Industry Overview

7. EXECUTIVE SUMMARY OF THE IMR REPORT 7. EXECUTIVE SUMMARY OF THE IMR REPORT PROTEG£ ASSOCIATES SDN BHD SUITE e-06-06, PLAZA MONT’ KIARA 2 JALAN KIARA, MONT K1ARA 50480 KUALA LUMPUR, MALAYSIA GEN +603 6201 9301 FAX +603 62017302 www.protege.coln.my o2 AUG 2013 The Board of Directors Solid Automotive Berhad
No.5, Jalan Dataran 5, Taman Kempas, 81200 Johor Bahru. Dear Sirs, Executive Summary of the Strategic Analysis of the Automotive Aftermarket for Parts and Components in Malaysia This Executive Summary of the ‘Strategic Analysis of the Automotive Aftermarket for Parts and Components in Malaysia’ is prepared by Protege Assodates Sdn. Bhd. (“Protege Assodates”) for inclusion in the prospectus of Solid Automotive Berhad (“Solid”) in relation to the proposed listing of and quotation for the entire issued and paid-up share capital of Solid on the Main Market of Bursa Malaysia Securities Berhad. Malaysia Economic Overview The Malaysian economy performed well in 2012 against the backdrop of a challenging international economic environment by recording an annual expansion of 5.6 percent or a real GDP at 2005 prices of RM749.1 billion. A higher growth in domestic demand has been credited as the main factor driving its growth ascension. Real aggregate domestic demand (excluding stocks) increased by 10.6 percent in 2012 as compared to 8.2 percent in 2011 spurred by higher investment spending and consumption. Despite the positive results revealed in most of Malaysia’s key economic indicators for 2012, the Malaysian Government is mindful of the challenging external environment that may affect the growth in the local economy. In the near future, the growth in the Malaysian economy is expected to be anchored again by domestic demand. Bank Negara Malaysia has projected Malaysia’s real GDP at 2005 prices to grow by between 5.0 to 6.0 percent in 2013. 110
7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
6RANL> I f-INANCE , MAR”‘·’ An Introduction to Automotive Aftermarket for Parts and Components Automotive parts and components include all the parts and components required for manufacturing or enabling motor vehicles to function in a desired manner. Automotive parts and components can be divided into braking parts, driving transmission and steering parts, electrical parts and components, engine parts, suspension parts and other parts and components. 1) Braking Braking parts and components are used to control, slow the speed or stop the movement of the motor vehicle by absorbing kinetic energy mechanically or electrically. Examples of braking parts and components are anti-lock braking system CABS”) steel pins, brake lines, brake backing plates, brake boosters, brake proportioning valves, wheel stUds, brake pads, brake drums and brake discs. 2) Driving transmission and steering Driving transmission and steering parts and components are used to change the speed or direction of a moving motor vehicle. Examples of driving transmission and steering parts and components are clutch slave cylinders, fan clutches, gear couplings, needle roller bearings, pressure plates, steering gears, steering shafts, steering stabilisers and transmission gears. 3) Electrical Automotive electrical parts and components have evolved from just basic wmng technologies that were used to distribute power to other parts of a vehicle to a more complex automotive electrical system or architecture found in modern motor vehicles today. These electrical parts and components are able to support increased vehicle content and electrification for facilitating a wide spectrum of functionalities such as safety, security, comfort, infotainment and vehicle operations. There are different types of automotive electrical parts and components as depicted in Figure 1. III 2 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ Figure 1: Types of Electrical Parts and Components in a Motor Vehicle
Automotive Electrical Parts & Components Automotive

