Friday, 29 June 2018

The Case for a Top Down Model for the Electronics & Electrical Sector

The Electronics and Electrical (E&E) industry is a significant sector for economic growth in both developed and developing countries. In 2013, countries in East Asia and South East Asia like China, Taiwan, Singapore, Malaysia, Vietnam, Thailand and the Philippines recorded a combined US $910.5 billion in E&E equipment exports. Figure 1 shows the 10 years E&E equipment export trend for China, Taiwan, Singapore, Malaysia, Vietnam, Thailand and Philippines.

Figure 1. 10 years E&E equipment export data for China, Taiwan, Singapore, Malaysia, Vietnam, Thailand and the Philippines. (Data source:

China is the largest E&E equipment exporter in the list. This is followed by Singapore, Taiwan, Malaysia, Vietnam, Thailand, and the Philippines. In terms of growth, Vietnam is the highest growth achiever. The 10-year growth rate, calculated using least-squares method, for Vietnam is 36.8%, followed by China (14.8%), Taiwan (7.3%), Thailand (4.5%), Singapore (4.3%), Malaysia (3.3%), with the Philippines registering negative growth (-2.8%).

Many developing countries expand their E&E sector by targeting Foreign Direct Investments (FDI). Typically this involves enticing investors with low labor costs, incentives for foreign investors, export oriented economic strategy and liberal economic policies. This is, however, not sustainable as competitive advantage of low labor cost diminishes over the long run.

As such, some developing countries strive to address this by moving up the value chain. This is done through investing in Research and Development (R&D) and having a flexible business model.  However, it requires heavy capital investments, transformation in the education system and long gestation period for results.  The product life cycle of electronics goods continues to decrease due to rapid technological innovation.  Large companies in mature E&E industry struggle to keep up with in-house R&D.  They supplement their Intellectual Property (IP) portfolio through acquisitions.

The conventional way of downstream players moving up the value chain is described here as the “Bottom Up” approach. It first involves building the downstream manufacturing and supporting industry locally, then slowly advancing to product development via R&D to complete the ecosystem. The limitation of this approach is that in Integrated Circuit (IC) market, the core technologies in both hardware and software are dominated by a handful of key players. During the initial development stage, the progression of local downstream players is highly reliant on a roadmap set by the foreign upstream market leaders. Thus, the risk for local downstream players to invest in costly R&D activities is high.  Research work also shows that the success rate from this approach is relatively low.

An alternative model to growth is the emergence of the open-license based microprocessor architecture business model by ARM Holdings.  By dominating the world’s smartphone market (95%), and capturing 50% of both the mobile computing (handheld computers, tablets and laptops) and Set-Top-Box market, they have changed the landscape of the industry dramatically. Companies from China and Taiwan, such as Rockchip, Allwinner, Spreadtrum and MediaTek have greatly benefited from this growth. These relatively new players have dominated China’s tablet and smartphone markets, accounting for 75.7% and 63% of those markets respectively. The demand for their products has created a new ecosystem. This in turn has directly boosted the demand for local downstream manufacturing and supporting business.  This is the “Top Down” approach. It is the local innovation from the top of the supply chain that spurs development at the bottom. The advantage of this approach is that the development of the entire ecosystem can happen concurrently, instead of waiting for the downstream players to move up the value chain progression, which is highly dependent on foreign upstream market leaders.

The “Top Down” approach could be adopted by Malaysia to move-up the value chain in the E&E sector.  Research for this is undertaken at the university level in collaboration with industry.  Cost for this may total upto USD15 billion but will generate a new ecosystem with strong valueadd to GDP and employment.

Thursday, 28 June 2018

Refinancing vs Restructuring

We have created a video on the differences between Refinancing and Restructuring.  Hope you will enjoy it!

Background music source:
Artist: Edson Lopes
Song: Caazapá (Aire Popular Paraguayo
Composer: Agustín Pío Barrios
Licence: The song is permitted for commercial use under license "Attribution 3.0 Unported (CC BY 3.0) "

Wednesday, 27 June 2018

"The Looting of India"

At the beginning of the 18th century, according to the British economic historian Angus Maddison, India’s share of global economy was 23 per cent. This was as large as the whole of Europe. By the time the British departed India in 1947, it had dropped to just over 3 per cent. The rise of Britain over 200 years was financed by the looting of India (“Inglorious Empire” by Shashi Tharoor).

