Consumer spending to remain robust

The CEO Outlook 2008 continues with the views of Tan Sri Liew Kee Sin, Alain Crouy and Rajah Kumar, from the property development, cement and consumer electronics sectors respectively. Liew, who leads the country's biggest property development company by market value, looks forward to spillover effects of RM9bil that may be released from the Employees Provident Fund's monthly withdrawal scheme. Crouy at Lafarge Malayan Cement welcomes fairer prices for cement after they had remained unchanged for many years following the Asian financial crisis. Rajah Kumar, who heads Philips, expects consumer spending to continue to be healthy as consumers become more affluent and look for innovative lifestyle products.

Tan Sri Liew Kee Sin

Managing director and CEO 

SP Setia Bhd Group

Tan Sri Liew Kee Sin

What is your outlook for the property market next year?

The property sector is on a growth trajectory, having benefited significantly from sweeping changes geared towards making Malaysia the top real estate investment destination as well as stimulating domestic home ownership. The FIC easing on foreign ownership and the real property gains tax exemption have put Malaysia on the radar screen of international investors. 

Foreign interest in local properties is gaining momentum, as reflected in new price benchmarks. The retirement and holiday home market is beginning to attract more interest from tourists. Foreigners are also keen on commercial developments with many Middle East consortia purchasing properties en bloc or taking equity interest in projects. 

We believe foreigners’ appetite for local properties will continue unabated as they are betting on an under-valued market with significant upside potential. 

Moreover, the unlocking of some RM9bil worth of funds from the Employees Provident Fund is set to unleash a profound spillover effect on the industry. The higher purchasing power arising from the monthly EPF withdrawal will enable contributors to upgrade to better homes. 

Collectively, we believe the broad-based boost from these initiatives will be sustained into 2008. Underpinned by the stable economy and attractive financing packages, we believe the property sector will continue to thrive next year. 

What are some of the opportunities and challenges for industry players going forward?

Thanks to the slew of pump-priming efforts to revitalise the property sector, market demand has picked up. The Government’s efforts to enhance the public delivery system have also contributed to increased investor confidence; foreign investors are also beginning to invest in the special economic zones such as the Iskandar Development Region (IDR) and North Corridor Economic Region (NCER). 

With the spotlight shifting to the Malaysian market, the stage is set for industry players to seize the opportunities and aggressively promote their products to the world. But liberalisation of the industry brings about increased competition. Foreign buyers are accustomed to the demanding and exacting standards of developed nations so the challenge is to meet these expectations. 

Moreover, the entry of foreign developers into the local market also means that local players would be subject to greater scrutiny by consumers who are increasingly spoilt for choice. 

Demand-wise, the domestic market will continue to expand organically by virtue of the nation’s young demographics. With 60% of the population below 30 years of age, the group will form the core base of housing demand as wealth creation and family formation increases. Developers that can distinguish their value proposition by identifying untapped potential and demonstrating superb delivery capability and branding prowess will garner greater market share and stay ahead of the pack. 

Which property sector and what development types offer the best potential for your company?

SP Setia has set its sights on becoming a fully-integrated developer with a complete suite of projects spanning the entire property spectrum. 

Building on our position of strength in Malaysia, we are also expanding geographically with Vietnam being our first stop overseas. We believe this will not only diversify S P Setia’s product offerings but also continue to drive future earnings growth and value creation for stakeholders. We are confident that our latest ventures will dovetail neatly into the upswing in the high-end and commercial sub-sectors. 

Recent news reports show that a luxury condominium in the KLCC vicinity changed hands at RM2,100 psf compared with the developer’s price at RM800 psf in 2005. Industry figures revealed that in 2006, 45% of the value of office transactions was by foreigners, compared with 19.3% the year before and 1.9% in 2004. Investments in office buildings also grew 119% in 2006 over 2005 to RM2.7bil from RM1.2bil, driven primarily by real estate investment trusts (REITs) and foreign investment funds. 