Charging Ignition LightingElectrical

System System System
Wiring
Source: IMR Report a) Automotive electrical wiring Automotive electrical wiring comprises of various types of wire harness, connector, device, electrical fuse, flexible electrical wire and fuse block used to fasten one end of an automotive component to the power source device for enabling the bearing of mechanical loads as well as for transmitting communication signals or electrical energy. b) Charging system There are three basic automotive parts and components used in a charging system namely alternators, interconnecting wirings and regulators. A charging system is required to control and regulate the charge in the battery of a motor vehicle. c) Ignition system In an ignition system of a motor vehicle, electric current is used to burn the fuel-air mixture in an internal combustion engine of a motor vehicle. Some of the major automotive electrical parts and components used in an ignition system of a motor vehicle include coil wires, electronic timing controllers, ignition controllers, ignition distributors, ignition switches and spark plugs. d) Lighting system The lighting system of a vehicle provides power to both exterior and interior lighting and signalling devices or components to generate automotive lights that can provide 112 3 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ the illumination and enhance the visibility of an automobile when required as well as can act as the warning signais. Examples of component used in automotive lighting systems are auxiliary lights, headlights, headlight control switches, instrument displays, sidelights and tail lights, e) Starting system Major automotive electrical parts and components used in the automotive starting system include bendix drive starters, starter drives and starter soienoids which are used to initiate the engine of a motor vehicle. f) Others Others include all other automotive eiectrical parts and components such as battery cables, battery cable terminals, battery control systems, battery plates, ground straps, windshieid wiper systems, power locks, horns, alarm sirens and voltage regulators used in an automotive battery, automotive batteries as well as the integrated circuits used in the eiectronic control unit of the motor vehicle to store new engine management programme. 4) Engine Engine parts and components are used to propel a motor vehicle by transforming chemical energy in fuel into mechanicai energy for power. 5) Suspension Suspension parts and components are used to support a motor vehicle on its undercarriage. Examples of suspension parts and components are control arms, idier arms, motor mounts, pinions, shock absorbers and suspension beams. 6) Others This category includes all the other automotive parts and components such as fan belts, hydraUlic pneumatic equipment, piastic mouided components, pressure die castings and sheet metal parts. The performance of the automotive parts and components market is positively correlated with the overall performance ofthe automotive industry. In other words, expansion in the automotive industry is expected to lead to higher demand for automotive parts and components. There are essentially two demand sources for automotive parts and components nameiy, the production or manufacture of vehicles via the original equipment 113 4 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ manufacturer (“OEM”) market and the aftermarket which refers to the replacement market for automotive parts and components. As Solid is a locally-based automotive parts and components market player that targets the aftermarket segment, thenceforth, Protege Assodates wiil be focusing more on the automotive aftermarket for parts and components in Malaysia. Under the context of the automotive industry, automotive aftermarket generally encompasses all products and services purchased for all motor vehides after the completion of the initial sales of these motor vehicles to the consumers. Products purchased include parts and components for replacement at varying qualities and prices, accessories, chemicals, appearance products, tires as well as the necessary tools and equipment for repair and maintenance works. The products purchased can be supplied by manufacturers (including manufacturers of remanufactured automotive parts and components), distributors and/or retailers. Meanwhile, the services purchased include the provision of services such as installation, repairing and maintenance works on the motor vehicles. The services can be prOVided at professional motor vehicle installation, repair and maintenance facilities or be performed by the consumers themselves. The automotive aftermarket is essentially a secondary market of the automotive industry.
Market Segmentation The automotive aftermarket for parts and components In general is considered as part of the overall transport equipment sub-sector. Based on the classification by the Malaysian Industrial Development Authority (“MIDA”), the transport equipment sub-sector is considered as one of the 19 sub-sectors within the manufacturing sector as depicted in Figure 2. 114 5 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE’ MAR””, Figure 2: Manufacturing Sector Classification
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ChernIeill Produ;:ts .,., ,,,,,,I[‘~ 1&’ Biotechndogv DeVices

 

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Nrn-metallic Minerai Prowcts .i “:-:-“\S%fJe! !~-1WPf-~’~’}r Pal>er. Printing & pUblishln~.j ~,.._ “” __,”_,.” …….,;…c..;.;”..~.~
r!W·· Wood & Wood Products & Furnitlre ….,.J -~,-“.”._-;”,,-, ….:, … ,>,.;.,;;.,!£~ [:.  PharmaCeuticals>]  Source: IMR Report  The transport equipment sub-sector  can  be further divided into three distinct industries
namely aerospace, automotive as well as shipbuilding and ship repairing industries. This is also depicted in Figure 3. 115 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ Figure 3: Overview of the Transport Equipment Sub-sector in Malaysia
Transport Equipment
Aerospace  Automotive  Shipbuilding & Ship Repairing  Source: IMR Report  1)  Aerospace
The aerospace industry comprises mainly of two markets namely the aviation market which includes the manufacturing of parts and components, maintenance, repair and overhaul C’MRO”) activities, design and development and operation of light aircraft and support services as well as the space market involving satellite. 2) Automotive The automotive industry consists of the manufacture or assembly of motor vehicles (including motorised two-wheelers), the reconditioning, reassembling, rebuilding or conversion of motor vehicles and the manufacturing of parts and components (including coach and vehide bodies) as depicted in Figure 4. Figure 4: The Automotive Industry in Malaysia
Automotive

