Scotiabank Global Economics Report

Scotiabank 

Global Economics

In-depth commentary and analysis

Scotiabank Economics provides in-depth commentary on economic, financial market and policy developments, both domestically and internationally.
With operations in more than 55 countries, Scotiabank is well equipped to provide this comprehensive worldview and the tools to make informed investment decisions...

According to a Scotiabank report published in July 2016, global gaming revenues will stabi­lise in 2016 after a sharp downturn in revenue.

“Economic conditions will remain support­ive of gaming, with increases in travel volumes across Europe, the United States and the Asia-Pacific region through this year.

“China’s economic slowdown is unlikely to weigh on outbound tourism expenditures, as the nation shifts to consumption-based growth as opposed to resource extraction and manu­facturing.

“A rapidly growing middle class and rising wages in China will boost gaming revenues in the region, and has spurred large casino devel­opments and expansions in Vietnam, Malaysia and the Philippines, amongst others,” the Scotiabank report adds.

The long term prospects of the aerospace industry looks rosy, as Boeing has recently forecast that there will be a need for 39,620 new aircraft worth US$5.9 trillion over the next 20 years.

GLOBAL ECONOMICS | GLOBAL VIEWS

Weekly commentary on economic and financial market developments

August 26, 2016

Key Data Preview

EUROPE. The economic calendar in Europe is quite busy this week. Flash inflation figures for August will be published in Germany and Spain on Tuesday, August 30th, followed by France, Italy, and the euro area aggregate on Wednesday, August 31th. We expect that Eurozone flash HICP inflation will remain stable at 0.2% y/y in August as favourable base effects from energy prices are partly offset by softer core consumer prices. Indeed, growth in Eurozone core inflation is forecast to ease slightly from 0.9% y/y in July to 0.8% in August due to softer service prices. Energy price base effects should lift August inflation in Germany and France slightly to 0.5% y/y from 0.4% in the prior month and 0.3% y/y from 0.2%, respectively.

LATIN AMERICA. Colombia’s DANE will release second quarter GDP data on Monday. We forecast Colombian output to have grown by 2.4% y/y following a slightly larger 2.5% expansion in Q1, marking a significant slowdown from growth of around 6% y/y as recently as 2014. The country’s economy has been affected by a steep deceleration in mining output and exports coupled with fiscal restraint to tackle a widening budget deficit. Brazil will also publish GDP figures, expected to show a contraction of around 4% y/y in Q2, slowly bouncing back from a massive 5.9% drop in the last quarter of 2015. Brazil and Colombia’s central banks will announce their policy rate decisions on Wednesday, where we expect policymakers to leave rates unchanged at 14.25% and 7.75%, respectively. Year-on-year inflation remains high in both countries, running at close to 9% y/y. This is close to two times the 4.5% midpoint of Banco Central do Brasil’s target inflation range of 2.5-6.5%, though appears on track to reach the center of the band in 2017 after cresting at 10.7% y/y in January. Inflation in Colombia, however, has steeply increased from under 2% in late 2013 to 9% y/y in July with no clear signs of abating and excessively above the 4% upper bound of the central bank’s range. Banrep has strongly sought out to tackle rising inflation expectations before the increase in prices, mainly in agricultural products, seeps through to rising wages; thus exacerbating inflationary pressures.

ASIA. India will release second quarter GDP data on August 31st. We estimate that the economy expanded by 7½% y/y following a 7.9% gain in the January-March period. While India’s outlook remains favourable, growth will likely slow from the first quarter pace due to base effects. India is the fastest growing major economy in the world. Against the backdrop of muted global trade activity, the Indian economy is able to outperform because it differs from its peers by being more dependent on domestic demand instead of exports. We expect India’s real GDP growth to average 7½% y/y in 2016-17, driven by household spending. Rainfall of the ongoing southwest monsoon has been above average, which will boost agricultural output and support rural incomes and consumption over the coming quarters. The administration’s commitment to improving road, rail, and energy infrastructure will provide further support. Nevertheless, India is expected to continue to struggle with a lack of private-sector investment until the nation’s business environment improves further.

