6. BUSINESS AND OPERATIONAL OVERVIEW 6. BUSINESS AND OPERATIONAL OVERVIEW 6.1 Nature of BuSineSS The Group is principally engaged in the manufacture and sales of SCFs and electronic hardware, with reputable OEMs as repeat buyers. The history of the Group began in 1999, when it commenced the manufacture of SCFs from leased premises located in Puchong. From its humble beginnings, the Group is now a full-fledged manufacturing plant with a factory building in Shah Alam with total built-up area of approximately 29,000 square feet. Over the years, the Group has increased its annual production capacity from 36 million pieces in 1999 to approximately 200 million pieces currently. SCFs are niche products within the fastener industry, which becomes a part of a panel, chassis, bracket or other items onto which it is installed. The SCFs are installed by pressing them into pre-punched or drilled round holes in the sheet metal. Generally, SCFs take less space and require fewer assembly operations than other fastening solutions, as SCFs were created with the aim to replace conventional screws, nuts and bolts in the metal sheet fabricating assembly. SCFs also have greater reusability and more holding power than sheet metal screws. The greatest advantage of using SCFs is that it enables design engineers to use thinner sheet metal (with thickness of less than 1 mm) for the chassis, thus saving material costs and weight in the finished products. SCFs also have greater reliability and holding power, and due to their compact design, SCFs also provide a neat finished appearance. The SCFs manufactured by the Group enable engineers to design products with the following specifications:(a) Fewer parts to handle. With the use of SCFs, hardware such as washers, lock washers and loose nuts are no longer used in final assembly;
(b) Fewer assembly steps. Since the task of hardware installation is performed during fabrication, the number of steps involved in final assembly also reduces:
(c) Less total assembly time. Fewer parts and steps involved also mean less assembly time required; and
(d) No special tooling required for installation.
6.2 Products 6.2.1 SCFS The range, and description of each type of SCF currently manufactured by the Group are as follows:(a) Self-Locking SCFs Self-locking SCFs permanently retain their inherent flexing characteristic, permitting repeated use and effective prevailing locking torque (torque is defined as rotational motion). The self-locking SCFs feature the same tried and proven design as the standard SCFs that is preferred and appreciated for its fast, simple assembly. The self-locking SCFs do not protrude through the reverse side of the sheet metal and provide positive, permanent attachment with high torque-out that is many times greater than locking torque, and high push-out resistance. 45 (b) Self-Clinching Flush Fasteners Self-clinching flush fasteners are designed to De completely flushed (i.e. arranged with adjacent sides. surfaces or edges close together. so as to be even, in one plane) in metal sheet as thin as 0.06 inches or 1.5 mm. These fasteners are ideal for applications where thin metal sheets are used and require load-bearing threads but must maintain smooth surfaces, with no protrusions on either surface (i.e. top or oottom). The self-clinching flush fasteners can De installed easily by pressing them into punched or drilled round holes in metal sheets. The hexagonal head of such fasteners and their self-clinching design ensure high axial and torsional strength. The use of the self-clinching flush fasteners enhances the functional and cosmetic qualities of the entire assemoly. Further, these fasteners can provide strong threads in places which are inaccessible for installation after the chassis has been formed. Self-clinching flush fasteners can De installed in metal sheets Defore bending and forming of the metal sheets. (e) Self-Clinching Nuts The self-clinching nuts are simple in design, and can be installed quickly and conveniently. They are pressed into punched or drilled holes, by embedding the clinching rings into the metal sheets. The clinching rings lock the displaced metal sheets to the tapered shank, thus ensuring high push-out resistance. High torque-out resistance is also achieved when the knurled platform is embedded into the metal sheets. Several nuts may be pressed into position simultaneously with proper pressing tools. As the clinching is performed on only one (1) surface of the metal sheets, the reverse side remains flushed and smooth. The proper installation of self-clinching nuts will not distort or damage the threads in these nuts, as the recommended length of their shanks is always less than the thickness of the metal sheets onto which these self-clinching nuts are embedded. These nuts will also not damage the painted surfaces when installed. (d) Miniature SCFs Miniature SCFs fit into minimal space and provide strong, reusable threads. Their strong knurled collars, which are completely embedded in the metal sheets, guarantee against the rotation of the miniature SCFs after they have been installed onto the metal sheets. The spin resistance at the knurled collars exceeds the torque that can be exerted by the self-locking SCFs. When the knurled collar is emoedded in the metal sheet, the cavity beneath the collar is filled with displaced sheet material thereby developing push-out resistance. THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK (e) (f) (g) (h) (i)
Self-Clinching Blind Fasteners Sen-clinching blind fasteners provide permanently mounted blind threads in metal sheets that are as thin as 0.04 inch or 1.0 mm. These fasteners provide barriers to protect the threads against foreign matter and the circuits from the intrusion of extra long screws. Sen-clinching blind fasteners, which employ the proven self-clinching design, are easily pressed into drilled or punched holes. Their shanks act as their own pilots and being round, these fasteners do not require indexing. These selfclinching blind fasteners can be easily installed using any standard press and applying a squeezing force.