:i’, ,Manufacture! Reconditioning! lmufacture of PaAssembly of Motor Reassembling! “and Componentsv
Vehicles (Including Rebuilding! ” “c1uding Coach a’~Motorised TWo­Conversion of Motor “Vehicle Bodies) ,~wheelers Vehicles h! Source: IMR Report 116 7 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ 3) Shipbuilding and Ship Repairing This industry includes manufacturing a wide range of ships such as barges, hovercrafts, hydrofoils, landing crafts, leisure crafts, passenger boats or ferries, patrol vessels, tankers, tug-boats and yachts as well as ship repairing activities. Historical Market Performance and Growth Forecast The automotive aftermarket for parts and components in Malaysia performed reasonably well in 2012 on the back of stronger local economic growth that helped to spur positive consumer sentiment leading to higher demand from customers. The market expanded by an estimated 4.0 percent from RM3.47 billion in 2011 to RM3.61 billion in 2012. Figure 5 depicts the historical and forecast size of the automotive aftermarket for parts and components from 2010 to 2017. Figure 5: Historical and Forecast Size of the Automotive Aftermarket for Parts and Components in Malaysia, 2010-2017

2010 2011 2012 2013 2014 2015 2016 2017 3.34  3.47  3.9  3.61  4.0  3.75  3.9  3.90  4.0  4.06  4.1  4.22  3.9  4.39  4.0
Notes: 1) CAGR (2012-2017) = 4.0 percent 2) The base year is 2012 Source: IMR Report The annual growth in the size of the automotive aftermarket for parts and components in Malaysia is projected to hover around 3.9 to 4.1 percent from 2013 to 2017 on the back of expected sustained demand for automotive parts and components in the automotive aftermarket. The CAGR of the market for the 2012-2017 period is projected to be 4.0 percent. On a closer look at the automotive aftermarket for parts and components or more specifically, the electrical parts and components in Malaysia, it is estimated to account for 19.0 percent of 117 8 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ the total revenue generated in the automotive aftermarket for parts and components in Malaysia for 2012 as depicted in Figure 6. Automotive non-eiectrical parts and components which consist of braking parts, driving transmission and steering parts, engine parts, suspension parts and other automotive parts and components are estimated to account for 81.0 percent of the totai revenue generated in the automotive aftermarket for parts and components in Malaysia for 2012. Engine and mechanical parts and components are coiiectively considered as automotive non-electrical parts and components. Figure 6: Estimated Automotive Electrical and Non-Electrical Parts and Components’ Share of the Total Revenue Generated in the Automotive Aftermarket for Parts and Components in Malaysia, 2012 Automotive ..——-Electrical Parts ______ and Components
19.0% J Source: IMR Report The growth outiook for the automotive aftermarket for eiectrical parts and components has remained positive. It is projected to grow incrementaiiy from 2013 to 2017 aided by the growing demand for eiectrical content in motor vehicles. The CAGR of this market for the 2012-2017 period is projected to be 5.1 percent. Rgure 7 depicts the estimated and forecast size of the automotive aftermarket for electricai parts and components from 2010 to 2017. 118 9 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ Figure 7: Estimated and Forecast Size of the Automotive Aftermarket for Electrical Parts and Components in Malaysia, 2010-2017
2010 2011 2012 2013 2014 2015 2016 2017 4.0 4.0 4.3 4.8 5.2 5.6 5.7 Notes:  1)  C4GR (2012-2017) = 5.1 percent  2)  The base year is 2012  Source: IMR Report
The automotive aftermarket for non-electrical parts and components in Malaysia is expected to grow from estimated RM2.95 billion in 2012 to RM3.51 billion in 2017 and register a CAGR of 3.5 percent during the 2012-2017 period. Similar to the broader automotive aftermarket for parts and components, the positive outlook on the demand for non-electrical parts and components in the automotive aftermarket in Malaysia stems mainly from a growing motor vehicle population and a higher average motor vehicle age, the growing prominence of motor vehicles in modern living, the absence of end-of-life vehicle policy and the continuing expansion In the local economy. Competitive Landscape of the Automotive Aftermarket for Parts and Components in Malaysia The automotive aftermarket for parts and components in Malaysia (which includes the automotive aftermarket for electrical and non-electrical parts and components) is huge and provides market opportunities to a large and wide range of participants. It is a mature and competitive market and estimated to be over 5,000 market players ranging from small to medium size companies known to participate in the automotive aftermarket for parts and components. These include automotive parts and components manufacturers (including manufacturers of remanufactured automotive parts and components), distributors, importers, wholesalers and retailers that typically compete on various competitive factors such as: 119 10 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ • branding;
• design and technological capabilities and/or collaborations;
• distribution channels or points of sales;
• pricing;
• product quality and reliability;
• range of products and/or brands; and/or
• targeted end-user markets namely OEM market or aftermarket or both, motor vehicle types or makes.
Given the competitive environment in the local automotive industry, the domestic market players have also been involved in certain industry manoeuvres to put themselves in a better position in the market in line with trade Iiberalisation. Some of the industry manoeuvres highlighted by MIDA include:
• upgrading of engineering and technological capabilities through collaborations such as joint-ventures and mergers;
• leveraging global networks to penetrate the export market;
• increasing capacity, productivity and efficiency; and
• acquiring international standards such as ISO 9000, ISO 14000 and ISOfTS 16949.

