Oil enters a new era of low prices: Opec vs US shale, impacts, perils as Petronas cuts capex

Oil Enters New Era as OPEC Faces Off Against Shale; Who Blinks as Price Slides Toward $70?

How Oil's Price Plunge Impacts Wall Street: Video Bloomberg News

OPEC’s decision to cede no ground to rival producers underscored the price war in the crude market and the challenge to U.S. shale drillers.

The 12-nation Organization of Petroleum Exporting Countries kept its output target unchanged even after the steepest slump in oil prices since the global recession, prompting speculation it has abandoned its role as a swing producer. Yesterday’s decision in Vienna propelled futures to the lowest since 2010, a level that means some shale projects may lose money.

“We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC,” said Mike Wittner, the head of oil research at Societe Generale SA in New York. “It’s huge. This is a signal that they’re throwing in the towel. The markets have changed for many years to come.”

The fracking boom has driven U.S. output to the highest in three decades, contributing to a global surplus that Venezuela yesterday estimated at 2 million barrels a day, more than the production of five OPEC members.

Demand for the group’s crude will fall every year until 2017 as U.S. supply expands, eroding its share of the global market to the lowest in more than a quarter century, according to the group’s own estimates.

Photographer: Eddie Seal/Bloomberg

Floor hands on the Orion Perseus drilling rig near Encinal in Webb County, Texas.

Benchmark Brent crude fell the most in more than three years after OPEC’s decision, sliding 6.7 percent to close at $72.58 a barrel. Futures for January settlement sank to $70.15 today, the lowest close since May 2010. Prices peaked this year at $115.71 in June.

Market Signals

“We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the market behaves,” OPEC Secretary-General Abdalla El-Badri told reporters in Vienna after the meeting. “We are not sending any signals to anybody, we just try to have a fair price.”

OPEC pumped 30.56 million barrels a day in November and has exceeded its current output ceiling in all but four of the 34 months since it was implemented, according to data compiled by Bloomberg. OPEC’s own analysts estimate production was 30.25 million last month, according to a report Nov. 12. Members will abide by the 30 million barrel-a-day target, El-Badri said yesterday.

“OPEC has chosen to abdicate its role as a swing producer, leaving it to the market to decide what the oil price should be,” Harry Tchilinguirian, head of commodity markets at BNP Paribas SA in London, said yesterday by phone. “It wouldn’t be surprising if Brent starts testing $70.”

Conventional Producers

Conventional oil producers in OPEC can no longer dictate prices, United Arab Emirates Energy Minister Suhail Al-Mazrouei said in an interview in Vienna on Nov. 26. Newcomers to the market who have the highest costs and created the glut should be the ones to determine the price, he said.

“That is what OPEC is hoping for,” Carsten Fritsch, a commodity analyst at Commerzbank AG in Frankfurt, said in an e-mail. “It’s the question of who will blink first.”

OPEC may now be prepared to let prices fall to force some drillers with higher production costs to stop pumping, said Julian Lee, an oil strategist who writes for Bloomberg First Word and has worked in the industry for 25 years. That scenario would mark the start of a fourth oil-market era since the end of the 1970s, he said.

Fourth Era

Since the early 2000s, surging demand growth drove up prices allowing companies to apply new extraction techniques and develop deep-water and other costly oil. That ended an era that pervaded since the mid 1980s, which was characterized by low prices and OPEC regaining the market share that it had previously sacrificed in an attempt to preserve high prices, Lee said.

OPEC will face pressure too, with prices now below the level needed by nine member states to balance their budgets, according to data compiled by Bloomberg.

“They haven’t taken collective action,” Richard Mallinson, an oil analyst at London-based Energy Aspects Ltd., said by phone. “That doesn’t mean they won’t do it in the next few months if prices stay low.”

U.S. Production

U.S. oil production has risen to 9.077 million barrels a day, the highest level in weekly data from the Energy Information Administration going back to 1983. Output will climb to 9.4 million next year, the most since 1972, it forecasts.

Middle Eastern exporters including Saudi Arabia, Iran and Iraq can break even on a cost basis at about $30 a barrel, Sanford C. Bernstein & Co. They need more to balance their budgets. Some U.S. producers need more than $80, the consulting firm said in a report last month.

OPEC’s policy will spur a crash in the U.S. shale industry, Leonid Fedun, a vice president and board member at OAO Lukoil, Russia’s second-largest oil producer, said in an interview in London before the group’s decision.