Self.Clinching Studs and Pins Sen-clinching studs are pressed into punched or drilled holes and embedded onto the metal sheets using any standard press. The metal displaced by the self-clinching studs flows smoothly and evenly around the ribs and into the annular groove. This action creates flush head assembly and securely locks the studs onto the metal sheets. thus ensuring high torque-out and push-out resistance. Sen-clinching pins satisfy a wide range of positioning. pivot and alignment applications. Their chamfered ends make mating hole location easy.
Self·Clinching Standoffs The sen-clinching standoffs, which use the proven self-clinching design. are pressed into punched or drilled holes and permanently mounted onto thin metal sheets. These standoffs are installed with their heads flushed with one (1) surface of the mounting sheet.
Keyhole Self·Clinching Standoffs Keyhole self-clinching standoffs are designed for use in the assembly of personal computer boards or panels. to enable quick and easy removal of the boards or panels from the assembled computer by simply sliding the boards or panels sideways and lifting them off. The use of such standoffs can dramatically reduce the amount of loose hardware required. They can also be used for spacing or hanging of replaceable components.
Self·Clinching Panel Fastener Assemblies This type of fastener is made from stainless steel for high corrosion resistance. It may be tool or hand-actuated and is available in three (3) screw lengths for most sizes. This fastener may also be made in steel.
Self·Clinching Low Panel Fastener Assemblies This is a low-profile design panel fastener. It may be tool or hand-actuated. The large knurls offers ease of use. 6.2.2 Electronic Hardware The Group also manufactures and distributes another type of fastener, commonly known as electronic hardware, which are used in the chassis and enclosures of computers, networking devices and servers, flat screen monitors and televisions, and other electronic and electrical items. THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
6.3 Manufacturing Process The manufacturing processes involved in the manufacture of SCFs are depicted as follows:MOULD AND DIE MAKING
10 Outsourced I RAW MATERIAL RECEIVING AND PREPARATION
SETTING UP OF MACHINERY
TURNING I DRILLING
MATERIAL HEAT TREATMENT (hardening) •
SURFACE TREATMENT (plating) •
FINAL QUALITY ASSURANCE INSPECTION
I I I I
SORTING, PACKING AND DELIVERY
THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK (a) Mould and Die Making The Group currently has the facility to perform mould and die making. In circumstances where it is more cost effective to outsource this process, the Group does not rule out such arrangements whereby the appointed supplier will carry out the various stages of design and development encompassing planning, review and verification activities based on specifications provided by the Group. Prior to acceptance, the Group will verify the moulds to ensure that the Group’s specifications have been met. The verification process involves testing by the Group as well as customers. (b) Raw Materials Receiving and Preparation Raw materials such as steel, aluminium and brass rods are inspected upon arrival at the factory, applying quality control (“QC”) procedures which utilise micrometers. The Group has adopted the first-in-first-oul (FIFO) method of inventory control using color codes to minimise stock obsolescence. (c) Turning / Drilling Raw materials consisting of steel rods which pass the QC inspection are fed into single-spindle machines and/or the 5-spindle Davenport machines where the steel rods are drilled at high speed into the required SCFs with the correct diameter and configuration. The single-spindle machines are able to churn out four (4) parts per minute whilst the 5-splndle Davenport machines, working at five (5) times the speed of a single-spindle machine, are able to churn out 20 parts per minute. (d) Chamfering Chamfering is the process of creating chamfers (i.e. holes) in the center of the SCFs for ease of tapping and installation onto panels. The Group currently uses 18 units of automatic chamfering machines for this process. (e) Tapping After the SCFs have been chamfered, they go through the tapping process whereby internal threads are cut in the chamfers of the SCFs, using automatic tapping machines. There are currently 32 automatic tapping machines at the manufacturing plant. (f) Material Heat (Hardening) and Surface (Plating) Treatment In order to increase the strength and hardness of the SCFs as well as to protect them from corrosion, the tapped SCFs undergo heat treatment and plating. The treated SCFs are then lapped and polished to altain shiny and smooth surfaces which prevent adhesion of foreign and unwanted material during mass production. This is an important step to maintain the high precision, low tolerance quality of the end product. These two (2) processes have been outsourced 10 a subcontractor. To ensure that customer requirements are being met, the SCFs are inspected prior to acceptance by the Group. The Group performs regular on-site audit visits to the subcontractor’s treatment facilities. 50 (9) Final Quality Assurance and Inspection As the products and/or their parts and components tend to be sophisticated in design, the quality of these products is essential in relalOlOg existing customers and attraCbng new ones. It is also important for the Group to maintam its slatus as a quality manufacturer of precision SCFs and electronic hardware. The Group applies in-process quality controls at all points of its manufacturing process to facilitate corrective actions to eradicate causes of deviation. The Group also conducts random sampling of Its finished products and quality assurance reports are then prepared. Besides lhe conducting of its regUlar quality aUdits, the Group’s quality management system is also subject to reviews by customers and bi· annual external audits carried out by 8M Trada in compliance with the criteria set out under the Group’s ISO 9001: 2000 certification. (h) Sorting, Packing and Delivery
The final products are then sorted manually and packed before delivery to customers. The Group is planning to use automatic optical inspection and sorting machines, which are the latest technology currently used by key industry players, to reduce human error in the sorting process to improve on the consistency in product quality.
