What price Malaysia’s corporate reconstruction?

Turning around Proton is one of the key challenges for Malaysian prime minister Abdullah Badawi as he tries to remake Malaysia Inc

Is it delivering them? There is clear progress on many fronts, and most of the bigger companies look to be in better shape than they used to. There are a couple of unquestionable triumphs. But there are still challenges, most urgently a restructuring of the national car maker Proton, and there are concerns that Khazanah’s growing power is pushing more influence into the hands of the state when it should be going towards the private sector.

Khazanah had taken on a big task when its mandate was revamped three years ago, turning it from a rather passive investment vehicle into an agent for change. Malaysian prime minister Abdullah Badawi had called for "nothing less than a remaking of Malaysia Inc" and said he wanted to see "Khazanah emerge as one of the biggest and most dynamic investment houses in the region... stronger, more nimble and able to create more value".

That meant assessing the often woeful performance of the GLCs – including Malaysia’s biggest airline, telco, utility, auto manufacturer and several of its biggest banks, among others – and then setting a series of strategies for sorting them out. From the outset Khazanah pledged to measure success by the use of strict key performance indicators (KPIs), with financial metrics the most important of these. Its approach is filled with talk of enhancing board effectiveness and director capabilities, bolstering regulation and social responsibility, improving capital management and better managing talent.

Dato’ Azman Mokhtar is the man entrusted with this vital mandate, and he tells Euromoney that things are going well. He says earnings at the 20 largest GLCs, jumped by 60% in 2006 and should rise a further 43% in 2007, in both cases dramatically outpacing the broader market. "For the first time, after underperforming for long periods and in some cases for 20 years or so, GLCs have begun to outperform the market," he says.

Mokhtar and Khazanah identified 11 companies that needed major restructuring in Malaysia and claims that problems at eight of them have been resolved, with only three outstanding. Two companies are the standout successes of GLC reform: Malaysia Airlines and CIMB.

The CIMB turnaround story is in many ways as remarkable as that of Malaysian Airlines (see box). In the space of two years, five different businesses have been wedged together: the investment bank CIMB itself, fund manager Principal, broker GK Goh, commercial bank Bumiputra Commercial Bank, and another commercial operation, Southern Bank. Before the mergers, CIMB had 1,000 staff and was essentially a Malaysia-only investment bank. Today it has 20,000 staff in 12 countries covering the full range of universal banking. Steve Hagger, research head at Credit Suisse in Kuala Lumpur, calls it "one of the most successful GLC turnaround stories".

Beyond those two there is more room for doubt. Mokhtar contends that there are plenty of other successes: utility Tenaga, Telekom Malaysia and engineering firm UEM Group among them. "The fact that these companies are in diverse industries, with different sets of antecedents and starting conditions, suggests that successful transformation can be achieved under quite different conditions," he says. "That’s very encouraging as it means the formula for success is indeed replicable." That formula, he says, involves "basic ingredients" of corporate governance, strong leadership, professional management and capable shareholders.

Mixed assessments

But Tenaga and Telekom in particular attract mixed assessments. "With Telekom, the market takes the view they haven’t really done much," says an analyst in Kuala Lumpur. "It’s been a little bit more asleep than its counterparts, although I wouldn’t say it was a failure." On Tenaga, he applauds efforts to push through a rate increase, improve cashflows, cut costs, and sort out the balance sheet. "Where I disagree is in the future of the company. Where’s growth going to come from?"

Mokhtar strongly disagrees with such views of Tenaga. "Tenaga has been widely acclaimed as a very successful GLC transformation with very significant improvements on both the cost and revenue sides," he says. (He does have some support in this: Hagger calls Tenaga "a leveraged proxy to GDP growth" and says share price weakness is "perplexing given that on an operational basis things are going so well".) On Telekom, Mokhtar concedes: "TM has been more muted to date," blaming intense competition and technological and regulatory risks afflicting fixed-line telcos everywhere. He argues that Telekom has addressed that by expanding into mobile markets in nine Asia-Pacific nations.

Khazanah readily admits that there is more to do at three companies: Time dotCom, Malaysia Airports and Proton. By a distance, Proton has been the most closely watched of these, and not just because of the mechanics of the business itself. Proton is a Malaysian icon, the national car manufacturer, and a pet project of previous administrations that remain protective of it today. Former Malaysian president Mahathir Mohammed spoke about it in an interview with the author (for Euromoney’s sister title Emerging Markets) in April. "Foreigners can come in, but not to control, otherwise it will not be a national car," he said. "A national car must be owned by the nation." It remains a typical attitude in much of Malaysia.

"A Proton-style restructuring involves cutting to the real socio-economic issue of people in the Malay heartland, who have been geared up for the past 10 years to fund it," says an economist, referring to Malaysia’s exceptionally high level of car loans relative to GDP. "So if you were to try to push through a restructuring story that ended in a lot of that group of people being hurt, that’s going to be tough."