Keynote Speech by Dato’ Md Nor Yusof
Chairman, Securities Commission
Remaking Malaysia: Investing In The New Malaysia
August 3rd – 4th 2004,
Rising To The New Competitive Challenges For Corporate Malaysia
Thank you for inviting me to speak at this conference this morning. The topic for this morning’s session reminds us that in every challenge lies an opportunity. But to uncover that opportunity we must understand what is giving rise to the challenge.
So what I would like to do first is to look at some of the reasons behind the new challenges facing corporate Malaysia, before turning to what we can all do to address these effectively. As you will see, the challenges that we face are linked closely with globalisation.
How has the Malaysian economy changed?
In a relatively short space of time, Malaysia has gone from being an agrarian society to an outward-looking manufacturing-based economy. In 1955, agriculture, forestry and fishing made up 40% of gross domestic product; manufacturing contributed to only 8%. Today, manufacturing accounts for a third of gdp while services makes up over half.
Globalisation has played a big part in Malaysia’s vitality. According to one major study, Malaysia is among the top 20 most globally-integrated countries in the world (out of 62 surveyed), with strengths largely in trade, direct investment, investment income, international remittances, internet users and travel1. In trade, our record speaks for itself: Malaysia is the second largest exporter and fourth biggest importer in the world2.
Such achievements have, to a large extent, been the result of a successful response to globalisation. A recent study ranks Malaysia the third most attractive destination for offshore locations in the world, behind China and India3. It highlighted, in particular, Malaysia’s relatively low costs, particularly for infrastructure, a very attractive business environment and high levels of global integration.
However, changes in the global environment are revealing challenges for Malaysia’s industries and firms.
How is the global environment changing?
The current thrust of globalisation arguably had its roots in the mid-1980s. Soon after the collapse of the Berlin Wall, market-based economies bloomed: eastwards across Eastern Europe and Russia, through to South Asia and the Far East. At the same time capitalist democracies rolled-back the state even further. Industries were deregulated and privatised the world over.
Two decades on we have the ex-Soviet bloc growing; India and China emerging fast; North-East Asia (including a slowly-recovering Japan) becoming a vibrant nexus of growth; and South-East Asia looking towards closer integration. Together, these developments are rebalancing the traditional hegemony of North America and Europe. A new global trading order has started to form in which Asia is playing a more significant role.
At the same time, advances in information and communication technologies are demanding new terms of international commerce and trade. Transactions are being executed at greater speed and convenience. Physical travelling time has been made shorter by faster air travel. Innovations in production technology have rendered obsolete previously successful processes and dependencies. Disintermediation and commoditisation are now the new watchwords in business restructuring guidebooks. Indeed in many cases, international modalities are replacing local commercial channels.
In short, how you buy a book, sell shares, order food and pay bills, and through whom, have changed beyond all recognition in the last few years. And in many cases, such transactions are no longer commanding the kinds of premium they used to.
What are the new challenges that Malaysia faces?
So where do these developments leave Malaysia, and in particular its corporate sector? In my mind, they mean having to cope with a more competitive and less protected environment. There are at least three aspects to this.
First, rivalry among existing competitors is intensifying, with the removal of structures that limit domestic competition. Monopoly licenses and special concessions will no longer be so readily available. Cartels will weaken. Regulatory reform will remove distortions to market forces and promote a more competitive environment.
Second, barriers to entry are being lowered. Witness the rise of online services: the lower cost of technology is reducing the up-front costs of setting up businesses; at the same time , technology and other process innovations are making certain commercial activities more viable with more modest scale economies.
Third, the boundaries that define economic geography no longer coincide with those that define political geography. This means having to deal with more intense and borderless competition-for consumers, for resources and for funding.
For consumers, thanks to new technology they can search more easily for what they want, compare prices and make purchases-worldwide. Theirs is now a market of global choices.
Workers and the firms that employ them (your partners and suppliers) are increasingly migratory; they are on the lookout for the most facilitative and cost-effective working environment anywhere in the world.
Investors are now just as likely to focus on cross-border opportunities as they are on prospects of specific countries or regions. Their criteria will be international rates of return.
What this all boils down to is that the standards of performance that many of you are used to may no longer be relevant to the standards which you are now being expected to deliver. For instance, would the market continue to enjoy similar price to value premiums if investment restrictions were liberalised?
Similarly, levels of profitability and efficiency cannot be assessed properly by comparing among the absolute earnings of local players. Global industry comparisons and a focus on indicators like return on equity are more appropriate and more likely to reveal the true extent of our performances. For instance, according to some estimate s, Malaysia’s averag e ROE sinc e 1998 is around 9.5% compared to 20% for India, 13.5% for Singapore and 11% for Taiwan. (For your information, some estimates put Malaysia’s average roe since 1998 at around 9.5% compared to 55% for Indonesia, 20% for India, 113.5% for Singapore, 11% for Taiwan, 7.8% for Korea and 7.2% for Thailand.)
The important thing to realise is that there are larger forces at work in your business environment. And it is these forces that your performance has to account for.
How should the private sector rise to these challenges?
Now it’s been said that the biggest challenge of a thinker is to state a problem, which readily allows for a solution. In the spirit of that implicit challenge for me this morning, allow me to elaborate on a number of ways in which I believe corporate Malaysia should be rising to the challenges they face. I will discuss five in particular:
- Realign your strategy, set focus and leverage the world
- Build on our comparative advantages
- Prefer “convergence” over “competition”
- Cultivate “emotional value” among your stakeholders
- Deliver strong shareholder value
It is clear today that the geography of the world economy has changed. Globally companies are rearranging and realigning their activities to the new order. There is now a new framework for competition in which companies compete for position. Malaysian companies must take a fresh reading of the map and gather all the information to secure your immediate position. But it is not enough to master the present. You need to know what is next. That takes global research. And the right knowledge at the right time. Relying on internal resources alone will never be adequate. Malaysian companies must leverage on what the world can offer. We must therefore be ready to make the necessary investment.
To reposition itself in the new competitive structure Malaysian companies will find it necessary to move outside their comfort zone; but do so in a manner that taps new markets from a position of strength; manage the trade-offs effectively; and keep in check the risks of business conglomeration.Building on comparative advantages
Next I’d like to turn to the issue of making fuller use of our comparative advantages. Malaysia is fortunate in having inherited a rich and varied set of factor endowments-land, natural resources and trainable workers, among others. It would be a mistake, in my mind, to pursue fully some “new economy” Holy Grail and abandon our traditional strengths completely.
This isn’t to say that we should abandon all efforts at increasing our competitive advantage. We must continue to create new endowments. But we should also make full use of what we have already been blessed with. Similarly we must be mindful that there can be a reversal of comparative advantage and therefore we need to be able to adjust accordingly.
How do Malaysian companies stand to gain from this? By tapping key endowments that we often take for granted: Malaysia’s geographical proximity to some of the largest and fast-growing markets in the world, namely China, India and soon Indonesia; and the cultural affinities our indigenous and diaspora population share with these markets. And there are numerous needs of China and India that can only be grown and cultivated under our climate.Preferring “convergence” over “competition”
Turning to the issue of convergence over direct competition, I would prefer to see more “Positive Sum” partnerships that collaborate and prosper, to “Zero Sum” competition that achieves gain for one at the expense of others.
Collaborative partnerships avoid the “race to the bottom” that typically accompanies the blind pursuit of individual corporate goals. And they are an expedient way of penetrating new markets.
Look at Sony and Ericsson, who combined their mobile handset units to take on Nokia and Motorola. Their partnership allows each firm to focus on core strengths (electronics in the case of Sony and telecommunications for Ericsson), and thus reap all the benefits of specialisation.
Now there are plenty of opportunities for collaboration within the Association of South East Nations alone. South East Asia offers a market of half a billion people, rich natural resources, skilled labour and an export industry concentrated in global high-growth sectors. These are all stitched together in a free-trade area created by asean .
To compete better internationally, asean needs more scale. Recent events have brought the region together more, but our countries will need to work even closer and more functionally together as a region in future. By creating a single production platform-as well as a large home market-throughout South East Asia, companies can realise economies of scale and capitalise on the region’s comparative advantages.