(i) Waste Treatment
In a month. the Group uses apprOXimately 2,000 litres of machining oil in the manufacture of SCFs and hardware component. Most ot the machining oil can be recycled by the oil-recycling machine. The wastewater from the manufacturing process, which is a mixture of machining oil and water, goes through a filtration process using three (3) filters prior to discharge into the common sewerage system. 6.4 Premises and Production Facilities The Group operates from its double-storey manufacturing plant located in the industrial area of Shah A1am with total built-up area of approximately 29,000 sq. ft. on approximately 40,000 sq. ft. of leasehold land, which will be expiring in 2096. The manufacturing plant is equipped with advanced-technology equipment comprising the following:134 units of single spindle turning machines 2 units of 5-spindle Davenport turning machines 3 units of computer numeric control (ileNe”) automatic lathe machine 1aunits 01 automatic chamfering machines 32 units of automatic tapping machines 3 units of profile projectors 50 units of micrometers 50 unhs of calipers 3 units of torque tester 1 unit of push-out tester 1 unit of standoff inserter machine 1 unit of oil recycling machine 1 unit of precision measuring instrument 1 unit of die drawing machine 1 unit 01 salt spray tester 1 unit of thickness tester 1 unit of press metal machine 1 unit of micro hardness tester. The manufacturing ptant is currently producing an output capacity of 200 million pieces and running on two (2) 12-hotJr proouction shifts. The Group has a supply of raw materials which can last up to four (4) to five (5) months at its manufacturing plant. In the past 12 months, there have not been any major disruptions in the operations of the Group’s manufacturing plant. 6.5 Dependency on Patents or Ucences. Indusbial. Commercial or Financial Contracts or New Manufacturing Processes Although the Group has intellectual propeny rights as disclosed in section 6.15 -Inteltectual Property Rights”, the directors of Techfast Holdings confirm that the Group does not depend on patents or licences, industrial, COilnr~cial or financial contracts or new manufacturing processes.
6.6 Marketing and Distribution Network The Techfast Holdings Group distributes its SCFs through two (2) key channets; direct selling to OEMs in the domestic market, and through strategtc alliances and partnership with key distributors overseas. The Group Managing Director is also very pro-active and hands-on in his marketing approach. Throughout the year, he would make numerous overseas marketing trips to approach customers directly to seek sales orders and has built a recognition amongst the customers. The Group also participates in trade exhibitions, both Iocalty and internationally. The Group’s website also offers customers information on the products manufactured by the Group. In addition, the Group has developed a strong sales and marketing team.
6.7 Competition The Group believes that it competes with lhe more established players in the global SCF manufacturing industry such as Penn Engineering & Manufacturing Corp. SouthCD Inc. and Captive Fastener Corporation in the US, and PSM International in the UK. As market leaders, they control a total of 40% of the workf SCF market (Source: Frost & Sullivan). Other competitors are based in Taiwan and China of which the Group does not have official sources of information on their current market share. The Group, through Techfast Manufacturing, captured approximatety 54% of the domestic SCF market and 0.36% of global market share in 2003 (Source: Frost & SUlliVan). 6.7.1 Competitive Advantages The directors of Techfast Holdings believe thai its competitive advantages in this market are as follows:<al EstabUslted Track Record The Techfast Holdings Group has established itsetf as a niche player in the SCF industry and has been in the business for over (5) years. It has captured 54% of the local SCF market share in 2003 and is the only manufacturer of SCF in Malaysia and possibly one of the tew, if not the onry manufacturer of SCF in the major countries in the ASEAN region (Source: Frost & Sullivan). It is now exporting to over twenty five (25) countries which spans over five (5) continents. (b) (c)
Wide Range of SCFS The Taehfast Holdings Group is currently producing approximately 1,500 different types of SCFs that cater for the electronic. telecommunications and information technology industry. The R&D initiatives undertaken by the Group will further enhance the range of SCFs manufactured by the Group in the near future. The Group believes that the diverse range 01 SCFs manufactured by the Group will transform the Group into a one-stop center to fulfill the SCF requirements of end users, wholesalers and distributors. Ability to Custom Make SCFs The Techfast Holdings Group has the ability to custom make SCFs to meet the requirements of its customers. With the ever changing technology trends and the introduction of new products in the electronic and electrical (“E&E”) and information technology (“IT”) industry, one of the key requirements for OEMs’ survival is the adaptivity of manufacturing processes and inputs to embrace these changes. The Techfast Holdings Group has the expertise in assisting OEMs in the development and introduction of the new types of SCFs required in the assembly of new products. Its R&D team has in the past successfully introduced various new SCFs and is currently researching on new forms of SCFs to adapt to the changing technology trends. Favourable GecrPolltlcal Locallon The location of the Group’s manufacturing facility in Malaysia has proven to be cost advantageous and has contributed to the Group’s growth. The Group also operates in a country which is economically and politically stable to the extent that the products manufactured by the Group have attracted the atlention of customers from the US and Europe which seek to diversify their supplier base to mitigate the risk of over reliance on a particular source country. Bestdes that, the cost of production in Malaysia ;s generally lower than those in the US, UK or Europe. Strategic Alliance with Key Industry Players The Group has successfulty formed strategic alliance with one of the largest industry players in terms of being its core supplier of SCFs. Besides that, the Group has over the past few years established its international distribution network via arrangements with key distributors. These alliances and distribution arrangements are hard to come by and provide the Tachfast Holdings Group a competitive edge as compared to the other players in the industry which do not have such alliances. Stringent Quality and Production Control Quality is one of the key success factors of the Group. The management is committed to maintaining the quality of its products. The Group’s stringent quality controi and assurance system not only ensures the quality of end products but also trouble shoots any faults that may arise during the manufacturing process. SCF manufacturers compete on quality, thus any defects found in the end products may cause the manufacturer to suffer losses. Strict quality and in-process control procedures are enforced where products are checked and measured at every stage of the production process by experienced quality controllers. As a testimony of the emphasis on quality management. Techfast Manufacturing was accredited with the ISO 9001 :2000 certification by 8M Trada in March 2002. 