Industry Overview

 

12. L’IDEPENDENT MARKET RESEARCH REPORT
(Prepared for indusion in this Prospectus) Frost & Sullivan (M) Sdn. Bhd. IS2l293W) Suite E-08″ 15, Block E, Plaza Mont’ Kiara 2, Jalan Kiara, Mont’ KiaraFROST &-SULLIVAN 50480 Kuala Lumpur Tel: 603 6204 5800 Fax: 603 6201 7402 To; www.frost.com The Board ofDil’cctors NOTION VTEC BERHAD C15-1 Level IS, TowerC, Megan Avenue II, 12 Jalan Yap Kwan Seng, 50450 Kuala Lumpur Re: Executive Summary ufthe Independent Market Research Report on the Hard Disk Drive Market The purposes of the Executive Summary of the Independent 11arket Research for Notion VTec Berhad is prepared hy Frost & Sullivan (M) Sdn Bhd for inclnsion in the Prospectus ofNotion VTec Berhad in relation to the proposed listing of and quotation for the entire issued and paid-up share capital of Notion VTec Berhad on the MESDAQ Market ofthe Bursa Malaysia Securities Berhad. The original research report for this industry was conducted and finalised in March 2004, An executive summary and some minor amendments updating the industry were prepared in March 2005. Findings in this study may be used in the listing prospect\L’; “With consent from Frost and Sullivan, Frost & Sullivan has prepared this report in 3n independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report, We believe that this report presents a true and fair view of the industry within the limitations of among others, secondary statistics and primary research. Our research has been conducted with an ”’overall industry” perspective and may not necessarily reflect the perfonnance of individual companies in this industry. We are not responsihle for the decisions and I or actions of the readers ofthis report This report should also not be considered as a recommendation to buy or not to buy the shares of any company or companies. Yours faithfully For and behalfof FROST & SULLIVAi’i (M) SDN BHD

SAN!,'”Y SINGH DJRECTOR 3 MAY 2005
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omd Kuala LumpurMUff/bal
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12. INDEPENDENT MARKET RESEARCH REPORT (ConN) Strategic Insights of the Hard Disk Drive Market Executive Summary
March 2005
12. INDEPENIlEl’;’T MARKET RESEARCH REPORT (Co”,’d) © 2005 Frost & Sullivan The market research process for this study has been undertaken through detailed primary research which involves discussing the statll~ {lfthe industry with I<:ading industry participants and industry experts, The methodology used is the Expert Opinion Consensus Methodol0gy. Quantitative market intbmt3tion is based primarily on such interviews and therefore could be subject to fluctuations. The executive summary provides an update ofthe report which was completed in March 2005 Me is prepared wlely for inclusion in the Prospectus. For information regarding pemris;::ion, write to: Frost & Sullivan Suite E~8· 15, Block E Plaza Mont Kiara, tvlont Kiara 50480 Kuala Lumpur
if11’5¥J .-, ~… ‘-~”~, FROST01: SULLlVANMAl’AYStA SllN IlIID (‘2:m3-W)SUI11! E-()8,.f5. BLOCK E, PLAZA MONT’ KIARA 2, JALAN KlARA, MONT’ KIARA S048Q KUALA LUMPUR n::~ 03-6204 j80Q FAX: 03-620i 74V~

