UMW Holdings: sustaining a centennial corporation

UMW HOLDINGS: SUSTAINING A CENTENNIAL CORPORATION

Khairul Akmaliah Adham, Rosmah Mat Isa, Noreha Halid, NorranaKhidil & Adlin Masood

UKM-Graduate School of BusinessUniversiti Kebangsaan Malaysia

SYNOPSIS

By the end of 2011, five years short of its centennialanniversary, UMW Holdings was one of the biggest conglomerates inMalaysia, registering revenues of RM 13 billion (USD4.3 billion),and net profit after tax of RM1 billion (USD0.33 billion). Bythat time, it had 110 subsidiaries, operating in four corebusinesses of automotive assembly and distribution of Toyotalines of products, automotive spare parts and lubricantsmanufacturing, industrial equipment franchisee, and oil and gasdrilling. In September 2011, the company had targeted itsautomotive business to contribute to 50% of its revenues, whilethe other 50% would come from its other three businesses, by theyear 2015. However, as of the first quarter of 2012, Datuk SyedHisham Syed Wazir, the Group CEO and his management team realizedthat, at 75%, the automotive business was still the maincontributor to the Group’s revenues. As the company’s Toyotafranchise was limited exclusively to the Malaysian market, plusin the face of fierce competition within the automotiveindustries, the company needed to strategize to achieve its 50:50plans. The case stimulates discussion on strategy formulation ofa mature conglomerate, involved in diversified businesses.

Keywords: conglomerate, business-level strategy, corporate-levelstrategy, strategic management process, industry analysis.

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CHARTING THE FUTURE

UMW Holdings operations began in 1917, as a bicycle spare partsbusiness. By the end of 2011, five years short of its centennialanniversary, UMW Holdings was one of the biggest conglomerates inMalaysia, 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 maintainedits head office in Shah Alam, 40 km from Kuala Lumpur, thecapital city of Malaysia. By that time, it had 110 subsidiaries,operating in four core businesses of automotive assembly anddistribution of Toyota lines of products, automotive spare partsand lubricants OEM and REM manufacturing, industrial equipmentfranchise, and oil and gas drilling service. OEM refers tooriginal equipment manufacturer, while REM refers to replacementequipment manufacturer. UMW Holdings had operations in theneighboring Singapore, Indonesia and Thailand, as well as inMyanmar, Vietnam, Papua New Guinea, Turkmenistan, Taiwan, China,Australia, India and the Middle East. As shown in Exhibit 1 forthe UMW Group structure, its Malaysian businesses were operatedby UMW Corporation.

In September 2011, the company had targeted its automotiveassembly and distributor business to contribute 50% to itscorporate revenues, while the other 50% would come from its otherthree businesses. This goal was to be achieved in 2015. However,the company’s post mortem review in early March 2012 revealedthat the automotive business was still the main contributor tothe Group’s revenues, at 75%. As the company’s Toyota franchisewas limited exclusively to the Malaysian market, and the fiercecompetition of the automotive industries, Datuk Syed Hisham SyedWazir, the Group CEO and his management team were aware that thecompany needed to strategically transform to achieve its 50:50plan. Otherwise, the company would be in a grave situation.

The management team needed to present its planned strategiesto all the company executives by the end of March 2012.Thepressure was mounting as they knew that vehicle sales in Malaysiain January had drop sharply by 25%, in comparison to the same

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month in the last year (2011). While the figure for February hadan increase of 1%, the figure for March had dropped by 15%(Bernama, 20 March, 2012; Wong, 20 July 2012). Datuk Syed Hishamand his management team knew that they needed to act fast, toensure the future success of the centennial company, which wasdeeply rooted in the heritage and traditions of Malaysia.

INDUSTRY OVERVIEW

This section presents an overview of the industries of automotiveassembly and distribution, automotive spare parts and lubricantsOEM and REM, industrial equipment franchise, and oil and gasdrilling service.

Automotive Assembly & DistributionThere were three types of automotive operations in Malaysia.First, companies that operated exclusively in luxury carssegment, such as BMW and Mercedes Benz. These companies eithermanufactured their cars in Malaysia at their local partners’facilities or imported cars directly from their foreignmanufacturers 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 modelswithin the domestic market (Market Watch, 2012).Third, companieswhich operated as a full-fledged car manufacturer that performedall 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 involvedin the production of passenger and commercial vehicles, compositebody sports cars, as well as motorcycles and scooters. Theseplants had a total manufacturing capacity of about 800,000commercial vehicles and about 1 million motorcycles per year. Theproduction served mainly the local market (MIDA, 2012).