It began with the East India Company, for the furtherance of trade. A commercial business became a business of conquest. The Mughal Empire stretched from Kabul to Bengal and from Kashmir to Karnataka in 1615. But 150 years later, the Mughal Empire was in a state of collapse. Pillaged by the Persians in 1739, India was ripe for takeover. Robert Clive (of East India Company) in 1757 laid the groundwork with superior artillery and deft chicanery. Till the so-called “Indian Munity” of 1857, the East India Company presided over destinies of over 200 million people. Thereafter, it was the Crown (from 1858). A multinational corporation ruled by and for a state had one focus – profit!

India today has a GDP of over USD9.5 trillion (PPP terms) and a share of global GDP of 7.45% (in PPP terms). GDP in current prices is USD2.6 trillion, rising to USD4.2 trillion by 2022. Please see charts below.

Chart 1: India’s share of GDP adjusted for
Purchasing Power Parity (PPP) from 2012-2022

Chart 2: India’s GDP in current prices from 2012-2022

Multinationals and lobbyists in Government lay the groundwork for states starting a war or “trade” war. The fruits of which will go to the Haliburtons, Exxons, Chevrons and all the rest of it. Look at Iraq or Libya today. Afghanistan and Syria are for other strategic reasons. And yes, today China is stepping into a gap where others have failed to tread. So their focus is in Africa, Asia and Latin America.

Technology, finance, military might and diplomacy are the essentials for survival as a nation! You may also add integrity, good governance and openness as other ingredients.

1. Shashi Tharoor, “Inglorious Empire”, C. Hurst & Co (Publishers) Ltd, 2017

Friday, 22 June 2018

Cost of Corruption: Too Big to Ignore?

Addressing corruption has become increasingly urgent. Corruption undermines a country’s ability to deliver inclusive growth (i.e. growth that benefits a wide cross-section of society).  And what is corruption? “The abuse of public office for private gain” as explained by the International Monetary Fund (“IMF”).

The costs of corruption are substantial. IMF estimates suggest bribery alone is about USD1.5 trillion to USD2 trillion (about 2% of global GDP). Malaysia loses about RM10 billion annually to corruption or between 1-2% of its gross domestic product.

Corruption has significant negative effects on key channels that affect growth (Figure 1).

Figure 1: Corruption-Growth Nexus                                                     

Depending on its pervasiveness, corruption affects all drivers of inclusive growth. Low rates of inclusive growth can also lead to increased incidence of corruption; creating a negative feedback loop that is self-fulfilling and long lasting. It weakens the state’s capacity to tax, leading to lower revenue collection. It discentivizes the taxpayer to pay taxes;  undermines spending programs; hinders sound monetary policy; weakens financial oversight; undermines recovery of debt; increases cost of public investment; reduces private investment; restricts access to capital markets; and, stifles productivity.

Mitigating strategies to reign in corruption include: a holistic approach that transcends culture, social strata and income levels; creating greater transparency including developing best practices; enhancing the rule of law; economic reform – including removing excessive regulation; and, building institutions. In the immediate for Malaysia, is to have a Corrupt Practices and Resolution Commission that provides “amnesty” for individuals and corporates to voluntarily report all previous corrupt practices and pay a penalty/compensation determined by the Commission. Its a kind of confession, reconciliation and penance of the Catholic Church. We may collect more than Tabung Harapan and provide an avenue to start afresh!

  1. Corruption:  Costs and Mitigating Strategies, Staff Discussion Notes, International Monetary Fund.
  2. Rm10 billion Cost to corruption every year, by Adrian David, New Straits Times, January 30, 2018         

Thursday, 21 June 2018

Project Financing vs Asset-based Financing

We have created a video on the differences between Project Financing and Asset-based Financing.  Hope you will enjoy it!

Background music source:
Artist: Edson Lopes
Song: Caazapá (Aire Popular Paraguayo
Composer: Agustín Pío Barrios
Licence: The song is permitted for commercial use under license "Attribution 3.0 Unported (CC BY 3.0) "

Friday, 15 June 2018

Another New National Car for Malaysia?

As usual, our Prime Minister, Dr Mahathir Mohamad has created a new diversion or sensation with his idea of another national car for the region. The cost of Proton with all its subsidies has been estimated at RM14 billion up to 2015 (based on statement by Minister of MITI, Malaysia). That excludes any opportunity cost.

