An extract of the MD&A for 2019. Full version can be found here.
In the ongoing evolution of GSCorp from a single manufacturing site specialising only in injection moulding in Johor Bahru to a multi-site, multi capability manufacturer capable of providing manufacturing solutions to end customers, the company is bound to face up to numerous issues and challenges. However, it must be said that 2019 and the early part of 2020 have proven to be one of the most challenging times to be managing a manufacturing business never mind the transformative changes that the management have set out to achieve. Just as 2019 ended and we began the new year with a degree of optimism as some significant new orders start to materialize, the impact of the Covid-19 suddenly reared its ugly head and we are back to being on the back foot, trying to manage around the uncertainty of the pandemic outbreak on our operations.
We shall be writing a bit more about this issue a bit later, but we will start our management discussion on the revenue side of the business.
The company faced a steep fall off in sales in 2019 when compared to 2018. The revenue recorded for 2019 was RM159mil a decrease of 21% from the year ago level of RM202mil. This fall off in sales is due to a combination of weaker global economy and a decrease in orders from a few key customers.
The Penang facility experienced the steepest fall in sales revenue as key customers pulled in less than expected and this drop in sales had a very significant impact on the profitability of the Penang facility. One of the customers had chosen to relocate their final assembly plant away from Malaysia while other customers had their own particular reasons for their drop in purchases. In the plastic facility in Johor, likewise a reduction in customers’ orders and unfavorable sales mix caused our sales to suffer accordingly. Meanwhile a marginal decline in sales was seen in the Johor sheet metal facility as its customer base
is biased towards industrial products which is generally a more stable demand source as opposed to consumer electronics which has more ups and down. The plastic plant in Vietnam, having moved into a larger and better built facility, gave it an opportunity to increase its sales on a year on year comparison. There was also an increase in enquiries from customers for manufacturing capacity in Vietnam as a lot of companies have set up their plants in Vietnam to supply into the US market to circumvent the US imposed tariff barrier. We are confident that this trend will continue to benefit the Vietnam facility going forward into the future.
COSTS, PROFITABILITY AND CASHFLOW
The reduction in sales revenue is the main reason for the company’s lack of profitability in 2019. Manufacturing companies like ourselves operate on the principle that a certain level of sales revenue is needed in order to cover fixed costs and after which the operational leverage can be quite significant. In the case of GSCorp in 2019, the converse is also true. In this case, all the subsidiaries suffered a drop in revenue and hence all the subsidiaries registered losses for 2019. In particular, the Penang facility experienced a delay in the mass production run for several new customers due to the long gestation period of new products. This was acutely felt as the lost revenue resulted in Penang’s operating result being the worst of all the subsidiaries. In the Johor facilities, extra costs were also incurred in management’s effort in keeping the company in compliance with 5S workplace organization and greater effort in complying with CSR standards expected of a modern manufacturing company. Finally, the successive hikes in the minimum wage rate in Malaysia also had a material adverse effect on our profitability as arguably these wage hikes were not fully supported by productivity improvements especially coming so soon after the previous year’s hike. In order to combat this increase in costs, management is taking active efforts
to instill more efficient manufacturing methods and the practice of lean manufacturing process is being instilled into the work force. There has also been some reduction in the workforce over the year as a cost reduction exercise. The management is confident that when there is an upswing in volume, the company will be able to leverage off these improvements to run on a better operating margin.
The operational overheads of the Company have also increased due to the substantial capex in plant and machinery that has been undertaken by at the various subsidiaries over the past years. These capex have been financed by an increased in bank borrowings therefore increasing interest expense and the depreciation charges of these newly acquired asset also add to the overheads of the company.
Notwithstanding the losses that has been suffered, the company have always been operationally cashflow positive and have at all times been in compliance with banking covenants. The management have been carefully monitoring the situation and giving transparency to our bankers through active engagement. The management is very appreciative of the support from our banking partners who bought into our long-term vision and have been very supportive of our capex programs as well as the working capital requirements that is required to operate in this business.
Over the past few years, the company has been transitioning to be a manufacturing company which can be relied on to provide manufacturing solutions to our customers from near and far, business development efforts have been focused on reaching out to these customers and the capex programme have been initiated in order to give these customers confidence in our ability to fulfill their requirements both in terms of capacity as well as capabilities jobs. For some of the sites, efforts are made to re layout the floor to be more efficient as well as improvements in process and workflow to give us the ability to handle higher production volumes as we supplement those much more substantive capex to purchase additional land and factory previously.
After the capex programs of the past years, the management believe that the increase in the available plant and facilities is at an optimal level and we do not anticipate significant additions to land and building over the next year or two. In the meantime, there may still be requirement for additional machinery to be installed as available capacity or machine tonnage may not match production requirements. Investments may also be made in the area of automation and critical processes as the company moves into being a complete manufacturing partner to our principals. The Enterprise Resource Planning (ERP) and Manufacturing Execution System (MES) that we are in the process of rolling out over the next two/three years will be a vital tool to link up the whole company to allow for data to be collected, stored and used over the entire business activities of the company thereby allowing for better management control of its activities.
BUSINESS DEVELOPMENT AND SALES FOCUS
While we have pointed to the weaker macroeconomic overtone and the reduction of customer orders as the primary reason for the steep falloff in our revenue, it can be argued that inadequate business development efforts in the past have resulted in a lack of customer/project pipeline and an inadvertent reliance on existing customers only. Eighteen months ago, the management initiated a more proactive business development area which resulted in better leads and project wins. An integral part of the process of business development was also the anticipatory capex such as acquisitions of strategically located plant and property and the necessary refurbishment in order to convince our principals that we have the capability and capacity to serve them better.
The other part of the business development effort is to be more proactive in meeting up with prospects. On a regional basis our colleagues in the business development department undertook many trips to Southern China and also further afield to reach out to those who may have been disrupted by the trade war to offer our manufacturing solutions. The realignment of supply chains as a result of the trade war between US and China have certainly increased the level of enquires from principals and brand owners wishing to diversify its supply chain away from China. It is however still incumbent on the efforts of the company to be out there to get the business.
Over the past year, besides the numerous trips over to China, the company also have participated in a medical device fair in Singapore, the K Fair in Dusseldorf, Germany and also in a MATRADE promoted US road show. In these instances, the
Company is very grateful to MATRADE the national trade promotion agency under the Ministry of International Trade and Industry for organising these overseas engagements. We are also very grateful and thankful to MATRADE for our enrolment in a sponsored coaching and mentoring programme under the MTCDP programme which benefited the company collectively and us individually tremendously. It is very heartening to be able to draw on the resources of MATRADE in our overseas marketing efforts and we have no doubt that this will be a very fruitful undertaking.
ENGINEERING AND MANUFACTURING SOLUTIONS
In this age of data and online solutions, devices is increasingly becoming more of a conduit for software connectivity and delivery, therefore product owners are more focused on the development of software, functionality, and marketing aspect of the product while leaning on their manufacturing partners for greater value added solutions in the manufacturing of the hardware. In some recent cases, we have been urged to suggest design improvements for better manufacturing or cost savings. In many ways this complementary capability is not only a value-added service but increasingly seen as a requirement to win new businesses. We recognise this trend and are gradually positioning ourselves in this value chain.
We have been equipping and reorganising ourselves with the right skills and capability to serve this market. We aim to be a globally recognised engineering and manufacturing solutions company.