High purchasing power, high-quality road system, incombination with Malaysians’ high family values, promoted therapid growth of automotive passenger industry in Malaysia, as

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shown in Exhibit 2. By the end of 2011, there were many local-international joint-venture assemblers and distributors of carproducers, ranging from Japanese, Korean, and Chinese toEuropeans and Americans. There were also many direct importoperations and local-international manufacturing partnerships.And so at that time, Malaysian consumers had various choices ofmanufacturers and brands of cars to choose from.

Automotive Spare Parts Manufacturing & EngineeringThe automotive parts industry comprised of original equipmentmanufacturers (OEMs) and replacement equipment manufacturers(REMs). The OEM business was generally contract-based, involving dealingsbetween the OEMs and car manufacturers; OEMs produced automotive partsthat were ordered and approved by the car manufacturers according to theirstandards, which in turn would be supplied to the vehicle assemblers.Whereas, REMs made alternative auto parts that would be distributeddirectly 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 supplyof over 4,000 automotive component and parts (Market Watch, 2012).Multinational OEMs included Delphi Automotive Systems, TRW, SiemensVDO, Bosch, Denso and Nippon Wiper Blade. Major domestic OEMs includedAPM Automotive, Sapura, Delloyd and Ingress (Henriksson, 2012). Thesemanufacturers produced steering wheels, rims, brake pads, filters, wheels,bumpers, bodies, exhausts, radiators and shock absorbers. Other productswere body panels, rubber parts as well as automotive electrical andelectronic parts.

In 2011, the component and parts sales in Malaysia were valued atRM5.77 billion and this figure had been on increasing trends in the last 10years (MIDA, 2012; MIDA, 2010).Malaysia was reported to be one of theactive automotive parts producers and exporters in the region. Futhermore,the rapid developments in the industry had attracted many internationalautomotive component manufacturers to conduct their business in thecountry (Market Watch, 2012). The industry sales volume depended heavilyon the domestic automotive industry, which was strongly influenced by theeconomic cycles. Malaysian producers were reported to have some problemsrelated to high production costs and limited capabilities in research anddevelopment and design (AmResearch 2005). It was reported that, by the endof 2012, less than 10% of these automotive parts manufacturers had thecapabilities of serving both the OEMs and REMs (MIDA, 2012).

ASEAN Free Trade Area (AFTA) liberalization had positive andnegative impacts on the Malaysian automotive component industry. Thepositive impact of the AFTA implementation on the market was it allowedthe manufacturers to access a larger market. The negative impact wasthelocal automotive parts makers faced increased competitionfromcheaperproducers from China as well as premium producers from Thailand (Jagdev,March 19, 2011). AFTA is a trade bloc agreement, which involved themembers of the Association of Southeast Asian Nations. The

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implementation of AFTA was aimed at developing a competitiveadvantage of the ASEAN production bloc, whilst attracting foreigndirect investment (FDI) into the ASEAN region. This effort on thewhole, was aimed at creating a production trade bloc amongst theASEAN 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 theaddition of Vietnam, Laos and Myanmar, increased to a total ofnine. The AFTA was implemented in stages starting in the 1990s,which purpose was to reduce trade barriers amongst the ASEANcountries (MITI, 2012).

Heavy EquipmentHeavy industries were high capital investment industries, whichinvolved heavy machineries and equipment. From 1960s onward, theMalaysian heavy machines had experienced rapid growth due to thehigh growth within the commercial sectors, which includedelectrical and electronics components, machineries, andappliances, as well as car assembly. Between 1960s and 1980s, inparticular, these rapid grow were induced by many governmentincentives for Foreign Direct Investment (FDI). UMW was amongstthe pioneers in bringing heavy machineries into the countrythrough it being a franchisee to Komatsu in late 1960s.

DRB-HICOM and UMW, being the two leading players, werecomprehensive providers of the heavy equipment industry, whilethe other providers seemed to serve specialized subsectors ofelectrical 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 andemployed around 24,000 people (DRB-HICOM Annual Report 2011).

By 2011, the Malaysian government had announced a plan tofurther develop the heavy industries into a high technology andhigh value-added industry. The government offered incentives tothe industry players to move into the upstream value chain of theindustry, which focused more on research and development anddesign (MIDA, 2012).

Oil & Gas – Drilling Industries

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The first discovery of oil in Malaysia was made in 1910 in Miri,Sarawak. Pursuant to that, the government passed the petroleumdevelopment act and established Petroleum Nasional Berhad(Petronas) (Abdullah, 2012). Petronas was created in 1974 whichshares are entirely owned by the Malaysian government. Sincethen, Petronas had grown rapidly and from 1995 onwards it waslisted in the Fortune’s 500 companies.

By the end of 2010, 100 years after oil was first discoveredin its soil, Malaysia was ranked 28th oil producer in the world.The country’s hydrocarbon reserve was recorded at 20.56 billionBarrel of Oil Equivalent (BOE). Its average production was 1.63million BOE per day. By early 2010, Malaysia’s oil and gasproduction shows continued with decreasing trends from 1,673,000to 1,659,000 BOE. Meanwhile, Malaysia’s oil and gas reserveremained stagnant over the same period of 2008 to 2010. By theend of 2010, the industry contributed about 20% to the country’sGDP (Abdullah, 2012).

