The Role of Japanese Direct Investment in Malaysia 9789814376594

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The Institute of Southeast Asian Studies

The Institute of Southeast Asian Stud1es was established as an autonomous organization in May I68. It is a regional research centre for scbolar1- and other specialists concerned with modern Southeast Asia. The ln~titute 's re~earch in· terest is focused on the man) .faceted problem~ of development and motlerniza· tion, and politica l and soc1al ch..tngc in Southea!>t Asia. The Institute i~ governed by a twenty-fou r-mem ber Board of Trustee~ on wluch are represented the l ' ni\cr~ it} of ar rubber estates in Province Wellesley, Kedah and Perak. The production and supply of charcoal for the first stage was 5,000 tons per mo nth with one blast furnace in operation ; in the second stage (from October 1970 onwards) with two blast furnaces in operation, the additional requirement of 5,000 tons per month of charcoal was produced and supplied by charcoal contractors located in Northern Peninsular Malaysia, and Southern Thailand. Today, the subsidiary produces about 4,000 tons of charcoal per mo nth for the parent company and the remaining 8,000 tons being produced by contractors. As a result of its backward linkages, MYS has generated substantial employment, especially in the rural areas. At the same time, MYS's decision to use charcoal in place

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Before the establishment of MYS, the iron ore produced locally was exported mainly to japan.

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Previously, the o ld rubber wood was burned during replanting. Today, thanks to MYS, old rubber wood has economic value. If and when the supply of rubber wood is exhausted, there are plans t o make use of jungle timber.

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Originally, seven kiln centres were built. one of them is closed down.

Now, because of the shortage of rubber wood,

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of imported coking coal is probably an im portant factor in placing the company on a competitive footing.6 1 Since the oil crisis, th e price of cooking coal has increased three times. Although the price of rubber wood and charcoal has also increased, the price increase has been much less. This has enabled MYS to keep its production cost at a competitive level. Thus, in this sense, the use of local resources has not only benefited the company but also the local economy. Another subsidiary company, Mal aysian Steel Corp. Sdn. Bhd., was incorporated m May 197 1 to manufacture tin plates. It applied to the Ministry of Trade and Industry for approval of the project but was turned down. It appeared that poten tial tin plate users in Malaysia objected to the project because of the higher production costs envisaged. A restudy of the project is being carried out with a view to appeal to the Ministry for reconsideration. Apart from MYS, which is the only large steel mill in Malaysia, there are four mini-mills. (Mini-mills are so called because they use scrap to make steel as opposed to integrated steel mills which use iron o re as raw material. The biggest mini-mill in the world produces 500,000 tons a year.) The four mini-mills are United Malaysian Steel Mills Berhad, Dah Yung Steel Manufacturing Co. Sdn. Berhad, Malaysian Steel Works (Soon Seng) and Southern Iron Steel Works. These four mills produce 50,000, 24,000, 18,000 and 12,000 tons a year, respectively. The mini-mills are not competitive with MYS since they mainly produce steel bars of commercial quality and th ey depend o n material biUet partly imported, partly produced on their own by electric arc furnace. These bars are used mainly for the housing industry for construction of single storey houses. Th e mini-mills canno t produce steel bars suitable for high rise buildings. MYS, on th e other hand, can also produce steel bars of commercial quality and can thus compe te for the mini-mills' markets. In fact, when MYS had excess capacity during the 1973 recession, it started producing C.Q. bars. This brought about protests fro m the mini-mills since MYS could produce the bars at a lower cost and o f a higher quality. Three more steel mills are on th e planning board. In August 1976, ~lala ysia and Austria signed a $2.6 million loan agreement to finance a feasibility study on

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A study undertaken by japanese experts hac! considered various processes such as the combined rotary kiln-electric smelting processes, the blast furnace process using cokt> from imported coal and the blast furnace proceu using charcoal. The experts condu(kd that the laat named process was the most econo mical. The success of the blast furnac e operations in Brazil using charcoal from l:.ucalyptus wood provided confidence o n the outcome of the study.

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an integrated steel mill on the East Coast. In October 19 77, it was announced that a $40 million steel mill (capacity 50,000 tons a year) would be set up in Pasir Gudang by a steel group from Europe, the Kloeckner Steel Mill. A joint venture project, Amalgamated Steel Works (Armed Forces and private sector equity), is scheduled to start operations of wire rod mill in late 1978. Its capacity is 120,000 tons. Malaysia is thus assured o f a further 180,000 tons a year in the future, in terms of steel bars and wire rods. 62

Equity and Control As mentioned, initially MYS had an authorized capital of $30 million. The authorized capital was later increased to $250 million. At the time of its formation, the company issued a nominal amount of o rdinary shares. When the construction started, MYS increased its paid-up capital to $12,7 50,000, shared by six local individuals and a consortium of Japanese firms. In March 1967, the Malaysian Government purchased about $3.5 million shares at par value of $1 each, thus making MYS the first industrial project in which the government had a stake. In July 196 7, the MIDF took up a further $2 million shares at par and, in the following month, the IFC, a subsidiary of the World Bank, took up about $3.1 million o rdinary shares at par (Table 10). The company was converted into a public limited company in September 196 7, with the public issue of about $4.2 million ordinary shares, raising the paid-up capital to $31.1 million. In June 19 75, the equity was restructured to give Malaysians 71.9% of the equity. PERNAS Engineering Sdn. Berhad, a wholly-owned subsidiary of the PERNAS Group of Companies, officially bought over 7,350,000 shares, worth about $17 million, from the J apanese investors and the IFC on 9 June 1975.63 PERNAS is now the single largest shareholder and, together with the shares formerly held by the Ministry of Finance, holds 30% of total equity. As a result o f the takeover and with mutual agreement between PERNAS and Nippon Steel Corporation, the Board of Directors of MYS was restructured. PERNAS Group Chairman, Tunku Datuk Shahriman, became Chairman of MYS while its Group l\lanaging Director, Rahman Hamidon, was made Chairman of the Board's Executive Committee. The Executive Director of PERNAS Engineering, M.B. Hashim, was also appointed to the Board and the Executive Committee. As a result of the restructuring, the number of

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"That Irreplaceable Steel," Malay sum Business, february 1978, p. 5.

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PERNAS (National Trading Corporation) was set up by the government in 1960 to spearhead bumiputra participation in the Malaysian economy.

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Table 10: Main Shareholders in Malayawata Steel Berhad, August 1968 to June 19 75

Period

MaiD Sbarebolden

Augut 1968

Malayaia

PERNAS Ministry of Finance MIDF Public (including Singaporeans)

l!e!!!. Nippon Steel Corporation Mit1ubiahi Corporation Miuui and Company Nittetlu Trading Company Nitteuu Mining Company

IFC

• Number of shareholden u at March 1978:

May 1969

June: l9 H

71.9

51.0

5 1.0

11.1 6.5 33 .4

11.1 6.5 33.4

5.3 36 .6 .

39.0_

39.0

28. 1

20.0 6.0 6.0 3.0 4 .0

24.0 6.0 6.0 3.0

16.3 4.7 4. 7 2.4

10.0

10.0

J

30 0

abo ut 6,000.