Market players in the automotive aftermarket for parts and components in Malaysia can also be divided into three types according to the size of their respective annual revenue generated namely Type-I, Type-2 and Type-3 market players. i) Type-l market players Type-l market players consist of market players that registered an annual revenue of more than RM300 million. The number of Type-l market players in the automotive aftermarket for parts and components in Malaysia is relatively small but they typically hold a dominant market position. Type-l market players are typically well capitalised companies. Due to their relatively strong financial footing, they are able to undertake large scale production of automotive parts and components to achieve better economies of scale and enable them to target a wider range of end-user markets. They are 120 11 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , also most likely to be the ones that explore for export opportunity in the international markets. Type-l market players also strive to compete by proViding the leadership in technology. They are likely to invest heavily in the latest machineries and introduce new product innovations to the market. ii) Type-2 market players Type-2 market players consist of market players that registered an annual revenue of more than RM50 million but less than RM300 million. Although Type-2 market players generate lesser revenues than their Type-l counterparts, this group of market players does possess reasonable size in terms of production scale, workforce, and capital resources. These Type-2 market players are also considered established along with Type-l market players and they generally have been participating in the automotive aftermarket for parts and components in Malaysia for a long period. They also have a steady pool of customers as well as comparable products under their product portfolio. iii) Type-3 market players Type-3 market players consist of market players that registered an annual revenue of RM50 million and below. Unlike their Type-l and Type-2 counterparts, Type-3 market players generally have a smaller production scale, workforce and capital resources. These Type-3 market players also generally have limited range of products and production capabilities. As such, they can only meet relatively small size orders from their customers and they also tend to embark on a niche marketing strategy by targeting specific end-user markets or selling their products in a particular geographical area only exempli gratia C’e.g.”) state, district or town.
Estimated Solid’s Market Share Solid was incorporated in Malaysia under the Companies Act 1965 as a public limited company on 12 september 2012. It is an investment holding company. Its subsidiaries are involved in the trading and distribution of automotive electrical, engine and mechanical parts and components as well as remanufacturing of automotive starters and alternators. Given that Solid registered revenue of RM104,155,000 in its FYE 30 April 2012 from the sale of its automotive parts and components in the aftermarket, the market share of Solid in the automotive aftermarket for parts and components in Malaysia for the year is estimated to be 121 12 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
2.9 percent as depicted in Figure 8. The estimated Solid’s 2.9 percent market share of the automotive aftermarket for parts and components in Malaysia in 2012 is derived by dividing its revenue registered in its FYE 30 April 2012 (RM104,155,OOO) over the estimated total size of the automotive aftermarket for parts and components in Malaysia for 2012 (RM3.61 billion). Figure 8: Solid’s Estimated Market Share of the Automotive Aftermarket for Parts and Components in Malaysia, 2012
Source: IMR Report Out of the total revenue registered by Solid in its financial year ended 30 April 2012, RM61,904,OOO was generated from the sales of automotive electrical parts and components in the aftermarket. As such, the market share of Solid in the automotive aftermarket for electrical parts and components in Malaysia for 2012 is estimated to be 9.0 percent as depicted in Figure 9. The estimated Solid’s 9.0 percent market share of the automotive aftermarket for electrical parts and components in Malaysia in 2012 is derived by dividing its revenue from the sales of automotive electrical parts and components registered in its FYE 30 April 2012 (RM61,904,OOO) over the estimated total size of the automotive aftermarket for electrical parts and components in Malaysia for 2012 (RM685.7 million). 122 13 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE’ MAR””, Figure 9: Solid’s Estimated Market Share of the Automotive Aftermarket for Electrical Parts and Components in Malaysia, 2012 l-~——–­Solid, 9.0%
i ____. .. . ._.__.._._._,_._.”_,,,_.__. . J Source: IMR Report Out of the total revenue registered by Solid In its financial year ended 30 April 2012, RM32,706,000 was generated from the sales of engine and mechanical parts and components, which are collectively considered as automotive non-electrical parts and components, in the aftermarket. As such, the market share of Solid in the automotive aftermarket for non-electrical parts and components in Malaysia for 2012 is estimated to be 1.1 percent. The estimated Solid’s 1.1 percent market share of the automotive aftermarket for non-electrical parts and components in Malaysia in 2012 is derived by dividing its revenue from the sales of automotive non-electrical parts and components registered in its FYE 30 April 2012 (RM32,706,000) over the estimated total size of the automotive aftermarket for non-electrical parts and components in Malaysia for 2012 (RM2.92 billion). Barriers to Entry The automotive aftermarket for parts and components in Malaysia has relatively high barriers to entry for potential manufacturers (including manufacturers of remanufactured automotive parts and components). However, the barriers to entry for other types of participant can be [ow if the scale of business operations intended is small. In order to participate in the market, potential new entrants may need to come out with a relatively high capital outlay involVing millions of ringgit to invest in manufacturing facilities, high-end production equipment and machineries, technology licensing, marketing and branding activities, raw materials, stocks, storage facilities and/or manpower. Therefore, potential new entrants need to have a long­123 14 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ term investment horizon as these initial costs may not be recovered in the short term period. In addition, any future upgrading of machinery is likely to incur a relatively higher initiai cost due to technologicai advancement. Like any other businesses, the need to invest substantialiy in setting up and to sustain competitiveness poses a significant risk which acts as a strong deterrent for potential market entrants. Potential customers usualiy prefer reliable and reputabie manufacturers or suppliers that possess sound technical knowledge and established reputation. This would pose a chalienge to new entrants as they would face difficulties in establishing their credentials given that they are new to the market and have no proven track record. In addition, potential new entrants wili likely face difficulty in getting favourable financing facilities without a proven track record -thus reducing their competitiveness considerably. This poses a high barrier to entry to potential new entrants. Potential new entrants need to be very knowledgeable about the technologies behind the automotive parts and components manufacturing processes. They need to be mindful that their customers may also require the development of various products involving different materials, designs, unique application, tight tolerance, physicai dimensions, et cetera (“etc.”). Hence, potential entrants need to possess suffident related technical expertise and updated technoiogy to participate in this market. Potential new entrants may also need to qualify as one of the approved suppliers of their targeted end-users to stand a chance of securing a job from them. The qualification process may take into account the background and track record of the potential new entrants and their personnel technical capabilities; something which put them at a disadvantage. In addition, established market players typicaliy have relatively iong-term relationships with their respective customers and therefore, they stand to enjoy a stronger goodwilL Building a viable and strong business relationship is not an easy task for any potential new entrants as relationships require a significant amount of time to establish. Once the business relationship is sufficiently strong, where trust and confidence are weli-established, it would be difficult to break up such a partnership. The trust and confidence factor is most important due to the constant exchange of highly confidentiai information as weli as the time criticality of their manufacturing operations. Potential new entrants in the market may find it very hard to break up such existing relationships already established among market players and forge trusting and confident ties with them anew. This can affect market penetration and as such, poses a high entry barrier. 124 15 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’

