Elsoft diversifies product base

Elsoft Research Bhd, a light-emitting diode (LED) test equipment maker, will design and develop embedded systems for medical device and automotive companies next year to broaden its revenue base and to mitigate the impact of the volatile LED market.

Group chief executive officer C.E. Tan says in an interview the group will leverage on its experience in developing embedded systems for its own LED testers, marketed under the Elsoft brand.

“We have been making embedded systems for LED test equipment for years. It is time we leverage on this experience to make embedded system for other electronic products, as embedded systems is essential to their operations,” Tan says.

An embedded system is a computer system with a dedicated function within a larger mechanical or electrical system, often with real-time computing constraints. It is embedded as part of a complete device, often including hardware and mechanical parts.

Embedded systems contain processing cores that are either micro-controllers, or digital signal processors, controlling many devices in common use today.

Tan says the group is now in talks with several local and foreign medical device and automotive companies in the country to co-design and develop embedded systems for their equipment and instruments.

“We expect to close one of the deals with a medical device company early next year and start making embedded systems next year,” he says.

The automotive market is a growing sector due to large demand for on-board safety features, telematics in automobiles and electric vehicles.

“According to London-based research firm Technavio, the embedded systems for automobiles contribute to about 20% of the total embedded systems market.

“The embedded systems market for automobiles is projected to reach US$20.9bil (RM66.88bil) due to the new onboard safety features of cars, growing popularity of electric vehicles and the use of computerised functions to transmit information,” he adds.

Tan says the group will leverage on its experience in developing embedded system for its own LED testers.

According to research firm SBD Consultancy and GSMA, which represents the interests of mobile operators worldwide, the global connected car market will be worth 39 billion euros (RM164bil) in 2018, up from 13 billion euros in 2012.

“Feedback from research reports shows that over the next five years, there will be an almost seven-fold increase in the number of new cars equipped with factory-fitted mobile connectivity designed to meet demand among regulators and consumers for safety and security features as well as infotainment and navigation services.

“The rapid development of the global connected car market will be driven in part by positive regional regulatory action in Europe, Russia and Brazil,” he says.

According to GSMA, more than 20% of vehicles sold worldwide in 2015 will have embedded connectivity solutions, and more than 50% of vehicles sold worldwide in 2015 will be connected either by embedded, tethered or smartphone integration.

“Every new car is to be connected in multiple ways by 2025,” the report says.

On its LED test equipment business, Elsoft secured RM10mil worth of orders from customers in Asia Pacific so far in the second half of 2013, driven by demand from multinational corporations in Taiwan and China, compared with RM14.8mil in the previous corresponding period, as there was a slowdown in the global test-equipment market in the second half.

“In the first half of 2013, we secured RM17mil worth of orders compared with RM18.7mil achieved for the whole of 2012. Thus for 2013, we can expect to perform better than in 2012. In fact, we anticipate to deliver the best results ever in five years.

“Feedback from customers is that orders for test equipment will start to come in again early next year,” Tan says.

The LED industry slowdown has to do with the drop in sales of metal-organic chemical vapour deposition (MOCVD) systems, which is critical to the production of LED crystals, according to Digitimes Research, the research arm of Digitimes, Taiwan’s leading high-tech firm.

According to the Digitimes Research report published in April, global shipment of MOCVD is projected to decline by 46% year-on-year to a total of 148 units in 2013, as LED chipmakers have sufficient capacity and the number of LED chips used in LED TV backlighting has been decreasing.

The LED industry, however, is expected to rebound in 2014, according to SEMI vice-president and chief marketing officer Tom Morrow, and that is due to the rise in LED wafer fabrication equipment spending. SEMI is the global industry association serving the manufacturing supply chain for the micro-and nano-electronics industries.

“In 2014, LED wafer fabrication equipment spending will rise 17% to nearly US$1.2bil in 2014, following a 30% decline this year and 45% decline in 2011,” Morrow says.

Moving forward, Elsoft aims to develop more LED test equipment that has the capability to test more LED chips per hour, with only a slight increase in price.

“Our objective in 2014 is to develop high-power LED test equipment, with a selling price of US$150,000 per unit, that can check 10,000 units of LED chips per hour.

“This, in turn, will translate the capital or investment cost of testing to about US$15 for a high-power LED chip per hour, compared with the current US$20,” Tan says.

He says the group will also build more LED test equipment with integrated functions, such as the capability to laser mark identification codes on the LED chips, vision inspection, functions to sort and test the chips according to their brightness and colour categories.

“Such test equipment will help LED lighting producers to cut the cost of production, as they will not need to outsource the task of laser marking and vision inspection to other vendors,” he says.

Tan says the group’s new RM12mil facility, which was financed internally, will start operations early next year and will be used for developing the embedded systems and the new range of LED test equipment.

“Due to the strong sales in the first half of 2013, the group has already outsourced some RM9mil worth of jobs to small and medium-sized vendors in Penang for various types of supporting work,” he adds.

Elsoft, which was listed on Bursa Malaysia in 2005, started as a producer of testers for encoders, optical mouse, integrated circuits and camera modules used in handphones.

“Due to the subprime crisis in 2008, our core business plunged in 2009. Fortunately, we were not in debt and with the help of investment income, we managed to make a profit of RM1.6mil.

“During the downturn, instead of laying off workers, we re-strategised our business plan and invested into research and development for our new generation of automated LED test equipment, which has driven our growth since 2010,” says Tan.

He says too stay relevant in the high-technology test equipment business and to ensure long-term sustainability, Elsoft will continue to invest in applied research.

“We invested RM2mil to RM3mil yearly in applied research activities over the past five years,” Tan says.