“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

The share prices of U.S. oil producers including Exxon Mobil Corp. and Chevron Corp. fell by at least 4 percent in New York trading today.

No Cut

Igor Sechin, the chief executive officer of OAO Rosneft, Russia’s largest oil producer, said after a meeting with Venezuela, Saudi Arabia and Mexico that his nation wouldn’t need to cut output even if prices fell below $60.

“The question is, what price level will be low enough to slow U.S. production growth?” Torbjoern Kjus, an analyst at DNB ASA, Norway’s biggest bank, said by phone. “What price will get U.S. growth to slow to 500,000 barrels a day from this year’s rate of 1.4 million barrels?”

Only about 4 percent of U.S. shale production needs $80 or more to be profitable, according to the Paris-based International Energy Agency. Most production in the Bakken formation, one of the main drivers of shale oil output, remains profitable at or below $42 a barrel, the IEA estimates. The agency expects U.S. supply to rise by almost 1 million barrels a day next year, with increasing flows to international markets.

OPEC has gone “cold turkey” on balancing the oil market, Goldman Sachs Group Inc. said in a report yesterday. Prices may have further to fall until there is evidence of U.S. production slowing, according to the bank. It said last month that oil markets were entering a “new oil order,” with OPEC retreating from its role as a swing producer.

“OPEC’s decision means it is over to you America,” Miswin Mahesh, a London-based commodities analyst at Barclays Plc, said in an e-mail. “This opens the window for the U.S. to be the new swing producer.”

Source: Bloomberg


The perils of cheaper oil

COME Dec 1, Malaysia will enter a new era long desired by the advocates of free market.

The pump price of petrol and diesel at the kiosk will be based on a managed float system depending on global oil prices. This will replace the current system where the Government fixes the price at the pump, a process that involves a huge amount of subsidy.

For years, the Government adopted the fixed price mechanism because it brought about an element of stability.

Unlike most other countries where the price at the pump varies from day to day, Malaysians are used to planning their expenditure based on a fixed price.

Right from a typical consumer to large companies, they all depend on oil or some form of energy to carry out their daily lives or operations. The fixed price has helped in their planning.

But the biggest disadvantage of having a fixed price for oil is that it involves a huge amount of subsidy, especially in an environment where oil prices go beyond what is anticipated by the Government.

Malaysia’s tale of subsidy woes is a subject matter that is often spoken about.

The subsidy bill is estimated at about 14% of the Government’s total operating expenditure of RM271.94bil for next year. The bulk of the RM38bil that has been set aside for next year is to ensure that the fuel cost remains stable.

There is a sales tax of 58 sen per litre on petrol sold at the pump. But the mechanism to collect the tax has not kicked in because the subsidy per litre is much higher than the sales tax.

Beginning July this year, the oil and gas dynamics changed with the United States becoming a large producer, thanks to the shale oil and gas.

The implications of the shale oil and gas on the global economy are huge. It has gone beyond the oil and gas industry. Oil-dependent nations such as Iran, Iraq and Venezuela are in trouble because a low oil price means less revenue and less money to fund their development programmes and, more importantly, to pay off their debts.

Venezuela is high on the list of countries that could seek some reprieve from bondholders because it needs oil price to be more than US$160 per barrel to balance its budget.

The Russian rouble has depreciated by more than 45% against the dollar and state-owned Rosneft has seen its profit almost collapse due to the depreciating currency.

Russia’s problems have exacerbated the slowdown in Germany, the strongest economy in Europe and this has in turn affected the entire eurozone recovery.

As for Asia, the best thing that the low oil prices have brought about is an era of low inflation and allowed some governments to carry out their reforms of energy policies. It has allowed governments to dismantle the subsidy system that has for long artificially kept the cost of production low.

Indonesia removed subsidies last week, a move that was cheered by foreign investors, because the system apparently only benefited a handful of powerful businessmen.

For Malaysia, when global oil prices are less than US$80 per barrel, which is the case now, there is no more subsidy for petrol and diesel sold at the pump. What kicks in is the sales tax of 58 sen per litre.

Come April 1 next year, the sales tax will be replaced with a goods and services tax of 6%. What this means is prices at the pump will be substantially lower than what they are today – provided global oil prices remain at less than US$80 per barrel.

Theoretically, this should translate into Malaysia having a lower cost of production due to cheaper energy prices. When oil prices went up over the past years, wages and all other costs followed suit. When the reverse happens, shouldn’t the cost of production come down?