Japanese Directors was reduced from five to three while the number o f Malaysian Directors increased from seven to nine. Thus, the control o f MYS was firmly tn Malaysian hands. At the same time, management o f the company had alread y been taken over by local personnel. At the moment, except for two J apanese staff, all the top management personnel are Malaysians. The two J apanese hold the posts of Senior Advisor to the General Manager and Senior Advisor to the General M.u1ager and concurrently Chief Engineer. The General Manager o f MYS is a Malay wh o came over from PERNAS. An Economics graduate from the University o f Malaya, he also holds a Master's degree in Business Administration. He attended a six month training proKra mmc at l l;uvard and is now in his thirties.

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The most senior J apanese staff in MYS is the Senior Advisor to the General Manager, J un Tanaka. Tanaka was in charge of accounting and finance at the head office of NSC. He was first sent to MYS in 1969 to assist the Deputy Managing Director. At that time Tanaka was made the Deputy Manager in charge of planning. Two years later, he returned to Japan and assumed control of NSC's Overseas Technical Cooperation Division. In 1976, NSC sent him back to Malaysia as Senior Advisor to the General Manager of MYS.

Labour Force Training MYS has 1,848 workers made up mainly of Chinese and ~1al ays (Table 11 ). In addition, the company also provides employment indirectly to abou t 8,000 o ther people in mines, quarries, rubber estates, transpo rt and o ther services.

Table 11:

Number o f Employees as at End of Ju ne 1978 (including Malayawata Charcoal Sdn. Bhd. 100% owned)

Malay

Chinese

Indian

j apanese

Others

Total

734

915 (49.5%)

187 (10.1%)

2 (0.1 o/o)

10 (0.6%)

1,848 ( 100%)

(39. 7%)

Most of MYS's staff (about 90%) work in the technical departments directly related to production activities. Of these, the majority are composed o f Grades I-IV workers. Most of the grade workers are employed at the lowest le' el and are trained on the jo b; their promotion to an u pper grade is made on the basis of their performance ; thus the existence of continuous skill-formation and self-generation is ensured. The most interesting aspect of the labour fo rce composition is seen in the significant decline in the number of J apanese staff. When construction first started, MYS had fourteen Japanese personnel. The number gradually increased until it reached a maximum o f ninety-two in 196 7 when the test run of each process started (Table 12). The breakdown o f the j apanese personnel was as follo ws: seventeen for

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Table 12:

Number of .Japanese Staff

Period

Number

May 1966

14 (3)

January 1967

32 (5)

August 1967

92 (5)

January 1968

76 (5)

January 1969

4 1 (2)

January 1970

23 (2)

January 1971

20 (2)

April 1972

8 (2)

April 1973*

8 (2)

April 1974

8 (2)

April 1975

8 (2)

April 1976 **

4 (2)

April 1977

3 (2)

April 1978

3 (2)

Note:

Figures in parentheses refer to the number of fulltime directors.

*

All Japanese staff except directors placed at advisory level.

** New agreement with NSC facilitating MYS to get dispatch of experts from Japan for emergency cases when the need arises.

for roll mills, sixteen for maintenance, thirty-one for management, and blast furnaces and raw material handling, twenty for charcoal and L.D. converters, five for power and three for construction. At that time, thirty-five officers out of forty-six holding engineer's rank in MYS were Japanese. (In addition to the ninety-two Japanese personnel sent by NSC, there were also fifty-eight other Japanese experts sent by equipment and machinery manufacturers and construction agencies.) This situation continued till October 1967 when the number of experts from NSC was reduced to eighty. The reduction came after the successful test run of the mill and charcoal kiln. Thereafter, the number of Japanese staff gradually declined. Today, thnt· are only two Japanese expatriates. Not only has the number of Japanese at MYS

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declined, the category of Japanese staff has also undergone a change. At the peak, most of the Japanese were directly involved in production and were engaged as superintendents, assistant superintendents, engineers and assistant engineers. With the completion of the transfer of operational technology, the number of Japanese superintendents and engineers declined significantly. By April 1973, all Japanese engineers had been placed at the advisory level. All these indicate that the transfer of technology at MYS is complete. Steelmaking involves a dynamic technology which is constantly undergoing changes and improvement. For this reason, a continuous transfer of technology is necessary. This explains the presence of the remaining J apancse staff at MYS. For the same reason, MYS maintains a Research Centre comprising twenty engineers and technicians. The Centre operates under the technical co-ordination group. A similar transfer of functions took place at the management level. During the initial period of operation, the duties of the Deputy Managing Director (sent from NSC) included managerial responsibility for the administrative departments, and the Chief Engineer from NSC took care of managerial responsibility for the technical departments. New local managers were appointed when qualified people were trained and promoted internally or recruited from outside sources. Thus, the number of management posts was increased gradually. By 1975, all the top posts m the seven departments had been filled by Malaysians. The smooth and rapid rate of technology transfer at MYS was due partly to the willingness of the Japanese partners to train Malaysian workers. Systematic training of engineers and technicians for MYS was carried out in Japan prior to the completion of the factory. A group of trainees consisting of eighteen engineers and twenty-nine technical assistants were sent to Japan in 1966. The trainees were exposed to an orientation and language training course at the Kaigai Gijutsu-sha Kenshu Kyokai in Yokohama for a month. Then they were sent to NSC for production training. At the same time, a special group of about sixty engineers and technicians was organized by NSC to prepare MYS for production. The group had two assignments: to train MYS's staff and to prepare a production schedule for the new factory. More than eighty specialized training texts were prepared in English with the production and maintenance departments. All production departments were used as the training site for the Malaysian trainees during their ten month stay. At the beginning of 1967, all trainees returned to Malaysia to take part in the final phase of construction.

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MYS pays its workers relatively high wages compared to firms in the surrounding area. In the most recent collective agreement signed between ~IYS and the Union of Malayawata Steel workers in 1977, the minimum basic pay for workers in the industrial and manual group is $150 per month. Skilled workers such as chargemen can receive up to a maximum of $765 per month. In addition, workers are entitled to perfect attendance allowance, transportation allowance, bonus and the other usual fringe benefits such as annual leave and free medical treatment. Possibly in view of the relatively generous benefits, the average turnover rate of MYS's workers is relatively low, less than 5% per annum. The turnover rate is relatively higher among the engineers and engineering assistants. Although this may represent a loss to MYS, it is a gain to the other firms. Most of the engineers who resign obtain posts as factory or production managers with new companies. The valuable practical experience which these engineers acquired on the job with MYS is applicable to any modem factory operation. To this extent, MYS serves as an important medium for diffusing technology.

