DISCLAIMER: THE FOLLOWING INFORMATION IS TAKEN FROM VITROX IPO PROSPECTUS DATED ON 16 AUGUST 2005. SOME INFORMATION MAY BE OUTDATED OR NO LONGER RELEVANT.
1 THE GLOBAL ECONOMY (Source: Infocredit D&B Report)
In 2004. the global economy expanded at its fastest pace since 1984, registering 5.0% growth. The expansion was led by the US, strong growth in the Asian region and a revival of growth in Japan and Europe. Above average growths in the first half of 2004 reflected the strong rebound from the lower base of 2003 as a re8ull of economic uncertainties related to the war in Iraq and the outbreak of the Severe Acute Respiratory Syndrome (“SARS”) in Asia. In the second half-year, despite the dampening effccts of sharply higher oil prices and the increase in interest ratcs, the growth momentum was sustained, reflecting sustained strong consumer spending and the revival in private investments. Ovcrall, the global economy exhibited greater resilience to energy shocks. Robust global expansion was reflected in significant improvements in both international trade and financial flows. Global trade expanded by 8.8% in 2004, mainly due to the global electronics up-cycle, higher eommndity prices and rising import demand, notably in the US and China. In the Asian region, these developments which are in tandem with stronger domestic demand contributed to further expansion in intra-regional 1rade. In the financial markets, major equity market indices increased strongly, buoyed by improved investor optimism amidst higher corporate earnings. In the foreign exchange markets. growing concerns on the large and widening US current account imbalances, and the sustainability of capital inflows to finance the fiscal deficit led to the depreciation of the US dollar against the other key currencies. The outlook for 2005 remains favourable. Both global output and globallrade arc projected to expand al 4.0% and 5.8%, respectively, in 2005. The pace of slowdown in the US and to a smaller extent, China is expected to be modest, on the basis that adjustments of the imbalances in these economics would be gradual. In addition, as crude oit prices recede from its peak as the supply and demand forces reach equilibrium, inflationary pressures are expected to remain manageable. This would provide flexibility for gradual increases in interest rates and in return, dampens the slowdown in consumer expenditure in the US. Monetary conditions are therefore, expected to remain supportive of growth. Meanwhile, China is expected to manage some softening of the economy so as to lessen its impact on the unemployment front. On the global inflation front, price increases arc forecast to rise gradually, stemming mainly from the pass-through effects of higher commodity prices. However, the rise in inflation is expected to be gradual as labour productivity continues to exceed real wage growth. The consensus is that the global cxpansion, while still solid, will therefore likely be somewhat weaker than earlier expected. The balance of risks has shifted to the downside with further oj[ price volatility a particular concern. On the policy side, interest rates will need to rise further as the economic recovery proceeds, although the pace and timing vary considerably across countries, depending on their relative cyclical positions. Global Gross Domestic Product, 1997-2005 (Real Growth) Growth (%) 1996 1997 1998 1999 2000 2001 2002 2003 201>4<: 2005f WorldGDP 4.1 4.2 2.8 3.7 4.7 2.4 3.0 3.9 5.0 4.3 Advanced Economies 3.0 3.4 2.7 3.5 3.9 1.2 1.6 2.1 3.6 2.9 U.S.A. 3.7 45 4.2 4.4 3.7 0.8 1.9 3.0 4.3 3.5 Japan 3.5 1.8 -1.2 0.2 2.8 0.4 -0.3 25 4.4 2.3 Eu:co area .. 1.4 2.3 2.9 2.8 3.5 1.6 0.8 0.5 2.2 2.2 China 9.6 8.8 7.8 7.1 8.0 75 8.3 9.1 9.0 75
,~\f)te.f. ‘* = buiialtts member (OJlI1/ntJ of the Ellro (Jt’ftJ (ANitria, Br’l.ium, Derrmpr!e, Finland, F,anlt, Gtt11ltJ’!Y. Grua, 1/a9. Ireland. LJJxtmboRTg, Nrlhmands, P”rlNg(]!, Spoin, Swedtn, United Kingdt;m) t;:’tJtimaU
7.2 MALAYSlAN ECONOMY (Source: Infocredil D&B Reporr)
With the more robust growth in global trade and domestic demand, the momentum of economic expansion in Malaysia, which began in the second half of 2003, gathered steam in 2004. Real GDP increased by 7.1 % in 2004, registering the fastest growth since 2000. The economy benefited from the rapid growth of global trade in manufactured products and higher priccs for primary commodities. Although global growth moderated somewhat in thc second half of thc year, the Malaysian economy remained resilient with stronger domestic demand providing the impetus for sustained expansion. The private sector was the main force of economic expansion, while the government continued with fiscal consolidation. The prospects for the Malaysian economy in 2005 remain sound with real GDP expected to grow hy at least 5.0% to 6%, The sustained global growth, the modest downturn in the global semiconductor industry as well as relatively favourable prices for primary commodities arc expected to provide support for exports. While the global electronics industry is beginning to consolidate after reaChing a peak in mid-2004, the cyclical downturn is forecast to be modest in view of the strong Asian demand, fast product life cycle and the relatively rapid inventory adjustments. In the domestic economy, the private sector would remain as the main driver of growth, as the government remains commilled to optimising expenditure in order to strengthen the fiscal position. Both household consumption and business outlays are projected to remain resilient, thereby CUShioning some