BUSINESS: Malaysian investments abroad

aug 1995

The China Syndrome
Investors lament red tape, political dogma and greedy officials

Until a few years ago, China was viewed by Malaysia as a destabilizing menace. Now, however, it is officially a land of opportunity, and nearly 200 top Malaysian executives queued up to accompany Prime Minister Mahathir Mohamad on a visit to Beijing last year.

As many as 36 memoranda of understanding were signed by the Malaysian delegation for investments covering power generation, road building, hotel and property development and light industries, together worth $ 3.43 billion. Nearly 18 months later, however, little has happened. Even the well-connected Renong Group has abandoned a proposed 150-kilometer highway worth $ 500 million after a 15-month study.

Despite their initial public enthusiasm, Malaysian businessmen are facing the same problems in China that vex other foreign investors. Says Al Alim Mohammed Ibrahim, senior fellow at the Institute of Strategic and International Studies in Kuala Lumpur: "We are overrating China: its importance, its structure, its opportunities."

Smart Malaysian investors in China depend on the right partner or deal only in cash. Berjaya Group's Vincent Tan, for example, is confident about his prospects of launching lotteries in six Chinese cities, though his deal is currently snagged because Beijing is rethinkingits policies on gaming. The reason for such optimism? Tan says: "Our partner is the Ministry of Social Welfare, which has the mandate to run lotteries in China."

Other gaming giants, like Granite Industries Bhd. and the Magnum-Dunlop group, have seen little action on their proposed lottery deals. Says a Singapore-based broker: "They were crazy to believe they had deals. Gambling is one of seven deadly sins for the communists. How could Malaysian Chinese be so naive?"

Then there are the hidden costs. An executive of a Malaysian industrial company, for instance, grumbles that his China office has become a glorified travel agency for relatives of well-placed bureaucrats. "All they want from our office are tickets, hotel bookings and shopping money," says the executive.

But some front-line stories are more encouraging. Take Kim Hin Industry Bhd., a Sarawak-based floor-tile maker with a $ 15 million venture in Shanghai. "The Chinese love to use tiles," enthuses Johnnie Chua, group managing director. But caution is the watchword. Chua's policy: Offer credit only to companies that Kim Hin has dealt with in other countries. For Chinese companies there is a different policy: cash with order.


The Malaysian Wave
Prime Minister Mahathir Mohamad is acting as an economic envoy to the region's developing countries-and that's good news for his country's major business groups.

When a party of executives from Malaysia's MBf Holdings Bhd. landed in Fiji last year, they expected the usual formalities and cordialities, perhaps enlivened by a little local exuberance. But instead of a few polite handshakes to mark MBf's takeover of the century-old W.R. Carpenter trading group, the businessmen were mobbed like visiting royalty. "The whole town (Suva) came out to celebrate," says Tan Mong Sing, a company president. Up to and including the Fijian prime minister, Sitiveni Rabuka.

Elsewhere in the region, and beyond, Malaysian businessmen are planting the nation's flag in developing countries and, usually but not always, basking in similar eruptions of gratitude. For they bring with them what every growing economy needs: capital, technology and managerial expertise. Moreover, they proclaim to come in the name of mutual benefit, rather than neocolonial exploitation.

Ask these Malaysian businessmen to explain their wanderlust and they have one answer: Prime Minister Mahathir Mohamad. With the Malaysian economy having expanded by an average of 8 percent since 1988, and the country now the world's 19th-largest trader, Mahathir has the clout to aggressively promote his vision of South-South cooperation, shorthand for a strengthening of political and economic links within the developing world.

According to one story, the prime minister felt slighted years ago when a Western delegate at the United Nations mistook Malaysia for Malawi (country placings are in alphabetical order). From that point, this version goes, Mahathir was determined to raise Malaysia's profile overseas. Now, he travels the world speaking on behalf of the world's have-not economies, often thronged by parties of Malaysian business leaders anxious to be seen to share his vision (though some quietly admit that they cannot afford to be seen doing otherwise).

Says Francis Yeoh, managing director of construction company YTL Corp.: "Our prime minister's influence has been dramatic. We have the ability to transfer to the region what Malaysia has achieved." YTL's plans include power projects in China, the Philippines, India and Pakistan, as well as a cement plant in Vietnam and a sound-and-light show at the historic Angkor Wat in Cambodia.

