Infocredit!!.~’l Infocredit!!.~’l EXECUTIVE SUMMARY The intention of this Report is to provide an overview of the electrical and electronics(“E&E”) industry, with a specific focus on the MEC (“Microelectronics Component”) a sub-segment of the Electronic Components sub-sector within which JHM Group is operating. In view of the wide spectrum of the MEC sub-segment, this Report will focus primarily on high brightness light emitting diode LED (“HB LED”). In addition, direct current (“DC”) micromotor will also be discussed in this Report. OVERVIEW OF E&E INDUSTRY IN MALAYSIA The E&E industry generally consists of four (4) major sub-sectors as diagrammatically illustrated below. Figure 1: Major Sub-sectors of E&E Industry
Souree: Malaysian Indllstrial Development Authority (“MIDA ‘J, lnflcredit D&B The electronic components sub-sector of the E&E industry is the leading sub-sector with the largest contribution to industry’s export, output and employment opportunities. The electronic components sub-sector can be further categorised into three (3) sub-segments, namely, semiconductor devices, passive components and display devices. However, as technology continuously evolved and the demand for smaller and lighter electronic components became increasingly eminent, the notion of MEC emerged over time. MEC encompasses Executive Summary
components and parts ofsemiconductor devices, passive components and display devices which are generally miniature in size. The evolution of microtechnology has largely driven the phenomenon of MEC. Microtechnology is the convergence of a multitude of technologies and disciplines such as physics, chemistry, engineering, materials science, microelectronics, lithography and information technology (“IT”), deployed in structures and devices with features in the micron level. It is not merely or even primarily about making things smaller. Its significance is exemplified in its ability to offer an altemative to conventional technologies and to date, it has made great contributions to wide areas, amongst others, computer peripherals, integrated circuits (“ICs”), fIB LED, sensors, bioscience systems and small actuators. Figure 2: Sub-segments of Electronic Components Sub-sector , _.-._._ , ,………•-.—–_ .•.,
. Display ! ! Semiconductor Devices ;; Components I De,,-ices ‘-‘-‘-‘-‘-‘-‘-‘-‘-‘-‘-”-‘-‘-‘-‘-‘-‘-‘-‘-‘-‘-‘ ‘-‘-‘-‘-‘-‘-‘-‘-‘—–‘ ISUNnY: Injv,.”di/ D&B Passive
Infocredit!!.~’l MARKET DEFINITION OF MEC MEC are components and parts that form the electronic components, which are miniature in design and size. They can be found in all the sub-sectors of electronic components, namely semiconductor devices, passive components and display devices. For the purpose of this Report, emphasis is given on two (2) types of MEC namely HB LED (a type of LED) components and DC micromotor (a type of electronic micromotor) components. Figure 3: Major Categories of MEC
Source: ltr/omdif D&B Infocredit!!.~’l 2.1 HBLED The LED has evolved from being a light source for indicator applications to being a source of illumination applications. As the evolution of LED technologies continues, different types of LEDs are being developed. In general, LEDs can be classified into two (2) major categories, namely conventional LEDs and HB LEDs. These LEDs are categorised based on differentiation in terms of performance such as brightness, thermal resistance and light output degradation. A summary of the types of LED is diagrammatically illustrated as follows: Figure 4: Major Categories of LED