The Fed, Asset Bubbles And The Reach For Yield   

Evidence of widespread asset bubbles is weak in housing and stocks, while the Fed can’t control the Treasury curve as it once did. Is a broadly based asset bubble emerging in the US economy that could require monetary policy to lean against it? There are actually two separate questions here. One is a lean-versus-clean debate among central bankers with respect to whether they should attempt to preemptively lean against asset bubbles via tighter monetary policy and in light of the experience of the past decade, or apply their policy tools toward cleaning up the aftermath. For now, however, the more primary question concerns evidence of asset bubbles as a motivator for Fed hikes in the first place. This has to be done in somewhat more rigorous fashion than pointing to absolute price levels that get used and abused in headlines about record or near-record this and that. Everything has to be valued or benchmarked relative to something else and that’s why Economics is all about ratios in one form or another. HOUSE PRICES ARE STILL WELL BELOW THEIR PEAKS First, look at housing. The US S&P CoreLogic Case-Shiller measure of house prices is now only 2% lower than the 2006 peak. Some interpret that as evidence of froth. The problem is that there has been growth in the fundamentals that have been driving valuations over time. Enter charts 1-3. They benchmark prices to rents, inflation, and incomes respectively. On average, they are nowhere close to record valuations. Real house prices are still about 15% below the December 2006 peak, house-price-to-income is still about 26% lower than the July 2005 peak, and house price-to-rent is still about 36% below the June 2007 peak. The desired aim should not be to reflate housing to the point of causing renewed imbalances, but the relative valuation metrics suggest that we remain considerably away from such a point. With house prices currently rising at about a 5% y/y nominal pace and growth occurring across these fundamental drivers — and others like local construction costs — the point of regaining prior valuation peaks likely lies years into the future. STOCKS AREN’T CHEAP, BUT THEY’RE NO BUBBLE EITHER The same logic applies to stock valuations. The S&P500 nominal price index currently sits at its highest level on record. Again, however, it is ratios that rule over index illusion. Multiple ratios need to be used given that no one single measure is perfect. Enter charts 4 through 8. Stocks are not cheap, but they’ve been more expensive in the past. On average, the measures suggest stocks are at the upper end of the fair value range. That makes the argument for popping a stock bubble weaker than looking at index levels, even if (a) the Fed could do so, and (b) the Fed should so do. Therefore, if a reason that the Fed believes it should hike rates is that evidence of financial froth is rampant, then a) it may be generally wrong in some of the key asset classes that matter most—except for bonds that the Fed may very well be unable to control, and b) central bankers arguably have as bad a track record at trying to pre-emptively cool asset bubbles as they do cleaning up the aftermath. The search-for-yield global bond market environment likely sets a cap on Treasury yields further up the curve that is more driven by relative carry influences including the impact of relative central bank policies. As the BoJ continues to buy a rising share of JGBs, ditto for the ECB and EGBs, the BoE has re-joined the bond buying party, and no one at the Fed is talking about halting reinvestment of maturing flows for a very long time, global scarcity of tradable fixed income product is going to continue to get worse. Supply on the open market will remain a challenge of greater significance than a quarter point hike here or there while demand for fixed income assets from investors such as pensions and life insurance companies continues to rise. In fact, hiking in such fashion as to add to USD strength could further improve expected returns into US yields and thus intensify appetite for US fixed income assets. This is not the bond market of 1994 or even a decade later and it’s not clear the Fed is as powerful an influence upon it as it once was in a less globalized world for central bank policies. Raising short-term rates in this environment risks courting the influences of a flat or possibly inverted curve.

