THERE are a few reasons why investing in world-class companies may offer advantages. Some of the advantages enjoyed by world-class companies include:
In the case of Malaysia, world-class companies exist in the plantation and rubber glove sectors. They are world class as they are among the largest global companies in their particular sector. It is a valid question to ask that why after over 30 years of industrialisation, there are so few world-class companies in Malaysia. The largest companies listed on Bursa remain plantation companies.
Perhaps, the National Economic Policy (NEP) played a part in diminishing the role of meritocracy in rewarding productive and efficient companies. The removal of the 30% bumiputra equity requirement for 27 services sub-sectors is a step in the right direction. Perhaps, it is the subsidy mentality that pervades the economy comprising expectations of subsidised food, petrol, gas, electricity and the insistence on cheap foreign labour for houses, restaurants and factories. The manufacturers would be the first to scream blue murder each time energy prices are raised or foreign worker availability is curbed. What follows next is often a “wayang kulit” show that eventually results in some backtracking by the Government.
The argument that Malaysian industry requires cheap foreign labour and subsidies is a fallacy that has trapped us in low-margin and low-technology industries. As companies cannot pay well for talent, Malaysia is unfortunately suffering from brain drain.
The solution to the problem entails better education and less reliance on subsidies and cheap foreign labour so that companies will have to focus on greater efficiency and high value-added industries requiring fewer workers. Malaysia’s productivity is lower than those of Taiwan and South Korea and significantly lower than those in European countries where labour cost is high. Detractors may argue that we are not ready but then if policies have not worked well after 30 years of industrialisation, we have to change them.
The planting of the first rubber trees in 1877 near the Kuala Kangsar District Office heralded the age of commercial plantations in Malaysia. Only one the nine rubber trees remain alive today. The oil palm, native to Africa, was also commercialised in Malaya. The first commercial oil palm estate was set up in 1917 at Tennamaran Estate in Selangor.
Malaysia has become the leader in plantations and palm oil technology as it has been an industry that Malaysia has had a head start. Today, Sime Darby Bhd, with 524,626ha planted, is the largest tropical plantation company in the world. This is followed by Kuala Lumpur Kepong Bhd (KLK) with 169,607ha planted and IOI Corp with 150,394ha. As suitable oil palm land is limited in Malaysia, most of the larger companies have expanded into Indonesia while Kulim (M) Bhd owns the largest oil palm plantations in Papua New Guinea. Kulim, among the cheapest plantation companies, also has among the fastest growth in palm oil production due to its aggressive planting programme.
Most of the companies derive the bulk of their profits from palm oil. Palm oil has overtaken soyoil to become the world’s most-produced vegetable oil, accounting for over 30% of global vegetable oil production. Oil palm enjoys several advantages like low production cost and the highest yield per hectare among vegetable oils at 4,000 to 5,000 tonnes per hectare.
The move away from unhealthy trans fatty acid arising from the hydrogenation of soyoil to create solid fats has boosted demand from palm oil. Vegetable oil demand has also been boosted by biodiesel demand. If one is bullish on the longer-term prospects of crude oil, one has to be bullish on vegetable oil which will not only appreciate in line with crude oil price but is also enjoying a steadily rising demand for food usage.
Since 1995, the global per capita consumption of oils and fats has risen from 15.6 kg to 23.4 kg per year, with vegetable oil assuming a larger percentage, 82% versus 78%, of total fat intake. China, the largest importer of Malaysian palm oil, was self-sufficient in vegetable oil production in 1985 but has to import an increasingly larger amount of vegetable oil due to rising per capita consumption and a shrinkage of arable land since 2000 due to industrialisation.
Increasing incomes and population in developing countries, combined with emerging biodiesel industries in various countries, is expected to stimulate an additional 36 million tonnes of world vegetable oil consumption in the 10 years to 2017/18.
Rubber glove companies
Malaysia leads in the rubber glove industry with over 50% market share. This is due to the efforts of Malaysian rubber glove manufacturers who have survived the shake-out in the industry in the 1980s and 1990s arising from too many players. The successful players, who have survived in the previously low margin and competitive environment, now enjoy an oligopolistic position following the consolidation of the industry.
The barrier to entry is not only financing, otherwise, Sime Darby and KLK which were unsuccessful in growing their rubber glove operations, would have dominated the industry. Instead, successful rubber glove operations have been built by ambitious and nimble players who have invested tremendous time and effort to improve quality, achieve efficiency and grow export markets.
It is for this reason that the present players will continue to dominate the industry as it will become increasingly difficult for new entrants to achieve economies of scale.
The demand for rubber gloves is expected to grow by around 10% per annum driven by greater health awareness, more stringent health standards and an aging population. Existing players will benefit from the continuation of the outsourcing trend and further industry consolidation. Demand growth is relatively recession-proof as a large proportion of rubber gloves are used in the healthcare sector.