SOtlrl’e: Injo’1’I!dit D&B By definition, HB LED is distinguishable from the conventional or common LED by their brightness levels. It utilises the technology derived from semiconductor devices. HB LED can be defined by its technical specifications and applications. Basically, HB LED can either be based on indium gallium aluminum phosphide (“InGaAIP”) or gallium nitride (“GaN”) materials. A HB LED has a higher lumen (measurement of light output. One lumen is equal to the amount of light emitted by one candle that falls on one square foot of surface located one foot away from one candle) output as compared to the conventional LED. Thus, HB LEDs can provide brighter light source than conventional LEDs. In terms of thermal resistance, the HB LED has a lower resistance than the conventional LED. As such, the HB LED is able to dissipate heat faster. In addition, it also has a lower light output degradation rate compared to the conventional LED. Due to these characteristics, HB LED is considered more efficient than the conventional Executive Summary Infocredit!!.~’l
LED. For the creation of white light, the conventional LED converts a blue LED with phosphorous while the HB LED combines a range of monochromatic LEDs Some of the major components of a HB LED include leadframe (a metallic frame used for mounting and connecting LED chips and functions as the electrical leads of the device), heat sink (also known as slug) and plastic package for leadframe. The combinations of these miniature components will determine the performance, quality, reliability and cost of the HB LED. As most of these parts are micro in size, precision and accuracy in designing are crucial. The design and development of HB LED is closely linked to each component of the HB LED. For instance, the design and the material used for leadframe must confonn to predetermined specifications for different application purposes. The need to ensure heat sinking with LED systems is also important to consider when these systems are installed. There must be sufficient means to conduct the heat away from the system, or ventilation to cool heated surfaces by convection. Thus, heat management is an important element in designing each component. In addition, improvements in chip packaging and chemistry are pushing the performance of both the AllnGap and Gan-based HB LED. In recent year, Philips Lumileds Lighting, Limited Liability Company (“LLC”), United States (“USA”), the world’s renowned manufacturer of high-power LED, has developed the world’s brightest LED including the Luxeon V, which delivers 120 lumens of white light in a single emitter. That product generates 20 to 120 times the output of competitive packages, or a brightness equivalent to that of a 10-watt incandescent bulb. In 2004, Luxeon LED was used to illuminate the world’s first LED backlight for liquid crystal display (“LCD”) home televisions. EXECUTIVE SUMMARY FOR THE INDEPENDENT MARKET RESEARCH REPORT AND THE LETTER THEREON (Coot’d) (Prepared for the inclusion in this Prospectus) Infocredit!!.~’l
2.2 DC Micromotor Electronic micromotor is a miniature motor. It is an electronic component, which provides the basic function of a motor, namely motion control. It can be classified into two (2) types of micromotors, namely the DC and alternating current (“AC”) micromotors. A DC micromotor converts electrical energy into mechanical motion. There are various kind of DC micromotors (such as step motor, spindle motor) for specific applications. Stepping or step motor refers to the miniature motor used to drive gears, which turn the hands in a quartz analogue watch. The spindle micromotor, also sometimes called the spindle shaft, is responsible for turning the hard disk platters, allowing the hard drive to operate. The spindle micromotor provides stable, reliable and consistent turning power for thousands of hours of, often, continuous use to allow the hard disk to function properly. There is also the brush type DC micromotor, which consists of conductive copper wire wound around a laminated steel stack, or, for coreless or ironless motors, a self-supporting copper wire winding. On the other hand, a brushless DC micromotor has a pennanent magnet rotor and coils in the stator. An external brushless DC motor controller sequences the stator coil currents. The main advantages of a brushless DC micromotor include the elimination of electromagnetic interference caused by the arcing brushes and having a longer life span.