[ Co~~:cnY,-N,-o’-‘-L,-6:::3c::7~-D J 12. INDEPENDENT MARKET RESEARCH REPORT (ConN) fROST & SULLIVAN Executive Summary Overview of the Hard Disk Drive Market A bard disk drive is a device mat stores data on one Of more rotating magnetic disks to allo\,v fast access to Mn-volatile data for computing needs, Miniaturization and dropping prices are cbaracleristic of the hard disk drive market as well as the intense competition faced by players in the industry. Current Stage and Deve’opment over Time Tecbnologtcul changes and discoveries have made dramatic changes to the data storage industry. IBM introduced the firsl HDD in 1956, \Y’hereby, to store 5 megabytes ofdata, it haslQ use 59 platters measuring 14 inches in oiameteL The initial sigltificullt development was IBM’s introdllction of the “thin film indm.:tion” head, It utiliz.ed a single element to read and write data to and t!’om the disk As hard disk drives expanded ill storage capacity, the magnetic domains had to be miniaturized so as to accommodate more ofthem on a platter. In 1991, IBM introduced the first ‘;anisotropic magneto~resistive'” (AMR) read heads for HDDs, With the creation of AMR read heads, HDD manufacturers were able to increase storage densi.ties by approximately 60% a year during the nineties. However, this could not keep up to the demands of >:ustomers who requested ever higher-density HDDs, In the meantime, IBM’s Almaden Research Centre in San Jose, CalifOfllia had been experimenting with ways of increasing: the storage density by using a technique called :sputtering, By the end Df 1997, IBM was ready to introduce the revolutionary giant magneto~resisti\’e (GMR) head, This was the scientific and technological breakthwugh that boosted the capacity ofHDDs from a few gigab}1eS to 100 gigabytes and more, In die process, :storage densities rowe rose from I fo 2 gigabytes per sqtl.;:lre inch of the first GMR HDD to about 100 gigabytes per square inch presently, The record is a poclet-sized 120~gigabyte HDD manufactured by \\’esrem Digital. Overall, the USA has a slight technology lead in the overall datu storage technology, especially in the 3.5·inch form factor f(lf HDDs. The Japauese manufactltrers, who are leaders in miniaturization technology, are leading in the 2,5-inc:h form factor and below for HODs. Industr:r Structure The HDD duster is quite established in ‘Malaysia, as a result of a huge inflow of foreign dira:t investrrll.:nts into this industry during the early to mid-nineties. These inflows ,>vere diverted from Singapore when <t 20<)5 hOSI & Sullivan

