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Capital Dynamics Sdn Bhd is the first independent investment adviser in Malaysia. It has been described as "one of the country's most iconoclastic and critical research outfits".

In February 2004, Capital Dynamics Sdn Bhd launched icapital education.

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Home > Articles > Lessons from PN4s

Part C: Economic Lessons


Before we discuss the economic lessons to be learnt, let us briefly recapitulate what our series on the PN4 companies were all about. These are the infamous 17 companies that became PN4 and were to be de-listed from the KLSE. Each of the 17 companies was featured in the i Capital, starting from the issue dated 13 Mar 2003 to the issue dated 10 Jul 2003. Following these specials, i Capital ran a 2-part special on “Investing Lessons” and another 2-part special on “Management Lessons”. This week’s “Economic Lessons” will, therefore, conclude the entire series on the 17 PN4 companies.

We all know what a disaster the 17 PN4 companies have been. But do we know how much damage it caused and how many investors were involved ? What were the economic consequences of the 17 PN4 companies ? Take a good look at Table 1.

Table 1:17 PN4 companies

Table 1 shows that these 17 companies had almost a quarter million shareholders or investors. While these would comprise some institutions and corporations, a large chunk of the shareholders comprises individuals. While a shareholder of a PN4 company may be a shareholder of another PN4 company and thus creating some double-counting, even if we divide the total figure by a factor of 2 or 3, we are still left with a huge number of investors that were severely affected. On the other hand, with the affected institutions and corporations also comprising more individuals, this would mean the actual number of Malaysians affected by the 17 PN4 zombies may turn out to be larger than 229,147.

It is not only the sheer number of investors badly affected that makes the 17 PN4 companies such a serious problem. Take a look at the wealth or market capitalisation that was destroyed. RM8.7 bln or the equivalent of 2.6-3.0% of Malaysia’s nominal GDP in 2000-2001 vanished. These are huge numbers and just to give our subscribers a sense of perspective, this is more or less equivalent to the output of the entire oil palm industry or the entire construction industry. This is how big RM8.7 bln is. In addition, more than RM6.5 bln of shareholders funds were wiped out.

Then, there is another level of damage that is more difficult to quantify and could even be more important and damaging. This is the total loss of confidence and a deep sense of disillusionment in our financial markets, our listed companies and economic policies among a very large number of investors, both local and foreign.

In our special study on the PN4 companies, we only looked at 17 of them. Do not forget that there are 59 more PN4 companies. The total damage that was wreaked by the 76 PN4 tornadoes needs more detailed research and study but you can be sure that the final tally would be shocking. Maybe too shocking for the government and our policymakers to do a post-mortem of what went wrong. In sustaining our economic development, the government and policymakers must take a very critical, self-honest post-mortem and then have the determination, the political will and integrity to undertake the necessary reforms and changes, even if they are painful in the short-term.

[1]. Research and analysis

The first economic lesson to be learnt from the 17 PN4 tornadoes is that our government and the policymakers must initiate a thorough, honest and very critical research into what went wrong with these 76 companies. The same recommendation also applies to the problems facing the Malaysian economy. The Malaysian private sector has been lambasted for not conducting sufficient research and development activities. At Capital Dynamics, we cannot agree more with this criticism. At the same time, the government and our policymakers have to be accused of the same failings too.

Whether Bank Negara or the Securities Commission or the Companies Commission or ISIS or MIER or local universities or private companies like Capital Dynamics do the research or study is not the important issue. The fundamental issue is for our government and its policymakers not to be in a perpetual state of self-denial. We have to realise, recognise and rectify our weaknesses. Using the 17 PN4 companies as example, the important task is for us to find out what went really wrong with our Malaysian companies instead of lambasting some foreigners as scapegoats.

Our “Management Lessons” have pointed out that problems like poor financial management, over trading, over borrowing, inadequate resources, badly planned expansion, etc were common in the 17 PN4 companies. Based on the research findings and studies, we can then tackle the underlying problems and attempt to make sure that the 17 PN4 tornadoes do not repeat in the next economic and financial crisis. However, this approach of conducting research and analysis should not only be confined to the PN4 companies. The need to conduct research and analysis must be undertaken whenever the Malaysian economy or a large segment of the economy is affected or better still, even before any crisis or major problem emerges.

We must find out and understand why Perwaja or Bank Bumiputera failed or whether Proton is ready and competitive enough for AFTA and globalisation. Studies must be made to find out whether we should still maintain our currency peg before we are hit with the next financial or economic crisis and then realise that a fixed exchange regime is no panacea either. Research must be made into why our small and medium sized enterprises do not expand beyond Malaysia or even if they do, why many cannot succeed. Instead of just relying on one person to decide that corruption is not rampant in Malaysia, there should be credible research into how serious and widespread corruption is in Malaysia and why it is so. Probe why new computer labs in schools collapse and share with the nation the honest findings. Research must be made into whether many of our industries are competitive and open enough and whether the lack of competition or in some cases, excess competition, has impeded the progress of our economy. Studies have to be made to find out why Korea succeeded in turning their chaebols into world-class competitors whereas Malaysia has only succeeded in developing their favoured businessmen into jaguh kampung. Critical research and extensive studies have to be made into whether our industrialisation policy, in particular, and our economic development policy, in general, has been based on sound and rational reasoning. Taxpayers deserve the right to know how the Malaysian government has used their hard earned money.

What is equally important then is for the research findings to be made public and be subjected to public debate and discussion. The local mass media must be made to help highlight the research findings and popularise the issues involved. We just cannot manage the Malaysian economy the way we use to where many major economic decisions are often made by a single person and without the entire nation knowing why they are made or reversed later on. The purpose of the research and analysis is not to finger point. This will be totally wrong and most unproductive. The primary objective is to make sure that the same policy mistakes are not made again and that the proper institutional checks and balances are put in place and respected by all Malaysians.

[2]. Reform economic policies

The second economic lesson is based on the experiences of companies like Jutajaya (Juta) and Autoways. Let us first recapitulate what we wrote on Juta.

[i]. Juta stayed focus on its core business for quite a while and made numerous attempts to strengthen them. By mid-1992, it had captured 40% of the local nets and ropes industry. By 1993, Juta launched the 8-strand rope, in which it was the only local producer. Focusing on its core business, it acquired a 100% interest in Norsan Fishing Net Industries S/B in 1995 and entered into a joint venture with Thai Lian Dessicated Coconuts Produce S/B. These represented a horizontal integration as both were engaged in the manufacturing of fishing nets, ropes, etc.

Table 2 : Financial data for the nets and ropes division (RM mln)

Table 2 shows the key financial highlights for the period 1990-1995. Despite sticking to what it knows best, Juta’s performance revealed a disturbing trend. Both pretax and net profit peaked in 1992 and started to decline even as sales rose. Margins followed suit. This was in spite of the new product, the 8-strand rope and an aggressive push into the export markets. The drop in profit margins was due to the reduction in import tariffs in the fishing net industry, which sharply increased competition and the tight labour market in the mid-Nineties, which increased staff costs. Perhaps this is a reflection of the poor economics of the overall industry that a company like Juta can only remain competitive and profitable as long as the tariffs are in place. Perhaps it is with these thoughts that large shareholders of Juta cashed out and reduced their stakes in Juta in 1996.

[ii]. Let us examine another PN4 experience - Autoways. Figure 1 shows the results of its core operations before one of the major shareholders–cum–management cashed out in 1993/94. Making rubber compound and retreading tyres is not glamorous or highly profitable but it was still generating profit. Even though Autoways was continuously investing to expand and improve its core businesses, the returns were not mouth-watering. The business was tough, highly competitive and the industry fragmented. So when someone comes in and offers a princely sum of RM35-40 mln for their stake, not surprisingly, they took it.

Figure 1:PBT of Mnfg&Retread division

Mountain versus Molehill
Now, you may think that we are making a mountain out of a molehill. We are not as we are talking about the entire Malaysian economy and its future. For the naïve (particularly our policymakers and their advisers), study the experience of Nokia and how the growth of a single company can propel the entire economy of Finland. Think, then multiply our example of Autoways or Jutajaya a few hundred or even thousands of times. Imagine the positive impact of this on the nation. This is when and where the entire Malaysian economy benefits.