World Trade Turns Higher —

But Slowly And From A Low Base

Global output growth may be showing some early signs of reviving. The volume of world trade increased a comparatively solid 0.7% in June, with exports and imports ringing up equally impressive 0.7% gains. Both advanced and emerging economies reported solid gains in export volumes in June. Among the advanced economies, exports were led by the U.S., though all regions outside of the euro area posted respectable gains. Central and Eastern Europe and Latin America registered the largest monthly advances, followed by a more modest gain in Asia. From an import perspective, the U.S. continued to exhibit comparatively strong demand for imported materials for the third month in a row, followed by a solid increase among ‘other’ smaller advanced nations. Japan and the Euro area recorded relatively weaker monthly gains. A number of factors are reinforcing expectations for a stronger and more sustained rebound in world trade volumes. First, U.S. demand for imported products should continue to rise. After an exceptionally weak economic performance which averaged a paltry 1% in the first half of the year, early indications point to a at least a 2½% annualized rate of growth in Q3, if not more. U.S. consumer and residential activity continues to be quite robust, the massive inventory liquidation of recent months appears to have run its course, and the contraction in energy-related business investment has moderated significantly. Second, the pace of output growth in China has stabilized as key sectors of the economy — autos and housing, public sector infrastructure, and State Owned Enterprises — have responded favourably to the latest monetary and fiscal stimulus despite ongoing efforts to reduce overcapacity in a number of industries. And third, the Brexit fallout on U.K. confidence and investment has been moderated by the lower-valued sterling which has buoyed the spending power of tourists and retail sales, alongside the ramped up monetary stimulus provided by the Bank of England. Activity in the euro zone had been showing moderate growth. Nevertheless, it may be premature to expect that a strong and sustained turnaround in world trade is developing. June’s uptick in volumes followed three successive months of decline. Coupled with the tepid and uneven performance of prior months, the year-over-year growth in world trade volumes has remained unchanged over the past year. Recent revisions to the global exports and imports have tended to favour more downside than upside adjustments. And anecdotal evidence — seaborne container traffic and port activity in many regions, for example — remains on the softer side. There are a number of factors — both cyclical as well as structural — which are likely to limit the extent of the rebound in world trade volumes. First, the global economy has been hobbled by a combination of self-reinforcing slowdowns. China’s output growth has effectively been cut in half in recent years, reducing demand for imported resources and intermediate and final products. The resulting oversupply conditions and weak commodity prices among the world’s major commodity producers, including the U.S., triggered an unprecedented global contraction in business investment. Although there are indications that the momentum of the downturn in business capital spending has moderated, the rebalancing underway has yet to fully run its course. The U.S. economy has not fully recovered from a prolonged period of export weakness, attributed to the persistent sluggishness in global growth and a strong U.S. dollar. Second, event risk is on the rise, further aggravating the sub-par growth performance around the world. These include geopolitical problems associated with Brexit, the recent coup attempt in Turkey, debt-related legacy government and financial sector strains in the euro zone, repeated international terrorist strikes, the refugee crisis in the Middle East, increasing civil strife in more and more countries experiencing widening income disparities, as well as aberrant weather. Not surprisingly, global output growth is expected to average close to a meagre 3.2% this year and next, down from the average of 3.4% in the 2011- 16 period which excluded the post-great recession stimulus-induced rebound, and well below the 4.8% average in the six years prior to the downturn. Third, potential output has been lowered considerably, notwithstanding the unprecedented monetary stimulus that continues to support worldwide activity. Cyclical factors are being reinforced by structural ones. Productivity gains across advanced and emerging economies alike have continued to moderate. In many countries, demographic trends are also less supportive with populations aging and labour force participation rates sharply reduced. Fourth, protectionist sentiment is creeping higher in the slower international growth environment. According to the World Trade Organization and the International Monetary Fund, local content rules and subsidies for domestic industries are becoming more prevalent. The raising of non-tariff barriers flies in the face of the prolonged effort to lower tariff barriers, and continued efforts to ratify trade deals, CETA and TPP for example. Populist policies being offered in an increasing number of countries facing national elections have raised the spectre of re-evaluating and rejigging existing trade initiatives as a means to redress economic and social underperformance. Fifth, there are signs that many companies and countries are ‘shortening supply chains’. Intermediate parts used in the manufacturing production process are increasingly being fabricated closer to the final assembly point or concentrated in larger markets, thereby reducing imports and trade. This change reflects a variety issues related to costs and security (for example, significant exchange rate fluctuations and the building of redundancy to offset potential production and delivery interruption). And sixth, technological developments, including 3D, are contributing to the reduced demand for the global trade in goods. Precision parts — new and replacement — can now be manufactured on-site, negating the need for international shipments. The volume of world trade expanded almost 2 percentage points faster than the globe’s real GDP in the six years leading up to the great recession, but has underperformed the globe’s output growth by 1 percentage point over the past six years of expansion (2011-16). Although many of the factors listed have added to the drag on trade, the prolonged weakness in business investment and the resulting falloff in imports appear largely responsible. World trade is largely dominated by goods production, with the precipitous slide in the advanced economies cascading through the emerging nations. Generating stronger and more sustained global growth and investment spending will likely continue to prove difficult in the medium term. Monetary policymakers are running out of manoeuvring room. Many governments are reluctant to implement more expansionary fiscal policies. And efforts to further liberalize international trade are meeting resistance…

Companies & Strategies

Pocket of Resistance

Despite recent bad news, some areas of the manufacturing sector in Penang are doing well.