Unfortunately that is not the case. The US is benefiting from the low energy cost era, at the expense of Asia. In fact, Asia as a whole may be losing out as a result of the steep fall in global energy prices.

Since the 1980s, Asian countries have been the destination for foreign manufacturers from the Europe and the US to relocate their operations because of the cheap cost of labour.

But manufacturers increasingly are paying more attention to destinations with low energy cost. Cheaper cost of energy is seen as an adequate substitute for low wages.

European manufacturers have turned to the US, where the cost of natural gas is one-third that of South-East Asia, to relocate their operations.

BASF, the large German chemical company, is planning to build a US$1.4bil plant in the Gulf Coast, apart from increasing its annual capital expenditure of US$20bil into that country.

An Austrian steel company, Voestalpine, is building a US$500mil facility in Texas to export iron for its steel plants. It will use natural gas to blast the furnace instead of coking coal in Europe.

Previously, these companies would make Asia their destination because of its low cost of production.

The flow of new manufacturing investments to the US is also assisted by the low rise in wages there compared with Asia. According to a report, between 2006 and 2011, Asian wages rose by 5.7% compared with only 0.4% in developed countries.

For decades the big gap in the wage rate increases between Europe, the US and countries such as Malaysia determined the flow of foreign investments. But now that is no longer the case.

Malaysia has to raise productivity or it will lose out on attracting new investments. Low wages alone will not do, especially now when prices of oil and gas resources are in a tailspin.

By M.SHANMUGAM The Star/Asia News Network

Petronas cuts capex

PETROLIAM Nasional Bhd’s (Petronas) announcement of its third-quarter results comes at a delicate time, considering that it is being watched by all and sundry.

Petronas president and CEO Tan Sri Shamsul Azhar Abbas

Amidst a scenario of a free-fall of oil prices and the politically-charged Umno General Assembly, it comes as no surprise that Tan Sri Shamsul Azhar Abbas (pic), the oil major’s president and chief executive, says he has to be “politically correct” in delivering his key message.

At a press conference yesterday, Shamsul also explained that Petronas had waited for the all-important Organisation of the Petroleum Exporting Countries (Opec) meeting to conclude before addressing the media in Kuala Lumpur.

And rightly so

The 12-member Opec decided on Thursday not to lower its output target, leading to oil prices plunging by a further 8% on Friday, cumulating in an almost 40% dip since mid-June.

The Brent crude oil price is now at US$72.84 per barrel and some forecasters are predicting that oil prices could hit US$60 per barrel.

Petronas itself is now predicting that oil prices could settle at US$70-US$75 next year.

This is a far cry from the US$108 per barrel that Petronas had averaged last year and the US$106 per barrel, which is the average price of the Brent crude for the first nine months of this year.

Shamsul lays out the bare truth on what the falling oil prices would mean for Petronas, the oil and gas (O&G) services industry and the federal government’s coffers:

• Capital expenditure (capex) on the O&G industry will be cut by between 15% and 20%
  
• Petronas’ contribution to Government coffers in the form of dividends, taxes and oil royalty for next year will dive by 37% to RM43bil, assuming the Brent crude settles at US$75 per barrel;
  
• Petronas will not proceed with contracts to award new marginal oil fields unless oil settles at levels above US$80 per barrel
  
• Projects in Pengerang that have yet to receive the final investment decision (FID) will be affected by the cut-backs. Projects worth US$27bil that have received FID will not be affected, but Petronas does not have 100% equity in all the projects approved.

The capex crunch is expected to send chills down the spine of the already fragile O&G sector, with the stock prices of listed players already haemorrhaging in light of the free-fall of oil prices.

Apart from the 40-odd listed O&G companies, there are close to 4,000 other smaller companies that depend on Petronas for O&G service jobs.

“Nearly all depend on Petronas for jobs,” says an official in the O&G industry.

The capex cut by the national oil company is likely to have a negative impact on these companies and runs contrary to what research houses have been projecting.

Global slide

Several research houses have been stating that the Malaysian O&G industry is sheltered from the global slide in crude because Petronas will keep up with its spending of about RM60bil per year.

Taking a jibe at the forecasters, Shamsul says he has been warning of a shake-up in the industry in all his quarterly briefings.

“But nobody wants to listen to me. The worst part is, some of them have been listening to these so-called desk-top analysts who say this cannot happen because Petronas is always there to help them out … dream on.”

