Industry Overview

10. INDEPENDENT MARKET RESEARCH REPORT 10. INDEPENDENT MARKET RESEARCH REPORT (Prepared for inclusion in the Prospectus) FROS1& SULLIVAN Independent Market Research on the Automotive and Automotive Leather Upholstery Industry in Malaysia and Overview on the Automotive Leather Upholstery Industry in Thailand and the Aviation Leather Upholstery Industry in Malaysia
FROST & SULLIVAN © March 2016 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FR.OST & SULLIVAN
© March 2016 Frost & Sullivan. The market research process for this study has been undertaken through secondary or desktop research, as well as detailed primary research, which involves discussing the status of the industry with leading industry participants and industry experts. The research methodology used is the Expert Opinion Consensus Methodology. Quantitative market information could be sourced from interviews by way of primary research and therefore, the information is sUbject to fluctuations due to possible changes in the business and industry climate. This market research was completed in February 2016. This report is prepared for inclusion in Pecca’s Prospectus in relation to the initial public offerings and the listings of and quotation for the entire enlarged issued and paid-up share capital of Pecca on the Main Market of the Bursa Malaysia Securities Berhad. No part of this research service may be otherwise given, lent, resold, or disclosed to non­customers without our written permission. Furthermore, no part may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without our permission. Frost & Sullivan has prepared this report in an 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, and does not purport to be exhaustive. Our research has been conducted with an “overall industry” perspective and may not necessarily reflect the performance of individual companies in the industry. Frost & Sullivan shall not be held responsible for the decisions and/or actions of the readers of this report. This report should not also be considered as a recommendation to buy or not to buy the shares of any company or companies as mentioned in this report or otherwise. For further information, please contact: Frost & Sullivan Malaysia Sdn Bhd Suite C-11-02, Block C, Plaza Mont’ Kiara 2, Jalan Kiara, Mont’ Kiara 50480 Kuala Lumpur. ~ c:/ Keith Lee Associate Director IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
& SULLIVAN
TABLE OF CONTENTS ABBREVIATIONS •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 4 1 INTRODUCTION AND BACKGROUND •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 8 1.1 DEFINITIONS, HISTORY AND BACKGROUND 8 1.2 INDUSTRY SEGMENTATION 10 2 ANALYSIS OF THE AUTOMOTIVE MARKET IN MALAYSIA •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 13 2.1 DEMAND CONDITIONS 13 2.1.1 Market Size and Growth Trends 13 2.2 DEMAND DEPENDENCIES 21
2.2.1 Market Drivers 21 2.2.2 Market Restraints 24 2.3 SUPPLY CONDITIONS AND DEPENDENCIES 25
2.3.1 Prominent Local Automotive Manufacturing Industry in Malaysia 25 2.3.2 Reliance and Vulnerability to Imports 27 2.4 RELEVANT LAws AND REGULATIONS 28 3 ANALYSIS OF THE AUTOMOTIVE LEATHER UPHOLSTERY INDUSTRY IN MALAYSIA•••••••••••••••••••••••••• 30 3.1 INTRODUCTION AND DEFINITIONS 30 3.2 MARKET SEGMENTATION AND VALUE CHAIN 32 3.3 INDUSTRY L1FECYCLE 37 3.4 MARKET SIZE AND GROWTH TRENDS 38 3.5 DEMAND CONDITIONS AND DEPENDENCiES .41 3.6 SUPPLY CONDITIONS AND DEPENDENCiES .43 3.7 PRODUCT SUBSTITUTION .43 3.8 RELIANCE AND VULNERABILITY TO IMPORTS .43 3.9 RELEVANT LAws AND REGULATIONS .44 3.10 INDUSTRY RISKS AND CHALLENGES .44 3.11 BARRIERS To ENTRy .45 3.12 COMPETITIVE LANDSCAPE AND STRUCTURE .46 3.13 MARKET SHARE .46 4 OVERVIEW OF THE AUTOMOTIVE UPHOLSTERY INDUSTRY IN THAILAND •••••••••••••••••••••••••••••••••••••• 50 5 OVERVIEW OF THE AVIATION UPHOLSTERY INDUSTRY IN MALAYSIA •••••••••••••••••••••••••••••••••••••••••••• 53 6 FUTURE OUTLOOK AND PROSPECTS FOR PLEATHER ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 56 7 RESEARCH METHODOLOGY ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 58 7.1 INTRODUCTION 58 7.1.1 Market Engineering Forecasting Methodology 58 IMR Report

10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
ABBREVIATIONS
General Definitions AP Approved Permit CAGR Compound Annual Growth Rate (%) CBU Completely Built-Up CEPT Common Effective Preferential Tariffs CKD Completely Knocked-Down Commercial Vehicle GOP Gross Domestic Product GNI Gross National Income IMP3 Third Industrial Master Plan ISOITS International Organisation for Standardisation I Technical Specification KLiA Kuala Lumpur International Airport LC Localisation of Contents or Parts LCC Low Cost Carriers LRT Light Rail Transit ML Manufacturing Licence IVIPV Multi-Purpose Vehicles MRT Mass Rapid Transit NAP National Automotive Policy NKEA National Key Economic Areas OBM Original Brand Manufacturer OEM Original Equipment Manufacturer POI Pre-Delivery Inspection PV Passenger Vehicle PVC Polyvinyl-Chloride REM Replacement Equipment Manufacturer T1 Tier 1 Supplier (Automotive) T2 Tier 2 Supplier (Automotive) TIV Total Industry Volume SUV Sports Utility Vehicles Companies, Authorities, Organisations and Countries AFTA ASEAN Free Trade Area Airasia Airasia Berhad and Airasia X Berhad ASEAN Association of Southeast Asian Nations DOS Department of Statistics, Malaysia EU European Union FAO Food and Agriculture Organisation
10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
ISO  International Organisation for Standardisation  JPJ  Jabatan Pengangkutan Jalan  KL  Kuala Lumpur  KTM  KTrvI Berhad  MAA  Malaysian Automotive Association  MAB  Malaysian Airlines Berhad  (formerly known as Malaysia Airlines System Berhad)  MOT  Ministry of Transportation  OICA  International Organisation of Motor Vehicle Manufacturers  Perodua  Perusahaan Otomobil Kedua Sdn Bhd  Proton  Perusahaan Otomobil Nasional Sdn Bhd  TAlA  Thailand Automotive Industry Association  WTO  World Trade Organisation  UN  United Nations
Foreign Currency Exchange Rates (as at 29 January 2016) USD1 (United States Dollars) : RM4.1475 THB1 (Thai Baht) :RMO.1159
Source: Bank Negara Malaysia (BNM)
10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) f RO S T SULLIVAN
GLOSSARY OF TECHNICAL TERMS
4X4 vehicles  General class of vehicle which all wheels of the vehicle to receive torque (power) from the engine. General term for applications that assemble and inspect the fundamental parts to form a final product typically through welding, gluing, fastening, riveting and sealing. A vehicle segment comprised of vehicles for commercial use and related purposes such as buses, trucks and lorries. A vehicle that is imported either completely or with minimal local assembly requirement before delivery to the end-customer. A vehicle that is manufactured either exclusively or with extensive local assembly activities before delivery to the end-customer. A period of economic downturn attributed to the interconnectedness of the global economy where financial problems in one country spread to another. Increase in adoption of local components and parts in the manufacturing or assembly of vehicles to obtain favourable tax rebates to lower excise duty. General term for applications in which raw materials are transformed, given additional desired properties or physical form for use in creating finished goods typically through processes such as forming and stamping. Permit to Manufacture or Assemble Vehicles in Malaysia. A sub-segment of passenger vehicles that is generally characterised by its ability to carry up to eight passengers. A status granted to one country by another country with the intention to increase trade with that country. The status is enforced by the World Trade Organisation. In the automotive sector, this refers to the company that typically design the final product and develop its distribution networks In automotive sector, this refers to manufacturer or assembler of the final product based on OBM specification from parts and component produced by various manufacturers. A vehicle segment for carrying passengers which comprised of passenger cars, window vans, 4×4 and MPV. The final process in automotive manufacturing which prepares the vehicle before delivery to the end-customer. The application of a different brand or trademark to an existing product which subsequently marketed as a distinct product.  Assembly  Commercial Vehicle  Completely Built-Up  Complete Knocked-Down  Global Financial Crisis  Localisation of Contents or Parts  Manufacture  Manufacturing License  Multi-Purpose Vehicles  Most Favoured Nation  Original Brand Manufacturer  Original Equipment Manufacturer  Passenger Vehicle  Pre-Delivery Inspection  Rebadge
6IMR Report © Frost & Sullivan 2016