Demand and supply conditions Demand and supply conditions refer to market factors that can positively or negatively affect future market size and growth by specifically altering demand or supply dynamics. These demand and supply factors can include trends, key developments or events that spur market expansion, leading to increases in sales or revenues, or developments that negatively affect market growth. Figure 10: Demand and Supply Conditions Affecting the Automotive Aftermarket for Parts and Components in Malaysia, 2013
A Growing Motor Vehicle Population and a Higher Average Motor Vehicle Age  Demand  +  The Growing Prominence of Motor Vehicles in Modern Living  Demand  +  The Absence of End-of-Iife Vehicle Policy  Demand  +  Increasing Demand for Electronics Content in Motor Vehicles  Demand  +  The Continuing Expansion in the Local Economy  Demand  +  Stricter Hire Purchase Financing Environment  Demand  Intensifying Efforts in Developing the Local Urban Public Transportation System  Demand  Encouraging Support from the Malaysian Government  Supply  +  Participation in Both Domestic and International Automotive Reiated Trade Fairs  Supply  +  Challenging Environment for the Hiring of Relatively Low­Skilled Workers  Supply  Prohibition on Imports of Used Automotive Parts and Components  Supply  Shortage of Testing Facilities  Supply  Upward Inflationary Pressure from Persistent High Oil Prices  Supply
Source: IMR Report
Market Reliance on and Vulnerability to Imports Although encouraging progress has been made thus far, the automotive aftermarket for parts and components in Malaysia still depends, to a large extent, on imports particularly for critical and high value parts and components such as engines, transmission systems and vehicle electronics components. Malaysia’s imports of automotive parts and components totalled around RM4.97 billion in 2011 alone based on the statistics released by the Department of Statistics, Malaysia. Figure 11 depicts Malaysia’S total imports of automotive parts and components from 2006 to 2011. 125 16 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
Figure 11: Malaysia’s Imports of Automotive Parts and Components, 2006­2011 6,000
Year Source: IMR Report As depicted in Figure 11, our total imports of automotive parts and components amounted to more than RM4 billion annually (from 2006 to 2011) -a sizeable figure that has further exposed the overall market’s reliance on and vulnerability to imports. This trend is also expected to continue during the forecast period from 2013 to 2017. However, market players involved in the remanufacturing activities may have to consider sourcing for their raw material needs (used parts and components) solely from the domestic market in light of the gradual prohibition on the importation of used automotive parts and components by the Malaysian Government. Manufacturers and remanufacturers in the automotive aftermarket for parts and components in Malaysia are also dependent, to a certain extent, on imported advanced machineries and foreign workers in order to participate, sustain and/or grow their manufacturing operations. On a more positive note, market players are relatively less reliance on and vulnerable to imports in terms of procurement for raw materials such as steel, rubber and plastic products except for certain high-grade steel products and plastic resins. 126 17 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ Substitute Products or Services Automotive parts and components are key products that support the overall automotive industry; either for the manufacture of new motor vehicles (OEM market) or for the replacement of existing automotive parts and components found in used motor vehicles (aftermarket) due to faulty, deterioration in quality, end of useful life or upgrading reasons. As long as motor vehicles are still being used, there is always the demand for automotive parts and components. Motor vehicle is gaining prominence in modern day Malaysian living as it Is generally considered to be a necessary mode of transport that can provide a sense of freedom and independence. On another note, existing automotive parts and components are constantly being improved or innovated from the advancement in automotive technologies while new materials are also being explored for their potential usages in the manufacture of automotive parts and components that can offer cost savings and better performance. Hence, it is not surprising that certain automotive parts and components may be rendered obsolete by newer automotive parts and components in a relatively short period of time -resulting in short product life cycle.
Relevant Laws and Regulations Governing the Market and Peculiarities of the Market • Quality and safety Standards Compliance to national and international standards is gaining prominence among market players in the automotive aftermarket for parts and components in Malaysia against the backdrop of liberalisation in the automotive industry. Besides meeting the requisite requirements set by each government, compliance can also go a long way towards boosting the confidence of potential vehicle manufacturers and end-users alike. It reinforces a market player’s commitment in providing acceptable quality products or services to its end-users. In addition, compliance with international standards is vital for penetration into the international market. New requirements on standards are expected to be imposed for automotive products by developed markets. These new requirements include the recyclability requirements for parts and components by the European Union \,EU”) and more usage of biodegradable parts and materials in the manufacture of motor vehicles. Apart from these requirements, some of the standards that market players in the starters and alternator markets in China should focus on achieving include but not limited to: 127 18 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ a) ISO 9000 ISO 9000 is a family of standards that is maintained by the International Organisation for Standardisation and catered for quality management systems. b) ISO 14000 ISO 14000 is the standard for environment management system. Compliance with this standard helps a company to fulfil its social responsibility in safeguarding the environment. c) ISO/TS 16949 According to the International Automotive Oversight Bureau (“IAOB”), ISO/TS 16949 is a common automotive quality system requirements catalogue based on ISO 9001, AVSQ (Italian), EAQF (French), QS-9000 (US) and VDA6.1 (German) automotive catalogues. IAOB added that ISO/TS 16949 is jointly developed by International Automotive Task Force (“IATF”) members and along with customer-specific requirements, It defines quality system requirements for use in the automotive supply chain. IATF members consist of vehicle manufacturers namely DaimlerChrysler, BMW, Fiat, Ford Motor Company, PSA Peugeot-Otroen, General Motors (including Opel Vauxhall), Volkswagen and Renault SA and their respective trade associations namely AIAG (US), ANFIA (Italy), VDA (Germany), SMMT (UK) and FIEV (France). d) OHSAS 18000 OHSAS 18000 is a standard related to occupational health and safety management system and comprises of two parts namely 18001 and 18002. e) Eco-Management and Audit SCheme (“EMAS”) EMAS is an environmental standard that was developed by the European Commission in 1995 to help participating organisations to identify and manage their impacts on the environment. In another development, the RTD has targeted the adoption of all 126 regulations from the United Nations Economic Commission for Europe C’UNECE”) by 2015. From 2007 up to 13 March 2012, the Malaysian Government had adopted 54 such regulations. Examples of the regulation adopted and gazetted are R7 (brake lamp performance), R13 (braking), R40 (exhaust emission -motorcycle), R41 (noise emission -motorcycle), R43 (safety glass), R46 (rear view mirrors) and R97 (vehicle alarm system). 128 19 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ • Approval of Manufacturing Projects According to MIDA, manufacturing companies with shareholders’ funds of RM2.5 million and above or engaging 75 or more full-time paid employees need to apply for a manufacturing lIcense for approval by the Mm as required under the Industrial Co­ordination Act 1975. Projects which are categorised as labour intensive will not qualify for a manufacturing license or for tax Incentives under the Malaysian Government’s guidelines for approval of industrial projects. Projects are classified as labour intensive if their capital investment per employee ratio are less than RM55,OOO. Nevertheless, MIDA added that exemption is granted for a project that meets one of the following criteria: • The value-added is 30 percent or more
• The Managerial, Technical and Supervisory (“MTS”) Index is 15 percent or more
• The project undertakes promoted activities or manufacture products as listed in the List of Promoted Activities and Products -High Technologies Companies
• Existing companies (formerly exempted) applying for a manufacturing lIcense