Shamsul says it is also reviewing the feasibility of some of its projects and could shelve projects that are no longer viable and for which Petronas has yet to make its FID.

“For the last nine months, we have been telling you guys about the likelihood that oil prices will drop. So the declining oil price is no surprise to us,” says Shamsul.

“But like every international oil company (IOC) out there, declining oil prices will impact us, and as such, we have to review our capex plans for next year onwards, which is also what the IOCs are doing. We have to assess the feasibility of projects,” Shamsul says.

He adds that at current oil price levels, marginal oil fields are no longer feasible for Petronas to get involved in, and warns that companies seeking to get involved in this business are “dreaming”.

When asked what was his message to the service providers seeking to do more work for Petronas, Shamsul said: “I’ve been singing this song for the last nine months, to watch out because things are not going to be that rosy.

“But not many seem to want to listen to me. So, I’ve stopped singing that song. But when they (service providers) get hurt, they will know,” he said.

Clearly, Shamsul is referring to how the sluggish oil price will force it to become more cost-effective in its projects, cancelling some, shelving others and negotiating down the terms of others.

Impact to federal government coffers

Meanwhile, Shamsul also explains that based on the assumption that oil prices average US$75 per barrel for 2015, the state oil firm would be paying the Government about RM43bil in dividends, royalty and taxes.

This would be 37% less than the RM68bil it plans to pay the Government this year.

“The lower dividend and other payout contributions is to ensure Petronas has enough money to replenish the reserves. If we are to maintain the payouts, it will have a significant impact on our growth plans,” says Shamsul.

As such, he says the Government should relook and rebalance its budget planning to adjust to the new level of oil prices.

He also reiterates that Petronas still needs to keep investing in new technology, in overseas projects and increasing its oil reserves in order to maintain its growth, considering that current production levels decline by some 10% every year, naturally.

At present, Petronas produces some two million barrels of oil equivalent per day.

“In five years, if we don’t replenish our production, our production will be down to half of what we have today,” he asserts.

By RISEN JAYASEELAN, NG BEI SHAN The Sunday Starbizweek Nov 29 2014  

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Barking up the wrong tree !!

Malaysia's problem isn't Bahasa Malaysia but English, and it is incredible that so many of us have refused to acknowledge this or even want to address it.

THERE have been so many silly remarks and statements by some Malaysian politicians and one-man show non-governmental organisations that it is becoming impossible to keep track of their comedy acts.

There is a saying: “There are people who are only good at making the news but cannot make a difference to the wellbeing of society.”

Well, in Malaysia, there are certainly many of them.

Last week, Johor state assemblyman Datuk Dr Shahruddin Salleh suggested that students who fail to master the national language be stripped of their citizen­ship. Yes, revoke, lucut, tarik balik, batal!

The Barisan Nasional representative for Jorak alleged that many students were not able to master the language, and this was even prevalent among the Malays. He didn’t say how many. Like one, 10, 20, hundreds or thousands, but was quoted as saying “many”.

“Even my own neighbour, whose father and mother are Malays, but because their child goes to international school, the child is unable to converse in Malay,” he said, adding that students were now more interested in mastering English and do not take the learning of Malay seriously.

The situation was prevalent in the vernacular schools, he added, because the use of Mandarin and Tamil made the students weak in the Malay language, which was further compounded by the fact that many of the teachers there are also not well-versed in Malay.

We’d like to think that Dr Shahruddin has a sense of humour but, seriously, what does he really mean when he said students who do not master the Malay language should be stripped of their citizenship?

How does one define mastery at the school level? Is it by the grades they score at the public examinations, like the UPSR, PMR or SPM? We know that these are just examination grades. A student can score a distinction or even fail miserably, but that in itself does not reflect his language proficiency in the real world.

To take an extreme example, some foreign workers who are in the country for just a few months can speak like a Malay, but do you think they will be able to pass the BM paper at SPM level? Or that they should therefore be accorded citizenship because they have mastered our national language?

We are not sure if Dr Shahruddin is having a bad patch with his neighbours because I do not think that his neighbours, who would have read his remarks by now, would be amused.

The reality is that there are many Malay households where English is prominently used because of a variety of reasons.

The children of diplomats, for example, because they are schooled in international schools, will definitely be more comfortable in English.

What about the children of politicians, especially those who send their children for better education overseas and then make a lot of noise about our local education system?

