4. INFORMATION ON THE PMCB GROUP (Cont’d) 4. INFORMATION ON THE PMCB GROUP (Cont’d) 4.11 Industry Overview 4.11.1 Overview ofthe Malaysian Economy The Malaysian economy entered 2002 on a stranger footing, after recovering from a downturn experienced in the last two quarters of 2001. Riding on the back of the US economy and a stronger outturn in the later half of 2002. the Malaysian economy is expected to register a higher but moderate growth in GOP. The year began with optimism as world economy recovered, led by the US on account of better demand for housing, motor vehicles. increased public expenditure on defence and turnaround in demand for electronics. The high expectations of a strong recovery for the year were, however, marred by a series of uncertainties, particularly a weak second quarter performance, reflecting a slower US GOP growth and lower corporate earnings. With globai economic growth intact and supported by a strang domestic sector, Malaysia’s economy is expected to further strengthen, particularly during the second half of 2002. The immediate and major challenge for 2002 is sustaining growth and strengthening macroeconomic fundamentals, past-September 11. The fragile and vuinerable global recovery necessitated a mildiy expansionary fiscal stance in order to ensure the growth momentum is sustained. Although, the Government is committed to begin with the move towards a balanced budget in the medium term, abrupt reduction of public sector expenditure is deemed premature in the light of the uncertain external outlook. The higher GOP growth of 4%-5%, driven by the domestic sector for the second year running, is expected to emanate from increasing contribution of the private sector. The services sector continue to be the leading contributor to economic growth adding 3 percentage points to growth, followed by the manufacturing sector with 1.6 percentage points arising from the turnaround and improvements in global demand for information and ICT products. Spurred by improvements in external demand for eiectronics exports as well as higher palm ail and rubber prices. private consumption is projected to expand by 5.9% (2001 :2.8%), with private investment recovering by 1.8% (2001:-19.9%) Malaysia’s leading edge, however, lies in the highly skilled, educated and trainable labour force with increasing number of knowledge-workers for the high value-add ICT companies. In addition, the annual dialogues between the public and private sectors held to resolve private sector concerns are fine examples of a pro-business and investor-friendly Government in line with the concept of Malaysian Incorporated. This continuous exercise is expected to further facilitate business activities in the country. With technological enhancement within the environment of the upcoming new economy, casts of doing business will be invariably reduced, thereby further increasing the country’s competitiveness. With the mild recovery intact in 2002 and expected to gather momentum in 2003, the world economy is projected to register output growth of 3.7% with trade expanding at 6.6%. The US is forecast to chart a stronger GOP growth of 2.6%, while the euro area is expected to further improve by 2.9%. The Malaysian economy, with the stronger macroeconomic fundamentals already in piace and complemented by more resilient corporate and financial sectors, is now poised to benefit from the muchimproved global economic environment projected for 2003. Output expansion is anticipated in all sectors of the economy, with GOP envisaged to chalk 6%-6.5%, arising from a broader based economy with growth emanating from a more pronounced role of a revitalized and dynamic private sector. The manUfacturing sector is expected to conlinue its expansion to record 8.5% increase in output and contribute 2.6 percentage points to GOP growth while the services sector, with a projected increase of 5.9%, remains the major contributor to growth with 3.3 percentage points. The construction sector is forecast to expand 4.5% while the agriculture and mining sectors are envisaged to improve by 3.4% and 2.5%, respectively. 62
4. INFORMATION ON THE PMCB GROUP (Cont’d) The Malaysian economy is envisaged to strengthen in 2003, led by further improvements in both exlernal and domestic demand. On the supply side, all sectors of the economy are expected to register positive growth rates. The anticipated growth in the global economy and world electronics demand wm contribute to a more robust and broad-based growth in the manufacturing sector. Overall, real GOP growth is expected to accelerate to 6%-6.5% in 2003. (Source.’ Economic Report, 200212003) According to the Malaysian Institute of Economic Research (“MIER”), given the uncertain threats of Severe Acute Respiratory Syndrome (“SARS”) and the aftermath of the Iraq War. the Malaysian economy may be negatively affected as well. MIER projected Malaysia’s GOP growth to decelerate to 3.7 per cent in 2003, in viewofa foreseeable weakness in the external sector and its impact through domestic linkages. With increased external demand, coupled with further revival of the private sector, the Malaysian economy could expand at a faster pace of 5.4 per cent in 2004. In the worse case scenario, there could be a sharp downturn in the global economy and domestic demand that would dampen Malaysia’s economy performance. (Source .’ The Malaysian Institute of Economic Research (MIER), Short-term Economic Outlook, 16 April 2003) 4,11.2 OveNiew of the Malaysian Manufacturing Sector Signs of a turnaround in the manufacturing sector have become more visible in the second quarter of 2002. After experiencing 11 months of consecutive decline, output of the manufacturing sector has improved from -11% recorded In the fourth quarter of 2001 to bounce back with three straight months of positive growth since April 2002. A steady recovery of the sector is anticipated for the rest of the year. on account of a revival in external demand and sustained growth in domestic consumption. Manufactured exports are expected to stage a turnaround in 2002, in view of the improving outlook on external demand. particularly in the US and the Asia Pacific region as well as the anticipated recovery of the global electronics industry. With a gradual global economic recovery and a more competitive Ringgit arising from the softening of the US dollar vis-a vis the yen and the euro as well as regional currencies, manufactured exports are poised for a stronger upturn in the second half of the year. For the year as a whole, manufactured exports are expected to turnaround to register a positive growth of 5.4%, driven by electrical and electronics (“E&E”) exports, which account for about 70% of total manufactured exports. E&E exports are expected to grow by 6.9% (2001: -13.5%). Similarly, exports of the non-electronic industries are expected to expand by 1.9% (2001: -2.7%), particularly those prOducing food, chemicals and chemical products, non-metallic products and machinery and transport equipment. (Source.’ Economic Report 200212003) The manufacturing and services sectors will continue to be the major contributors to the growth in the Eight Malaysian Plan period. The manufacturing sector is expected to grow at an average rate of 8.9% per annum, with its share to GOP increasing to 35.8% by 2005. With technology transfer and greater R&D efforts, more linkages are expected to be forged between the larger enterprises and small medium enterprises thereby contributing towards sustained growth of the manufacturing sector. 4. INFORMATION ON THE PMCB GROUP (Cont’d) Efforts will continue to be made to enhance the development of new resources of growth in order to diversify and broaden the manufacturing base. The strategic thrust will be to promote greater inter·industry and sectoral linkages in line with industry clusters development approach of the Second Industrial Master Plan. In order to promote the development of the dynamic industrial clusters. the key factors such as critical mass of the entrepreneurial firms, networking capabilities. technology management, technology transition and skill formation will be addressed. The challenge is to generate cluster growth dynamics that mutually adjusts one factor to the other along a high growth path. Greater coordination is required at the state level to stimulate the growth dynamics of clusters and promoting system links within individual region cluster. (Source: Eighth Maiaysia Plan 2001-2005) 4.11.3 Overview ofthe Semiconductor Industry/Automation Industry Year 2001 was one of the most difficult years experienced by the semiconductor industry. Global economic conditions withered resulting in the collapse of the enduser electronics markets. The terrorist attacks on 11 September 2001 had exacerbaled an already uncertain business environment. As a result, the year ended with speculation about a protracted recovery cycle. However, year 2002 started with some encouraging first quarter results. World silicon wafer area shipments improved by almost 15% during the first quarter of 2002 when compared with fourth quarter of 2001 area shipments. The silicon wafer area shipments were 1,011 million square inches in the first quarter of 2002. up from the 878 million square inches shipped during the fourth quarter of 2001 and the second quarter in a row In which wafer shipments increased sequentially. Silicon wafer is the fundamental building materials for semiconductors. which in turn, is vital components of virtually all electronic goods, including computers, telecommunication products and the consumer electronics. Semiconductor Equipment and Materials international (“SEMI”), the global industry association of companies that supply manufacturing technology and materials to the world’s chip makers, reported worldwide semiconductor manufacturing equipments billings of USD4,05 billion in the first quarter of 2002. The figure is 64 percent below the same quarter a year ago and one percent below the billings for the fourth quarter of 2001. SEMI also reported worldwide equipment orders of USD4.15 billion in the first quarter of 2002. The figure is 36% below the same quarter a year ago but 35 percent above the orders figure for the fourth quarter of 2001. While the first quarter results emphasize the sharp decline in the worldwide semiconductor equipment market over the past year, on sequential basis, the data also demonstrate that the market has stabilized, Although clear signs of the new market driver remain elusive, the latest monthly data refiects the first sequential worldwide increase in 17 months, prOViding further evidence that the industry’s worst cyclical downturn has bottomed and is forming a new base, (Source: Semiconductor Equipment and Materials International. March 2002) THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 4. INFORMATION ON THE PMCB GROUP (Cont’d) The table below shows the data on billings, bookings and book-to-bill ratio up to March 2003: Year 2002 April May June July August September October November December Year 2003 January February March April (preliminary) Billings (3-month Average’ USD Billion 814.6 869.6 927.1 969.1 994.8 1.044,6 999.9 976.4 878.3 784.4 777.7 857.1 853.8 Bookings Book-to-Bill Ratio· (3-month Average) USO Billion 995.6 1,105,2 1,171.3 1,181.9 1,016.8 831.6 778.6 776.7 626.5 739.0 760.6 777.3 737.2 1.22 1.27 1.26 1.22 1.02 0.80 0.78 0.80 0.94 0.94 0.98 0.91 0.86
The SEMI book·to-biJl is a ratio of 3-month moving average bookings to 3-month moving average bi!1ings for the North American semiconductor equipment industry, Abook-fa-bill ratio of 1.22 (re. April 2(02) indicales that for every $100 worth ofproduct billecl S122 worlh of orders were bOOked. 1. “Billings”refertobillings bythemanufacturers ofsemiconductorequipment.
