1. Risk Factors

Besides the marketing and production risks associated with any type of
business, the chemically-based insecticide business is also greatly
ezfected by natural phenomena, such as soil and weather conditions,
which vary from year to year. Such factors not only directly effect
agricultural activities, but also have a huge impact on the sales of
insecticides. Drought is a major hindrance of the cultivation of high
quality crops, and it reduces the volume of produce considerably, as
well as the demand for insecticides. Conversely, when there has been
major crop damage, the demand for insecticides could increase to such an
extent that manufacturers are unable to meet the increased demand.

In recognition of such risks, therefore, PATO Chemical Industry Plc. has
gone to great lengths to research and develop new products, in an effort
to minimize the variations in the demand for insecticides caused by such
natural crises. For example, in the case of drought, the use of liquid
weed killers, instead of pills, goes a long way in reducing the impact
on PATO Chemical Industry’s sales. In addition, the company’s new range
of insecticides, designed for use with a wide range of crops, such as
rice, field crops, orchards, para rubber and oil palm, helps minimize
the effect of such natural crises on these crops.

With regard to risk factors concerning foreign exchange rates as a
result of the import and export business activities of the company and
affiliated companies, the company has taken a Fully Hedged position for
all financial risks or for as much as possible for imported products.
Affiliated companies with earnings from exports and which at the same
time make foreign purchase orders, manage risk factors through FX
Forward Contracts for both imports and exports. As for Packing Credit
loans in foreign currency, a Natural Hedge is adopted for export
earnings in the same currency.

Ironically, the very risks which usually effect other businesses the
most, i.e. marketing and production, have hardly had any impact at all
on this company. Its extensive nationwide network of agents means that
this risk is negligible. Furthermore, its distribution strategy, which
enables each distributor to sell only one product range to avoid
competition among distributors, has proved most successful. But it is
the company's reputation, amongst farmers, for manufacturing products
which are both reliable and of a high quality that has contributed most
to the company’s success. The fact that its product prices are
considerably lower than those of imported products also helps keep the
company on solid ground.

The company faces no problems of the technological variety, as its
manufacturing processes use only a very limited amount of advanced
technology. In the absence of any technological advantages, therefore,
expertise and specialized production techniques are emphasized, to give
PATO Chemical Industry the edge over its competitors. Whatever the
processes, whether it be import, research and development, production or
distribution, it has to be authorized by the Agricultural Toxic
Substances Division as well as any other relevant government offices, to
ensure that all products meet required specifications, and are safe.
They must not have any adverse effects on the environment either. It is,
therefore, fairly obvious that running such a business requires a great
deal of time and effort.

The most critical problem which the company faces is bad debt. To
minimize the risk of accumulating bad debts, PATO Chemical Industry has
implemented a number of measures, including:

1. Control of credit balance

2. Strict consideration when opening new market

3. Shortening of payment period

4. Emphasis on crops with high potential and price, eg. rice

5. Reduction of granting credit to high-risk crops, eg. sugar cane

6. More detailed market studies by marketing personnel