The assemblyman may want to project his nationalistic credentials ahead of his party general assembly, and he has conveniently used his whip at English and, of course, vernacular schools, the current flavour of the month.

There are enough statistics to show that many of our students and teachers are struggling with English in schools, especially those in the rural areas. Just Google.

The Malaysian Employers Federation secretary Datuk Shamsudin Bardan reportedly said that a survey a few years ago among its members found that 60% of them identified low English proficiency as the main problem with young recruits.

A similar survey in September last year by online recruitment agency

JobStreet.com found that 55% of senior managers and companies considered poor command of the English language among graduates to be the main reason for their difficulty in finding employment.

Sabah Tourism, Environment and Culture Minister Datuk Masidi Manjun had said that 70% of Malaysian graduates are having a hard time finding jobs in the private sector due to poor command of English.

Citing his past work experience with a multinational company in peninsular Malaysia, Masidi said 70% of those interviewed did not make it through to the second round as they could not converse well in English.

Second Education Minister Datuk Seri Idris Jusoh had said that about two-thirds of English Language teachers in the country have been classified as “incapable” or “unfit” to teach the subject in schools. These teachers, he said, have been sent for courses to improve their proficiency in the language.

It has also been reported that about 70% of the 60,000 English Language teachers who sat for the English Language Cambridge Placement Test performed poorly.

Granted that there are students who fare badly in Bahasa Malaysia, but we do not think the numbers are big. Instead of making such a generalisation, we expect the Jorak assemblyman to back up his claim with more substantial findings and figures.

Neither has he been able to support this pathetic claim that “the use of Mandarin and Tamil by teachers in vernacular schools is another reason for students being weak in Malay, adding that the teachers are also not well-versed in Malay.”

Our real problem isn’t Bahasa Malaysia but English. It is incredible that so many of us have refused to acknowledge this problem or even want to address it, lacking the political will, unfortunately.

There is no point in deceiving ourselves by allowing our children to easily pass the English tests in schools and in public examinations.

There may be a huge number of students scoring distinctions in English at the SPM level but their real ability is revealed when they enter tertiary education and, later, the working world.

The MEF’s Shamsudin told a news portal in April that there are those with As and Bs in English at the SPM level who cannot even hold a conversation in English.

“Which is why we were excited when the government decided to teach Mathematics and Science in English (PPSMI), as we felt this could boost their command of English. Unfortunately, it was cancelled after seven years when we should have allowed it to continue for 14 to 15 years to see the results.

“The inability to converse and understand English (among young school-leavers) is a constant complaint among our members,” said Shamsudin. The MEF has 4,800 direct members and 21 affiliated trade associations.

In the end, it will be the rural students who will suffer the most. These are the very people that our elected representatives claim to represent and fight for their rights and interests.

Do we need to check how many of our Honourable Members are sending their children to private and international schools even as they wax eloquence about the importance of the national schools?

Actually, we should all be concerned about proficiency in English, an issue that has also been recently taken up by Tun Dr Mahathir Mohamad and Tengku Razaleigh Hamzah, who can see the value of the English language without undermining the stature of the national language.

As Dr Mahathir rightly pointed out, the rich go to private schools while the poor go to national schools at home, adding that “I must confess that although my children all went to national schools, my grandchildren all go to private schools in the country and abroad. They do speak the national language but their kind of schooling widens the gap between races as well as between the rich and the poor.”

Well, it looks like the only thing that we have fared consistently well in is the comic relief provided by some of our politicians. And we can be sure the curtains will never come down on these comedians as they continue to seek out non-issues to put themselves in the spotlight.

The views expressed are entirely the writer’s own.

By Wong Chun Wai on the beat focus

Wong Chun Wai began his career as a journalist in Penang, and has served The Star for over 27 years in various capacities and roles. He is now the group's managing director/chief executive officer and formerly the group chief editor.

On The Beat made its debut on Feb 23 1997 and Chun Wai has penned the column weekly without a break, except for the occasional press holiday when the paper was not published. In May 2011, a compilation of selected articles of On The Beat was published as a book and launched in conjunction with his 50th birthday. Chun Wai also comments on current issues in The Star.


Malaysian Chinese National-type Schools

DON’T bark up the wrong tree. That is the message many would like to convey to Deputy Minister in the Prime Minister’s Department Datuk Razali Ibrahim who has opposed the approval for building new Chinese national-type schools (SJKC).