The statistics point to the vast potential to be tapped in these new market segments. While pursuing these new ventures, we will also stay focused on the mass and mid-end housing market, which continues to provide a stable stream of income for the Group. 

What are the challenges and issues being faced by the industry and what is the possible impact on your company?

Like any other industry, the fortunes of the property sector are dictated by the economic climate. The rising cost of doing business caused by the spike in oil as well as raw material prices has exerted tremendous pressure, particularly on the construction and real estate related industry. On one hand, developers are finding it increasingly hard to absorb the escalating costs as this will shrink margins but on the other, passing the buck to the consumer is also not possible due to the affordability threshold. 

The perennial problem of poor quality workmanship remains an issue. This is largely due to the shortage of quality and skilled manpower as well as the high dependence on foreign labour, given that locals continue to shun the sector. 

To mitigate this, we benchmark our high-end homes using the Singapore-developed CONQUAS quality measurement standards. For mass housing, all our contractors are subjected to stringent in-house quality control criteria. Outperformers will be rewarded while those who are not up to par will be penalised. 

I think the most pressing need to ensure the country’s long-term vitality is to devise a new economic model that completely weans itself off the “subsidy mentality” and protectionist policies. 

Malaysia cannot afford to distance itself from the wave of globalisation or we will fall behind with the rise of new economic stars such as China, India and now Vietnam. 

The only way to go forward is to open up, enhance competitiveness and fully integrate Malaysia into the world’s free market. For instance, there should not be oligopolies permitted in critical industries such as cement and steel production, which have caused artificially inflated prices and created supply problems that add to the cost burden for the construction and property industry. 

Even the fuel subsidy for the public cannot be continued indefinitely. Malaysians need to be prepared to face global realities even if it means we have to go through the painful adjustment period. 

What are some of the interesting property launches that can be expected from your company?

We will be rolling out a range of products under our five product brands in 2008. To mark our foray into the luxury high-rise sector, we will be launching Setia Sky Residences. Situated on six acres in Jalan Tun Razak, Kuala Lumpur, this striking landmark comprising luxury serviced apartments will enjoy spectacular views of the KLCC Twin Towers. Another project is Duta Grandé, an ultra luxurious development in the upscale Bukit Tunku neighbourhood. 

With just 15 units of select bungalows on 6.2 acres of freehold land, Duta Grandé aims to set a new price benchmark at RM30mil per bungalow. 

Under the commercial brand, we recently launched our first mixed use project named Setia Walk in Puchong to good response. Positioned as a one-stop lifestyle destination, the RM800mil Setia Walk is a creative hybrid of retail and residential components. Other similar niche projects to be launched include Setia Nexus 1 in Klang with a gross development value (GDV) of RM200mil. 

We also have ambitions to develop sizeable retail and commercial cities in the foreseeable future. These include Setia City in Shah Alam and Setia EcoCity in Johor Baru, which will be undertaken in phases with construction expected to start as early as next year. 

We will also be launching a number of projects under our award-wining “Eco” brand of green-themed developments. These include the RM2bil Setia Eco Gardens in Johor Baru and the RM1.2bil Setia Eco Villas in Cyberjaya. This popular concept will also be exported to Vietnam via our first project in Vietnam, EcoLakes near Ho Chi Minh City.

Alain Crouy

President and CEO 

Lafarge Malayan Cement Bhd

What is the crux of the problem which resulted in builders and contractors crying foul over the high prices in major building materials like steel bars and cement?

Builders and contractors are our customers and if there is a wrong perception over the prices of our products, we are pleased to provide our perspective on the issues. 

The perception of the current cement price being high is a result of cement having been sold, for many years after the Asian financial crisis, at unsustainably low levels (including in 2005 where builders and contractors enjoyed steep discount in prices for a six-month period), which did not provide the industry with reasonable returns. 

The price of cement remained unchanged for 11 years between 1995 and December 2006. The situation became untenable a few years ago when prices of fuel, electricity and materials as well as transport cost started to surge recently, resulting in a 40% increase in total costs. 

