THE market is rife with speculation that main board listed optical data storage manufacturer Megan Media Holdings Bhd may lose its largest customer Grundig AG.
However, executive director of Megan Media Yeo Wee Siong is keen to put those concerns to rest. We are confident we will not lose them (Grundig). Our relationship with Grundig is a long and very established one. Even our extension of the current contract came about after Sampo bought into Grundig.
In fact, we met up with both parties, both Sampo and Grundig, and as I said we are confident we will not be losing Grundig. It is merely an assumption (that we will lose Grundig), he tells BizWeek.
The recent proposed acquisition of 80 per cent in Nuremberg-based Grundig by Taiwanese company Sampo Corp for RM405 million has sparked market talk of a possible switch by Grundig to Taiwan-based software manufacturers, once an ongoing contract with Megan Media expires in December 2005.
Last year, Grundig was Megan Media's largest customer, accounting for some 35 per cent of the software company's business, and contributing some RM50 million in turnover to the company.
Sampo, it is believed, is looking to use Grundig's distribution channel to sell more of its own products while increasing the latter's market share in Asia. Sampo may also be looking to shift Grundig's purchasing department to Taiwan.
Yeo explains that even in the event of Megan Media losing Grundig's business, there is nothing to fear as the company has many other clients, more than the company can handle.
We have other large clients as well, more than our capacity in fact. We have had to add more production lines and install a new facility to cope, this should be able to increase our capacity by some 40 per cent by this year end, Yeo says.
Megan Media has an impressive list of clients including Etronics Corp Ltd, International Business Machines Corp (IBM), BASF Corp, Samsung Electronics and Mitsubishi Electric Semiconductor Group, among others.
An analyst from Maybank Research agrees, stating that Megan Media may not necessarily lose Grundig's business.
The risk (of losing Grundig) is there, but the company (Megan Media) is not just merely manufacturing CDs for Grunding, but they also do other work like labelling on CDs, and other add hoc services for the company, she says.
She adds that Sampo is more of a hardware company, while Megan Media's contract with Grundig is more for software, making it unlikely that there will be any change with Sampo taking over Megan Media's functions.
Unless of course Sampo wants to introduce a Taiwanese software company, but then again there is the 30 per cent import duty on Taiwanese CDs, as part of Europe's anti-dumping policy, making it difficult for such a move, she notes.
Taiwanese companies manufacture CDs at a song, requiring the imposition of a 30 per cent import duty to protect European CD manufacturers from losing business. There is, however, no such imposition of duty on Malaysian made software.
Megan Media is also in talks with certain Korean and Japanese companies, to form long-term ties, manufacturing CDs and DVDs, which could hedge such a (big) loss as Grundig, says the analyst from Maybank Research.
She says that the outlook for Megan Media seems positive with the demand for both CDs and DVDs showing upward trends.
An analyst from a local research house holds a differing view. The actual impact of the loss of Grundig is hard to say at present. Yes, the company (Megan Media) may be looking to hedge the possible loss of Grundig with Korean and Japanese parties making up the difference. However, it will be better if Megan Media retained Grundig, and still won long-term contracts with the Korean or Japanese parties.
The local research house analyst says Megan Media's sales could moderate to the minimum contractual volume until 2005, if Sampo decides to source optical products from Taiwan, posing a potential business risk to Megan Media.
Optical media products are the largest contributor to the company's earnings, some 52.4 per cent of last year's turnover. The profit margins on optical media are also considerably high ranging from 40 per cent to 60 per cent, meaning the possible loss of Grundig could erode profit margins.
Megan Media's five largest customers contribute to some 65 per cent of sales that has compelled the company to diversify its customer base. This plan, however, has taken a back seat to the company's plan to increase capacity.
The company aims to be able to produce 20 million optical disc a month from the current capacity to produce 7.5 million discs a month. Megan Media ran at full capacity throughout last year but still had to turn away excess orders, most of which were from existing clients like Grundig and Etronics Corp.
For the cumulative two quarters ended Oct 31, 2002, Megan Media made a net profit of RM11.88 million on the back of a RM99.40 million turnover, up from the corresponding period the preceding year, where the company made RM10.40 million in net profit and RM58.12 million in turnover.
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