UMW Holdings: sustaining a centennial corporation

UMW HOLDINGS: SUSTAINING A CENTENNIAL CORPORATION Khairul Akmaliah Adham, Rosmah Mat Isa, Noreha Halid, Norrana Khidil & Adlin Masood UKM-Graduate School of Business Universiti Kebangsaan Malaysia SYNOPSIS By the end of 2011, five years short of its centennial anniversary, UMW Holdings was one of the biggest conglomerates in Malaysia, registering revenues of RM 13 billion (USD4.3 billion), and net profit after tax of RM1 billion (USD0.33 billion). By that time, it had 110 subsidiaries, operating in four core businesses of automotive assembly and distribution of Toyota lines of products, automotive spare parts and lubricants manufacturing, industrial equipment franchisee, and oil and gas drilling. In September 2011, the company had targeted its automotive business to contribute to 50% of its revenues, while the other 50% would come from its other three businesses, by the year 2015. However, as of the first quarter of 2012, Datuk Syed Hisham Syed Wazir, the Group CEO and his management team realized that, at 75%, the automotive business was still the main contributor to the Group’s revenues. As the company’s Toyota franchise was limited exclusively to the Malaysian market, plus in the face of fierce competition within the automotive industries, the company needed to strategize to achieve its 50:50 plans. The case stimulates discussion on strategy formulation of a mature conglomerate, involved in diversified businesses. Keywords: conglomerate, business-level strategy, corporate-level strategy, strategic management process, industry analysis.  CHARTING THE FUTURE UMW Holdings operations began in 1917, as a bicycle spare parts business. By the end of 2011, five years short of its centennial anniversary, UMW Holdings was one of the biggest conglomerates in Malaysia, registering revenues of RM 13 billion (USD4.3 billion). Its net profit after tax at the end of 2011 was RM1 billion (USD0.33 billion). It operated in 13 countries, and maintained its head office in Shah Alam, 40 km from Kuala Lumpur, the capital city of Malaysia. By that time, it had 110 subsidiaries, operating in four core businesses of automotive assembly and distribution of Toyota lines of products, automotive spare parts and lubricants OEM and REM manufacturing, industrial equipment franchise, and oil and gas drilling service. OEM refers to original equipment manufacturer, while REM refers to replacement equipment manufacturer. UMW Holdings had operations in the neighboring Singapore, Indonesia and Thailand, as well as in Myanmar, Vietnam, Papua New Guinea, Turkmenistan, Taiwan, China, Australia, India and the Middle East. As shown in Exhibit 1 for the UMW Group structure, its Malaysian businesses were operated by UMW Corporation. In September 2011, the company had targeted its automotive assembly and distributor business to contribute 50% to its corporate revenues, while the other 50% would come from its other three businesses. This goal was to be achieved in 2015. However, the company’s post mortem review in early March 2012 revealed that the automotive business was still the main contributor to the Group’s revenues, at 75%. As the company’s Toyota franchise was limited exclusively to the Malaysian market, and the fierce competition of the automotive industries, Datuk Syed Hisham Syed Wazir, the Group CEO and his management team were aware that the company needed to strategically transform to achieve its 50:50 plan. Otherwise, the company would be in a grave situation. The management team needed to present its planned strategies to all the company executives by the end of March 2012.The pressure was mounting as they knew that vehicle sales in Malaysia in January had drop sharply by 25%, in comparison to the same month in the last year (2011). While the figure for February had an increase of 1%, the figure for March had dropped by 15% (Bernama, 20 March, 2012; Wong, 20 July 2012). Datuk Syed Hisham and his management team knew that they needed to act fast, to ensure the future success of the centennial company, which was deeply rooted in the heritage and traditions of Malaysia. INDUSTRY OVERVIEW This section presents an overview of the industries of automotive assembly and distribution, automotive spare parts and lubricants OEM and REM, industrial equipment franchise, and oil and gas drilling service. Automotive Assembly & Distribution There were three types of automotive operations in Malaysia. First, companies that operated exclusively in luxury cars segment, such as BMW and Mercedes Benz. These companies either manufactured their cars in Malaysia at their local partners’ facilities or imported cars directly from their foreign manufacturers using local partners’ approval permits. Second, companies that operated under automotive manufacturing joint-ventures, such as UMW and Honda. UMW Toyota Motor assembled, distributed, and provided after sales service to Toyota models within the domestic market (Market Watch, 2012).Third, companies which operated as a full-fledged car manufacturer that performed all the functions within the value chain in this category, research and development, assembly, distribution and after sales. The two players were Proton and Perodua. By 2011, 28 manufacturing and assembly plants were involved in the production of passenger and commercial vehicles, composite