For a small economy with total car sales of only 0.5 million per annum, it is a heavy price to pay. Only a Chinese “rescue” saved Proton from extinction. India’s “Ambassador”, a copy of the Morris Oxford (of the 50s) was finally scrapped in 2015. And India doesn’t have a national car.

If Malaysia is in the forefront of self-driving technology or has access to it with Google, Uber or some other major player, then it may break new ground. But why would Google, GM or Ford work with Malaysia? The world may also see driverless cars as-a-service (“Caas”) by 2025. That technology could help reduce mobility costs whilst offering a safer alternative to a human driver.
Big data and AI are playing an essential role in customization of vehicles. But we (Malaysia) are not in any way in the lead on Big data or AI. Hence, it is an uphill task to justify investment in an area we have no comparative advantage.

It is better for us to scrap the “Approved Permits” for importing cars by selected people and any existing subsidies for the foreign owned Proton. The resistance to scrapping APs is because the previous Government conducted a study that suggested the following:

·        RM450m per year contribution to service sectors such as banking, insurance, shipping and logistics;
·        Collection by Government of RM2 billion in taxes and fees per year;
·        Job opportunities to 3,800 high and medium income earners; and
·        Provided 5% out of 36% bumiputra  equity in automotive sector.

Be that as it may, the current Government needs to review the Open AP Policy and if it benefits the cronies of the previous Government.

So no new national car, unless it makes a real technological difference, and no more APs for selected people and please no more subsidies for Proton or Perodua.

Reference:          1. Karl Utermohlen,
                                 “The Future Technology in the Automotive Industry”,

                              2. Economics Malaysia

Thursday, 14 June 2018

KLCI Performance during World Cup Month

The 2018 FIFA World Cup will be held in Russia from 14th June 2018 to 15th July 2018.  It is one of the biggest events on Earth, attracting billions of viewers across the globe, from students to professionals and from housewives to retirees.  Curiously, we would like to observe the performance of KLCI during the World Cup month.  The following chart and table shows the performance of KLCI during past World Cups.

During the past 20 years, KLCI was in the red four out of six World Cup events.  The average performance during the World Cup month was negative 0.93%.  Could the lack of sleep due to mid-night matches impact the stock market participants’ judgement? Looking at the match schedule this year, not many matches are held at midnight, hopefully the impact to the KLCI will be minimal.

We wish you have a great time during the World Cup month and Selamat Hari Raya Aidilfitri to all our Muslim readers!

Friday, 8 June 2018

Trump’s Tariffs: Brace for Impact?

Tariffs had been fading into history and were measures of a bygone era. Most economists regard them as harmful to all nations involved. Last week, Trump imposed steel (25%) and aluminium (10%) tariffs on Canada, Mexico and the European Union. He has threatened tariffs on Chinese products of up to USD150 billion. Further tariffs on imported cars, trucks and auto parts are to be looked into. All these under the guise of national security.

Trade wars can have crippling effect on global economy. In the 1930s, U.S. imposed 900 tariffs and its imports declined 40% within two years. Major trading partners retaliated and global trade fell 66% and worsened the Great Depression. The international financial system reeled because free trade and free international capital flows go together. Countries that borrow must export in order to service debt. Hence defaults on foreign debts. In the current context, the saving grace is that we are not there yet.

So are tariffs a wise policy? Most economists, save for Peter Navarro (Trump’s trade adviser) say no! Tariffs drive up costs of imports and reduce competitive pressure for those domestic industries that benefit.  But why is Trump doing this? Because he is turning a campaign rhetoric into action. What’s his end-game? No one knows, not even Trump! In 2002, George W. Bush (the Harvard MBA graduate) slapped tariffs on imported steel. That cost 200,000 American jobs and Bush had to reverse his action after World Trade Organisation ruled it illegal. Then there are other drawbacks:

·       More expensive prices for consumers;
·       Higher costs of production;
·       Disruptions (in markets); and
·       Retaliation (by trade partners).

Paul Krugman, the economist who was formerly at Princeton, notes if you impose tariffs on imports when the economy is close to full capacity, domestic supply may not meet new demand and prices move up. Inflationary pressure ensues. The Fed may increase interest rates, which increases the value of the dollar and that increases U.S. export prices.