MBf and YTL are only two of dozens of Malaysian companies that have greatly expanded their horizons in the past three years. Among them: Renong Bhd. has proposed a hugely ambitious 10,000-kilometer highway network in India; Landmarks Bhd. is sitting on a 700-hectare landbank along South Africa's Johannesburg-Pretoria expressway; Malaysian Airline System Bhd. (MAS) has taken control of carriers in the Maldives and Cambodia; Robert Kuok's Shangri-La hotels group is committing nearly $ 2 billion to hotel, commercial and residential projects in China; and Ariston Bhd. has begun work on a massive $ 1. 3 billion casino and infrastructure project in Kompong Som (formerly known as Sihanoukville), Cambodia.

Some Malaysian tycoons move faster than others. Vincent Tan, chairman of the diversified Berjaya Group Bhd., 18 months ago read in a magazine about the lush, sprawling forests of Suriname on the northern coast of South America, a mere 17, 000 km away. He was on the next plane out of Kuala Lumpur, and once in the capital of Paramaribo wasted no time in hiring the brother of the foreign minister and bidding for a 1 million-hectare timber concession. Says Tan: "Suriname is rich in forest products, and it is starved of investment. Very few companies want to go there (but this is due to) sheer lack of vision."

Western environmentalists view it differently. The Washington-based World Resources Institute says Tan is paying only $ 7.50 per hectare annually for logging rights, one-tenth of what he would have to pay in Malaysia. Tan dismisses the group's complaints: "Theirs is an uninformed campaign. The government has seen the benefit investment can bring to Suriname."

Certainly, many recipients of Malaysian money are not complaining. Cambodian Tourism Minister Veng Sereyvuth, for instance, says: "We thank Dr. Mahathir for allowing neighbors to get the opportunity to grow with Malaysia. We want the private sector to take over infrastructure projects so that we can devote our attention to important security issues."

Chen Lip Keong, a reclusive tycoon who is the driving force behind the huge Kompong Som project, makes the same point from the Malaysian side: "In an attempt to enrich Malaysia we do not want to impoverish Cambodia. We want Cambodia to survive and prosper with us."

UST A decade ago, Malaysia was deep in recession and had too many distractions at home to look beyond its own borders. Its huge state-run companies were digesting the British colonial-era trading and plantation houses they had bravely swallowed in pre-dawn raids on the London Stock Exchange. The long-dominant United Malays National Organization had splintered and popular former Finance Minister Razaleigh Hamzah was challenging Mahathir's leadership. Economically, the imperatives were to stabilize the ringgit, boost exports and, most importantly, woo foreign investment.

In the past five years, however, economic uplift has allowed Malaysia to display the kind of swagger reminiscent of the legendary Malay hero, Hang Tuah, who once said "tak Melayu hilang di dunia" (the Malays shall not shrink from the world). Two projects symbolize the nation's new self-assurance and industrial power: the serpentine North-South Highway and the home-built Proton automobile, which in 1994 captured nearly three-fourths of the domestic car market.

Kuala Lumpur city center is throbbing to the din of feverish construction, with what will be some of the world's tallest buildings already jutting skyward. Inside the existing glass towers, mega-deals are cut and decisions made by a new breed of "bumillionaire" (the "bumi" prefix coming from the Malay word bumiputra, or indigenous Malaysian). Their London-tailored suits, gold cufflinks and cellular phones are the insignia of a business elite in the vanguard of the country's economic explosion.

Businesses are booming partly because of a privatization program in which domestic companies are awarded plum projects without public bidding or competition. Although some of those projects have been mired in controversy, they have upgraded the country's skills and technology base and given domestic companies the confidence to go pitching for infrastructure projects abroad.

Says Larry Gan, a managing partner at Andersen Consulting in Kuala Lumpur: "Malaysian entrepreneurs are aggressive and they have been early on the privatization train. If they had not been on it, they wouldn't have seen the opportunities in running public services profitably."

Malaysian companies also are riding the crest of prosperity ushered in by a seemingly insatiable craze among foreign investors for exposure to emerging markets. In 1993 alone, the market capitalization of the Kuala Lumpur Stock Exchange doubled. But that buying hunger has pushed stock prices high relative to current earnings. Says one fund manager: "The dilemma for Malaysian firms is simple: How do you sustain such high P-E (price-earnings) ratios? Only by expanding abroad and keeping foreign funds interested in your stocks."

During the great bull run of 1993, demand for Malaysian assets was so great that Bank Negara, the central bank, was forced to intervene in the foreign-exchange markets to rein in the ringgit, out of fear that an overvalued currency would hurt exports. According to some analysts, the central bank spent one-fifth of the country's gross domestic product trying to soak up the foreign currency lashing Malaysian shores. Encouraging Malaysians to invest overseas is one way to try to ensure the ringgit does not become too muscle-bound.

While booming China presents an obvious opportunity (see box, page 35), Malaysians are at the forefront of several prominent projects elsewhere in the developing world. "This strategy is not purely altruistic," explains Azman Hashim, chairman of the Arab-Malaysian Group. "It coincides with Malaysia's own development goals. Our businesses have to look at new markets to grow." Azman also heads Malaysia South-South Corp., a consortium of 48 leading businessmen set up to look for investment opportunities in the developing world.

If all the proposed investments come to fruition, Malaysia may boast as many as 10 homegrown multinationals early next century. A bulletin on what the leading players are up to, and where:

Cambodia: Malaysia is Cambodia's largest foreign investor. Timber group Samling Corp., for instance, has been granted two large logging concessions. More prominently, Malaysian Helicopter Services Bhd., which holds the dominant stake in national carrier MAS, stepped in to revive Royal Air Cambodge when a proposed deal between Singapore Airlines and the Cambodian authorities fell through.

But Malaysian influence in Cambodia has raised eyebrows. Former Finance Minister Sam Rainsy claims the $ 10 million aviation deal, which gives MAS a free managerial hand, violates four articles of the Cambodian constitution. The new Cambodian carrier's launch also meant that privately held Cambodia International Airlines had to cease operations, prompting its Thai managing director, Udom Tantiprasongchai, to say: "I am shocked. (This is) not international practice."

In an even more controversial deal, thick with allegations of dubious business practices, privately owned Ariston is committing $ 1.3 billion to build casinos, highways, a new airport and telecommunication links in the former Sihanoukville. Within four months of Ariston securing the contract, a floating casino began operation in Phnom Penh, flanking the historic Cambodiana Hotel.

Dismissing doubts about his ability to deliver, Ariston's Chen says: "Malaysian companies have experience in constructing airports, power stations, water and sewage plants and resorts, and we don't envisage any problems in finding management and technical expertise, Inshallah (God willing)."

South Africa: Samrand Development, the main vehicle of Landmarks Bhd., is developing a huge site off the Johannesburg-Pretoria expressway. Its location between South Africa's financial and administrative capitals makes it a real-estate speculator's dream, with 70,000 cars daily driving along the picturesque highway and easy access to three airports. The initial phase of its planned development includes offices and light-industrial units, leading to a self-contained township that will boast hotels, retail space, a golf course and residential property.

Less urgency is tangible at Renong House, a $ 10 million property which lies on a narrow, jacaranda-lined road in the Johannesburg suburb of Sandton. Behind the huge walls and imposing gates, an artificial waterfall sprays fine mist into the morning air. Inside the building, Malaysian paintings dot the wall of a lounge more suited to hosting guests than conducting serious business. "We are still looking around for opportunities," says Izzuddin Shah Othman, the young Renong country representative in South Africa.

The Philippines: Malaysia has become the biggest Southeast Asian investor in the Philippines, largely as a result of a $ 90 million joint venture to make Protons in Pangasinan province, 200 km northwest of Manila. This is the first plant outside Malaysia set up by Perusahaan Otomobil Nasional Bhd. (Proton), and besides serving the Philippine market it will export the marque for the first time to places such as Latin America, Papua New Guinea and Indochina. The first car will roll off the production lines in mid-1996.

Financier Chua Ma Yu, who helped set up leading Kuala Lumpur stockbroking firm Rashid Hussain Securities Bhd., is planning to open casinos in a magnificent theme park on the palm-fringed island of Cebu. Chua says: "Cebu offers a package for the entire family, and it is set to boom."

India: For sheer ambition, nothing beats Renong's proposal in India: A 10, 000-km highway network that will wind the length of the sprawling subcontinent, linking major cities. If it materializes, it will be the single biggest infrastructure project of its kind in the world, at an estimated cost of $ 35 billion over 20 years. Moreover, by laying the road with high-tech fiber-optic cables, the project will integrate India electronically, an achievement as significant as the railroad network the British built in the 1850s.

But some of India's nationalists are not so upbeat: They sniff the return of the colonizing British East India Co. in every foreign investment proposal. Also , India boasts what one Malaysian businessman calls a "genuinely open society," the downside of which is that the highway project will be carefully scrutinized for hidden costs. "They have a real free press and Parliament," says the businessman, "and they can make things very difficult if you try to do business in the Malaysian way."

Vietnam: In what is probably the first build-operate-transfer project of its scale in Ho Chi Minh City, a $ 30 million Malaysian joint venture led by IJM Corp., the construction subsidiary of property company IGB Group, will build a water-treatment plant with two reservoirs and a pump-house. In another project, Renong associates Faber Group Bhd. and Kinta Kellas PLC are working on plans for an export-processing zone near Ho Chi Minh City.

Despite corporate Malaysia's impressive overseas plans, there is still an awesome gap between proposed and actual capital flows. One example: A Mahathir-led delegation of businessmen last year signed 36 memoranda of understanding in Beijing, for a notional combined investment in China of $ 3.43 billion. Malaysian total outward investment in 1993 (the last year for which statistics are available) stood at a modest $ 1.34 billion, though that figure was likely surpassed in 1994 (see chart, above).

So much for outward capital flows easing the upward pressure on the ringgit. Says Rajeev Malik, an economist with Jardine Fleming International Securities Ltd. in Singapore: "The figure is still too small to make any significant impact on Malaysia's balance of payments. Its capital account will not be affected by such meager sums." Nor have the benefits trickled though to the bottom line of corporate profitability. Says Yeoh Keat Seng, director at Crosby Research (Malaysia) Sdn. Bhd.: "We have yet to see any material impact on earnings through the overseas operations of any Malaysian company."

Not only that. New markets require enormous patience to win project approval, secure guarantees on profit repatriation, and adapt to the local business environment. Jarring shocks can sometimes be in store. Malaysian Minister of International Trade and Industry Rafidah Aziz visited South Africa last August eager to cash in on decades-long support of the African National Congress, which only a few months previously had been voted into power in the country's first all-race elections. She was taken aback to be handed a protest by the Congress of South African Trade Unions which said it viewed "in very serious light" Malaysia's "anti-labor-rights history."

Some Malaysian companies have ambitions beyond their resources. Says Edmund Terence Gomez, an academic at the Institute of Advanced Studies at the University of Malaya who has written extensively on the relationship between politics and business in Malaysia: "Some companies just don't have the hands-on expertise or experience to go overseas and manage large projects." Seemingly falling into that category is gaming operator Metroplex Holdings Sdn. Bhd.'s proposal to build a power plant in China.

Other investors, however, take a more conservative approach. IJM Corp. looks for projects offered by other Malaysian companies abroad, or those aided by the World Bank or the Asian Development Bank, which come with payment guarantees. Says IJM Corp. Deputy Managing Director Krishnan Tan: "There is some risk in the developing world, so we ask ourselves simple questions: Is the project feasible? Can you bank it? Can you put your own money into it? Can you manage it? If we can't, we don't go in."

Another useful tactic is to acquire a bank. That earns the foreign investor legitimacy and respectability while providing a cash cow. Landmarks' solid reputation in Johannesburg is at least partly based on a 27 percent stake it took in Cape Town-based Bank Boland. Likewise, Asia Pacific Land Bhd. teamed up with Tamexco Ltd. of Vietnam to acquire Tanviet Commercial Bank.

If Malaysian companies concentrate on industries they understand -- hotels, gaming, timber, infrastructure -- then the rewards of the present overseas drive will be enormous, according to most analysts. Says Lai Kwok Kin, vice president at Merrill Lynch International Bank in Singapore: "Malaysian businessmen are gutsy and willing to take high risks. If they focus on businesses in which they have expertise, they will do extremely well."

-- Additional reporting by Bolaji Ojo in Johannesburg