10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F It 0 S T SULLIVAN
Replacement Equipment Manufacturer  In the automotive sector, this refers to manufacturers that produce replacement parts and components that extend or enhance the use of existing vehicles. It is naturally comprised of suppliers for OEM as they have matching specification.  Sports Utility Vehicle  A sub-segment of passenger vehicles that is generally characterised by all-wheel drive and raised ground clearance.  Tier 1 Supplier (Automotive)  Immediate supplier of intermediate parts to the OEM based on the given specification.  Tier 2 Supplier (Automotive)  Immediate supplier of individual components and parts to Tier-1 supplier that meets OEM specification.  Tota/lndustry Volume  Total sales of both passenger and commercial vehicles in a calendar year.
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10. INDEPENDENT MARKET RESEARCH REPORT (Cant’d) FROST & SULLIVAN
1 INTRODUCTION AND BACKGROUND 1.1 DEFINITIONS, HISTORY AND BACKGROUND The automotive industry encompasses companies involved in the design, development, manufacturing, assembly, marketing and sale of motor vehicles. Motor vehicles are wheeled vehicles that run on their own engines, such as cars, buses, trucks and motorcycles. In Malaysia, the automotive industry largely comprises manufacturers, assemblers and distributors of motor vehicles. The industry has developed to become a fast-growing sector of the Malaysian economy, where in 2015, vehicle sales figures were recorded at 666,674 units, while the numbers of vehicles manufactured or assembled domestically stood at 614,664 units. The economic contribution of the automotive industry is widespread, with significant interlinkages to the manufacturing and services sectors. The industry started off with the importation of motor vehicles from abroad, subsequently progressing to assembly operations and parts manufacturing, the production of the first national car, to the establishment of a wide network of automotive industry players today. Prior to the 1960s, all of the cars in Malaysia were Completely Built-Up (“CBU”) units imported from overseas 1. The automotive industry in Malaysia began in 1964 when the Government introduced the National Automotive Policy (“NAP”) aimed at encouraging the establishment of local assembly plants and the manufacture of automotive component parts. In the late 1960s, assembly plants were formed to create employment and to substitute imports of motored vehicles. In 1966, the Government introduced protective tariffs to further grow the local automotive industry. Import taxes and tariffs were imposed on the imports of CBU units, and all distributors and dealers were required to obtain import licences, which had to be renewed every six months. A Local Content Policy was mandated to encourage localisation of the automotive industry. A minimum content of locally sourced component parts was set at 20% where vehicle assemblers need to comply by 1977. The Government approved the operation of six assembly firms in 1967. By December 1967, Swedish Motor Assemblies Sdn Bhd (assemblers of Volvo), commenced the production of Completely Knocked-Down (“CKD”) vehicles. Other assembly firms included Asia Automobile Industries Sdn Bhd (assemblers of Peugeot and MaZda) and Tan Chong Motor Assemblies Sdn Bhd (assemblers of Nissan, then known as Datsun). Initially, assembly firms were mainly joint ventures between motor vehicle manufacturers, largely from Europe and Japan, and a local 1 The first automotive assembly plant in Malaysia (then Malaya) owned by the Swedish Motor Assemblies Sdn Bhd began its operation in 1968. IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & sUttIVAN
partner, their previous local distributor. Up to the early 1980s, there were about 15 assembly firms producing vehicles for manufacturers from Europe and Japan. Although the local content requirement was introduced to promote the growth of local component manufacturing, the effort was not very successful. This was due to the fact that there were too many makes and models available in the market, causing the demand for a particular component to be low, which sUbsequently led to the difficulty for component manufacturers to achieve economies of scale. In 1972, the local content requirement was revised up to 35% and slated to be realised by 1982. Similarly, the Mandatory Deletion Programme2 was introduced in 1980 to prohibit motor vehicle assemblers from importing all motor vehicle parts and components listed as “mandatory deleted components” for use in local motor vehicle assembly. In May 1983, the first national carmaker, Perusahaan Otomobil Nasional Sdn Bhd (“Proton”), was incorporated. Proton was established to manufacture, assemble and sell motor vehicles as well as related products, including accessories, spare parts and other components, with technical assistance from Mitsubishi Corporation and Mitsubishi Motors Corporation of Japan. Proton rolled out Malaysia’s first national car, the Proton Saga in July 1985. The Proton Saga was given preferential tax and duty treatment to ensure viability. Proton’s entry into the local automotive industry in 1985 led to a significant structural change in the landscape of the market. The automotive industry shifted from being highly dependent on imported vehicles, particularly from Japan, to an industry dominated by locally produced cars. For distributors of non-national cars, the entry of Proton resulted in greater competition for market share in the mass market segment. In 1993, the second national car producer, Perusahaan Otomobil Kedua Sdn Bhd (“Perodua”), was established. Perodua is a joint venture between companies from Malaysia and Japan, including UMW Corporation Sdn Bhd, IVIBM Resources Berhad, Daihatsu Motor Co Ltd, PNB Equity Resource Corporation Sdn Bhd, Daihatsu (Malaysia) Sdn Bhd, Mitsui & Co Ltd and Mitsui & Co (Asia Pacific) Pte Ltd. The first Perodua car was Perodua Kancil, introduced to the market in August 1994 targeting the mini car mass market segment of the industry. In August 2000, Proton introduced the first in-house designed car, the Proton Waja. Prior to the Proton Waja, all previous Proton models were rebadges3 of Mitsubishi models. In February 2004, another in-house designed car, the Proton Gen2 was launched featuring the 1.6 CamPro engine. The CamPro engine was developed by Proton in collaboration with Lotus Group International Limited, a subsidiary of Proton. The development of the CamPro engine marked a new milestone in the local automotive industry. Proton introduced the Proton Preve to replace Proton Gen2 in mid-2012. In addition, a newly developed hatchback model, the Proton Suprima was introduced 2 Foreign assemblers are forbidden from including certain components in their imported CKD package. 3 The application of a different brand or trademark to an existing product which is subsequently marketed as a distinct product.
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10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
by Proton in 2013. In 2014, Proton launched a compact car, the Proton Iriz, under the B-segment
(Small Cars) category. To encourage a competitive domestic automotive industry as well as to promote Malaysia as a regional automotive hub, several measures were undertaken in attempt to liberalise the industry. The introduction of the NAP in 2006 and subsequent reviews in 2009 and 2014 by the Government were aimed towards achieving these objectives. (Please refer to Relevant Laws and Regulations in Section 2.5 of this report for a more detailed discussion on the NAP).
1.2 INDUSTRY SEGMENTATION Motor vehicles are generally divided into passenger vehicles (“PV”), commercial vehicles (“CV”), and motorcycles. All data quoted will exclude data pertaining to motorcycles. Passenger vehicles (“D’U”\ ! I-‘asse hlr.ll~g r·”‘MPV”) Commercial ‘vehliciEls C”C\/”) I Trucks, Prime Movers, Pick-ups, Panel Vans, Buses and Others Source: Malaysian Automotive Association (MAA) In Malaysia, the automotive industry was dominated by the PV segment, making up 88.3% of the Total Industry Volume (“TIV”) in 2015. TIV of PV has grown at a CAGR of 5.9% from 80,420 units in 1980 to 591,298 units in 2015. The local automotive industry is also classified according to origin of manufacturers, whereby national and non-national vehicles compete within their own segments. This is due to the fact that national car manufacturers and assemblers enjoy greater incentives from the Government to encourage the development of the local industry. As a result, national cars are more competitively priced compared to non-national cars of similar specifications, making it challenging for non­national cars to directly compete with national models in terms of pricing. For the purpose of this report, only Perodua and Proton shall be classified under national manufacturers. [The rest of this page is intentionally left blank] IMR Report
10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
SULLIVAN

Perodua Proton” Audi Aston Martin BMW Chery Chevrolet Citroen Ford” Honda Hyundai Infiniti Inokom” Kia Land Rover” Lexus Maserati Maybach Mazda” Mercedes-Benz” Mini Mitsubishi” Naza Nissan” Peugeot Porsche Renault” Saab Smart/MINI SsangYong” Subaru Suzuki Toyota” Volkswagen Volvo” BMC Changan Daihatsu Dong Feng Hicom Perkasa Hino Isuzu Mahindra MAN Mercedes-Benz Mitsubishi Fuso Scania Tata Tuah Volvo Note: ” Manufactures both passenger and commercial vehicles Source: Malaysian Automotive Association, MAA Figure 1-1: Industry Segmentation (Malaysia), 2015
Source: Frost & Sullivan The automotive industry in Malaysia further segments the PV category according to vehicle size. The local industry is dominated by vehicles in the A-segment (mini cars) and B-segment (small cars). The popularity of A and B segments is attributed to the fact that both segments are considered entry-level segments, and are typically more fuel efficient as compared to larger models. ill 7 I ! IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FRO S T & SULLIVAN

A-Segment Mini Cars Kia Picanto, Hyundai i10, Perodua Viva, Smart ForTwo Honda City, Ford Fiesta, Mazda2, Nissan latio, Toyota Vios, Proton B-Segment Small Cars Prev€!, Nissan Almera, Proton Iriz, Perodua Myvi Civic, Hyundai Elantra, Mazda3, Mazda 3 MPS, Kia Forte, C-Segment Nissan Sylphy, Toyota Altis, Proton Inspira Honda Accord, Hyundai Sonata, Mazda6, Nissan Teana, Toyota large CarsD-Segment Camry, Proton Perdana, Volkswagen CC Executive Cars Audi A6, BMW 5 Series, Jaguar XF, Mercedes E Class E-Segment Audi A8, Audi TT, BMW 7 Series, Mazda MX-5, Mazda RX-8, luxury Cars Mercedes ClK, Mercedes S Class, Maserati Ouattroporte, F-Segment 350-Z, Porsche 911 Multi-Purpose
Honda Odyssey, Hyundai Grand Starex Royale, Mazda5, Maz:da8, MPV Vehicles Perodua Alza, Proton Exora Sports Utility
Audi 05, BMW X5, Honda CRV, Hyundai Santa Fe, Mazda SUV Vehicles Mazda CX-7, Mazda CX-9,Toyota Harrier, Nissan Murano
Source: Frost & Sullivan [The rest of this page is intentionally left blank] IMR Report

 

10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F itO S T & SULLIVAN

2 ANALYSIS OF THE AUTOMOTIVE MARKET IN MALAYSIA 2.1 DEMAND CONDITIONS 2.1.1 Market Size and Growth Trends The automotive industry in Malaysia has experienced a steady growth over the past 35 years, registering a CAGR of 5.7% of the TIV from 1980 to 2015. In 1980, TIV was recorded at 97,262 units and the volume has grown by 585.4% to reach 666,674 units in 2015. Proton’s entry into the automotive industry in 1985 with the introduction of the Proton Saga was marred by the 1985-86 recession. The recession, which saw a decrease in demand and increase in prices of motor vehicles, was caused by the appreciation of the Japanese Yen against the Malaysian Ringgit. Vehicle sales picked up as the domestic economy recovered, contributing to Proton’s increased production and market share. As subsequent generations of the Proton Saga were introduced between 1986 and 1990, it became one of the major contributors towards TIV growth in which TIV increased to 181,877 units in 1991. With the introduction of Perodua Kancil by Perodua, Malaysia’s second national car manufacturer in 1994 coupled with the economy growth, the local automotive industry was invigorated. As the Government’s support of the establishment of local assembly plants continued, vehicle sales flourished with the upsurge of CKD vehicles in the market. In 1997, TIV hit 404,837 units, almost three times the amount sold in 1992, which was only 145,084 units. However, the 1998 Asian financial crisis instigated a severe downturn in vehicle sales, with the reduction of TIV by 59.5% from the previous year to just 163,851 units sold in 1998. Similar to the years following the 1985-86 recession, vehicle sales only picked up as the domestic economy recovered. The industry subsequently enjoyed steady growth over the next four years before TIV returned to the pre-1998 recession level of more than 400,000 units. TIV dipped slightly from 434,954 units in 2002 to 405,745 units in 2003, as consumers withheld their purchases in anticipation of lower prices with the implementation of ASEAN Free Trade Area (“AFTA”), along with the imminent launch of new models by Proton. In January 2004, Malaysia announced tariff reductions for CBU and CKD units under the Common Effective Preferential Tariffs (“CEPT”), CEPT-AFTA scheme, whereby the import duty structure for cars within ASEAN was reduced to 20% (Refer to Section 3.5). The enforcement of the CEPT-AFTA scheme boosted the local demand for non-national cars, and TIV peaked at 552,316 units in 2005. IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FRO ST & SULLIVAN
Vehicle sales picked up again in 2008 but the effects of the international financial crisis resulted in a slight fall in TIV in 2009. The subsequent recovery of the domestic economy in 2010 led to a steady increase in new registered vehicles, with TIV reaching 605,156 units that year. In 2011, the decline of TIV to 600,123 units was attributed to the tightening of lending rules by BNM since end-2010 along with the disruption upon the automotive value chain due to earthquake in Japan and floods in Thailand which affected supply. However, the swift recovery in supply has seen the TIV resumed its growth trajectory in subsequent years with 627,753 units recorded in 2012 to 666,487 units in 2014. However, the TIV has remained even at 666,674 units in 2015. Passenger and Commercial Vehicles Sales of PV in Malaysia have consistently exceeded the sales of CV, from 80,420 to 591,298 new units sold in 1980 and 2015 respectively registering a CAGR of 5.9%. In contrast, CV recorded sales from 16,842 units in 1980 to 75,376 units in 2015 and registering a CAGR of 4.4% in the same period. Both segments have similar patterns exhibited by the TIV over the years from 1980 to 2015, with the sales of PV moving almost in parallel with TIV. The number of new registered PV and CV dropped in 1985-1987, 1992, 1998, 2006 and 2011 due to unfavourable economic conditions. In 2011, the plunge of 1.6% in TIV from 2010 was also due to the earthquake and tsunami in March 2011 damaging many factories in north-eastern Japan. Hence, this has caused sudden reduction in sales of cars such as Toyota and Honda in Malaysia, mainly due to shortage in parts supply. In 2015, only the PV segment registered positive growth compared to 2012. The number of new registered PV increased by 39,109 units (an increase of 7.1% from 2012), while the CV segment decreased by 188 units (a decrease of 0.2% from 2012). [The rest of this page is intentionally left blank] I  J  m  IMR Report  14  © Frost &Sullivan 2016
I Company No: 909531-0 I 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FRO ST & SULLIVAN
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1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 nn~_=,_=~_·,_·_~_~_·_·_·_¥_~_~~,_·,··,···· 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 97,262 100,935 102,447 108,314 109,915 94,999 67,847 48,996 71,592 109,357 165,861 181,877 145,084 167,928 200,435 285,792 364,788 404,837 163,851 288,547 343,173 396,381 434,954 405,745 487,605 552,316 490,768 487,176 548,115 536,905 605,156 600,123 627,753 655,793 666,487 666,674 80,420 86,444 86,859 92,623 90,059 68,257 49,553 36,727 55,954 78,233 114,441 132,194 115,685 136,645 166,461 238,557 295,344 334,503 146,210 262,376 309,441 358,758 392,227 354,863 416,657 454,496 400,297 442,885 497,459 486,342 543,594 535,113 552,189 576,657 588,348 591,298 16,842 14,491 15,588 15,691 19,856 26,742 18,294 12,269 15,638 31,124 51,420 49,683 29,399 31,283 33,974 47,235 69,444 70,334 17,641 26,171 42,727 50,882 70,948 97,820 90,471 44,291 50,656 50,563 61,562 65,010 75,564 79,136 78,139 75,376 Source: MAA and Frost & Sullivan Iii 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
National and Non-National Manufacturers National cars manufactured by Proton and Perodua have dominated the industry due to the preferential duty structure and increased incentives to manufacturers, giving the cars a competitive edge in terms of pricing over the non-national manufacturers. Despite attempts to liberalise the industry, sales volume of national cars remained strong over the period, largely due to dominance of the entry-level segments with competitive pricing. Malaysia’s continuous increase in GOP and GNI resulted in an upsurge of entry-level buyers, who in previous years would have only been able to afford second hand cars. Nonetheless, the liberalisation of the Malaysian automotive market through the NAP initiatives has encouraged the introduction of more competitively priced A and B-segment car models by the non-national car manufacturers. As a result of intensified competition, the combined sales of national cars by Perodua and Proton declined to 47.3% of the TIV in 2015. Chart 2-2: Total Sales b National and Non-National Manufacturers
400,000 National Non-National L, 11I2010 Ll2011 _2012 1a2013 02014 -2015 -J Source: MAA Proton dominated the market share of national cars since its entry into the automotive industry in 1985 until 2006 when it was overtaken by Perodua. Perodua’s upsurge in sales was primarily attributed to the popularity of the Perodua Myvi and Perodua Alza models. Among the non-national PV manufacturers in Malaysia which largely consist of players from Japan, Korea and Germany, Toyota, Honda, and Nissan were the three leading manufacturers in 2015, which collectively held 73.3% of the market share in terms of sales for non-national PV across all segments. Toyota has consistently been the market leader of non-national PV manufacturers from 2010 to 2013, where its best-selling models namely Toyota Vios, Toyota Camry and Toyota Corolla Altis sustained its sales volume to range between 60,000 units to 75,000 units annually. However, Toyota was relegated to second position since 2014 as its market share diminished from 35,9% in 2010 to 23,7% in 2015.
IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FRO ST & SULLIVAN
Chart 2-3: Total Sales by National Manufacturers (Malaysia), 2010-2015 250,000
Perodua Proton 11II2010 132011 152012 132013 Gl2014 11II2015
Source: MAA This is attributed to the favourable sales performance of key Honda models, such as Honda City and Honda Jazz in the B-segment, Honda Accord in the O-segment and Honda CRV in the SUV segment which has propelled Honda to become the largest non-national PV manufacturer since 2014. Honda sold 44,483 units in 2010 and its sales grew at a CAGR of 16.4% to 94,902 units in 2015. Nissan has consistently held third place in terms of sales of non-national PV from 2010 to 2015. Its sales grew from 26,322 units to 41,941 units at a CAGR of 9.8%. Amongst the other manufacturers, Subaru, Lexus, Kia, Mazda, Ford, Volkswagen and Mercedes-Benz have the highest CAGR for the period between 2010 and 2015, with 154.0%, 37.3%, 37.0%, 26.6%, 24.5%, 17.9% and 16.6% respectively. 18IMR Report © Frost & Sullivan 2016 I Company No: 909531-D I 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F RO S T & SULLIVAN
Chart 2-4: Total Sales Volume of Leading 16 Non-National PV Manufacturers (Malaysia), 2010-2015 100000 1 90000 l
o’1} o-‘1} ‘1}~ o’1} ~ 0~~ , ~’1} $ 0’ o&­~~ !?>~ ~'” 0<“‘” x-0<:’ ~”,,,, ~~ ‘f;’Q~ ~’1}<:$ *-0 .,t” «.0″ ,,’Q”‘r’ ,?”\S”‘o~ <Q ~'” ,~o ,§> ~§ «0~~ ~,§> .o~o’Q~ ,Ol ‘\ .~,~ CJ’l! ‘” o~ …..” ~’Q” ‘::’ x-~\S 11I2010 1il!2011 1il!2012 %2013 m2014 m2015 Note: ‘Others include Chevrolet, Land Rover, Volvo, MINI, Porsche, Chery, Renault, SsangYong, Naza, BAW, GWM, Jaguar, Maybach, Isuzu, Smart and Mahindra. IMR Report © Frost & Sullivan 2016 343 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F ROS T & SULLIVAN