of the effccts of lower public invcstment spending arising from the government’s gradual fiscal consolidation programme. As a small net oil exporter, Malaysia benefits to a degree from higher world oil prices as crude oil accounts for around 5.0% of exports. Since the 2001 economic slowdown, most industrial countries, but notably the US, have pursued highly expansionary macroeconomic policies. As a result, world interest rates are close to historical lows and many countries have bigh fiscal deficits. Low interest rales have fuelled housing and asset price rises, at the same time supporting consumption and leading to a sharp deterioration in the current account in the US. As global GDP accelerated over the past year, inflationary pressure started to mount, albeit remaining very mild. However, higher oil prices, if sustained over a long period of time, will feed int1ationary pressures, possibly forcing interest rates to rise faster than expected. This could trigger a sudden reversal in consumption and savings behaviour, leading to a substantial slowdown in world economic gro\\1.h and affecting, in particular, non·oiJ exports from the Asian economies, including Malaysia. A slowdown in the US economy would have both heavy direct and indirect negative effccts on exports, since the US is by far Malaysia’s biggest export market. The signing of a Malaysia-US Trade and Investment Framework Agreement in May 2004 may help to mitigate this, Inflation is likely to nudge up in 2005, as budgetary consolidation may lead the government to reduce its subsidies on consumer energy. Due to a slowdown in exports, particularly electronics and electrical products, private consumption is expected to remain the main source of GDP growth. The 2005 budget targets a modest reduclion in the deficit to 3.8% of GDP. Going forward, the government’s plan for a new broad·based goods and services tax in 2007 adds credibility to its commitment to fiscal balance, and may pave the way for a long-anticipated cut in business income taxes, which is critical in attracting more
direct foreign investments. Annual Change in Real GDP by Sector (1987-100) Main Indicalol’li (%) 1996 1997 1998 1999 2000 2001 2002 2003 2004p 2oo5f Sectors 8.6 7.7 ·7.4 5.8 8.3 0.3 4.1 5.3 7.1 6.0 Agriculture 4.5 0.7 -3.3 3,8 6.1 -0.6 2.6 5.7 5.0 3.3 Manufacturing 18.2 10.1 ·13.4 13.5 18.3 -5.9 4.1 8.3 9.8 4.5 Mining and quarrying 2.9 1.9 0.8 -3.1 0.3 -1.5 4.0 5.9 4.t 5.0 Construction 16.2 10.6 -23.0 -5.6 0.6 2.1 2.3 \.9 -1.9 ·\.O Services 8.9 9.9 -0.7 3.3 6.7 6.0 6.4 4,4 6.7 5.7
j’\olr. p=prr/£minory [= (omasl 7. INDUSTRY OVERVIEW (Cont’d) 7.3 MAlAYSIAN MANUFACTURING INDUSTRY (Source: In[ocredit D&B Report) The manufacturing sector grew at 9.8% in 2004 compared to 8.3% in 2003 underpinned by double-digit expansion. Robust growth in the manufacturing was mainly driven by strong demand for electronics which is in tine with global pick-up of the semiconductor industry. This is in tandem with developments in the global electronics industry, in which Malaysia is a major exporter. The manufacturing sector continued to be an important contributor to the national economy, aecounting for 31.6% of GDP in 2004. As an export-led economy, manufactured exports took up 78.4% of the country’s total exports. The manufacturing industries have widespread linkages to the rest of the economy. The diversified base would assist to moderate the impact of the ongoing consolidation in the global electronics industry. With the export-<lriented industries facing a slowdown, the domestic-oriented industries are expected to sustain their growth in the manufacturing sector. The country’s manufacturing business is largely concentrated on production, with limited upstream activities as well as downstream activities, where a major portion of the value added can be derived. In light of the keen competition for foreign direct investments from the other emerging economics, the manufacturing sector is venturing into industry deepening, defined as a process of increasing technological capability within a particular industry. This is achieved by increasing the capability to undertake more complex and demanding tasks through the development of new processes, systems and methods, adaptation of best practices, design, engineering development and innovation within the current technology that is used. Industry deepening can lead to a more widespread diffusion on technology, more product differentiation, higher added value and a greater use of local resources. It can also enhance the ability to respond more effectively to changes in market conditions. Industry deepening is especially applicable to the small and medium enterprises (“SMEs”). Rapid technological advancements as well as trade liberalisation and globalisation have placed a severe strain on the SMEs. In promoting the industry deepening process, a core clement is the supporting industries, which are mostly SMEs. Having a strong supporting industry base enables less reliance on foreign imports. It can also create additional employment as well as provide linkages between the large companies and SMEs. A strong supporting industry can also assist the growth of SMEs through subcontracting arrangements and lead to further developments of local entrepreneurs, resulting in a higher utilisation of domestic resources. Recognising the SMEs as an endogenous engine of growth, the govcrnment’s current development focus is on SMEs that have the capability to manufacture products with higher intellectual property content with the requisite human capital.
