Industry Overview

7. INDUSTRY OVERVIEW 7. INDUSTRY OVERVIEW
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Decide with Confidence EXECUTIVE SUMMARY 1.1 INTRODUCTION The principal customer of Inari Technology Sdn Bhd is Avago Technologies (Malaysia) Sdn Bhd, which is a subsidiary of Avago Technologies Limited, a leading designer and manufacturer of III-V analogue semiconductor devices. III-V refers to elements from those groups in the periodic table of chemical elements, and their examples are gallium arsenide, gallium nitride and indium phosphide. III-V semiconductor materials have higher electrical conductivity, enabling faster speeds and tend to have better performance characteristics than conventional silicon in applications such as RF and optoelectronics. The products of Avago Technologies limited are geared primarily for four (4) markets: wireless communications, wired infrastructure, industrial and automotive electronics, and consumer and computing peripherals. The applications for the products include cellular phones, consumer appliances, data networking and telecommunications equipment, enterprise storage and servers, factory automation, displays, optical mice and printers. In the case of the wireless communications markets, the major end­’customers are LG Electronics Inc; and Samsung Electronics Company, Limited. The competitors to Avago Technologies limited range from large, international companies offering a wide range of semiconductor products to smaller companies specialising in narrow markets. In the wireless communications market, the primary competitors are Hittite :Microwave Corporation, RF Micro Devices, Inc; Skyworks Solutions, Inc; and TriQuint Semiconductor, Inc. In terms ofranking by revenues, Avago Technologies Limited achieved the highest position for the latest FYE. Based on the segmented revenues from the latest financial statements among these five (5) competing companies, Avago Technologies Limited was estimated to command a market share of 23.1 % in the wireless communications market, in 2010. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSTRY OVERVIEW

Decide with Confidence Table 1: Rankings by Revenue
Source: D&B Maltgsia
Avago Technologies Limited has a nearly 50-year history ofinnovation dating back to its origins within Hewlett Packard. It is able to apply its expertise to develop front-end modules for 3G wireless cellular phones. Its development of film bulk acoustic resonator (“FBAR”) micro­electro mechanical systems filter products and their adoption by customers have provided it with a leadership position in the code division multiple access cellular phone market. In addition, the company is expected to be a significant contributor to front end modules in next generation 3G cellular phones. It is able to provide the wireless market with a broad variety of RF semiconductors, including monolithic microwave integrated circuit filters and duplexers using its proprietary FBAR technology, front end modules that incorporate multiple die into multi-function RF devices, diodes and discrete transistors. Also, its expertise in amplifier design, FBAR technology and module integration capability enables it to offer industry-leading efficiencies in RF transmitter applications, including an integrated optical finger navigation device to replace the mechanical trackball on certain high-end cellular phones. This is also supported by its proprietary gallium arsenide processes which are critical to the production of power amplifier and low noise amplifier products. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSTRY OVERVIEW
‘–‘-_..•Decide with Confidence Avago Technologies Limited maintains design and product development resources around the world. It has two (2) design centres in the US, four (4) in Europe and five (5) in Asia. As a result, it has developed an extensive portfolio of intellectual property that currently includes more than 5,000 US and foreign patents and patent applications. Through leveraging this intellectual property portfolio, it is able to integrate multiple technologies and create component solutions that target growth opportunities. The semiconductor industry is characterised by companies holding large numbers of patents, copyrights, trade marks, and trade secrets. As a result, it has been able to develop specialty process technologies that provide differentiated product performance, are difficult to replicate and create entry barriers for potential competitors. Hence, through these strengths, it is able to sustain itself in the wireless market, as well as in the foreseeable future. Avago Technologies Limited recognises that its ability to compete successfully in the market depends on elements both within and. outside of its control, including industry and general economic trends. During the past periods of downturns in the industry, competition in the market in which it operates intensifies as the competing companies reduced prices in order to combat overcapacity and high inventory levels. It also recognised that many of its competitors have greater financial and other resources with which to withstand similar adverse economic or market conditions in the future. Some of its competitors are well-established, have substantially greater market share and manufacturing, financial, R&D and marketing resources to pursue development, engineering, manufacturing, marketing and distribution of their products. In addition, both current and perspective customers for its products evaluate its capabilities against the merit ofits competing companies. It is expected that competition in the market is anticipated to further increase as the existing competing companies improved or expand their product offerings. In addition, companies not currently in direct competition with it may introduce competing products in the future. As the products are often building block semiconductors providing functions that in some cases can be integrated into more complex ICs, it also faces competition from IC manufacturers, as well as customers that develop their own IC products. The competitive landscape is changing as a result ofan increasing trend of consolidation in the industry, and this is expected to continue. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSfRY OVERVIEW
Decide with Confidence The fast pace of technological developments and the increasingly extensive applications of electronics in the world today will provide tremendous opportunities for the electronics industry to develop further. It was once predicted that the electronics industry would grow larger than the automobile, steel and aerospace industries combined. The industry itself is moving very fast, generating a constant stream of new and more complex devices. In return, this generates a constant stream of challenges and opportunities to companies along the supply chain, including both the OEMs and EMS companies. The Asian region is home to some huge and fast-growing markets. The OEMs are establishing more and more production facilities there, virtually obliging international EMS companies to follow. In the case of Inari Technology Sdn Bhd, it is an EMS company supplying semiconductor SiP packaging to the OEMs, which in turn sell them as RF semiconductors to the cellular phone manufacturers, as well as network products manufacturers. Finally, these manufacturers incorporated these RF semiconductors into the RF module during the production process of the cellular phones and network products. It is quite common for EMS companies such as Inari Technology Sdn Bhd, to rely heavily on a single customer for the majority of their revenues, particularly in the early years, prior to expan<l~g their customer base. The sales are guaranteed within a captive market in a set time span, with little marketing expenses involved. Eventually, the EMS companies are able to diversify their base of customers over a period of time. This strategic and symbiotic relationship assists to ensure greater efficiencies among both the OEMs and EMS companies, through very close interactions. In return, the EMS companies would continue to benefit from the outsourcing processes of the OEMs. Meanwhile, the OEMs is given the flexibility and do not need to ramp up their production capacities and inventory exposure, when there is a sudden surge in orders, through outsourcing the work to the EMS companies. This outsourcing model is advantageous for OEMs which lack the resources to engage in vertically integrated manufacturing. 7. INDUSTRY OVERVIEW