53 6.7.2 (9) A Dedicated and Experienced Management Team The Group is managed by a team of competent individuals with a combined 33 years of experience in the manufacturing industry, including 15 years in the SCF industry, who are well versed in all aspects of technicalities associated with SCF manufacturing and distribution. Barriers to Entry The SCF industry is characterised with high barriers 10 entry, The barriers to entry provide a good protection to the Group from additional competition from new entrants and also eXisting fastener manufacturers trying to become niche players in the SCF industry. One of the main reasons that there are no other SCF manufacturers in Malaysia and the Techtast Holdings Group could be one of the few, if not only manufacturer of SCF in the major countries in the ASEAN region is because of the high barriers to entry in this industry. The barriers 10 entry are as follows:(a) Technical Expertise Required to Produce SCFs As the SCF is a niche product within the fastener industry, technical engineering expertise is required to ensure high levels of product consistency and quality is crucial in SCF manufacturing operations. Specialised production processes are required to produce different types of SCFs and the control of machinery to churn QuI SCFs with the exact required measurements lie in the expertise of the engineers and not merely by employing the use of machinery. The founder of the Techfast Holdings Group, Yap Yeon Sing has more than eigh~ (8) years related experience in precision turn part machining prior to starting his SCF business. Besides that, it took him and his management an additional 1ew years to refine the day-to-day operations and implement process improvements. (b) Restricted Market Penetration The SCF is a niche group of products in the fragmented fasteners market. Due to its classification as specialty fasteners. the access to distribution in the world marker has traditionally been dominated by a few major key suppliers. The Techfast Holdings Group distributes its SCFs through two (2) key channels; direct selling to OEMs in the domestic market, and through strategic alliances and partnership with key distributors overseas_ The Techfast Holdings Group has successfulty formed a relationship with one of the largest distributors of fastening and assembly products in the world. The symbiotic relationship includes securing an exclusive arrangement to distribute the Group’s SCFs to the world markets. The arrangement also includes technology transfer that will enhance the Group’s operations. The Group has recently secured a tie-up with a key distributor in the India market and is also currently in discussions with several key distributors in the US for exclusive territorial distribution agreements. (c) (d) As the Techfast Holdings Group continues to tie-up with key distributors, Ihis strategy limits the access of new entrants to strategic distribution channels. The Group believes that any new entrants will need to overcome the long and productive relationships the Techfast Holdings Group has with its customers which were formed based on long term co-operation, highquality products and exclusivity. Hence, it is difficult for new players to penetrate the distribution channels for the SCF industry. Established Customer Base and Market Acceptance The users of SCF place quality as one of their utmost priorities. As such, the users of SCF are very selective in sourcing for their supplies. Hence, establishing a wide customer base and obtaining market acceptance from users from various industries and countries has proven to be difficult. One of the benefits of having an established and diverse customer base is the sustainability and growth in sales. The Techfast Holdings Group services a customer base that comprises 23% local and 77% international customers in diverse industries for the financial year ended 31 December 2004. As such, the Group is not reliant on a specific industry/market. It was not easy for the Techfast Holdings Group to penetrate the export market and its achievement today is a result of its focus on product quality, brand recognition, customer relationships and service reliability_ Having an established customer base strategically positions the Techfast Holdings Group across the emerging domestic market. Emerging markets provide greater potential for acceleration of sales growth. However, the risks associated with unsustainable non-recurring sales in these markets are balanced by sales acquired through mature markets, such as the US and Europe. The Group’s portfolio of buyers has enabled the Group to diversify its business risk. The Group believes that new entrants will find it difficult to attain the international market penetration currently enjoyed by the Techfast Holdings Group and obtaining market acceptance for untested products. The Group has formed long and productive relationships with its customers, some spanning over five (5) years. Critical Mass Orders I Economies of Scale An important factor in ensuring the success of key market players Is the ability to achieve a critical mass of order quantity. Grealer sales volume translates into large production volume which enables a manufacturer to leverage on economies of scale. New players would find it difficult to obtain critical mass orders especially in an industry where the distributlon channels restricted to existing players and maJ1<et acceptance of products from new players is low. Possessing economies of scale will impact favourably on profit margins as there will be less production downtime incurred to cater for adjustments to machinery to cater for non-standardised product specification variations. As at 18 April 2005. the Techfast Holdings Group has approximately 130 active customers, both domestic and overseas. The Group, through Techfast Manufacturing, has also entered into a strategic alliance with one of the largest distributors of fastening and assembly products in the world, as a channel for the distribution of the Techfast Holdings Group’s range of SCFs. The management anticipates that this aUla-nee will substantially increase the Group’s export volume in the coming years. 55 Through the alliance, the Techfast Holdings Group will also secure the transfer of technology and skills in operating the Davenport S-spindle highspeed automatic lalhe machines. These machines are capable of turning oul fIVe (5) times the output of the single spindle machines. incorporating the tapping process which eliminates the additional secondary process currently used. The use of the Davenport machines will substantially lower production costs. The Techfast Holdings Group currently has two (2) Davenport machines at its factory. (e) Niche: Product Strategy From the onset as a startup in the manufacturing parts business, the founders of the Techfast Holdings Group have identified the business focus. I.e. on SCF as a niche product. The unique feature of the SCFs market requires a manufacturer to have a diverse range of line items (exceeding