7.4 THE ICf INDUSTRY IN MALAYSIA (Source: In[ocredi( D&B Report)
The Government has been promoting ICf since the early 1990s. The country’s ICf was fuelled by the public and private sectors’ commitment to develop the country’s ICf infrastructure with the latest technology, including the development of the Internet infrastructure. The Government’s most significant emphasis and support was the establishment of the Multimedia Super Corridor (“MSC”) in 1996 that provides world<lass facilities to foster the development of high technology and innovations for both domestic and foreign companies. The effort is followed by the rollout of the second phase of MSC in Kulim and Bayan Lepas as the hub of development for the northern region in Peninsular Malaysia. The MSC was established for the sole purpose of moving Malaysia towards a fully developed nation with a knowledge-rich and technologysavvy society by 2020. AS part of the strategy to achieve this VISIon, Malaysia embarked on a plan to leapfrog into the information age by providing intellectual and strategic leadership. This meant investing in an environment that encourages creativity and innovation, helping companies, both Malaysian and International, to reach new technology frontiers, partnering global IT players and providing the opportunities for mutual enrichment and success. In addition, special cyberlaws, policies and practices were set up to further facilitate the infrastructure. 7. INDUSTRY OVERVIEW (Cont’d) Data in the past few years showe<! that the Malaysian leT industry has recovered from the economic downturn in 1998. Market billings have stabilised and are expected to grow higher in tandem with the economic revival in a number of service-centric sectors. The Malaysian leT industry revenue from 1997 to 2004 is highlighted as follows: Malaysian ICT Industl”)’ Revenue, 1997 -2004 Year ICT Industry Domestic Billings (RM million)
1997 1998 1999 2000 2001 2002 2003 2004* ~ projtc/ion 5,380 4,840 5,230 5,910 6,510 7,151 7,866 9,050 KNOWLEDGE-BASED ECONOMY (Source: Ill/acredit D&B Report) Over the past few decades, Malaysia has enjoyed phenomenal economic development. The challenges t>f technological advancements, globaIisation and heightened competition are the main factors that necessitate a paradigm shift for Malaysia to reengineer herself for sustainable growth to take place. Recognising such critical need, the Government has embarked on the transformation from a productionbased economy to a knowledge-based economy (“K-based”), which is productivity-driven and competitiveness-driven, supported by knowledge intensive efforts. The Government launched the Knowledge-based Economy Master Plan (the “Master Plan”) under the auspices of the Malaysian Ministry of Finance. The Master Plan provides a strategic framework outlining the changes to the fundamentals of the economy. It is the blueprint guiding the transforming and migration of the country into a K-based economy. The key is to move up the value chain by engaging in original and innovative design, improving quality~ enhancing productivity and competitiveness in all sectors. Educated and skilled knowledge workers, or human capital, arc the most valuable asset. K-based economy is also characterise<! by high investment in R&D, high literacy, high tertiary education enrolments, good technology-related capacity and skills, strength in innovation, high leT penetration and
Internet usage. In providing the infrastructure support for the development of a K-based economy and leT industries, the development of MSC has covered further grounds. As at 15 March 2005, a total of 1208 companies have been awarded with the MSC status of which 928 companies are in operation. The Multimedia Development Corporation estimated that the MSC companies employ more lhan 23,000 people in 2005 as compared to about 19,000 in 2003 and about 22,000 in 2004. In terms of total expcnditure, the MSCstatus companies’ total expenditurc in 2003 and 2004 were RM4.6 billion and RM4.5 billion respectively as compared to 2002 expenditure of RM3.6 billion.
7.6 MACHINE VISION INDUSTRY (Source: lnfocredit D&B Report)
7.6.1 Industry Outlook
Globally, the machine vision systems are used in many industries such as the semiconductor, food, automotive and pharmaceutical. It is a multi-billion industry registering revenues of up to US$6.6 billion in 2003. Within the semiconductor industry, machine vision system market can be categorised into two main segments namely the OEM and the factory floor. The factory 1100r segment comprises the systems integrators and thc end-users. OEMs arc identified as companies that build standard products sold as capital equipment. They will posses the technical expertise to build the machine vision systems directly into their products or source the machine vision systems from developers. These value-added products arc then re-sold to the end users in the various industries. OEMs may be involved in a variety of aclivitics and not all their products will incorporate a machine vision system. System integrators or total machine vision solutions providers are companies that specialise in the development of total machine vision solutions and provide system integration serviccs to meet thc requirements of end-users. They will utilise a combination of proprietary technologies and components from different vendors. End-users are usually technology users who are involved in the manufacturing of a variety of products. They are usually companies which do not specialise in the machine vision system. The end-users markel is not only confined to the semiconductor industry but also the electronics industry, the automotive industry, the food manufacturing industry etc. Total machine vision solutions providers can service a wide spectrum of these segments whether it is the OEMs or end-users.