Technical Assistance MYS received full technical assistance from NSC. The technical assistance agreement between the two companies was made in 1965. The objective of the agreement was to facilitate the smooth execution of construction and operation of MYS whereby MYS would be provided with such technical knowledge and technical guidance by technical experts as NSC considered necessary. Particulars of the technical assistance agreement have been given previously. In return for the assistance, MYS agreed to pay NSC a sum of US$275,000 m three instalments. In addition, when NSC dispatches its personnel to MYS, the expenses arising in connection with the trip and stay and the salary (including welfare expenses and other fringe benefits) during the stay of such personnel would be borne by MYS. Similarly, when MYS dispatches its technical staff to NSC, the expenses concerned would also be borne by MYS. Apart from assistance on construction and operation, NSC agreed to give MYS "the right without payment to use in the Federation of Malaya patents, technical knowledge and know-how which NSC possessed or had the right to sublicense or would possess or would have the right to sublicense in the future, required for the construction and operation of MYS":

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PROVIDED THAT in cases of patents involving major develo pments after the effective date of this agreement, details of payments and other terms and conditions shall be determined in each individual case through mutual negotiation ; FURTHER PROVIDED THAT payment and other terms and conditions referred to in this clause of Article 4 shall be subj ected to the prior approval of the Ministry of Commerce and Industry, Federation of Malaya. Expenses to be paid to a third party in connection with patent, technical knowledge and know-how which NSC obtained fro m the third party after the effective date of this agreement especially for MYS would be borne by MYS and the details would be determined in each case through mutual negotiation. The agreement stated that NSC was not bound to give MYS patent, technical knowledge or know-how which, by th e terms of any agreement or contract between NSC and a third party, NSC was under obligation to withho ld fro m any o ther parties. Under the agreement, MYS was entitled to indicate that its products had been manufactured with technical assistance from NSC but, without the prior consent of NSC, could not use the NSC trademarks. The agreement was made effective fo r a period of ten years and might be renewed and/or reviewed by mutual negotiation. So far, MYS is satisfied with the technical service agreement. Under the agreement, MYS has been provided free access to technology from NSC with certain qualifications. Top management in MYS and NSC are o n good terms and there is close co-operation, although there are some problems at the lower level. But, generally, relations are good.

Production Facility and Output The construction of the mill at MYS was carried out in two phases. The construction o f Phase I of the mill started in April 1966 and was completed in August 1967. Phase I consisted of a D.L. Sintering plant (with 10m 2 of floor space), a 170 T/D blast furnace (with inner volume of 145m• ), two 12 T/C L.D. converter for steelmaking, a reheating furnace, a roughing and finishing rolling mill,

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and an oxgyen plant. At the same time, auxiliary setvice facilities, such as maintenance, power, water, transportation, anal ysis and testing, etc., were also built. The total cost of equipment fo r Phase I was estimated at $40.5 million in 1965 (excluding cost of land and project planning expenses), and were purchased by the J apartese. All the machinery artd equipment were purchased new from Japan, although there were some allegations that some used mac_h inery were included. According to the Japanese, this was no t possible because each steel plant has its own unique specifications and machinery for the plant must be fabricated, according to such specifications depending on the capacity required. There is no steel plant in J apan having the same capacity as MYS, so it was not possible for the J apanese to sell used machinery to MYS. In September 1969, Phase IIA of MYS's expansion project ·· consisting of No. 2 Blast Furnace, expansion of the steelmaking plant, modification of rolling mill, No. 2 oxygen plant and additional auxiliary service facilities .. was undertaken. The expansion was completed in December 1970. Phase liB expansion .. comprising one Electric Arc Furnace , a continuous casting plant, a slitter line, a cold forming line, a slit bar line and auxiliary service facilities .. was completed in 19 72.

The company's recent expartsion programme called Modification I consisted of enlarging artd relining No. 1 blast furnace and modifying the rolJing mill both to increase its capacity. The construction of the projec t commenced in May 1973 and was completed on 9 July 19 75. a result of the company's expansion programme, total production capacity is now as follows: As

Hot metal

15 7,000 to ns p.a.

Molten 1teel

186,000 tons p.a.

Ingot and billet

165,000 tons p.a.

Rolling mill

15 7,000 tons p.a.

With the installation and about 1982, the total ou tput of to about 500,000 metric tons a adequate supply o f construction commodity by that time.

commissioning of the second rolling mill on or the company's two rolling mills will be increased year. This, according to MYS, would ensure an bars to meet projected growth in demand for the

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Total capital expenditure incurred in respect of Phases I and II and recent expansion came to about $120 million. The sources of funds were: Deferred payment

$43 million

Long terrn loan

$14 million

Medium term loan

$15 million

Own fund

$48 million

An integrated iron and steel mill such as MYS can present an atmospheric pollution problem. In this regard, the company has taken steps to ensure that the pollutants emitted into the atmosphere are regulated within safe limits. Since the mill started operations, it has spent a few million dollars on pollutio n control devices. To ensure maximum effectiveness in controlling pollution, these devices are installed throughout the entire plant at the points where pollutants are being emitted into the atmosphere. The salient features of the pollution control devices installed are: ( 1)

In the Blast Furnace Plant, pollution control devices consisting of Dust catchers, Spray Washers, Centrifugal Separators and Combustion Towers have been installed to collect the dust particles and to burn away the carbon monoxide from the exhaust gas.

(2)

In the Steel Making Plant, pollution control devices consisting of a Hood, a Spray Cooler, a Venturi Scrubber and a Water Treatment Plant have been installed to remove the dust particles from the L.D. Steel making process.

(3)

In the Sintering Plant, dust catchers of the Cyclone and Multicyclones type have been installed to collect dust particles from the exhaust gas and to discharge the treated gas into the atmosphere through a 10-metre high chimney_

(4)

In the Charcoal Handling Plant, a Bag Filter has been installed to remove fine charcoal dust from the atmosphere. Another Bag Filter will be installed soon to further reduce the amount of fine charcoal dust emitted into the atmosph~.:re.

The production plan for MYS was divided into two stages. The first stage was the period in which No. 1 blast furnace started operations (August 196 7) and

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the second stage was the period in which No. 2 blast furnace started operations (December 1970). Proposed products and output for the two stages were as follows: Product

Stage I

Sta e II

Sintered ore

94,900 t.p.a.

94,900 t.p.a.

Pig iron

62,000 t.p.a.

124,000 t.p.a.

Steel ingots

60,500 t.p.a.

121,000 t.p.a.

Steel producu (bars, shapes & flat bars)

55,500 t.p.a.

111,000 t.p.a.

At the start of production in 1967, MYS produced hot metal, ingot and billet, rolled products and reinforcing bars. Since then, the variety o f products has increased to meet the do mestic demand for steel produc ts. Thus in 1977, MYS produced , in addition to th e products mentioned earlier, angle bars, wire rods, slit coils and light gauge steel. What is even mo re significant is that MYS has maintained a high ratio of small sized bars in its product mix as required by the government. 64 MYS now accounts fo r 50 o r 60% o f Malaysia's demand for steel bars. Furthermore the co mpany's products arc manufactured to British Standards (B.S.), altho ugh the qual ity is a bit low. This is because MYS uses local iron o re which has poor iron content and a lo t of impurities. On the other hand, the prices for MYS's products ae vef) co mpetitive. 65 Before the recent yen apprec iation (when $1 = ¥119), th e prices of MYS's products were comparable to those of NSC. Since the yen appreciat ion, MYS's products have become relativel y cheaper. Generally, MYS produces only fo r the domestic market. I lowever, when domestic demand for ho t rolled products could no t absorb total production, MYS exported some rolled products in 1968-69 and 19 71-73. ln line wi th the increase in production, sales revenue increased fro m $3,894,000 in fiscal year, 1967 (six mon ths fro m Octo ber 1967 or November 64

Production of amall sized bars is not profitable becawe o f its low productivity.

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The domestic prices for steel are controlled by the government and MYS cannot raise prices at will. These have to be approved by the government. At the present, t he approved price of ateel bars is S690 a to n for the popular 3/8 inch bar.