Ang says the output of PVC is expected to increase to 14,000 MT by 2018 from about 8,000 MT presently.

Khaw: We also use a smaller quantity of resin for thin-gauged products, which saves us on pro­duction cost.'

By David Tan

StarBizWeek/Sunday, 27 August 2016

THE closure and relocation of factories in Penang have generated the impres­sion that all is not well with its manufac­turing sector, in particular the technology seg­ment, which is the backbone of the state’s free industrial zone.

But the surge in worldwide demand for plastic packaging materials, foods, test equip­ment, aerospace components and gaming machines are benefiting some of the compa­nies in Penang involved in those businesses.

Flexible packaging material manufacturers have gained from a weaker ringgit against the US dollar, lower raw material cost and growth in the demand from existing and new custom­ers, in particular from the food and beverage and healthcare segments.

SLP Resources Bhd managing director Kelvin Khaw says that the group imports about 45% of the raw materials, while some 60% of its earnings are in US dollars.

“This offsets importation cost, allowing us to gain more in foreign exchange.

“We also use a smaller quantity of resin for thin-gauged products, which saves us on pro­duction cost.

“As the thin-gauged materials are of higher value due to their durability, the selling price are maintained, and not adjusted downwards in tandem with lower resin price,” Khaw adds.

The price of resin is now around US$1,200 per metric tonne (MT) compared with US$1,600 per MT in 2014.

The selling price of packaging materials range between US$2,200 per MT and US$2,700 per MT, depending on whether they are con­ventional or thin-gauged packaging materials.

The food and beverage sector, generating 12% of SLFs revenue, provides steady orders for the group’s conventional and high-value products.

“Moving forward, we want to anchor the group’s business in the healthcare segment which is also another reliable segment that can provide consistent orders.

“We are talking to a healthcare customer in China to whom we plan to supply about 1,800 tonnes of packaging materials by 2018.

“The group plans to produce 18,000 MT of plastic packaging materials by year-end, com­pared with 17,000 tonnes in 2015, which would have a value of about RM154mil based on the average selling price of US$2,200 per tonne,” Khaw adds.

Thong Guan Industries Bhd is also riding on the growth in the food and beverage sector to be the largest polyvinyl chloride (PVC) food wrap producer in South-East Asia by end 2017.

Group managing director Datuk Ang Poon Chuan says the output of PVC is expected to increase to 14,000 MT by 2018 from about 8,000 MT presently

“The PVC food wrap business, generating about 9% of the group’s revenue now, is expected to contribute about 18% by 2018,” he adds.

Thong Guan expects its performance for this year to improve over 2015 due to rising demand for stretch-film products from existing and new customers, projecting a double-digit percentage growth of not more than 20% in orders in the second half of 2016, according to Ang.

Thong Guan has set a target to produce about 120,000 tonnes of packaging products for this year, about 20% more than a year ago.

According to a Smithers Pira report, the global market for flexible packaging will grow at an annual average rate of 3.4% during the period of 2015-2020, reaching US$248bil in 2020.

The report says the food packaging sector, occupying over 70% of the global consumer flexible packaging market, grew by 4% on average in volume terms, and reached over 18.8 million tonnes in 2015.

The growth in the demand for gaming machines in the Asean region is generating fresh business for gaming machine manufac­turers like RGB International Bhd.

RGB is projecting a double digit percentage growth over last year’s net profit, riding on the demand in the gaming industry in Asean.

Group managing director Datuk Chuah Kim Seah says RGB is getting more orders from entrepreneurs in Asean countries either to lease or to buy gaming machines.

“The secured orders for the first half of 2016 is 700 units of gaming machines valued at RM80mil, of which about 500 units have been delivered to customers.

‘Tor the second half, the group had 400 more gaming machines with an estimated market value of RM45mil to deliver before the end of the year.

“South Asia is also a potential market where we are trying to penetrate.

“As our earnings are 60% in US dollars, we naturally gain in foreign exchange as the ring­git has weakened,” Chuah adds.

Gaming outlook

According to a Scotiabank report published in July 2016, global gaming revenues will stabi­lise in 2016 after a sharp downturn in revenue.

“Economic conditions will remain support­ive of gaming, with increases in travel volumes across Europe, the United States and the Asia- Pacific region through this year.

“China’s economic slowdown is unlikely to weigh on outbound tourism expenditures, as the nation shifts to consumption-based growth as opposed to resource extraction and manu­facturing.