Note: ‘-‘ denotes no sales volume recorded for the year; 1 represent brands which were not specified in the “Market Review for 2015 and Outlook for 2016” released by MAA on 21 January 2016. Source: MAA 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F RO S T & SULLIVAN

 

2.2 DEMAND DEPENDENCIES 2.2.1 Market Drivers Rising Income Level of Consumers Malaysia’s TIV has been rising steadily along with the GNI at current prices from 1980 to 2015. Demand for motor vehicles has increased, attributed to the nation’s economic growth, whereby families are able to afford more cars and entry level buyers are able to buy brand new cars instead of used cars. Malaysia’s economy has shown signs of recovery following the recession caused by the 2008 financial crisis. The economy contracted by 1.7% in 2009 but has since recovered by registering an annual growth rate of 6.0% between 2010 and 2014. According to 0084, Malaysia’s economy grew by 5.0% in 2015 and the World Bank has projected growth to be moderate at 4.5% in 2016. Among the Government initiatives to develop Malaysia into a high income nation by 2020 includes the creation of highly-skilled manpower for critical industries of the National Key Economic Areas (“NKEA”). Higher skilled workforce commands higher wages which enhance their purchasing power. The median monthly household income in Malaysia has increased at a CAGR of 10.1% from RM2,830 in 2009 to RM4,585 in 20145, This trend is favourable for the automotive industry as more consumers may demand premium offerings in vehicles. Chart 2-5: GNI at Current Prices and TIV (Malaysia), 1980-2015 1,200 Ul 1,000 Ql to) ‘C c..~l: 800 -l: ._0 Ql=….­… .0 600:l:!: ~o:: lll~ 400Z C) 200 900 ~GNI
800_TIV 700 Ul600 -‘c :l 500 g o 400 ::.­> 300 i= 200 100 0 +,–r.,–r-r-r-….-r–r~r-T·—r’-,.,–r,-r,….”….-,.–,.,–r,-r,….”c-r.-.–r-r-r–.–r–r~r-r-.–r+ 0 1980  1985  1990  1995  2000  2005  2010  2015  Source: Depa rtment of  Statistics,  Malaysia ( “DOS’; and MAA  4 Dated February 18th, 2016 5 Department of Statistics, Malaysia
IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F iRO S T & SULLIVAN
Underdeveloped Public Transport System The public transport system in Malaysia consists of buses, railways and taxi services. However, the current system is neither fully developed nor well-integrated. Public transportation is largely considered to be inefficient and unreliable, and suffers from insufficient capacity as it is not able to cater for the growing population. Furthermore, within the Klang Valley, the Light Rail Transit (“LRT”) and monorail systems are concentrated in the Kuala Lumpur (“KL”) city centre while a large portion of the surrounding suburbs have yet to be integrated into the routes. Outside the Klang Valley, the LRT and monorail systems are undeveloped thus the public need to rely on buses and taxis as means of public transportation. Within the Klang Valley, buses are widely known to be unreliable, infrequent and overcrowded. Furthermore, bus routes are concentrated in high-traffic commercial and residential areas, while there is a shortage of bus routes between newly developed housing neighbourhoods and the city centre or LRT stations. In light of this, majority of the population choose to drive instead of taking pUblic transport, driving the demand for PV. The urban rail system in Malaysia is largely concentrated within the Klang Valley, with other parts of the country still relying on buses as the main mode of public transportation. The RapidKL LRT Iines6, Keretapi Tanah Melayu (“KTM”) Komuter lines, and the Express Rail Link (“ERL”) service? connect Greater KL to the city centre, while the KL Monorail line only runs throug h the heart of KL. However, a large portion of the surrounding KL suburbs such as Damansara Utama, Cheras and Puchong have yet to be integrated into the routes. Consequently, commuters are dependent on buses or taxis as the mode of transportation to get to the nearest stations. In addition, the rail systems are not well integrated, where most interchange stations between various lines are not conveniently located within close distance of each other. Though the Government has plans of improving the Klang Valley urban rail system through the Mass Rapid Transit (“MRT”) project, it is only expected to be completed by 2017. Despite the limitation in connectivity, the annual railway ridership for the KTNI Komuter, Light Rail lines and the ERL had grown at a CAGR of 7.6%, 7.3% and 15.3% respectively from 2010 to 2014. 6 Ampang and Kelana Jaya lines ? Kuala Lumpur International Airport (“KLlA”) Transit and KLiA Ekspres IMR Report
10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
Chart 2-6: Annual Railway Ridership Statistics in Malaysia (in millions), 2010-2014 i’160.0 -Iii); ;  r:: 0  140.0  1=  ‘E  120.0  r::  Co :E  100.0  l!! Q) “‘C  80.0  0::  >. III  60.0  ~  “iii  40.0  0::

Note: Latest available ridership data is until 2014. The KTM Inter-city includes Electric Train Service or ETS. Source: Ministry of Transport (“MOT’) and Frost & Sullivan Malaysia’s Car-Centric Culture Malaysia is known to exhibit a car-oriented culture, whereby most Malaysians in general prefer to drive over using public transport or adopt carpooling practices. This can be attributed to the rising income of consumers and relatively low price of fuel, which is subsidised by the Government. The convenience of driving one’s own car still appeals to the Malaysian public. Furthermore, in Malaysia, the number and type of cars owned is perceived by others as a sign of wealth and the social status of an individual. Consequently, these cultural factors are seen to collectively drive the automotive industry forward. According to the latest data made available by the Jabatan Pengangkutan Jalan (“./PJ”), the number of active private vehicles per 1,000 people in Malaysia has increased at a CAGR of 4.6% from a ratio of 492 private vehicles in 2010 to 589 private vehicles in 2014. The trend of increased ownership of private vehicles is expected to continue, with the Malaysia Automotive Institute in January 2016 projecting the TIV to reach 717,444 units by 2020. IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN

Note: Refers to vehicles with valid road tax and insurance. Source: JPJ, MOT, DOS and Frost & Sullivan Promotional Activities Automotive companies engage in extensive marketing and promotional campaigns to create awareness and promote consumer acceptance over their brand models, especially during the launch of a new product. Marketing activities such as advertisements, roadshows, sponsorships, media public relations and social networking play a significant role in determining the sales volume of vehicles. In addition, companies also engage in activities such as end-of-year discounts, sale of demo cars, trade-ins and free maintenance to further attract customers. Brand positioning is a key factor in gaining a competitive edge over other manufacturers. By adding value in terms of performance, high quality and safety standards, as much as making the brand a lifestyle statement, manufacturers will be able to tap into the appropriate market segment to boost sales. 2.2.2 Market Restraints High Tariffs for Non-National Cars National cars have been given protection by the Government since the entry of Proton into the local automotive industry in 1985. The dominance of national cars such as Proton and Perodua is a direct result of having lower prices compared to non-national cars, brought about by preferential tax treatment and protectionist policies of the NAP. High import duties imposed on CBU and CKD units (30% for CBU and 10% for CKD for imports from Most Favoured Nations\ excise duties and sales tax, essentially restraints the imports of non-national cars, thereby restricting the choices of consumers. Despite excise duty being the same for all manufacturers, the NAP mandates that cars consisting of a certain amount of local content as well as local activities (such as local R&D activities) will be eligible to receive incentives from the Automotive Development Fund and Industrial Adjustment Fund. Hence, although Proton and Perodua are still subject to the same level of excise duty as their non-national counterparts, both companies get substantial rebates due to their high investment in the local automotive industry. 8 Most Favoured Nations refer to member countries of the World Trade Organisation IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST SULLIVAN
The lifting of the suspended Manufacturing Licence (“NIL”) on selected vehicle segments 9 following the NAP review in 2014 is aimed to induce manufacturing and assembling activities that do not directly compete with Proton and Perodua. In addition, the open Approved Permit CAP”) issued for every imported vehicle amounting to RM10,000 each further expands the price gap between national and non-national cars. The protection given to the national manufacturers has resulted in non-national vehicles sold in Malaysia to be priced higher as compared to other countries. Impact from Recurring Economic Slowdowns Sales registered by the automotive industry are largely influenced by economic conditions, both domestically and internationally. TIV dropped during the recession in 1985-86, the 1998 Asian financial crisis and the international financial crisis in 2008-09. Uncertain global economic climate leading to unstable fuel prices also led to a drop in TIV, as exhibited in 1992 during the Persian Gulf War. Domestic sentiment also weakened following uncertainty over the implementation of the Goods and Services Tax (“GST”) in April 2015. Conversely, a resilient and progressive economy will result in TIV recording healthy growth. 2.3 SUPPLY CONDITIONS AND DEPENDENCIES 2.3.1 Prominent Local Automotive Manufacturing Industry in Malaysia The manufacturing and assembly of motor vehicles have remained strong over the last decade, with local production of motor vehicles moving in tandem with the economic climate and TIV. Total production volume grew during early 2000s, but dipped in 2003 due to lower demand of PV as consumers withheld purchases in anticipation of lower prices of vehicles following the implementation of AFTA the following year. Subsequently, production volume surged and peaked at 563,408 units in 2005, but the increase in domestic fuel prices led to a temporary fall in demand in 2006 and 2007. PV and CV were reclassified in 2007, whereby 4X4 vehicles were reclassified under PV, reSUlting in the sudden decline in CV production and the apparent increase in PV production that year. Production picked up in 2008, but effects of the 2008 international financial crisis led to another fall in production volume in 2009. The local economy has since recovered, with total production volume reaching 614,664 units in 2015. 9 Cars with engine capacity of 1,BOOcc and above and on-the-road price of RM150,OOO and above, hybrid and electric cars, pick-up trucks, commercial vehicles and motorcycles with engine capacity of 200cc and above IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F itO S T & SULLIVAN
Chart 2-7: Total Production Volume (Malaysia), 2001-2015 6°A ———–:;>CAGR Total Production ~~~~:~~: __0_————-­700 —­… —­…. ———­11II Passenger Vehicles 12 Commercial Vehicles

IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) f It 0 S T & SULLIVAN

2.3.2 Reliance and Vulnerability to Imports The automotive industry is relatively dependent on imports, especially among the non-national manufacturers. CBU units are fully imported from abroad while CKD units assembled locally also largely consist of imported components. The reconditioned car segment is also fully dependent on imports of used cars. National manufacturers have minimal dependence on imports, whereby most vehicle parts and components are sourced from established local vendors. Imports are limited to critical parts and components such as engine parts and tyres. Non-national manufacturers distribute both CKD and CBU units. CKD units assembled locally are dependent on the import of CKD packs10 from foreign Original Equipment Manufacturers (“OEIVI”), which mainly consist of engines, metal body parts and transmission systems. Critical non-safety parts such as rims, entertainment systems, carpet and seats are usually sourced locally. On the other hand, CBU units would require minimal fitting or assembly as they are being fully equipped by foreign OEMs. The importation of vehicles in Malaysia is subjected to relevant duties and tariffs, and is regulated by the AP system, which is further elaborated in Section 2.4 -Relevant Laws and Regulations. However, since 1 June 2011, import of used auto parts and components into Malaysia are banned by the Government, following the NAP Review 2014. 2.4 INDUSTRY lIFECYCLE The local automotive industry is currently at the growth stage of the industry lifecycle, both in terms of vehicle sales and production. The industry has seen much progression and development since it started off in the 1960s, and its performance is closely tied to present economic conditions. The growth potential of the industry is greatly influenced by increasing GNI of the population. In addition, the Government has set out measures in terms of policies and incentives to further develop the automotive industry. [The rest of this page is intentionally left blank] 10 CKD packs refer to packs that contain CKD parts and components IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FIt0 ST & SULLIVAN
Figure 2-1: Lifecycle of the Automotive Industry (Malaysia), 2015
Source: Frost & Sullivan 2.5 RELEVANT LAWS AND REGULATIONS The local automotive industry is governed by a number of policies and agreements, both local and international, as well as laws and regulations to ensure safety of users. In addition, the Government have put various incentives in place to encourage the development of the local automotive industry. AP System The AP for motor vehicles is an import licence issued by the Ministry of International Trade and Industry (“MITI”) for the importation of motor vehicles into Malaysia, subject to the laws and regulations stipulated under the Customs Act 1967. An AP is required for the import of all new or used CBU and CKD motor vehicles, including motorcycles and CV. Companies that are eligible to apply for an AP are: • Companies holding existing allocation of AP for CBU vehicles
• Franchisee of CBU vehicles
• Local assemblers of CKD vehicles
• Non-AP holders importing the following:
o Classic cars more than 25 years of age
o Temporary/permanent imports of motor vehicles for the purpose of R&D, exhibitions, grand prix, gifts and contribution
o Motor vehicles to be used by ministries, government departments, statutory bodies and non-governmental organisation (HNGO”)

 

IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) if R0 ST & S,VLLIVAN
National Automotive Policy (NAP) On 22 March 2006, the NAP was first introduced to expedite the required transformation and integration of the domestic automotive industry into regional and global industry networks. It was aimed at increasing the Iiberalisation of the automotive industry to facilitate global competitiveness underscored by the Third Industrial Master Plan (“IMP3”), 2006-2020. Ultimately, the policy was intended to maximise the long-term contribution of the domestic automotive industry to the national economy. The latest review of the NAP was in January 2014 with the aim to promote a competitive and sustainable domestic automotive industry with greater emphasis on the automotive supply chain, predominantly vendors of equipment and parts. The latest review envisions Malaysia as an Energy Efficient Vehicle (“EEV”) regional hub with increase in exports of vehicles and auto components by 2020. Strengthening of the domestic automotive value chain will lead to greater job creation, particularly in the area of skilled professionals to facilitate even greater technology transfer from abroad. Towards this end, the government have allocated RIVI2 billion soft loans and grants for the automotive sector and for the human capital development in the automotive industry. National Budget 2016 While no announcement was made specifically for the automotive sector for 2016, the Budget envisions growth of the automotive industry in line with the National Automotive Policy (“NAP”) 2014. Up to 150,000 new jobs are expected to be created in the manufacturing as well as after sales and service sectors by 2020 to sustain the development and competitiveness of the Malaysian automotive industry at the regional and global level. [The rest of this page is intentionally left blank] IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
3 ANALYSIS OF THE AUTOMOTIVE LEATHER UPHOLSTERY INDUSTRY IN MALAYSIA 3.1 INTRODUCTION AND DEFINITIONS The automotive sector is one of the prime industries spearheaded by the First Industrial Master Plan (UIMP1 “) between 1986 and 1995, which outlined the framework for the development of broad-based manufacturing industry in Malaysia. The national car project launched in 1983 provided the impetus to acquire technology and industrial know-how within the manufacturing industry. Subsequent introduction of import substitution policies spurred the growth of domestic manufacturing as it promoted localisation of automotive components11. The subsequent IMP2 (1996-2005) further strengthened the linkages within the automotive manufacturing sector through the establishment of automotive clusters in Tanjung Malim (Perak), Gurun (Kedah) and Pekan (Pahang). With a structured vendor development programme in place, these clusters have successfully spawned a network of suppliers and producers of automotive parts and components. With local capacity of suppliers strengthened, it is only fitting that the most recent IMP3 (2006-2020) aiming to spur economic integration of the automotive manufacturing industry at the regional and global level. A vital engine of growth, GOP contributions from the automotive sector is expected to account for 10.0% by 2020 from 3.4% in 201312. Investment in the automotive sector has grown to RM 4.9 billion in 201413 from about RMO.7 billion in 2009. As of November 2015, about 19 licensed car assembly plants and manufacturers are in operation with a cumulative annual production capacity of 800,000 vehicles, supported by 550 vendors in the automotive component industry. Overall value of the automotive manufacturing industry have grown at a CAGR of 11.0% from RM14.3 billion in 2008 to RM21.7 billion by 2012. In the same period, manufacturing of automotive components have grown at a slower CAGR of 9.7% from RM4.8 billion to RM6.9 billion. To ensure the long-term competitiveness of the Malaysian automotive sector, the IMP3 has identified several priority areas to expand the industry profile beyond manufacturing. It demands upgrading of local engineering capabilities to incite innovation in vehicle design and development. Distinctively, this includes the styling of both exterior and interior of vehicles which have progressively become the focal point of brand awareness and differentiation hence a vital feature to attract and retain increasingly sophisticated consumers. However, recalibration of exterior 11 l\Iotable ones include the Local Material Content Policy which aims to increase percentage of local components for all range of motor vehicles from 45% in 1992 to 60% by 1997 12 Media Briefing on the NAP 2014 by the Minister of International Trade and Industry, January 20 th 2014 13 As at end 2014 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F RO S T & SULLIVAN
design of vehicles is typically more onerous and costly as it potentially impinges on the vehicle’s performance, safety, and fuel economy. Hence, the automotive brand owners, designated in the industry as the original brand manufacturer (“OBM”), have been experimenting with interior modelling to influence the overall impression of prospective consumers. Interior components comprise various parts that include instrument panels, door panels as well as electronics. Yet, it is the upholstery that would be the most distinguishable part as it occupies the majority of the car interior. In recent years, the use of leather trim for automotive upholstery and other interior panels such as dashboards and doors has become more widespread. According to a recent survey by Frost & Sullivan, more than half of the passenger car models on sale in Malaysia have leather for its upholstery offered as either standard or optional 14. Given that, this section will focus on the automotive leather upholstery industry. Generally, the automotive upholstery industry in Malaysia comprises leather manufacturers that at the very least, undertakes the cutting and stitching operations to produce intermediate leather seat covers for the automotive industry. The manufacturers would procure finished leather from tanneries 15 as the key raw material, which are almost exclusively from bovine origin. Upon inspection of the raw materials for defect, the finished leather is then naturally shaped for seats. It is a common practice in the industry for the leather to be affixed with additional material, typically Polyvinyl-chloride (“PVC”), to achieve greater manufacturing cost efficiency. Presently, advanced manufacturing processes allow improved colour-matching that diminish the visual distinction between the two materials. The leather is subsequently being cut into a template size and shape, based on the clients’ requirement, that correspond with its designated installation part on the seats. This is due to the fact that different parts of the leather have different tactile properties hence with varying durability. Upon being sorted by its respective pieces, the leather may be subjected to additional processes such as emboss, embroidery and perforation 16 to meet clients’ seat design requirement. The pieces are then sewn together to a foam material, which provide additional padding for comfort before the final stitching which joints all the leather pieces to produce the final intermediate leather seat cover. The seat cover is then is packed according to the orders for delivery based on batches. 14 A total of 203 models were surveyed across 28 car makers, as of December 2015 15 A factory where hides and skins are subjected to tanning process which treats it to produce leather, making it more durable and less susceptible to decomposition 16 A hole or series of holes punched through the upholstery for fitting purposes and workings of seat systems IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F ItO S T & SULLIVAN
3.2 MARKET SEGMENTATION AND VALUE CHAIN The growing international automotive market resulted in the emergence of regional automotive hubs, especially in developing countries with reputable automotive manufacturing profiles. The OBM often engage local automotive manufacturing partners, designated by the industry as the OEMs to manufacture and assemble their car models. Nevertheless, the ultimate decision on the vehicle specification to be manufactured remains with the OBM, including on the use of leather for the vehicle upholstery. Figure 3-1 presents a general overview of vehicle production processes in the automotive industry. It also highlights the positioning of the leather upholstery industry within the automotive value chain. The assembling process is the core of the vehicle production processes as it involves assembling different semi-finished components into a final functioning product -a fUlly operational vehicle. This is a very complex operation. The components that build up a vehicle such as doors, headlights, seats, and on-board electronics are made of thousands of individual components. To ensure that each components and parts of the vehicles are fully compatible and attuned for optimum efficiency and performance, the value chain for the automotive industry are typically segmented into several logical components such as the powertrain, body works, instrumentations and automotive seats. Hence, the automotive manufacturing industry is characterised by cascading requirements imposed by the OEM throughout the supply chain to comply with the OBM-approved specification. Within the automotive seat segment, the OEM will first engage its direct supplier for finished automotive seats, referred to as the first tier supplier (“T1 “). The T1 essentially produce the seats by means of assembly of various seat components that comprise seat frames, automotive seat systems and leather upholstery. As T1 generally do not produce all of the seat components, they would typically source some of the components from multiple manufacturers including from automotive leather upholstery manufacturers. Hence, the automotive leather upholstery manufacturers are referred to as second tier supplier (“T2”) in reference to the OEM. Although the value chain is structured in this manner, both T1 and T2 suppliers are involved in the development stages for new car models including in the production of prototypes for the optimum design for a particular car model. However, later at the production stage, it is the T1 that will work closely with the T2 to ensure that the projected supply of various components of the car seats, including the leather upholstery, can be fulfilled. With growing production volume in emerging markets, the T1 are now expected to manage the shortfall of production faced by the T2. There is also increasing evidence of OBM becoming involved throughout the domestic supply chain as they seek to uphold the quality of parts provided by the T1 and T2 suppliers. IMR Report I Company No: 909531-D I 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
Figure 3-1: An Overview of Vehicle Production Processes and its Supply Chain within the Automotive Industry in Malaysia I OEM Stage of Vehicle Production Collaborative Process Planning & Designing  I  Prototype Development & Testing  Process of making the engine, stamping and welding Assembly Lines Pre-Delivery Inspection Sales Notes: 1 Pecca Group Berhad (“Pecca’) operates in this domain; 2 OEM segment; 3 POI segment; 4 Other panels include door panels and knobs; and 5 Instrument panels include speedometer, fuel gauge and odometer.  CKD unit2 CKD units3 CBU units3 Special Editions3
Source: Frost & Sullivan IMR Report © Frost & Sullivan 2016 357 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
On this account, Frost & Sullivan segments the automotive leather upholstery industry in Malaysia, into three distinctive parts which are the OEM segment, the Pre-Delivery Inspection (“POI”) segment and the Replacement Equipment Manufacturer (“REM”) segment. Figure 3-2: Segmentation of Automotive Leather Upholstery Industry ~~’~”'”‘-‘”‘~-”’—~-, ~,­Original Equiment Manufacturer (OE M)