The deputy minister was quoted as saying, “As long as approval is given, the relationship between the different races shall be further deteriorate, and shall be like throwing a spanner into the works of nurturing national harmony.”

This is clearly a statement made without having researched the functions of SJKCs in fostering mutual understanding between the races. For the record, Chinese national-type primary schools (SRJK) have more non-Chinese students than boarding schools and religious schools have non-Malay students.

There are at present approximately 80,000 Malay students in the so-called “unity-harming” SJKCs. Thus, I humbly ask Datuk Razali if the opinions of parents of these Malay students have been sought.

These parents appear to be sending their children to Chinese national-type schools not to “de-Malaysian-ise” them but to Malaysian-ise them.

In Malaysia, it common knowledge that most Malays are fluent in just two languages, namely English and Bahasa Malaysia while, most Chinese and Indians know at least three languages. Knowing one more language certainly gives children a cutting edge.

There is also, at present, growing pessimism over the way education in national schools is handled. Teaching science and mathematics in English which reverted to the teaching science and mathematics in Bahasa Malaysia as well as the ever-changing format of national level examinations are just a few areas of concern.

There is also the perception that certain races are favoured by the national school system. It is due to this perception that many, who want a level-playing field, choose the Chinese national-type school system.

Furthermore, perhaps China’s emergence as a world political and economic power has persuaded pragmatic Malay and Indian parents to try to get their children to learn Mandarin, the second most widely spoken language in the world after English.

How exactly do Chinese national-type schools affect national unity?

Children in Chinese schools still sing Negaraku. Bahasa Malaysia is still being taught there. There is no difference in syllabus taught in national schools. In fact, all children in Chinese schools are taught to love and respect Malaysia.

So Datuk Razali, I humbly ask just what are the problems which affect national unity?

SJKCs schools have been around for decades, so why is the question of unity being brought up?

In my opinion, educators who use words like “pendatang” and tell students to “balik Cina” and “balik India’ are the real threats racial harmony.

I believe that racial harmony has actually been disrupted due to political figures who’ve made use of race as propaganda to score political points and win votes. The exaggeration of petty issues and the manipulation of these issues via social media have made these politicians heroes in the eyes of supporters. However, what it has really done is instil hatred among the races.

If, and it’s a big if, Chinese national-type schools do contribute to disharmony, the better option would be for the Education Ministry to form a special taskforce, and conduct periodic audits of the schools and their syllabuses. That would be better than denying parents an option with regard where they wish to educate their children.


 Eye of the Tiger by by Mike Chong Yew Chuan The Star/Asia News Network

Mike Chong Yew Chuan is Press Secretary to Minister in the Prime Minister's Department YB Datuk Dr. Ir. Wee Ka Siong. He is also currently MCA National Youth BN Youth Affairs Bureau Deputy Chairman.

Startup's components of a support system, govt incentives, market access - part 5, 6, 7

How components of a support system nurture nascent companies - part 5

Geared up: A participants in the 1337 Accelerator programme demonstrating a gaming app, Agent RX — a single player top down stealth game. The app can be used on a desktop and be enhanced with the Oculus.

Difference between Accelerator and Incubators: Infographic:  https://infogr.am/infographic-79580 via @infogram

Over the course of grooming startups, the industry has perhaps grown familiar with the terms “incubator” and more recently, “accelerator”.

These organisations, part of the modern support system for new entrepreneurs, have helped startups take shape in their early stages.

In almost all cases, participation in an incubator or accelerator programme has enabled entrepreneurs gain access to resources beyond their own to scale their business. Services such as regulatory and strategic expertise that otherwise may not be available to independent startups become more readily available.

And because of their seemingly similar functions and involvement with early-stage startups, incubators and accelerators are often mistaken to mean the same thing. But they are not.

An incubator is essentially a physical work space that hosts a new business with many other startup companies. Startups are usually allowed to stay in the space as long as they need to and mentorship is typically provided by the incubator or through peers at the facility.

An accelerator programme, on the other hand, is limited to a three- to four-month period intended to accelerate a startups’ business and the kick them out of the nest. Accelerators often make investments in the companies they support and provide a strong network of mentorship. These programmes typically culminate in a “pitch day” for startups to raise more funds from venture capitals.

In Malaysia, both private and government funded incubators have been set up in the Klang Valley over the past few years as the government pushes for the growth of more local entrepreneurs and startups.

