Mid-East investors are no strangers to Malaysia and its wealth of
opportunities but it looks like they will soon have to share the
spotlight as the next wave of investments come from India. Truth is,
the country has ample room and allure for all.
INDIA has long been a sweet spot for Malaysian companies looking for
investment opportunities abroad. Let's face it – India's sheer size
makes it hard to ignore.
Business opportunities in that country served as beacons of hope,
particularly for our local construction companies, which not too long
ago were forced out of their comfort zones to look for new businesses
abroad in order to survive.
More recently, two of our local telecommunication companies, enthralled
by the allure of India's vast potential given its underserved
population, ventured into that market by acquiring stakes in two mobile
service providers as a means to counter slowing growth rates at home.
Indeed, statistics point to the fact that the major
areas of Malaysia’s investments in India have been in the construction
sector, software production, electrical and electronics as well as
rubber products.
The country’s vast economic potential, its growth-friendly policies and
reform measures, large population and rising affluence levels have no
doubt fuelled the growing exuberance among Malaysian companies to set
up shop there.
That Malaysia is India's biggest trading partner in South-East Asia is
testimony of the good bilateral ties that exist between the two
countries. Statistics indicate that the two-way trade is growing. It is
estimated that the figure will jump to US$10bil in 2007, a far cry from
the US$6.58bil value recorded just a year ago.
But somehow, in terms of foreign direct investments between Malaysia
and India, the funds seem to have flowed mostly one way – our companies
investing in India.
Truth is, Malaysia has never aggressively courted
Indian investors. Even now, all the attention appears to be on Middle
Eastern investors and the heaps of petrodollars they can pour into this
country. But there's a difference between these two groups of
investors.
“The Mid-East investors are bringing in the mullah but in terms of expertise and knowledge, they need us more.
“As for investors from India, they are coming in with the cash and the expertise,” says an observer.
Given the vast amounts of liquidity that have been building up in India
in recent years, it is heartening that Malaysia is steadily gaining
prominence among Indian investors now looking for alternative
investment destinations. And that Malaysian investors have long built
their ground in India offers certain comfort levels that may add to the
lure.
The past week alone has seen our local business
publications highlight deals involving some high-calibre investors like
Reliance Industries Ltd, Satyam Computer Services Ltd and more recently
Manipal Education and Medical Group International of India.
“For Indian companies, Malaysia is still one of the cheaper markets to
penetrate compared with Singapore and Hong Kong. We are going to see a
lot more deals being struck in the coming months, particularly in
sectors like property development and software,” says Baljeet Kaur
Grewal, chief economist and head of global research at Kuwait Finance
House (KFH).
India is hungry
That India is in a shopping binge is crystal clear. In fact, the wave
of acquisitions has earned it second place on the global M&A list
this year in the Asia-Pacific region, with a total outbound deal value
of US$13.5bil.
Indian giants with deep pockets such as the Tata
Group, Reliance Industries, Essel Propack, Videocon India, Nicholas
Piramal India, Shasun Chemicals and Drugs and United Breweries have
steadily made their bold moves into global markets, namely US and
Britain.
Much of the hunger has been attributed to a vast supply of funds,
globally competitive business practices and a favourable regulatory
environment, besides growth prospects.
Sick global entities are also on the radar screen as there are gains to be reaped post turnaround.
Of course, it's hard to forget the bold manoeuvres of Indian tycoon
Lakshmi Mittal and his controversial US$22bil hostile bid for Europe's
largest steel maker Arcelor; a move which earned him the tag “the
barbarian at Europe's gates”, having drawn hostile resistance from
France, to Spain to Luxembourg.
The steel baron is now the world's third richest man
and chief executive officer of the world's largest steel company
Arcelor Mittal. The geographic scope of Arcelor Mittal, with its
320,000 employees in 60 countries, is impressive to say the least.
There are lots more where Mittal comes from. Infosys Technologies Ltd,
an IT company that started out in 1981 with seven people and all of
US$250, is an influential name in the worldwide technology industry.
The company now has a market capitalisation of US$20bil, operates nine
development centres in India and has over 30 offices worldwide.
Talk about Indian conglomerates and the Tata Group immediately comes to
mind. One of India's largest conglomerates, the group reported revenues
of about US$22bil in 2005/06. This is the equivalent of about 2.8% of
India's gross domestic product. The group's market capitalisation stood
at US$56.3bil as at Aug 30, 2007.
Location counts
The deals in Malaysia we have seen so far aren't exactly small potatoes.
In Satyam's case, the group is clearly building on the success of its
Global Solutions Centre (GSC) in Cyberjaya to now turn Malaysia into
its largest software hub outside India.
The IT services group first ventured into Malaysia in 2003 when it launched its GSC.
The facility serves as a major technological development and software
support centre for Satyam's global operations. It involved an initial
investment cost of less than US$2mil.
The hi-tech centre is equipped with state-of-the-art infrastructure. It
also has round-the-clock access to Satyam's global knowledge
repository, which can be leveraged to deliver solutions to customers
across the globe.
Equally important is that the centre's inception has paved the way for
local graduates to gain training in India and to be absorbed as
full-time employees.
Since 2005, Satyam's Malaysian operation has been recruiting batches of
fresh graduates and sending them to the group's Learning Centre in
Hyderabad, India, to undergo training stints.
The GSC, which now has about 300 workers, will also spearhead the development
of some mission critical systems and directly support the software
needs of the Asia-Pacific operations of some of Satyam's Fortune 500
clients.
Even then, this is just the first phase of a grander plan that is afoot for Satyam's operations here.
The plan is for Malaysia to house Satyam's Global Delivery Campus,
which will eventually have a staff strength of 5,000 in a few years to
come, its founder and chairman B. Ramalinga Raju was quoted as saying.
Reliance Industries, on the other hand, is here as part of a bigger
plan to increase its global market share of polyester fibre. Its
acquisition of Hualon Corp (M) Sdn Bhd's assets for an undisclosed
price early last week will pave the way for the chemicals group to
command more than 7% of the global market share in polyester fibre and
yarn and strengthen its position in the textile value chain.
The Manipal group has unveiled plans to set up its first hospital in
Penang and a stem cell research and development centre in Bukit Jalil
Technology Park next month.
The healthcare management group will invest an initial US$5mil to launch the first phase of the stem cell R&D centre.
Malaysia also hosts a number of other major Indian companies like Ranbaxy, TCL Industries, Godrej and SM Chemicals.
Most of these investments are concentrated in chemicals and chemical
products, petroleum products, food, beverages and tobacco and
non-metallic mineral products.
Mind-boggling opportunities
If observers agree on one thing, it is that there is a lot more room for Malaysia to sell its story to Indian investors.
Says KFH's Baljeet, “Some sectors in India are growing in amazing ways.
So, for Indian companies to look outside of India for growth
opportunities would mean that they face certain constraints in their
home market, whether to do with increasing costs, saturation or the
absence of quality and efficient infrastructure.
|
Chart 1 |
“For instance, real estate prices in Bangalore have
gone through the roof. Factors like these are compelling companies like
Satyam to look to Malaysia to set up their development centres and
support their expansion plans,” she explains.
Indeed, the growth figures coming out of India are mind-boggling.
India has emerged as the second fastest growing economy in the world,
after China, with a GDP growth rate of 9.4% between April 2006 and
March 2007.
This has helped propel the country to claim the status of a global economic powerhouse in the region.
KFH estimates that India’s real estate sector will reach US$90bil in value by 2015 from just under US$15bil in 2007.
By 2010, India’s telecommunications market is expected to reach
US$38bil in value and contribute to more than 5% of the country’s GDP.
At present, telecoms is one of the key sectors contributing to India’s
exuberant growth.
The healthcare sector, already one of the largest service sectors in
the country, is poised to grow further to US$61bil or 5.5% of GDP in
2009 and US$79bil or 8.3% of GDP in 2012.
But all that growth has come with a price, which some Indian companies are finding a tad hard to swallow.
As KFH points out, India's persistently high economic growth over the
last three years has resulted in a dramatic rise in inflation and
widening financial imbalances.
|
Chart 2 |
Asset prices are high, equities even higher (price to
earnings exceeding 20 times) and the prices of real estate have
sky-rocketed by more than two-fold in many big cities.
This would help explain why Indian outsourcing companies like Infosys
Technologies and Wipro have been setting up operations in other
countries, particularly China and Eastern Europe, in recent years.
The cost of hiring engineers and staff attrition rates in India are
also rising given the growing number of Indian companies that offer
services operations there. In Malaysia, the outsourcing industry is
still in its infancy.
This means that companies like Satyam will have access to a large pool of local talent.
There is also the infrastructure aspect to consider.
Satyam's Asia Pacific and Middle East director and senior vice
president Virender Aggarwal has been quoted as saying that Malaysia
offers a lot of first world facilities at costs that are closer to
third world ones.
“This makes capital costs far lower because we don’t have to invest in
captive power generation for example,” he said, referring to India’s
persistent power problems.
Other factors like rising wages in low-cost countries like India and China have also made Malaysia look more attractive.
“It is true that the hiring costs in Malaysia are still about 50%-60%
higher than in India and China, but for that price you get ready access
to a large pool of good talent, world-class infrastructure and strong
government support.
This makes the overall cost of doing business in Malaysia quite competitive,” says one observer.
FOREIGN DIRECT INVESTMENT (see Chart 1 & Chart 2)
In 2006, FDI inflows to India stood at US$11.12 bil, an increase of
255% from that in 2005. They were dominated by the services sector at
40.5%, followed by electrical equipment 20.9%, telecommunications 10%,
transportation 4.1% and power, fuels and oil & gas 2.6%. As at
1Q07, FDI inflows to India amounted to US$3.22 bil, an increase of 174%
y-o-y over 1Q06’s US$1.85 bil.
For full year 2007, we project India’s FDI inflows to trend higher to
US$12.89 bil, of which 10%-12% is expected to go into the healthcare
segment.
BIO TECH & IT
* India's share of global biotech market stands at approx 1.1%
* In 2006, the sector generated a revenue of some US$1.5bil. There are some 280 companies involved in the sector.
INDIA owns the top spot in the world's IT and ITES (IT enables services) stage
* 1.3 mil and 3 mil people are directly and indirectly employed in overall IT industry in India
* Business Process Outsourcing (BPO) is estimated to contribute 5.4% to India's GDP in 2007 (2006:4.8%)
* Export of software services and IT-BPO in 2007 estimated at US$31bil
* Indian companies' world wide share of global outsourcing market rose from 0.5% to 7% within the last 4 years
* Bangalore, the hot bed for India's IT industry, has over 500 major
international IT companies (40% of the whole of India's IT industry is
located here)
* In future, India is expected to have a 70% share of the estimated US$17bil global KPO (Knowledge Process Outsourcing) market
Source : various sources on the net including official Indian Government websites
|
Malaysia gains
Seeking more Indian investment inflow makes good sense from a Malaysian perspective.
The Malaysian Government has given priority to the information and
communications technology (ICT) sector with the Multimedia Super
Corridor or MSC.
“It makes sense for Malaysia to collaborate with Indian companies,
which are light years ahead of us in some sectors like ICT, healthcare
and life sciences,” says an observer.
Unlike Middle East investors who are happy to just pump in the cash,
Indian investors tend to place a lot more emphasis on the technology
transfer and human capital aspects of their investments.
Satyam's Malaysian operation is a case in point. The GSC initiative has
helped Satyam staff its centre in Cyberjaya while transforming fresh
graduates into industry-ready software engineers.
This has bolstered the country's ICT base along the way.
Currently, the GSC employs about 300 professionals, of which two-thirds
are Malaysian. They will have access to Satyam's matured processes.
Like India, Malaysia has zeroed in on the services sector as a prime
area for growth and development. The Iskandar Development Region's
focus on the services sector is proof of this.
The expanding Indian economy offers opportunities for local and Indian
companies to explore collaborative initiatives in an array of services.
“India and Malaysia have strong complementarities in services, which
can be further explored through collaboration in all sectors and modes.
“Some of the areas of significant interests include tourism, financial
services, transport, construction services, business process
outsourcing, after-sales services, education and training services,
health and diagnostics services and consultancy services,” the observer
comments.
Strategic partnerships like the one struck with the Manipal group, for
example, will accelerate Malaysia's pursuit to become a regional
biotechnology hub.