1.500 line items) to be considered as a key player in this niche market. As a result of its business focus, the Techfast Holdings Group has managed to manufacture a diverse range of SCFs over the last five (5) years. It has also built up a sufficient level of stock availability on a pareto range of SCFs such that new entrants will encounter difficulties in duplicating the Group’s product range in a short period of time. In essence, the Techfast Holdings Group believes that it has developed a tead time advantage over new entrants in this field in the Asia Pacific region. 6.7.3 SUbstitute Products The directors of Techfast Holdings believe that currently there is no direct substitute for SCFs in thin sheet metal assembly requiring threaded fastening. Permanent fixtures, such as blind rivets, are non-threaded fasteners and cannot substitute SCFs in areas where maintenance and repair require the disassembling of parts. The directors of Techfast Holdings further believe that SCFs are now the industry norm for thin sheet metal assembly requiring threaded fastening.
6.8 Growth and Marketing Strategy Since incorporation, the Group has been focused on moving up the industry value chain to becoming a manufacturer with an established brand name which is readily recognised by customers and offering a wide range 01 products known for its consistency in product quality. To achieve its objectives, the Group will adopt the following strategies:(a) Increase its sales volume; and
(b) Establish its brand name.
6.8.1 Increase in sales Volume The Group’s strategy to increase sales volume is predominantly driven by the following:(a) The expansion of its geographical market to include China;
(b) The introduction of new technohJgy to increase production output;
(c) Continuous efforts in cost reduction to ensure competitive pricing:
(d) A wider range of product offering which will also include higher value added products; and
(e) The establishment of alternative marketing channels.
56 Geographical Market Expansion The developing economy of China represents a sizable portion of the world SCF market in terms of usage which still remains untapped. As SCF manufacturers rush to lower production costs and continue to compete in the world market on price, the Techfast Holdings Group also faces the same cost competitive pressures. It will be to the Group’s advantage to expand it market reach as well as manufacturing facilities into China. For the year eOOed 31 December 2004. the Group exported 3.38% of its total sales to this market. The viability of this proposed expansion will require the Group to evaluate several factors such as the location of the manufacturing facility, capital requirements and the requirement of regulatory approvals. Introduction of New Technology to Increase Production Output The Group is a.mently evaluating more effective use of the Davenport machines. which may significantly increase production output. These machines are not only able 10 combine the turning, chamfering and tapping processes into a single machine but are atso able to complete these processes in a fraction of the time usually required. However, the management notes that the use of such machines requires the existence of a critical mass order to justify the economic feasibility of using the Davenport machines. The management is atso introducing eNG automatic lathe machines into its production process for more precision manufaduring. such as the manufacture of panel fasteners. Continuous Efforts in Cost Reduction to Ensure Competitive Pricing The location of the Group’s manufacturing facility has proven to be cost advantageous and has contributed to the Group’s growth. The Group is continuously improving its manufacturing processes as well as evaluating the expanstorl of its manufacturing facility to regions where there is abundant cheap direct labour to reduce manufacturing costs. The management believes that this strategy will result in the growth in the Group’s market share. Wider Range of Product Offering, Including Higher Value Added Products The management is currently conducting R&D on the production of higher value added productS which will require more processes whilst utilising the Group’s existing machinery. Few types of the panel fasteners have already been commercialised and will be the key driver in sales growth. both in terms of value and volume. The Group has already received interests in the panel fasteners from buyers in the US and Europe. Establishment of Alternative Marketing Channels The management recognises that the Internet is changing the fastener distribution network. By distributing through the Internet. the Group will be able to employ real-time communication technology that allows for better control of its inventory, purchasing and logistic support to meet timely delivery. 57 The management is evaluating an e·business presence through the creation of e-commerce capabilities on its website. This website, when completed. is expected to provide a business-ta·consumer (B2C) business model where customers are able to place orders online. The investment required for the establishment of such a business model is currently being evaluated by the management. The establishment of this web presence is expected to provide an alternative sales and marketing channel to drive sales growth. 6.82 Establishment of a Brand Name The Group plans to build its TFM T”l brand name into a worldwide recognisable name. TFMTM already enjoys respectable presence and recognition amongst its peers and buyers in the global market through TFM™’s repeated participation in international trade shows. In line with this strategy, the Group has submitted applications for the registration of the TFMTM togo in Malaysia under International Class No.6. The TFMuoil trademark has been registered in the UK and US, under International Class No.6. The Group’s investment in its brand name reinforces the Group’s dedication to quality that is a hallmark of the work culture that the Group has adopted for its entire organisation. The Group’s brand differentiation strategy is geared towards establishing loyalty, brand image and premium pricing. The Group also aims to produce its catalogues with TFM™ part numbers for distribution to the global market. As brand name becomes more established and the TFMTM part numbers grow, the Group’s customers will start to quote orders in TFMTM part numbers. In line with market development initiatives, the Techfast Holdings Group is currently evaluating the economics of selling third party standoff inserting machines, which is complementary to the Group’s existing operations. The long-term goal is for these machines to bear the TFM TW brand. From a strategic viewpoint, the usage of such machines, which in the future wilt carry the TFMTM brand, by customers, is aimed at increasing the customers dependence on these machines, hence, increasing switching costs should the customers switch to other brands. Switching costs are critical forms of barrier to entry. 