Worldwide, oil and gas industry was growing fast, due mainlyto advancement in oil exploration technologies. Specifically inMalaysia, the growth of the industry might be fueled further bythe government tax incentives to be implemented in 2013 onwards.These incentives included full income tax exemption for 10 yearsfor public-private business operations involved directly indeveloping oil and gas industry in the country. With theseincentives, it could be expected that there would be an increasein the foreign direct investment as well as the number of newcompanies entering the industry. Moreover, mergers andacquisitions were expected to be more active (Tee, October 13,2012).

By the end of 2011, the renewable energy made up about 7% ofthe entire energy market. This number was expected to double innext 20 years. However, the lack of investment into renewableenergies by many governments in the world, contribute to theslowing of its growth in the near future (Tee, October 13, 2012).

The industry value chain of crude oil involved five mainactivities: exploration, production, transporting, refining andmarketing. Exploration involved activities of finding oil fieldsand oil wells. The production activity involved operations ofextracting the oil from the fields. The transportation function

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involved bringing the oil to the locations of the refineries andconsumers. The transporting of oils was done through tankers,trucks and pipeline. The fourth value chain that was refininginvolved the activities of transforming crude oil into finishedproducts. The final part of the value chain was marketing whichinvolved distribution and sales of the finished oil products. Thevalue chain of natural gas was similar to the crude oil valuechain in regard to the functions of exploration and production.However, once the gases were brought to the surface, they wouldundergo a processing treatment. Then, they would be transportedvia pipeline and tankers before being distributed to consumers.See Exhibit 3 that shows the activities within the value chainsof crude oil and natural gas.

Within the Malaysian market, the oil exploration functionwas dominated by Petronas; whilst the subsequent value chain, theproduction of oil and gas, specifically the drilling function,comprised of two main players, SapuraKencana Drilling and UMWHoldings. SapuraKencana was an integrated oil and gas servicesand solutions provider. It was a public-listed company employingmore than 9,000 people and had operations in over 20 countries(SapuraKencana, 2012). The company entered the oil and gasdrilling business in 2010. The customers of these two drillingcompanies were mainly the owners of oil wells and fields.Therefore, within the Malaysia market, the two companies’ majorcustomer was Petronas. The production value chain was an asset-laden industry, which required high capital investment. Thesupplier to the oil and gas drilling businesses were themanufacturers of machineries and equipment that were utilized indrilling 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 automotiverepair shop in Singapore. In 1936, the company acquired theagency for Pennzoil lubricants product. In 1961, the companyadded industrial equipment to its business portfolio. By 1967,the company became franchisee of Mitsubishi Heavy Industry,

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obtained distributorship of Komatsu Japan heavy equipment, andacquired the agency for the Toyota forklift. In 1970, UMW becamethe group’s holding company and it was subsequently listed on theKuala Lumpur Stock Exchange (KLSE).

Throughout the 1970s, UMW set up many branches on bothpeninsular and East Malaysia. During that time, UMW had also beeninvolved in various businesses including construction, rebuildingof tractors, leasing, furniture, and material handling. In 1981,UMW obtained the rights to import, assemble and distribute Toyotamotor vehicles in Malaysia from Toyota Corporation Japan. Itwould also provide after sales service of the vehicles as well assupply the components and parts. For this purpose, UMW and ToyotaCorporation Japan created a 70:30 private limited joint venturecompany, Sejati Motors in September 1981 (UMW held 70%; ToyotaJapan 30%).The granting of the rights was perhaps due to UMW’ssuccessful distributorship of the Toyota forklift (Zuraidah Omar,2008).

By 1982, it recorded revenues of more than RM1 billion. In1984, it had losses of RM30 million and by1985, the groupsuffered further losses of about RM60 million and by 1986, itslosses before tax was about RM77 million. These spiraling lossesseemed to be the result of too rapid expansion of the company(Zuraidah Omar, 2008). By 1987, the company underwent a capitalrestructuring exercise. In 1988, the capital reconstructionexercise was completed resulting in Permodalan Nasional Berhad(PNB) owning 26% of UMW Holdings. PNB was one of the Malaysia’sbiggest fund management companies, which was incorporated in1978. In 1989, UMW registered a net profit before tax of RM100million. In 1990, Toyota cars became the top seller in theforeign brand sector of the Malaysian automotive market.

