Today, we break tradition in our CEO Outlook by featuring just ONE captain of industry.
But Tengku Tan Sri Mahaleel Ariff is no ordinary CEO. He is currently sitting in what is perhaps the hottest corporate seat in town.
It has not been a good year for our national carmaker, Perusahaan Otomobil Nasional Bhd or Proton. Its sales fell 18% to 136,973 units for the first 10 months of this year, from 166,047 during the equivalent period of 2002.
The outlook appears to be uncertain as well – at least that's the market perception – given the entry of so many foreign competitors and the opening up of the car market come 2005.
The Prime Minister has announced that he will unveil the new duties on imported cars at the end of the year, and everyone is holding his breath.
But, already, a report in the Asian Wall Street Journal last week claimed that Mahaleel had written to the government seeking tariff protection for Proton for another 20 years. This report has not endeared Proton to consumers and market observers.
Mahaleel has not responded to the daily's claim – at least for now.
But as far as market competition is concerned, the former racing driver from the Kelantan royal house prefers to let action speak for itself.
Yesterday, Proton placed full-page colour ads in the major papers announcing the introduction of a revamped and upgraded Iswara model at just over RM33,000.
It's an indication of things to come. The fight is on NOW.
I had lunch the other day with Wolfgang Schlimme, the new boss of BMW Malaysia. He asked me why are Malaysians so critical about themselves. Before coming to Malaysia, Schlimme built up the BMW network in Russia from scratch. Today, BMW is the leading marque there.
I told him perhaps Malaysians are made up of different races and we view the same object from different racial, cultural and historical perspectives. In a sense, this is good, as this critical attitude keeps us all on our toes. But yes, we tend to be too negative about ourselves.
Coming from Germany, maker of the world's best cars, Schlimme understands the Malaysian government's objective of nurturing a national car industry to spearhead industrialisation.
Can Proton survive in a globalised and low tariff environment?
That's the multi-billion dollar question for Mahaleel to answer.
In turn, he would probably want to turn the question around: Do Malaysians want Proton to survive in a globalised world? – WONG SULONG
What do you see are the challenges and prospects for Malaysia's economy in 2004?
The global economy, although seemingly positive in terms of outlook, is I believe still fragile.
The global engines of growth – the United States, Europe and Asia – have varying degrees of performances. The United States is positive but we should be cautious about US dollar fluctuations. The greenback is weak and thus promotes US goods for exports but makes purchases somewhat more expensive. Moreover, the US is a major creditor and thus if confidence in the US dollar diminishes, investors might not take up bonds, etc.
It is Asia that is probably the better engine for the moment. China’s growth of 9% is stellar in today’s weak economic environment. Coupled with India and Asean registering 4–6% growth and the US$ 1.6 trillion of cash reserves in Asian economies, I believe Asia is in a good position to be the primary engine.
This is further demonstrated by the growth of exports/imports within Asean and Asia, which now amount to 52% and are still growing. The Asian economic bloc will play a larger role in influencing our domestic economy.
There are a couple of business fundamentals that I believe are important and that can affect Malaysia's economy.
Levels of investments: Foreign direct investment (FDI) inflow will be a factor. The success of the strategies outlined must address the types of FDI we are seeking. I don’t think we will attract the high labour content type of investments these days as Malaysia is already almost a developed country. These will be attracted to China/India and developing Asean economies. What we need is to seek the high IP production content FDI.
Second, it is crucial that local companies also invest. In the case of Proton, we are averaging RM800mil a year of investments in plants and new product design such as our new Tanjung Malim plant, Campro engine, and new cars, which go back to our economy. These investments are to create new products to market, crucial to win customers.
Business Profitability: The level of profitability of Malaysian businesses is also crucial in 2004. This factor will ensure sustained employment and also re-investment and expansion. By and large, our businesses are relatively profitable and should continue.
Certainly, the 'demand' products such as oil, palm oil, and rubber will continue to be strong and our companies can serve the China/India markets and contribute to our national cash inflow.
Electronics should pick up as the United States and even the Asean/China/Taiwan demand for chips continues.
Liquidity: Liquidity, I believe, should be good in 2004 and that will be good for business and consumer credit.
In the motor sector, though, the recent spate of new models and national type vehicles with high foreign content can contribute to a large fund outflow as cars are major forex ticket items, unless of course the same company exports an equal number.
Technology: The level of technology we apply to either change the business model or reduce cost or speed to market for Malaysian companies contributes to market growth or profitability. A good example is AirAsia which has, apart from other strategies, used IT to cut costs and prices, and created a new segment of travellers which in turn has benefited a whole new spectrum of industries such as hotels, hired cars, etc. In the case of Proton, we are the largest user of Catia design systems in Malaysia and this has reduced our design costs and cut introduction to market of new models by at least 40% and reduced time by one year.
