approximately 15.5 billion pairs compared to the same period in the pervious year. Exports Between 2002 and 2006, the total export value of Rubber Gloves increased at an average annual rate of 14.4%. In 2006, the total export value of Rubber Gloves increased by 19.5% to reach RM5.4 billion. Between January and September 2007, the total export value of Rubber Gloves increased by 11.1 % to reach RM4.9 billion compared to the same period in the pervious year. Horta/ega Holdings Berhad Latex G/ove Industry 344 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Between 2002 and 2006, the total export quantity of Rubber Gloves grew at an average annual rate of 16.1%. In 2006, export quantity of Rubber Gloves increased by 0.5% to reach 36.8 billion pairs. Between January and September 2007, the export quantity of Rubber Gloves increased by 15.3% to reach 34.4 billion pairs compared to the same period in the pervious year. (Source: Department ofStatistics) 13. DRIVERS OF GROWTH • Some of the drivers of growth for the Latex Glove Industry are: Growth in the consumption of Latex Gloves by end-user industries such as hospitals, healthcare, food processing and high technology sectors including electronic and bio-technology industries. As the use of Latex Gloves is prevalent in the healthcare sectors, any outbreak of diseases will also inadvertently drive the demand for Latex Gloves. Increase in the demand for Latex Gloves will come from export markets, as the industry is primarily export-oriented. Growth in demand will come from major export markets including the United States, United Kingdom, Japan, Germany, Brazil, Italy, France and other countries. Innovations and developments in Latex Gloves for new applications would create new demand from existing or new end-user industries. Growth in the healthcare industry sectors including, among others, planning and development of new hospitals and other medical institutions, will also generate demand for Latex Gloves. Socio-economic growth such as Gross Domestic Product growth and population growth will also place increasing demand for Healthcare services. This will in turn stimulate the demand for Latex Gloves as one of the critical disposable items used in the healthcare sector. 14. THREATS AND RISK ANALYSIS 14.1 Increase in Raw Material and Oil Prices • As Natural Rubber and Synthetic Latex are commodities, the cost of sourcing these commodities as raw materials for the production of Latex Gloves are subjected to fluctuations in world prices. Malaysia may be a producer of Natural Rubber, however it is still subjected to world prices as a commodity. Hartalega Holdings Berhad Latex Glove Industry 345 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Between December 2002 and December 2007, the average monthly price of Natural Rubber latex concentrate registered an average annual growth rate of 19.6%. The average monthly price of natural rubber latex concentrate recorded a growth of 34.5%, from 395 sen per kilogram in December 2006 to approximately 532 sen per kilogram in December 2007.
• Similarly, the price of synthetic rubber, which is mostly sourced from the United States and Japan, had also registered a growth of 6.4% from USDI,607 per tonne in 2005 to USDI,710 per tonne in 2006 and a growth of 12.6% from Japanese Yen 182,000 per tonne in 2005 to Japanese Yen 205,000 per tonne in 2006. As at third quarter of 2007, Synthetic Rubber Prices reached Yen 228,000 per tonne and U8D2,256 per tonne.
• In addition, the price of synthetic rubber is also dependent on the price of petroleum. This is because petroleum products are used as the major feedstock to produce petrochemical based products including synthetic rubber, namely acrylonitrile-butadiene, polyvinyl chloride, polychloroprene and polyurethane. These types of synthetic rubber are the raw materials used in manufacturing Synthetic Rubber Gloves.
• Rubber constitutes approximately 55% of the cost of manufacturing. In some situations, increases in the prices of raw materials are not easily passed onto the customers. This could impact on the margin or alternatively, if the increase in cost is passed onto the customers, the manufacturers may not be price competitive.

(Source: Department of Statistics, Malaysian Rubber Board, Malaysian Rubber Glove Manufacturers’ Association and International Rubber Study Group) Mitigating Factors • Manufacturers with strong financial positions may be able to purchase and maintain stocks of key raw materials to create a cushion against price fluctuations.
• As this raw material is a commodity and therefore subjected to world prices, all manufacturers that use this material are equally affected.

