The Malaysian corporate sector is striving to find a foothold in global business. Some went abroad in the 1990s. Are we seeing a second wave?
WITH positive signs emerging that the worst of the crisis may be over, Malaysian companies are once again looking yonder. Their desire to cross borders underscores the inherent spirit of adventure in many of our corporate figures. Like their counterparts who left family and home in search of new markets about a decade ago, our companies are today venturing out again in what may be a secoond wave.
Be it in banking, manufacturing, construction and infrastructure, property development or communication, the desire to seek a larger audience has become imperative.
Does this mean Malaysia has become too small for them? Vincent Khoo, research head at UOB KayHian says with trade barriers crumbling, the world has become one giant marketplace.
“He who reaches the market first will be the winner,” says Khoo. The surge in these investments comes just when exports should be climbing more rapidly than investment abroad.
Malaysian companies are able in some cases to double their profit margins by relocating overseas. This means if they previously earned a ringgit by producing locally, they earn RM2 when they relocate overseas.
Profit margins have doubled due to lower production costs and proximity to markets.
Added to these are economies of scale and investment incentives granted by the host country.
For most of our local players, the move to go overseas probably started about 10 to 15 years ago.
Public Bank and Maybank entered Vietnam in the mid 1990s. During the same period, the manufacturing and construction players also ventured out.
Most Malaysian companies relocate their labour intensive operations, for instance the manufacturing and assembly of electronics, semiconductor, gloves, plastic injection products to lower wage countries like China and Vietnam. Khoo says the move overseas is inevitable for companies seeking growth. “Malaysia as a market is mature in most segments,” he says.
RAM chief economist Dr Yeah Kim Leng shares this view. He says as domestic markets mature or become saturated, companies grow by going abroad to penetrate new markets, reduce production cost to raise efficiency, procure natural and strategic resources including technology and knowledge-based assets and reap first mover advantage.
In the aftermath of the current financial crisis, it is only natural for companies to once again seek its fortunes as a result of the diminished opportunities in developing markets.
“Malaysian companies are faced with mature markets along with contracting revenue and profitability growth. There is a need to diversify risk and insulate oneself from a slowdown,” says Yeah.
Certainly, to be considered a serious player in the world market today, a company should be growing by producing in many countries, and not just exporting. Some choose to go overseas as an ‘insurance’ to diversify risk and revenue.
In January 2006, Maxis Communications Bhd acquired a 74% stake in Indian celco Aircel Ltd for US$800mil. Aircel has contributed positively to Maxis’s bottom line since the day it was acquired.
Then there’s the Genting Group with its gaming exposure in Malaysia, Singapore and Britain.
In the past, the Genting group had acquired several British casinos amounting to RM5bil in investments, spent another RM6bil in Star Cruises and will spend a whopping RM11bil (when completed) on the Sentosa Integrated Resort in Singapore.
It was recently reported that Genting’s affiliate, Star Cruises Ltd, and Alliance Global Inc are investing about US$740mil (RM2.61bil) to develop a world-class integrated tourism project in Pasay City, the Philippines, by 2012.
Pricewaterhouse Coopers Advisory Services Sdn Bhd senior executive director Tan Siow Ming says companies that succeed overseas normally display a clear strategic intent.
Their overseas investments or merger and acquisition (M&A) strategies leverage on their present core competency or competitive advantage.
They have the ability to exercise pricing discipline. In the heat of chasing a deal, it can be very tempting for some companies to overpay.
“The devil is in the details and due diligence is indispensable. The execution post -deal is also crucial. Sometimes, the cultural differences of doing business in a foreign country can be a deal-breaker. Therefore, there must be an awareness and a sensitivity to local customs. These ‘soft’ or people factors must be managed well,” he says.
Tan says there is an uptick in M&A deals in the May to July period. “Activities are returning, but its still far from what it was a year ago. It is not picking up rapidly, but there will be continued interest as both corporates and private equity players are looking for good deals and opportunities,” he says.
Tan notes that despite the global financial crisis, some Malaysian companies are fundamentally and structurally stronger than the previous Asian financial crisis, and are capable of capitalising on good M&A or investment opportunities abroad, especially in their core businesses. Perhaps the most well known Malaysian brand which has spread its wings to the world is budget carrier, AirAsia Bhd.
Since its establishment in 1993, its chief executive Tony Fernandes has engineered a remarkable performance by turning a profit in 2002, launching new routes at breakneck speed, and aggresively competing with Malaysia Airlines Bhd by offering fares from as low as RM1.
AirAsia operates at a unit cost of US$2.25/ASK (average seat per km), the world’s lowest, and serves 117 routes, carrying 11.8 million passengers last year.
Up to its second quarter to June, passenger growth continued to rise by 24%.
A Malaysian bank with a reasonable footprint abroad would be CIMB Group, which is Malaysia’s second largest financial services provider, and fifth largest in Southeast Asia by total assets.
It serves close to seven million customers in over 600 locations with over 25,000 staff in 11 countries.
Having companies with significant international footprint is now a national agenda.
The Ministry of International Trade and Industry (Miti) has a goal of making Malaysia one of the top 10 trading nations in the world by 2020.
At the Asian Economic Ministers meeting in Bangkok in August, Miti said that the establishment of the Asean Economic Community, especially the creation of a single market, was on track.
The ministers also noted that the initiatives to create a single large market have contributed to the significant increase in intra, regional and external Asean trade.
Intra-Asean trade in 2008 stood at US$453bil, or 26.7%, of Asean’s external trade.
Ten years ago, intra-Asean trade was only US$120bil.
Last year, Asean’s global trade exceeded the trillion dollar mark to rise up to US$1.69 trillion.
Collectively, Asean as a region, has attracted US$184.6bil over the 2006 to 2008 period.
The European Union, the United States and Japan have been the main sources of investment.
Meanwhile, the volume of outbound investment registered a slight decline from 2006 to 2008 (2006:178; 2008:161).
However, the average deal value increased significantly, driven by large deals in the banking and telecommunication sectors in 2008.
So far, first half figures show that deal volume and value took a sharp decline.
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