Technology upgrade needed to stay competitive

M'sia must catch up technologically to stay competitive in E&E sector

By EUGENE MAHALINGAM
eugenicz@thestar.com.my

PETALING JAYA: Malaysia needs to step up its pace technologically if it wants to remain competitive in the electrical & electronics (E&E) sector, according to a report by RAM Rating Services Sdn Bhd.

“Malaysia must catch up technologically to compete against players that are higher up in the value chain, as reliance on lower-end operations will keep the local E&E industry in a vulnerable position.

“In this regard, we believe that investments, which are picking up again industry-wide to revitalise earlier plans halted amid the crisis and expand into new technologies, will enable local E&E players to tap new businesses,” RAM said.

The rating agency also noted that the Government’s efforts to boost the local E&E sector, such as the development of training centres and academic programmes, as well as focus incentives towards strategic segments of the value chain such as design testing and precision machining, were steps in the right direction.

“Nevertheless, it remains to be seen whether these initiatives are sufficient for the sector to leap to the next level,” RAM said.

According to the rating agency, the E&E industry is characterised by the need for continuous capital investments as well as technology upgrades.

“E&E players are required to continually develop new features and capabilities, which require them to also attract and retain developmental talent. As such, technological capabilities and the ability to be ahead of rapid technological changes are key to the success of E&E players.” it said.

It said those that were highly skilled in technology would have a competitive edge, thus making it easier for them to maintain their market positions.

RAM also said having a wide product mix would reduce the exposure of E&E players to just a single market.
“A broader and more diversified clientele also adds strength to a company as it would then be less vulnerable to the loss of any single key customer.

“In addition, more extensive geographical coverage is viewed positively as this would reduce the company’s vulnerability to economic cycles in a particular country.”

The rating agency also said that the competitiveness of an E&E company was underpinned by its operational efficiency.

“Cost structure is important for E&E companies because of pricing pressures, particularly from other emerging economies like China,” RAM said, adding that constant cost-reduction initiatives could offset such pressures.

“Improved operating efficiencies can be derived from cost-efficiency drivers such as economies of scale, mechanised operations or localised benefits, such as easy access to raw materials as well as cheap and skilled labour.”

RAM said the competitiveness of local E&E players had been diminishing when compared with regional counterparts in more technologically advanced economies and countries with lower production costs.

“Malaysia’s overall market share in the global E&E industry has been sliding amid intensifying competition, with the main threat being China’s booming E&E industry.

RAM highlighted that China had evolved into the world’s largest producer of consumer electronics, with exports charting a compound annual growth rate (CAGR) of 28% from 1998 to 2008, compared with Malaysia’s CAGR of 6% during the same period.

“Furthermore, China’s exports of industrial electronics show a CAGR of some 31% from 1998 to 2008, compared with Malaysia’s 8%.”

RAM said the local E&E segment also faced a shortage of skilled personnel, such as software and design engineers, which could hinder the industry’s long-term growth and competitiveness. “Additionally, the E&E industry in other emerging economies, such as Vietnam, are picking up fairly quickly.”

The rating agency also said there was a notable “technological gap” between Malaysia and countries such as Taiwan and Singapore, especially within the electronic components segment.

Jho Low, love him or hate him

ON THE BEAT WITH WONG CHUN WAI

Malaysians, and the world, will continue to hear about Low Taek Jho if his present flamboyant lifestyle continues.

Low: Wants to bring his Hollywood friends to visit Malaysia to promote the country.

US$1m before graduation -On the best stocks he had invested in, Mr Low said 'at the end of the day, it was all about returns and diversification'. -- PHOTO: THE STAR

LET’S admit it – a lot of us would like to be in the shoes of businessman Jho Low. He is flush with cash, parties with Hollywood celebrities and rubs shoulders with the most influential and powerful.

You either love or loathe the 28-year-old businessman who has been dubbed the international mystery man by the world media for his parties with Paris Hilton and Megan Fox and his penchant for expensive champagne.

I had the opportunity to meet this chubby Penangite last week at his office in one of the top floors of Petronas Twin Towers.