14.2 Dependency on Imports of Synthetic Latex • With Synthetic Latex Gloves, there is a dependency on imports of certain types of Synthetic Latex including acrylonitrile-butadiene rubber (NBR). There is only one producer of Synthetic Latex in Malaysia and as such, the bulk of the domestic consumption of Synthetic Latex is mainly sourced from overseas.
• NBR is a type of Synthetic Latex used for the manufacturing of Synthetic Latex Gloves.

Mitigating Factors • There are various sources of imports of Synthetic Latex. In 2006, some of Malaysia’s import sources of Other Synthetic Latex of the type used for the manufacturing of Nitrile Gloves include among others, Japan, United States, Germany, Taiwan, and United Kingdom. In 2006, the world production of Synthetic Latex increased by 3.6% to reach 12.5 million tonnes. Hartalega Holdings Berhad Latex Glove Industry 346 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • In the second quarter of2007, the world production of Synthetic Latex increased by 4.6% to reach approximately 3.3 million tonnes compared to the same quarter in 2006.
• In 2006, Malaysia’s consumption of Synthetic Latex was estimated to grow by approximately 16.6% to reach 112,385 tonnes. As such, there is ample supply of Synthetic Latex in the world market.
• Between January and June in 2007, Malaysia’s consumption of Synthetic Latex was estimated to reach 60,413 tonnes.
• In addition, there are no import duties and tariff imposed on the import of acrylonitrile­butadiene rubber (NBR) Latex as one of the types of raw materials used for the manufacturing of Synthetic Gloves.

(Source: Department ofStatistics, Royal Customs and Excise Department Malaysia and International Rubber Study Group and Malaysian Rubber Board) 14.3 Natural Rubber Protein Allergy • The Natural Rubber Protein Latex Allergy problem will continue to be a major issue in the usage of Latex Gloves and this could pose as a threat to Malaysian Latex Glove Manufacturers. Mitigating Factors • To overcome this problem, local manufacturers, together with the relevant authorities have put in place various strategies, including the following: Introduction of the Standard Malaysian Glove (SMG) certification would provide users with some comfort level that approved manufacturers would produce Latex Gloves below 200 microgram of extractable protein per gram of Latex and residual powder content of powdered glove with 150 microgram per glove. The SMG program was launched in 1998 and revised in 1999. This certification programme will, over time, reduce the maximum allowable extractable protein for compliance. Alternative materials, for example Nitrile Gloves, made from Synthetic Latex, effectively removes the problem of Latex Allergy. In addition, the development of Nitrile Gloves with greater retention properties compared to normal Nitrile Gloves, provides increased flexibility to the end-user. Processing methods including chlorination that produces powder-free Latex Gloves that has low extractable natural rubber protein. On-line polymer coating in the Latex Glove manufacturing process helps to further reduce the amount of extractable rubber protein. The polymer coating helps to create a barrier to ensure that the skin does not come in contact with the Latex. Reduction of cornstarch powder in Latex Glove through various processes. Hartalega Holdings Berhad Latex Glove Industry 347 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) o
14.4 14.5 VITAL FACTOR CONSULTING Creating Winning Business Solutions To counter the nitrosamine issue, which is caused by using accelerators and other chemicals in the manufacturing process, formulations have been developed to produce low nitrosamine or nitrosamine-free Latex products. Marketing and promotional campaigns undertaken by, among others, the Malaysian Rubber Export Promotion Council to alley some of the fears of Natural Rubber protein allergy. • In 2006, Malaysian Rubber Board introduced a new ruling, whereby Malaysian made Natural Rubber Latex Gloves with a protein content of more than 400 microgram per gram will be barred from exports. This new ruling is not applicable for industrial and household gloves. (Source: Malaysian Rubber Board) Competition from Low-Cost Producing Countries • The main threat will come from Thailand and Indonesia. These two countries have the following advantages that may enable them to produce Latex Gloves at a lower cost: abundance oflow-cost labour; abundance of Natural Rubber. Mitigating Factors • Malaysia continues to command a reputation for high quality Latex Gloves. With Latex Gloves playing a key role as a barrier to prevent and protect against contamination, quality of the Latex Gloves is therefore paramount.
• As such, Malaysia will need to constantly altain and maintain a high level of quality, high user awareness of its quality, as well as continually striving for cost-effectiveness to overcome threats from countries with some low cost advantages.