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Figure 1: Industry Supply Chain for RF Semiconductors EMS Cellular Phone Manufacturers Companies Network Products Manufacturers

 

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Source: D&B Makgsia Semiconductor manufacturing may be defined as the process of producing a silicon wafer from pure silicon, fabricating the IC onto the silicon wafer, followed by assembling the fabricated wafer onto a package and finally testing the chip for proper functioning. Typically, semiconductor manufacturing comprises the following steps: • Production of silicon wafers from very pure silicon ingots;
• Fabrication ofICs onto these silicon wafers;
• Assembly of every IC on the wafer into a finished product / device;
• Testing and back-end processing of the finished product/device.

The first two (2) steps form the front end side of semiconductor manufacturing and the latter two (2) steps form the back end side of semiconductor manufacturing. In particular, Inari Technology Sdn Bhd is involved in back end wafer processing, package assembly and RF final testing services in the back end side of the semiconductor industry. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSTRY OVERVIEW

Decide with Confidence Figure 2: Semiconductor Value Chain Growing silicon c’}”ta1 ingots Slicing crystals into wafers Chemiail mechanical polishing
Front End
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1.2 PRODUCT / SERVICE DEFINITION EMS is a tenn used for contract manufacturing companies that design, test, manufacture, distribute and provide return/repair services for electronic component and assemblies for the OEMs. In return, the OEMs sell the products under its own brand names. Semiconductor packaging, encompassing both test and assembly, is the process of enclosing the IC chip in the package. It refers to the connection of the IC to the PCB. Another function of packaging is to provide the desired mechanical and environmental protection so as to ensure reliability and perfonnance. The semiconductor industry manufactures a very wide variety of ICs that have different packaging requirements. Packaging attributes that are taken into consideration when choosing a package type for a particular semiconductor device include size, lead count, power dissipation, field operating conditions and cost. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSfRY OVERVIEW
Decide with Confidence SiP is a combination of multiple active electronic components of different functionality, assembled in a single unit that provides multiple functions associated with a system or sub­system. A SiP may optionally contain passives, micro electromechanical systems, optical components and other packages and devices.
1.3 DIFFERING SEGMENTS Since the early seventies, the electronics industry in Malaysia has been dominated by the production of electronic components, which accounted for between 80% and 85% of output. However, there has been a shift in the composition of the industry since 1990, due an increased emphasis placed on both consumer electronics and industrial electronics. Nonetheless, the electronic components segment still accounted for the largest portion of the electronics industry in the country. The years spent in the learning curve has made Malaysia one (1) of the world’s leading locations for semiconductor test and assembly. As the electronics industry is very wide, it can be further subdivided into three (3) segments, namely, electronic components, consumer electronics and industrial electronics. lnari Technology Sdn Bhd is competing in the semiconductor segment. Figure 3: Segmentation ofElectronics Industry [ Electronics Industry  )  I Electronic Components I Semiconductors Passive components  [  Consumer Electronics Audio equipment Visual equipment Home automation Telematics  )  I Industrial Electronics 1 I PCs Telecommunications
Source: D&B Mal’!Jsia 7. INDUSTRY OVERVIEW

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1.3.1 Electronic Components The electronic components segment covers the manufacture of semiconductors and passive components such as capacitors, inductors, resistors, relays, connectors, coils, transformers, magnets, quartz crystals and oscillators. All semiconductors are active components. Others include amplifiers and switches. Active components have the ability to produce gain, or amplify a signal, while passive components do not. A discrete device is a single semiconductor device such as a transistor or a diode mounted in the individual package; as opposed to an “integrated” device which would be a transistor acting as an element of an integrated circuit. Electronic components usually end up as embedded parts in both consumer electronics and industrial electronics. A semiconductor is a material with an electrical conductivity that is intermediate between that of an insulator and a conductor. Semiconductors are made of a solid crystalline material formed into a simple diode or many ICs. A simple diode is an individual circuit that performs a single function affecting the flow of electrical current. On the other hand, an IC combines two (2) or more diodes. In the past, semiconductor manufacturers or integrated device manufacturers used a business model whereby they owned and controlled all the processes and equipment in the vertical market segment required to design, develop, produce, test, assemble and ship devices to their customers. This model requires a large amount of capital and human resources and hence, tends to favour the large, well-established companies. Inrecent years, a new model has emerged, for a number of reasons, which segments all these different operations among many companies along the value chain. This model is called the subcontract manufacturing model. In this new model, there are two (2) main subdivisions, the design house that implements the IC design part and the foundry that does the fabrication, and which more often than not, outsource the testing and assembly of the IC 7. INDUSTRY OVERVIEW
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Decide with Confidence 1.3.2 Consumer Electronics The consumer electronics segment includes the manufacture of audio and visual equipment such as television sets, radios, in-car entertainment systems, compact discs and digital versatile discs players, hi-fi systems, home theatre systems, set-top boxes, video cameras and digital cameras. The local manufacturing of consumer electronics started in the 1970s with the establishment of a number of European and Japanese establishments to produce audio / visual products. The operations were then labour-intensive and the raw materials, parts and components were mainly imported. However, in view of globalisation forces and stiff competition from the lower cost countries such as China, Thailand and Indonesia, consumer electronics companies in Malaysia had undergone major restructuring and rationalisation exercises in the 1990s. The operations were reorganised to produce higher value-added products and to move up the value-added chain such as design, product and process R&D activities, after-sales service and distribution activities. Most consumer electronics production involves assembly operations, and hence, a strong and efficient supply chain is needed. Most of the work conducted on consumer electronics in the country involves the assembling and testing of the final product prior to their shipment. Changes in the market demand for consumer electronics towards both convenience and miniaturisation have led to an increase in the usage of plasma and thin film transistors -liquid crystal display for applications such as in cellular phones, televisions and computers. The latest emerging technology developments in the field of consumer electronics are focussed on digital home systems such as home automation, and telematics, or automotive electronics.
1.3.3 Industrial Electronics As the name implies, industrial electronics involves a wide spectrum of products. Due to the wide diversity of products, industrial electronics can be further segmented into computers and telecommunications.