Automotive Leather Upholstery
~___1__”””,”_,,_, Pre-Delivery Inspection (POI) I “” ”’,,” Replacement Equipment Manufacturer (REM) Source: Frost & Sullivan OEM Market This segment is the largest in volume as it caters for the design and production of leather upholstery for new vehicles each year by the T1 and T2 suppliers, both of which being appointed by the OEM. The OEM segment refers to the installation of automotive leather seats in a given volume at the vehicle assembly line, where several parts of the vehicle are assembled in sequence until the final product is produced. This meant that the vehicle can be delivered on a shorter delivery time17. The OEM typically prefers eligible suppliers to have a manufacturing plant adjacent to their manufacturing plant in order to mitigate logistical risk. Another critical requirement is for the supplier to have a TS/IS016949 certification which is a dedicated quality management system certification for the automotive manufacturing industry which assures the supplier’s capacity to afford seamless integration into existing OEM supply chain. Given that leather upholstery are being installed in relatively limited quantity, a single supplier will supply the entire leather upholstery for a given OEM model to attain economies of scale, unlike other automotive components including fabric upholstery. While the OEM segment provides a consistent stream of revenue for the suppliers, this is the most complicated and demanding segment. Suppliers need to have a solid financial standing as they are expected to bear the development cost, throughout the designing phase which varies 17 Commonly referred by the industry as shorter lead time IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F It 0 ST & SULLIVAN
from a month up to a whole calendar year depending on whether the development is for new or existing models. This process entails elaborate calibration, testing and documentation before the final design and the subsequent price that can be agreed upon. Suppliers are also being constantly subjected to fluctuating volume of orders on a quarterly basis reflecting the anticipated demand for a given model. Strong research and development capabilities and continuous improvement programmes are vital for suppliers to remain competitive. The OEM expect their suppliers to achieve gradual cost­savings throughout the production phase, reflected in the declining price per seat of leather upholstery. This is being accomplished through various methods such as improved repetitive production time and use of cost-effective yet similar materials. POI Market The POI process is mandatory in automotive manufacturing. It prepares a vehicle for its final delivery to the end consumer. This final process in the automotive manufacturing plant has grown beyond merely final inspection to include accessorisation of the vehicle including leather upholstery. Hence, the POI segment is a relatively new segment sprouted from the needs of automotive distributors to enhance the attractiveness of their outgoing models or existing stocks during economic downturn through interior refurbishment. At the outset, installation of leather upholstery in the POI segment is restricted to vehicles with basic seat designs -those without additional functions such as heating and airbags. The earlier retrofitting processes involved the disassembly of seats for ease of installation and to ensure impeccable finishes. l\Ionetheless, modern automotive seat designs have become increasingly sophisticated with integrated comfort and safety features. The whole seat including the embedded airbags is essentially draped in upholstery of choice thus retrofitting may affect its deployment and consequently marginalise the safety of the passenger concerned. As a result, disassembly or even retrofitting of seats altogether is not a preferred option by most OEM. Despite these challenges, recent innovations in automotive seat upholstery now enables virtually any vehicles fitted with fabric upholstery to be retrofitted with leather without the need for seat disassembly while still conforming to stringent OEM requirements on seat designs. This distinctive feature makes the POI segment increasingly important as a strategic production and marketing device for both OEM and distributors. Before 2009, leather upholstery are reserved only for the premium models and selected trim levels which are usually priced higher as it also includes other accessories, such as enhanced entertainment system and vehicle body modification kits. Leather upholstery can now be offered as an accessory option even for entry­level models by distributors. The OEM would no longer have to disrupt the supply chain of production at the assembly line to cater for increase in the demand for leather upholstery in their models, which can potentially affect its delivery time. With this flexibility, the distributors are able 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
to gauge consumers’ preference before undertaking leather programmes in the OEM segment,
should the volume of demand permits. As both OEM and POI segments are in effect installed at the manufacturing plant at different stages of production, both are considered by the industry as factory-made with approval of warranty by their respective suppliers.
Frost & Sullivan expects the frequent launching of new models (especially special edition models) and the increasing segmentation offerings by OEM to result in a higher growth in the POI segment compared to the OEM segment, where there is shorter vehicle lifecycle.
In fact, the ability of suppliers to meet stringent OEM requirements for POI installation of leather seats, particularly those with airbags, will give the suppliers a strategic advantage to penetrate the regional and global automotive hubs, where establishing a local manufacturing plant is no longer a requirement to secure the OEM contract.
REM Market Commonly known as the aftermarket segment, the REM segment involves the distribution, retailing and installation of leather upholstery after the purchase of vehicles by the consumers. The intent of consumer purchasing the REM products is driven by both personal preference (pursuing greater personalisation of the vehicle) and needs (replacement or restoration of parts). There are various channels of delivery for leather seat REM products which targets varying groups of consumers. In general, these channels would include auto detailing specialists and traditional REM suppliers, as well as independent and OEM-approved workshops. Presently, the REM products are not being regulated and this may pose danger to consumers due to its incompatibility and quality of parts. While low-priced complementary REM products are the defining feature in this segment, many of these products do not conform to automotive standards. This includes leather REM products which are likely to be made from non-automotive leather, as the raw material is considerably cheaper. Frost & Sullivan estimates that about 65% or approximately 365,000 units of PV produced locally in 2015 are without leather upholstery. As the Government intend to regulate the REM segment by 2020 as outlined by the latest revised NAP in 2014, this will bolster consumer’s confidence and interest in the segment going forward. Furthermore, the global automotive market is expected to reach 89.7 million units in sales in 2015, driven by growth in the emerging markets 18. The ASEAI\J automotive markets, particularly Indonesia, witnessed both historical highs in automotive sales as well as production in 2013. Although total production in Thailand has declined in 2014 due to weakening domestic demand (see Chapter 4), ASEAN is expected to retain its position as the sixth-largest automotive market 18 OleA IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FIt0 ST & SULLIVAN
globally with a total production of 7.6 million units by 2020, with PV emerging as the key segment19. To date, at least 10 OEMs are recorded to have invested in new plant operations. As there are generally considerably more vehicles produced without leather upholstery annually, this implies greater demand potential in the export market for the REM segment in the near future. 3.3 INDUSTRY L1FECYCLE The automotive leather upholstery industry is currently in the growth stage of its industry lifecycle. There is ample room for growth as the Government aims to almost double the production volume of PV to about 1.1 million by 2020. In addition, local CKO production for premium continental brands such as Volkswagen and Mini has since commenced. These OEMs are more likely to have leather upholstery installed in their vehicles thus will likely spur the competitors to adopt the material as well. Besides, there is tremendous space for greater use of leather in automotive interior such as dashboards, door panels, seatbacks, sun visors and headlining. Figure 3-3: Lifecycle of the Automotive Leather Upholstery Industry in Malaysia
Source: Frost & Sullivan The shifting trends of the regional automotive industry are also favourable to the leather upholstery industry. Asia is expected to account for 51 % of global production volume and 44% of global sales of PV by 2020, largely attributed to the Chinese and Indian markets20. Compact and sub-compact vehicles are expected to be the best performing segment in this region due to increased urbanisation. These segments are also becoming increasingly price sensitive; hence greater accessorisation particularly with leather upholstery will be a key value proposition. 19 Frost & Sullivan -Automotive Market Engineering Report, June 2014 20 Frost & Sullivan -2020 Vision of the Global Automotive Industry, June 2012 IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
In the same way, leather upholstery is increasingly important for developed automotive markets notably America, Canada and Europe which were dominated by mid-sized and SUV vehicles. Consumers in China are observed to follow similar trends supported by the steady growth in economy and disposable income with a considerably large young population 21. With a high degree of competition across all segments, consumers continued to seek greater offers and value instead of only attracted to OBM. As the automotive sector becomes more developed, leather upholstery is likely to be a standard offering by OEM. 3.4 MARKET SIZE AND GROWTH TRENDS The intricacy of automotive supply chain speaks of its competitive nature. Information on suppliers and its production processes are typically proprietary as it establishes a firm’s competitive advantage. Therefore, publicly available information is generally confined only to the volume of local production and sales of new vehicles, making it only fitting to estimate the market size for the OEM and POI segments for the CKO units. The variation of volume and quality of leather installed in particular models also commands the potentially vast difference in pricing. On that basis, Frost & Sullivan estimates the market size of OEM and POI segment based on the volume of locally-assembled PV that comes with leather upholstery, excluding REM segment. Chart 3-1: Trends in Volume of Local Production for PV (OEM Segment) by Type of Upholstery, 2010-2015—_._———_.._–_._-_.—-_.._—_.—–._..——_._._—-_..__.•_————­600 Ql E 500 ::I (5
> ~ 400 . l::!!o .­I~ § 300 ::10 “‘Co
eE 200 ll. ] 100 o I­o 2010 2011 2012 2013 2014 2015
lIIII Leather ~ Fabric Source: MAA and Frost & Sullivan 21 Frost & Sullivan -2014 Automotive Outlook for China, July 2014 IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
The demand for leather upholstery in the automotive industry has been relatively stable with total production increased at a CAGR of 1.5% between 2010 and 2015. Although the national OEM still commands the majority in production, the production of PV with leather upholstery for non­national OEM have already increased at a strong CAGR of 36.9% compared to -5.2% for national OEM between 2010 and 2015, thus hiving off national OEM’s market share of leather upholstery to non-national OEM from 85.5% to 48.5% in the same period. This decline of market share held by national OEM is largely attributed to the fact that most of the models on sale into 2010 by the national OEM are nearing the end or have gone beyond the average industry product lifecycle. According to a publication by the United States International Trade Commission22. the vehicle lifecycle has now reduced from seven to five years to improve the brand appeal and its competitiveness. As launching of new models during the market downturn is unfavourable, accessorising the outgoing models including with leather upholstery, is now part of the OEM strategy to add value to their present offerings. A case in point is Perodua which has extensively utilised leather upholstery for its Myvi line-up prior to the release of a redesigned version in 2011. This move has altered the competitive landscape of the market particularly in the small, family sedan segment. The adoption of leather upholstery has helped Perodua in its positioning as a market leader thus instigating a similar move by their competitors, with Proton SUbsequently introducing leather upholstery in their Persona model. This has effectively moved leather upholstery towards the mainstream among the national cars. The decline in volume of national cars with leather is attributed to stronger sales projection of newer models by the OEMs. Proton for instance has temporarily ceased its leather programme for the Exora after its successful launch in 2009. Leather options were only re-instated later in 2011 to boost its sales. On the other hand, Proton Saga has been registering solid sales figures without having a leather upholstery programme since its launch in 2010. The recent launches of Perodua Axia and Proton Iriz in 2014 demonstrated the growing demand and appeal of leather upholstery in PV. As both entry-level models come with a low-base price, this meant the consumers could afford adding accessories such as leather upholstery. Financing such purchase is easier for consumers since it is covered under the Hire Purchase agreement instead of dispensing their savings at the aftermarket. Given that, these factors will drive demand for leather upholstery further. 22 Industry and Trade Summary: Motor Vehicles (September 2002) IMR Report 10, INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
& SULLIVAN
Chart 3-2: Trends in Volume of Local Production of Passenger Vehicles with Leather for National and Non-National OEM in Malaysia, 2010-2015 200,000 1/1 150,000Gl 1i:.c Gl > 100,000…. 0… ‘i: :::J 50,000
0 2010 2011 2012 2013 2014 2010 ~National OEM -..-Non-National OEM -.-Total PV 126,390  21,384  147,774  98,239  36,995  135,234  86,646  49,903  136,549  36,139  60,079  96,218  50,372  87,271  137,643  96,710  102673  199,383