7.6.1 Global machine vision systems market estimates [n the year 2002, the global machine vision industry saw a decline of 4% from lhe previous year. The global market size stood at US$5.2 billion in 2002 as estimated by Nello Zueeh, President of Vision Systems International. This estimate covers the entire machine vision industry in various application markets including eleclronics industry, automotive industry, food industry etc. Based on the latest report from Automated Imaging Association (AlA), Ihe total world market for all types of machine vision system is estimated at US$6.6 billion in 2003 which represents an increase of 13.5% from the previous year. Based on the revenue analysis of 2003, Japan has the largest market at 35%, followed by North America al 24%, Europe at 23% and the rest of the world has about 18% of the global market. [t is estimated that the global machine vision industry, in terms of revenue will be worth more than US$lO billion by 2008 with a compound annual growth rate (CAGR) of 8.8% per annum between 2003 and 2008. Below is worldwide projected growth of the machine vision industry:
Projected Worldwide Market for Machine Vision 330,000 310,000 290,000 270,000 ~ ‘2 ::J 250,000 230,000
210,000 190,000 170,000 150,000
2003 2004 c:::::J Units 10,500 10,000 9,500 c 0 9,000 a E 8,500 ‘” </>::J 8,000 ” 0 C 7,500 ” > ~ 7,000 6,500
2005 2006 2007 2008 Year -+-Revenue (US$ million) 7.6.2 Machine vision systems in the semiconductor industry The machine vision system industry is relatively dependent on the semiconductor industry as its main market driver. This can be clearly seen from the decline in revenue in the machine vision industry in 2002 when the semiconductor industry took a largc bcating in sales in thc same year. According to Semicooductor Equipment Materials International (SEMI) thc assembly and packaging equipment will be leading tbc way, in the rceovery of the semiconductor equipments in the next two years. Advanced packaging like BOAs and esps including QFNs and other leadless package will be in high demand within the semiconductor industry. In North America, the semiconductor industry contributes 31.5% to the overall revenue of machine vision system in 2003.
Projected World Wide Machine Vision Systems Sold to North America Semiconductor Market 500.0
c 500:sc350.0 ·s300.0
400 0.. -Revenue USl mil : ‘a'” ;:> 250.0 ;:> -+-Unitsu300ii 200.0 ~ 150.0 2000:: 100.0
7.7 GOVERNMENT LEGISlATION, POLICIES AND INCENTIVES (Source: lnfocredit D&B Report)
MalaysLa is onc of the leading sites for the semiconductor assemhling, testing and packing industry in the world as it houscs the world largest industry players like Intel, Motorola, Agilcnt, Fairchild, Hitachi etc. They arc mainly involve in the assembly and testing of semiconductor devices which include microprocessors, memory chips, power lCs, linear ICs, optics devices and other logic and discrete devices. Export of semiconductors in 2002 amountcd to RM89.3 billion which is about 39.8% of the electronics industry. In the 1970’s, the Government promotcd the country to be one with inexpensive labour but today the Government is shifting its focus from being merely having cost compctitivcness but also possesses advance technology to support this industry. Some of the government related bodies which arc focus in this area is listed below: 7.7.1 Intellectual Property Protection Malaysia is a member of the World Property Intellectual Property Organisation (WlPO), the Berne Convention for Protection of Literacy and Artistry Works and signatory to the Agreement on Trade Related Aspccts of Intellectual Property Rights (TRIPS). WIPO is one of the 16 specialised organisalions of the United Nations, which administers 23 international lreaties dealing with different aspects of intellectual property protection. A brief description of some of the key Malaysian legislation for intellectual property protection and the ICT industry is as follows: (i) The Trade Marks Act 1976. This piece of legislation provides for a registration system for marks (for example, logos, brands, signs) used in relation to goods and scrvices. Thc registration of a mark in relation to specified goods or services is valid for ten (10) years from the date of filing and is renewable for subsequent periods of ten (10) years each. The rcgistcrcd proprietor is entitled to commence infringement action against others who use his mark without consenl or lodge a complaint under the Trade Description Act 1972.
(ii) The Patents Act 1983, provides for a system for registration of patents and utility innovations. Upon grant, a patent is valid for twenty (20) years from the date of application. The owner of a patent has the exclusive rights to exploit the patentable invention. assign or transmit the patent and to conclude licence contracts, and to make claims where there is an infringement of its rights. (iii) The Copyright Act 1987, gives the exclusive right to the owner of a copyright for a specific period. There is no system of registration for copyright in Malaysia. Literary works, musical works, artistic works, films, sound recordings, broadcasts and derivative works is protected automatically if sufficient effort has been expended to make the work original in character; the work has been written down, recorded or otherwise reduced to a material form. The Copyright Act 1987 also specifies the circumstances amounting to and remedies for infringements and offences. The Copyright (Amendment) Act 1997 which amended the Copyright Act 1987 provides for unauthorised transmission of copyright works over the Internet as an infringement of copyright. It is also an infringement of copyright to circumvent any effective technological measures aimed at restricting access to copyright works.
