Hope vs. Reality

When can we turn hope into reality?
So near, yet so far.
As long as we work towards our hope,
Ubah will become reality one day.
New era for a better Malaysia,
Hidup Rakyat, Selamatkan lah Malaysia!
U-B-A-H !!

SWOT analysis to save palm oil industry

华商与经济转型系列83：SWOT救活棕油业

夏伟文 & 陈薛卉

Palm oil has an interesting place in Malaysian economy history. Originally grew wild in West Africa, it was introduced by British to Malaysia in early as an ornament plant. Commercial planting started by Frenchman Henri Fouconnier in 1917 in Tennamaran Estate, located at Batang Berjuntai, Selangor. At that time, tin mining and rubber plantation are the main engines of growth.

In 1953, Paley Report claimed that Malaysia’s reserves of tin will be exhausted round year 1980s. In 1960s, rubber plantation fading fast mainly because of losing competition to synthetic rubber and rising cost of production. Fear of losing these two growth engine, government introduced economic diversification program. Besides import-substitution industrialization, commercial palm oil plantation has been promoted not only as new engine of growth but best solution to eradicate poverty in rural.

Since then, Malaysia has been the No. 1 producer and exporter of palm oil in the world. However, Malaysia is currently only second largest producer behind Indonesia but still the largest palm oil exporter in the world. Its contribution to national economy has dropped to 4^th largest, amounted for about 8% of national Gross National Income (GNI) per capita.

Nonetheless, palm oil plantation remains important and being selected as one of the twelve “National Key Economic Areas” (NKEA) in Economic Transformation Program (ETP).

SWOT Analysis & ETP Strategies

SWOT or “Strength, Weaknesses, Opportunity, Threat” analysis can give systematic assessment on palm oil plantation in Malaysia as well as suitability of ETP strategies on this area. In Sun Tzu’s Art of War, we should tap benefit from favorable opportunity and avoid threat to enhance our strength and minimize our weakness.

Strength

ETP has identified three strengths for Malaysian’s palm oil. Firstly, Malaysia has amongst the highest average palm oil yields per hectare per year at 21 tonnes. Our closest competitor, Indonesia has 19 tonnes per hectare. Entry Point Project (EPP 2) aims to further improve the average yearly fresh fruit bunch yield to 26.2 tonnes per hectare by 2020.

However, Statistical Department and Malaysian Palm Oil Board (MPOB) give different yields scenario as in Figure 1. Between 1974 and 2012, yields per hectare ranged from 15.90 tonnes (lowest, recorded in 1983) to 20.26 tonnes (highest, recorded in 1993). Average value for that period is 18.47 tonnes per hectare. Thus, if based on this average figure, the yield rate needs continuous annual growth of 4.467% starting from 2013 until 2020 to achieve its target.

Figure 1: Malaysia’s Palm Oils Yields per Hectare

Source: Statistical Department and Malaysian Palm Oil Board (MPOB)

Smallholders’ planter who collectively accounted to 63% of “backlog” palm oil trees (aged above 25 years) are main target group for improvement. Palm oil tree of that age is believed to give very low yield per hectare. Among the program planned to enhance yield are increasing expertise officers (called TUNAS) to give service to smallholders clustering all independent smallholders, mandating one of industry best practices for all and annual ranking of average yield for smallholders. Of course, a longer term solution will be replanting the palm oil trees that are older than 25 years as targeted in EPP 1.

Second strength is excellent plant breeding activities. ETP claimed that Malaysia has 20 world class seeds producers. They have annual production capability of 87 million seeds and leading in related Research and Development (R&D) activities. These most likely useful in producing higher yield seeds/plants, increasing palm oil extraction rate (EPP4) and developing downstream palm oil industry.

Thirdly, regulatory environment in Malaysia is believed to be conductive. The Malaysian Palm Oil Board Act 1998 replaced two old Acts on palm oil industry while dissolved three related regulatory bodies to consolidate into Malaysian Palm Oil Board (MPOB). The Acts is comprehensive in vesting power to enable conductive function of MPOB.

Weaknesses

The biggest weaknesses are perhaps (i) limited land bank and scope of mechanism, and (ii) reliance on upstream. ETP estimated that the country may able to increase land bank for palm oil up to 28 percent only or 1.3 million of additional hectare. These additional lands most likely will be on hilly or peat terrains while 75% (or 1 million of hectare) will be located in Sarawak. Making things worse, palm oil plantation heavily relied on foreign workers who are cheaper than but unfortunately not as cheap as in Indonesia, the current world largest palm oil producer. Mechanism may increase overall productivity, thus make up for the disadvantage in relative higher cost of production.

To increase workers’ productivity, EPP 3 proposed for changing from (i) manual harvesting to motorized harvesting known as “Cantas”, (ii) everyday traditional sharpening to “diamond” sharpening that can lasted about 5 days, and (iii) manual collection to buffalo assisted collection, which is 12 times less costly per unit than mini tractor grabber .

On the second weaknesses, our oil palm industry heavily depends on upstream segment, which involve mostly harvesting the palm fruits, production of crude palm oil and simple processed form like crude palm olein and palm fatty acid distilled. Upstream outputs usually have relatively lower value added as compare to downstream segment such as biodiesel and oleochemicals. Upstream segment contributed 87% of industry GNI and 81.5% of total export of variety types of palm oil output.

Thus, EPP 6 focused on development of oleo derivatives, which is a further process from basic oleochemical. The later is currently oversupplied in global market (expected to remain oversupply in near future) and has average lower profit margin at 7%. The higher-value oleo derivatives has higher average profit margin at 20%. Other strategies listed included commercializing second generation biofuels (EPP 7) and growing food-based and health-based downstream segment (EPP 8).

Opportunity

Raising global population and income may have caused global demand for oil and fats (includes palm oil) rising at an average rate of about 7% over the past ten years. Indeed, demand for palm oil growing relatively faster at about 10%. According to Bloomberg report on 7^th May 2013, palm oil export globally is predicted to increase to a record high of up to two thirds of combined exports of seven major oils and fats. This is due to insufficient supplies of other oils and fats, price discount of palm oil as well as strong demand from China and India. Thus, this situation provides good opportunity for palm oil industry. Table 2 shows selected data of palm oil production, import, export and consumption extracted from United States Department of Agriculture (USDA).

Another opportunity for oil palm as compared to other types of oils is that the former has much higher yield per hectare versus its substitutes. Oil palm produces 4 to 5 tonnes of oil per hectare which is 8 to 10 times higher than other oil seeds such as rapeseed and soya bean.

Threat

Threats to palm oil industry have always been international anti-palm oil campaign and palm oil tree’s pest and diseases. Palm oils are constantly being attacked (believed to be orchestrated by American soya bean lobby group) on health and carbon footprint issues. Unjust tariff and smear campaign do harm palm oil competitiveness in global oils and fats markets, especially at non-Asian countries.

In pests and diseases aspects, ETP itself has acknowledged that long-term sustainable, cost-efficient and effective solution is still not available. The only temporary solutions currently are continuing research, early detection and constant control.

In the aspect of threat, no clear plan is found in ETP to reduce the mentioned threats. The only partially related measure is commercialization second generation bio-fuels (EPP 7) which is seem as environmental friendly and could reduce carbon footprint.

Table 2: Selected Palm Oil Production, Import, Export and Consumption (Thousand metric tonnes)

Year	2009/10	2010/11	2011/12	2012/13	2012/13 (% of total)
Production (Top 3)
Indonesia	22,000	23,600	26,200	28,500	51.5
Malaysia	17,763	18,211	18,202	19,000	34.4
Thailand	1,287	1,832	1,892	2,000	3.6
Total	45,909	48,680	51,884	55,293	100.0
Imports (Top 3)
India	6,603	6,661	7,473	8,500	20.7
China	5,760	5,711	5,841	6,500	15.8
EU-27	5,438	4,932	5,618	5,800	14.1
Total	35,213	36,293	38,736	41,045	100.0
Exports (Top 3)
Indonesia	16,573	16,423	18,452	20,100	48.3
Malaysia	15,530	16,596	16,600	17,200	41.3
Papua New Guinea	520	577	587	620	1.5
Total	35,512	36,862	39,034	41,603	100.0
Domestic Consumption (Top 5)
India	6,440	7,080	7,425	8,425	15.7
Indonesia	5,494	6,414	7,129	7,815	14.6
China	5,930	5,797	5,841	6,300	11.8
EU-27	5,210	4,813	5,530	5,575	10.4
Malaysia	3,103	3,220	3,058	3,193	6.0
Total	45,040	47,736	50,620	53,608	100.0

Conclusion

In conclusion, history has proved that palm oil can be an important source of growth for Malaysia. However, industrialization has eroded its contribution but increasing uptrend of palm oil price and global demand may help reviving palm oil industry in Malaysia. Yet, right strategies are critically needed to maximize the strength, minimize the weaknesses, take advantage of the opportunity and reduce the threat.

[Chinese version published at Nanyang Press, 28th January 2013. Available online at http://www.nanyang.com/node/550860. This English version may be slightly different from the Chinese/ newspaper version]

Greed and moral need to be balanced

华商与经济转型系列78：贪婪与道德须平衡

夏伟文 & 陈薛卉

Economic plans and policies can be written in splendid wordings with great ambition to be achieved. However, how many of them explicitly highlighted certain moral standards and responsibilities needed to be achieved in their plan? At minimum level, moral element is only embedded in corporate social responsibility (CSR) and assumed to be taught in certain subjects in education. These are not enough. Therefore, moral responsibility is an important missing piece in economic planning which can enhance the economy as well as welfare of its people.

Missing moral element in economic plan may not affect contemporary growth but does negatively impact on holistic and sustainable development. On one hand, economic plan that too bias to capitalist may results in income inequality where capitalists may immorally parasite on workers’ and society’s welfare for corporate or shareholders’ profit. This creates a greedy economy. On the other hand, socialist style policy that bias to worker group commonly causes inefficiency where none has incentive or moral responsibility to work hard. This creates a sluggish economy. The ideal should be a balance between reward for constructive greed and restriction by moral responsibility.

What will be the effect if we never explicitly set moral responsibility in economic planning? Does our economic plans like Economic Transformation Plan (ETP) has moral responsibility as target? How can moral element enhance ETP and our economy?

Greed is good?

“Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind.” Those words are from a famous fictional character named Gordon Gekko, the main character and antagonist of the 1987 film Wall Street and then, the 2010 film Wall Street: Money Never Sleeps, both directed by Oliver Stone.

Here, the question will be is being greedy the right way towards healthy economy? From the economics perspectives, at least one person claim “yes, greed is good” – Adam Smith of the classic school. Through his theory of invisible hand, market can achieve efficiency when consumers and producers try to be greedy by maximizing their utility and profit respectively. Despite ‘promoting’ greed is good, Adam Smith’s idea of free market is actually originated from his Theory of Moral Sentiments that uphold moral value in society and economics. This actually supported our call for “balance between reward for constructive greed and restriction by moral responsibility”. Only matter is that it needs to be highlighted out rather than assume moral responsibility will be automatic.

Without determining certain moral responsibility, “efficiency” could be misinterpreted as monetary efficiency in which maximize profit neither equal to maximize economic sustainability nor collective welfare. This could be resulted in negative externalities to the environment, exploitation of labor and social imbalance, which threaten sustainability, social justice and welfare.

In a simple micro perspective example, let take a look at our surrounding. You may find public car park lots being occupied by car repair shops, eateries, illegal DVD selling stalls, pubs/disco and variety types of shops. One car wash bay can easily swallowed five to eight parking lots at no cost to them but to the public welfare. Together with businesses like selling pirates DVD, book photocopying, illegal betting, illegal car jokey, prostitution, drugs, money laundering and others make up so called “underground economy”. This type of economy does not pay taxes nor usually benefit the society. Due to constant missing moral element in policy and economic plan as well as lack of enforcement, underground economy is flourishing in Malaysia.

Education

In macro perspective example, commercialization of education and healthcare under two of its National Key Economic Areas (NKEAs) may result in greedy economy rather than welfare economy if no moral restriction is being attached to its Entry Point Projects (EPP).

Few education NKEAs could be better by emphasizing moral element through CSR. ETP wishes to transform education sector from small scale, highly regulated and public funding to national or regional players, self-regulated and demand-side funding. All these planned changes are dangerously directing education into a highly commercialized “commodity industry” as termed by German philosopher Theodor Adorno (originally in German language as “kulturindustrie”). Thus, the government should force private education institutions (from pre-school to university level) to provide free education to (for example) one needy student out of 20 paid students.

Acknowledging that child’s brain develops the most during the first five years of life, EPP 1 and EPP 2 have been planned to develop early child care and education. This is good. Yet, this goodness should be able to benefit all Malaysian including the poor family. Indeed, President Barack Obama has recently planned for a free national pre-school in United States to ensure every American child has fair access to education at every level.

Thus, highlighting or legally imposing the needs to do CSR (preferable in free education) in ETP could have bigger positive impact to our social and sustainable economic development than relies on voluntarily charity. 

Healthcare 

Developing health care as industry is like kill two bird with one stone – enable healthy and therefore, more productive Malaysians and as new powerful engine of economic growth. Some of the EPP are focused on globalizing and exporting of medical devices and pharmaceutical products. Examples are EPP 3, EPP 9, EPP 10 and EPP 11. Some aim to make Malaysia an international medical hub for in vitro diagnosis (IVD) (EPP 7), medical tourism (EPP 4) and medical refurbishment (EPP 12).

All those EPPs can upgrade the medical industry in Malaysia but will the fruits of success also being enjoyed fairly by the poor? ETP wishes private sector to play more active and bigger role in Malaysian economy. Hence, make them play equally more active and bigger role in protecting society welfare, especially improving the poor is important aspect in economic planning. Highlighting private sector’s moral responsibility in ETP for healthcare could enhance the economic plan itself.

It would be nice if ETP has certain target for free medical for the needy. In addition, instead of focusing on foreign workers, EPP 1 could be enhanced by targeting certain level of insurance coverage for every Malaysian including non-working persons like housewife.  EPP 5 could be enhanced by giving tax relief incentive to private hospital to give free diagnosis service. There are various private companies listed as EPP champions for respective areas. It would be better if they are given targets to give education scholarship for medical study for the qualified needy talents in Malaysia as their moral responsibility.

Conclusion

Ronald Reagan, former President of United States once said the ultimate aim of welfare is to eliminate the need of its existence. However, this can only be achieved with moral economy rather than greedy economy system. In developing countries like Malaysia, moral responsibility needs to be administrated and then gradually cultivated before assuming it to be an automatic process. 

[Chinese version published at Nanyang Press, 28th January 2013. Available online at hhttp://www.nanyang.com.my/node/541864?tid=687. This English version may be slightly different from the Chinese/ newspaper version]