7. INDUSTRY OVERVIEW
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Decide with Confidence Personal computers (“PCs”) first appeared in the early 1970s and it has revolutionised a wide range of applications during the last decade. It has closely followed the evolution of the IC technology. Both the processing speed and storage capability of the PCs have increased the productivity of office staff many folds. The vast increase in the capability of PCs has been due mainly to both automation and miniaturisation and the technology is still evolving. The telecommunication products manufactured in Malaysia include telephones, cellular phones, walkie-talkies, switching equipment, transmission equipment, mobile communications equipment, private automatic branch exchange systems, answering machines, radio communications equipment, broadcasting equipment, satellite receivers, satellite dishes, descrambler units and modulators. The modernisation of the telecommunications infrastructure in Malaysia and the surrounding region has provided excellent opportlmities for the development of the telecommunications industry. The continuous technological upgrading has created opportunities in the manufacturing of switching equipment, transmission equipment and devices, radio base stations and digital wireless transceivers. New and emerging telecommunications technologies such as broadband networks and Bluetooth are expected to enhance the usage of wireless communications. At the same time, new hardware and Internet appliances such as multi­functional cellular phones, global positioning systems and hand-held gaming devices have created the demand for wireless networking enhancement. Since the turn of the century, there has been a trend towards the manufacturing of communications and networking equipment in Malaysia. 7. INDUSTRY OVERVIEW

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1.4 SUBSTITUTE SERVICES AND PRODUCTS Outsourcing is not a new concept for the OEMs. In the 1970s, the manufacturing of electronic products was outsourced to contract manufacturers. Cost reduction, complex manufacturing processes, shorter product life cycle, and reduced time-to-market posed problems for the OEMs. All these factors encourage OEMs to use the manufacturing, assembling, supply chain management and after sales service expertise from the EMS companies. By leveraging the services of EMS providers, the OEMs were able to focus on R&D activities and business development strategies, as well as tackle manufacturing complexities. The services offered by the EMS companies for the OEMs provide attributes such as greater flexibility, improved cost-effectiveness, reduced cycle time, reduced time-to-market, and higher quality. Achieving these objectives depends on both OEMs and EMS providers to synchronise their operational activities. Such collaborative attitude can enable OEMs to respond more quickly to changing market scenarios in an efficient way. In cases where OEMs are outsourcing a greater number of functions, the partnerships with EMS companies may grow stronger due to their heightened dependence on the latter. Furthermore, the ability of EMS companies to offer design services will also further strengthen their relationships with their customers. The OEMs can also eliminate the need to ramp-up or ramp-down their workforce and operations, in tandem with industry cycles. Hence, there is no substitute to the EMS industry, unless the OEMs wish to undertake the manufacturing activities themselves. Cost reduction is the most important driver behind the outsourcing trend. However, OEMs have been continuously evaluating the advantages and disadvantages of manufacturing their products on an in-house basis. SiP has evolved as an alternative approach to system-on-chip (“SoC”) for electronics integration because this technology provides advantages over SoC in many market segments. In particular SiP provides more integration flexibility, faster time-to-market, lower R&D cost, and lower product cost than SoC for many applications. SiP is not a replacement for high level, single chip, silicon integration but should be viewed as complementary to Soc. For some very high volume applications, SoC will be the preferred approach. 7. INDUSTRY OVERVIEW