(iii) The Industrial Designs Act 1996, implements a system for the registration of an “industrial design” in Malaysia, which arc “the features of shape, configuralion, pattern or ornament applied to an article by any industrial process” being features which in the finished article, appeal to and are judged by the eye. The registration is valid for five (5) years and is renewable for two (2) further periods of five (5) years each. The Industrial Designs Act 1996 further specifies the extent of rights granted to the owner and what amounts to infringement.
(v) The Layout Designs of Integrated Circuits Act 2000 sets out the criteria for the protection of the layout design of integrated circuits and the extent of protection conferred upon the right holder. A layout design is valid for ten (10) years from the date it is first commercially exploited.
(vi) The Digital Signature Act 1997. This is an enabling legislation which allows for the development of, amongst others, e-commerce by providing a method for secure on-line transactions through the use of digital signatures.
(vii) The Communications and Multimedia Act 1998, provides a regulatory framework to cater for the convergence of the telecommunications. broadcasting and computing industries in Malaysia. It includes the formation of The Malaysian C’.ommunications and Multimedia Commission as the sole regulator of the new regulatory regime. (viii) The Computer Crimes Act 1997, creates several offences relating to the misuse of computers, such as unauthorised access to computer material, unauthorised access with intent 10 commit other offences and unauthorised modification of computeT contents. 7.7.2 Ministry of Science Technology and Innovation (MOSTI) The Ministry of Science Technology and Innovation (MOST!) was established in 1973 as the Ministry of Technology, Research and Local Government and assumed the name of Ministry of Science, Technology and Environment in 1976. In April of 2004, the ministry was split and assumed the name of Ministry of Science, Technology and Innovation (MOSTI). The all encompassing mission of the ministry is to promote science and technology competence in order to maintain intemational competitiveness while ensuring environmental conservation and sustainable development. Since 1988, the Government has implemented a centralised grant system of financing science and technology (S&T) research in public institutions and research agencies. The MOSTI is charged with the responsibility of managing the fund and the implementation of S&T research and development (R&D) programmes in the country. During the Eighth Malaysian Plan (2001·2005), a total of RMl,622,8 million was originally allocated for R&D but the amount was later revised upwards to RM1,922.8 million, Of this amount, RM1,363 million has been specifically allocated for R&D funds in the following areas: (i) IRPA (allocation of RM840 million) which provides funding for applied, strategic and prioritiscd research are more industry-related and with greater potential for commercialisation; (ii) Biotechnology Research and Development Fund (BRDF) (allocation of RM103 million) established under the BIOTEK;
(iii) Industry Research and Development Grant Scheme (raS) (allocation of RM230 million) which will enable private sector companies to collaborate with public universities and research institutions to conduct R&D especially in areas of advanced manufacturing, electronics, photonics as well as machinery and equipment; (iv) MSC Research and Development Grant Schemes (MGS) (allocation of RMI00 million) which enable MSC status companies to undertake research in the area of leT; and
(v) Demonstrator Application Grant Scheme (DAGS) (allocation of RM90 million) to foster wider participation of the community in using leT.
7.73 MSC Status
MSC status is onc of the key initiatives of the Government to facilitate leT growth in Malaysia and to spearhead Malaysia’s Vision 2020. MSC physically occupies a 15 kilometres by 15 kilometres garden corridor located close to the region’s largest international airport, Kuala Lumpur International Airport, the administrative capilal of Malaysia, Putrajaya and a world-elass intelligent city, Cyberjaya. It is also an integrated logistics hub with express rail links to Kuala Lumpur. The MSC is also supported by a world-class high-capacity global telecommunications and logistics network built on a 2.5 -10 gigabits digital fibre optic backbone. In order to drive the development and growth of the MSC, seven (7) MSC Flagship Applications were launched, namely, e-Governmcnt, multipurpose card, smart schools, tele-health, R&D cluster, e-business and technopreneur development. Together, these Flagship Applications will push ahead the development of MSC and will provide business opportunities for leT companies, the ultimate effect of which will be to transform the Malaysian society into a knowledge society. To attract participants to the MSC, it has offered a ten (10) point Bill of Guarantee, that is: (i) Provide a world-class physical and information infrastructure;
(ii) Allow unrestricted employment of local and foreign knowledge workers;
(iii) Ensure freedom of ownership by exempting companies with MSC Status from local ownership requirements; (iv) Give the freedom 10 source capital globally for MSC infrastructure, and the right to borrow funds globally;
(v) Provide competitive financial incentives, including no income tax for up to ten (10) years or an
investment, tax allowance, and no duties on import of multimedia equipment; (vi) Become a regional leader in intellectual property protection and cyberlaws; (vii) Ensure no Internet censorship; (viii) Provide globally competitive telecommunications tariffs; (ix) Tender key MSC infrastructure contracts to lcading companies willing to usc the MSC as their regional hub; and
(x) Provide an effective one-stop agency -MDC.