body sports cars, as well as motorcycles and scooters. These plants had a total manufacturing capacity of about 800,000 commercial vehicles and about 1 million motorcycles per year. The production served mainly the local market (MIDA, 2012). High purchasing power, high-quality road system, in combination with Malaysians’ high family values, promoted the rapid growth of automotive passenger industry in Malaysia, as shown in Exhibit 2. By the end of 2011, there were many local-international joint-venture assemblers and distributors of car producers, ranging from Japanese, Korean, and Chinese to Europeans and Americans. There were also many direct import operations and local-international manufacturing partnerships. And so at that time, Malaysian consumers had various choices of manufacturers and brands of cars to choose from. Automotive Spare Parts Manufacturing & Engineering The automotive parts industry comprised of original equipment manufacturers (OEMs) and replacement equipment manufacturers (REMs). The OEM business was generally contract-based, involving dealings between the OEMs and car manufacturers; OEMs produced automotive parts that were ordered and approved by the car manufacturers according to their standards, which in turn would be supplied to the vehicle assemblers. Whereas, REMs made alternative auto parts that would be distributed directly to the service centers and repair shops for the end user market (AmResearch, 2005). By 2011, about 700 firms were involved in the manufacture and supply of over 4,000 automotive component and parts (Market Watch, 2012). Multinational OEMs included Delphi Automotive Systems, TRW, Siemens VDO, Bosch, Denso and Nippon Wiper Blade. Major domestic OEMs included APM Automotive, Sapura, Delloyd and Ingress (Henriksson, 2012). These manufacturers produced steering wheels, rims, brake pads, filters, wheels, bumpers, bodies, exhausts, radiators and shock absorbers. Other products were body panels, rubber parts as well as automotive electrical and electronic parts. In 2011, the component and parts sales in Malaysia were valued at RM5.77 billion and this figure had been on increasing trends in the last 10 years (MIDA, 2012; MIDA, 2010).Malaysia was reported to be one of the active automotive parts producers and exporters in the region. Futhermore, the rapid developments in the industry had attracted many international automotive component manufacturers to conduct their business in the country (Market Watch, 2012). The industry sales volume depended heavily on the domestic automotive industry, which was strongly influenced by the economic cycles. Malaysian producers were reported to have some problems related to high production costs and limited capabilities in research and development and design (AmResearch 2005). It was reported that, by the end of 2012, less than 10% of these automotive parts manufacturers had the capabilities of serving both the OEMs and REMs (MIDA, 2012). ASEAN Free Trade Area (AFTA) liberalization had positive and negative impacts on the Malaysian automotive component industry. The positive impact of the AFTA implementation on the market was it allowed the manufacturers to access a larger market. The negative impact was thelocal automotive parts makers faced increased competitionfromcheaper producers from China as well as premium producers from Thailand (Jagdev, March 19, 2011). AFTA is a trade bloc agreement, which involved the members of the Association of Southeast Asian Nations. The implementation of AFTA was aimed at developing a competitive advantage of the ASEAN production bloc, whilst attracting foreign direct investment (FDI) into the ASEAN region. This effort on the whole, was aimed at creating a production trade bloc amongst the ASEAN members, which has a high competitive advantage. Initially, ASEAN members were made up of six Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand, and later in 1999, with the addition of Vietnam, Laos and Myanmar, increased to a total of nine. The AFTA was implemented in stages starting in the 1990s, which purpose was to reduce trade barriers amongst the ASEAN countries (MITI, 2012). Heavy Equipment Heavy industries were high capital investment industries, which involved heavy machineries and equipment. From 1960s onward, the Malaysian heavy machines had experienced rapid growth due to the high growth within the commercial sectors, which included electrical and electronics components, machineries, and appliances, as well as car assembly. Between 1960s and 1980s, in particular, these rapid grow were induced by many government incentives for Foreign Direct Investment (FDI). UMW was amongst the pioneers in bringing heavy machineries into the country through it being a franchisee to Komatsu in late 1960s. DRB-HICOM and UMW, being the two leading players, were comprehensive providers of the heavy equipment industry, while the other providers seemed to serve specialized subsectors of electrical and electronics, oil and gas, agriculture, logging, automotive and others. DRB-HICOM was formed in 1985, and by 2012, it operated more than 60 subsidiaries and associate companies and employed around 24,000 people (DRB-HICOM Annual Report 2011). By 2011, the Malaysian government had announced a plan to further develop the heavy industries into a high technology and high value-added industry. The