Is Malaysia mired in the deep end?

By Jose Barrock

In the first of a two part series, KiniBiz highlights author Joe Studwell’s thoughts on what ails Malaysia. He talks about what Malaysia did wrong in terms of the development of the car and steel industry, with particular reference to Proton and Perwaja, and explains why South Korea succeeded while Malaysia failed.

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It is a humid afternoon in downtown Kuala Lumpur. Joe Studwell struts into a prominent hotel, joining KiniBiz for a coffee. He is very frank, very knowledgeable and importantly, open about his experiences in this part of the world, which makes it an interesting tete-a-tete.

Very early into the session, he talked about the uncertain outlook for Malaysia, brought about as a result of weak political will, and past mistakes, made largely during the 22 year reign of former premier Dr Mahathir Mohamad.

Then again, the more pressing issue he said stems from there being a lack of leadership since the Mahathir era, be it at the ruling Barisan Nasional coalition or the opposition Pakatan Rakyat.

“No one has carved out their space, whether it’s their fault for being weak leaders or Mahathir’s fault for trying to undermine anybody who follows him I don’t know, (but) I don’t think anyone has stamped his mark, and I haven’t seen anyone project a set of ideas on anything very much since Mahathir.

“That would count for the opposition as well…I can’t say (opposition leader) Anwar (Ibrahim) has any vision, and of course Anwar was in many respects the side kick of Mahathir while these policy mistakes were being made. He (Anwar) showed very limited capacity (during the financial crisis) to really intellectually sort of think his way through the challenges Malaysia confronted,” Studwell laments.

Studwell has been covering the Asean countries since the Asian financial crisis of the late 90’s, and has a wealth of experience speaking to many people of authority understanding what really happens in these countries.

Interestingly enough he opined that the mistakes made in the past seem to be haunting us till today. Some of the cardinal mistakes, Studwell highlights, is how Malaysia misinterpreted and misunderstood the industrialisation techniques successfully utilised by the Chinese, Taiwanese, South Koreans and Japanese, which hinged on competition.

He cites two examples where this has happened, with disastrous effects.

One is automaker Proton Holdings Bhd, a company Studwell comments considerably on in How Asia Works.

The Proton conundrum

Proton has at best been a thorn in the side of the government for many years, and even after disposing off the ailing company to businessman Syed Mokhtar Albukhary, the government is still forking out hundreds of millions in terms of grants—if industry players are to be believed.

In his book, How Asia Works, Studwell highlights the location of Proton’s plant in Shah Alam and Tanjung Malim, and deduces that exports were never high on the automaker’s priority list. This is in contrast to with Hyundai Motor Co’s plant in Ulsan, which has its own port enabling aggressive exports.

The key reason for Proton’s failure he added is the lack of competition.

“You have to frame competition…But unfortunately this is what (former premier) Mahathir failed to understand. When he looked at (South) Korea and Japan he saw the need for industrial policy, but he failed to understand why it works in those countries, or why it works in China today,” Studwell laments.

South Korea it seems started its automotive industry with five companies, two of which have since folded. Daewoo has been taken over by General Motors Corp and Hyundai has taken over Kia Motors Corp.

Basically the South Koreans allowed the five to fight it out before one was sustainable. And now Hyundai is the fourth largest auto company in the world, and sold 3.6 million cars in 2010.

“Mahathir chose one (Proton), and with Perodua (the second national carmaker Perusahaan Otomobil Kedua Sdn Bhd) it was not even designed to compete with Proton, but to make small cars and Proton make big cars…It is a complete misunderstanding of the nature of industrial policy in (South) Korea, despite the fact that he made several visits,” Studwell said.

Strengthening his case he highlights that China has about 15 auto companies, but the number will be whittled down to either one or two, after the weaker companies fall by the wayside.

Proton has since been swallowed up by diversified DRB Hicom Bhd, in a takeover early last year.

Its last financial performance as a standalone listed entity was not encouraging. For its financial year ended December 2011, the national automaker suffered a net loss of RM68.1 million from RM5.9 billion in revenue.

If industry sources are to be believed, Proton’s officials even recently sought a grant from the government.

“It is still a problem today because with the losses that have been absorbed in Proton, no one wants to put more money into it…but the basic reality is that without a degree of domestic competition, Proton is not going to happen,” Studwell explained.

Proton’s failure is apparent for all to see, its market share locally is dwindling as well and stands at below 20% as at end December last year, while exports have been more or less non-existent.

Our failed steel policy

Studwell, explaining his views on the Malaysian tragedy, said that Malaysia’s steel policy hinged on Perwaja Steel was a disaster, in comparison to the South Koreans and Japanese. Perwaja was not under any pressure to export, and faced no competition.

At the initial stage Perwaja was supposed to produce steel for Proton, high value automotive steel, but never produced any, instead producing construction steel inside a protected market.

“Anybody can make that product, there is no technological learning…so again it was a failure to learn from the experience of South Korea,” Studwell said.

He added that at the outset the South Koreans in contrast to the Malaysians did not trust Nippon Steel, where the technology for steel was obtained by both countries.

South Korea’s Posco (formerly Pohang Iron and Steel Co) hired three independent consultants to go through everything Nippon Steel recommended, and immediately began to start making the steel production machinery.

“Here (in Malaysia) Nippon Steel recommended technology, (and) there was no independent review, and Malaysia moved immediately to this kind of bleeding edge technology,” Studwell said.

In contrast South Korea bought very basic technology, used it, learnt it and initially even rejected computerisation so as to understand the manual workings of the machinery, opposing the Japanese who wanted them to take the computerised system which was more complex and harder to understand let alone master.

“Within 10 years the Korean’s had learnt so much about steel-making that Nippon Steel was refusing to co-operate with them anymore, because they were becoming a competitor,” Studwell added.

Posco according to reports, had an output of 39.1 million tonnes of crude steel in 2011, making it the world’s fourth-largest steelmaker, and a year later in 2012 was at 146 on Fortune magazine’s list of 500 largest companies. .

Back on the home front Perwaja is still struggling, and the listed entity Perwaja Holdings Bhd, suffered a net loss of RM92.6 million on the back of RM663.2 million in sales for its six months ended June this year.

A closer look at Perwaja Holdings balance sheet reveals that as at end June this year the company had cash and bank balances of RM1.7 million, and deposits with banks amounting to RM5.1 million. On the other side of the balance sheet the company had short term debt commitments and overdrafts of RM972.4 million, while its long term borrowings were RM337.5 million.

Perwaja Holdings finance costs for the six months in review was RM54.6 million.

What went wrong?

Studwell said that Mahathir was at a huge disadvantage when compared to the South Koreans who picked up much of their skillsets from the Japanese, as the then president Park Chung Hee spoke Japanese and was surrounded by groups that better understood the Japanese.

“They were basically copying their neighbours…but in Southeast Asia, in 1981, when Mahathir came in all his neighbours were giving bad examples. Who could Mahathir copy, Thailand, Philippines, copy Indonesia?

“He had to try to reinvent the wheel…which is why I stress this— that Mahathir is given credit for trying to do the right thing, for recognising what was happening in Korea and Japan was different and worked, but the problem is the implementation which went wrong,” Studwell said.

And Malaysia seems to be having a tough time with implementation even now.

“Even today I think politics in Malaysia seems to be very petty, everybody’s calling each other names all the time, and nobody is trying to think about the problem. Nobody is trying to think their way through the problem,” he added.

Southeast Asian countries he said are not going to break out of this development cycle unless the people open their eyes and do what the Japanese did originally, and go around the world and really think about how rich countries became rich.

“It takes a lot of conviction not to do what everyone else is doing. People are like sheep they are copying each other all the time. To stand up and be different—which is what Mahathir tried to do—takes a lot of courage and conviction. It’s like the Chinese saying, “The first bird to rise out of the tree is the one that gets shot,” he said in conclusion.

Tomorrow: Malaysia – the mistakes, the way forward