EXECUTIVE SUMMARY FOR THE INDEPENDENT MARKET RESEARCH REPORT AND THE LETTER THEREON (Coot’d) (Prepared for the inclusion in this Prospectus) Infocredit!!.~’l
3 INDUSTRY DYNAMICS 3.1 Market Growth in Malaysia 3.1.1 Market Growth for LED Table 1: Sales ofLED in Malaysia, 2001-2005 In Malaysia, statistics specifically for the sales of HB LED are not available. For the purpose of this study, the sales value of LEDs in general to provide an indicative overview of the market condition, is used as an indicator. Between 2001 and 2005, the sales value of LEDs has been registering a compound average growth rate (“CAGR”) of 29.4%. From a mere sales value of RMO.9 billion in 2001, the sales value soared to RM2.5 billion in 2005. In 2003, the sales value grew by 51.1 %. Compared to 2002, the sales of LED have more than doubled in 2005, reflecting the growing potential of the market. The sales value of LEDs has been increasing in line with its broadening applications and market acceptance. \~’ith growing demand that is especially evident from the perfonnance of the export market, local manufacturers with R&D capabilities will stand a better chance in competing among themselves. This will further contribute towards efforts in establishing Malaysia as a regional Original Equipment Manufacturing / Original Design Manufacturing hub for some of the world’s leading players such as Philips Lumileds Lighting, LLC, US, Nichia Corporation and OSRAM Opto Semiconductor GmbH. Infocredit!!.~’l 3.1.2 Market Growth for Electronic Micromotor Table 2: Sales of Electronic Micromotor in Malaysia, 2001-2005
RM ‘000 % 2001 1,149,343 2002 706,409 2003 430,204 2004 267,216 2005 309,717
Soum:: DOS Over the years, the global electronic micromotor sector faced stiff price competition among the major players. In Malaysia, the sales value of electronic micromotors has been gradually falling between 2002 and 2004. In 2005, the market size was valued at about RMO.3 billion compared to RM1.l billion in 2001. Albeit the electronic micromotor sector appears to be declining in general, some local manufacturers are moving up the value chain by providing a full range of services from contract design and manufacturing, to post-manufacturing services for niche markets. 3.2 Industry Life Cycle The MEC sub-segment is highly volatile. It is dependent on global economic trends, end users’ demand for E&E products and the advent of technology trends. The peaks and troughs of the market cycle are normally steep due to the sudden changes in production output arising from unpredictable demand trends in E&E products. Rapid changes in technology, product development and innovation, changing consumer preferences and short product life cycles are, amongst others, the challenges faced by the industry players to keep up with global developments. Infocredit!!.~’l
3.3 Challenges Faced by the MEC Sub-Segment Product Ufe Cycle With the competitive pressure on MEC manufacturers to design and develop more efficient components and products, local manufacturers constantly strive for shorter design and development time in order to compete efficiently. The ability to introduce new products on a timely basis will ensure that these products are not obsolete when they reach the market. Furthermore, these products must not lag behind and risk becoming technologically obsolete to remain competitive in the global market. As such, MEC manufacturers must apply the latest design and R&D technologies to maintain their competitive edge in the industry in line with international trends. Increase in the Emphasis on Product Quality and Reliability The need to produce high-quality and reliable MEC is essential to the industry. MEC which are of high quality will ensure that the end products operate efficiently and effectively. In the case of the end product manufacturers, the quality of the intermediate components such as MEC will play an important role in determining the quality of the end products. The high quality of MEC will help to improve the quality of the end products. .As such, end product manufachlrers have to be very cautious when they source for intermediate components. MEC manufacturers, which are able to provide high quality in both products and design and product development services, are likely to be more competitive and well-accepted compared to other players in the market. In order to be competitive, MEC players will have to be able to provide high quality and reliable products. Infocredit!!.~’l