12. INDEPENIlEl’;’T MARKET RESEARCH REPORT (Co”,’d) •FRO ST i;Y SULLIVAN production 1;-{)5t5 became too high. DtiC to the tight compeljtive conditions in the disk drive market, lower~ end production uf dIsk drives and removable drives wu relocated from Singapore to Malaysia in late: eighties. Correspondingly, a number of supporting industries in the value chain has also been established, in the areas of disk media, disk substrates, magnetic recording heads, actuators, head gimbals, ann ,lssembly, spindle motors, bl:’urings aod PCB (printed circuit board) fubrkatiQll. Altogether, there are approximately 35 companies involved in the production and assembly of data storage devices in Malaysia; many are located in Penang or the Kulim Hi.Tech Park m neighboring Kemh_ The major peripherals and component parts manufactured arc: :i HDDs -Western Digital (Malaysia) SdrL Bhd. ~ Disk media -Fuji Elec1rk (Malaysia) Sdn. Bhd. and Komag USA (Malaysia) Sdn, SM. ~ Disk substrates ~ Advanced Disk Technology (Malaysia) Sdn. Bhd., Toyo Memory Technology Sdn. Bhd., and Fllji Electric (Malaysia) Sdn. Bhd. :> Magnetic recording heads -Penang Seagate Industries (M) Sdn. Bhd. :> Actuators -Eng Teknotogi $dn. BM. ~ Head gimbal assemblies Penang Seagate Industries (M) Sdn. Bhd. i:l Voice coil motors -Shin~Et$!,1 (Malaysia) Sdn. Bhd. :> Spindle mot{)fS -Sankyo Precision (Malaysia) Sdn. Bhd. Market Position and Shares Demand for hnrd disk components is closely cQrrelated with the demand for hard disk drives, which therefore ne-:essitares a close look at the global hard disk drive industry, Globally, the industry has consolidated to around 20-odd companies, Increased consolidation in the hard disk drive induslly has resulled in highly eftkient operatifms, lmproved economies of scale, intense competition and supply chain optimization, all of which tend to reduce the average selling price. This pressure extends backwards throughout the supply chain, including the precision engineering companies, The glohal market con..::entraticll1 ofthe top three disk drive manufacturers was 67 percent m2003. Whilst magnelic data Morage is a mature product with established market competitors with their supply chains:, it is an extremely competitive market with low margins and advantages derived through scaling. Since 1980, prices of hanl disk drives have decreased by about five orders of magnitude. Also, as existing companies continue to dominate the overall data stOfllgC market in teuns of their revenue contribution, it \vill be eXfremely challenging for a new participant to enteI’ this segment.
S3mu’€i~  Fujitsu  5%  \  iL%  Toshita Stor~  I  Device Divrsion–~_ €f;’t’–­ ~ ‘.  \  Hil3clli Giol::ai / Sttt~ Tecmcge”J 16%  /  /  Westem Diglt::ll 17%  ”’.  Mader 21%
[ C.ompany No,
12. INDEPENDENT MARKET RESEARCH REPORT (Cout’d) F It 0 ST & SULLIVAN Char! 1-1: Global jV1arket Shure of Hard Disk Drive Manufacturers, Z003–‘—–­Glol::al Market 3we ct Hard Dis-\<;: Drive MariJocltxers. 2Xl3 Source.’ Fl’o.\1 & Sullivan Assembly of lurd disk drives requites strong supporting industries like precision engineering in the value chain. MIDA eslImates the presence of 150 companIes speciali1;ing in metal precision engineering in Malaysia, and a majority of them do not have higl! precision capabilities <lnd/ot the capactl}’ to serve global multinational corporations such as Western mgitat Notion Venture 3d» Bha, however, has both the expcrti.<,e and capability to pmduc~ the high precision (‘omponents that are required by the HDD industry. In 2004, thi;l!i;l were two domestk comp.’loies involved in tbe supply of disk clamps and spa.;er rings to Western Digital~ which is the wle hard disk drive assembler in Malaysia. NVSB wa..\ the top supplier of disk clamps to Western Digital and commanded between 38% to 42% market share of the locai HDD disk damp and spacer ring market. Ch3r! 1-2: r.·larKet Share of Disk ClilC1P (lnd Spacer Manufacturers, 2004 Market S1.,re of Disk Clarrp am Sp::Icer M”,rtJ!acturers, d)):i Irrp::xts (DiSk Notion Venb.re Sd1 Predsim Private 8h::l LlniJIx:!) ~~ 3’l% 42)1, ~.I!(%

L~mpanYNo.

12. INDEPENDENT MARKET RESEARCH REPORT (C<mt’dJ FRO ST & SULLIVAN Computer Ivfarket Although demand for HDDs has been largely Oat (1) the peri-od from 2000 to 200l, HDD demand has turned positive and is seen to be growing steadily with improvements seen in Asia and OS. The worldwide HDD shipment is expected to grow positively at a CAGR 01’8.3’:1,., nver the period 2004 to 200B. The sources for HDD industry grO\vth in the years ahead are poised to come from two major areas: the “omputer market and consumer electronics market. The computer market is further subdivided into 3 segments, which are the server market, persona! computer market and notebook market. Growth from the resJX:ctive segments ofiloe HDD industry is highlighted below: • The global HOD shipment is proje<:led to grow at a CAGR of 8.3% from 2004 to 2008.
• The glob:J[ &::rvt”r market is projected to gmw at a CAGR of9.7%, from 2Q04 to 2003.
• The desktop! personal computers market is projected to grow at s CAGR of6,8% from 2004 to