7.8 PROSPECTS AND INDUSTRY OUTLOOK (Source: lnfocredit D&B Report)
The prospects and outlook of the machine vision industry will largely depend on the demand from the electronic industry which will then spur the semiconductor industry. The electronics industry is forecasted to gain momentum due to increased consumer demand for wireless products and higher corporate spending for IT infrastructures. Both these segments arc expected to drive the demand for the semiconductor industry in the corning years.
7.8.1 Electronics Industry
The second largest application market for machine vision systems, after the semiconductor industry, is the electronics industry. It has been estimated that as at 2002, 17.1% of any electronic systems arc made up of semiconductor. Over the past few years production trends had indicated that the semiconductor industry had closely mirror the trends of the electronic industry. This can be clearly seen from the graph below: Worldwide Electronic System Production vs Worldwide Semiconductor Growth (1983·2007 (I)
“”~ SO ~ e:;;40 ~ e'” 0 ~30 tl 20 ‘” ~ 0 0 u 10 ‘5 0 CFlo 0 -10 .,—Electronic -10 -20 system sales (“!o) ·30-IS ·l –+–Semicond-40·20 uctor Yea< Indus-tn’ Nott: *” Foncast Within the electronics industry, machine vision systems can be used during the printed eircuit board (PCB) assembly process. Machine vision system are being used to detect solder paste presence, coplanarity, component leads, verify presence and position for components and pattern position during board assembly process. Machine vision systems arc also being used to inspect flat panel displays. With the increasing demand for flat panel displays, this is another industry which will significantly impact the sales of machine vision system. Within the electronic industry, the higher demand for machine vision system seems to be driven by the ever-smaller components, increased components per square inch, finer pitch density ctc. The trend seems to be moving into 3D machine vision system used to measure solder paste volume and X-ray based systems used to inspect soldercd boards. In North America, there was an increase of 21.2% (2002: US$21.2 million; 2003: US$25.7 million) in 3D machine vision systems in 2003 compared to 2002.
7.8.2 Semiconductor industry in Asia
The machine vision system has been predominantly utilised in the semiconductor industry. Thus the prospect of growth in the machine vision system will be dependent on the semiconductor. The semiconductor industry has played a significanl role in the development of many countries in Asia. Countries like Malaysia, Singapore, Philippines and Thailand have benefited from the outsourcing of many semiconductor manufacturing companies to this region. With the emergence of China in the international market, Asia has been a focus of many semiconductor companies. In 2004, the semiconductor industry in Asia Pacific has grown 42.5% compared to 2003 in tcruns of tOlal shipments. Malaysia The semiconductor industry in Malaysia has been primarily focused on the production of linear and digitalICs. memory, microprocessors, oplo-electronics, diserelc deviccs, hybrids and arrays. The export of semiconductor dcvices accounted for RM89.3 billion or 18.6% of total exports in 2004 which is an increasc of 4.8% from thc previous year. The Malaysia American Electronic Institute (MAEI) projected that the semiconductor industry will sustain a growth of 6.9% over the next two (2) years. Malaysia is important in the international semiconductor industry. As at 2004, Malaysia’s semiconductor exports accounted for 7.1% of the worldwide semiconductor exports. Among developing countries, Malaysia is the second largest exporter of semiconductor devices after Singapore. The Malaysian semiconductor industry has begun to move from basic operations to more complex packages to cater for demand of faster, smaller aod higher computing power and multi-functional chips. Singapore In 2004, the semiconductor total output increased by 15.1% compared to 2003 output. The semiconductor output SG$28.7 billion in 2004, which translates into 15% of the total manufacturing output of Singapore. In order to maintain the country’s competitiveness in this industry, the government is promoting high end manufacturing such as semiconductor design and wafer fabrication abilities. The efforts arc supported by logistics infrastructure and supporting industries such as fabless and fab-lite companies, third-party testing and assembly facilities and device manufaclurers. China Over the span of a few years, China has emerged as one of thc largest consumer of scmieonductor products, accounting for ncarly 40% of global sales. China is also primarily involved in the back end semicooduclor assembly and lest industry and like Malaysia it is slowly venturing into wafer fabrication. Many semiconductor companies invested in China to take advantage of its cheap and abundant labour supply in the country. China is expected to experience an average annual growth of 18.6% in the semiconductor industry until 2007. The government of China is providing many tax incentives in enticing large semiconduclor companies to establishing their plants. Chip makers are expected to pay zero income tax for first five years of inveslments and then pay half of the regular tax in the next five years. It is the government’s strategy to reduce reliance on foreign companies compared to its local consumption from 80% to at least 50% in the coming few years. Philippines The Philippines is another country in South East Asia which is heavily reliance on the semiconductor industry. As at end-2004, exports from semiconductor accounted for 51% of the country’S total export. There arc more than 800 companies in Philippines which are involved in the semiconductor industry but the country is slowly losing ground in terms of FDI to countries like Thailand and Vietnam. The Semiconductor and Electronics Industries in the Philippines (SEIPI) estimatcd that the local semiconductor industry will grow at 10% but still much slower than the other countries in this region.