Customisation of MEC As the application for each MEC may be different, the demand for customised MEC will increase tremendously. Thus, MEC manufacturers will have to design and develop customised MEC to meet the specific requirements set by the end product manufacturers. This would include special features incorporated to a MEC with basic specifications. For instance, the production of HB LED requires the customisation of the HB LED based on each type of application. With the possible expansion of its application markets, customisation will playa pivotal role in ensuring the HB LED is able to cater to the various functions that are specified. In terms of the electronic micromotor, its application in various products will demand increase levels of both quality and customisation. As a result, the importance of product design and development by both the LED and electronic micromotor MEC players will determine the success in marketing their products. Dependency on Other Industries The MEC sub-segment is dependent on the industries or sub-sectors that it is directly linked to, namely the E&E and automotive industries. Most of the components used in the production of computing and telecommunications products are electronic products. Besides, the end user market stem from consumer electronics, electronic components and industrial electronics, all of which provide continuous demand for high-quality tooling and parts, and direcdy affect the MEC sub-segment. 3.4 Key Demand Drivers Outsourcing Trend by MNCs The role of Electronic Manufacturing Service (“EMS”) providers has become increasingly critical in supporting the manufacturing industries globally. The global EMS market was estimated to be worth USD288 billion in 2005. The Asia region (excluding Japan) is expected to be the fastest-growing region for EMS market, mainly driven by lower operating costs. Malaysia, in particular, is poised to benefit from this growlOg trend. Equipped with an abundance of labour that possess the required process knowledge and manufacturing knowhow, as well as the growing ability to provide quality products to MNCs and larger Original Executive Summary EXECUTJV£ SUMMARY FOR THE INDEPENDENT MARKET RESEARCH REPORT AND THE LETl’ER THEREON (Coot’d) (Prepared for the inclusion in this Prospectus)
Equipment Manufacturers (“OEMs”) in the consumer electronics, computers and peripherals, and semiconductor devices, local manufacturers serving these end user market have been flourishing. Sony Corporation, Hitachi Ltd. and Royal Phillips Electronics NY are some of the MNCs that use local contract manufacturers. In addition, local manufacturers also take part in product development programmes with MNCs. As such, there is a potential market for MEC manufacturers to participate in both the development and manufacturing of the intermediate and end products. ODMTrends The days of manufacturing has evolved from transfonning designs into production to original product design where manufacturers custom-make solutions for end user industries. The concept of original design manufacturing was commonly used in the computer-making industry within which many Original Design Manufacturers (“ODMs”) become not only a manufacturer but also to sell their products to OEMs such as Dell, HP and Sony, who in turn market their products using their own labels or brand names. Examples of established ODMs in the market are BenQ and Quanta. Typically, ODMs are manufacturers that customise designs and sell a similar product to several OEMs servicing a wide variety of markets in the commercial and industrial sectors. OEMs are companies that usually acquire a product from a contract manufacturer and incorporate it into a new product under its own brand name. Manufacturers with original design manufacturing capabilities are able to se.rve a wide customer base, focus on niche OEMs and/or move into high-volume manufacturing for multiple original equipment-manufacturing customers. In the case of the MEC sub-segment, manufacturers of electronic components may outsource part of their manufacturing and design and development activities to local MEC manufacturers. These requirements or specifications for a component will be given to the local MEC manufacturers who will carry out the design and development activities.
Infocredit!!.~’l Support from Government In general, the Government of Malaysia (“Government”) has been supportive to the E&E industry. Through various agencies such as the Malaysian Industrial Development Authority (“MIDA”), the Government has been promoting the E&E industry by providing various facilities and incentives. Betw”een 2001 and 2005, MIDA has approved 1,048 E&E projects with an estimated capital investment value of RM43A billion. In 2005, 226 projects worth Rl\113.8 billion were approved for E&E manufacturing projects. The number of approvals reflects the support given by the Government to promote the E&E industry. The electronic components sub-sector has registered an approved investment (both for new and expansion projects) amount of Rl\f8.1 billion in 2005. It was also the largest investment approval recipient among the three (3) E&E sub-sectors. The approved investment amounts for the industrial electronics and consumer