PLENTY has been said about the status of Padiberas Nasional Bhd (Bernas) as Malaysia’s sole importer of rice. This is seen as the glittering gem in the company’s business model, giving Bernas a lucrative monopoly and good standing with the government.
But that is only half of the story. A large part of the company’s value resides in the supply chain it has been strengthening over the last several years.
In fact, as the paddy and rice industry goes through the throes of trade liberalisation, an exclusive import licence may become less meaningful than the ability to efficiently move goods and commodities through a sturdy distribution network.
This is believed to be a decisive factor in persuading Gandingan Bersepadu Sdn Bhd, a company linked to low-profile tycoon Tan Sri Syed Mokhtar Albukhary, to pay RM100 million for control of Bernas.
On Feb 5, Gandingan Bersepadu entered into a conditional share sale agreement with Permatang Jaya Sdn Bhd, ZAW Ventures Sdn Bhd and Simpletech Sdn Bhd to acquire the trio’s 55 per cent equity interest in Budaya Generasi (M) Sdn Bhd, which has a 32.6 per cent stake in Bernas.
The rest of Budaya Generasi’s shares are spread over four companies and two national bodies representing fishermen and farmers.
Reports about Syed Mokhtar routinely mention that he started out in the rice trade some two decades ago. But it would be fanciful to think that his interest in Bernas is about returning to his roots.
For one thing, he has moved on to far bigger ventures. His stable of listed companies includes Malaysia Mining Corporation Bhd (MMC), Pernas International Holdings Bhd and Johore Tenggara Oil Palm Bhd (JTop).
The paddy and rice industry itself has undergone many structural changes, including the privatisation of the custodian role, which led to the emergence of Bernas.
Observers say Bernas is attractive simply because it offers synergies, particularly via its supply chain, with other divisions of the sprawling Syed Mokhtar empire.
The Bernas supply chain connects layers of players in retail, wholesaling, logistics, import and export, and manufacturing.
It was not always that way. In its early days, the company operated in a fragmented market. Its initial activities were largely to buy paddy from local producers and to import rice, and push these through to the next layers (millers and wholesalers, respectively) in the industry.
According to a November 2000 paper on rice distribution in peninsular Malaysia, the Malaysian market had some 1,200 wholesalers supplying almost 1,500 brands of rice.
Considering that there was a base of 38,000 retail outlets in peninsular Malaysia, a wholesaler serviced an average of 32 shops. And the myriad of brands for what is virtually a homogenous product worsened the intense competition and inefficiencies.
“It sounds so silly but that was essentially the situation then,” says Bernas director Datuk Mohd Ibrahim Mohd Nor. “Some people questioned our move to go into wholesaling and branding, but our argument was that the industry needed to consolidate for when the market becomes more open.”
In a series of acquisitions and strategic alliances, the company built a seed-to-shelf presence in the industry. One of its more significant moves was to establish a joint venture in 2000 with the Rice Wholesalers Association of Malaysia to develop a food distribution network.
Previously, relations between Bernas and the association had been adversarial at times. The partnership was critical in the sense that it gave Bernas heft in the wholesaling segment – at the time, the association members had a 36 per cent market share – and more importantly, it showed that the company was making headway in persuading other industry players to buy into its vision of linking the rice supply chain.
Today, Bernas has a hand in 35 to 40 per cent of the rice sold in Malaysia. This is a huge share, especially for commodity-like goods.
An industry insider describes the Bernas supply chain as a highway paved with rice. “You can run other goods on this highway. And the more you can pass through the supply chain, the lower the transaction costs go and the stronger you get.
“And what are we very good at producing? Palm oil. If you can work that into the network, the potential is enormous.”
This fits well into Syed Mokhtar's collection of businesses. He owns oil palm plantation through JTop and Tradewinds (Malaysia) Bhd, a listed subsidiary of Pernas International.
Furthermore, the bulk of Malaysia's rice imports are from Thailand, Vietnam, China, Pakistan and Australia. Some of these are leading importers of Malaysian crude palm oil (CPO). China, for example, was our biggest CPO market last year.
And there is, of course, the sugar connection. Central Sugar Refinery Sdn Bhd, the country’s second largest sugar miller, drives Tradewinds’ manufacturing and trading activities. Syed Mokhtar is also said to have a stake in Gula Padang Terap Bhd, another major producer.
Incorporating sugar into the Bernas supply chain would be a natural step. It is telling that Bernas' purchase of a 30 per cent stake in Gardenia Bakeries (KL) Sdn Bhd in 2001 was seen as a step towards entering the flour business. The theory was that Gardenia, being one of the biggest buyers of flour in the country, could provide leverage for such a move.
However, these possible synergies are not likely to bloom immediately. “We've done a lot, but there's a lot more to do, believe me,” Ibrahim points out. In addition, there is bound to be some asset shuffling within Syed Mokhtar's empire to streamline the various operations.
As such, Bernas' import monopoly still counts for a lot. However, the company's capacity to earn from this is somewhat weakened by factors such as smuggling and the problems associated with the company's social obligations.
Industry analyst Datuk S. Jegatheesan says the presumption has always been that the mark-up from Bernas' import business should more than make up for the costs of undertaking its social obligations.
However, the company's imports in recent years have been declining drastically as rice smuggling becomes more rampant. Jegatheesan says the amount brought illegally into Malaysia could be as high as 300,000 metric tonnes a year.
Industry insiders agree that smuggling is not a new problem. The difference is that it has taken on a new dimension of late, with allegations that it involves rice by the container-loads. The insiders say an effective solution lies in addressing the economic and structural weaknesses of the industry rather than on stepping up enforcement.
Another thorny issue is the fact that the paddy farmers tend to think of Bernas as a government entity because it is a successor to Lembaga Padi dan Beras Negara (LPN). It is hard for them to appreciate that the company has to be run as a profit-seeking business.
“To some extent, Bernas deserves sympathy. The LPN legacy is hard to shake off,” says Jegatheesan. This problem has political implications because the country's eight granary areas are in the Malay heartlands.
What this all means is that Bernas' new shareholder will have to deal with some serious challenges before it can reap the synergies of the supply chain and the advantage of a monopoly.