But it may come as a surprise to some that there is only one proper accelerator model in Malaysia, known as 1337 Accelerator.

1337, pronounced “leet”, started in March last year with an initial government funding of RM5mil to invest in startups. The programme has two intakes a year where budding tech-entrepreneurs are given the opportunity to join the programme to develop their ideas and take them to market.

“We invest in the best minds in the country. The teams here have to earn their way into the programme. They have to go through a stringent panel to see if they have an investor-worthy idea and can contribute back to the ecosystem,” said Bikesh Lakhmichand, chief executive officer of 1337 Ventures Sdn Bhd.

He explained that accelerators are more mentor-driven and are directly involved with the development of the startup.

According to Bikesh, accelerators are the way of the future for startups, noting that the trend is growing globally to create a more vibrant startup community.

However, incubators, too, have their appeal.

As incubators do not invest in startups, entrepreneurs are able to maintain full ownership and control of their companies while tapping onto facilities provided by the incubators.

Among incubators in Malaysia, many would probably be familiar with Technology Park Malaysia (TPM) and MAD Incubator.

TPM spans some 650 acres of land in Bukit Jalil with total lettable business and incubation space of 725,000sq ft.

Its president and chief executive officer Datuk Mohd Azman Shahidin said the number of companies at TPM has grown to more than 200.

Companies that have been selected for TPM’s incubation programme will be guided through a hand-holding and business coaching programme over a duration of six to 18 months. Here, they will be equipped with knowledge on product development, marketing techniques, R&D and networking.

“Our main role is to accelerate the growth of small businesses. We are here to grow and be the catalyst for these companies. And we have seen some companies here that have grown to become listed companies,” Azman said.

MAD Incubator has also seen good traction with its facilities and had launched its third incubator in Malaysia in the middle of the year.

While different in nature, both incubators and accelerators play an important role in boosting early-stage venture. One model may not necessarily be better than the other. But interested startups should be clear on what they want out of these supporters to get the best out of these facilities

Govt incentives for startups - part 6

Ample opportunity: Malaysia provides many initiatives to fund startups. Recently Axiata Group Bhd launched Axiata Digital Innovation Fund, a RM100mil venture capital fund, with Malaysia Venture Capital Management Bhd (Mavcap). Its group president and group chief executive officer Datuk Seri Jamaludin Ibrahim (right) is seen here exchanging document with Mavcap chief executive officer Jamaludin Bujang (left). Looking on are Khazanah Nasional Bhd managing director Tan Sri Azman Mokhtar and Prime Minister Datuk Seri Mohd Najib Tun Abdul Razak.

Silicon Valley has long been known as a hub for high-tech innovation. The southern part of the Bay Area is home to many of the world’s largest companies and thousands of startups including Facebook, Google and eBay.

But Silicon Valley was not an overnight success story. It took decades of government funding and support to make it the vibrant tech cluster it is today.

Policymakers play an important role in supporting the growth of a startup ecosystem. Be it in funding research and technologies or in building infrastructure, government help create ideal conditions for innovation and commercialisation.

In Malaysia, the government has announced various initiatives, including financial allocations, over the years to groom entrepreneurship and support the startup ecosystem.

In the Budget 2015 speech, the Prime Minister noted the government’s aspiration to position Malaysia as a choice location for startups in the region.

And among its efforts to achieve this target is the establishment of Malaysian Global Innovation & Creative Centre (MaGIC) to create a more conducive ecosystem for startups.

Financial assistance

One of the most crucial ingredients for the development of startups is funding and several government agencies have been established to dispense pre-seed and seed funding to enable startups to transform ideas into commercially viable products and ventures.

These agencies include not-for-profit organisation Cradle Fund Sdn Bhd and venture capital company Malaysia Venture Capital Management Bhd (MAVCAP), both under the purview of the Finance Ministry.

As a VC, Mavcap makes direct investments with fund size ranging from RM1mil to RM20mil and participates actively in the management and operations of these companies.

Mavcap also invests through its Outsource Partners Programmes, whereby it allocates capital to other VC fund management companies to invest in high-growth businesses.

Cradle offers a maximum seed funding of up to RM500,000 to help technology companies attain commercialisation.

Tax incentives

The government has also introduced tax breaks to encourage private investments in startups as well as promote the setting up of high-tech companies in Malaysia.