Labour Intensity • Two issues are pertinent: Any shortage of labour would compromise Malaysia’s ability to meet shipment schedules. This would open up opportunities for competitors to gain Malaysia’s market share. Labour cost in Malaysia is not as competitive to other lower-cost countries like Thailand, Indonesia and China. These countries will pose a threat if labour becomes a significant component of the total manufacturing cost. Mitigating Factors • Automation is increasing in Malaysia, particularly the use of automation to strip the Gloves from the mould, and in packing.
• Manufacturers with larger scale and automation operations are able to enjoy the benefits of economies of scale and moderate the labour intensity issue.

Harlalega Holdings Berhad Latex Glove Industry 348 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 14.6 Foreign E;l:change Fluctuations • Fluctuations in foreign exchange rates will have an impact on the prices of imported raw materials as well as export earnings.
• This may have an impact on the profitability of operators within the Latex Glove Industry. An unfavourable foreign exchange movement against Ringgit would either reduce demand as the prices would need to be increased or manufacturer’s profitability would suffer if they decide to absorb the price increases.

Mitigating Factor • Since 21 July 2005, the Ringgit was allowed to operate on a managed float basis, with its value determined by economic fundamentals. Bank Negara Malaysia will monitor the exchange rate against trade-weighted index of Malaysia’s major trading partners. Promoting stability of the exchange rate continues to be a primary objective of Malaysia’s foreign exchange policy (Source: Bank Negara Malaysia). 14.7 Shortage of Natural Rubber • Manufacturers of Natural Rubber Latex Gloves are dependent on the availability of raw materials, primarily Natural Rubber Latex. Thus, any shortage in the supply of Natural Rubber will have an impact on manufacturers of Natural Rubber Gloves.
• The potential supply of Natural Rubber in Malaysia is dependent on the total area under rubber cultivation, and on the replanting rate of rubber trees.
• Between 2002 and 2006, total acreage of Rubber plantation decreased at an average annual rate of 2.4% to reach a total acreage of 1.23 million hectares.
• Rubber cultivation in Malaysia is dominated by smallholders, who operate 95% of the total area under rubber cultivation in 2006. If Latex prices were low, smallholders may reduce their investments in rubber forest plantation.
• In 2006, areas that were replanted with Natural Rubber declined by 1.8% to reach 20,212 hectares. However between 2002 and 2006, areas replanted with Natural Rubber increased at an average annual rate of 1.5%.
• In addition, the conversion of Rubber plantations to Oil Palm plantations, housing, and other commercial uses, plus the low level of returns from rubber plantations by smallholders will have an impact on the future availability of Natural Rubber Latex.

(Source: Department of Statistics and Ministry of Primary Industries and Malaysian Rubber Board) Hartalega Holdings Berhad Latex Glove Industry 349 15. INDEPENDENT MARKET RESEARCH REPORT (Collt’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Mitigating Factors • As part of the Ninth Malaysia Plan, the Malaysian Government will continue to promote Agriculture sectors including the Rubber Sector. Part of the Plan includes development of the Rubber Sector to focus on accelerating efforts to consolidate and rehabilitate smalllioiding rubber plantations to increase productivity. An optimum area of 800,000 hectares will be maintained as rubber zone by 2020 to meet the requirements of local rubber processing industries.
• Between 2002 and 2006, production of Natural Rubber registered an average annual growth rate of9.6%. In 2006 production of Natural Rubber increased by 14.0% to reach approximately 1.3 million tonnes. Between January and June in 2007, the production of Natural Rubber amounted to 590,100 tonnes.
• Between 2005 and 2010, production of Natural Rubber is expected to grow by an average annual rate of2.8% to reach approximately 1.3 million tonnes in 2010.
• The Government’s support and measures for the Rubber Sector will at least provide some form of assurance on the availability of Natural Rubber to cater to the growing Natural Rubber Latex Gloves in the medium-term.
• In addition, manufacturers that are producing both Natural Rubber and Synthetic Latex Gloves are better positioned to insulate themselves against any shortage in supply of Natural Rubber.
• Malaysia also imports Natural Rubber to supplement its own production. In 2006, Malaysia imported 521,669 tonnes of NatiJral Rubber mainly from ASEAN countries.