Since 1995, the only revision of the cement price was the 9% increase in December 2006. Even after such revision, the cement price in Peninsular Malaysia is still one of the lowest in South-East Asia and still significantly lagging behind the 40% cost increase, with an insufficient return on investment for the cement industry. 

The Automatic Pricing Mechanism (APM) proposed by the Government in April is a measure that would bring more responsiveness to industry’s cost movements. With a more orderly mechanism for price adjustments, builders and contractors will be able to take into account such price movements in their budgets, planning and project bids.

Is it true that developers are at the mercy of building material manufacturers, which can command higher prices for their products despite the ceiling prices for cement and steel?

Alain Crouy

Cement is sold in accordance to the ceiling price set by the Government, including a commission for distributors for the cement which is not sold directly to end users. 

Furthermore, cement constitutes only a small portion of construction costs of residential or commercial properties, although it constitutes a slightly higher proportion in infrastructure works. 

For example, in a double-storey house, the cost of cement is approximately 5% to 7% of total construction costs. A 10% revision in the ceiling price should then translate into a 0.5% to 0.7% increase in the total cost of construction.

Would it be fair to ask the Government to open the local cement and steel market, and leave local prices to the free market?

In a free market economy where there is no price control, prices of goods will be determined by market forces. 

As Malaysia is a trading nation, we believe that for market efficiency, cement could be in the future be considered for exclusion from the price control list. 

At the current price of cement on the domestic and on the international markets, however, and taking into account the cost of freight necessary to bring in the cement, importing cement into Malaysia would not be economically viable.

Also, we believe that innovation and quality can be important differentiating factors vs potential imports. In the last two years, Lafarge has introduced two new products - Avancrete for bag users and Mascrete Pro for bulk users to better meet their needs. 

At the end, the proposed implementation of the APM will allow government controlled price to more responsively mirror free market price movements and would be a good interim step towards letting local prices to follow free market flows as mentioned in the question.

What is the 2008 outlook for raw material/feedstock prices for building material manufacturers? Please compare the past two to three years performance and the supporting drivers for further growth in demand.

The drivers of cement demand growth will be the implementation of the Ninth Malaysia Plan (9MP) projects, stronger private investments and consumption, hopefully leading to more construction of residential, commercial and industrial properties. No significant increase in cement activities has been seen in the last two years and, in fact, cement demand has stayed flat since 2004. We hope to see a growth of 4% to 5% in the domestic cement market for the next two to three years.

With the recent surge in sea freight rates and commodity prices such as crude oil and coal, production costs are expected to increase considerably in 2008 compared with 2007. If the high crude oil prices lead to the Government’s withdrawal or reduction in price subsidy for diesel and gas, transport costs and electricity prices are likely to increase. It is, therefore, important that the ceiling price of cement be reviewed again with the implementation of the APM. 

What are the immediate and long term measures that should be considered by the Government/associations to help remedy the current distortion in building material prices, and artificial shortage in supply (as claimed by developers) as well as better coordination in the supply chain between manufacturers and builders?

It is true that, during the third quarter of this year, there was a short supply of cement in a limited number of places in the country. This was due to the unfortunate conjunction of several simultaneous unplanned plant shutdowns for maintenance by several producers during the same period. We helped those manufacturers who had problems to limit the disruptions as much as possible. 

With domestic cement demand at only about 70% to 75% of total cement industry capacity, there is still a major overcapacity in the industry and ample cement supply to serve all the needs of the Malaysian domestic market. 

This situation is likely to continue at least for the next four to five years despite the expected growth of the Malaysian market as the industry, in addition to gradually redirecting its exports to serve the domestic market, is also developing the use of blended cement, which adds to capacity.

An increase of the cement price and the proposed implementation of APM will improve the situation in the cement industry and allow for the long term supply of Malaysia’s cement needs throughout the 9MP and beyond. 