“A rapidly growing middle class and rising wages in China will boost gaming revenues in the region, and has spurred large casino devel­opments and expansions in Vietnam, Malaysia and the Philippines, amongst others,” the Scotiabank report adds.

The long term prospects of the aerospace industry looks rosy, as Boeing has recently forecast that there will be a need for 39,620 new aircraft worth US$5.9 trillion over the next 20 years.

SAM Engineering & Equipment (M) Bhd, a leading aircraft component maker, is on track to have its aerospace business to generate 80% of its revenue in 2017, as the orders in hand of the group has increased to RM3.5bil from RM2bil in 2014.

Last August 2015, SAM Engineering secured a long-term contract to supply major machined parts to the A319neo, A320neo and A321neo PW110G engine, which will add a projected US$130mil (RM520mil) to its current order book.

However in the shorter term, the aerospace industry’s growth is experiencing some hic­cups due to the slowdown in the delivery of Boeing.

“Boeing has given a 2016 revenue guidance of US$93bil-US$95bil, slightly lower than the US$96bil achievement for 2015.

“This decline is no surprise as Boeing had already warned investors about a slowdown in Boeing’s deliveries for 2016,” according to Market Realist, a leading provider of institu- tional-quality investment research and analyt­ics.

SAM Engineering, for example, has reported lower net income for the quarter ended June 30 2016.

The group posted RM9.8mil in net profit on the back of a RM127mil revenue, compared with RM13.2mil and a RM134.4mil achieved in the previous year corresponding period.

In a filing to Bursa Malaysia, the group attributed the dip to the decrease in revenue from the aerospace, precision engineering, and equipment manufacturing segments.

Not all technology and electronic manufac­turing companies are experiencing slow orders as a result of the downturn in the semi­conductor and electronic industries.

Test equipment manufacturers in Penang are expecting to close with a good financial year as they supply also to the automotive sec­tor, which makes up about 40% of their busi­ness.

They also supply to major smart phone brand names which require their machines to check semiconductor and electronic compo­nents for used in next year’s new models.

Their earnings are largely in US dollars, off­setting the 10% to 30% of the production cost spent for importing raw materials.

Pentamaster Corp Bhd, for example, sup­plies about 40% of its test equipment for the automotive sector.

Group executive chairman CB Chuah says the group will deliver approximately RM40mil of test equipment in the second quarter of 2016.

“About 40% of the test equipment are for the automotive segment, compared with 30% a year ago, while the remaining are generated from the smart device sector.

“We are projecting a double-digit percentage growth for our revenue and bottomline in 2016.

“We spend about 30% of the production cost to import raw materials, while the earnings are about 80% in US dollars,” he revealed.

In the first quarter this year, the group deliv­ered about RM30mil of test equipment, a sig­nificant portion of which went to the automo­tive industry, according to Chuah. .

MMS Ventures Bhd, which supplies 40% of its test equipment to the automotive industry, is also on track to achieve better results over 2015.

“We import about 10% of the raw materials used for the test equipment, while our earn­ings are about 70% in US currency.

“In the first half of 2016, the group has deliv­ered between 30 and 40 units of test equip­ment worth more than RM20mil,” Sia adds.

GUH Holdings Bhd, a printed circuit board (PCB) manufacturer, is also expecting to deliv­er improved results for 2016 over last year as there is growth in orders for PCBs used in the automotive industry, audio and visual prod­ucts, and home appliances.

“Our PCBs are used in branded automotive and consumer electronic and electronic home appliance products.

“The Asia-Pacific region is still the hub of consumer of electronic device manufacturing activities due to lower manufacturing costs.

“The demand for PCBs has increased because countries like Singapore, Thailand and Vietnam are showing a high growth rate in the production of electronic goods,” group manag­ing director Datuk Kenneth H’ng says.

Poultry supplier CAB Cakaran Corp Bhd is on track to achieve a RMlbil revenue this 2016 fiscal year ending Sept 30 2016, driven by the demand from Singapore and Johor.

‘Tor the last six months, demand from the domestic market and Singapore has improved by double digit percentage growth over a year ago same period.

“Our subsidiary in Singapore, Tong Huat Poultry Processing, has benefited from the growth in demand and is expected to generate about 10% of the group’s revenue for 2016 fis­cal year.