government offered incentives to the industry players to move into the upstream value chain of the industry, which focused more on research and development and design (MIDA, 2012). Oil & Gas – Drilling Industries The first discovery of oil in Malaysia was made in 1910 in Miri, Sarawak. Pursuant to that, the government passed the petroleum development act and established Petroleum Nasional Berhad (Petronas) (Abdullah, 2012). Petronas was created in 1974 which shares are entirely owned by the Malaysian government. Since then, Petronas had grown rapidly and from 1995 onwards it was listed in the Fortune’s 500 companies. By the end of 2010, 100 years after oil was first discovered in its soil, Malaysia was ranked 28th oil producer in the world. The country’s hydrocarbon reserve was recorded at 20.56 billion Barrel of Oil Equivalent (BOE). Its average production was 1.63 million BOE per day. By early 2010, Malaysia’s oil and gas production shows continued with decreasing trends from 1,673,000 to 1,659,000 BOE. Meanwhile, Malaysia’s oil and gas reserve remained stagnant over the same period of 2008 to 2010. By the end of 2010, the industry contributed about 20% to the country’s GDP (Abdullah, 2012). Worldwide, oil and gas industry was growing fast, due mainly to advancement in oil exploration technologies. Specifically in Malaysia, the growth of the industry might be fueled further by the government tax incentives to be implemented in 2013 onwards. These incentives included full income tax exemption for 10 years for public-private business operations involved directly in developing oil and gas industry in the country. With these incentives, it could be expected that there would be an increase in the foreign direct investment as well as the number of new companies entering the industry. Moreover, mergers and acquisitions were expected to be more active (Tee, October 13, 2012). By the end of 2011, the renewable energy made up about 7% of the entire energy market. This number was expected to double in next 20 years. However, the lack of investment into renewable energies by many governments in the world, contribute to the slowing of its growth in the near future (Tee, October 13, 2012). The industry value chain of crude oil involved five main activities: exploration, production, transporting, refining and marketing. Exploration involved activities of finding oil fields and oil wells. The production activity involved operations of extracting the oil from the fields. The transportation function involved bringing the oil to the locations of the refineries and consumers. The transporting of oils was done through tankers, trucks and pipeline. The fourth value chain that was refining involved the activities of transforming crude oil into finished products. The final part of the value chain was marketing which involved distribution and sales of the finished oil products. The value chain of natural gas was similar to the crude oil value chain in regard to the functions of exploration and production. However, once the gases were brought to the surface, they would undergo a processing treatment. Then, they would be transported via pipeline and tankers before being distributed to consumers. See Exhibit 3 that shows the activities within the value chains of crude oil and natural gas. Within the Malaysian market, the oil exploration function was dominated by Petronas; whilst the subsequent value chain, the production of oil and gas, specifically the drilling function, comprised of two main players, SapuraKencana Drilling and UMW Holdings. SapuraKencana was an integrated oil and gas services and solutions provider. It was a public-listed company employing more than 9,000 people and had operations in over 20 countries (SapuraKencana, 2012). The company entered the oil and gas drilling business in 2010. The customers of these two drilling companies were mainly the owners of oil wells and fields. Therefore, within the Malaysia market, the two companies’ major customer was Petronas. The production value chain was an asset-laden industry, which required high capital investment. The supplier to the oil and gas drilling businesses were the manufacturers of machineries and equipment that were utilized in drilling operations. UMW STRATEGIES, UP TO 2011 The history of UWM Holdings could be traced to the year of 1917, when Mr Chia Yee Soh, the company’s founder opened an automotive repair shop in Singapore. In 1936, the company acquired the agency for Pennzoil lubricants product. In 1961, the company added industrial equipment to its business portfolio. By 1967, the company became franchisee of Mitsubishi Heavy Industry, obtained distributorship of Komatsu Japan heavy equipment, and acquired the agency for the Toyota forklift. In 1970, UMW became the group’s holding company and it was subsequently listed on the Kuala Lumpur Stock Exchange (KLSE). Throughout the 1970s, UMW set up many branches on both peninsular and East Malaysia. During that time, UMW had also been involved in various businesses including construction, rebuilding of tractors, leasing, furniture, and material handling. In 1981, UMW obtained the rights to import, assemble and distribute Toyota motor vehicles in Malaysia from Toyota Corporation Japan. It would also provide after sales service of the vehicles as well as supply the components and parts. For