7.8.3 Emerging trends in the IC packages in the semiconductor industry Not only is the semiconductor industry growing in terms of volume, it is also advancing very rapidly in terms of technology. Within the front end processing. especially in wafer fabrication, the wafer size had grown from 200mm in the mid 1980’s to the current size of 300mm. Not many companies in the world are capable of producing this wafer size. In Malaysia, the technology has only advance to producing wafers of 150mm to 200mm. As the cost of fabricating wafer increases as the size gets larger, the importance of machine vision system increases in tandem. The trend is moving towards integrated metrology tools which can replace thc standalone devices. In addition the technology for IC packages has also changed as they become more complex and lead count has also increased. In the mid 1990’s the lead count for IC was around 300 but by 2005 it is eSlimated that lead count could grow to about 1,500. With increased number of lead on the IC, the need for machine vision systems becomes more critical. This becomes another potenlial for growth for machine vision systems. The current trend in IC packages towards increased speed, with larger number of pin counts and the packages getting smaller in size. Demand is also pushing for more advanced packages like BGAs and esPs with greater acceplance of QFNs and other leadless package. It is expected that the demand for advanced packaging is about at 95% in 2004.
7.8.4 Emerging trends in machine vision system
Consumers arc continuously demand faster, cheaper, increased accuracy, ease of use and more robust machine vision system. Machine vision system designers have always trade off one element for another, for example in order to have increased accuracy the system will operate at a lower speed. However, with increase demand from consumers, this trade offs is increasing hard to justify. Thus, machine vision suppliers need to look for new innovative ways to fulfill customers demand. One of the ways to reduce cost can be by adopting the use of open standards which dispenses with the need to pay for licensing.
Secondly the advancement in machine vision components like the cameras, lenses, frame grabbers have also enable the industry to adopt smaller components, higher speed and greater accuracy. For inslance, the FOV of area scan has shrunk to capture more details for greater accuracy. Unfortunately the area which the machine vision system needs to cover has become larger as the image area has grown beyond the range of a standard 640 pixels by 480 pixels area-scan eamCra. This has prompted the use of line scan cameras which builds an image by capturing thc entire objeci to be inspected, line by line and fecd it into a frame grabber for input to the PC. Traditionally, the software of the machine vision system is perceived to have complicated and complex algorithms which makes the system not easily adaptable. The new trend is to use adaptive algorithms which consist of software models that can adapt to changes without having 10 require major reprogramming from the suppliers. Artificial intelligence (AI) is one ncw adaptive algorithms technology which allows high versatility during inspection. In addition, designers of machine vision syslem has also incorporate the usc of human machine Interface (HMI) to cnsure case of usc and empowering Ihe endusers to be able to conduct cuslomised solutions without the need for major development work. As such if machine vision systems continue to be able to fulfill customers’ demands of requiring faster, cheaper, increased accuracy, ease of use and more robustness in its system, the higher the prospect of these systems being utilised in different application markets. As a machine vision system developer, ViTrox continues to keep abreast with the curreot emerging trends and started to ineorporale the use of all these new and innovative technologies especially with AI and HMi. Keeping abreast with new trends in the industry has become a necessity in order to ensure that machine vision developers stays ahead of competition and adapt to the ever changing needs of its customers.
7.8.5 Diverse application markets
The second largest application market for machine vision systems, after the semiconductor industry, is the electronics industry. Within the electronics industry, machine vision systems can be used during the printed circuit board (PCB) assembly process. Machine vision system are being used to detect solder paste presence, coplanarity, of component leads, verify presence and position for components and pattem position during board assembly process. Machine vision systems are also being used to inspect flat panel displays. With the increasing demand for flat panel displays, this is another industry which will significanlly impact the sales of machine vision system. Although the semiconductor industry is one of the pioneers and largest consumer of machine vision system, other application markets arc slowly to recognise its benefits. The food industry for instance has been using machine vision system to reduce the need for manual labour and increase production efficiency. In the fruit picking industry, for example machine vision systems arc being used to replace manual sorters to sort the ·’good” fruits from the rotten ones. The replacement of manual sorters is inevitable as the cost of labour increase and the monotony of the work has shunned many new workers especially those working in Europe and US. In the automotive industry, machine vision systems are being used in the assembly lines. One company in Europe introduced the use of machine vision system in the gear assembly bearings. For safety issues, there was a need to ensure 100% accuracy in the assembly of gear bearings. The machine vision system is able to verify the presence of all bearings in each assembly and gauging their diameters to make certain they are shaped correctly and not damaged. Another industry which has received a lot of attention from the machine vision industry is the pharmaceutical industry. Machine vision systems arc being used in verifying and proofreading some of the labels on the boxes to ensure that the descriptions arc accurate. Machine vision syslems have proven to bc very successful in the packaging of pharmaceutical products as it relieves the industry from hiring manual workers to perform these lasks. With the growing acceptance of machine vision system in different manufacturing industries, the usc of machine vision systems will increase tremendously. Although, the semiconductor is still the major consumer of machine vision system, it will not be long before these systems arc incorporate into manufacturing Jines diverse industries to improve quality of products.
8. SUMMARY OF FIVE (5)-YEAR BUSINESS DEVELOPMENT PLAN
The following is a summary of the five (5)-year Business Development Plan prepared by ViTrox for the purpose of inclusion in this Prospectus.
8.1 BUSINESS OBJECfIVES
Since the establishment of the Group in 2000, the Group has carved a niche reputation in the development of cost effective and innovative machine vision inspection system with customisation capabilities. In preparing to transform the Group into a leading global total machine vision solutions provider, ViTrox Group is seeking additional funding from the capital market to realise its aforesaid potential. The ViTrox Group will continue to meet the challenges of fulfilling the growing expectations of the market while maintaining its profitability. This will entail balancing business expansions, operalion efficiency and technological enhancement with financial viability. Efforts will be channelled towards coordinating product innovations, market expansions and staff training with operation and cost management efficiency.
8.2 KEY BUSINESS STRATEGIES
8.2.1 Business Development As part of the Group’s plan to achieve its Objectives, the management has laid out the necessary foundalions. ISO 9001:2000 certification is just one of the many targets that ViTrox Group has achieved. The next milestone to be achieved by the Group within the next five (5) years is the implementation of the Six Sigma programme to ensure continuous improvements on productivity and quality. Six Sigma certification indicates that an organisation has achieved all the required competencies that measures quality products to ensure near perfection. To achieve Six Sigma, a process must not produce more than 3.4 defects per million parts. A Six Sigma defect is defined as anything outside of the customer’s specifications. This certification will ensure thai ViTrox Group will receive visibility in the international market such as international companies like General Electric and Motorola, who arc also Six Sigma certified. In order for an organisation to be Six Sigma certified, organisations must nominate individuals to undergo training of the sLlbject matter, complete and pass all the proficiency tests io addition to the ability to demonstrate competency in hands-on environment. These training and proficiency tests arc usually organised by Six Sigma training and consulting company. Upon completion of the course and achieving the Six Sigma crileria in all the proccsses in the organisation, t~e organisation will then be Six Sigma certified.
8.2.2 Market Development
The ViTrox Group has defined a strategic globalisation programme for next five (5) years, in which a series of initiatives have been and on-going to be carried out to expand the business globally. In the initial phase of the globalisation programme, the Group will continue to participate in the international semiconductor trade shows to promote the Group’s products as well as to estahlish a global network with global OEMs and cnd-user. ViTrox Group has planned its market expansion plans in two (2) phases: Globalisation Programme Phase 1 The globalisation programme phase 1 will entail the sales and marketing division of Ihe Group concentrate on North Asia namely China, Taiwan and Japan as well as South East Asia namely Philippines and Thailand. In addition, the Group will set-up technical service and support centres in those selected target markets to provide system supports, software updates and systems maintenance, which forms part of the Group’s efforts in providing timely response to its overseas customers needs.
Globalisation Programme Phase 2 In the second phase of the globalisation programme, the Group will focus on expanding its presence in USA and Europe. 8.2.3 Product Development Strategy ViTrox Group has identified three (3) areas for the Group’s produci development in the next fivc (5)
years as follows:Product Expansion The Group will continue to conduct R&D to improve on the 2D vision inspection systems and 3D vision inspection systems in order to improve upon the speed, accuracy and user-friendliness in line with the rapid changes in the semiconductor industry and customers’ demands. In the meantime, the Group is expanding the 2D and 3D vision inspection system for ltigh lead count Ie packagcs as well as other new packages in the market. On the next stage of product advancement, the Group intends to go into colour vision inspection systems. Vertical Expansion With the Group’s established cxpcrienee in the machinc vision systems design and development, the Group is well prepared to venture deeper into the machine vision industry which is to provide a complete machine vision inspection haodler. ViTrox’s strategy would bc to focus on developing vision handlers, which are not currently produecd by its existing key customers and thus, would be servicing a niche market with relatively few competitors and potentially higher margin. Application Market Expansion The Group intends to develop new macltine vision inspection systems to explore market opportunities in new segments within the semiconductor sector in the near future. The new markcts includc vision inspection systems for Front-Of-Line processes and advanced packaging, some of which may bccome industry standard in the near future. In tltis new market segment, the Group intends to focus on two (2) areas namely the llip-cltip inspection system and flexible tape inspection system for advanced packaging. 8.3 CONCLUSION With the identified key business strategies as set out above being implemented over the next five (5) years, ViTro< Group believes thaI the Group will be able to continuously meet the technological and financial expectations of the market through diversification and enhanced depth of its product offerings and market reach, supported by an expected growing demand for machine vision produ<.-‘1S and favourable industry prospects as set out in Section 7.6 and Section 7.8 of this Prospectus.