“Our company in Johor, CAB Cakaran Sultan Sdn Bhd, which started operation late last year, has also contributed recently,” group manag­ing director Chris Chuah says.

Companies supplying to the construction sector are feeling the impact of the slowdown in the building industry, and are taking meas­ures to deal with the situation.

Astino Bhd currently has six production facilities located in Penang, Selangor, Malacca and Pahang and is expected to produce about 108,000 tonnes of roofing and building materi­als for the 2017 financial year ending next July.

The group expects the 2017 fiscal year to be flat against 2016.

“Our targeted output for 2017 is about 108,000 tonnes of building materials and roof­ing products, which is more or less the achievement for 2016.

“We are also looking at a monthly revenue target of about RM38mil per month, which is the same as a year ago.

“The bulk of our building material products are sold in the country,” executive chairman Ng Back Teng says.

He says the domestic market is slow although on-going infrastructure projects and private housing schemes in the country are generating demand for its products.

“There is no clear indication as to when the market will improve but we think there should be some pick up in the next two years,” Ng says.

Due to the slowdown, Chin Well Holdings Bhd is reducing the output of heavier construc­tion grade fasteners, and raising instead the volume of value-added lighter DIY fasteners.

“In Europe this construction slowdown occurred in the third quarter 2016, while in Malaysia since last year’s fourth quarter.

“We expect to produce less than 100,000 MT of fasteners for the 2017 fiscal year ending next June, which means that the per quarter output of fasteners for the 2017 fiscal year would be less than 25,000MT,” group executive director Tsai Chia-ling says.

Chin Well is now negotiating with a US cus­tomers to conclude a 30 container per month deal for do-it-yourself (DIY) fasteners for a 10 month period, which is renewable yearly.

“Given today’s selling price of fasteners, the 30 containers is worth about US$500,000.
“The demand for DIY fasteners has increased in UK and Europe as more people are undertaking renovation work for their homes,” Tsai adds. Chin Well is also negotiat­ing to conclude a major deal with a US cus­tomer to sell grill mesh by its subsidiary Chin Herr.

SMEBiz Focus

Plastic Fantastic

The Company’s Group MD showing off the products made by Rapid Growth at their plant in Bukit Minyak, Penang.

A worker doing QC inspection on the hygiene care products Rapid Growth manufactures.

A worker getting ready to ship out Rapid Growth's plastic-based hygiene care products.

The production floor for manufac turing extrusion plastic sheets at Bukit Minyak.

The future is plastic for Rapid Growth

Hygiene care products being churned out at the Rapid Growth's plant.

Cepco's Lim showing the plastic resin used in the production of extrusion plastic sheets.

Cepco employees working on extrusion plastic sheets at the factory in Bukit Minyak.

The manager super­vising a technician at the Cepco fac­tory

Cepco's factory in Bukit Minyak, Penang.

The medical device segment is proving to be a lifesaver for plastic manufacturers in Penang in the face of the slowdown in the semiconductor and F&B sectors, DAVID TAN talks to two SMEs that are moving into this new growth area.

The Star/Focus/Monday, 29 August 2016

THE GROWING medical device industry has become an attractive sector for plastic-based consumer product manufacturers to source for fresh business opportunities.

According to a Euromonitor International report released early this year, the global medical device production value will record strong growth of almost 6% in 2016, reaching US$315bil.

Although the Asia Pacific region is difficult to access, the region may provide medical device producers the opportunities to grow and gain new markets over 2016, the report says.

One Penang-based manufacturer that is looking to tap the plastic-based medical device business is Rapid Growth Technology, which is leveraging its vast experience in making plastic-based hygiene care products. Group managing director Ng Choon Keat says the company will be investing more than RMlmil in a production line to manu­facture disposable medical device used for treating external injuries for a customer in the US.

“The US customer has spent seven years to design the product,” he reveals.

“We are now in discussion with the cus­tomer on how to add value to the product. We plan to start production at the end of this year, tapping into the state-of-art production line we’ve imported from Japan and 'Germany to make plastic-based products.

“The company also already has the ISO- 13485 certification, which enhances the our eligibility to bid for major overseas con­tracts,” Ng says.

“Our plan is to focus on the US market, which accounts for 26% of the global market, making it the largest producer and consumer of medical devices in the world,” he stresses.

Moving forward, Rapid Growth is also looking to tap into the medical device market in South-East Asia.