2. “‘Bookings· refer to monthly orders issued by customers to the manufacturers 01 semiconductor equipment.
3. “Book to Bill Ratio” refers to the ratio of new orders received from customers over products biJIed to customers during the month.
According to the respective press releases by SEMI, the developments in billings, bookings and book-to-bill ratio up to April 2003 can be summarised as follows: (a) “The July bookings data likely reflects renewed questions about the robustness of the economic recovery and the prospects for the consumption of electronics goods. The data is consistent with the recent announcements of reduced capital spending plans by some global chipmakers and supports the consensus of industry analysts projecting market recovery in 2003”. (Source: SEMI press release dated 20 August 2002).
(b) “The decline in orders was anticipated considering recent announcements from chip and capital equipment manufacturers about the poor visibility for the semiconductor industry in the second half of this year. While bookings are considerably higher than one year ago, the overall order trend is not prOViding any signal of substantial further improvement this year” (Source: SEMI press release dated 18 September 2002)
(c) “As has been the case across the technology sector, the persistence of poor forward visibility continues to hamper the ability to forecast the timing of the next upcycle in capital spending”. (Source : SEMI press release dated 17 October 2002)
(d) ‘While there are indications that capacity has been added throughout the current downturn at leading-edge fabs. broader-based capacity expansion has been on hold. This trend will continue into 2003 until semiconductor manufacturers have stronger signals regarding the outlook for chip demand”. (Source: SEMI press release dated 21 November 2002)
65 4. INFORMATION ON THE PMCB GROUP (Cont’d) (e) “The current bookings levels, down from highs earlier in the year, reflect the uncertainty facing the semiconductor industry as the New Year approaches, although the overall mood in the industry is that conditions will improve in 2003”. (Source: SEMI press release dated 18 December 2002)
(f) “The increased bookings level suggests further cap~aJ equipment market stabilization. While the bookings fIQure is well below the peak levels in 2002, the bookings and billings figures are nearing parity, which is seen as a positive trend”. (Source: SEMI press release dated 21 January 2003)
(g) “North American suppliers of semiconductOf manufacturing equipment continue to see a weak industry environmenr….The current outlook remains uncertain with few indications of a strong rebound in the immediate future”. (Source: SEMI press release dated 18 February 2003)
(h) “Bookings of new semiconductOf manufacturing equipment have remained essentially flal for the last six months and as a result, a number of equipment manufacturers have announced recently plans for further consolidating and restructuring of operations and product offerings” (Source: SEMI press release dafed 18 March 2003)
(i) “Signs of some improvements in corporate earnings and in the geopolitical environment provide further hope for recovery this year, however, we remain cautious looking out over the near term….:’Orders for final manufacturing equipment have increased for three consecutive months and the book-to-bill ratio for the segment has been above parity for two straight months” (Source: SEMI press release dafed 17April 2003)
(j) “Despite hopefui indications in last month figures, orders for new semiconductor manufacturing equipment remain at relatively low levels…….The April data reflects continuing uncertainty in the broader markets in regards to recovery in consumer and commercial spending” (Source: SEMI press release dated 15 May 2003)
Results based on a survey of global semiconductor manufacturers by SEMI indicate a modest recovery is expected to begin next year, growing 15% in 2003 to USD21.8 billion and 21% in 2004 to USD26.4 billion. Survey results indicate an expected flattening of the market in 2005, with growth of 4% to USD27.5 billion. The outlook for a USD3.0 billion market expansion fOf equipment in 2003 fits the prevailing sentiment that capital expenditures will resume in the latter part of the year as inventories are bumed-off and manufacturing capacity utilisation increases. e Semlcon uc Of aOl1a ,QUIDment M rk tb E tSeQmenWortdwiddte·tlE a e OY =QUlpmen 2005 Forecast2002 Estlmato 2003 Forecast 2004 Forecast2001 (Actual) USD % USD %USD % USD %Equipment Type Bil~on ChangeBi.ion Change Bi.ion Change Bi.ion Change 19.55 4.6Wafer Process 13.44 (36.0) 15.41 14.7 18.69 21.320.99 1.44 2.7Assembly & Packaging 0.99 (30.2) 1.13 14.6 1.40 23.61.41 Test 4.04 2.93.40 2.74 (19.7) 3.20 17.0 3.93 22.8 1.79 (19.6\ 2.47 3.5Other 2.03 13.0 2.39 18.02.23 27.51 4.1Total Equipment
18.95 (32.4) 26.41 21.328.03 21.77 14.9 , The survey results are given In tStmS of mar1(et size in billions of dollars and percentage of growth over the prior year. (Source: SEMI press release dated 4 December 2002) 66
4. INFORMATION ON THE PMCB GROUP (Cont’d) To the best knowledge of the Directors of PMCB, the semiconductor industry relies heavily on imported automated equipment. We believe a substantial portion of the equipment used by the semiconductor players especially the MNCs are imported mainly from Japan, USA, Switzerland and Korea as these equipment are not easily available locally due to scarcity of local manufacturers. Hence, if local automation company is able to upgrade its manufacturing capabilities similar to what PMCB has achieved, we are able to provide an alternative source for the players to buy local equipment which is less expensive. The market demand is huge if local automation companies can produce high quality and technology equipment As for the raw materials and components consumption, we beiieve more than 50% of the requirements are imported. The Directors of PMCB are also of the opinion that the equipment used by the semiconductor industry is not easily substituted. However, most of the raw materials and components used can be easily substituted and obtained locally through local agents and distributors in Malaysia. If not available locally, it can be easily sourced from overseas. The Directors believe that there are not many local automated equipment manufacturers having the same set-up and capabilities similar to that of PMCB Group. Hence, there is not much local competition in Malaysia. Based on the Directors’ opinion, apart from the normal manufacturing licence, there are no material government laws. regulations and policies that may govern the semiconductor industry and automation industry. 4.12 Prospect and Future Plans of the PMCB Group PMCB Group plans to continue the diversification of its products range using its technological expertise. It will also continue to expand and leverage on its four(4) major product lines:(a) Semiconductor Standard Equipments;
(b) Material Handling System;
(c) Vision Software System; and
(d) Software Automation System.
In addition, the Group also intends to venture into the development of a few new products as follows:(a) Industrial Technology Training System (“ITIS”);
(b) Warehousing Software and Hardware System; and
(c) IT Industries such as Security System and RFID.
THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 4. INFORMATION ON THE PMCB GROUP (Cont’dl IITS is a training system aimed at educating individuals on various technologies that are required to design, build and deploy industrial manufacturing solutions. The IITS architecture is widely deployed and used in various manufacturing industries. It integrates various types of technologies int o one comp rehensive training system as illustrated below:
Each technology is highly diverse and is flexible enough to be used by various industries besides manufacturing which makes it an invaluable tool for individual application for various processes. IITS architecture serves to train an individual on various technologies and showing them the seamless integration that exist between the various technologies. One of the attractive features of the tITS is that it provides individuals with hands on experience that will enhance the understanding of the concept and methodologies of each technology. This hands on experience also allows individuals to understand better the practical applications of these technologies, thus enabling them to troubleshoot problems and derive appropriate solutions, particularly during the implementation stage of the various technologies. Warehousing Software and Hardware SYstem and IT Industries such as Security System and RFID The Warehousing Software and Hardware System as well as the Security System and RFID are also products currently under development, which will add to the range of existing products of PMCB Group. The warehousing system provides a comprehensive warehouse management tool for public bonded, distribution and manufacturing warehouses. The system enables inventory accuracy, handles vendor managed inventory processes, reduces carrying costs and streamlines complex Business-to-Business (“828”) fulfilment operations with business partners as well as suppliers. For convenience and mobility, PMCB Group’s warehousing system is able to send out data to various systems, which include desktops, handheld devices and cell phones. The system also provides various interface modules to connect to different system or processes such as messaging, B2B, electronic logistic (“eLogistic”), electronic custom form (“eCForm”) etc. The system also has a tight integration with Microsoft Excel to provide more flexible means to manipulate and generate reports utilising pivot tables and pivot charts. 68 4. INFORMATION ON THE PMCB GROUP (Cont’d) PMCB Group strives to become a renowned international supplier of automated machines and systems solution provider. To remain resilient in the current competitive environment, PMCB Group will continue to develop up-to-date technology and quality products with least cost and supported with good after sales service. PMCB Group shall continue its R&D activities in order to minimise products cost and to improve product functional capabilities and features. The Group’s export sales contributed approximately 55.60% of the Group’s turnover in 2002 and expected to grow in the future. It is the Group’s aspirations to increase the export sales to more than 50% of the Group’s turnover. PMCB is currently seeking bUsiness opportunities to secure orders for its new range