Decide with Confidence 1.5 INDUSTRY PLAYERS, COMPETITION AND POSITIONING Inari Technology Sdn Bhd is an EMS company principally involved in the manufacturing of semiconductor SiP packaging to the OEMs, which in turn supply them as RF semiconductors to the global production networks of the electronics industry. Inari Technology Sdn Bhd’s semiconductor packaging contributed 99.9% of the group’s revenues for FYE 2010. The SiP packaging market in Malaysia is dominated by four (4) major players and besides Inari Technology Sdn Bhd, they are Unisem (M) Bhd, Carsem (M) Sdn Bhd, and Globetronics Sdn Bhd. They are also the closest comparable competitors to Inari Technology Sdn Bhd. Based on the latest publicly available financial statements, in terms of revenue and PBT margin, Inari Technology Sdn Bhd is ranked number 3 (three). However, in terms of return on total assets, Inari Technology Sdn Bhd achieved the highest position among the closest comparable competitors. According to the management of Inari Technology Sdn Bhd, it managed to achieve these positions due to a combination of factors such as a good supply chain, relatively low internal cost structure and having a different product mix (Inari Technology Sdn Bhd is relatively stronger in RF wafer probing and testing). This is a notable achievement since its relatively short inception from June 2006. Table 2: Rankings by PBT Margin “”‘,–~”f -. ~-“” m.”~” ‘~” ‘,’ -“””. =” 7\”\ -‘t. ,. “. t ····>··.. “‘f”-·”‘–“‘~;;;”l’~[ij”””‘-”’TI~”””’-‘;)’Atl”1l’lmlrlG~”’Ir’9>?;;i;~’;;;’.”~’ (~,-)·”lY;IiW·!-;·~:;J;:’·’i;ii·~’,.”‘;~ ti<~,,;:!f'” -‘”ft~fr;)8″ ~ ~FtJ ‘;F”, ~ ~ ~~ ~ f~M;m!;t,:) ~.’. ~!~r 1″ l\ ”1fjt,v’s”4’ii).:4 ~~~~:~r~ _~:-Z’~~~.~ :~~ ~·~~~~2::~~~E~t:I~;~~::::<~~~.i;;=C::~:fJ:;l:~: }:~~~~. ~:.~t:’~:~l~~~If:~:;~ ~ :’ ._–~ ~::~~~: ~~~i~~; ~~;i~~~ :~;~ ~ :’: ~l.:;;.;n~:, ~f:J
Globetrorucs Sdn Bhd*  31/12/09  128,362.9  20,686.9  16.1  Unisem (M) Bhd  31/12/10  1,395,078.0  193,289.0  13.9  Inari Technology Sdn Bhd  30/06/10  154,800.0  15,273.0  9.9  Carsem (M) Sdn BhdA  30/06/10  993,704.8  19,507.1  1.9
Notes: A = a subsidiary ofHong Leong Industries Bhd *= a whol/y-owned subsidiary ofGlobetronics TechnokJgy Bhd Source: Companies Commission ofMalf!Jsia, management ofInan TechnokJgy Sdn Bhd 7. INDUSTRY OVERVIEW

Decide with Confidence Table 3: Rankings by Return on Total Assets ;:’ ‘~r; ~ d~; r’-n;~~” ..tf:’1r”–~”·.T-:::-”””;”; ~-~~’Y:’~~ ‘””‘~…:r:~~ ‘../~ ‘3-=””7″-,;~r::r.-;z~–“;~-;-;:”~·~-:-~-“;.~’Jfii’~:~~6~:~~~<~f~~~”~t:-r.:·~;.:t. . ‘0 ‘:\,~:®; ‘~Il:”‘):1’i,)’V””” ~m~’c.” 1li’J~””,”.<50.’.'” ,,~, , ~·<“,g”,.,c,r ~…,K0.!”’ ,-,,;’0i(~~J'”””’ .illsf(w” > • ~’1Jl .\0;3″3′:;(‘”.0,-..
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Inari Technology Sdn Bhd  30/06/10  14,754.0  67,892.0  21.7  Carsem (M) Sdn BhdA  30/06/10  66,007.1  974,052.7  6.8  Unisem (M) Bhd  31/12/10  182,958  1,835,750.0  10.0  Globetronics Sdn Bhd*  31/12/09  19,786.9  N.A.  N.A.
Notes: N. A. =Not Available A =a subsidiary ofHong Leong Industries Bhd * =a whol!y-(Jwned subsidiary ofGhbetronics Technohgy Bhd Source: Companies Commission ofMalqysia, management ofInari Technohgy Sdn Bhd Inari Technology Sdn Bhd possesses the ability to utilise technologies such as hybrid multi-chip packaging, and mixed technologies in COB and surface mount processes. In particular, mixing logic and analogue dies (also known as hybrid multi-chip packaging) in a single SiP can be challenging. Hybrid multi-chip packaging is used to meet the demands for higher performance and further miniiturisation. The advantages ofhybrid multi-chip packaging include the following: • improved performance;
• higher integration density;
• lower power consumption;
• mixed signal applications; and
• lower costs.

Inserting several dies into the same package allows much faster introduction of the product into the market. Time-to-market is of great importance since the highest profit margins are always achieved in the early stages of the product life cycle. 7. INDUSTRY OVERVIEW

Decide with Confidence COB is a technology that utilises wire bonding to connect large scale integrated circuits direcdy to PCBs. Designing the COB process assembly sequence is critical, particularly for applications where die products and surface mount components are combined on a single substrate. However, the merging ofmixed technologies such as COB into mainstream surface mount processes usually entailed acquiring the specialised knowhow through considerable “hands-on experimentation” and a relatively long learning curve. In other words, the assembly process must be very precise and stable. The ability to master this technology translates into the ability to achieve better, more precise and cleaner signals, as well as more accurate RF semiconductor devices, with less noise as well as electromagnetic interference and radio frequency interference. 1.6 MARKET SHARE The principal products that lnari Technology Sdn Bhd is manufacturing are classified under HS code 8529 90900 for trade recording purposes. lnari Technology Sdn Bhd operates in a free industrial zone (“FlZ”) and as a contract manufacturer, its products are sold to OEMs in the FIZs which then export them; and hence, for the purpose of this report, lnari Technology Sdn Bhd’s sales can be considered as exports. Only export-oriented companies are allowed to operate in a FIZ. In 2010, the Department of Statistics reported that exports under this code amounted to RM2.1 billion, As lnari Technology Sdn Bhd supplied RM156.7 million worth of products under this code for the calendar year 2010, it export market share was registered at 7.6% in the same year. 7. INDUSTRY OVERVIEW

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1.7 LEGISLATIONS, INCENTIVES AND POLICIES 1.7.1 Legislations Under the Factories and Machinery Act, 1967, any employees in the factory exposed to a wet or dusty process, to noise, heat or any poisonous, corrosive or other injurious substance which is likely to cause bodily injury to them, may be provided with suitable and adequate personal protective clothing and appliances. They include goggles, gloves, leggings, caps, foot wear and protective ointment or lotion. Both the foundations and floors of the factory shall be of sufficient strength to sustain the loads for which they are designed; and no foundation or floor shall be overloaded. The EMS companies are also subjected to the Occupational Safety and Health Act, 1994. This Act is enforced by the Ministry of Human Resources under the Department of Occupational Safety and Health. Under this Act, the. employer has a duty to protect the safety, health and welfare of all his employees. The Act requires the employer to: • provide and maintain plant or equipment and systems of work that are safe and without risks to health;
• make arrangements for ensuring safety and absence of risks to health in connection with the use or operation, handling, storage and transport of plant;
• provide information, instruction, training and supervision as is necessary to ensure the safety and health of the workers; and
• maintain his place ofwork to ensure it is safe and without risks to health.