For example, the Angel Tax Incentive allows angel investors who have invested in early-stage startups to qualify for tax exemption. This would indirectly see more fund flows to startups and also encourage eligible angels to participate in the ecosystem.

There are incentives for ventures that have obtained MSC Status including a 100% investment tax allowance and duty-free importation of multimedia equipment.

Building skills

Various programmes have also been initiated to build entrepreneurial and technical skills as well as encourage interest among the local community to venture into the startup scene.

MaGIC recently launched its partnership with Stanford University, which, among its programmes, would send entrepreneurs to Silicon Valley for a two-week immersion programme.

The partnership will also see an exchange programme whereby local entrepreneurs will be able to learn from the Stamford faculty on marketing and commercialising their ideas.

Another significant component of the partnership is the “Faculty Train Faculty” Programme where faculty members from 14 local universities will be sent to Stanford over the next three years to help them develop impactful and creative entrepreneurship programs in their respective universities.

Early this year, MDeC announced its MSC Malaysia Startup Accelerator Lite programme to help early-stage ICT startups map out and accelerate their goals.

MDeC is also working with partners such as JFDI Asia, a regional startup accelerator, to help mature and globalise the local startup community.

Government agencies are actively seeking partnerships with startup communities and small and medium companies in other countries to provide local startups with an opportunity to learn from and potentially partner with startups abroad as well as explore other markets.

Market access can be as important as funding for startups - part 7

Sealing the deal: Prime Minister Datuk Seri Najib Tun Razak with Malaysia Venture Capital Management Bhd Ceo Jamaludin Bujang (left) and Axiata chief executive officer Datuk Seri Jamaludin Ibrahim at the event announcing the RM100mil Axiata Digital Innovation Fund recently. The fund will focus on helping startups gain access to markets. — Bernamapic

BEYOND just starting a business, a startup company’s main purpose for being is to offer a product or innovation that addresses a problem.

As one investor puts it, a truly innovative product will solve a customer’s problem that has not been solved before.

But one of the challenges of introducing a new product or innovation is that it has not been tried or tested. Naturally, the market may be slow in embracing such an innovation.

Additionally, startups rarely have the capacity or network to tap into new markets to bring their products out.

As such, investing partners, with their strong networks and deep pockets, play an important role in the startup ecosystem by providing the kind of market access needed by startups to reach potential customers.

Corporations, investors and even the government are increasingly recognising this need and are providing platforms for startups to tap into, beyond just early and growth-stage funding.

For example, early last year, Telekom Malaysia, the Multimedia Development Corporation and StartupMalaysia.org collaborated on an accelerator programme focusing on getting startups to market quickly.

More recently, telco giant Axiata Group Bhd and Malaysia Venture Capital Management Bhd (Mavcap) recently signed an agreement to establish a RM100mil venture capital fund, the Axiata Digital Innovation Fund (ADIF), to help companies with innovative products in the digital-services space markettheir offerings.

ADIF will focus on revenue-generating companies that may still require support to grow in terms of funding, know-how and market access.

Axiata noted that digital-services entrepreneurs will have unprecedented access to regional partnership opportunities among other things, thanks to its extensive market reach of over 13 million customers in Malaysia and over 250 million across Asia.

Given Axiata’s many years of operations in the region, these startups are also able to leverage the telco’s in-depth knowledge of the regional market.

Likewise, Alliance Bank’s SME Innovation Challenge 2014 programme provides participating startups with an opportunity to be coached by corporate titans, a platform to network through, and access to markets.

When new products are launched, startups and their investors concentrate the bulk of their initial efforts on educating the market about what the products offer.

But entrepreneurs understand that having an innovation with little visibility and access to markets does no good.

Startups are now seeing the need for opportunities to tap into existing networks and markets, coaching, exposure and resources, offered by incubation and accelerator programmes.

In other markets where the startup ecosystems are more mature, the private sector and governments have introduced programmes to tackle market-access issues for startups.

These include the US Market Validation Program run by Silicon Valley-based tech accelerator, US Market Access Center, and the Market Access Grant administered by the Irish government to incentivise companies to develop viable and sustainable market entry strategies for new products and markets.

While such efforts have yet to become well established here, different players in the local ecosystem are becoming more aware of the need to provide startups with market access to ensure better chances of success.

By Joy Lee The Star/Asia News Network

■ This is the seventh instalment of MetroBiz’s tie-up with Malaysian Global Innovation and Creativity Centre (MaGIC) to explore startup ecosystems.

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