this purpose, UMW and Toyota Corporation Japan created a 70:30 private limited joint venture company, Sejati Motors in September 1981 (UMW held 70%; Toyota Japan 30%).The granting of the rights was perhaps due to UMW’s successful distributorship of the Toyota forklift (Zuraidah Omar, 2008). By 1982, it recorded revenues of more than RM1 billion. In 1984, it had losses of RM30 million and by1985, the group suffered further losses of about RM60 million and by 1986, its losses before tax was about RM77 million. These spiraling losses seemed to be the result of too rapid expansion of the company (Zuraidah Omar, 2008). By 1987, the company underwent a capital restructuring exercise. In 1988, the capital reconstruction exercise was completed resulting in Permodalan Nasional Berhad (PNB) owning 26% of UMW Holdings. PNB was one of the Malaysia’s biggest fund management companies, which was incorporated in 1978. In 1989, UMW registered a net profit before tax of RM100 million. In 1990, Toyota cars became the top seller in the foreign brand sector of the Malaysian automotive market. In 1993, UMW jointly invested in Perusahaan Otomobil Kedua Sdn Bhd (Perodua) with other Malaysian and Japanese partners. Perodua was the second Malaysian national car project. In the venture, UMW Corporation was the largest shareholder with 38% stake, followed by Daihatsu Motor Co. Ltd. Japan and Med Bumikar Mara, each 20% stake. The remaining shares were held by PNB Equity Resources Corporation 10%; Mitsui & Co Ltd Japan 7% and Daihatsu Malaysia 5% (Zuraidah Omar, 2008). UMW’s investment in Perodua transformed the company from an assembler and distributor of cars into a car manufacturer (Zuraidah Omar, 2008). Later in 1999, UMW went through a restructuring exercise in the shareholding of UMW Toyota, which resulted in reduction of UMW’s stake from 70% to 51%, and an increased in Toyota Corporation’s stake from 30% to 49%.The restructuring was undertaken in view of the pending AFTA implementation, which among others would open the automotive markets within the ASEAN countries. Increased competition was one of the expected consequences of the AFTA implementation (Bernama 15 April 1999; Zuraidah Omar, 2008 p. 158). Up to 2002, UMW Holdings business was heavily dependent on the automotive industry, in which it was involved in assembling and distributing Toyota cars in the Malaysian market.UMW automotive business was a franchisee business operation which businesses were restricted exclusively in Malaysia. Thus, opportunity for growth was limited. To support its other two business units which growth seemed to be slowing down (with estimated growth of about 10 to 15%), in 2002, under CEO Dato’ Abdul Halim’s management, UMW ventured into oil and gas industry in Malaysia. This move was also part of its efforts to buffer the effect of the pending fiercer competition within the Malaysian automotive industry (Zuraidah Omar, 2008). Being the associate company of government-owned largest mutual funds operations, Permodalan Nasional Berhad, the company benefited from the government-to-government (G2G) relationship in helping it established its presence in overseas countries. Along 2001 and 2004, its oil and gas ventures experienced tremendous growth involving many acquisitions especially in China through the government-to-government platform (Zuraidah Omar, 2008). Its main strategy for the oil and gas business in the initial stage was to acquire firms. These acquisitions were enabled by their cash-rich situation. These acquisitions were necessary given that the company was at the embryonic stage in entering into the oil and gas industries. Within three to four years, the group increased its stakes in some of the acquired companies, transforming them into its full fledge subsidiaries. In the oil and gas business, UMW served as a contractor to the owners of the oil wells and fields. Mr. Rohaizad, the Group’s Corporate Training and Development, explained the UMW oil and gas businesses: “In Malaysia, all oil fields and wells are owned by Petronas (Malaysian government owned and operated oil company), we served as their contractors by providing drilling crews. Within this drilling contractor business in Malaysia, there are only two providers, our self and SapuraKencana Petroleum. There are also international players like Transocean (a US-based company) and Seadrill (a Norwegian-Bermudan company) but they are not big players in Malaysia and none of these local or international contractors are owners of the fields. What we mainly provide is services.” In mid-2000s, UMW Holdings started a rebranding exercise, as related by Mr. Rohaizad: “At that point of time, UMW was always associated with Toyota. In general, people didn’t know we have other businesses. So the top management felt that the company needed to rebrand. Since then, you can see that there is a new logo and advertisement on the billboards signifying UMW as a multiple portfolio businesses.” The company chose Beyond Boundaries as its advertisement tagline to indicate the UMW group as “an international conglomerate that develops industries, manages partnership and facilitates growth” (Zuraidah Omar, 2008, p.190). Later in 2008, the company also launched its new logo. In 2004, the company started its five-year quantum leap program that ended in 2008. Then, in 2008, another five-year target