electronics sub-sectors were RMl.5 billion and Rl\10A billion respectively. With the support from the Government and investors, the E&E industry will remain as one of the main drivers of the economy. Growth in E&E Industry As one of the end users of MEC, the E&E industry has shown an impressive performance over the years. In 2005, Malaysia’s output of E&E goods were valued at &\.1189.6 billion, an increase of 10.0% compared to RMl72.3 billion in 2004. There are a number of MNCs which operate in Malaysia such as Intel Electronics (M) Sdn Bhd, AMD (M) Sdn Bhd, Agilent (M) Sdn Bhd, National Semiconductor Sdn Bhd, Fairchild Semiconductor Sdn Bhd, Fujitsu Components (1f) Sdn Bhd, NEC l\falaysia Sdn Bhd, Toshiba (M) Sdn Bhd, Infineon Technologies (1f) Sdn Bhd and ST Nllcroelectronics Sdn Bhd. These MNCs are involved in the assembly and testing of semiconductor devices such as memory chips, microprocessors, power ICs, linear ICs, opto devices as well as a variety of logic and discrete devices. Executive Summary
1% nretJJ1JV£ stlTMMAJlY fOR THE mDEPElNDENT MARKET RESEARCH REPORT AND 11IE LE’f’lERTHEREON (e.t”d) (f!~f«*~iindliis~) Infocreditrl
In the oomputet and computet’ peripherals market, several global playelS have established manufacturing faciliries in Malaysia., namely Dell Asia Pacific Sdn Bhd, NEC Malaysia &In Bh~ Pujiuu Components (M) Sdn Bhd, Samsuog Malaysia Electronics Sdn Bhd and BenQ Technologies Sdn Bhd. In addition, there are local manufacturers such as I-Berhad, FrEe SY5Ufn Sdn Bhd, Nascom System Corp Sdn Bhd, MIMOS Berhad, Perbadanan Komputer Nasiooal Bethad and Gerak Mobile Technology SOO Bhd, which engage in the manufacturing of a variety of computer and computer peripherals including thin film transistor CerFT”) monitors, keyboards, printers and scanner for the local and export markets. Malaysia has been a popular destination for manufacturers such as Western Digital (M) Sdn Bhd (manufacturer of hard disk drive) and TEAC Electronics (M) Sdn Bhd (manufacturer of floppy disk drive). Potential in the Lighting Market While the cost of producing a HB LED for lighting applications may be relatively high eomplU’ed to the conventional LED, there is a potential for HB LED to playa dominant role in this market. HB LED~ offer advantages such as longer life times, lower power consumption, low heat generation and are more environment-friendly, as compared with traditional incandescent and htlogcm lamps. With that) the HB LED is expected to replace all existing lighting products used in homes within 5 to 10 }’ears, especiaUy if technology is improved to increase brightness. The technical tnd aesthetic efficiency of the HB LED is expected to improve exponentially al~ with i~ market applications. through either replacement ofexisting matndescent solutions ()1″ introduction HB LED as a new form ofillumination device. ~m.U\d for Energy-5aviDg Devices \’Vith the ~wing im.pomnce in energy saving. me HB lED oilfa:s an mettgy-sawing ww-a of liIht fur ~~ appliations. Compared to oom:unttiimnall bglInt. HB LEJDs C2a1 ~ by ~\%umiing a lo’0.Jtt kvd. of ~without oo~ttJIne ~of1tlIne lIiigllnt. ;\$ ~ HB ~ i% oon%iidered ID be an ~-effi.cien1t ~. :m aMiittiionn” ttJme HB lLJED ClJlm be war ~ b lOOt1lW.y-~~~:soch :is lDlJlObiIke ~~ ttIbq ;;nre 1Ill!iOrll fOJ!’ ube lCIYs; ~~1t a1i1!d bp•. :un ~ttries wllllene ttlhe <tromt «»if ~iii; • HB .1L1EDJ; d lM.~ at ~~ l0f ~~. lUtn tthi5; ~ nlbYe !klmw ~~IUllf JHIlB Jl.1EDl; _
attracted attention from developed countries such as the US and Japan. In these countries, national programmes were initiated to develop solid-state lighting industries. Demand for Miniature Electronic Components With the growing demand for compact-sized E&E products such as the mobile phone, notebook, digital camera as well as for other applications (for example automotive and medical), there is a need for miniaturisation of electronics components to accommodate the smaller-sized end products. As a result, MEC manufacturers play the role of designing and manufacturing microelectronics parts and components that are able to fit into end products of a smaller dimension. For instance, HB LEDs and DC micromotors in the mobile phone are used as flashlights and motion control mechanism respectively. As the size of mobile phones decreases or functions increases, electronic components must also reduce in size to accommodate these requirements or specifications. Growing Number of Mobile Phone Users As the infrastructure for mobile communication increases and the cost of mobile telecommunications reduce, the demand for mobile phones, both new and replacement, will increase. With the aggressive advertising promotions by manufacturers such as Nokia AB, Samsung, Motorola, Sony Ericsson, there is a growing trend to purchase the latest mobile phones in the market. With the introduction of camera-enabled mobile phones, consumers arc able to utilise the phone with additional camera functions. As such, there is a demand for HB LEDs (for colour LCD screens, camera flash and keypad lighting) and electronic micromotors (for motion control in optical zoom) to cater to these segments of the mobile phone market. In Malaysia, the mobile phone penetration rate is about 74.1 %, equivalent to 19.5 million users in 2005. Infocredit!!.~’l