6,9 Research and Development The Group understands the importance of R&D in its business continuity and has set-up a R&D facility within its factory building in Shah Alam. The Techfast Holdings Group has embarked on several R&D initiatives on enhancements in product offerings and improvements in production processes. The Techfast Holdings Group aims to create a niche position in providing revolutionary solutions in specifIC areas of sheet metal assembly through design innovation, engineering process innovations and development of higher value·added products with optimal cost efficiency. Currently, the Group’s R&D initiatives are spearheaded by Fang Kok Leong, the Executive Director of Techfasl Holdings, supported by a team of four (4) technical personnel. In line with the Group’s R&D plan, the Group will expand its R&D team. The R&D Department is equipped with equipments such as a profile projector, an inserting machine, a salt spray tester, a micro hardness tester and computer·aided design (CAD) software. 58 The Group’s R&D initiatives are focused on the following areas:(a) Design of Products: (b) Production process improvement; and (c) Machine usage and technological upgrades.
6.9.1 Design of Products The Group’s R&D initiatives in this area concentrate on the design of value-added products, such as panel fasteners, ultra thin metal sheet swage SCFs and plastic encapsulated fasteners, which are expected 10 contribute higher profit margins due to the complexity in the manufacture of these products. The management believes that these value-added products are also the currant focus of manufacturers located in countries which experience higher labour costs, such as Singapore. The Group is in a unique position whereby its manufacturing facilities are located in a country with relatively lower labour costs and the Group also enjoys access to a pool of intellectual capital resources. The Groups’ R&D initiatives on design of new products are on-going as the Techfast Holdings Group intends to widen the breadth of its product offering. The Techfast Holdings Group has successfully designed new SCF series such as ‘TFPF 11/12″, “TFPF30″, TFFF C2” and “TFSP”.
6.9.2 Production Process Improvement The objectives of this area are to develop innovative, effective and efficient production methodologies, and expertise in sourcing of suitable raw material and its usage; facilitate automation through the design of accessory devices and lools; and reduce the dependence on human monitoring. The management is constantly seeking new methods to improve the productIon process and enhance operational efficiencies. Lower costs and efficiencies will ultimately add to lhe Group’s competitive edge. The Group has previously been successful in integrating the turning, chamfering/drilling and tapping process. Currently the Group is conducting research on a new method of production which will create very little scrap materials and the final prooucI will have better mechanical properties in terms of strength. This method of production will also involve substantial cost savings.
6.9.3 Machine Usage and Technological Upgrades (a) In”ovation in Machine Usage Machines, such as the CNC machines and the Davenport 5-spindfe machines, are essential tools for the high precision SCF industry. To remain competitive, the Group recognises that it is imperative to keep abreast with the technology advancements of these machines. The Group is building its technical expertise on the CNC and Davenport machines so that the Group can utilise quick-change tooling and produce a proprietary computerised interface 10 constantly monitor tool wear, productivity and quality. As a start. two (2) of the Group’s employees have been sent overseas to undergo training on using the Davenport machines under Ihe technology transfer arrangement with one of the largest distributors of fastening and assembly products in the world. (b) Technological Improvements I Upgrades In the fastener industry where carbon steel is extensively used, zinc chromate plating is commonly used as a corrosion protection finishing. Although zinc chromate is the norm for fastener protection finishing, the international environmental protection community has called for a stop in the use of hexavalent chromate in zinc plating. Many countries have set a time frame to discontinue the use of hexavalent chromate. The European Union has already set the beginning of year 2007 as the time for total prohibition of use of hexavalent chromate. The USA and Japan are expected to follow suit. The Group is pro-actively collaborating with their plating sub-contractors to develop innovative technologies using organic and inorganic materials to replace zinc chromate conversion in plating. Currently, the Group’s products are already in compliance with the requirements set by the European Union. The amount spent on past R&D projects for the past four (4) financial years ended 31 December 2004 is as follows:31 December 2001 2002 2003 2004 RM’OOO R..’OOO AM’OOO AM’OOO A & 0 expenses 63 110 137 205 Percentage of lLXnover 1.31 2.02 1.65 1.43
THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK ICompany No_ 64782O·D I 6.10 Major Licences and Permits Obtained The details of the Group’s major licences and permits as at 18 Apri12005 are as follows:· Authority Date of licence f Permit Validity Nature of Ucence I Permit Equity Condition Status of Compliance Techfast Manufacturing Royal Customs and Excise Malaysia (“RCE,.,,) 11.01.2003 from 01.06.1999· SalesTax Act Manufacturer’s Licence for video cassettes player parts, remote cootrol parts, telecommunication equipment parts. television radio parts and fax machine parts N.A. RCEM 10.11.2OOJ 06.12.2004 to 05.12.2005 Safes Tax Act -Licence for the import/purchase of materials and components free of sales fax for use in the manufacture of goods NA Min 22.11.2003 from 14.08.2003· Manufacturing licence for SCFs, turned parts and nut parts NA Maj~s Porbandaran Shah Alam (“MBSA”) 07.01.2003 Expires 31.12.2005 Induslrial licence for metal pnxlucls and unlit advertisement permit N.A.