This is already evident in the automotive sector, where automakers are viewing asean as a single market and production centre. It is not uncommon to have auto parts made in Malaysia, assembled in Thailand and eventually sold in Indonesia. Global players are taking full advantage of economies of scale and low cost opportunities that are available; regional players are fast beginning to do so: Singapore and Thailand are pooling their strengths in the electronics and automobile industries. For instance, Singaporean and Thai automotive firms attended the Singapore-Thailand Enhanced Relationship forum to discuss ways to integrate their business.Cultivate “emotional value” over products and services
By cultivating “emotional value” I am suggesting that we should not only be concerned with the technical and physical attributes of our products or services. As I’ve mentioned earlier these become quickly obsolete in the presence of rapid innovation. We should strive to make our products and services win our consumers’ hearts and minds.
I think it’s fair to say that the government now recognises the importance of strategic branding to the nation. But this will come to nought if firms and industries don’t address reputational issues themselves. We can count Malaysian Airlines and Petronas as global brands; indeed Petronas is in the Fortune 500. But we need more.
Better global brand recognition has tremendous pay-offs both domestically as well as in international ventures. Vodafone and Optus, Coca Cola and Sony have all established strong international reputations, which they have gone on to use to push locally delivered services.
This is important for sending out the right signals; we want to shape opinion, not “fire-fight” customers’ reactions. But don’t think that a major exercise in marketing will simply do. We-by which I mean both the public and the private sectors-must craft carefully our brands and reputations by ensuring that our delivery matches, and even exceeds, our stakeholders’ expectations.Deliver shareholder value
Underpinning all the points I’ve made so far is shareholder value. There must be a strong commitment by the private sector to enhance it. Firms must unlock and maximise value so that shareholders can look forward to long-term returns, which in turn will attract more investments.
For this to happen, corporate culture must emphasise value creation and recognition. This means adopting strong business management techniques like benchmarking against key performance indicators. This may also mean having to dispose of non-core and non-profitable assets and subsidiaries, redundant product lines-even management!
To project ourselves internationally we must be willing to embrace international expectations. We must be internationally compatible in both form and content. Just as we take pride in our Malaysian talents being accepted around the world we should leverage on the cross-cultural benefits of employing international expertise in Malaysian companies.
All this would elevate the capital market and corporate practices in Malaysia and promote good perception and win market endorsement. It would also reinforce investor confidence in the value of Malaysian companies.
The role of the public sector
And what of the state’s role in all of this? The government has many times emphasised the role of private sector as taking over the engine of growth. From the standpoint of long-term economic growth, development economists agree that it is best to have a state that is restrained in scope, focusing on the provision of necessary public goods, but strong in its ability to enforce the rule of law.
The state must provide an environment that enables value creation to occur. In a market-based environment, this means ensuring that information flows smoothly; property rights are protected; people can be trusted to live to up to their promises; side effects on third parties are curtailed; and competition is fostered.
To achieve this, there has to be a strong institutional structure for the enforcement of laws. Indeed, the risks of promoting liberalisation in the absence of strong basic state institutions are great. There can be a perverse effect by undermining the state’s capacity to maintain order.
Russia went from a strong totalitarian state to a weak one that could not collect taxes or control oligarchs; privatisation, in the absence of a rule of law, tainted the whole process. Thailand liberalised its capital market in the early 1990s before it had adequate banking regulation in place; its inability to handle the ensuing flood of liquidity led to the financial crisis of 1997.
In the case of Malaysia’s capital markets, the last decade has seen a tremendous development in the microstructure of markets, as well as in market foundations such as accounting and corporate governance standards. Amid a more dynamic global environment, our efforts at Securities Commission -and those of our other regulatory counterparts-will continue to ensure these keep pace with global standards.
Ladies and gentlemen
Changes in the global environment are revealing new challenges for Malaysia and its corporate sector. We will be facing a more competitive and less protected environment.
It is important to realise that there are larger forces at work in your business environment. And it is these forces that your performance has to account for.
It’s been said that challenge is a dragon with a gift in its mouth: tame the dragon and the gift is yours.
Thank you for kind attention.
1 A.T. Kearney/ Foreign Policy Magazine Globalisation Index 2004.
2 World Bank; World Development Indicators 2002 ; imports and exports of goods and services as a percentage of gross domestic product, 2000
3 A.T. Kerney’s 2004 Offshore Location Attractiveness Index.