Friday, June 26, 2015

High Income Nation By 2020? Dream On

Looking at how're things going in this country, we won't make it. In fact, I think we will never make it.

You might ask what sort of "kelentong" our government going to come up with when that target is missed? Well, we have about 4 and a half years to 2020, in the meantime we can just make the cronies richer. And since GDP per capita is measured on average, those outliers might just be enough to raise it. (Be sure to check the Gini coefficient when our government announces the "good" news).

When we mention about income stagnation in Malaysia, we'll be sure to hear about the complaints about the quality of our workforce and education. True, and I agree for the most part. But we are only addressing 33% of the problem (if we ever did address). For the remaining 66%, I can say goes unnoticed and I can't recall even BFM ever discuss about it. (To be fair BFM has done great jobs discussing many issues on not just business but art and health as well, way better than Bloomberg radio in my opinion).

So what's the remaining 66%?....

I'm a Malaysian, so I'll first pick on our clueless government. Actually I'm not sure if they should be called clueless because in 2009, our government unveiled the New Economic Model (NEM) PART I. That, is the most beautiful thing I've ever seen coming from the government. Seriously, beautiful.
Here's the link to it:

It showed pretty much all the diseases that plagued Malaysia economy and spell out the plans to address them, albeit high level, but Hey, that's a fantastic start. I highlighted Part I because only Part I is great, Part II is rubbish. That's because "tarak-telor"...well that pretty much explains why. And I won't bother giving you the link.

What upset me is when I read this news today:

Here's the snippets:
  • 1.5 million Bangladeshi workers to arrive in 3 years, says home minister
  • These workers will be involved in various fields, especially in the plantation sector and will meet the demands of the job market in Peninsular Malaysia, Sabah and Sarawak.
  • "However, this initiative only involves fresh workers from Bangladesh. Illegal Bangladeshi immigrants working here are not involved and we will continue to deport them," he said in Malacca today. (Belum kira illegals lagi beb)

That's only Bangladeshi workers, belum kira lagi Indonesian, Burmese and Nepalese. Let me make my point clear, I have nothing against these workers. In fact I think most they are hardworking and severely UNDERPAID. My problem is, this policy will make our already inefficient Chinaman companies even more unproductive, below par and potential. I will come to this later. Studies done by our Economic Planning Unit (EPU) clearly highlighted the effect of heavy reliance on cheap foreign labours.

Here's the snippets from NEM:

Disease (One of it)
  • Low-skill jobs equal low wages
  • In Malaysia, not enough high-wage jobs have been created. In fact the share of skilled labour has declined across industries.
  • The E&E sector, which is the major contributor to Malaysia’s growth, has experienced some
    of the biggest declines in use of high-skilled labour.
  • ...employers do not pay for skills, relying instead on tried and tested means such as a readily available pool of unskilled foreign workers and underpriced resources to generate profits.
  • Immigration policies favour low skilled and cheap labour. Between 1990 and 2005, foreign labour contributed more than a third of the increase in total labour supply, and over 98% were low-skilled contract migrant workers.
  • Malaysian firms prefer to undertake less sophisticated activities, such as upgrading existing product lines or machinery and equipment. Activities that give rise to greater innovation and require the filing of patents are undertaken less frequently.

Possible Policy Measures (from NEM)
  • Incentivise firms to embrace technology and move up the value chain.
  • Fostering R&D links between the institutions of higher learning and the private sector
  • Focus on palm oil-related downstream industries to develop indigenous technology and innovation or acquire technology to meet new market demands
  • Encourage upstream technology innovation to develop higher yielding fresh fruit bunches
    first mover and other comparative advantages
  • Identify E&E subsectors to build depth and foster new niche industries, and to capture a greater share as a distributional hub as intra-regional trade expands.
Too bad, all these are now flushed through the drain.

Second, is none other than our Cina-apek style companies. Despite its name, it doesn't only apply to Chinese companies. In fact, a lot GLCs and crony companies I know of are guilty of it. It means old fashion, disorganized, inefficient, useless hierarchy and employees squeezing organization. To prove this, all we have to look is no further than Bursa. Our glove makers provide the best comparison.

When a business talks about productivity, it is measured in $$. In our case, revenue per employee and better still profits per employee. Hartalega (modern) is well known for its automation process and from the information I got, they are always on the look to invest in technology. Top Glove (Chinaman) on the other hand is the likely employer of the 500K new Bangladeshi workers next year.

The table and charts above speak for itself. In fact, Top Glove, Kossan and Supermax only start to automate after minimum wages policy was introduced. Top Glove is the world largest glove producer by revenue but its profit is only nearly half of what Hartalega is making. Kalu margin rendah, camne nak bayar gaji lebih. Top Glove revenue per employee is RM207K vs Hartalega RM286K. Profit wise, Top Glove generates 16K/employee while Hartalega churns 69K/employee that's more than 4 times more.

My point is corporates in Malaysia never have any incentive to improve productivity and they were picking the low hanging fruits all these while. And our clueless government (although once enlightened) are encouraging them to do just that. We simply don't have the competitive environment for corporates to invest in technology.

More productivity equals higher income, everyone knows that. We are only aware and looking at our workforce (33%). The 66%, which are governments and corporates need to play their part as well. But hey, 33% plus 66% is only 99%. The remaining 1% are the entrepreneurs and the creative disruptor as Schumpeter calls it. There are 2 companies I know of in Penang belongs to the 1% and yes they are local. They are the kind of species to bring us up the value chain. Sadly, the environment to do that is almost non-existence in this country.