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1968) to $104,354,000 in fiscal year 1977. MYS made its first profit in fiscal year 1969 and by fiscal year 1973 it had wiped out all its accumulated losses and also the preliminary and start-up expenses. At the same time, it was also able to declare a maiden dividend of 7\12%. The declaration of a dividend only seven years after production started was a surprise to the Japanese investors. They had not expected any dividend so soon because of the limited capacity of MYS. 66 Most likely, the use of a novel plant layout to suit the limited capacity o f MYS, together with the maximum utilization of local materials, enabled MYS to produce at a reasonable level of cost and earn a profit fo r its shareholders. In 1974, MYS and its subsidiary, Malayawata Charcoal Sdn. Bhd., made a profit of $14 million as compared to $12 million in the preceding year. A taxfree dividend of 10% was declared and paid to all shareholders. Notwithstanding the recent success of MYS, it should also be pointed out that the company suffered serious losses in the first few years of its operation. In the first two years of production the co mpany had run up accumulated losses o f $9.6 million. The main reasons for the loss were as fo llows. First, towards the end of 1966 when MYS was about to start operations in 1967, there was speculation among dealers. Many Chinese dealers feared the government would protect the steel industry, so the price of MYS products would increase. At that time, the world market situation for steel was bad and prices were low. So the dealers imported large quantities of steel bars (up to two years' supply/consumptio n). As a result, when MYS started operations in 196 7 it could only sell 3,000-4,000 tons of steel a month while production capacity was 6,000 tons. This problem could have been avoided if the government had imposed duty earlier. In any case, the duty imposed ($ 70 per metric ton) was not sufficient. MYS asked for higher protection and this was given in 1969. By then, production level had improved. Together with the revised customs duty, better world market conditions and increased efficiency, MYS managed to break even in 1969. Secondly, mos t of the top management people of MYS at its initial stage had poor knowledge in running a big organization, especially in manufacturing. Possibly this was because most o f th e companies operating in Malaysia at this time were engaged in trade or commerce. Thus, most of the other management staff

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New integrated steel mills in Japan o r Europe take around eight years to become profitable.

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also had no experience. What MYS needed was a business-minded person. Because of unsuitable management, there were serious problems during th e construction period. MYS then decided to change the top management in line with the agreement among the government, Japanese investors and IFC. Robert Kuok became the new President. Management was reshuffled and improvements made. Robert Kuok laid the strong foundations of MYS. Last year the proje-cted demand 200,000 tons were actually used. 1t is were imported into Malaysia last yeear. of 100,000 tons. This gives a total o f

was for 225,000 tons of steel and approximately estimated that between 30,000 to 35,000 tons Th e 4 mini-mills have a total rated capacity 300,000 tons a year.

With the Third Ma]aysia Plan (TMP) at its half-way stage, it is the rate of growth of the Malaysian economy will gather momentum. the Economic R eport 1977- 78, growth in the construction sector was 7 This should provide year and is expec ted to be stronger this year. 6 for further expansion at MYS.

expec ted that According to strong last a strong basis

Apart fro m a projected increase in output however, MYS has no plan at present to widen the range o f its products. It might, however, produce specialized steel if regional economic co-operation under the ASEAN countries is intensified. At the moment, there are plans to rationalize the iron and steel industry in the ASEAN region and to identify possible projects for complementation. For instance, country A may produce billets, country B flat products and so on. However, due to various problems, there is no concrete plan at present. (One of the problems is the choice of product. A number of countries want to produce the same product.) As a result, co-operation is mainl y in the form of exchanging technical views on steel production. Although prospects for the futu re appear promtsmg, MYS faces a number of problems in the fu ture. Its main problem will be the shortage o f local iron ore, unless substantial new local sources of suitable ore are discovered soon. The Fe content of local iron ore a t present is very low but th is can be compensated by the comparative lower price, due to the close proximity of the sources o f supply to MYS. However, even now MYS is purchasing some of its ore from further afield, for example, J ohore, Pahang, etc. This has resulted in increased costs because of

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Economic Report 1977-197 8 (Kuala Lumpur: Ministry of Finance, 19n ), p. 273.

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the higher transport c~arges. For its future big expansion, the proposed No. 3 blast furnace might have to utilize imported ore. The existing sources of supply are too small and of poor quality for economic operation. Alternatively, MYS may use an arc furnace to make steel utilizing scrap as the raw material. Another problem is charcoal. MYS cannot rely on local rubber wood charcoal for future expansion, in spite of the fact that it is negotiating to produce charcoal from rubber wood in Pahang as well. There will be three alternatives and these are imported charcoal, imported coke or coke from coal from East Malaysia. The importation of charcoal from Thailand will not be enough to fulftl the requirements for the third blast furnace and the importation of coke would not be so easy as the supply of coking coal all over the world would be very limited and therefore negotiations at an early stage for long term contracts would be necessary but transportation cost will be an inevitable problem still. Investigation was made of the coal resources in East Malaysia a few years ago. However, it is learnt that the development of the site does not seem to be easy or economical.

Conclusion In conclusion, MYS may be considered to be one of the most successful J apanese joint ventures in Malaysia in many ways. First, the formation of MYS has led to the establishment of an important basic industry which plays a crucial role in the industrial development of Malaysia. More specifically, MYS will help to spearhead Malaysia's entry into the field of heavy industry. At the same time, the establishment of a local iron and steel industry enables the government to exercise a stabilizing influence on the domestic price of steel. Fluctuations in the price of steel would have adverse effects on development plans, particularly those relating to the building and construction industry.

Secondly, MYS has successfully utilized local resources to the maximum. All the iron and limestone come from local mines. Prior to the establishment of the mill, the iron ore was exported mainly to Japan. All th·e charcoal used by the mill comes from old rubber wood which had no economic value, prior to the establishment of MYS. The mining of iron ore and limestone and the produe.tion of charcoal from waste rubber wood have generated substantial economic activities. providing employment to thousands of people living in the rural areas.

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Thirdly, in terms of employment, MYS provides direct employment to about 2,000 Malaysians and indirect employment to another 8,000. The combined total of about 10,000 workers is not an insignificant figure. In addition, MYS has helped to train thousands of skilled workers. The skills which these workers have acquired in the iron and steel industry can be widely used in other industries because of the variety of basic technology involved. The experience acquired on the job with MYS, gained from intensive supervision of team work peculiar to the industry, is also useful in any modem manufacturing operation. Fourthly, in terms of equity and technology one observes that the Japanese partners have been willing to transfer not only their share of the equity but also the technology to the local partners. Japanese shareholding phases out significantly from the initial 49% in 1965 to 39% in 1967 and 28.1% in 1975. At the same time, the number of Japanese in MYS which started with fourteen in 1966, then increased to a maximum of ninety-two in 1967, has now declined to only two. Both equity and technology transfer took place within a relatively short period of eleven years. Perhaps, more significantly, the Japanese made an attempt to modify the technology to suit the relatively low domestic demand in Malaysia and, even more important, adapt the technology to make maximum use of local resources. All this was achieved without sacrificing profitability or modern developments in steelmaking technology. As a matter of fact, the main reason for the financial success of MYS is the suitability of its original design. As for its technology, MYS is still one of the most modem steelmaking plants in the world. The reason for MYS's success probably lies in the fact that the joint venture was initiated at the top level between the former Prime Minister of Malaysia and the President of NSC on the basis of close friendship and cordial relations. Malaysia was fortunate in having, as a partner, NSC, which is not only the largest steelmaker in the world but has also made significant innovations in technology, some of which have been adopted by even the most advanced countries in the West.