The employer shall also ensure that no worker shall be employed at any machine or in any . process, being a machine or any process liable to cause bodily injury, unless he has been fully instructed as to the dangers likely to arise in connection therewith and the precautions to be observed. The worker must receive sufficient instruction in work at the machine or process; or is under adequate supervision by a person who has knowledge and experience of the machine or process. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSTRY OVERVIEW

Decide with Confidence Lasdy, both effective and suitable proVlsIon shall be made for secunng and maintaining adequate ventilation by the circulation of fresh air in every part of the factory and for rendering harmless, so far as practicable, all gases, fumes, dust and other impurities that may be injurious to health arising in the course of any process or work carned on in the factory. The back end semiconductor processes produce spent cleaning solutions, spent solvents, and spent epoxy. Realising the potential danger posed by improper management of toxic and hazardous wastes, the government has extended many efforts since 1979 to identify possible options and the necessary measures for their proper management. These include the identification, classification and quantification of the various types of toxic and hazardous wastes generated and their treatment and disposal. The Environmental Quality Act, 1974 was enacted on 22 March 1974, to prevent, abate and control pollution and enhance the environment. As the Department of Environment encountered and experienced various deficiencies over the years, a comprehensive review was carried out to address these shortcomings. A new regulation, namely the Environmental Quality (Scheduled Wastes) Regulations 2005 was enacted and came into force on 15 August 2005. The major change in the 2005 Regulation is that scheduled wastes are now categorised based on type of waste rather than the source or origin of the wastes. New provisions instituted include the special management of waste, limiting the amount and duration of waste storage, recovery of scheduled wastes, conduct of training for persons handling scheduled wastes and improvement in the labelling requirements. Scheduled wastes are now categorised under five (5) groups: • Metal and metal-bearing wastes;
• Wastes containing principally inorganic constituents which may contain metals or organic materials;
• Wastes containing principally orgamc constituents which may contain metals and inorganic materials;
• Wastes which may contain either inorganic or organic constituents; and

Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSTRY OVERVIEW

Decide with Confidence • Other wastes. 1.7.2 Incentives Most export-oriented companies are situated in the FIZs. Other than minimal customs facilities, the FIZs enable export-oriented companies to enjoy duty free import of raw materials, component parts, machinery and equipment required directly in the manufacturing process, as well as minimal formalities in exporting their finished products. Companies can be located in the FIZs when their entire production or not less than 80% of their products are meant for export; or their raw materials and components are mainly imported. Nevertheless, the government encourages companies located in the FIZs to use local raw materials and components. Under the Promotion of Industrial Investments Act 1986, Inari Technology Sdn Bhd has been granted pioneer status by MIT!, with a tax exemption of 70% on statutory income for a period of five (5) years. This is for the production of wireless microwave telecommunication filters and wireless home broadcast digital television cards. Eligibility for pioneer status is based on certain priorities, including value-added of 30% and the level of managerial, technical and supervisory staff achieving at least 15% of total manpower. In order to reduce the cost of doing business caused by interruptions in the power supply, companies which incur capital expenditure on equipment to ensure the quality of power supply, are eligible for accelerated capital allowance for a period of two (2) years which allows the companies to write off the capital expenditure within two (2) years, i.e. an initial allowance of 20% and an annual allowance of 80%. 7. INDUSTRY OVERVIEW

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1.7.3 Policies During the Tenth Malaysia Plan 2011-2015, the government will focus its resources towards prioritising specific national key economic areas as part of the strategy towards greater specialisation. The E&E industry has been identified as one (1) of the national key economic areas. Efforts will be intensified to move the E&E industry up the value chain through effective public-private partnerships. Opportunities in automation, miniaturisation, digitisation and multimedia applications will be pursued, and specialisation in semiconductors, embedded systems, optoelectronics, RF and wireless will be promoted. The government will focus on developing key enablers such as upskilling existing talent and increasing supply of relevant talent, strengthening the R&D system, growing the domestic vendor base and establishing the infrastructure. Under Third Industrial Master Plan 2006-2020, the electronics industry is envisaged to continue to grow and contribute significandy to industrial progress and transformation. The MNCs will continue to assume a significant role in increasing the technology level of the industry, in tandem with. the global trend in miniaturisation and convergence of technologies in multifunctional product. Testing activities will be part of the development of the entire semiconductor value chain. Towards realising the objectives and targets set for the electronics industry, seven (I) strategic thrusts have been established and they are as follows: • Strengthening and deepening the semiconductor industry: The semiconductor industry will be further strengthened through the establishment of a fully developed semiconductor cluster covering the north-western corridor in the peninsula, including Penang, Perak, Kulim High Technology Park and the neighbouring industrial areas of Kedah; 7. INDUSTRY OVERVIEW

Decide with Confidence • Deepening and widening the development of the information and communications technology (“ICT”) industry: The industrial electronics segment will be further developed through the enhancement of the ICT value chain. The value chain, presently centred around the Multimedia Super Corridor in the Klang Valley, will be progressively expanded to designated areas around the country;
• Intensifying R&D and design activities: Measures will be introduced to promote the specialisation of R&D activities and the creation of centres of excellence among existing R&D centres in the public universities and research institutes, so as to facilitate the development of new and emerging technologies;
• Promoting the application of new and emerging technologies: The application of new and emerging technologies like nanotechnology, ffilcro electromechanical systems, photonics, wireless technologies and advanced display technologies will be encouraged to improve the competitiveness of domestic companies;
• Integrating the industry into regional and global supply chain networks: Measures will be undertaken to nurture the existing domestic companies with the growth potential to expand and integrate into the regional and global supply chain networks, as well as become major producers on their own;
• Making available a sufficient supply of highly skilled and innovative workforce: There will be undertakings in the development of the required human resources in the industry, so as to ensure that skilled personnel and a qualified workforce will be readily available; and

Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 124 7. INDUSTRY OVERVIEW

 

Decide with Confidence • Strengthening the institutional support for the development of the electronics industry: Institutional support include the formulation of a standardised quality control management system, management and disposal of scheduled wastes and strengthening the role ofindustry associations, so as to further develop the industry. Under the Economic Transformation Programme (“ETP”), the electrical and electronics (“E&E”) industry has been identified as one (1) of the National Key Economic Areas (“NKEAs”). An NKEA is defined as a driver of economic activity that has the potential to directly and materially contribute a quantifiable amount of economic growth to the Malaysian economy. The government realises that it needs to focus on a limited number of sectors and geographies in order to achieve the goal of becoming a high income nation. The NKEAs were chosen on the basis of their contribution to high income, sustainability and inclusiveness. An initial set of 12 potential NKEAs have been identified, comprising 11 industries and one (1) geographic area. 1.8 DEMAND AND SUPPLY CONDITIONS
1.8.1 Demand Both form factor and technology-driven integration have been the prune events ill RF semiconductors. The products need to have high performing and low power consuming attributes, occupy low footprint, and can also support multiple air interface standards, apart from the value-adding applications such as global positioning system and Bluetooth. Wireless communications has evolved from the days of voice only to both voice and data communication. Hence, to meet the requirements of these services, RF semiconductor suppliers need to gear themselves to supply high efficiency products at an acceptable cost. 7. INDUSTRY OVERVIEW

Decide with Confidence The drive toward modularisation is on the rise as the market demands compact integrated product modules. The cellular phone industry is moving toward a complete radio solution where one (1) module will have integrated in it all the functions that are comprised in the RF portion. Apart from performance and power characteristics, the ease of design and the flexibility to interface are the other notable factors propelling RF semiconductor manufacturers to enhance their product offerings. The major RF semiconductor devices utilised in cellular phones are as follows: • RF switches;
• RF filters;
• Power amplifiers; and
• RF transceivers.

The RF switch, which is used for band selection, encompasses antenna switches and transmit­receive switches that are used in the RF front end of a handset. The antenna switch is connected to a common antenna, which provides signal isolation between the different frequency bands for a multi-band system. The transmit-receive switch performs· signal isolation between the transmit and receive signals. Filters include bandpass filters, intermediate filters and duplexers. The bandpass filter aids the duplexer in attenuating the first image noise and filters other undesired responses of the receiver. On the transmit side, the RF filter suppresses unwanted frequencies, attenuates noise and assists in avoiding receiver desensitisation. Meanwhile, the function of the intermediate filters is to attenuate the out-of-band frequencies in the signals emerging at the output of the two (2) mixers. Finally, the duplexer’s primary function is to isolate the transmit and receive paths in the input diplexer. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSTRY OVERVIEW

 

 

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~-_Decide with Confidence The power amplifier is a very important component in the RF portion of any cellular phone. Its’ primary function is to provide the required output power level and transmit the signal amplification as needed at the antenna output port. The power amplifier also serves to maintain the integrity of the input signal. For maintaining the output power at the desired range, the power amplifier must provide sufficient gain. As the data capabilities of cellular phones gain more importance, and cellular phones with embedded data communication functionality increase in number, the demand for more powerful power amplifiers becomes more acute. The main purpose of a RF transceiver is to receive and transmit the desired signals, while at the same time rejecting undesired (spurious) signals that can be present at the receiver input, or that may be generated at the various signal processing stages. The RF semiconductor segment is witnessing a huge wave toward integration. The universal demand for smaller cellular phones is compelling manufacturers to minimise the size of component parts, and hence the board space occupied by the RF module. This calls for high levels of integration, with the discretes and passives being progressively integrated into chips and multi-chip compact modules. The increasing number of wireless standards and the coexistence of many standards in any region create the need for multi-mode multi-band cellular phones that can provide service to customers across different frequencies and bands. With the increase in proportion of multi­mode and multi-band handsets, there is a corresponding increase in the number of RF components that go into a handset. For instance, to cater to multiple frequencies, additional filters need to be incorporated in the front-end. Hence, this ultimately results in an increase in the output of the RF semiconductors, and the associated SiP packaging. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 127 7. INDUSTRY OVERVIEW