“The medical device market in the Asean region is projected to double from US$4.6bil in 2013 to US$9bil in 2019, according to the data from Medical Manufacturing Asia 2016. Three Asean countries — Malaysia,

Indonesia, and Thailand — account for approximately 65% of the current medical device market among the 10 member coun­tries,” Ng adds.

Currently, Rapid Growth is involved in the manufacturing of hygiene care products used in residential and commercial premis­es, washrooms and automotive.

 “We produce about five million sets of hygiene care products per annum, of which the bulk are air hygiene products. Rapid Growth manufactures for a US-based multi­national corporation, which supplies the , worldwide market.

“This means hygiene care products made by Rapid Growth are widely used in the world,” Ng points out.

He says the company is targeting to gener­ate about RM80mil in revenue this year, up from about RM60mil a year ago.

“We are able to maintain consistently a reasonable net margin per annum because of the cost-saving technology used in the pro­duction process.

“In this competitive market, it is not possi­ble to raise selling price to cover for higher salaries and higher importation costs.

“The company spends about 30% of its production costs on US dollars and euros to import raw materials such as plastic resin from overseas,” he says.

Rapid Growth also does value-added design work on to the products to make them more attractive and appealing to the market.

“The company allocates about RM500,000 per annum for design and development activities. Nowadays being an original equip ment manufacturer (OEM) is different from about 10 years ago, where most OEM compa nies didn’t have the opportunity to take part in designing work.

‘To save cost and to better position them­selves for global competition, many of our customers now are outsourcing designing work for their products to us.

“Moving forward, Rapid Growth is in the process of transforming itself into an origin design manufacturer. We plan to achieve this objective in three years,” Ng confides.

Rapid Growth operates in a 180,000 sq ft manufacturing facility on a four-acre site in Bukit Minyak on the Penang mainland, engaging some 280 workers, comprising mainly skilled workers such as engineers and technicians.

Another Penang SME that has cottoned on to this segment is Cepco Trading. The Prai- based company is targeting its sales of cus­tomised high-impact polystyrene sheets at the medical sector, aiming to make it contrib­ute about 30% to the company’s revenue in three years’ time.

The customised high-impact polystyrene sheets are for making rigid thermo-forming tray packaging materials used in the medical industry.

“Due to the slowdown in the semiconduc­tor and food and beverage segments three years ago, we decided to tap into the medical device industry, as the demand from the medical device market is more consistent,” says Cepco director Jansen Lim.

“Both the demands from the semiconduc­tor and food and beverage segments have declined by about 10% to 12% per annum for the past two years,” he reveals.

The group’s total revenue from the manu­facturing and trading divisions is expected to stay flat at around RM60mil this year.

Lim says the group has since last year also started tapping into the stainless steel trad­ing business.

Cepco is now distributing stainless steel under the Ulbrich brandname for the manu­facturers in the medical, automotive, and aerospace industries.

“But because of the global slowdown, sales from the stainless steel trading segment is expected to decline to RMlmil from RM1.5milin 2015.

“According to Outokumpu, a leading

Finnish stainless steel producer, the global stainless steel demand is set to reach 38 mil­lion metric tonnes in 2016 and 39.2 million MT in 2017, with global consumption expect­ed to increase at an annual average growth rate of around 3% from 2016 through 2019,” Lim adds.

Cepco spends about 30-50% of its produc­tion cost in US dollars and euros to import raw materials such as plastic resin from overseas, depending on the product mix.

In its annual report, Outokumpu says the deceleration of growth is most pronounced in the Asia Pacific region and the Americas, where the growth slowed markedly below the average rates of previous years, Outokumpu reports.

“Slowing economies in emerging markets, notably China, broad-based weakness in global manufacturing and deteriorating nick­el prices resulted in weaker demand growth in 2015 compared with previous years,” the report adds.

Lim says growth for 2016-19 is likely to be driven mainly by increased consumption of around 3% per annum in Asia Pacific, while demand in Europe, Middle East and Africa (EMEA) and the Americas is estimated to increase by around 1% a year.

Lim says that this is the reason why the medical device sector will serve as the most consistent driver of growth over the next three years.

Cepco ventured into supplying the medical device segment three years ago. Presently, its trading business contributes about 60% of the group’s RM60mil revenue.

“The other 40% comes from manufactur­ing, which is spearheaded by sales of custom­ised engineering plastic sheets for the semi­conductor and food and beverage sectors,” says Lim.