NEC (Malaysia) Sdn. Bhd: The Nippon Electric Co. Ltd. (NEC) is one of the largest electrical and electronic product manufacturers in Japan. It~ ma·.or r xoducts include satellite communications, computers, electronic components and telecommunications equipment,

64

aJJ of which are exported worldwide. The company has forty subsidiaries located in various parts of the world. Towards the end of 1960, NEC decided to establish a subsidiary in Malaysia to produce semiconductors. This decision formed part of an overall NEC plan to • locate some of its manufacturing operations abroad. Overseas manufacturing was prompted by a number of factors. First, economic activities in Japan had improved considerably since 1965 as a result of which there was a labour shortage, particularly in the electronics industry. It was difficult to employ young girls to carry out the delicate operations related to the manufacture of electronics products. At the same time, the demand for NEC products was increasing yearly. NEC tried to meet the increasing demand by introducing automation. But even this did not solve the problem, so it was decided to commence production overseas. Secondly, NEC's competitors had also' started ·production overseas to take advantage not only of low labour costs, but also of the preferential treatment granted to exports from developing countries. The Southeast Asian region was chosen because the market demand for NEC's products had been increasing more rapidly in Southeast Asia than in any other region of the world. Southeast Asia was also a convenient point for export and import. Malaysia was selected to be the host country because of its relatively stable political and economic condition. Other countries in the region were also surveyed but not selected. The labour cost in Singapore was relatively high. Government policies in Thailand and Indonesia were rather unpredictable. In view of the above, NEC concluded that Malaysia was the best among the Southeast Asian countries to establish a manufacturing subsidiary. The decision having been made, the application for an approval of pioneer industry status was made to the Malaysian Industrial Development Authority (MIDA) in January 1974. Following the application, a survey team was sent to Malaysia to negotiate the conditions of pioneer status with officials of the government concerned. Subsequently, NEC (Malaysia) was given pioneer status by the Ministry of Trade and Industry in May 1974. The company was given a tax exemption period of six years, an additional year over the usual maximum period of five y.ears in view of its export orientation (see below). Following this, the company was incorporated as a wholly owned subsidiary of NEC in June 1974 with an authorized capital of $8 million and paid-up capital of $4.5 million (at the first stage, and $6 million at the second stage). It was decided to locate the company's factory at the Teluk Panglima Garang Free Trade Zone in Kuala Lancat, Selangor, about thirty miles from Kuala Lumpur.

65

Factory construction for the first phase, in which builtup area was 25,000 sq. ft., started in August 1975 while an area of 30,000 sq. ft. for the tecond phase started in August 1977. Construction of the factory was delayed because when the decision was made the worldwide recession had made its impact felt in Japan. Thus, it was not until the end of April 1975 that NEC gave the approval to NEC (Malaysia) to begin construction. Factory construction was completed by end of March 19 76 and the training programme for production workers began in May 1976. At the inauguration of the training programme, the Managing Director stressed the importance of producing quality components. He said that the electronic components, especially semiconductors which the flllll was going to produce, were indispensable elements in the manufacture of television receivers, radios, electronic watches, stereo sets, etc. If the quality of these components was poor, it would affect the final product in which they were incorporated. This point in the Managing Director's speech has been emphasized because NEC (Malaysia) pays particular importance to product quality (see below). The company's total amount of investment including land, building and machinery, at the end of 1976, was about $8 million. The investment was increased to about $20 million in 19 78 and is expected to double by 1980. Most of the investment will be made in building and machinery. The funds will come mainly from long term loans.

In its application for pioneer status, the company stated that it would manufacture transistors for commercial use at the first stage, integrated circuits at the second stage and condensers at the third 'stage. At the moment, the company is producing signal transistors (Type T0-92) for use in T.V. receivers and radios. Two other types of electronic components, power transistors (Types MP-7 and MP-5) and linear integrated circuits (Types.., 7(8)P and lOP) will be introduced for production in the near future. These components will be used in T.V. receivers, stereo sets, digital watches, etc. The market for these products appears promising. Production began in May 1976. The first three m~nths were given to training for the fll'st phase. This was followed by two m>nths of trial' production. Components produced during this period were ·sent to NEC Oapan) for tests. Training for second phase began in September 1976 while mcu;s production commenced two months later.

66

Most of the matcriall and components UKd in the company's production an imported. The company only purchacs soldCTing flax and min from JocaJ suppliers. 1"M rest of the intcrrncdiate inputs - wafCT, cradl~, gold tape, gold win ·• aft imported. Accordinl to the Production ~r, thne itnns are no t availabw locally. The company WOI'U ~ tbifts and total o utput is inaeasing at the ~m~iannual rate of 10-~ The value of sales in 1977 amounted to $4.999 million. lbe company's entire output it exported, 1Mf. to the p~t company and the nst to NEC's aublidi.rin in Sinppon (~Mf.) and Hong Kong (5~) . Whm production bqan~ the company had about 100 workers. The numbfto gradually inc~ucd and today the company has a workforce of 600 workers. The number will incrca~t to 700 in 1979 and 1, 100 in 1980. The company's labour force is p~ominandy Malay (70-7"') poteibly because the majority of the population in the co...,y's locality it Malay. The rest is made up o f Indiana (14. 14J(.) and O.incw (12.M(.). Workers aft generally recruited through advCTtiltments in ntwspapcn and employment acmcics. At the at.vt of production, the people who had expCTience in manufacturing were- limited to the twelve- Japancw staff and nine local foremm who had been trainrd in Jilf>&l' for four months. Thut a massive in-plant o n-the-job training programme- wu st•ted for the remaininc local staff. Apart from the provision o f local trainina. the company h» Knt a numbCT of worken to its parent company for training. In addition to the nint fo~m mentioned earliCT, fo ur employees wCTe ~rn t after production commtnced. ThOK Knt We're the pe-rsonnel manaccr, SUpervisor, accountant and engineCT and they were Knt for a duration of two weeks to o ne month. In ~ptcm~r last yur, ont supervisor and two foremen were abo sent for training. Th~ company plaM to scDd diffCTCnt categories of emplo yctt to Japan for training. Th.is will not only give thnn an incm!Wc to work hardCT but abo absorb rww knowledge- and experience. ln mticipation of an C'Ventual tranafCT o f top management potts to local staff, th~

compmy hu abo stutcd a

~mcnt

training progra.mmc.