What’s the alternative? The U.S. has great comparative advantage on new technologies and applications. It has to promote these rather than protect an industry that has been in long-term decline since the 1960s. Tariffs cannot tackle fundamental issues of regional decline and technology related job losses.

What’s the impact for Malaysia? Many local economists say the impact is minimal, because steel and aluminium together make up only 0.1%-0.3% of all steel exports to the U.S. But when it impacts electrical and electronic products and retaliatory measures by others, that’s when a small, open economy has to brace for impact.

Friday, 1 June 2018

When is Federal Government Debt Too Much?

Excessive debt tends to be centre of many scare stories. And it runs something like this “we have lived beyond our means, we await divine retribution”. Global debt has reached USD200 trillion, over 2.5 times global GDP in 2017. The top five countries with high debt to GDP ratios were: Japan (220.8%); Greece (179%); Portugal (138%); Italy (137.8%) and Bhutan (118.6%). Singapore has a ratio of 104.7% and is ranked 10th.

In 2010, Reinhart and Rogoff (Harvard University) in their book “This Time is Different” suggested that when debt is 90% (or more) of GDP it will impact negatively the growth rate of a country. This was challenged by Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts, Amherst on the basis that the data used was debatable, exclusion of certain items and, there was a coding error in the spreadsheet. The reason this subject is important is not because of some academic spat on methodology but the results impacted policy in the U.S. and Europe. “Austerity” was the catch-word for the Republicans (in the U.S.) and Conservatives (in the U.K.). Reinhart and Rogoff, of course have defended their work with the argument that they were only pointing out an association between debt and economic growth – not necessarily high levels of debt means low or negative economic growth.

Be that as it may, prudent levels of debt will make repayment feasible (from income streams derived from investments). The new Minister of Finance laid out the Malaysian Federal Government debt and liabilities as follows:

Source: The Edge Markets

The RM1 trillion figured touted is not all debt but obligations as well. We need to exclude lease payments which are already included under operating expenses of the Government. Then the Government guarantees of approximately RM200 billion will not be wholly “called” as these are guarantees for borrowings made by Government-owned special vehicles. And these vehicles will refinance their debts (when they fall due) against the same guarantees until income streams cover operating costs and potential repayment profiles. Perhaps, 20% of these guarantees (following Pareto principle) may be called (like for 1MDB) and therefore say, RM40 billion be included as potential realised debt.

What really matters is the sum of RM686.6 billion or 50.8% of GDP. Interest rate, quantum of exposure in foreign currencies and foreign holders of Federal Government debt are the key to any risk. In other words, the risk exposure in terms of currency, interest rate and types of holders of debt is the important issue. Offshore borrowings (in RM equivalent) for the Federal Government were at RM22.7 billion (as at end 2017). That’s less than 3.5% of debt. Interest rates are fairly competitive and are generally below 5% p.a. for either Ringgit denominated or foreign currency denominated papers. Our sovereign rating is still A3 (stable) by Moody’s. That means we still have access to capital markets. That may change with any uptrend in interest rates. But the real problem is foreign holders of Government debt. That constitutes over 28% (or RM194 billion) which is of concern. Why? Because they could potentially “dump” the Government securities and flee. That may cause a market tremor and forex collapse (including BNM reserves). In addition, we may need to keep an “eye” on offshore borrowings by private sector which was over RM150 billion in 2017. Generally, these are against offshore income streams which then are a natural hedge.

So what’s the solution? Borrow if you must but for projects that can provide return better than cost of debt. Secondly, examine existing debt/guarantees against potential income streams of projects. So I would pour through the cash flows of all Government special vehicles with the view to reducing or restructuring debt (including securing fixed rate instruments). Next, is to engage with foreign holders of Government debt and provide timely, transparent position of Government finances.

So what’s the maximum? That’s determined by the debt-service to export ratio which is the indicator of debt sustainability. It indicates how much of a country’s export revenue will be used-up in servicing its debt. A country’s international finances are healthier when the ratio is low. For most countries it is zero to 20%. For Malaysia it is expected to be 5.4% for 2018 (World Bank Development Indicators 2017). For Singapore, it is 9.1%.

1. This Time is Different: Eight Centuries of Financial Folly, Carmen Reinhart and Kenneth Rogoff, Princeton University Press.
2. Oliver’s Insight (22 March 2017, Edition 8)
3. Stashlearn (July 2017)