(Source: Department o/Statistics and Ninth Malaysia Plan 2006-2010, Prime Minister’s Department) 15. THREAT OF SUBSTITUTES • There is no threat of substitute products. At this point in time, there are no substitutes for Gloves with the exception of not wearing any Gloves.
• Unfortunately not wearing gloves is not a viable alternative. In addition, professions in some industries are required to wear gloves such as in healthcare institutions, dental clinics, research and scientific laboratories, food and beverage manufacturing, and high technology manufacturing.
• The only other manner whereby some may consider as substitute products is the use of different raw materials, such as synthetic latex as opposed to Natural Rubber. Some of the synthetic materials include polyvinyl chloride, neoprene/polychloroprene, polyisoprene, and polyurethane materials depending on the application.
• Nevertheless, these are still Latex Gloves, albeit made from a variety of different raw materials.

Hartalega Holdings Berhad Latex Glove Industry 350 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 16. AREAS OF GROWTH AND OPPORTUNITIES 16.1 Increasing Global Demand • The key areas of growth will come from increasing demand from consumer countries particularly the United States. In 2006, United States represented 38.8% of the total exports of Latex Gloves from Malaysia.
• Between January and September 2007, the United States remain the largest export market representing 35.9% of Malaysia’s total exports in Rubber Gloves. This is followed by Germany, United Kingdom and Japan which accounted for 8.1%, 6.2% and 5.0% respectively.
• As Latex Gloves have many applications, demand will come from many sectors of the industries, although the main user-industry will continue to be the Healthcare Industry. Some of the other areas of demand could come from clean room gloves and food contact gloves.

16.2 Increasing Sales outside the United States • To date, Malaysian manufacturers have focused significantly on the United States market.
• Other major consuming markets, especially Europe and Japan are not well represented by Malaysian manufactured Latex Gloves. As such, these markets would offer growth opportunities for manufacturers.

16.3 Focusing on New Areas of Business • Traditionally, the focus of the usage of Latex Gloves has been predominantly within the Healthcare Industry lead by Latex Examination Gloves.
• Other applications of Latex Examination Gloves, especially within the Food and Beverage manufacturing, Laboratory Testing field, High Technology manufacturing, Hospitality and even the Household markets are underdeveloped. As such, they offer incremental growth opportunities for manufacturers.

16.4 New Materials • In light of the Natural Rubber Allergy issue, there has been a shift from Natural Rubber Latex Gloves to lower protein powder-free and Synthetic Gloves.
• Although new materials are substitute products for Natural Rubber Gloves, growth in this

area is critical from the following perspectives: Ability to meet users’ needs and specifications, especially in the light of the Latex Allergy issue; Prevent existing customers from replacing Malaysian Latex Gloves with new material gloves from other countries; Serves new areas of applications as electric protective gloves, and specialised gloves for use when administering chemotherapy. Hartalega Holdings Berhad Latex Glove Industry 351 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Synthetic Gloves such as Nitrile, Polyvinyl Chloride and PolychloroprenefNeoprene Gloves may be the next closest substitute to Natural Rubber Latex Gloves. 17. CRITICAL SUCCESS FACTORS • The critical success factors for manufacturers within the Latex Glove Industry are: Quality is critical in this industry whereby the fmished product, Latex Glove is often used as a protective barrier against life threatening situations such as blood contamination from AIDSIHIV, Hepatitis, Bird Flu and other viruses. This situation applies to most Examination and Surgical Latex Gloves. Successful manufacturers are those that are able to manufacture quality products consistently. Certification to International Standards such as ISO quality standards, AFNOR, EN and FDA standards are highly important in this industry as this provides customers with the assurance and confidence in the quality of the finished products. Failure to obtain these certifications will virtually exclude manufacturers from selling into these countries. Distribution Network is highly important in reaching the customers. In this case, market coverage for the Latex Glove Industry must be global. This is because the Latex Glove Industry works on large volumes and low prices. Production volumes are in the hundreds of millions or in some cases billions of pieces per year. Therefore to survive and to be successful, a manufacturer must have an extensive distribution network to provide consistent volume of work for production efficiency and financial viability. Cost Competitiveness is also a critical success factor. This is mainly predicated by the following factors: this is a high volume business; competition is increasing especially from low-cost producing countries like Thailand and Indonesia. • Therefore larger scale manufacturers with automated manufacturing operations are in a stronger position to reduce operating cost and benefit from economies ofscale. 18. MARKET SIZE 18.1 Market Size of Total Latex Gloves • In 2007, the market size of Total Latex Gloves in Malaysia based on an annualised output was estimated at 41.3 billion pairs.
• In 2007, the market size of Total Latex Gloves in Malaysia based on an annualised output value was estimated at RM5.8 billion.