In addition, application to MIDA is required for a licensed company which wants to expand its production capacity or diversify its product range by manufacturing additional products. • National Automotive PolIcy The Malaysian Government announced the National Automotive PolIcy (“NAP”) Framework on 19 October 2005 to spur further growth in the local automotive industry. The five major objectives that have been identified by the Malaysian Government are as follows: a) to promote a competitive and viable automotive sector, in particular for national car manufacturers; b) to become a regional hub for manufacturing, assembly and distribution for automotive vehicles; c) to enhance value-added and local capabilities in the automotive sector; d) to promote export-oriented Malaysian manufacturers as well as components and parts vendors; and 129 20 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
6RANL> I f-INANCE , MAR”‘·’ e) to promote competitive and broad-based Bumiputera participation in vehicle manufacturing, distribution and importation as well as in components and parts manufacturing. • Employment of Foreign Workers Market players in the automotive aftermarket for parts and components in Malaysia that are interested in hiring foreign workers need to observe the immigration procedures. They can only hire foreign workers from the folloWing countries: • Indonesia
• Cambodia
• Laos
• Myanmar
• Nepal
• Pakistan
• Sri Lanka
• Vietnam
• Thailand
• Philippines (Male only)
• Turkmenistan
• Kazakhstan
• Uzbekistan