Source: MAA and Frost & Sullivan This availability of leather upholstery in entry-level models also instigated greater adoption in the higher segments due to increased consumer demand, particularly with the non-national OEM. Increasing sales of non-national OEM has encouraged non-national OEM to venture and expand their local production instead of directly importing their vehicles as CBU units. Along with availability of fiscal incentives, the push for higher localisation of content or parts will provides non-national OEM reduction in tariff which will improve their competitive standings. In line with the consistent growth of market share over the national OEM in the PV segment, the non-national OEM’s share of PV produced with leather upholstery has simultaneously risen from 14.5% in 2010 to 51.5% in 2015. This rise is largely driven by Japanese OEMs which has expanded their leather programme by nearly 70,000 units between 2010 and 2015, which translate to a CAGR of 45.3%. The Korean and European OEMs have also shown strong growth with a CAGR of 53.8% and 15.0% respectively in the same period which both augmented their leather programmes by almost 11,100 units combined. Furthermore, non-national OEM such as Volkswagen, Mini and Subaru are gradually expanding their local production footprint. Expansion in local production of premium marques is likely to promote growth in automotive leather upholstery market. IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’dj –>–” ..’···’···.······fROST SULLIVAN.. :.-~ e·· 3.5 DEMAND CONDITIONS AND DEPENDENCIES Greater need for localisation by non-national OEM to achieve competitive pricing Non-national OEM is currently subjected to high import and excise duties which resulted in a homologated price that is considerably higher than the national OEM. With the exception of AFTA and other free trade agreements with Japan and Australia23 , the Government still imposes a high import duty of 30% for other importing countries in 201424. Excise duty is also being imposed on all non-national OEMs which range between 60% and 105% 25. Along with the limit on the numbers of cars that can be imported under the AP framework, this has consequently subdued the demand of non-national and premium car models. However, non-national OEM has pursued various avenues to strengthen availability and achieve more competitive pricing. Apart from venturing into local CKD assembly for selected models which eliminates the import duty, they have increasingly adopted greater localisation of contents or parts (“LC”) from Malaysia and other ASEAN countries 26 . Through the LC approach, non­national OEM may obtain tax rebates to reduce overall excise duty which will largely reduce its final selling price27. Despite these advantages, non-national OEM especially the premium marques are very selective in establishing or expanding their local manufacturing footprint, even more of their LC strategy to safeguard their premium brand reputation. Critical component such as engines and transmissions are often shipped as finished parts as this affect the final performance and reliability of vehicles. As such, it is the non-critical component or accessories such as entertainment system, batteries, tires and leather upholstery that become the preferred LC items. As there are only limited accessory items available from local suppliers, the automotive leather upholstery industry is fast becoming an integral part of the non-national and premium OEM strategy to achieve competitive pricing for both CKD and CBU units. Strong Institutional Support for a Competitive Automotive Industry The automotive sector has long been one of Malaysia’s strategic sectors. A key priority area of the latest NAP is the development of high value-added manufacturing activities in niche areas 23 According to MITI, import duties for all car segments from ASEAN have been rationalised in 2010 with similar expectation for both Australia and Japan 2016 24 The import duty is unlikely to change in the immediate future as it is a major revenue source for the government
25 MAA -“Duties and Taxes on Motor Vehicles” 26 Under ASEAN Free Trade Agreement (“AFTA”) 27 According to MITI’s Car Price Reduction Framework, this alone will result in reduction of car price up to
30% by 2017 IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
& SULLIVAN
through the liberalisation of ML28for selected segments particularly luxury cars29.The sales of luxury cars have been growing strong in the past decade, especially in the greater Asia Pacific region. As this segment offers their clientele a higher degree of customisation including design of leather interior, proximity between suppliers and assemblers does not only provide the critical cost advantage but also allow OBM to stay abreast on consumers’ trends. This proves to be a pivotal feature for Malaysia as it is geographically located at the heart of the ASEAN automotive hub. On that basis, the Automotive Supply Chain Development Roadmap of the NAP will facilitate the expansion of local manufacturers’ engineering and innovation capabilities, from basic assembly of imported kits to regional supply and global export. As OEMs often establish regional design and innovation centres near their assembly plants, the development of world-class vendors would incentivise global OEM to source design and intermediate inputs from local suppliers. Soft loans such as the Automotive Development Fund and Industrial Adjustment Fund of approximately RM295.0 million are allocated to spearhead this transformation under the NAp3o. Hence, these strategic interventions of the NAP will enhance both the supply as well as the demand for automotive leather upholstery. Application of Leather for Brand Differentiation and Appeal Similar to fashion, the automotive sector has become increasingly sensitive to consumer trends. With this understanding, leather upholstery has become a vital tool for OEM to convey a statement of luxury and prestige. It is also used to improve marketability of existing, outgoing models without compromising on its final selling price. Recent innovation allows cost-effective refurbishment of automotive upholstery in unsold cars to include leather which greatly enhance its appeal, allowing car makers to improve their turnover rates. Improved and cost-effective supplies of leather upholstery have facilitated greater adoption in the growing compact car segment as leather are now increasingly offered as standard while maintaining its competitive pricing thus its appeal. Car interiors have become more important as consumers are spending more time in their cars commuting longer distances. Hence, consumers would generally prefer higher quality and comfort of leather upholstery. Growing affluence of the population in both industrialised and developing countries have also stimulated demand in fashion, personal preference and prestige for natural materials in vehicles particularly leather. The vehicle is adapted to meet a diversity of customer’s individual needs to 28 The suspension of Manufacturing License previously was due to excess capacity in the industry. Vehicle assemblers were allowed to make available their excess capacity to third parties to assemble new models provided it did not directly compete with models of national car manufacturers 29 Vehicles with on the road prices not less than RM150,000 30 MITI Briefing on the NAP 2014 IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’dj FROST & SULLIVAN
enhance its functionality and appeal, especially among owners of existing vehicles, which drive greater adoption of leather upholstery in the REM segment. 3.6 SUPPLY CONDITIONS AND DEPENDENCIES The supply of automotive leather upholstery is dependent on its immediate upstream tanning industry. As automotive leather is a highly-engineered product to yield its durable characteristics, Frost & Sullivan is of the view that there are no local production available as of 2014 thus this raw material has to be imported from tanneries abroad. According to the International Trade Statistics31 the global export and import of raw hides and leather were valued at USD36.6 billion (RM127.9 billion) and USD35.9biliion (RM125.5 billion) respectively for 201432 . Italy was the top leather exporting country, which accounted for 15.4% of the world exports followed by the United States (9.6%), Brazil (7.6%) and Hong Kong SAR (5.8%). Tighter environmental regulations may slow the expansion of output tanneries, especially in the European Union (UEUU). According to Food and Agriculture Organisation (“FAa”), production of tanneries is also marginally affected by export restriction of raw hides by several African nations. 3.7 PRODUCT SUBSTITUTION Textile or fabric is the standard material for automotive upholstery. However, with growing consumer affluence, demand for higher quality substitute such as leather upholstery is likely to increase in tandem with increasing production of vehicles. Simultaneously, improvement in textile technology has also led to invention of synthetic leather that exhibit similar aesthetics properties to leather. Synthetic leather thus can be considered as a close substitute, yet it does not command similar prestige and quality as leather. Nevertheless, the availability of synthetic leather provides the platform for industry players to use complementary materials to achieve greater cost advantage that meets the OEM configuration. 3.8 RELIANCE AND VULNERABILITY TO IMPORTS The importation of finished hides takes place to make up for the shortfall of leather in local tanneries. According to FAa, Malaysia produced about 6.2 thousand tonnes of bovine hides and 31 Managed by the joint agency of the World Trade Organisation and the United Nations 32 USD/MYR exchange rate is based on 31 December 2014 of RIV1 3.4950 per USD dollar IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F&0 ST SULLIVAN
imported less than 1.0 thousand tonnes of bovine hides and skin in 2012 33 . However, automotive leather is a highly-engineered product which is not locally produced currently thus automotive upholstery industry players import the raw materials from key producers, typically from the EU. Tanneries prefer to supply leather in pre-cut pieces of finished leather instead of hides to improve their profit margin by earning the cutting yield. On the contrary, the industry players have preference to source the raw materials in hides as this would also provide them with greater control over the input quality and to capture greater value. The increasing LC adoption has induced OBM to have greater clout over the suppliers primarily to uphold quality and pricing of inputs. 3.9 RELEVANT LAWS AND REGULATIONS Although there were no particular legislation governing the automotive leather upholstery industry, there are increasing legislation in place in recent years aimed to reduce harmful effects of the leather industry on the environment particularly in the EU that restrict the usage of substances in leather production and toxicity of its wastewater. The automotive leather industry in the EU is well­organised in conforming to the stringent regulations. The application of leather in the automotive sector is governed by the technical standards specified by the United States-based Society of Automotive Engineers and the International Standard Organisation. 3.10 INDUSTRY RISKS AND CHALLENGES Fluctuation in Leather Hide Prices Automotive leather is a major cost component in the automotive leather upholstery industry. There are great variations in the price of automotive leather which largely corresponds with the difference in its quality. As the tanneries that manufacture automotive leather procure the semi­processed or wet-blue leather, there is also inherent yet limited risk from the fluctuation of leather hide prices with the supply and demand condition in the global market. This is due to the fact that only a portion of leather hides are used to produce automotive leather. According to the IMF Primary Commodity Prices, leather hide prices based on the Heavy Native Steers category have moderated from its all-time high in September 2014 of USD1.15 per pound to USDO.70 per pound in February 2016. The dip mirrors similar trends in global commodity prices. Furthermore, weaker growth in the emerging markets has also resulted in lower market demand especially for leather-based products. As of 2015, the US remains as the world leader in 33 FAO -World Statistical Compendium for Raw Hides and Skins, Leather and Leather Footwear (1992­2012) IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F’,·· .. .. 0·.·’.’y.””D’ ..’..··· ..'”c.,; 1\ .,—.): … -~.::, & SULLIVAN exportation of bovine hides by value while China became the world’s largest importers of hides despite seeing its production grow in the past since 199334. Chart 3-3: Trends in Average Monthly Leather Hide Prices (in USD per pound), 1990-2016
It).. <Xl <Xl <Xl 0′> 0′> 0′> 0 0 0 …… …… …… N N N C”> C”> C”> ‘<t ‘<t ‘<t It) It) <0 Q) 000000 …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… 0000000000000aa 000 00 00000 ~ NNNNNNNNNNNNNNNNNNNNNNNNN .cQ) .cQ) .cQ) .cQ) .cQ) .cQ) .cQ) .cQ) .c’0’0 ‘0 ‘0 ‘0 ‘0 ‘0’0Q)c Q)c Q)c Q)c Q)c Q)c Q)c Q)c Q) l.L. ::J 0 l.L. ::J 0 l.L. ::J 0 l.L. ::J 0 l.L. ::J 0 l.L. ::J 0 l.L. ::J 0 l.L. ::J 0 l.L….., …., …., …., …., …., …., …., Note: Based on Heavy Native Steers category Source: IMF Primary Commodity Prices Availability of Raw Materials The cost, quality and availability of leather inputs are major impediments to the competitiveness of automotive leather industry. Competition in sourcing the raw material alone has become increasingly intense with the growth of automotive manufacturing hubs in China and South America, as well as competing demands from the apparel and clothing industries35 Unabated, this will result in the growing use of synthetic materials. Advancement in fabric technology has already led to the development of fabric with leather-like properties at greater economic value. 3.11 BARRIERS To ENTRY AlthoUgh the industry will have lower entry barriers as it becomes more competitive with the progressive market liberalisation under the revised NAP, most of the automotive leather upholstery players have established close working relationship with the OBM who decide on the final specification and to some extent, suppliers for the OEM to procure on their behalf. Hence, appointed T2 have long-term contracts with the T1 to cater for the production of selected models for an OEM that may last for several years. It is likely there will be horizontal integration of existing 34 According to FAO and International Trade Centre 35 Confederation of National Associations of Tanners and Dressers of the European Cornrnunity (COTANCE), News Release following the COTANCE Council rneeting in February 2013 IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) fROST SULLIVAN
suppliers to achieve greater economies of scale in the immediate future. An enlarged footprint particularly in the automotive upholstery industry in general will make it difficult for new firms to capture value. 3.12 COMPETITIVE LANDSCAPE AND STRUCTURE A prospective OEM supplier would have to comply with a set of stringent safety and manufacturing standards. It is understood that very few of the existing local automotive leather manufacturers would qualify for the role of OEM supplier. Based on publicly available information, the following is the profile of selected automotive leather upholstery manufacturing companies that partake in the automotive upholstery industry, particularly in the OEM segment in Malaysia.
Source: Company’s Websites, Companies Commission of Malaysia and Frost & Sullivan 3.13 MARKET SHARE As noted in Section 3.4, there are limitations in the market share estimation for the automotive leather upholstery industry in Malaysia. The aggregated statistics from MAA shows that the total industry volume (TIV) for PV and the locally-assembled PV are nearly identical -even though TIV is based on sales. Frost & Sullivan infer that high domestic demand remains the major thrust for locally-assembled PV, which subsequently led to higher sales or TIV for PV. Based on publicly available publication, total production of locally-assembled PV represents at least 95.4% of TIV in 2015 thus it is representative of the industry. IMR Report
10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FRO ST & SULLIVAN
Chart 3-4: Trends of Locally-Assembled and TIV for PV (in ‘000 units), 2010-2015 _.__•••• ••__•••_ •••_. •••• •• •__•__••••_ ••••_ _ •• •• •••• •••••••••__••••_ ••_ ••••••••_ ••__•••• ._._••••••••_ __•• __~_u~~ ~u _.~._~ 700 J 600 500 400 300 200 100 o 2010 2011 2012 2013 2014 2015
lIlTotal PV Production !2JTIV for PV Source: MAA Hence, Frost & Sullivan’s methodology entails the assessment of all active car models with leather programme from 2011 to 2015, which covers approximately 203 models and variants across 28 car makers. Once a comprehensive industry profile is obtained, the information which is subsequently charted against the production volume of locally-assembled PV would provide a more accurate representation for the OEI\II and POI segments. This is the best frame of reference as the annual production statistics by make and models are publicly available and closely monitored by the Malaysian Automotive Association (I\IIAA). The fact that POI segment has recently grown increasingly important since 2015 needs to be taken into consideration despite it being a relatively new segment. Given these conditions, the market size estimation will be based on the OEM and POI segments. While Frost & Sullivan views the REM as a potential segment given that vehicle ownership often span nearly a decade due to long period of purchasing repayment up to 9 years and more than 2.7 million PV aged 10 years or more in 2011, lax regulation and enforcemene6 on automotive REM products in general has permitted offerings of identical products with substandard qualitl7. The respective models with a leather programme in a particular year were validated to derive the market size for the automotive leather upholstery industry. The production numbers of PLeather is subsequently evaluated against the market size for its market share approximation. 36 Malaysia Institute of Road Safety Research (MIROS) -Review Report 02/2012 37 Products that did not meet the automotive manufacturing and safety standards IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
SULLIVAN

Source: MAA and Frost & Sullivan Analysis
Source: MAA and Frost & Sullivan Analysis Frost & Sullivan estimates the volume of locally-assembled PV with leather upholstery in Malaysia after excluding the REM segment to be at 199,383 units in 2015, of which PLeather has supplied approximately 133,046 units. Hence, PLeather captured a market share of 67.7% in 2015 while other players commanded 32.3%. This established the company as the leading player in the combined OEM and PDI segments of the automotive leather upholstery market in Malaysia, without the inclusion of REM segment. As observed in the following table, PLeather’s market shares were 36.3%,38.4%,57.8% and 65.2% respectively from 2011 to 2014. [The rest of this page is intentionally left blank] IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
Chart 3-5: Distribution of Total PV Production by Upholstery and Market Share of PLeather Among Automotive Leather Upholstery Companies, 2015
Leather Upholstery 35.4% .._
Source: PLeather and Frost & Sullivan Analysis Chart 3-6: PLeather’s Market Share among Leather Upholstery Companies Based On Locally-Assembled PV with Leather Upholstery in Malaysia, 2011-2015

2011 2012 2013 2014 2015 IJ Pecca rzJ Other Players ~~~~~. ~~~~~~~~~~~_..J Source: PLeather and Frost & Sullivan Analysis [The rest of this page is intentionally left blank] IMR Reporl 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
4 OVERVIEW OF THE AUTOMOTIVE UPHOLSTERY INDUSTRY IN THAILAND Thailand’s economy has been growing rapidly at a CAGR of 7.2% from USD263.7 billion in 2009 to USD373.8 billion by 2014 and is estimated to grow by 3.5% in 2015. During the same period, its population38 grew marginally at a CAGR of 0.4% from 66.5 million to 67.7 million. Thailand’s population is becoming more affluent with GDP per capita 39 rising at a CAGR of 6.9% from USD3,979 in 2009 to USD5,561 in 2014. It has been observed that increasingly wealthy population leads to increase in vehicle ownership4o. The sales of new passenger cars in Thailand have increased nearly three-fold from 230,037 units in 2009 to 411,402 units in 2014, growing at a CAGR of 12.3%. According to Frost & SUllivan 41 , a favourable industry trend is the steady rise in sales volume of PV with larger engine capacitl2 at a CAGR of 11.2% from 43,094 units in 2009 to 73,383 units in 2014. These larger capacity engines are typical of midsize and large vehicles of which the interior of the vehicles are fitted with leather upholstery 43. It is clear that these recent trends are favourable to the automotive components and parts industry particularly the leather upholstery industry. 44Thailand is reported to have a favourably conditioned automotive supplier landscape in ASEAN and Interhides PLC is the leading leather upholstery supplier in Thailand. The company’s operations are vertically-integrated from the tannery process to the manufacturing of finished leather products. In 2014, it supplied to more than 30 car models largely comprised of Japanese 45 46and Continental OEMs. Other playersinclude Chai Watana Tannery Group Limited, Trim International Co. Ltd. and Kuru Tannery Co., Ltd. As the industry is dependent on the performance of the automotive industry, it is expected to grow further in tandem with the increase in production capacity of PV spurred by growing domestic and export demand. Thailand accounted for 2.1 % or 1.92 million units of the world’s automotive production in 201547 in which it ranked nineteenth and sixth in global production of PV and CV respectively. The PVand 38 World Bank 39 World Bank 40 Thailand Case Study -Global Report on Human Settlements 2013, for UN Habitat 41 Frost & Sullivan Car PARC Database, July 2015 42 Passenger vehicles with engine displacement of 1,801 cc and more 43 A presentation on “Vehicle Interior Trends and Technologies for 2025” by Johnson Controls, a leading global OEM automotive seat supplier 44 Thailand Board of Investment 45 Maybank Kim Eng Research Report on Thai Auto Parts, June 2013 46 Thai Autoparts Manufacturers Association and Frost & Sullivan analysis 47 0lCA IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FltOST & SUllIVAN
CV 48 segments accounted for approximately 39.8% and 60.2% of Thailand’s automotive production in 2015 respectivel/9. The PV production is expected to witness stronger growth than CV with a CAGR of 6.6% from 554,387 units in 2010 to 762,308 units in 2015. Although the brief implementation of the First Car Buyer Scheme 50 by the Thai Government between 2011 and 2012 has stimulated excessive production of vehicles to meet strong domestic demand, the weak macroeconomic conditions coupled with the rising level of household debts have impacted loan growth in various industries including the automotive industry. This caused the weakening of sales for PV and CV from 2013 onwards51 . Chart 4-1: Trends in Volume of Production for Passenger and Commercial Vehicles in Thailand, 2010-2015E Ql E :::l  3,000 2,500  r . 31% ———‘?­CAGR Total Volume _o! .:!~~~~ ~<:~:. -.: ———­—-­ (5  >-­l:.l!!0’­._ l:  2,000  ‘t):::l :::lO  1,500  “‘Co 0 0… ::.­c..  1,000  I9 0 I­ 500  0  2010  2011  2012  2013  2014  2015E  L-..,.  •  III!I Commercial Vehicle .~  III Passenger Vehicle  ..J
Source: OlGA, TAlA and Frost & Sullivan Nevertheless, the automotive industry in Thailand has long been export-oriented. The automotive manufacturing and components industry has grown rapidly since the late 1990s as it swiftly emulated the Japanese approach in strengthening the industry’s integration in the global automotive supply chain52 . The industry, which is dominated by the Japanese OBMs, is catalysed by the Thai Government’s total liberalisation of the sector53 with accommodative fiscal incentives and low corporate tax rate environment. 48 Passenger vehicles segment in Thailand comprised of Passenger Cars and Pick-up Trucks 49 TAlA 50 Allowed First Car Buyers to receive up to THB100,OOO (approximately USD3,333) in tax refund at the time 51 Federation of Thai Industries -Monthly News Update, August 2015 52 JBICI Review No. 11 53 According to Thailand’s Board of Investment, there is no restriction in foreign ownership, local content, export volume and foreign currency IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SUllIVAN
The regional economic integration of the ASEAN Economic Community also enhanced Thailand’s prospect as an attractive gateway to penetrate ASEAN countries that has none or low automotive manufacturing base. Approximately 55.9% of the total automotive production in Thailand is being exported in 2014 with Asia Pacific commanding the major share of the export volume with 43.1 %54. The export market too had a major effect on the automotive leather upholstery industry as the premium midsize and large vehicle segments commanded sizable export value of US02.4 billion or 35.7% of US06.6 billion in total PV exports in 201355 . In fact, the elimination of import tariff on automotive parts and components within ASEAN in 2010 has accelerated the industry linkages within the region particularly with Malaysia, Indonesia and Philippines. The Japanese OEMs have progressively expanded their manufacturing footprint across ASEAN following the massive floods in 2011 which has caused severe disruption to automotive production and its supply chain56. Hence, it is the Japanese OEMs that become a critical enabler in the sourcing of automotive leather upholstery within the region particularly from Malaysia through the POI segment, given that it does not require a local manufacturing base. It is evident that the automotive leather upholstery industry stands to gain from these recent developments. As accommodative automotive national and regional policies are expected to continue in the near future, the nation’s macroeconomic growth factors and rising demand for the larger PV segment, which led to higher sales of premium vehicles, are expected to drive the industry forward. [The rest of this page is intentionally left blank] 54 According to the Thailand Board of Investment 55 Compiled from UN Comtrade Database, including parts and accessories 56 2012 White Paper on International Economy and Trade, published by Japan’s Ministry of Economy, Trade and Industry (METI) IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F itO S T & SULLIVAN
5 OVERVIEW OF THE AVIATION UPHOLSTERY INDUSTRY IN MALAYSIA The civil aviation industry in general encompasses a network of commercial aircraft operators, airports, and manufacturer of aircrafts and their components. Since 2000, the Malaysian aviation sector grew significantly, dovetailing the progressive liberalisation of air services in regionS? Total passengers handled in Malaysian airports58 have recorded strong growth at a CAGR of 9.9% from 58.4 million in 2010 to 85.1 million in 2014, while it stands at 63.8 million as of September 2015. In the same period, total commercial aircraft movement59 in Malaysian airports has increased at a CAGR of 9.1% from 590,024 aircrafts in 2010 to reach 834,538 aircrafts in 20146°, while it stands at 647,813 aircrafts as of September 2015. The growing middle class and fleet expansion of Malaysian-based airliners especially the Low Cost Carriers (“LCC”) have made air travel accessible to the larger population. Based on publicly available publications, Malaysian Airlines Berhad (“MAB,,)61 (formerly known as Malaysia Airlines System Berhad 62) along with Airasia Berhad and Airasia X Berhad (“Airasia”) 63 collectively 64operate approximately 336 aircraftsas of 2014. Liberalisation in air services is expected to further augment regional and international connectivity. Total international passengers handled in airports throughout the country recorded similar growth at a CAGR of 9.7% from 27.6 million passengers in 2010 to 40.0 million passengers in 2014, against total domestic passengers with a CAGR of 10.0% from approXimately 30.8 million passengers to 45.1 million passengers in the same period. This is reflective of the larger trend globally where more commercial aircraft operators competing over lucrative international routes especially in Asia Pacific driven by the fast growing tourism industrl5. Although it has been 57 Commitment to liberalisation guided by the WTO agreement and the ASEAN multilateral Open Sky policy 58 According to statistics reported by the Ministry of Transportation which excludes transit passengers and covers airports operated by the Malaysian Airports Holdings Berhad and Senai Airport Terminal Services Sdn Bhd 59 Refer to movement of an aircraft take-off or landing at an airport. For airport traffic purposes, one arrival and one departure is counted as two movements 60 MOT 61 Excludes 6 Viking Air DHC6 400 Series Twin Otter 62 Prior to September 1, 2015 63 Includes Airasia X Berhad 64 Malaysia Airlines Berhad and Airasia Berhad 65 International Air Transport Association (lATA), International Civil Aviation Organisation (ICAO) and Frost & Sullivan Analysis 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’dj FROST & SULLIVAN
resilient to external factors such as volatile fuel prices, consumer demand for aviation sector is acutely price-sensitive66. Chart 5-1: Total Aircrafts Operated by MAS and AirAsia, 2009-2014
Note: Estimates on AirAsia X Berhad’s aircrafts for 2009 is based on known flight destination for the year. Latest available data on aircraft fleet from annual reporls of MAB and Airasia are until 2014. Source: Malaysia Airlines Berhad, Airasia Berhad, Airasia X Berhad and Frost & Sullivan Given that, there is increasing emphasis by global airliners especially with the LCGs on the design of the aircraft interior particularly on seating arrangements and selection of upholstery such as leather 67 in view of improving traffic through enhanced consumer experience while inducing greater cost efficiency. Being a highly-regulated industry, the aviation upholstery including aviation leather must comply with the stringent regulations on flammability standards 68 for all permanently attached cabin contents to an aircraft promulgated by the Federal Aviation Administration69 . There is greater proposition for leather as the preferred aviation upholstery especially for the long­haul flights. The highly-engineered aviation leather is lighter and more durable than conventional fabric upholstery thus reducing maintenance costs due to wear and tear. It also diminishes airport charges with quicker cabin preparation turnaround and lighter take-off weight. 66 International Air Transport Association (lATA) and Airbus Group 67 Aircraft Interiors International, a leading publication serving the industry 68 FAA Federal Aviation Regulation -Section 23.853 69 A United States agency that is primarily responsible for the advancement, safety and regulation of civil aviation IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’dj FRO S T & SULLIVAN
The Malaysian-based airliners particularly MAB and Airasia are also catching up with the global trend. AirAsia X has retrofitted its aircraft designated for long-haul flights with leather seats since the delivery of their first aircraft in 20097°. In 2012, MAB announced that its fleet of Airbus A380s and Boeing 737-800s will be equipped with full leather upholstery71. In addition, leather upholstery will also be used on new and refurbished headrests on its fleet of Airbus A330. In July 2013, MASwings, a wholly-owned subsidiary of MAB, purchased their first new ATR 72-600 turboprop aircrafts fitted with leather seats in a dual class configuration for the East Malaysia routes within Sabah and Sarawak72. With the expansion of the aviation industry underscored by the airliners’ pursuit for greater cost efficiency and enhanced customer value proposition, the demand for the aviation leather upholstery will drive future growth. [The rest of this page is intentionally left blank] 70 Airasia public relation article titled “Finally, New Seats for Airasia X” published on 16th February, 2010 71 Published online on 25 September 2012 through the official publication of ADS, a trade organization that advance the United Kingdom’s Aerospace, Defense, Security and Space industries 72 Malaysia Airlines Annual Report 2013 IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) J<. l’ “.:.’.:. z,’;_,~F nO·”T” & SULLIVAN 6 FUTURE OUTLOOK AND PROSPECTS FOR PLEATHER Malaysia has achieved a TIV of 666,674 units in 2015 and it is projected to grow to approximately 717,444 units in 2020, registering a CAGR of 1.5% over the same period by the MM. The demand for the automotive industry is expected to be driven by the rising income level of consumers, inefficient public transportation system, Malaysia’s car-centric culture and promotional activities undertaken by the various manufacturers and distributors. These factors will collectively drive TIV, and consequently the automotive industry forward. Chart 6-1: Projected TIV in Malaysia, 2015-2020F 740 CAGR 2015 -2020F: 1.5% __ ——‘7Ql E 720 . –_ ——-­::J ‘0 >~ 700r:::£lo .­._ r::: t) ::J ::JO 680 “‘Co 00… ::..­… 0 I-640 620 600 2015 2016E 2017F 2018F 2019F 2020F

2015 2016E 2017F 2018F 2019F 2020F 666,674 650,000 669,500 “””’·”””'”..v/,,.,.=~~w,””-­686,200 702,000 717,444
-2.5 -3.0 2.5 2.3 2.2
Source: MAA and Frost & Sullivan IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
& SULLIVAN
The positive outlook of the automotive industry will provide a promising growth prospect for PLeather. Increasingly wealthy population, supportive institutional policies and greater localisation of content by non-national OEM are the key drivers for the automotive leather industry. Non­national OEM has pursued various avenues to strengthen its availability and to achieve more competitive pricing including venturing into local CKD assembly of selected models and increasingly implement greater localisation of contents or parts from Malaysia and other ASEAN countries73. According to MAA, sales of PV by non-national OEM increased at a CAGR of 1.2% compared to -1.8% for national OEM between 2010 and 2015. With the non-critical component or accessories such as leather upholstery becoming the preferred LC items, the automotive leather upholstery industry is fast becoming an integral part of the non­national and premium OEM’s strategy to achieve competitive pricing for both CKD and CBU segments. This bodes well with the revised NAP which aims to develop high value-added manufacturing activities in selected segments particularly the luxury cars 74 segment. The Automotive Supply Chain Development Roadmap of the NAP has earmarked RM295.0 million to develop world-class Malaysian automotive vendors between 2014 and 2020, which Frost & Sullivan believes PLeather is well-positioned to reap the benefits from this initiative. According to Frost & Sullivan, it is estimated that about 35.4% of the total local PV production in 2015 came with leather upholstery. Frost & Sullivan notes that there is favourable growth potential with the rising sales of affordable passenger car models launched in 2014 such as Proton Iriz and Perodua Axia and the selective facelift models of Perodua Myvi equipped with leather upholstery. For the overseas business, PLeather is also expected to benefit positively as the demand for automotive leather upholstery products is growing faster than the output of local production. This will place PLeather in a strategic position to capitalise on this growing market. Hence, the outlook is strongly favourable as the demand for automotive leather upholstery is well­supported with the growing sales of PV annually and is even greater when its sales are less optimistic. As an example, Perodua’s adoption of leather upholstery for its Myvi line-up prior to the release of a redesigned version in 2011 helped the OEM to retain its market share. All of the above factors bode well for PLeather as it looks to strengthen its position as a key player in the automotive leather upholstery industry in Malaysia, especially with its commanding market share of 67.7% in 2015 according to Frost & Sullivan. Demand will remain strong as Malaysia’s automotive industry continues to undergo further liberalisation and transformation. 73 Under the ASEAN Free Trade Agreement (AFTA”) 74 Vehicles with on-the-road prices not less than RM150,OOO IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) F ReO S T & SULLIVAN
7 RESEARCH METHODOLOGY 7.1 INTRODUCTION Frost & Sullivan has refined its research methodology over many years of experience, having researched diverse markets in many different life cycles-from the embryonic to mature. Frost & Sullivan’s reference pUblication, Industrial Market Engineering (Publication 5168-80), explains the research methodology in great depth. Frost & Sullivan’s Market Engineering system: • Focuses on challenges, problems, and the needs of industry participants
• Is based on primary market research, and not on secondary or previously pUblished ones
• Focuses on detailed, comprehensive, “bottom-up” data collection techniques
• Is based on measurements

7.1.1 Market Engineering Forecasting Methodology 7.1.1.1 Overview One of the most common questions that Frost & Sullivan receives from its clients is, “What is your forecasting methodology and how can I assess its level of credibility and accuracy?” This section on Frost & Sullivan’s proprietary Market Engineering forecasting methodology has been added to answer this question. This methodology integrates several forecasting techniques with the Market Engineering measurement-based system. It relies on the expertise of the analyst team in integrating the critical market elements investigated during the research phase of the project. These elements include: • Expert-opinion forecasting methodology
• Delphi forecasting methodology
• Integration of market drivers and restraints
• Integration with the market challenges
• Integration of the Market Engineering measurement trends
• Integration of econometric variables
• Integration of customer demographics

IMR Report 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FRO S T & SULLIVAN
The Market Engineering forecasting methodology is a seven-step system that maximises the credibility and accuracy of the forecasts. These are: 7.1.1.2 Market Engineering Research Process Completed The Market Engineering research process provides the navigational measurements of current market position and trends, which become the basis of the forecast. 7.1.1.3 Measurements and Challenges Analysed over Time Measurements and challenges are analysed over time to provide additional insights into their potential impact on the market size and development. 7.1.1.4 Identification ofMarket Drivers and Restraints At this stage, the analyst specifies the factors that will drive the market forward in terms of revenues and determines the elements that will inhibit growth. 7.1.1.5 Expert-Opinion Integration with Analyst Team The interview process includes a variety of industry experts: competitors and key customers. These experts’ opinions on the direction of the market are integrated with the data and analysis already created. 7.1.1.6 Forecasts Calculated At this stage, analysts collect the market data needed to create the initial forecast scenarios. Each scenario is assessed to determine the most probable outcome for the market size. For example, the forecasts are matched to the leading economic indicators and drivers for each specific industry. 7.1.1 ..1 DELPHI TECHNIQUE INTEGRATION, IF NEEDED If data and forecast scenarios conflict, it becomes necessary to again discuss the market forecasts with the industry experts interviewed in the research process. 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) FROST & SULLIVAN
7.1.1.7 Quality Control within Research Deparlment Once the forecasts are integrated into the market section, they are verified by the other team members in the industry research group (IRG), and the research director. The forecasts are also ensured for mathematical accuracy and internal consistency by the final review preparation department and the editing department. 7.1.1.8 Strategic Significance of the Market Engineering Forecast The Market Engineering forecast can have a significant impact on the business in several areas. Therefore, it should be integrated into business planning, strategy development, and decision­making. 7.1.1.9 Judging Credibility and Accuracy of Market Engineering Forecasts Frost & Sullivan forecasts integrate the key elements that typically have an impact on market growth and size. No one can consistently make accurate forecasts, but market research has a proven track record in making accurate projections of market trends and growth rates.
The key test of credibility is whether the analyst team had integrated all the critical elements of the market into the forecast. If all such elements are included in the analysis, then the forecast has strong credibility.
The accuracy of a forecast to within a 10.0 percent range over a three-year period is not vitally important. What is important is that the overall trend be forecast correctly, because it drives the appropriate strategy and subsequent decisions. The Market Engineering forecasting methodology has consistently proved to be an accurate and reliable forecasting tool, particularly for high technology and industrial markets.
All the currencies reported are specified in US dollars, unless indicated otherwise. Over the last 40 years, Frost & Sullivan has had an impressive track record in forecasting emerging markets, new technologies, and shifts in existing markets. Unexpected events have
significantly changed the marketplace, but these do not occur often, and they merely delay the development of the market, rather than destroy it. Frost & Sullivan always advise clients that its forecasts should not be the exclusive basis for
decision-making at their companies. It should be an additional source of input and a support tool
for their work in investigating the market and creating a winning strategy. In the final analysis, decision-making is based on the general trend of the forecast, not its absolute accuracy.
It is important to accurately determine the range of the forecast, as it will have the greatest impact on the investment or strategy decision. Typically, the decisions revolve around questions such as:
10. INDEPENDENT MARKET RESEARCH REPORT (Cont’dj ..•.’-.•…….
·U~’PROST “”SULLIVAN Should the company enter the market? Should the company increase or decrease its investment? Should the company improve its performance in the market? These decisions do not require accuracy within a few percentage points. They require accuracy in
the determination of the general trend category. All business decisions carry some risk. Market Engineering increases the probability that the decisions will be correct, but it does not eliminate all risks.
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