4 COMPETITORS ANALYSIS 4.1 Nature of Competition In general, a small group of foreign-owned and local manufacturers dominates the MEC subsegment by supplying to a large customer base comprising mainly MNCs, OEMs and contract manufacturers. The largest end user of the MEC comes from the E&E industry. In terms of foreign competition, tariff deregulations amongst Association of South East Asian Nations (“ASEAN”) members will result in companies striving hard to maintain competitiveness within the region. This market is also a key potential target for MEC companies in Malaysia and around this region due to the lucrative returns. However, the competitive position of a company would depend largely on the type and quality of products it sells as well as its R&D capabilities. In order to penetrate these markets, local players must have a combination of strengths such as competitive pricing, fast delivery and strong local representation and R&D capabilities. In addition, China is one of the potential competitors for local MEC players to look into as China’s economy has been registering tremendous growth for the past few years.
4.2 Market Share and Positioning As at the date of this Report, based on the research conducted by Infocredit D&B, there are four (4) comparative players operating in the provision of supporting services to the LED market. They comprise Affinex Technology Sdn Bhd, CS Opto Semiconductor Sdn Bhd, JHM Group and RHS Innotech Sdn Bhd. However, there is no direct competing player in Malaysia that is providing a similar line of supporting services as JHM Group. Currently, JI-IM Group is the only Malaysian-owned company involved in the design, development and prototyping of lcadframe, plastic package for leadframe and heat-sink for the HB LED market. Meanwhile, Malaysia’s micromotor manufacturing market is dominated by foreign companies such as Minebea-Matsushita Motor Corporation (“MMMC”) and Mabuchi Motor Co. Based on the Department of Statistics, Malaysia (“DOS”), the sales value of micromotor in Malaysia has been decreasing. This is mainly due to the competitiveness of the global micromotor industry. Executive Summary InfocreditPJ.
Therefore, local manufacturing companies should continuously invest and involve in R&D activities and move up the value chain in order to remain in a competitive environment. Based on the research conducted by Infocredit D&B, ]HM Group is currently the only Malaysianowned company that is involved in providing design, development and manufacturing services for the micromotor manufacturers in Malaysia in supporting global leading industry players.
OUTLOOK OF THE MEC SUB-SEGMENT Growth of the HB LEDs has been on the upward trend for the past one decade except for the flattening market in 2000-2001. The worldwide market was valued at USD1.2 billion in 2000 and bounced to USD1.8 billion in 2002. In 2004, the HB LED market was estimated to be worth USD3.6 billion. The soaring growth was mainly driven by increasing use of HB LEDs as well as wider application markets such as mobile phones, automotives and electronic equipments. By 2009, the global HB LED market is expected to reach CSD7.2 billion. Eventually, the advancement in design and development technologies will enable HB LEDs to replace conventional lighting. In addition, product application in backlighting for display devices and medical equipment are some of the potential market for HB LEDs. In recent times, the DC micromotor market has faced stiff price competition among manufacturers, due to the emergence of oversupply and an increase in raw material costs. In addition, manufacturing activities have been shifting to low production cost countries such as China. In order to remain resilient in a competitive environment, local manufacturers must move up the value chain by continuously upgrading and investing in R&D activities to enhance its capabilities in the design and development of DC micromotors, which can be customised to cater to wider application markets such as the mobile phone market. In short, the growing application markets coupled with continuous product upgrading and enhancement via R&D activities will pave the way for sustainable growth for the local players in the MEC sub-segment. Furthennore, the increasing trend of MNCs outsourcing their manufacturing and R&D activities will create opportunities for local MEC manufacturers to participate in this flourishing market. Executive Summary