DESPITE a slowing global economy, local test and vision inspection equipment companies will collectively increase their outsourcing expenditure to small and medium industries (SMIs) to over RM500mil this year.
Pentamaster Corp Bhd, Vitrox Corp Bhd, MMS Ventures Bhd, and Elsoft Research Bhd are some of the companies with plans to spend more on outsourcing this year, and will raise their expenditure for design and development activities.
Pentamaster Corp Bhd executive chairman C.B. Chuah said, although the global semiconductor industry remained sluggish, the increase in outsourcing could be expected as many of the local test equipment companies are turning to the military, automotive, medical, and general-illumination industries to generate growth.
According to Chuah, revenues from the semiconductor industry used to be the main rice bowl of local test and vision inspection equipment manufacturers, but due to its volatile nature, many of the companies have turned to other sectors to reduce their dependence on the semiconductor segment.
According to Connecticut-based Gartner research company, the spending for semiconductor wafer fabrication equipment is forecast to decline to US$27bil (RM83bil) this year, a 9.7% drop from 2012.
The market is projected to return to growth in 2014, according to Gartner.
“In 2011, when the semiconductor market was healthy, the collective revenue of some of the 10 test and vision inspection equipment companies in Penang was approximately RM1.6bil, of which about 60% was outsourced to small and medium vendors in Penang.
“Last year, due to the poor demand for semiconductor test equipment, the amount outsourced was about RM500mil.
“This year, because local test equipment companies are able to tap other opportunities, the collective amount to be outsourced can be expected to exceed RM500mil, as there are 10 medium to large test and vision inspection equipment companies in Penang,” he said.
Chuah said Pentamaster is increasing its outsourcing expenditure this year to RM60mil compared with RM40mil last year.
“The work to be outsourced includes computer numerically controlled fabrication work, sheet metal work, mechanical assembly, and powder coating,” he said.
Material test handlers, test equipment, and vision inspection systems manufactured by local companies are used to test printed circuit boards (PCBs) and sensor integrated circuits used in smartphones, tablets, automobiles, medical devices, military equipment and LED lighting products.
Pentamaster is also increasing its design and development expenditure from RM3mil to RM6mil this year, to produce new-generation test equipment that can handle smaller integrated circuit (IC) packages that presently measure 0.35mm in thickness and 0.6mm in length and width.
On the smartphone and tablet market, Chuah said, according to Gartner’s projection, the number of smartphones and tablets purchased was expected to jump from 821 million in 2012 to 1.2 billion in 2013.
“Although the jump is about 45%, the growth in the segment alone is not enough to generate jobs for all test equipment manufacturers.
“This is why it is necessary to tap into the business opportunities of the growing military, medical and automotive sectors,” he said.
Vitrox Corp Bhd is also raising its outsourcing expenditure this year to RM40mil, up from RM20mil to RM30mil in 2012.
Group chief executive officer Chu Jenn Weng said the group would outsource customised electronics design and development work and machined precision component fabrication.
“We will also raise our design and development expenditure to RM12mil this year from RM10mil in 2012 to innovate our present three-dimensional vision inspection technology.
“The demand for our vision inspection equipment will come from the automotive, medical equipment, smartphone and tablet markets, which are expected to drive up the sales of the vision inspection equipment by 10% to 20% this year,” Chu said.
MMS Ventures Bhd, a light-emitting-diode (LED) test equipment manufacturer, will outsource approximately RM6.5mil worth of projects to SMIs this year, compared to RM5mil in 2012.
Its chief executive officer T.K. Sia said the challenge in the LED industry today is to produce LED testers equipped with manufacturing processing features as well.
“The group’s testers equipped with processing features such as sorting, packaging, and assembling helps our customers to produce LED lighting products cost-effectively as they don’t have to rely on manual labour or outsourcing for these functions.
“Although there is growth in the LED lighting industry, there are also many players fighting for the general illumination market.
“Thus, to compete, you need to produce equipment that can help customers to reduce their costs for producing LED lighting,” he said.
MMS will spend around RM2.2mil this year for design and development work, compared with RM1.6mil a year ago.
Sia said the market outlook for general illumination looks flat the first quarter of this year.
“This is because most of the LED manufacturers have already bought the testers for the new lighting products recently released into the market.
“The high price of LED lighting is still a barrier to adoption,” he said.
According to Taipei-based technology newspaper Digitimes, worldwide LED sales are projected to reach US$15bil this year, growing at an average rate of 17% since 2011.
LED test equipment maker Elsoft expects its sales for the first half of this year to grow at a double-digit percentage rate compared with the same period last year.
Elsoft’s chief executive officer C.E. Tan said demand for LED test equipment comes from countries such as China and Taiwan, which started to phase out incandescent lighting last year, and from Malaysia, which is scheduled to ban incandescent lighting by 2014.
“We will also be outsourcing more work to local SMIs, increasing the expenditure from RM6mil (2012) to RM8mil this year.
“The other contribution to the group’s revenue this year will come from the smartphones and tablet market.
“We will be spending about RM4mil on designing and development work this year, compared with RM3mil in 2012, to produce test equipment that can sort out different groups of LED lights more efficiently.
“The function helps customers produce higher quality LED lighting products for the general illumination and high technology consumer electronic product markets,” he said.
The expectation that the opportunities in the military, automotive, medical, and general illumination sectors will mitigate the impact of the semiconductor industry is justified and well supported.
Demand for military devices such as infrared imaging systems, laser designators, mobile telecommunication equipment, and rangefinders are some of the growing areas in military applications, according to Defencetalk.com, a global military and defense news portal.
The current global man-portable military electronic market is presently valued at about US$2.77bil, according to the news portal.
“The Asia and the Middle East are growing markets for infrared detectors and systems,” said Chuah.
Meanwhile, according to Espicom, a UK-based research company, the global medical equipment market is expected to rise to US$434.4bil in 2017; a compounded annual growth rate of 7.15% for the 2012 to 2017 period.
“There is strong demand in the US and Europe for advanced medical equipment such as magnetic resonance imaging and positron emission tomography, a nuclear medical imaging technique that produces a three-dimensional image or picture of functional processes in the body.
“Asia Pacific is also a fast growing market, with a projected compounded annual rate of more than 6.71% for the period 2009 to 2017,” Chuah said.
According to the Canada-based Scotiabank’s Global Auto Report released in December 2012, global automobile sales are expected to grow by 4% this year, after having seen growth averaging 7% for the past three years.
The report said strong growth employment in the developing nations, low interest rates, and the recent acceleration in the pace of monetary expansion around the globe are the key reasons for the projected growth in worldwide automobile sales.
According to TechNavio’s latest report out in December 2012, the global market for original-equipment-manufacturer automotive electronics will be worth US$198.93bil by 2015.
One of the key factors contributing to this market growth is the need for enhanced driving assistance, the report said.
TechNavio is an international online-business research portal specialisng in automotive, engineering, and IT reports.