Better And Cheaper Alternatives To GLCs

Better and Cheaper Alternatives To GLCs

M. Bakri Musa

www.bakrimusa.com

The overall performance of these GLCs, especially with respect to their primary mission of spearheading Malay participation in commerce, is underwhelming. It is time to abandon this expensive and ineffective strategy.

These GLCs have acquired powerful constituencies. As such it would be a monumental political undertaking to dismantle these GLCs. If we were to have these GLCs then I would prefer that they be modeled after such American entities as the giant utility Tennessee Valley Authority (TVA), financing arm Export-Import (Ex-Im) Bank, or the space agency NASA. These companies undertake major and expensive ventures with their associated unquantifiable risks that cannot be borne by private entities. The need for GLCs in those areas can thus be better justified.

Consider NASA. The potential gains from its missions are long term, if at all realized. NASA’s research is literally out of this world with both the risks and costs unquantifiable and thus difficult to justify to shareholders. Yet we have seen the tangible benefits (aside from the moon landing and space exploration generally) in many seemingly unrelated fields such as manufacturing in zero gravity environments and elemental diets in clinical medicine.

Likewise with TVA; the tremendous boost in farm productivity and overall improvement in living conditions in America’s rural heartland owe much to the massive rural electrification programs made possible through TVA. Ex-Im Bank finances exports ranging from Boeing jets to Iowa wheat.

I would have also included Freddie Mac and Fannie Mae to the list of American GLCs except for their recent abysmal if not criminal performances. Both were instrumental in creating the housing bubble 2007 that triggered the worst economic crisis in America since the Great Depression. Theirs is a noble mission–to increase home ownership among the poor and minority groups long ignored by banks and mortgage companies.

Alas, noble mission alone is no guarantee of success or it being subverted. Both corporations aggressively pursued their mission and enjoyed robust profits. As it turned out those profits were used to lobby congressmen and regulators so the companies could skirt around existing regulations. In America, acts otherwise considered outright corruption and influence peddling in any other jurisdiction are viewed as legitimate pursuits of democratic rights! The excesses of Freddie Mac and Fannie Mae helped burst the American real estate bubble that in turn greased the slide into America’s worst recession.

There is however, one major difference with the way the Americans handled their GLC fiascoes as compared to Malaysians. Those debacles were subjected to intense public scrutiny through congressional hearings and criminal prosecutions. The shenanigans of the major culprits were exposed and they were held accountable. By contrast, to date Malaysians still do not know the extent, costs, or persons responsible for such spectacular failures like the Bank Bumiputra bankruptcy. As we do not examine our mistakes, we never learn from them. Malaysians are condemned to repeat them and at a much higher scale and cost. The Malaysian learning curve with respect to GLCs is depressingly flat. The current 1MDB debacle differs from previous ones only in scale, specifically the magnitude as well as audacity of the greed, and thus the cost.

The concept of GLC is legitimate. There are as many models as there are countries. I am supportive of China’s version. I do not mean the old communist state enterprises under Mao where they were known more for their bloated workforce, low productivity, and shoddy products. Those GLCs were meant to keep the masses employed, or more correctly, occupied.

The new GLCs of the post-Deng era have radically different missions, more along America’s TVA and NASA, to undertake massive commercial ventures that are beyond the capacity of China’s existing private sector. As China’s embrace of capitalism is recent, its private sector is not as yet robust; hence the need for GLCs. Chinese GLCs are also more focused, concentrating on three areas: civil engineering (including solar energy), high technology, and biotechnology.

The second mission of Chinese GLCs is to take on multinational corporations. China had to move quickly as they were entering the country at an exceptionally fast pace, thanks to Deng’s economic liberalization and the enticement of a huge untapped market. The company Lenovo that bought IBM’s personal computer unit is an example of this modern Chinese GLC.

With China allowing and encouraging foreign companies to enter its market, there was (still is) a stampede by them to establish beachheads. While the Chinese are supporting their GLCs either directly or indirectly, WTO rules notwithstanding, what they are not doing is limiting the entry of these foreign companies. Chinese GLCs are thus forced to compete with these multinationals.

For Malaysia, the obvious fields where it has a definite competitive advantage, and thus a good place to establish these GLCs, would be in such areas as rubber, palm oil, wood products, and our old-world rainforest biodiversity. This would also be a way for our GLCs to expand the market for local products. Consider the potential for natural rubber. The biggest market is of course car tires. Here the competition is from synthetic rubber but with the price of oil ever rising, natural rubber could prove competitive. The niche and highly profitable market however, would be in tires for jet planes, earth-moving equipment, and heavy trucks where the resilience of natural rubber is superior. Additionally, rubber is being used as shock absorbers for buildings in earthquake-prone areas.

Similarly there could be downstream manufacturing and marketing of palm oil and wood products. Currently FELDA is involved mainly in plantations with little downstream activities. At the moment it concentrates on selling raw palm oil in bulk to China and elsewhere instead of exporting the final products. Again we see this with lumber; we still export raw logs instead of the finished products. Engineered wood products are finding ever increasing use in construction. So far there is little interest in the private sector to engage in these R&D and manufacturing activities, hence the need for GLCs to spearhead them.

Malaysia should no longer export tin, rubber, or lumber; instead only their finished or manufactured products. The GLCs should focus on those activities. What Malaysian GLCs should not engage in is direct competition with established private sector industries. I see no merit in having a GLC in airlines, hotels, or hospitals. The Malaysian private sector is doing well in these arenas; there is no need for the government to interfere.

Sell off Malaysia Airlines. If AirAsia feels that Malaysia Airlines would complement it, then be prepared to pay a premium for that, lest risking losing Malaysia Airlines to another bidder. I have no problem if the airline were to be sold to Singapore Airlines, Air Timbuktu, or whoever else willing to pay the best price.

There is only one justification for GLCs like Malaysia Airlines and Pernas Hotels. That is, to serve as training grounds for Malays. Thus Malaysia Airlines should be training pilots, cabin crew, aircraft mechanics, and ground personnel in such numbers that it becomes a net supplier to other companies in the industry, regionally and globally. Similarly, those GLCs with hotel subsidiaries should be the practical training grounds in preparing Malays for the hospitality industry.

Back in the1960s and 70s, these GLCs functioned precisely as that. Many budding young Malays cut their executive teeth in these GLCs and were then poached by multinationals and other major employers. That contributed towards fulfilling the mission of increasing Bumiputra participation in the corporate sector. It was also a tacit recognition of the value of their experiences with these GLCs.

Today it would be a rare scenario to see any “poaching” of young executives from GLCs into the private sector. It is even rarer to see a GLC executive leaving the company to start his or her own enterprises. That more than anything else reflects the caliber and value of their experience, which in turn tells us volumes about these companies.

I see no merit in having GLCs in sectors already well represented by local players. That would be redundant and serve only to “crowd out” legitimate local enterprises.

Next: Transforming GLCs

Adapted from the author’s book, Liberating The Malay Mind, published by ZI Publications, Petaling Jaya, 2013. The second edition was released in January 2016.