He was more interested in talking about how he made his money, mostly in the Middle East, and his friendship with Arab princes who studied with him at Harrow, an English boarding school that has produced seven prime ministers, and the Wharton School of Business at the University of Pennsylvania.

I was more interested in asking him about his exploits, if the word is appropriate, with Paris Hilton and his Hollywood friends.

It was obvious that Low Taek Jho wanted to clear the many media stories, mostly fabricated, that had been reported about him.

He tried to play down the hefty bills for his champagne, his parties and the limousines at his New York apartment, which he said he shares with 11 others.

But I couldn’t help feeling that Low wanted to say that as a single, young man who has made millions, he has the right to be a party animal.

Never mind if he is using his own money – or that of his Arab friends. His lifestyle may be seen as excessive and a waste by others in conservative Malaysia.

Low, who described himself as a businessman and entrepreneur, makes his money by making money for his clients. That’s what people who handle funds do, and he has a portfolio of rich clients.

He puts deals together for businessmen and even governments, using his extensive networking and mostly friendships from his school and university days.

No one can dispute his link with powerful Arab figures like Yousef Al Otaiba, who is currently the ambassador for the UAE to the United States and Mexico.

He talked about certain Hollywood celebrities as if they are his drinking buddies, which they are.

When asked if he had invited Mick Jagger, the Rolling Stones legend, to watch the World Cup in South Africa, his reply was: “I didn’t. I invited Leonardo (Dicaprio) who in turn invited Mick Jagger.”

Are actor Daniel Craig, who plays James Bond, and multi-millionaire rapper Sean “P. Diddy” Combs his neighbours at his apartments?

His reply was: “I don’t know but I have been inside the lift with Sean Combs.”

He denied having any romantic links with Paris Hilton nor any interest in her sister Nicole, saying he was a family friend of the Hiltons and that he handled their investment portfolio.

Low talked of bringing his Hollywood friends to visit Malaysia to promote the country, saying these people had millions of followers on their Twitter.

“Can you imagine the impact they can create for tourism when they promote Malaysia on their Tweets with their millions of followers?”

That would certainly be cheaper than placing advertisements on billboards and in the media, particularly when the international media would also follow these celebrities here.

An advocate of the Blue Ocean Strategy, he has put that on his status message of his Blackberry.
He also sees West Asia and China as massive markets.

Low sees himself as a loyal Malaysian who wants to bring Arab investors to his country, including to Johor’s Iskandar Development project.

But he has also invited criticism with his new-found fame.

His detractors have questioned his credibility and integrity and there are unflattering comments about how he conducts himself and his business deals.

Some have said he is hardly the brilliant financial strategist he has made himself out to be, brushing him off as merely a good salesman. They were outraged by the media prominence accorded to him, including by this newspaper.

But many of these critics have also admitted that they do not know him personally but picked up the negative remarks from friends or friends of friends or the blogs.

His friends, including some powerful figures, say he does not need to open himself to these criticisms as he could choose to stay away. After all, New York and Abu Dhabi are his two working bases.

Malaysians, and the world, will continue to hear about him if his present flamboyant lifestyle continues. He will make good copy for the media.

Hate him or love him, he has attracted attention. This writer has received endless telephone calls from media and business people who want to know him personally, and they include those who hate his guts.

Interest rate hikes starting to help ringgit

Household consumption is watched even though rates rise has not affected debt repayment

WHEN Bank Negara raised interest rates for the third time this year earlier this month, expectations were that the ringgit would appreciate.

That, together with the removal of China’s yen peg to the US dollar, led to suggestions that the ringgit could regain some of the buoyancy in its value against the US dollar that had seen the local currency emerge as one of the best-performing currencies this year.

There was also the school of thought that suggested those domestic interest rate hikes had created a buffer between rates in Malaysia and elsewhere that might see the local currency becoming a carry trade currency.
While the ringgit is not yet seen as a carry trade currency, its slow ascendency against the US has been seen after the third rate hike earlier this month.

After interest rates were raised by 25 basis points to 2.75% in the July 8 meeting of the Monetary Policy Committee, the ringgit saw a brief spurt against the dollar but has since see-sawed in a narrow band.

But that has changed a wee bit as the ringgit has strengthened to its highest level this year as RM3.18 to the dollar yesterday.