(Source: Department o/Statistics and computed by Vital Factor Consulting Sdn Bhd) Hartalega Holdings Berhad Latex Glove Industry 352 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) o
18.2 18.3 19. 19.1 19.2 19.3 VITAL FACTOR CONSULTING Creating Winning Business Soiutions Market Size of Natural Rubber Latex Gloves • In 2007, the market size of Natural Rubber Latex Gloves (a sub-sector of Total Latex Gloves) in Malaysia based on an annualised output was estimated at 33.1 billion pairs. (Source: Department 0/ Statistics, Malaysian Industrial Development Authority and computed by Vital Factor Consulting Sdn Bhd) Market Size of Synthetic Latex Gloves • In 2007, the market size of Synthetic Latex Gloves (a sub-sector of Total Latex Gloves) in Malaysia based on an annualised output was estimated at 8.3 billion pairs. (Source: Department 0/ Statistics, Malaysian Industrial Development Authority and computed by Vital Factor Consulting Sdn Bhd) MARKET SHARE Market Share of Total Latex Gloves • In 2007, the market share of HartaJega Group for Total Latex Gloves was estimated at 3% based on its total output of Latex Gloves.
• In 2007, the market share of Hartalega Group for Total Latex Gloves was estimated at 4% based on its total revenue from the manufacture of Latex Gloves for the financial year ended 31 March 2007 (taken as proxy for calendar year 2007).

(Source: Department o/Statistics and computed by Vital Factor Consulting Sdn Bhd) Market Share of Natural Rubber Gloves • In 2007, the market share of Hartalega Group for Natural Rubber Latex Gloves (a sub­sector of Total Latex Gloves) was estimated at 2% based on its output of Natural Rubber Latex Gloves for the financial year ended 3 I March 2007 (taken as proxy for calendar year 2007). (Source: Department 0/ Statistics, Malaysian Industrial Development Authority and computed by Vital Factor Consulting Sdn Bhd) Market Share of Synthetic Latex Gloves • In 2007, the market share of Hartalega Group for Synthetic Latex Gloves (a sub-sector of Total Latex Gloves) was estimated at 6% based on its output of Synthetic Latex Gloves for the fmancial year ended 31 March 2007 (taken as proxy for calendar year 2007). (Source: Department 0/ Statistics, Malaysian Industrial Development Authority and computed by Vital Factor Consulting Sdn Bhd) Hartalega Holdings Berhad Latex Glove Industry 353 15. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 20. MARKET RANKING • Hartalega Group with a total turnover of RM240.9 million for the financial year ended 31 March 2007 (taken as a proxy for calendar year 2006) ranked seventh among manufacturers within the Latex Glove Industry in Malaysia in 2006 based on turnover. (Source: Secondary and Primary Market Research undertaken by Vital Factor Consulting SdnBhd). Vital Factor Consulting Sdn Bhd has prepared this report in an independent and objective manner and has taken all reasonable consideration and care to ensure the accuracy and completeness of the report. It is our opinion that the report represents a true and fair assessment of the industry within the limitations of, among others, secondary statistics and infonnation, and primary market research. Our assessment is for the overall industry and may not necessarily reflect the individual perfonnance of any company. We do not take any responsibilities for the decisions or actions ofreaders of this document. This report should not be taken as a recommendation to buy or not to buy the shares of any company. Yours sincerely
Wong Wai Ling Director Vital Factor Consulting Sdn Bhd Hartalega Holdings Berhad Latex Glove Industry 354

Comments are closed