Alternate scenarios
Let us imagine an alternate scenario. Imagine the original shareholders and management of Autoways stayed on and stuck to their core business. Remember that in 1999 and 2000 and even in 1997 and 1998, the boring business of making rubber compound and retreading tyres was still making money – see figure 1. The Malaysian government recognised the situation and the problems faced by companies like Autoways and Juta – rising material costs, shortage of workers, poor productivity, limited market size, lack of economies of scale, fragmented industry and difficulties in expanding overseas. The government stepped in and organized a consolidation of the industry and uses the National Productivity Corporation and other Malaysian organisations and institutions to assist Autoways overcome the problems of poor productivity and cost competitiveness. With the two sides working together, we could now have Autoways as a regional leader in this industry, one that is able to compete and therefore help the Malaysian economy to grow. In fact, Autoways was already expanding its core business into China and Sri Lanka. Such an Autoways would now be creating jobs (remember, jobs for our children and the thousands of unemployed graduates). Our financial institutions would have good borrowers to lend to. Our investors would have a decent and profitable rubber product company to invest in.

The same positive scenario could have been painted for Juta. What the government could have done was to study the local nets and ropes industry in great depth, see what were the problems facing the producers and how to help the companies involved. How can a company like Juta that was focused on its core business remain attractive despite having to face lower selling prices? Can the government and its policymakers find ways to assist a company like Juta stay competitive ? So why is it that we did not have such a good ending ?

Policy Failures
First, why did the major shareholders and management of Autoways and Jutajaya sell out ? Put yourself in their shoes. There was someone willing to pay a price so high that it would take the selling shareholder a long, long time to earn the same amount from managing the core business. If they did not sell, they have no confidence that they could make Autoways or Juta into a competitive and successful player. Faced with the almost insurmountable odds, there was really no reason or motivation for the major shareholders of Juta or Autoways to stay on and develop the group into a regional or even global player. Why ?

At Capital Dynamics, we see this as an unspoken but no less painful failures of Malaysia’s economic policy. We are not writing this only in hindsight. We have been writing about this for a long time. It is just that our government and its policymakers were placing the wrong priorities on the wrong policies. The government and its policymakers focused on improving the performance of a community. They ignored the basic fact that the competition was not between one Malaysian community against another Malaysian community. The real competition was Malaysia versus the rest of the world. In addition, the Malaysian business environment and its economic policies do not reward and encourage genuine entrepreneurship. Who you know rather than what you know is more important. Think, then multiply our example of Autoways or Juta a few hundred or even thousands of times. Imagine the negative impact of this on the nation. This is when and where the entire Malaysian economy suffers. Instead of making a tough business more profitable and the companies more productive and competitive, our economic policies created destructive monsters. Autoways alone recorded massive losses of RM457.7 mln from 1997 to 2000. Imagine, all these from just one small Second Board company.

For those subscribers who may have forgotten or too young to remember, the Malaysian economy in the mid-Nineties was riding high. Malaysians were led to think that we could do no wrong or so it seems. In 1994, 1995 and 1996, i Capital was instead constantly badgering our government and policymakers to do something urgently about our poor productivity, efficiency and competitiveness (PEC). These lonely calls and prophetic warnings from i Capital were not heard or heeded. Companies like Juta and Autoways were facing serious problems in staying viable and competitive.

[3]. Old Problems, New Solutions

As the new Prime Minister comes in, it is timely for him to implement new solutions to Malaysia’s old problems. Like what i Capital recommended above, conduct many, many more research and in-depth studies on a regular and open basis. If necessary, set up or take active steps to encourage the setting up of more credible stand-alone think tanks or as part of universities. It is time to critically scrutinize the many sacred cows. It is time to reform our economic policies especially those that have outlived their usefulness. Even from the 17 PN4 zombies, there are so many precious economic lessons.


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