New Toyo

[portuser]

BAT has expected at least a 30% growth in production volume during the term of the supply contract.
The further implication is that BAT is likely to renew the contract with Tien Wah who has served its master well.
In the latest 2012 AR, Tien Wah cited that one of the KPIs (complaints from clients) have dropped significantly. Tien Wah is further aiming to achieve 0% defect rate, the 1st of its kind in the tobacco packaging industry.
If u check around the tobacco packaging sector, it is very rare indeed for any company to be able to secure such a long term supply contract with BAT (7 yrs + an option for 3-yr renewal). Tien Wah has shown that it is a league above the rest .

The 30% spare production capacity at any one time required of Tien Wah under the BAT supply agreement is to meet demand fluctuation and surges, according to Tien Wah's circular dated 14 Jul 2009.

BAT gave up producing its own cigarette cartons to concentrate on cigarette production and marketing. In 2008, BAT sold its printing firm in Australia, Anzpac, to Tien Wah; and as part of the sale arrangement, Tien Wah is given the exclusive rights to supply cigarette cartons to BAT factories in Singapore, Malaysia , Australia and Vietnam for seven year, with option of renewal for another three years

It may be inferred that the long duration of the supply agreement is to enable Tien Wah to invest in infrastructure for higher printing volume and more sophisticated printing demanded by BAT. Events have proved that the RM 75m spent by Tien Wah on equipment acquisition and upgrading is highly profit-accretive.

Given the importance of cartons in BAT's overall production chain, it is reasonable to assume that BAT would want Tien Wah to operate smoothly to enable the BAT factories to churn out their final products uninterrupted.

The notion that BAT being unreasonable to Tien Wah seems far-fetched.