That pattern of trade has somewhat broken away from the initial pattern seen after the yuan ended its peg against the US dollar last month.

After a surge, the Chinese currency has traded within a narrow band of between 6.77 and 6.78 to the dollar.
Notwithstanding the slow rise towards the year high for the local currency, the interest rates hikes in recent months, which the central bank says is a move towards normalisation, has led to money entering Malaysia.

While higher domestic rates might have been the main factor, another was the fact that selected Asian currencies were the flavour of the month, given the economic malaise in Europe and the sluggishness of the US economy.

In a response from Bank Negara to StarBizWeek, the central bank says portfolio capital flows were influenced by both domestic and external factors. Domestically, the impressive 10.1% GDP growth in the first quarter of the year, talk of a stronger economy and the transformation of Malaysia into a high-income economy have whet the appetite of investors.

The central bank said in the first quarter of 2010, portfolio inflows amounted to US$3.4bil, a healthy gain from the US$1.4bil in the fourth quarter of 2009.

“Nevertheless, the pace of portfolio flows in recent months has been relatively modest, given the volatility arising from the European sovereign debt crisis and the lingering concerns over the global economic recovery,” says Bank Negara.

“Overall, the flows have been manageable and well-intermediated by the financial system.”

Bank Negara points out that because of the strength and depth of the domestic financial system, inflows are more effectively intermediated without causing undue risk to the economy.

It cites the fact that the ringgit bond market is one of the largest in this region, with a size of 94.1% of GDP.
Furthermore, the country’s Islamic bond market is also deeper than other markets, with the highest number of sukuk issuances recorded this year thus far.

“At the same time, Bank Negara has developed a robust surveillance system that enables us to monitor capital flows on a near real-time basis and Bank Negara is equipped with a wide range of monetary instruments to sterilise these inflows,” says the central bank.

“Bank Negara’s policy is solely to maintain orderly market conditions while at the same time ensure that the ringgit is not misaligned from its fundamentals so that it will not contribute to the build-up of internal and external imbalances.”

Bank Negara adds that interest rate differentials is a determinant of capital flows, but it is not the only one.
“Some of the other factors include economic growth prospects, exchange rate expectations, anticipated returns in the equity market and other investments, as well as investor sentiments,” it says.

The central bank adds that the overnight policy rate of 2.75% was broadly in line with other regional interest rates and that there are many other countries that have higher official interest rates.

The official borrowing rates of Indonesia, the Philippines, China, India and Australia are 6.5%, 4%, 5.31%, 5.5% and 4.5% respectively.

A recent report by Morgan Stanley suggests that the interest rate hike might also have been used as a tool to attract foreign capital to bolster the country’s foreign exchange reserves, which have not kept pace with the rise seen in the reserves of Malaysia’s neighbours.

Foreign exchange reserves saw a drop in the middle of last year and has basically plateaued from the last quarter of 2009.

While the hikes would lead to more capital flowing in, which is welcomed, considering the quantum of the fall, the country is comfortable with the level of reserves as data for the middle of June says it is sufficient to finance eight months of retained imports and 4.4 times the short-term external debt.

The interest rates hike, however, is seen to have an influence on the real sector as a means to cap skyrocketing property prices.

“One of the major assets facing some strong pressure has been the property market,” says RAM Holdings group chief economist Dr Yeah Kim Leng.

“We needed a tightening to prevent a further build-up in those asset prices.”

The effectiveness of a 75-basis-point rise in interest rates might not quell speculation on properties but with the household sector debt now at 76.6% of GDP, higher repayments for debt taken to buy cars, houses and for other consumption needs would bite into private consumption.

Yeah says the rate hike was a move towards a balance between consumption and savings.

The rise in household debt to GDP was partly due to the contraction of GDP of 1.7% in 2009 but authorities are confident that the financial asset side of the ledger remained sound as financial assets to debt was 2.44 times.

The ratio and growing affluence of households has allowed for increased access to financing and with gross non-performing loan ratio for household remaining low at 2.7% at the end of April 2010, over extension of debt might not be a problem just yet.

By JAGDEV SINGH SIDHU

jagdev@thestar.com.my