2008, * The notebook market is projected to grow at a CAGR of 13.7% tt”Om 2004 to 2008. • Tlte non-traditional computing applications., namely consumer elcctrnnks market, with built in HDD, are projected to expand at a CAGR of52.7% during th<: period 2004 to 2008. Nevertheless, personal computers and notebooks continue to be the main products that consume most of the HDD productions. The market for servers is dependent on both business sentiments and business expansions, as they are lnainly used in large corporations. To ensure the integrity and security of information., business ootpOfations locus on data replication, Hnd hence, data storage in servers, The telecommunications industry has been a mAjOr cad-user influencing data storage demand. The g.IQbal server market is proj~ted to grow at a CAGR of 9.7% during the forecast periO>-1 2004 to 2008 The market in Malaysia is. anticipated to expand at a lower pace, registering il CAGR of 8.4% during the corresponding period. Over the last few years, there has been a gradual migration from desktop personal computers to the notebook platform. In addition, computer assemblers are keener to market notebooks, as they provide higher margins compared 10 desktops. flit: popUlarity ot mobile electronics among consumers is also driving the notebook market The advent of wireless LAN (tocal area network) and public WiwFi (win~less fidelity) hotspots has driven the sales (lfnoteoooks over the past two years. Declining Wi-Fi chipset prices have also accelerated the migration to notebooks. Unit shipment of personal computers in the global market is anticipated to increase at a CAGR of 6.8%, during the forecast period 2004 16 2008, surpa&~iag the forecastoo unit shipmeni CAGR jn ?”,Ialays!a, which is projected to be 6.1 % during tIle corresponding petiod. On the other hand, urut shipment ofnotebooks in the globa! market is anticipated at a strong C’AQR of 13,7% for the same forecast period, which is slightly higher lhan the unit shipment CAGR of 12.9% that is projected for the Malaysian market ‘V 2(1i)5 Fro” & Sulliv4TI www.rr<1SI.COm [ Co~~:cnY,-N,-o’-‘-L,-6:::3c::7~-D J 12. INDEPENDENT MARKET RESEARCH REPORT (ConN) fROST & SULLIVAN ChUlt J-J: Hard Dt>..{ Drives Market Unit Shipment, 2001-2008 v”‘, (;lebal Growth nlU Malaysia Growtb nte SWtw (Ifglobal (MlIIlonnnits) (%) (Milliun units) (%) (%) 20(H 196.0 0.96 0.49 2002 219.2 11,8 1.14 18.8 0.52 200} 254,3 16.0 1.34 17.5 0.53 2004 278.2 9.4 1.53 14.2 055 lOllS J.03A ‘.t L67 92 055 lOO6 330.4 8.’ 1.81 8.4 055 2007 357J) 8.1 1)13 6.6 0.54 2008 382.5 7.1 2.04 <” 053~., CAQg (21Ji)4-2li9St 8-3% 7_~’}” Note: AI! figures are rounded; tlie base year is 2003. Source: Frost & S(}!!ivan Consumer Electronics Market BesIdes producing hard disk drives for the computer market, most HDD manufacturers are now focusing o>n the rising demand fOt data storftge from consumer electronics. A majQrity of such products would initially be consumed in the more develope-d countries like the USA, Europe {lnd Japan, due 10 the relatively higher per capital 1l1C0Il1e and better digital infrastructure. Global unit shipments of consumer electronics like digital ~till carner-as, camera phmles, personal digital assistants, digital camcorders, portable digital music players, gaming consoles, digital video disk recorders and car navigation systems are collectively anticipated to grow at a CAOR of 26.3% during the fOrecast period 2004 to 2008. However, cowmmer e-le-<:tronics with built-in hard disk drives are projected to expand at a much stronger CAGR of 52.7% during the same forecast period, A projected growth summary of certain consumer electronics products using HDD applications, for the period 2004 to 2008, are indkated below: • Unit shipment of digital cameras with buib-in HDDs :is forecasted to expand at a CAGR of 70.7%.
• Unit shipment of camera phones is projected 10 expand at a CAGR of 33.4%.

Howeve·r, the growth of camera-phones inwrporating high-end features, which include functions of the PDA and compressed digital musIc, and incorpotaring a digItal stili cnorern may pos~ibly cannibftlise the sales of the standalone digital cameras, PDAs and portable digital music plnyers in the market • Unit -shipment of digital video recorders \’fith built-in HDDs is projected to expand at a CAGR of 75.3%.
• Unit sbipment of gaming consoles with a built-in HDD is projected to gro\V at a CAGR of41.1%.

© 2005 Fnm & SuLiv!I.!l WWVi. fr;:;~t.clli!!
12. INDEPENIlEl’;’T MARKET RESEARCH REPORT (Co”,’d) FRO S T SULLIVAN • Unit shipment of PDAs with built-in HDDs is expected to chart a strong CAGR of 72.0%. • Unit shipment of digital camcorders is projected to grow at a CAGR 0[9.7%.
• Car navigation systems incorporating the HDDs afe anticipated to expand at a CAGR of 49.5%.

Chart 1-4: Server, PC, Notebook, and Consumer Electronics with built-in HOD market, 2001-2008 Servers Desktops/PCs Notebooks Consumer electronics with built in HDDs Shipment Growth Shipment Growth Shipment Growth Shipment Growth YEAR Rate Rate Rat, Rate (Million (Million (Million (Million units) (%) units) (“I..) units) (%) units) (%) 2001 4.4 111.5 22,0 1.7 2002 4.6 4.5 112.3 0.7 23.8 8.1 7.9 364.7 2003 55 19.6 121.8 8.4 30.2 27.0 9.5 20,3 2004 6.5 18.2 133.5 9.6 34.6 14.5 12.0 26.3 2005 7.4 13.8 144.5 8.3 39.4 13.6 19.8 65.0 2006 8.1 9.5 155.3 7.5 44.6 13.3 34.0 71.7 2007 88 86 163.9 5.5 51.8 16.1 50.3 47.9 2008 9.4 6.8 173.6 5.9 57.9 11.7 65.3 29.8 CAGR (2004­9,7% 6.8% 13.7% 52.7% 2008) Note: All figures are rounded; the base year is 2003. Source: Frost & Sullivan Prospects and Conclusion Due to its basic importance and extensive fOlWard and backward linkages, the precision engineering industry plays a key role in the country’s manufacturing process that is far greater than its proportional contribution to the total manufacturing output and employment might suggest. The trend in corporate outsourcing instead of having precision machining and tooling workshops appended to principal manufacturers has also translated into more demand for the services of independent precision machining and tooling companies. Multinationals favor outsourcing because it leads to more flexibility in plalming and production, as well as reduced capital expenditures, working capital, business risks and fixed overhead costs. Manufacturing processes with higher levels of precision and miniaturization will continue to be the objective of manufacturing engineering worldwide. A wide range of advanced technology products is totally dependent on precision engineering, As a high technology product, the assembly of hard disk drives is heavily dependent on precision engineering component parts with exacting fit. !t. 2005 Frost & Sullivan www.frost.com @?~pany No. 637546·0 ] 12. INDEPENDENT MARKET RIlSEAllClf REPORT (C<J””d) FRO ST & SULLIVAN Faster CPtJs and bus standards make It possible to process all the new data~inten$ive applications and files in the computer. This in return, requires increased hard disk drive capacity and performance in o-rder to read and write the data at 😉 speed that matches the rest of the system’s capabilities. Hence, in 1oday’s environment of almost limitless data, the capability of the hard disk dxive component of a computer is a critical element in the overall performance (if the system, With computers fimtly entrendled, the n…”ed for storage has never been greater. 11tere is no doubt that the data storage needs of modem society wiliiDcrease astronomically in tbe coming years, Improvements in data storage technologies are providing lower cost per gigabyte storage every year, a fact not missed by many end-users. 111e hard disk drive still appears to have a considerable remaining lifespan, al1hough tl slowing ratc of prog.ress is anticipa!”,d due to significant technkal challenges, ther.: ls a widely held view tlla! no alternative technology is likely 10 provide serious competitkm over the next len years. Tht: price of a hard disk drive typically constimte& less than 10 percent of the total cost of the systems it goes into, and present alternative technologies are still about two orders of magnitude more expensive than the hard disk drive, thus ruling them out as storage devices in the computing industry, except for COll’lUlller electronics. High-speed semiconductor memory could compete with hard disk drives in the future. Semiconductor memory is much 1′”ste-f than magnetic disk drives, but currently il> not competitive from a cost standpoint. Flash rr.£n’J.Ory, 3 non-volatile semiconductor memory, is currently more costly and while it has a higher “read” performance than hard disk drives, it has a lower “write” pertumlance. As both computers and consumer electrOniCS become more cOnillKiditized, pric~ differentiation, and not product <lifferentiation in the market become the key consnmer attribute in the decision to purchase. Flash memory could become competitive in the llear future tor applic3tions requiring less data storage capacity than that provided by hard disk drives, Overview of the Automotive Market in Malaysia Market Overview Malaysian ve-hicle sales made a strong comeback in 2004, and are estimated to register a stnmg grnwth of apPlOxlumtely 17%, as consumers who restrained themselves earlier proceed \\i:th their purchases after realising that AFTA is not going to result in lower prices for cars. Additionally, factors such as the aggressive launching of new -car and low interest rates Df b¢1ween 3~5% for new cars are belping to boost car sales. All vehicle segments are forecasted to register positive growth during 2004. In the year 2004, nOlHtatiollal makes registered clear gains :H the expCllse of national vehicle makes. and are threatening to gain more ground as vQrn~ti1ion intensifies. PrQton lQ&t 3% market share in 2004, and Perodua suffered a drop in market sb:ue of about 4%, which can be attributed to a lack of new models and also the intmduction of directly competing models like Kia’s Picanto. Even so. other national players like h10kom and Naz3 continue to grow stronger wlth the suppOrt of re-brnnd’ed 1;; lOOS Frosl $£ S”lliv-,m