of products. If an order is secured, PMCB is able to roll out the new products within a relatively short period of time. It is also the intention of the Group to strengthen its position in the local market with further diversification of its customer base as well as to build up international presence in the global market. Thus, to cater for this expansion, the Group has embarked on the following:(a) Marketing Strategy The Group is determined to maintain and expand its market share by continuously setting-up and expanding its sales and marketing network into major cities around the world. PMCB Group believes that by achieving global player status coupled with a diversified product range, it will continue to be an important supplier of automation technology for the semiconductor, manufacturing and IT industries. Currently, the Group has appointed four(4) distributors to service its customers at their respective locations in the southern region of Peninsuiar Malaysia, Singapore, Taiwan and China. PMCB Group has set up a sales and service office in Shanghai, China to spearhead its export initiatives into China. As more and more companies are moving and/or expanding their operations to China, PMCB’s presence in China, will be invaluable in assisting the Group’s establishment in the international arena. PMCB Group will continue to put efforts in forming manufacturing alliances with Original Equipment Manufacturers by identifying their needs and requirements. In addition to the current semiconductor and computer industries that PMCB Group supplies mainly to, the ability to develop niche products specially to cater for specific industrial use, via continuous R&D activities, will also enable the Group to penetrate new industries such as the automobile, warehousing and IT industries. The Group will continue to maintain good relationships with its customers who are mainly MNCs. Such close ties have enabled the Group to be at the forefront of acquiring information such as future trends and requirements of the industry. With such knowledge, the Group is able to develop products that meet international demand and standard, thus, enabling the Group to make strong presence in the local and international markets. In order to increase awareness of its products and services, PMCB Group regularly participates in local and overseas exhibitions. The Group also has its own websites to help promote and market its products.
4. INFORMATION ON THE PMCB GROUP (Cont’d) (b) Technology Superiority, High Quality and Cost Competitive Products To remain resilient in the competitive environment, PMCB Group will continue to develop advance technology and high quality products with minimal cost and supported with good after sales service. The Group shall continue to invest in R&D activities in order to drive down the products cost and improve the functions, features and capabilities of the products. Continuous R&D activities are also undertaken to reduce manufacturing time so that products can be delivered to the customers at the shortest possible time. PMCB Group is using its technology and experiences especially its software knowledge to produce intelligent and automated solutions for its customers. Among the products currently under development are the Traffic Control System and warehousing system which utilises computer intelligent control system, RFID control and monitoring system for heavy industries such as car manufacturing industry, and for security control system such as biometrics, door access and video streaming monitoring system. Biometrics is the automated use of physiological or behavioural characteristics to determine or verify identity. The solutions offered by PMCB Group utilises biometrics technology to replace conventional security techniques such as passwords and encryptions mechanisms. The system replaces password authentication with fingerprint biometrics authentication to secure desktop, server logons, file and folder access. It also provides means to send secured electronic mail (“e-mail”), which is encrypted with biometrics fingerprint signature and to open the said e-mail, the recipient has to provide his biometric fingerprint signature as well. (c) Excellent and Timely Customer Service Response The Group believes that one of the key factors in maintaining and expanding its existing customer base is to provide excellent and timely after sales customer services. In order to achieve this objective, appropriate systems and programs have been put in place such as having 24 hours technical service team within the vicinity of customers’ operational sites. In areas not covered by Internal service team, reliance will be placed on the Group’s distributors who are required to assemble a full time service team who are well trained and guided on how to service and operate the Group’s machines and equipment. The Group’s response time commitment to its customers is less than 12 hours. Furthermore, to facilitate ease of access by customers, the Group has established a Customer Care Division where customers can contact its Customer Care Consultants through a dedicated hot line service to make enquiry with regards to product enquiry and related machine and equipment problems. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK