Malaysia's Palm Oil Industry And National Competitiveness

Choose an Asian country/market. Analyze this country's economy and business environment to assess the competitiveness. Explain, how competitive are the companies from a given market? Is it worthwhile investing in this market? Under what condition and which sectors are attractive? If not, why? 

Each student will analyze a country/market in Asia. Depending on the number of students in the course, in most cases, two students (or more) will report on the same country. Your report should reflect our discussion of national competitiveness, as well as, entrepreneurship, women in the workforce, trade agreements and transparency. Where appropriate, include information on business practices and customs unique to that market. 

A substantial amount of data is available (online, TU portal, TUJ library). Your task is to filter, curate and share your analysis with your classmates. As discussed in class, feel free to mix and match elements from frameworks (below) which assess national competitiveness. 

Definition of National Competitiveness

National competitiveness can be defined as a method that examines the capabilities which the economy of a nation has to grow. The examination and measurement are conducted with the help of set factors, institutions, and policies that are utilized to determine the level of productivity in a nation. The national competitiveness is a tool that is very crucial for uplifting the standard of living in a nation. Malaysia is considered to be a very competitive nation and even after facing massive challenges in the year 2016, the country was considered in the top 25 most competitive nation’s list for 2017. Malaysia’s national competitiveness is due to a stable economy which successfully over the uncertain challenges, skilled workers, stable political conditions, a strong infrastructure, and an excellent legal system. The one industry that has contributed to the Malaysian economy largely, especially in the last forty years is Malaysia’s Palm Oil industry. Malaysia is the second largest producer of palm oil after Indonesia and every year the country produces around 90 million tons of palm oil in different varieties. The palm oil industry has such a huge impact on the Malaysian economy that more than 16% of land in Malaysia is covered with palm trees that is around 57,400 km².

The Malaysian economy is considered as the third largest economy in the Southeast Asia. The economy of Malaysia is a knowledge based industry along with the adaptation of technology that is cutting edge due to manufacturing and also the digital economy. The agricultural sector in Malaysia has shifted their focus from the food cropping of coconut and paddy to industrial crops like rubber and palm oil and this happened years back when the country realized the benefits of palm oil (A 431-439). Though Indonesia is the largest producer of palm oil in the world but Malaysia is the largest exporter in the world of palm oil. The population of Malaysia is diverse with a mix of Malays, Chinese, Indian and many other indigenous cultures. The GDP per capita of the country for the year 2018 is estimated to be $30,858. The palm oil industry in Malaysia contributes to the nation’s economy in an overall way that means the industry contributes both in the national income and employment. The contribution of the palm oil industry in the GDP of the nation is around 6-7%, but according to the new strategies and techniques this contribution will be made twice by 2020 (Applanaidu, Md. Ali and Haji Alias 29-40). The Malaysian palm oil industry is also responsible for providing employment to a large number of people both highly skilled and amateur. The palm oil industry provides employment to approximately 600.000 people and even more. With the help of research and innovation, there are some recent advancements that have been made in the development of harnessing palm oil biomass, which will further increase the employment rate in the palm oil industry, thus helping Malaysia in an overall manner. All the administration of the palm oil industry is conducted by the department of the Malaysian Palm Oil Council. The other department that helps in the development of any sector in Malaysia is the National Key Economic Activities (NKEA). This is a driving force for development and increasing the contribution in the economic income as it encourages the different development aspects and possibilities that lie in the palm oil industry. The Burse Malaysia has some of the largest plantation companies of palm oil that includes Sime Darby, IOI Corporation, Kuala Lumpur Kepong, Genting Plantations Felda Global Ventures Holdings, and United Plantations. These are the major producers of palm oil, but there are a number of small businesses who also contribute to the palm oil industry and ultimately to the national income of Malaysia (Aziz, Hashim and Ibrahim 35-49).

Malaysia's Competitiveness Factors

Though the top companies of palm oil in Malaysia contribute largely to the national income, but these companies also have a massive competition amongst them, this can be determined by examining the amount of production that is conducted by each company.

This organization is the largest conglomerate in Malaysia and a giant company under the palm oil industry. The organization Sime Darby Berhad estimated worth is 65 million in Malaysian ringgit. This also includes the contribution from many other industries in which it works. The organization is the largest palm oil company in terms of the plantation size, as it operates in Malaysia, Liberia, Indonesia, and in the Papua New Guinea & Solomon Islands and having the ownership of around 1.0 million hectares of land (Fauzi, Rashid and Omar 81-84). The organization work is not just limited to plantation,, but it also excels in the fields of producing oils and fats, biodiesels, oleochemicals, and many other products. This organization is the 800-pound gorilla in Malaysia. The company generated huge revenue in the year 2016 amounting to be RM43.96 billion and the company’s net profit was around RM2.4 billion. The organization is presently trading at 21.0 times earnings, providing a dividend of 2.8% to yield. The market capitalization of the organization is around RM62.7 billion.  

The organization IOI Corporation is another conglomerate but different from the Sime Darby the organization generates its maximum percentage of revenue from its palm oil business. The total amount of land under which the organization conducts plantation is 218,000 hectares that are combining the entire land in Malaysia and Indonesia. The company, though share a huge percentage of share in a plantation company in Singapore (Izawati, Masani, Parveez and Ismanizan 813-820). The company’s share in this another organization is around 31.4%. The company is also involved in different activities apart from the plantation that includes the production of fats, oils, and oleochemicals. The revenue that the organization generates from their palm oil business in the year 2016 is around RM11.7 billion and the net profit was around RM630 million. The organization is presently trading at 45.0 times earnings and provides a 2.0% of dividend yield. The market capitalization of the organization is around RM29.1 billion (Kho and Jepsen 249-266).

This is another conglomerate organization that functions both in the property business and palm oil industry. The total amount of land under this organization is about 270,000 hectares that include land in Malaysia, Liberia, and Indonesia (Lim and Biswas 45-67). The organization also is involved in the production of various products amongst which oleochemicals is produced hugely by the organization. But the plantation of the palm oil trees is their main business with the major part of the plantation is done in Malaysia. The organization earned a revenue of RM16.5 million in the year 2016. The organization is presently is trading at 20.6 times earnings and offers a dividend yield of around 2.0%. The organization market capitalization is estimated to be RM25.8 billion (Loh 285-298).

Palm Oil Industry in Malaysia

This organization has a huge reputation for their gaming business, but they also invest and are one of the biggest players in the field of palm oil tree plantation in Malaysia. The total amount of land under this organization is around 227,000 hectares combining the entire land in Malaysia and Indonesia. The organization, apart from being involved in the field of the plantation, the organization is also involved in the downstream and upstream business of palm oil (M B 485-495). This organization utilizes the use of biotechnology that’s main focus is on research for development in the field of palm oil. The organization earned a revenue of RM1.5 billion in the year 2016 and the net profit gained by the organization is around RM367.5 million. The organization is trading at 23.3 times earnings and offers a dividend yield of around 0.9% (Hasan and Reed 1).

The Felda Global ventures have the reputation of being the third largest organization in the palm oil industry and this organization is also linked with the government. The organization has a land area of around 450,000 hectares that includes land in Malaysia and Indonesia. In the current scenario that the organization is facing are very bad, as the company is under a scandal due to its few dealings that it had with the different organization (Nambiappan 13-25). The organization is witnessing a huge change in its management and is trying to build a new brand image above its competitors. Even after such huge struggles, the organization earned a revenue of RM17.3 billion and this is the biggest revenue generator of 2016 and with the net profit of RM29.6 million. The organization is having the current trading at 206.0 times earnings. The market capitalization of this organization is around RM5.8 billion.

This organization is opposite of Felda Global, as it is the smallest organization of palm oil and have a total area of 51,000 hectares including all of it in Malaysia and Indonesia. The organization’s activities are only limited to the field of the plantation. The organization in the year 2016 earned a revenue of RM1.23 billion and the net profit of the organization was around RM330 million, which is similar to the organization Genting Plantation. This organization, though being the smallest has been most consistent with its profit. In the last decade, the organization has attained a return on equity that ranges from 12% to 21%, and these figures are highly respectable in this field. The organization has a current trading at 16.3 times and with the dividend yield of 1.50% (Rozali, Yarmo, Idris, Kushairi and Ramli 45-52).

Malaysia's Economy and Knowledge-Based Industry

The last five years have been terrible for the palm oil industry, but even then the six organizations have should a growth. But the growth rate amongst each organization mentioned above is different. The organization Felda and KLK have the most aggressive competition between them and this is represented through the revenues earned by both these organization, with the growth rate of both of these companies being to be 8.97% and 7.6% respectively in the last half decade (S, S and A 66-75).

Some other graphs that will display the variation between the six organizations-

According to the above information and the huge variations in the growth rate of the six organizations, this can be noted that the palm oil industry business has a great potential in Malaysia and even if the organization restricts its activities to the field of plantation only, like practiced by the organization United Plantation (S, S and A 66-75). This is also important to know that the investment made in this industry is worthwhile due to the beneficial effects of the palm oil that are currently emerging even more with the changing times. The only point of the problem is the current challenges that the palm oil industry is facing and also the Malaysian economy due to the uncertain decrease in the economy. There are though, various other factors too that bring a lot of hurdles in the development, research and the smooth functioning that arises in the business of palm oil manufacturing, which has affected the last five year performance of the industry and has further reduced the nation’s competitiveness in the international market (Silitonga, Bahagia, Simatupang and Siswanto 34-56). The palm oil industry is very promising with providing profits and a steady growth that all business looks for. This industry also provides quick opportunities to spread into the nearby areas like Indonesia, Liberia and many other places providing with the opportunities to function in different markets and bigger markets, providing more opportunities to maximize the profits of the organizations. The palm oil tree business also provides with the facilities to invest in many different other businesses that emerge from the palm oil business only like the production of fats, oleochemicals and many more (Szulczyk 55-78).

Major Producers of Palm Oil in Malaysia

Conclusion:

After analyzing the competitiveness of the palm oil industry of Malaysia and the huge contribution which it has on the nation’s economy, this can be concluded that the palm oil industry also displays a huge contribution in the national competitiveness. Though the organization also contributed to the nation’s national income and the competitiveness between the major organizations of the palm oil industry is very fierce and aggressive that showcases an attitude of improvement and development, which is the main focus of Malaysia. The national competitiveness can only be achieved if there are driving forces that push the industry towards more growth and after the complete examination, this can be certified that in the palm oil industry there are many driving forces.

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