48
materials, and from regulations issued by foreign governments, such as import bans on the Group’s product types, which may adversely affect the Group’s price competitiveness and revenue.
For instance, the US government has enforced a policy to impose import duties on Chinese furniture products since 2005 as a result of a decision by the US International Trade Commission’s the USITC.
This decision was motivated by the belief that Chinese furniture producers had carried out dumping practices on exports to the US. As a result, Chinese furniture products have become less competitive in
terms of price, prompting a significant decline in sales of Chinese furniture products. Although at present the US government is not enforcing any tariff policy on Indonesian furniture products, the enforcement of
such policy in future may result in a significant impact on the Company’s sales. In addition, the USITC is in the midst of reviewing its tariff policy. Should the USITC decide to lower or remove the import duty
tariff on Chinese furniture products, sales of Chinese furniture products to the US market may increase and therefore impact sales of Indonesian furniture products, including the Company’s sales to the US
market.
In addition to the US government regulations, the Company may also be affected by the EU rules and regulations on the trade of wooden products. In May 2016, the EU’s FLEGT has decided that Indonesia
would become the first country in the world qualified to issue FLEGT licenses following the acknowledgement of the Timber Legality Certificate or Sertifikat Legalitas Kayu the SLK issued by the
SVLK as a FLEGT License. The Company currently possesses the SVLK certificate and therefore has met the FLEGT requirements to export furniture products to the EU market. However, should the
Company fail to maintain the SVLK certificate, or should the Company fail to meet new EU regulations in the future, the Company’s ability to sell its products to the EU market may be adversely affected which
may result in a decline of the Company’s sales.
6.2. MATERIAL RISK FACTORS
Risk relating to foreign exchange rate fluctuations for the Company
The Company’s export revenue and expenses are primarily denominated in USD and Rupiah respectively. In accordance with Bank Indonesia Regulation No. 173PBI2015 concerning the
Mandatory Use of Rupiah Within the Jurisdiction of the Republic of Indonesia, the Company’s transactional currency for domestic transactions such as payment of salaries and wages, procurement of
materials from domestic companies and other operating expenses is Rupiah. The Company’s consolidated financial statements are prepared in Rupiah. Therefore, any fluctuation in the USDIDR
exchange rate may affect the accounting of the Company’s export revenue and profit in the Company’s consolidated financial statements. For instance, any significant appreciation of Rupiah against USD may
result in a decrease of the Company’s export revenue recorded in its financial statements, and therefore may have material adverse impact to the Company’s financial performance.
Risk relating to the supply of raw materials
The Group internally sources for logs and timber from Narkata and Belayan, as well as externally through third parties. There is no assurance that the supply of raw materials will always be available to
meet the demand and specifications required by the Group. Risks may arise from factors that are beyond the control of the Group. Majority of logs and timber produced from the forestry concessions in East
Kalimantan are transported via the rivers in the concession to the ports located next to Narkata and Belayan. The occurrence of the El Nino phenomenon or the La Nina phenomenon may also impact the
supply or logs and timber since the transportation of logs and timber are affected by the rise or fall of water levels in rivers. In addition, adverse sea conditions may also hamper the transportation of logs and
timber from the ports in East Kalimantan to the Group’s productions facilities in Sidoarjo, East Java. In the long term, if the Group fails to manage their internal sources or is unable to secure adequate
49
supplies of raw materials from external sources, there may be an adverse material impact to the Group’s business activities, financial performance, business performance and prospects.
Risk relating to fire at production facilities
The Group’s production facilities are highly susceptible to fire due to the nature of the raw materials and production processes involved. The dry kiln and boiler areas may be susceptible to fire if not properly
maintained or operated as these areas are actively utilized. In addition, the finishing areas may also be susceptible to fire as these areas contain a significant amount of flammables such as dry timber, paint,
glue, and other chemicals. If fires that break out in the Group’s production facilities are not immediately dealt with or contained, they may cause significant damage to the Group’s production facilities which
may have an adverse impact to the Group’s financial and operational performance.
Risk relating to the increase in the regional minimumwage level
The regional minimum wage in Sidoarjo has increased significantly during the last few years, from Rp1.3 million in 2012, Rp1.7 million in 2013, Rp2.2 million in 2014, Rp2.7 million in 2015, and Rp3.0 million in
2016. This represents an increase of 37.4 from 2012 to 2013, 27.3 from 2013 to 2014, 23.5 from 2014 to 2015, and 12.4 from 2015 to 2016. The Group has experienced significant increase in labor
cost during the past few years as a result of increased salary expense stemming from more than 6,000 employees. If the regional minimum wage continues to increase from year to year, the Group may have
to increase the price of its products, which may have an adverse impact to its price competitiveness compared to its competitors from Indonesia and other countries.
Risk relating to dependence on major customers
On a consolidated basis, the Group does not have any customers contributing more than 20.0 of the Group’s total consolidated sales. While no single major customer dominates the Group’s sales at the
consolidated level, there are several major customers with fairly significant contributions to the Group’s sales. In the event that several of the Group’s major customers reduce or stop their purchases from the
Group at or around the same time, there may be a significant decrease in the Group’s sales.
Risk relating to business competition
Majority of the Group’s competitors are from Vietnam and Malaysia. The Group has to be able to maintain their competitiveness in terms of price, product design, quality and production capacity. If the
Group is unable to maintain its competitiveness, the Company’s revenue may decrease and this may have an adverse impact on the Group’s financial performance.
While the Group has established policies for the purposes of maintaining their reputation, the quality of their products, and relationships with customers, and implementing marketing strategies to secure new
projects at reasonable prices, there is a risk that the Group may lose its market share to its competitors, which may have adverse impact to the Group’s financial performance.
Risk relating to technological advancement
Technological advancements have the potential to affect competitive landscape as it may enhance the competitiveness of firms that are able to take advantage of such technological advancements and may
also reduce the competitiveness of companies which are less able or slow to adapt.
50
While the Group’s operations are labor intensive, machinery and technology is also required to efficiently produce furniture and building components. Should the Group’s competitors be able to adopt new
technology more quickly, the Group may lose its ability to price its products competitively.
6.3. GENERAL RISK FACTORS