The backbone of our economy still lies in our 25,000 small- and medium-scale (SMEs). This is an area where a strong initiative should be mounted to increase their use of technology. For example, on average Proton vendors only automate less 20%. Japan, on the other hand, would be more than 50% and in some areas 90%. This will increase quality and productivity.
Government initiatives: The announcement of specific areas on which the government will concentrate is useful. By and large, I assume that fiscal policies will be further tweaked for business improvement.
Balancing of the budget is a prudent and project prioritisation is an excellent move.
The Prime Minister’s stepping up of good governance can only become better, as productivity and cost of business improves as corruption and bureaucracy reduces.
Another area that will be good for the economy is the focus on the reduction of poverty. This can only increase the 'market' size as more people have higher disposable income. Buyers’ purchasing power is critical for businesses, so I think this is a good move.
In summary, next year's economic platform looks good overall, guided by the very prudent and balanced approach of our leaders and planners to make 2004 another success in a turbulent world.
How badly was your company affected by sars and the Iraq war, and has it recovered from these events?
These two events were unwarranted; one we could not prevent but the other certainly could have been avoided.
SARS did not affect our industry much. But the Iraq war did. We lost out on supplying 5,000 cars under the UN oil-for-food programme. Iraq had been a major market for Proton the past two years and this is certainly a setback. To make it worse the politics of this is not helping. We have to at least ensure that the order is not cancelled but what with the war, to supply to Baghdad itself poses many new challenges.
The focus of your group next year?
Regain market share/keep positive cashflow and continue, overall, the group's profitability.
For us to do this, the concentration of efforts to roll out new models and search for new markets and strategic partners will be the cornerstone in 2004.
Never before and certainly very few companies in the world have attempted to build a new car platform, a new engine, and a new factory and make it work together right the first time. This is what we have attempted to do and 2004 is the year where it all comes together after 3½ years of work.
We are excited about the new products, engine and vehicles and hope the public likes them. If we pass the test then our results will certainly look good.
This year, too, we shall begin to focus on the development of our alliances. The Iran technology agreement for 16 years is very exciting for both of us. This will allow not only the re-badging of our new products but also see the growth development of our engineering business with Iran.
Conversely, we expect to access their lower engineering and manufacturing resources. We are also in discussion with other partners and hope to ink deals in 2004.
I believe the work done in 2003 and the capacity of Proton and Lotus have enabled us to become a 'global' supplier of products and engineering services to OEMs.
In Asean, 2004 is when we will develop new manufacturing facilities to participate in Afta. We see Indonesia, Thailand and even Vietnam as strong markets for our new products.
We also see 2004 as one in which we can concentrate more on customer service as our engineering programmes stabilise. The public will begin to see more and more surprises from Proton.
Do you expect your company/group to do better or worse in 2004 compared with 2003? Why?
We believe the tide will be in our favour by end of the first quarter 2004, although I believe the Industry is slowing down. The year 2003 will certainly end lower than 2001/02.
Customers are, of course, waiting for the Afta tax announcements and new models, including ours. This delay in purchasing does have an effect on the industry, and we are not the only ones with inventory; I believe almost all of us do as we had over-forecast. That’s why we see a spate of huge discounts.
Very worrying of course is also the influx of competitors especially South Korean cars and capacity. As Proton adds Tanjung Malim, we shall have a national production capacity of almost 750,000 units a year, as against a market size of only 360,000. This is double the market size. This, of course, gives rise to a host of new problems, especially on scale and profitability of the 16 local assemblers and Malaysian vendors.
Second, newcomers with special treatment are basically re-badging, which was what we did many years ago. Under IMP 2, companies should do their own research and development (R&D) and own designs by 2004. The local content of these new vehicles are low, maybe 20%, thus it will reduce the local parts purchase which Proton alone procures for almost RM4bil annually.
This RM4bil circulates in the domestic economy, while low local content means we are buying from overseas parts suppliers, which certainly should not be our economy’s current account strategy.
Also, the introduction of South Korean cars completely built up (CBU) and completely knocked down (CKD), with their on the road prices so low, seems difficult to justify when you work the mathematics and compare these with the identical cars supplied in other export markets.
If this is true then the profits of the importer in our calculations are just unbelievable. The discounts given further demonstrate the huge margins enjoyed. Such prices pose new challenges and destroy values, impacting across many aspects of the industry – one is certainly profitability – especially for local vendors who are required to invest, which is necessary for sustainable growth.