Decide with Confidence Cellular phones have become both a status symbol and fashionable device to consumers. The product life cycle for cellular phones is also getting shorter, as consumers opt for more feature­rich devices. Along with decreasing average selling prices, these factors boost the cellular phone replacement market. In addition, the mobile penetration rate has already surpassed 100% in some countries, as some consumers take a second connection for personal use. Global unit shipments of cellular phones reached 1.4 billion units in 2010 and are expected to attain 1.6 billion units in 2014. The growing popularity of smart phones has also driven the overall cellular phone market. Some consumers are also turning in their older generation cellular phones and replacing them with smart phones. Smart phones fall under a category of cellular phones that provide advanced capabilities beyond a conventional cellular phone. Table 4: Global Unit Shipments of Cellular Phones ~~~~7t'{-‘;””,’:”‘::?:;’:ff:~I]:f~~t’~~jf”/~~l1’T1i’ffif~~fnffit;:~~~,:;-{‘::~%’!:Y~~:tf’·-:,c{J. r”‘” ‘,’,’,:~'”,,’,0,’ ”’.’i’t;J:i’t)~ -‘C_”‘.’~’I-“~’_’ ~”i~ ‘-lW~, > Q~!d..~~.~ ””’ ,,_c.~ “”of, -?:S>”r}.tI .”J­,_ ~ ~f~~:’~~:::c~~k,i~i:[~~~)&~:ilf~~)~-k.\j:~~;~~”j;~~~;~J:~J~~ar;~:i:;;~~~~l~~iE~~:~~~:  2010  1,388.2  14.6  2009  1,211.0  -0.9  2008  1,220.0  6.0  2007  1,150.0  16.0  2006  990.8  21.0
Source: D&B-Malcgsia 1.8.2 Supply lnari Technology Sdn Bhd is involved in the manufacturing of SiP packaging, which is used mainly for the RF semiconductor market. The Department of Statistics does not gather any industry statistics for SiP packaging nor RF semiconductors per se; but rather for semiconductor devices as a whole. Further analysis of the industry statistics revealed that the semiconductor devices are segmented into unit shipments of products such as semiconductors, electronic transistors and ICs.
7. INDUSTRY OVERVIEW

Decide with Confidence Table 5: Ex-Factory Sales of Semiconductor Devices (RM ‘000)
Source: Department ojStatistics Table 6: Production (Unit Shipment) of Semiconductor Devices
,C:’,–,~ “. :.c.. ‘:-. . ,-‘ , :: ‘”‘::~~~~~f~t~~~~;i % Growth Million % Growth 2010 17,997 20.9 33,968 16.1 38,007 63.3 2009 14,885 -27.5 29,271 -6.6 23,279 -24.3 2008 20,520 -7.5 31,346 1.5 30,752 -8.4 2007 22,192 26.3 30,888 5.2 33,558 -5.4 2006 17,569 34.1 29,357 6.5 35,455 18.4 2005 13,101 27,559 29,949 Source: Department ojStatistics Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSTRY OVERVIEW

Decide with Confidence Specifically, the principal products that Inari Technology SOO Bhd is manufacturing are classified under HS code 8529 90900 for trade purposes. After experiencing rapid increases in 2007 and 2008, exports under this code registered a contraction of over 2% in 2010 following a decline of over 22% in 2009. Imports under this HS code also recorded declines in 2008 and 2009. However, imports rebounded by over 28% in 2010. A substantial proportion of semiconductors imported into the country are processed and / or incorporated into another product, before being re-exported. In other words, some value added activiti~s are conducted on these products before they are being re-exported. The contractions occurred due to the recent global financial crisis, which also affected the semiconductor industry. In 2010, unit shipment of semiconductor devices appears to have recovered from the global decline, in tandem with the global economic recovery. This is expected to continue over the short and medium term. Table 7: Trade of Semiconductor Devices (RM Million)
~fi.~t~~~ll1l~~~~!~~1~~~r~~1~j~~~~~e~I~~:~f~~(;~~!;::~ fi~~
Import  % Growth  Export  % Growth  2010  2,018.4  28.9  2,056.8  -2.33  2009  1,566.4  -50.6  2,105.9  -22.8  2008  3,170.2  -24.4  2,727.7  20.2  2007  4,191.5  14.5  2,269.6  14.6  2006  3,660.5  20.4  1,980.8  -15.6
Notes: HS code 8529 90900: Parts suitablefor use orprincipal!! with apparatus such as transmission, television cameras, digitalcameras, and video camera recorders; radar apparatus, radio navigational aid apparatus and radio remote control apparatus; reception apparatus for radio broadcasting; and monitors andprojectors Source: Department ofStatistics Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSTRY OVERVIEW

Decide with Confidence Converging markets and technology advancements are driving paradigm shifts in the electronics market and there is now a continuous stream of multifunctional new products coming out to address the changing demands of the consumer. TIlls has led to the increasing development of functional, modular components or SiP which brings together many test and assembly technologies to create highly integrated products. SiP has rapidly penetrated most major electronics market segments such as consumer electronics, cellular phones, automotive, computing, networking, communications, medical electronics etc. Attributes such as time-to-market, size, power requirements and cost have resulted in the strongest initial penetration in cellular phones.
1.9 INDUSTRY RELIANCE AND VULNERABILITY TO IMPORTS Wafers for RF applications are manufactured in Malaysia, by SilTerra Malaysia Sdn Bhd. Depending on the contracts, some OEMs also sourced the wafers and then supplied them to the EMS companies involved in test and assembly activities. Hence, these EMS companies do not rely and are not vulnerable to imports of wafers. Although there were some plant shutdowns in the past, the majority are the older· fabs which are less economical and underutilised, due to the older technology involved. Over the medium term, the global semiconductor industry has reached agreement to start a 450-rom pilot line by 2012. The 450 rom wafer size is attractive to semiconductor manufacturers since the total silicon surface area and the number of printed die is more than double that of a 300-rom wafer which is presently used in the industry. TIlls would assist to ensure sufficient supply of wafers to the market.
1.10 PROSPECTS AND OUTLOOK OF THE INDUSTRY The future growth of the electronics industry in Malaysia will be influenced by the advancement of technologies, particularly in semiconductors. The further integration of technologies will enable companies to develop greater product functionalities and enhanced performance and system management. Malaysia is anticipated to benefit from the growth in demand for semiconductors from both the developed and emerging economies, as a result of the further integration of existing semiconductor companies into the global production networks. The need to sustain competitiveness will compel the OEMs to outsource their manufacturing process to the most cost efficient EMS companies. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSTRY OVERVIEW