12. INDEPENIlEl’;’T MARKET RESEARCH REPORT (Co”,’d) FRO S T SULLIVAN Korean makes by taking advantage of the national car status and the privileges and incentives that comes with it. The outlook for the local automotive sector is very bright indeed and stands to gain further from a more open and liberalised market as the implementotlou of AFTA takes place, Component Parts Market In 2004. the Malaysian automotive component market was estuuated at RM3,S billion. This increase stems from hi£,her \:omumptlon of OEM (original equipment market) component parts due to gro\\wg sales of new vehicles since 1998, OEM sales acoount for almost 60 percent of market revenues, while the aftemmrket contributes the remaining 40 percent. In the OEM, parts sales mirror the production of ncw vehicles. Aftel1narket revenues arc derived from the existing vehicle population. Local component parts manufacturers focus on the OEM, while foreign part’> manufacturers target the aftet1tl.Jrket Nati01UlI vehicles provide a gmlni.nteed and captive market [or these OEM manufaCTurers who continue to thrive from the local content puliey and high tariff,,, on new vehicles. Malaysian manufact~rs have become more proficient at making car component parts ever since the Proton project was implemented and thus wel”e able to seJ:ure orders for compunent parts from other e:n assemblers in Malaysia ai> well as from other ASEAN CQl.llltr1es. There are many opportunities for local autolU()bile component producers to take advantage of the ASEAN Free Trade Area (“AFTA”} to export these components. Under AFT:\. requiretnents, automotive imporls must satisfy tbe “local coment requirement”, which meam tbat at least 40% of the products content roost originate from any single/cumulative ASEAN mcrnber(s). Increasing competition in the region Is forcing Malaysian parts manufacturers to reduce costs to bcwme competitIVe. Some shifted OVenieas and coHaborale with foreign partners to reduce costs, gain access to foreign markets through overseas l1etw-ork, and develop and share proprietary technolQgies, In addition, manufacturers can build parts compOnel1t that lean towards the international market and conform to global standards rather than rely solely on the limited Malaysian market. ¢ 201)5 Frost & Sullivan

 

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