According to MIDA, the approval is based on merits of each case and subject to conditions that will be determined from time to time. The Malaysian Government only entertains applications after the applicants have exhausted efforts to find qualified local citizens and permanent residents. An annual levy is imposed on foreign workers. • Minimum Wage Policy The ‘Minimum Wage Policy’ was implemented in the country with immediate effect from 1 January 2013. The minimum wage is a provision in the National Wages Consultative Council Act 2011. The minimum wage has been set at RM900 or RM4.33 per hour for Peninsular Malaysia and at RM800 or RM3.85 per hour for Federal Territory of Labuan, 130 21 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ Sabah and sarawak. The minimum wage covers both local and foreign workforce, except for domestic workers such as gardeners and domestic helpers. • Occupational Safety and Health Regulations All legislations related to occupational safety and health in Malaysia are administrated and enforced by the Department of Occupational safety and Health (“DOSH”) under the Ministry of Human Resources, Malaysia. The three major legislations governing the enforcement activities on occupational safety and health are the Occupational Safety and Health Act (“OSHA”) 1994, the Factories and Machinery Act (“FMA”) 1967 and the Petroleum Act (Safety Measure) 1984. Market players in the automotive aftermarket for parts and components in Malaysia need to comply with occupational safety and health regulations particularly the OSHA 1994 and FMA 1967. Legislative framework to promote, stimulate and encourage high standards of health and safe working culture among all Malaysian employees and employers through self­regulation schemes are provided by OSHA 1994. All occupational activities in the following sectors are subject to OSHA 1994: • Agriculture, forestry and fishing;
• Construction;
• Finance, insurance, real estate and business services;
• Hotels and restaurants;
• Manufacturing;
• Mining and quarrying;
• Public services and statutory authorities;
• Transport, storage and communication;
• Utilities (gas, electricity, water and sanitary services); and
• Wholesale and retail trades;

According to MIDA, there are seven regulations under OSHA 1994 enforced by DOSH namely: • Classification, Packaging and Labelling of Hazardous Chemicals Regulations, 1997;
• control of Industrial Major Accident Hazards Regulations, 1996;

131 22 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ • Employers’ Safety and Health General Policy Statements (Exception) Regulations, 1995;
• Notification of Accident, Dangerous Occurrence, Occupational Poisoning and Occupational Disease Regulations, 2004;
• safety and Health Committee Regulations, 1996;
• safety and Health Officer Regulations, 1997; and
• Use and Standards of Exposure of Chemicals Hazardous to Health Regulations, 2000.
Meanwhile, the FMA 1967 was enacted to provide for the control of factories on matters relating to the safety, health and welfare of persons, and the registration and inspection of machinery. According to MIDA, there are 13 regulations under FMA 1967 enforced by DOSH namely:
• Administration Regulations, 1970;
• Asbestos Process Regulations, 1986;
• Building Operations and Works of Engineering Construction (safety) Regulations, 1986;
• Certificate of Competency-Examinations Regulations, 1970
• Electric Passenger and Goods Lift Regulations, 1970;
• Fencing of Machinery and safety Regulations, 1970;
• Lead Regulations, 1984;
• Mineral Dust Regulations, 1989;
• Noise Exposure Regulations, 1989;
• Notification, Certificate of Fitness and Inspection Regulations, 1970;
• Persons-in-Charge Regulations, 1970;
• Safety, Health and Welfare Regulations, 1970; and
• steam Boilers and Unfired Pressure Vessel Regulations, 1970.

132 23 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ • Environmental Regulations
Manufacturing companies, including those involved in manufacturing or remanufacturing automotive parts and components also need to comply with the Environmental Quality Act, 1974 and other relevant environmental-protection related legislations. They need to be mindful of adhering to these regulations particularly on the disposal of sewage and industrial effluents.
• Regional SCheme
Locally manufactured automotive parts and components are expected to face competition from imported products from ASEAN member countries in line with the implementation of ASEAN Free Trade Agreement CAFTA”). As part of AFTA, intra-regional tariffs are reduced to 0-5 percent through Common Effective Preferential Tariff CCEPT”). Hence, imported products from ASEAN member countries are competing on the same platform with minimal or no import duties.
• Others

• Trade Liberalisation in the Regional Automotive Industry The ASEAN automotive industry, which includes the Malaysian automotive industry, had also experienced trade Iiberalisation among ASEAN member countries for Its products. This development Is expected to lead to the entry of more big regional market players into the field, not only automotive manufacturers, but also their suppliers who proVide the necessary parts and components. The competition in the local and ASEAN automotive industry is anticipated to increase significantly with the Iiberalisation trend and global automotive players are poised to position themselves strategically in this region. These global automotive players are likely to invite their suppliers from other regions for automotive parts and components to participate as well and they may not source their raw materials like automotive parts and components from local manufacturers or suppliers. In the face of rising competition, market players in the automotive aftermarket for parts and components in Malaysia may need to juggle between enhancing product quality and sacrificing profit margins. The market players in the automotive aftermarket for parts and components in Malaysia are expected to face stiff competition from their foreign counterparts in offering competitive pricing for their 133 24 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ products. Market players who are able to offer products of acceptable quality with the lowest price may stand a good chance of securing orders for their products. On a more positive note, market players are able to explore export opportunities in the vast regional market which has been opened up by the Iiberalisation within the ASEAN automotive industry and stand to benefit from potential economies of scale. Prospects and Outlook of the Automotive Aftennarket for Parts and Components in Malaysia The automotive aftermarket for parts and components in Malaysia is projected to continue growing during the 2013-2017 period albeit at a more moderate pace as depicted In Figure 12. Figure 12: The Forecast Size of the Automotive Aftermarket for Parts and Components in Malaysia, 2013-2017I l
4.60
2013 2014 2015 2016 2017 ! Year ~ Source: IMR Report The positive outlook on the demand for parts and components in the automotive aftermarket in Malaysia stems mainly from a growing motor vehicle population and a higher average motor vehicle age, the growing prominence of motor vehicles in modern living, the absence of end-of-Iife vehicle policy, increasing demand for electronics content in motor vehicles and the continuing expansion in the local economy. Nevertheless, market players in the automotive aftermarket for parts and components need to be mindful of the growth restraining factor posed by the stricter hire purchase financing environment and intensifying efforts in developing the local urban public transportation system. 134 2S 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conl’d)
6RANL> I f-INANCE , MAR”‘·’ On the supply side, although the market is expected to be boosted by the enrouraging support from the Malaysian Government and partidpation in both domestic and international automotive related trade fairs, it faces various challenges ahead. The prohibition on imports of used automotive parts and romponents may pose a tough procurement challenge for existing importers as well as remanufacturers of automotive parts and components. In addition, market players are also expected to cope with shortage of testing fadlities, upward inflationary pressure from persistent high oil prices and challenging environment for the hiring of relatively low-skilled workers during the forecast period from 2013 to 2017. Moving forward, the size of the automotive aftermarket for parts and components in Malaysia is expected to reach RM4.39 billion in 2017. Its CAGR for the 2012-2017 period Is projected to be 4.0 percent. Protege Associates 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 boundaries and limitations of secondary statistics, primary research and continued industry movements. Our research has been conducted to present a view of the overall industry and may not necessarily reflect the performance of individual companies in this industry. We are not responsible for the decisions and/ or actions of the readers of this report. This report should also not be considered as a rerommendation to buy or not to buy the shares of any company or companies. Thank you. Yours sincerely,
SEOW CHEOW SENG Managing Director Protege Assodates Sdn. Bhd. 135 26

 

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