The other is the loss of the government's tax revenue due to low CIF prices, when already the country is facing budget balancing issues. I believe this is an area that needs urgent addressing.
For Proton and the Group, we are more optimistic about 2004 as all the planning and designing is almost finished. Now it's execution time.
Next year will see the launches of many new products that we have designed completely new. Of the four platforms that we have engineered since 2000, three are already complete and the last one will be ready next year. These platforms can produce 15 to 20 new products, from mini-sized to larger-than-Perdana-sized vehicles, comprising cars, sports cars, cross-over vehicles and more. It will be exciting.
On top of this, we shall continue with our older models which will be cost-down, and the latest Saga with its brand new interior at RM33,239 demonstrates our capability and is the beginning of these new initiatives.
All these were funded with our internal cash and reserves. So we have built in financial prudence to take shocks as in 1997.
Even more important, because of our capability many companies – such as in China, India and Iran – are seeking strategic technical alliances with us. They are seeking to buy our engines, our platforms, and also re-badge our new cars.
Also in 2004, we shall aggressively seek export markets as our new products are not only stylish, incorporating the latest technologies, have our own engines, but are more cost competitive.
And all these will be sold via our new showrooms of which we have built two prototypes, and which we intend to launch globally.
Challenging but also exciting times, it needs 'Calm Nerves'.
Is China an important factor in the management of your operations?
China is such a huge economy that it will continue to grow for a decade even. Thus, we cannot over-emphasise its importance. All other auto OEMs are there too. Furthermore, I believe that at the rate Asia is developing we shall by 2020 or 2030 become the world’s largest business bloc. That is why we have acquired a Chinese partner and are awaiting the car licence.
At the same time, Lotus is developing new business opportunities and we have been successful in identifying new clients and even strategic partners that wish to acquire our Campro engine and new platforms for their vehicles.
We also see China as another source for engineers, whom we are short of, and place China as a major resource centre.
In your view what should be the new Prime Minister's priorities be for the country and the industry you are in?
For the country:
The PM’s moves are straight to the point. It is, obviously, building up on the already sound platform that we have.
A country’s competitiveness comes from the development of its natural attributes of sea and land, etc. which I believe we have done very well. Sound fiscal and monetary policies are in place.
The efforts to reduce red tape and corruption are precisely the correct execution of the 'soft' issues impacting business. Excellent.
The move to eradicate poverty is also excellent as it will 'increase' the size of the buying market.
Also, the PM is close to the ground on the 'quality' of education. This is a fundamental competitive resource in the age of 'Global Competition'. He who wins on brains wins the ground battle in this era.
Thus, the attention to the quality of education not only in schools but also universities is a fundamental raw material for companies.
Perhaps an area in which we still lack is Malaysian product creation.
This applies to both large firms and SMEs in Malaysia. I believe Malaysia, as a whole, lags behind other economies in exporting of our own creations. Selangor pewter is a good example of a successful Malaysian company able to design its own products and market them successfully worldwide. We need more of this.
For the industry:
The industry is reaching maturity. Incidentally, many Malaysians are unaware that only 11 countries can design a vehicle ground-up that meets global regulations. Through Proton, Malaysia is one of them. Not only that: it is the only developing and Islamic country to do so.
Given the severe overcapacity problem that the industry faces in a small market, perhaps we need to start a review process going forward.
Second, our industry is now mature. Efforts and incentives could be structured for these companies to develop design and engineer products locally as this is the highest value end of the automotive industry.
Local companies must seek to invest or market overseas to enlarge the 'base' market and gain revenue and foreign exchange.
Policy direction and incentives should be developed for any company that reaches a certain level of capacity and capability to access these incentives which must be towards an intellectual property-based one.
Since we cannot compete for long on low labour cost, we should divert to competing on high intellectual labour content products. Designing, testing and manufacturing a vehicle as a whole is this product.
Views from CEOs of port operators: Tan Sri G. Gnanalingam of Westport Malaysia, Basheer Hassan Abdul Kader of Northport (M) Bhd, Datuk Mohd Sidik Shaik Osman of Pelabuhan Tanjong Pelepas, and Datuk Ahmad Ibnihajar of Penang Port Sdn Bhd.
Views from scions of prominent families: Datuk Nazir Razak of CIMB, Datuk Lee Oi Han of Kuala Lumpur Kepong Bhd (KLK) and Carl Bek-Nielsen of United Plantations Bhd.
Views from banking CEOs: Tan Sri Teh Hong Piow, chairman of Public Bank Bhd, Datuk Amirsham A. Aziz, president and CEO of Maybank group, and Piyush Gupta, head of Citigroup in Malaysia.
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