Nofes:· N.A. Not applicable a No expiry date.
6.11 Principal Markets and Major Customers The Group sells its SCFs to a range of companies. both local and internatiOnal, such as OEMs and contract manufacturers as well as wholesalers and distributors. Local sales contributed approximately 23% to the Group’s total turnover for the financial year ended 31 December 2004, with the balance from overseas markets. For the aforementioned financial year. the Group exported to a total of 25 countries respectively. mainly to the US, the UK, Singapore. Italy, Japan and China. Save as disclosed below, there were no customers who individually contributed more than 10% to the Group’s total sales for the financial year ended 31 December 2004:· Name-of CustOITlff Country Length of Relationship (Years) TR Fastenings Ltd United Kingdom 2 Fillech COrpol’Dlion Pte Ltd Singapore 2
The Techfast Holdings Group’s top ten customers for the financial year ended 31 December 2004 are as follows:Name of Customer Country % of Turnover Length of R~ationshlp (Years) TA Fastening Ltd Ukom Caseworks Sdn 8M JDI Fastening PIe Ltd United Kingdom Malaysia SingajX)re 12•9 2•3 TR Formac Pte Ltd Singapore 8 4 Rllech Corporation Pie Ltd SI~e 11 2 $.1. Precision Engineering (Mj Sdn 8M Malaysia 3 6 TR Formac (Shanghai) pte ltd Peoples Republic of 3 3 months China Fastener and Components US 5 3 PSM Celada Fasteners SAL 1ta1y 3 2 YOlXlgreem Electronics (M) Sdn Bhd Malaysia 4 1
The Group does not have any major reliance on any individual customer for business. 6.12 Sources of Raw Materials and Major Suppliers The raw materials required by the Group in the manufacture of SCFs include steel, stainless steel, aluminium and brass. which are mainly sourced from local suppliers. The quality 01 such raw materials is 01 international standards as the Group has adopted the policy 01 only seeking reputable suppliers. The good working relationships developed with its suppliers have also ensured that the raw materials supplied to the Group are priced competitively and delivered on time. Save as disclosed beklw, there were no suppliers who individually contributed more than 10% to the Group’s total purchases 10r the financial year ended 31 December 2004:Name 01 Supplier Country % of Purchases length of Refatlonshlp (Years) Weng Zheng Sdn 8M Malaysia 42 5 Jia Guan Metaline. Taiwan 29 3 Chung Yih Steel Sdn Bhd Malaysia 16 3 months
For the financial year ended 31 December 2004, the Group’s ten (10) largest suppliers were as follows:Name ot Supplltr Country % of Purchases Length of RelatIonship (Y….) Weng Zheng Sdn Bhd Jia Guan Metaline. Chung Vih Sleel scm 8M Malaysia Taiwan Malaysia 42 29,. •4 1 TR Formae Pte Ud Singapore 9 3 E-Metal (M) Sdn Bhd Hwa Guan Metal (lot) Sdl’l Bhd Thi&rl Soon Industrial Hardware SOO Bhd Malaysia Malaysia Malaysia 1 < 1 < 1 6•3 Bright Enterprise (Malaysia) Sdn Bhd Malaysia <1 1 JDI Fastening (8) Pte Ltd Singapore <1 2 TSA Industries (Malaysia) Sdn Bhd Malaysia <1 4
Presently, there are no long-term agreements between the Group and its customers and/or suppliers as it is an industry norm due to the price competitiveness. Please refer to Section 4.2 ~Absence of Long-Term Contractual Agreements with Customers and/or Suppliers” for additional information. However. the Group has satisfied the stringent demands imposed by its customers at competitive prices. thus enabling long-standing business relationships to continue. In addition. the good working relationships established with the Group’s suppliers have ensured their co-operation in terms of supply frequencies, schedule changes and technical advances. Other than the above named suppliers, there are alternative suppliers that Techfast Holdings is able source its supplies from and Techfast Holdings is not reliant on any single supplier. 6.13 Employees As at 18 April 2005, the Group had 185 employees in the following categories:Category of Employees Full-Time Employees Contract Workers Total employees No. % Average Length of No. % Durat’on 01 No. .. Sennce Conlract (Years) (Years) Managerial and professional 7 4 4 7 4 Technical and supervisory 9 5 4 9 5 Clerical, sales and sales related 4 2 4 2 3 6 3 General wor1<ers 3 2 4 29 16 3 32 18 Factory worXers 11 34 6,. 4 120 151 84 81 3 131 185 70 100
