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MANAGEMENT DISCUSSION AND ANALYSIS (continued)
Business review

To the disappointment of many business leaders on both sides of the Pacific and around the
world, the China-US trade dispute has worn on for more than a year, creating stiff headwinds
for many companies and industries, thus hindering both micro and macroeconomic growth.

The Group’s AV business, consisting of audio, visual and tablet products, was severely
impacted by the toxic trading environment. When the US government began imposing tariffs
against made-in-China goods, they also started targeting specific industry leaders in China,
such as ZTE and Huawei. Many manufacturers directly or indirectly connected to such
industry leaders’ supply chains began to collapse causing some to desperately fight for orders
regardless of cost. Such hysterical competition made it virtually impossible for the Group to
find or secure profitable orders, leading eventually to a severe erosion in gross margin.

Tariffs imposed on 15 October mainly affected the Group’s audio and visual products. And
as aforementioned, the Group was forced to absorb all of the extra import duties for certain
models (as the after-tariff retail prices made such products unappealing to consumers); some
of the Group’s products had yet to receive any re-order because the extra import duties for
them were too high to absorb by the Group or its customers, leading to loss of revenue as
well as profit. Still other challenges faced include delayed purchases by some customers who
took a wait-and-see approach, while other customers elected to source similar products from
other parts of Asia, Mexico, South America, or Eastern Europe.

As far back as 2016, the Group was already aware of the need to establish alternative
revenue streams to enable it to diversify its business segment and territory. Such awareness
served as catalyst for the Group’s development of AVITA Consumer Laptops and Nexstgo
B2B/Commercial Laptops. As at 30 September 2019, the Group offered 13 models of
Consumer Laptops and Commercial Laptops, including the AVITA ADMIROR flagship
laptop and Nexstgo PRIMUS NX301 ultra lightweight business-grade laptop, both of which
were launched in May at COMPUTEX 2019 in Taipei, Taiwan. The Group’s involvement in
the distribution of Commercial Notebook PCs for VAIO Corporation of Japan via Nexstgo
Company Limited, a wholly owned subsidiary, has also been progressing with a line-up
under Nexstgo’s distribution expanding to a total of six models, including the newly launched
A12, SX12, SX14 and SE14.

22 ALCO HOLDINGS LIMITED Interim Report 2019