plan was developed for the periods ending 2013. The company targeted for RM13billion of total revenues for 2013. By 2008, Malaysia started implementing AFTA (ASEAN Free Trade Area), opening its automotive markets to its ASEAN partners. AFTA stipulated tariffs of no more than 5% when trading within ASEAN countries (Zuraidah Omar, 2008 p. 158). The AFTA implementation resulted in production rationalization in Toyota Corporation, which enabled cross-countries manufacturing and supplies of vehicles. On the whole, the AFTA implementation helped UMW and Toyota to reach economies of scale. By the end of 2011, the company successfully raked in revenues of RM13.5 billion. UMW STRATEGIES, BEYOND 2011 For its automotive business, by the end of 2011, Toyota captured close to 20% while Perodua captured close to 30% of the Malaysian market. On the whole, the company and its associate company, Perodua captured 45% of the overall Malaysian automotive market. At that time, UMW still was the largest shareholder of Perodua, holding 38% of shares. High costs of advertising and promotional expenses were some of the threats faced by the company. However, there were incentives on hybrid cars in which by 2011 only Honda and Toyota were offering. Malaysia Automotive Association (MAA) forecasted an increase in the numbers of vehicle sales in the next year (in 2012), at total industry volumes (TIV) of 615,000 units (Bernama, 17 January 2012). The distribution arm of UMW Toyota comprised of its own branches and dealers. These branches and dealers also provided after sales service and staffed by UMW own employees. Among its plan to expand its automotive businesses included developing a structured program to educate and train the employees of the UMW branches. However, UMW did not have full control over its dealers as they are separate companies. And so, the level of services at the dealers, in regard to sales and after sales service was more difficult to control. UMW’s automotive spare parts manufacturing and industrial equipment businesses were mainly involved in trading. UMW’s automotive spare parts manufacturing business served two types of markets: the OEM (original equipment manufacturer) market (which manufacturers included Perodua, Toyota, and Proton) and the replacement equipment manufacturer (REM) market. The business expansion within this business was heavily dependent on its manufacturers’ partners. The company had anticipated some increase in sales for some of its spare part, lubricant and also absorber businesses, under its manufacturing and engineering core. While at the initial stage of its oil and gas operations, UMW was not focusing on specific activities, by 2010, its activities were more focused on the up-stream activities, serving as a drilling contractor in the oil and gas industry in Malaysia. By end of 2011, it had about more than 30 subsidiaries or associate companies in the oil and gas business. The group expected significant growth for this business in 2012 due to the mobilization of many of its equipment and facilities in multiple locations. The company also had plans to develop its in-house capabilities for supporting its oil and gas business. The company also had developed a comprehensive retention program as part of its effort to develop more depth into the oil and gas business. Parts of developing in-house capabilities and retaining its employees, the group had planned to further develop its training center into a full pledge academy that involves in operating a degree granting program, short courses and certificate granting courses. By the end of 2011, the management of the group decided that all new businesses that support their growth and expansion would come from the four core businesses that were made up of automotive assembly and distribution, automotive spare parts and lubricants manufacturing, industrial equipment franchisee, and oil and gas drilling. Since then, all new business venture decisions were made based on the synergistic relationship within these core businesses. By then, the automotive business contributed about 75% to the overall company revenues. The remaining 25% were shared amongst the other three core businesses. For the near future, at the end of 2015, the company planned to increase its non-automotive businesses to 50% of the group’s entire revenue, and the remaining 50% encompassed of revenue of the automotive business. This means that the group had to further develop its non-automotive sector from its current 25% to the targeted 50%. By late March 2012, Datuk Syed Hisham Syed Wazir, the Group’s CEO and his management team knew that they need to act fast, to strategize to realize its 50:50 plans, by the year 2015. They knew that the planned strategies were critical to ensure the company’s progression into its next century. REFERENCES Abdullah, Rao. “Oil & Gas Industry – Opportunities and Challenges Ahead”. 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Print.  EXHIBIT 1: UMW GROUP CORPORATE STRUCTURE, END OF 2011EXHIBIT 2: MOTOR VEHICLE SALES IN MALAYSIA, 1999-2011 Sources: Malaysia’s Automotive Industry (MIDA, 2010) and The Malaysian Automotive Industry (Market Watch, 2012)  EXHIBIT 3: VALUE CHAINS OF CRUDE OIL AND NATURAL GAS CRUDE OIL VALUE CHAIN NATURAL GAS VALUE CHAIN Source: Oil and Gas Value Chain, Petro Stategies Inc. 2000  PAGE \* MERGEFORMAT 3