The company's tni.ning program~~W h» been Vft'Y succaeful This may be indicated by co mpariac the rate of skill acquisition by the company's workers and tho.t- o f its punlt comp&ny. For tlw purpoK of dilcuMion., 'ft take two piOCftiCI in lh~ company's ~U~Wfacturint opnarion, rw~Kiy, mount~ and bondinc. In japM. W01Un iD dK p.armt co.-pMy \.ak dun .-onthl lO at&ain a pvcn &.IIJrl for w

67

mounting and bonding processes. In Malaysia, workers in NEC (Malaysia) takes only two~d-a-half months to achieve the same target. The management was surprised that the rate of ~kill acquisition of local workers was higher than that in Japan and attributed the difference to the efforts of ~e local workers as well as the excellent training programme instituted. Except for the Penonnel Manager, management of the company is wholly in the hands of Japanese expatriates. The twelve Japanese expatriates occupy the following positions: Managing Director, Technical Director, Finance Manager, Planning and Purchasing Manager, Quality Control Manager, Production-cum-Chief Engineer and Process Engineers (six positions). All the Japanese personnel came from the parent company. The Managing Director has a doctorate in engineering from Oaab University. He then spent one-and-a-half years in the U.S. doing postgraduate studies. On completion of his studies, he worked in a government organization dealing with telecommunications equipment. Subsequently, he joined NEC and has been with the parent company for twelve years. He was the General Production

Manager in the parent company before his posting to NEC (Malaysia). Initially, NEC (Malaysia) had some problems with its workers because some of ita management practices were not familiar to them. Fo r example, when an accident occun in the plant, company regulations require the foreman or supervisor to present a signed statement giving details of the accident, whether or not he is directly responsible for it. The aim here is not to blame any person but to prevent the same accident from recurring. However, the people concerned did not understand this and initially refused to sign any written statement for fear that it would be held against them. The problem was eventually overcome when the workers had a proper understanding of the company's motive. The company has formed six committees to help management carry out its functioJU. The1e committees are as follows: Discipline Committee, Employment Committee, Safety Party, Canteen Committee, Recreation Co mmittee and Award Committee. The main function of the Discipline Committee is to set out disciplinary rules and 1ee that such rules are followed. The Committee holds a meeting once a month or at any time called by the Chairman. The Committee carries out an inlpection of the plant once a week and reports the result at the Managers' meeting. The Committee of Employment is headed by the Personnel Manager and its tasks, among others, are manpower planning, recruitment and selection of workers. The Safety Party takes care of fire, flood and other disasters.

68

As mentioned earlier, the company places a lot of weight on the quality of its products. It takes the following measures to ensure a high level of quality: (1)

Education for Quality Control

Quality control starts with the workers' uniform. Before entering the production area, workers have to put on the company's ~te lD'lifcxm 'The engineering staff explain that this is necessary to keep the work area free from dust. Lectures are then given on how to handle the product, how to read the guidebook, how to wash, and so on. (2) Instruments for Quality Control For the assurance of quality control, NEC (Malaysia) has introduced three types of modern instruments: the dust counter, X-ray T.V. set and data logger. The transistor includes internally such kinds of elements as gold wire of 20 micron in diameter, transistor pellet of 0.4 mm x 0.4 mm x 150 micron in size, and other such elements which are not visible from outside once they are sealed by resin. Before the X-ray T.V. set was introduced, the engineer for quality control had to open the resin sealing when he wanted to examine the conditions of the above elements. This took a lot of time. With the aid of the X-ray T.V. set, ihe condition of these elements can be seen on the screen of the T.V. set. Since this procedure takes only a few minutes, the information can be relayed quickly to the manufacturing department so that necessary modifications could be made immediately. The institution of strict quality control measures and introduction of modern machinery has enabled NEC (Malaysia) to increase the acceptance rate of its components. In fact the average rate of rejection by its purchaser is only thirty units per million. Although the most modern equipment is used in the Quality Control Department, at the actual production stage, the company has tried to take advantage of the low wages in Malaysia by using relatively less capital intensive machinery compared to those used in the parent company. For example at the mounting stage, workers place the pellets on the cradle individually. They then wire the element of the pellet to the electrode of the cradle separately. At the parent company, all this is done by automatic machines. In the quality control section, however, the latest testing equipment imported from Japan is used. The value of this expensive equipment comprises about a quarter of the total value of all equipment used in the factory. Thus, although the firm adjusted its manufacturing operations to take advantage of the labour cost in

69

Malaysia, it did not do so at the expense of quality. Perhaps this was not surprising since the fli'm exported all its products. The company has also introduced an NEC System 100 computer to handle the payroll, keep track of parts and inventory and control work-in-process. At a later stage, the computer will be used for cost control, fmancial reporting, budgeting, production planning/control, Quality Control (Q.C.) analysis and system integration. Generally, the company's performance has been better than expected. In view of the remarkable rate of increase in output since the start of operation in 1976, the company could not help amending the initial plan so as to increase production by introducing additional machinery in September and December 1976, and April 1977. The strong market demand for the company's product also prompted the increase in production. With increased production, the company has become one of the main sources of electronic components. Notwithstanding its satisfactory performance, the company suffered a loss of $746,768 in 1977. This is not surprising since production only began in May 1976. Apart from its loss, the company also faces a number of problems. The most important of these relate to the conditions for approval of pioneer status which the company obtained in 1974. One of the conditions attached to the approval was the need to allocate 30% of the equity to local investors by a certain year after commencing production. To date, the company has not yet restructured its capital to meet this requirement. However, it is now looking for a suitable investor. The Managing Director explairu that it is not easy to find such an investor. This is because the electronics industry is not a stable one but is subject to economic fluctuations. Moreover, constant innovations are taking place in the industry and this necessitates constant new investments of money and manpower. Thus, the potential investor must have the necessary funds and must also be prepared to take a long range view on the return of capital. Another condition relates to the transfer of top management posts to local employees. In line with this requirement, the company has instituted a training programme for its local staff. However, the company feels that time should be given for a smooth transfer of management. This is because it will take time for the local staff to be familiar with the company's philosophy of management. Another problem which the company faces is labour mobility. Possibly because labour mobility is relatively low in Japan, due to the lifetime employment system, the company is concerned with the turnover rate of ils workers. Ahhough

70

the rate is only 1.5% per month and is relatively low compared to that in other parts of the country, the company is still concerned over the loss of time and money in training new workers to replace those who have' left. A third problem relates to the provision of power supply and water. The company negotiated with the National Electricity Board (NEB) for a power supply of 250 KVA. Although NEB initiated a plan to provide additional power supply in 1972, this plan has not been realized. As a result NEB cannot supply additional power, since the power line to the area is already at full capacity. Consequently, the company's proposed additional inves~ment has been suspended, pending the provision of additional power supply. In addition to the above problem, the company has also experienced frequent electric power failure. Such failure has an adverse effect on production. As it is well known, production in an electronic component factory is continuous and cannot be interrupted even for a few seconds so one can imagine the disruption caused by an electric power failure. When power supply stops, air conditioners stop, so temperature and humidity increase. The air filter and circulating system also stop, so dust level increases as well. All these affect the electrical properties of the electronic components and also the machinery. The loss of raw material is particularly serious. For example, the resin for moulding must always be kept in a cold room at a temperature of less than 20°C below zero. The resins are stored in large quantities to meet three months' production requirements. Once the temperature rises above the critical level, the resins are destroyed. In short, a continuous power supply is essential. Yet disruptions are quite common. For example, in AprU 1977, the ~lectric power supply failed five times for a total duration of sixty hours. Apart from the power supply, the water supply is also unsatisfactory. An adequate supply of clean water is indispensable for the production of electronic components. The water is required not only for processing the elements but also for cooling the machinery. Once the water becomes dirty, it will destroy the material used. Yet the Department of Public Works sometimes supplies muddy water to the company. The company has a reservoir and some devices to filter the muddy water but sometime the water is too muddy to be ftltered. Despite all the above problems which the company hopes will be solved in due course, the company is generally satisfied with its decision to locate in Malaysia.

71

Matlulhita Group of Companies The MatsUJhita group of companies constitutes one of the largest of the Japanese joint venture companies, both in terms of paid-up capital and the number of employees. AB of October 1978, there are six members in this group with a total paid-up capital of about $85 million. 68 The six companies are Matsushita Electric Company (MELCOM) which produces electrical appliances such • televisions, radios, rice cookers and so on; Matsushita Electronic Components Sdn. Bhd. which produces components such as variable resistors and electrolytic capacitors; MatsUJhita Industrial Corporation Sdn. Bhd. which produces air conditioners and their component parts; MELCOM Industries Sdn. Bhd. which produces cast iron parts, aluminium casting parts, die casting components and heating elements parts; Matsushita Sales and Service Sdn. Bhd. which is responsible for the marketing and after-sales service of all "National" products produced locally and imported from Japan; and Matsushita Precision Industrial Company which will begin operation sometime this year. The number of employees found in the first four of the six comes to over two thousand. In overall size, this group is comparable with some of the bigger non-Japanese business enterprises in Malaysia. The reuoru for the Matsushita interest in Malaysia relates to long term planning, according to one of the Japanese managers interviewed in Matsushita Electric Company. The decision to set up this company in 1966 came as part of the calculation by the parent company in Japan to safeguard their markets overseas. Malaysia was an important market. In addition, there were certain features found in Malaysia which acted as further inducements for the expansion of Matsushita operations. According to the Deputy Managing Director of the group,69 there were three features. These were the wealth of natural resources in Malaysia, a well organized and highly efficient government machinery that is conducive to investment and trade, and good infrastructural facilities. ~

far as the Matsushita Electric Company is concerned, it is a joint venture between the Matsushita group and the Malaysian public. Matsushita owns 43%, while 52% went to the public (Tabung Haji and the Army Cooperatives were among the original partnen who sold out later). The remaining 5% is held by the Westerm firm

61

Tbe Mataubita Electric Company of japan hu a total of thirty ..ix factorica and firma outlidc Japan.

6t

Bwifleu

n...,

(Kuala Lumpur), 27 October 1978.

72

of Hagemeyer which acted as a distributing agent for Matsushita products before the Matsushita Sales and Services Sdn. Bhd. was established. The raw materials for Matsushita Electric Company are almost all imported from overseas while the majority of the machinery used come from Jap~. This machinery is all new. The decisions in the company that are made on a long term basis have to be referred to Japan while those on a short term basis are made locally. The only incentive this company enjoys is the pioneer status incentive which has already expired after five years. Only 10% of the products of this Matsushita Electric Company is for export and they consist primarily of electrical irons. These exports go primarily to Southeast Asia, the Middle East and Africa. The Matsushita group of joint ventures can be considered quite successful, either in terms of the saleaibility of the product (in this connection, the popularity of National brand products was such that unauthorized persons pose as service and repair personnel in order to cash in on its name 70 or on its relations with the government). According to Ken Kurahashi, the previous general manager, in a discussion, the good relations with the government was achieved by tireless efforts to explain Matsushita's purposes to government personnel. It seems that the Matsushita group is now poised to set up more projects in Malaysia, primarily those involved in export oriented industries. 71 Recently Matsushita announced that it would set up a $10 million factory in Senai, Johore, to manufacture precision electronic components for colour television and computer heads. 72 At the same time, it announced plans to further increase its investment and manufacturing activities in Malaysia by raising its present investment capital of $80 million to $1 20 million in the early 1980s. In recognition of the company's efforts to increase its investments and to strengthen trade relations between Japan and Malaysia, the Malaysian Government recently conferred an award on the founder o f the Matsushita Electric Company of J apan, K. Matsushita.

The Textile Corporation of Malaya Berhad and Its Group of Companies The Textile Corporation of Malaya (TCM) group consists of the Textile 70

See an advertisement on National productt in Business Times, 10 November 1978.

71

Business Time4 10 November 1978. New Straits Times, 5 December 1978.

72

73

Corporation of Malaya, Malayan Weaving Mills or MWM (which is a wholly owned subsidiary) and a joint venture with MARA called KIMA Sendirian Berhad (KIMA Ltd. Company). According to the JETRO list, the combined paid-up capital of these three came to $24,850,000 and the total number of employees came to over 2,000. MWM is one of the first of the Japanese joint ventures in Malaysia established in 1957. TCM was established in 1961 and KIMA in 1968. The principal object of TCM was the construction, the equipping and the operation of an integrated cotton spinning mill in J ohore Bahnt while the subsidiary MWM was to operate the weaving, dyeing, printing and garment departments. KlMA was to produce fabrics. The group began with the establishment of MWM in 1957 by some Hong Kong people, one of whom was Frank Tsao. Then in 1961, Frank Tsao contacted Mitsui Buaaan which then invited Unitaka to get involved. Unitaka was interested because the textile situation in Japan was not exactly very heal1hy,and to survive and prosper Japanese textile companies had had to move overseas. Unitaka then had only one venture oveneu and that was in Brazil. Malaysia was attractive because of the low labour coati and political stability. Thus, TCM was set up in 1961 with the Japanese partnen being Unitaka and Mitsui Co. Ltd.

The raw materials for TCM come from abroad from such countries as Brazil, Mexico, Egypt, Tanzania, Pakistan and Russia. There are no local purchases except for synthetic fibre from the company Penfibre. The annual production capacity of the company is 10,000,000 lbs. of cotton yarn and cotton synthetic blended yarn. The subsidiary has a weaving production of 30,000 yards of grey cloth and a finishing capacity of 26,000,000 yards of dyed and printed cloths per annum.

The average sales of TCM and its subsidiary came to 30,000,000 linear yards of doth and some of the make-ups and garments are valued at about $35,000,000. Foreign countries such as the U.S., U.K., New Zealand, Canada, Australia, Western Europe and some African. countries absorb about 45% of the final products of the company and its subsidiary. The total number of employees for TCM and its subsidiary came to 1,860 with 480 involved in spinning, 1,000 involved in weaving and 380 involved in dyeing and finishing. As for Japanese personnel, there were 15 in the beginning. This went down to nine in 1970 and three in 1975. The problem of the turnover of personnel is particularly acute. Among the reasons given for this were the larae number of industries in the J ohore Bahru area and the proximity to Singapore

•th

ita ahortage of labour and its ability to offer better terms.

74

The profitability of textile companies in Malaysia is not very good and only three out of seventeen textile companies make. profit. TCM is one of the fortunate three.

Pentex Sendirian Berhad Pentex, together with Penfibre Sdn. Bhd., forms one of the largest Japanese joint ventures in Malaysia in terms of paid-up capital and employees. The total paidup capital is $90 million and the total number of employees exceeds 3,500 (Penfibre Sdn. Bhd. $70 million, 3,068 employees, product: polyester staple fibre; and Pentex Sdn. Bhd. $20 million, 719 employees, products: polyester/cotton, blended grey yarns and fabrics). & far as Pentex is concerned, it was first set up as a result of the appeal of the Chief Minister of Penang, Lim Chong Eu, to Textile Alliance Limited (Hong Kong) to set up a factory in the Prai Free Trade Zone. Textile Alliance Limited (TAL) has previous connections with a local Malaysian banker who, with other locals, have 10% in Pentex while Hong Kong people invested 30%. The other 60% is taken up by C. Itoh and Co. Ltd. (10%) and Toray Industries Inc. (50%). The Japanese partners had some previous connection with the Hong Kong group and they were also keen to be involved because of the depressed textile situation in Japan. They hoped to take advantage of the cheaper labour here and the quotas for textiles for Malaysia given by other countries. Also, they found the political and economic environment in Malaysia favourable to their involvement. Pentcx's main products and monthly production capacity consist of: (1)

Polyester Cotton Blended Yam: 1,450,000 lbs. and

(2)

Polyester Cotton Blended Fabric: 4,850,000 yards.

Almost 100% of Pentex's products are exported to Europe, Australia, Canada, the U.S., New Zealand, Hong Kong, the Middle East, Sri Lanka, Japan, Singapore and Africa. The quality of their products is apparently quite high and of international standard, according to the local manager from Hong Kong. Seven other Japanese trading companies such as Mitsui, Mitsubishi and Nissho-Iwai have come to purchase from them. . Pentex is one of the unique Japanese joint ventures in Malaysia that has a dormitory to accommodate their employees, mainly those from outstation. The

75

initial capital investment for this dormitory came to $3 million and it can house 500 employees. The racial breakdown of their employees are Malays (40%), Indians (20%), and Chinese (30-40%).

VI:

CONCLUSION

JDI in Malaysia, since World War II, began only about twenty years ago and has increued rapidly within the last decade. Since then, however, Japan has invested more than $900 million in Malaysia and established more than 360 enterprises. Many of these enterprises were established because of the fear that tariff protection would exclude them from the local market. Others came to take advantage of the liberal incentives and excellent facilities provided to foreign investors while some were let up to exploit Malaysia's natural resources. The general proflle of Japanese entcrpri.ICs in Malaysia which emerges from the study shows that most of them are engaged in manufacturing, concentrating mainly in electrical machinery, chemicals and chemical products, wood and rattan products and textiles. The Japanelle firms tend to concentrate on the production of increasingly mature products which have become uneconomical to produce in Japan. The typical firm is generally small in size particularly in terms of employment, with an average of less than fifty workers. Many of the Japanese firms are established on a joint venture basis with local investors. In recent years, a number of Japanese firms have tied up with quasigovernmental agencies, in part to provide for bumiputra equity participation. Japanese manufacturing firms in Malaysia generally produce for the domestic market although the export oriented type of Japanese investment may gradually become more important as Japan shifts some of its labour intensive industries to Malaysia. Finally, data from the profile allows that Japane~e fums in Malaysia are making reasonable profits. An evaluation of the impact of JDI in Malaysia shows that, in terms of

employment, Japanese firma in Malaysia employ less than 1% of the total labour force in Malaysia. This may be explained by the fact that most Japanese firms are concentrated in the manufacturing sector which is relatively capital intensive. In line with the government policy of providing more industrial employment to bumiputras, about 45.5% of the workers in these f1tms are bumiputras. Japanese employee• form only about 2.4% of the total employees in Japanese firms and are

76

mainly confined to the top managerial and technical group. Most of the Japanese expatriates come from the parent companies, are w~ll qualified and have considerable experience. Although employment generated by Japanese firms is relatively insignificant, the training provided appears to be quite substantial. All Japanese frrms in the sample survey provided training schemes for their workers. Although workers are generally trained locally, a relatively large number of trainees have also been sent to Japan. In terms of subcontracting, it is surprising to find that, while this practice is common in Japan, most Japanese firms in Malaysia have not adopted it here. When pressed for an explanation, the usual one given is that the component is unavailable locally or is relatively too expensive or of poor quality. Such an attitude is rather unfortunate since Japanese firms in Malaysia can play a substantial role in the industrial development of Malaysia if they take the lead in encouraging the production of components locally. In this way, they would also be able to develop strong linkages with local fums and integrate more closely with the local economy. Finally, another major benefit of foreign investment is said to be the transfer of technology. Since JDI in Malaysia is mainly concentrated in the relatively low technology industries in the manufacturing sector, it has not resulted in the transfer of any sophisticated technology to Malaysia. At the same time, Japanese fums have not made much effort to adapt their technology to suit the local resource endowment. Technological adaptation, if any, is generally made to scale down plant and equipment to the lower volume of the Malaysian market. There are relatively few instances of adaptation to take advantage of low labour costs. It is unlikely that this practice will be reversed since hardly any Japanese firm in Malaysia has set up a R & D facility. In short, the above evaluation appears to indicate that JDI has not made much of an impact on the Malaysian economy. The above evaluation should, however, not obscure the fact that there are exceptions. Malayawata is a case in point where some of the more positive aspects of Japanese investment, such as the transfer of technology, the generation of employment and the usage of local products, are found. Nor shoult it be said that Japanese investment is not playing a useful role, small as its overall impact may be. as any contribution to reasonable employment opportunities and what transfer of technology there may be are welcome. It is hoped, nevertheless, that future Japanese investment should take into account some of the points brought out in this study.

77

APPENDIX SURVEY QUESTIONNAIRE OF JAPANESE DIRECT INVESTMENT IN MALAYSIA

Date:

Name of Enumerator: Sample No.:

- - - - - - --

Name of Firm:

Address:

----------------------------------------------------------=c=============================================================;========== A. Employment & Training 1. What ia tb~ a~ turnover rat~ per annum of your worken by type of employment?

(i) (ii) (iii)

---------% ---------%

foreman and aupervilor production worken all other catqory

2. P1euc

pe

- - -------%

particuluw of the foreign worken employed in your firm by type of workers as follow s: No. of foreign workers japanese Non-japanese

(a)

(i) (ii) (iii) (iv)

----

MmacciDCilt Technical/Profaaioaal Foreman lc Supervi8on Other {~pecify)

-----

---- --cam~

from

th~

{b)

How many Japane.e worken

parent company?

(c)

How many Japane.e workers did you have initially? - -- - -

- ----

5. Did the parent firm tend any technical expert• to atart production in the firm ? If yes, how many experta, bow long were they here and what type of experts?

78

S.N. ---

5. How many workers in your ftrm have been provided with trAining opportunitie1 by type of training? Off-the-job On-the-job Off-the-job In-plant Out-of-plantfl= (i)

management

------

(ii)

foreman/auperviaor

(iii)

production worker

----------

----------

----------

-----

---·-·-

fl= If Off-the-job Out-of-plant training is provided, atate the name of the training inltitute and place:

6. What is the average duration of each type of training provided? (i)

on-the-job

----year

(ii)

off-the-job in-plant

----year

(iii)

off-the-job out-of-plant

---year

7. Do you provide any training for your supplier firma and distributora? If yea, pleue detcribe the training provided.

8. Do you have any problem getting work permits for your expatriate staff? If yea, please explain.

79 S.N.

B. 1. Of tM fm: (a)

(b)

~or

Production and Technology

pieces of machinery Uled in your firm, how would you rank them

ill terma of model •

(i)

oldc:at

(ii)

latest

(ill)

intermediate:

in terma of automation

- (i)

completely automatic

(ii)

~emi·automatic

(iii)

manually operated

!. From which country or cowntrie1 did the above S major piecel of machinery originate:?

Weft tMy purchued new or ICcondhand?

S. What il the IDOit diffacult production procc:u in the: manufacture of your main product? What is the lcacth of traininc requir