Merger challenge for Penang freight forwarders

By David Tan in Penang

THE freight forwarding industry in Penang, which generates revenue totalling about RM2.5bil per month, is now facing challenges from globalisation and new government regulations that may drive those in- volved in the business to merge with one another. 

Penang Freight Forwarders As- sociation (PFFA) president Krishnan Chelliah told StarBiz that one of the challenges stemmed from the recent mergers of several multinational corporations (MNCs) involved in the freight forwarding business. 

“MNCs such as DHL, Danzas/AEI, Fritz, UPS, MSAS and Exel have started merging with one another already. As a result, they now have the necessary networking and infrastructure to offer a wide range of services such as vendors inventory management, supply chain management, third-party logistic solutions, multi-modal transportation, and project management,” he said. 

Krishnan Chelliah

Krishnan said that unless the smaller freight forwarding firms merged with the medium-sized ones, they would lose their competitive edge and be phased out. 

“Since January, the government has also introduced a new regulation, requiring those smaller freight forwarding companies providing customs clearing services and land transportation for cargoes to have at least a RM50,000 paid-up capital to obtain an operating licence,” he said. 

According to Krishnan, for those companies with nationwide branches, they are required to increase their paid-up capital to RM100,000. 

“They have been given a one-year grace period to raise their paid-up capital,” he said. 

Krishnan said on top of that, these companies must also pass an examination before they could deal with the customs. 

“It would be wise for companies which are unable to increase their paid-up capital to merge with larger ones. A merger would mean the smaller companies need not raise their paid-up capital to obtain an operating licence, which would mean they have to forego making transactions with the customs. They can, however, get involved in other aspects of the forwarding business such as soliciting business for the group or consortium,” he said. 

Krishnan said some 10% of its 100 members belonged to this small group category. 

He said with the arrival of Asean Free Trade Area (Afta) and World Trade Organisation (WTO) agreements in the offing, it had become even more vital for PFFA members to consider merging with one another. 

“Afta and WTO can either be a threat or an opportunity, depending on how you look at it. If our members form mergers, they can further tap into the business of their existing customers whose export markets have broadened with Afta, and seize the opportunity to expand into the neighbouring Asean countries. If they do not take steps to strengthen themselves, then both Afta and WTO will be a threat,” Krishnan said.  

He said the freight forwarding in- dustry had become more challenging as the needs of the customers had become more varied and complex. 

Adrian Toh

“Customers do not just want their goods to be delivered. They also want the freight forwarders to perform warehouse inventory management services and provide third-party logistics services. Third-party logistics means the freight forwarders must have the expertise and networking to carry out services normally performed by the customers,he said. 

According to Krishnan, for a freight forwarding company to remain competitive today, it must provide services for customs clearance, freight forwarding via multi-modal transportation, warehouse inventory management, and third-party logistics. 

The 102 members of the PFFA, employing a total of 150,000 workers in Penang and in the northern region, exported 182,550 tonnes of cargo via air last year. 

“At the Butterworth container terminals, our members handled 634,042 TEUs (20-ft equivalent units) of containers last year,” he said. 

Krishnan noted there were some 300 freight forwarders in Penang. 

“Some 60% are involved exclusively in air freight forwarding, and the remaining are both ocean and air freight forwarders. About 70% of our members are locally-based medium-sized companies and another 10% are small companies. MNCs form 20% of our membership,” he said. 

Meanwhile, PFFA vice-president Adrian Toh said the war in the Middle East had slowed down the demand for exports from Penang. 

“Prior to the war, companies in the US had already begun stockpiling their goods. Now that the war is on, these companies had begun to slow down their orders,” he said. 

Toh said many of its members were still able to do brisk business because of the re-routing of flights going to the US via the Middle East. 

“Many of these flights going to the US have to re-route to Thailand for refuelling. This means that the aircraft will have less cargo capacity for the cargo from Thailand. These cargoes would therefore have to be re-routed to destinations via Malaysian ports, creating business for the forwarders in Malaysia,” he said.  

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