Decide with Confidence Semiconductor technology lies at the heart of the amazing revolution we are witnessing in computing, communications, consumer electronics, transportation and health care. This revolution is enabled by designing and building successive generations of chips that perform an ever increasing number of functions, run faster, and cost less. The development of the Ie package is a dynamic technology. Applications that were unattainable only a few years ago are today common place thanks in part to advances in package design. From mobile telecommunications and satellite broadcasting to aerospace and automotive applications, each imposes its own individual demands on semiconductor packaging. In the telecommunications market, streamlining RF applications into packaging to operate at super-high frequency shall continue to break barriers over the next several years, with more and more portable functions integrated for higher individual productivity levels. This is anticipated to increase the demand for RF semiconductors and in return, the associated semiconductor packaging. Hence, the participation of Inari Technology Sdn Bhd in the EMS industry catering to RF semiconductors is likely to succeed, and has the potential for profitable operations and wealth creation. It also has the adequate resources to realise its potential, as it has a sustainable position in the industry, with respect to its competitiveness. Besides being integrated into the global production networks, the OEMs also prefer to outsource their manufacturing processes. Hence, the EMS companies will need to be present along the supply chain of the semiconductor industry. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 7. INDUSfRY OVERVIEW

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~_Decide with Confidence 1.11 THE GLOBAL ECONOMY In 2010, the global economic recovery continued to strengthen at varying paces across regions, largely attributed to sustain fiscal stimulus and accommodative monetary policies worldwide. 1bis was further supported by better economic performance in emerging economies, particularly China and India. In 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 ASEAN economies as well as oil producing countries will provide the impetus for global growth. The World Trade Organization projected global trade growing at 6.5% in 2011 after expanding 14.5% in 2010, mainly supported by economic recovery of emerging markets such as China and Brazil. With China’s exports growing at 28% in 2010, it will continue to be one the drivers of global trade. Nevertheless, volatile oil prices, and persistent unemployment in developed economies could pose a challenge to continued growth in global trade. 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 liberalise 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. The unrest in the Middle East and the earthquake inJapan have moderated global trade momentum. 7. INDUSTRY OVERVIEW

Decide with Confidence Table 8: Global Real GDP Growth, 2002-2011f
Notes: *= Indicates member countries ifthe Euro area (Austria, Belgium, y,prus, Finland, France, Genna’!), Greece, Ireland, Ita!J, Luxembourg, Malta, Netherlands, Portugal, Slovak Republic, Slovenia, Spain) f= forecast
Source: Bank Negara MakrJsia, Ministry ifFinance 1.12 THEMALAYSIANECONOMY 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 significantly 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. 7. INDUSTRY OVERVIEW

Decide with Confidence 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 consumption 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 ofmajor civil engineering projects. Table 9: Annual Change in Real GDP by Sector, 2002-201t (2000 prices) ~~~:r~-:ll~~V~t;;::.r,[?~·. ‘;””;”~’I.’-‘” y’-‘” ~/, !” .r::· ” :”g!,’iJ.;;~~r>T'”:”~,~~,~.,.;C;C’:!li;;”,’!’~-:”Z~”C’~:::i”.::”’·:t~ r~~,.·:’i’n;:’n~~w,,”‘:’..-“C, -~” ~~~Wii~i€,,,,.;~~; 7’~~~§(:BJJ11&~P,r;·@}1fYJ i. ‘r~ict2l~ff,·ttV:~J:£;r;,·&!Xv~:;tI~fjffiw?-; <f,illO~;)f}:;’2~;Wf~; “~~{iJ;11y ‘,’~ J2.l;;1J1Z~?,;¥Z~id1~~~.i.~ci&i~~~A~ ….1~i5~ :s~~~.f_ “.:!~..:t.,-,; ~: ~ :t-=:~~::fu1~~~~£.~ ~;;~]k.fL;:>~il'”4~~’:..B. ~~. i.’~”z:/ ~:. ~t~.:~~~ -aa.g’.-….X,’;,: %~”~~ t~~ : ~ ._. ~;1 :l.:Th GDP 5.4  5.8  6.8  5.0  5.8  6.2  4.6  -1.7  7.2  5.0-6.0  Agriculture  2.9  6.0  4.7  2.6  5.4  1.4  4.0  0.4  1.7  4.5  Manufacturing  4.1  9.2  9.6  5.3  7.1  3.1  1.3  -9.4  11.4  6.7  Mining  4.4  6.1  4.1  -1.3  -2.7  2.0  -0.8  -3.8  0.2  2.9  Construction  2.3  1.8  -0.9  -1.8  -0.5  4.7  2.1  5.8  5.2  4.4  Services  5.8  4.2  6.4  6.7  7.3  9.6  7.2  2.6  6.8  5.3
Notes: f= forecast Source: Bank Negara Makgsia, Ministry ofFinance 7. INDUSTRY OVERVIEW

Decide with Confidence 1.13 THE MANuFACTURING SECTOR IN MALAYSIA The manufacturing sector is poised for strong growth in 2010, based on the observed momentum of recovery since the end of 2009. Broad-based expansion is expected across all clusters, reflecting improved external demand and strengthening domestic demand. The E&E cluster is projected to turn around with the pick-up in global demand for electronics, particularly with the return of corporate information technology spending, where upgrade and replacement of software and equipment were held back during the global downturn. The chemical industry is expected to improve in tandem with the E&E, automotive and household markets, while demand for hygiene and medical products will continue to support the rubber products industry. Meanwhile, the consumer-related cluster is expected to move in line with the strengthening of domestic demand, particularly private consumption. Also, the performance of the construction-related cluster will be influenced by anticipated higher domestic construction activity and infrastructure projects in the region.

 

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