Rajah Kumar

Chairman & CEO 

Philips Group of Companies, Malaysia

Raja Kumar

What is your outlook on consumer spending for 2008?

With the promising economic outlook, I believe that consumer spending will continue to be healthy in 2008. We are almost back to the pre-recession growth rate, although many consumers are still quite cautious when it comes to high value items. The recent rise in electricity and fuel prices has also sparked increased interest in energy efficient appliances, an area in which Philips is the leader.

The buoyant mid to high-end residential housing market will also drive the demand for premium electronic products into 2008. 

Also with the increase in government expenditure such as additional increments for police and army workforce; a 100% increase in the Cost of Living Allowance (COLA) and; a revision of pension payments for retired civil servants, we can expect a bigger impact on the economy arising from the multiplier effect of the collective monetary adjustments for civil servants.

How was consumer spending in 2007?

Consumer spending bolstered by rising incomes, led economic expansion in the first half of 2007. There were a few drivers for the increase in spending. Firstly, private consumption rose in conjunction with strong growth in home ownership, buoyed by low interest rates. The Government’s announcement to allow EPF contributors to offset or pay their housing loans also encouraged the growth in home ownership. 

From this, it is only natural to see excellent growth in demand for consumer lifestyle products, ranging from household appliances, entertainment electronics and also our new range of Ambilight TVs. 

Secondly, in the second half of this year, private consumption was given further support from significant pay increases for public sector employees. This coupled with a drop in the unemployment rate this year and the Government’s price control on staple products allowed for more spending dollars for the average household. 

What is your expectation of spending at the higher end? Please define ‘higher end’ in your industry.

As Malaysians become more affluent and knowledgeable, they tend to spend more on lifestyle products. 

Philips’ key business focus is in the continuing innovation in healthcare and lifestyle products. More than 50% of Philips global revenue now comes from products that are less than three years old. 

Most of them are high-end, high-tech products, but with our brand promise of Sense and Simplicity. 

Currently, there is increasing appeal for green products. Consumers are more aware of the threat of global warming and are looking at alternative avenues to be more energy efficient. 

The lighting solutions offered by Philips, although slightly more expensive than traditional light bulbs, provide substantial savings on electricity consumption in the long run. Knowing that lighting represents up to 30% of a home’s energy consumption, it is clear that remarkable savings in electricity cost can be achieved with smart lighting choices. 

In the latter part of this year, we launched a new range of consumer LED lighting solutions that are 90% more energy efficient.

We have high-end green products in all categories of lifestyle and healthcare segment such as Ambilight TV, digital audio video players, Achieva MRI machines and also garment care and personal care products.

How has the tourism dollar helped to boost consumer spending? What further measures can be introduced to boost tourism?

Medical tourism is a strategic area that has gained much attention from both Government and the private sector. In order to draw health tourists to Malaysia, our medical facilities should continue to be world-class and be at the leading edge of technology and patient care. 

Philips is unique in using its competencies in lighting, display and healthcare systems and products to provide ambient intelligent diagnostic suites where patients experience a friendly and conducive environment for undergoing diagnostic examinations and treatment. 

This lifestyle experience in a healthcare environment will attract our local population as well as tourists as human beings are increasingly averse to stress.

What are the new challenges during a time when consumers are said to be spoilt for choice?

I would look at it positively and call it rightfully that consumers are now more empowered to make their choice. In the past, it was about introducing new and innovative products with better design features at the right price point. 

Today, consumers are more discerning; they demand products that address their environmental concerns, enhance their lifestyle and that are aesthetically pleasing as well. For example lighting. There is now a shift from fluorescent and tungsten bulbs to LED lighting. Instead of viewing lighting as purely functional, consumers today want lighting to enhance their living or working space, save energy and be environmentally-friendly - all at the same time.

The challenge remains as always to recognise fast-evolving consumer trends and lifestyle changes and being flexible and forward-thinking enough to compete effectively for consumers’ mind share and purchasing ringgit.

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