The Group recognises the importance of its employees and constantly updates them on the latest developments in the industry. The Group also constanlty grooms its factory operators with cross-functional training to produce multi-skilled machinists who are adept in the functions and handling of various machinery utilised in the manufacturing plant. The employees afe not members of any labour unions and the management enjoys cordial relationships with the employees. There have not been any labour or industrial disputes in the past between the employees and the management, save for an incident involving a claim by an ex·employee for which the decision by the Industrial Court was found to be in favour of Techfast Manufac1uring. The term of employment for the foreign workers is normally for three (3) years. AU the Group’s foreign workers are approved by the Ministry of Home Affairs. As at 18 April 2005, being the lalest practicable date prior to the printing of this Prospectus, there are no action, caution, reprimands or conditions imposed by the immigration department. THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 6.14 Summary of Landed Properties Net Book Title and Value Registered Location I Postal Description Ag.of Building Land …… Buill-up Arca Tenure and as at 31.12.2004 Owner Address I Land Use (Years) (sq. fl.) (sq. ft.) Expiry Date (RM’OOO) Note Techfast HSO 113071. Industrial 7 39,579 29,419 Leasehold 3,728 a Manufacturing PT43 Seksyen 23, Land I Single 99 Years Mukim Bandar Storey (14.0B.2096) Shah Alam, Detached Daerah Petaling, FaC10ry with a State of Selangor three-slorey I No. 11, Jalan Front Office Pasaran 23/5, Annex 5eksyen 23, 40300 Shah Alam, Selangor Daru! Ehsan Techfast H.S(D) 37672, End Unit 2 ‘h 10 1,782 1,554 Freehold 147 b Manufacturing P.T. No. 5184, storey Mukim Klang, link house I Daerah Klang, Staff Quarters State of Selangor I No. 15, Jalan 25/57, Seksyen 25, 40400 Shah Alam, Selangor Darul Ehsan Techfast HS(D) 37363, PT Intermediate 10 840 1,554 Freehold 140 , Manu1acturing 4875 Mukim 2 ‘Ii storey Klang, Daerah link house I Klang, State 01 Staff Quarters 8elangor I No. 23, Jalan 25/47, Jalan Nikmat, 5eksyefl 25, 40400 Shah A1am, Selangor Darul EhSan Perbadanan GRN 43023, Lot 3 apaf1ment 24 2,259 Freehold 243 d Peng….usan 33686, Muklm units I 81aff (aggregate) Valencia Klang, District of Quarters Klang, State of Selangor I No. 3C Block D, No. 4A Block H and No. 8e Block K, Jalan Tokoh 25/28, Taman Sri Muda, 40400 Shah Alam, 5elangor Oarul Ehsan ~:. a The Group’s ffl8nufacturing plant, constructed on the leasehold industrial land, obtained its certificate of fitness (rom MajNs Perbandaran Shah Alam on 21 August 1995. The Group’s manufacturing plant was purchased on 29 May 2002 at a purchase consideration of RM2.5 miflion. The leasehold industrial land, which has been charged in favour of Malaysian Industrial Development Finance Berhad, cannot be sold, leased, mortgaged or transferred in any way unless with the permission of the State Authorities. 64
b The end unit 2 ‘J.. storey link house obtained ;,S certificate of fitness from Majlis Perbandaran Shah AJam on 1.10.85. The house is charged in favour of Hong Leong Bank 8emad and is used as staff quarters. c The intermediate 2 ‘h storey link house obtained its certificate of fitness from Majlis Perbandaran Shah AJam on 2.10. 1985. The house is chargud in favour of Hong Leong Bank Berhad and is used as staff quarters. d The 3 apartment units obtained its certificate of fitness from Majlis Perbandaran Shah Alam on 30 October 1990, 11 October 1998 and 23 September 1998 respec6vefy. The apartments are charged in favour of Hong Leong Bank 8erhad and are uSlNi as staff quarters.
6.15 Intellectual Property Rights The Group’s TFMTM logo has been filed for trademark registration under International Class NO.6 in Malaysia. The logo has been registered in the UK under International Class NO.6 under Trade Marks Act 1994 of Great Britain and Northern Ireland and the US under International Class No.6 under the US Trademali< Act of 1946. The trade mark registered is in respect of the following goods: common metal and their alloy, self-clinching fasteners made of metal. nuts (fasteners) of metal. bolts of metal. metal bolts (fasteners), screws (fasteners). rivets of metal. threaded rivets of metal, spacers of metal, inserts of metals, thread inserts (screw) of metal, screw inserts of metal, spring bushes of metal, bar turned components (rough or semi-finished), and precision turned parts of metal (semi-finished). The registration will be opened for cancellation if the trade mark is not used over 5 years period. For information on the Techfast Holdings Group’s intellectual property rights protection, please refer to Section 4.13 “Protection of Intellectual Property Rights” of this Prospectus.
6.16 Interruptions in Operations There have not been any interruptions in the Techfast Holdings Group’s business that have a significant effect on its operations during the past twelve (12) months preceding 18 April 2005 (being the latest praeticabie date prior to the printing of this Prospectus). THE REMAlNDER DF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK