Frankly Speaking

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Global cars at local pricesProton unveiled its sleek new hybrid concept city car at the Geneva Motor Show last week and said this was the beginning of a shift in its strategy, which was to develop and produce cars for the global rather than home market.

Only by making products that are in tune with the tastes of global car buyers will it be able to export and make its presence felt in the world, the national carmaker said.

In addition, with a larger production volume through selling to the global market, it could bring prices down to a more attractive level for Malaysian car buyers.

Finally, Proton is on the right track. This is the strategy it should have adopted a long time ago, from the day it was founded in 1985.

It took the company 25 years to head in this direction and as it does so, it avoids admitting to its lack of capability in the past.

Put it this way, the reason Proton was unable to export in meaningful volumes or to have a strong brand image abroad was not because it was forced to design and produce “Third World” cars for the poor Malaysian car buyer, but because it lacked the capability.

For years, Malaysian car buyers have complained about having to purchase Proton cars at prices that could have bought them much better cars in the developed countries. Hence, the excuse that Proton was stuck with the national duty of offering “affordable” products to the Malaysian customer and had to sacrifice exports is not valid. At the end of the day, it is about Proton’s capability as well as the designs and refinement of its products.

Hopefully, all future Proton models will be world-class products, but sold at local prices.
Commendable EPF dividend Contributors to the Employees Provident Fund (EPF) would have been cheered by news last week of a 5.65% dividend for 2009. This is a good 115 basis points higher than the 4.5% declared in 2008.

The higher payout is certainly commendable but not surprising given the sharp market recovery that was seen last year. As the EPF said in a statement, the dividend rate was declared on the back of the highest ever net income achieved of RM19.63 billion, increasing 34.82% from the RM14.56 billion recorded in the previous year.

Naturally, contributors yearn for the days when the EPF declared dividends of between 7% and 8.5% — from the mid-1970s to just before the 1997/98 Asian financial crisis. By 2008, the dividend yield had declined to a low of 4.5%. Given the country’s changed economic circumstances compared to the high growth years, expectations of a return to the dividend rates of that period may be too high. Contributors would have to draw comfort from comparing the EPF’s dividend rate against what they would earn if their retirement savings were kept in fixed deposit.
How about some transparency, Pharmaniaga?When Pharmaniaga Bhd informed Bursa Malaysia last Wednesday that its manufacturing licence had been revoked following a routine audit conducted by the Pharmaceutical Services Division of the Ministry of Health on its subsidiary Pharmaniaga Manufacturing Bhd, it raised more questions than its three-paragraph announcement could answer. While the company did say that it will be addressing the issues raised by the Ministry of Health to ensure the reissuance of its licence, it failed to say why the licence was revoked in the first place.

Pharmaniaga did add that the cessation of production is not expected to have a significant impact on its financials because its other business lines are not affected.  Also, it is confident of resolving the audit issues within a “relatively short time”.

Queries from the media were not addressed sufficiently either. It was only after Bursa queried the company that it revealed more information on the cause and impact of the revocation. The issues raised in the audit were related to three areas of storage and segregation of reject and quarantine materials; handling of reject/recall materials and aspects of its premises and equipment. Pharmaniaga also provided an illustration of the impact on historical earnings per share assuming the revocation is not withdrawn in the current financial year.

Kudos to Bursa for pushing for more information. As a public-listed company, Pharmaniaga should be more forthcoming on critical matters affecting its operations by providing more clarity to all stakeholders. As a pharmaceutical player, Pharmaniaga’s stakeholders include shareholders and investors, and just as importantly, consumers who put their trust in the efficacy of its products.

It may seem surprising that Pharmaniaga’s share price barely budged on news of the revocation but this is likely due to its shares being tightly held, with UEM Group Bhd holding an 86.8% stake. 
Reap as you sowIt is hardly surprising that senior bankers and industry observers worldwide who were polled for the Banking Banana Skins 2010 survey, have rated political interference as the No 1 risk facing the global banking industry now.  With government rescues and takeovers an ever-present prospect since the financial crisis broke, the mood is that “the future of the industry is out of its hands”.

This is the first time since 1996 that political interference has factored as a top risk in the annual survey conducted by the Centre for the Study of Financial Innovation in association with PricewaterhouseCoopers.

Closely related to the top risk is the No 3 risk, “too much regulation”, suggesting that, incredibly, the global financial industry has yet to recognise the US’s folly in rolling back the Glass-Steagall Act, which had prevented the coupling of investment banking and lending.As David Lascelles, the survey editor, aptly said: “It is ironic that politics should emerge as a risk when the banks had to be rescued in the first place. But there is clearly a crisis in the relationship between banks and society, and it will take years to rebuild trust.  Until it is, banks will operate under a financial handicap.”

There are two simple lessons that bear reiteration. One is that regulation is not always bad and too much laxity can come back and bite. This would not be lost on those banks that now have to raise their capital adequacy ratios to provide for a possible weakening of the economic outlook.

Two is that it would be wise to keep the good old conventional lending that is the lifeblood of economic activity separate from the high risk-high return universe of speculative financial instruments. And if a financial institution wants to go for the big kill, it must be ready to pay the price when business confidence tanks. No bailouts. Fair enough?
This article appeared in The Edge Malaysia, Issue 796, Mar 8-14, 2010