In 1993, UMW jointly invested in Perusahaan Otomobil KeduaSdn Bhd (Perodua) with other Malaysian and Japanese partners.Perodua was the second Malaysian national car project. In theventure, UMW Corporation was the largest shareholder with 38%stake, followed by Daihatsu Motor Co. Ltd. Japan and Med BumikarMara, each 20% stake. The remaining shares were held by PNBEquity Resources Corporation 10%; Mitsui & Co Ltd Japan 7% andDaihatsu Malaysia 5% (Zuraidah Omar, 2008). UMW’s investment in

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Perodua transformed the company from an assembler and distributorof cars into a car manufacturer (Zuraidah Omar, 2008).

Later in 1999, UMW went through a restructuring exercise inthe shareholding of UMW Toyota, which resulted in reduction ofUMW’s stake from 70% to 51%, and an increased in ToyotaCorporation’s stake from 30% to 49%.The restructuring wasundertaken in view of the pending AFTA implementation, whichamong others would open the automotive markets within the ASEANcountries. Increased competition was one of the expectedconsequences of the AFTA implementation (Bernama 15 April 1999;Zuraidah Omar, 2008 p. 158).

Up to 2002, UMW Holdings business was heavily dependent onthe automotive industry, in which it was involved in assemblingand distributing Toyota cars in the Malaysian market.UMWautomotive business was a franchisee business operation whichbusinesses were restricted exclusively in Malaysia. Thus,opportunity for growth was limited. To support its other twobusiness units which growth seemed to be slowing down (withestimated growth of about 10 to 15%), in 2002, under CEO Dato’Abdul Halim’s management, UMW ventured into oil and gas industryin Malaysia. This move was also part of its efforts to buffer theeffect of the pending fiercer competition within the Malaysianautomotive industry (Zuraidah Omar, 2008).

Being the associate company of government-owned largestmutual funds operations, Permodalan Nasional Berhad, the companybenefited from the government-to-government (G2G) relationship inhelping it established its presence in overseas countries. Along2001 and 2004, its oil and gas ventures experienced tremendousgrowth involving many acquisitions especially in China throughthe government-to-government platform (Zuraidah Omar, 2008). Itsmain strategy for the oil and gas business in the initial stagewas to acquire firms. These acquisitions were enabled by theircash-rich situation. These acquisitions were necessary given thatthe company was at the embryonic stage in entering into the oiland gas industries. Within three to four years, the groupincreased 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 tothe owners of the oil wells and fields. Mr. Rohaizad, the Group’s

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Corporate Training and Development, explained the UMW oil and gasbusinesses:

“In Malaysia, all oil fields and wells are owned byPetronas (Malaysian government owned and operated oilcompany), we served as their contractors by providingdrilling crews. Within this drilling contractorbusiness in Malaysia, there are only two providers, ourself and SapuraKencana Petroleum. There are alsointernational players like Transocean (a US-basedcompany) and Seadrill (a Norwegian-Bermudan company)but they are not big players in Malaysia and none ofthese local or international contractors are owners ofthe fields. What we mainly provide is services.”

In mid-2000s, UMW Holdings started a rebranding exercise, asrelated by Mr. Rohaizad:

“At that point of time, UMW was always associated withToyota. In general, people didn’t know we have otherbusinesses. So the top management felt that the companyneeded to rebrand. Since then, you can see that thereis a new logo and advertisement on the billboardssignifying UMW as a multiple portfolio businesses.”

The company chose Beyond Boundaries as its advertisementtagline to indicate the UMW group as “an internationalconglomerate that develops industries, manages partnership andfacilitates 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 leapprogram that ended in 2008. Then, in 2008, another five-yeartarget plan was developed for the periods ending 2013. Thecompany targeted for RM13billion of total revenues for 2013. By2008, Malaysia started implementing AFTA (ASEAN Free Trade Area),opening its automotive markets to its ASEAN partners. AFTAstipulated tariffs of no more than 5% when trading within ASEANcountries (Zuraidah Omar, 2008 p. 158). The AFTA implementationresulted in production rationalization in Toyota Corporation,which enabled cross-countries manufacturing and supplies ofvehicles. On the whole, the AFTA implementation helped UMW and

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Toyota to reach economies of scale. By the end of 2011, thecompany successfully raked in revenues of RM13.5 billion.

UMW STRATEGIES, BEYOND 2011

For its automotive business, by the end of 2011, Toyota capturedclose to 20% while Perodua captured close to 30% of the Malaysianmarket. 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 promotionalexpenses were some of the threats faced by the company. However,there were incentives on hybrid cars in which by 2011 only Hondaand Toyota were offering. Malaysia Automotive Association (MAA)forecasted an increase in the numbers of vehicle sales in thenext year (in 2012), at total industry volumes (TIV) of 615,000units (Bernama, 17 January 2012).

The distribution arm of UMW Toyota comprised of its ownbranches and dealers. These branches and dealers also providedafter sales service and staffed by UMW own employees. Among itsplan to expand its automotive businesses included developing astructured program to educate and train the employees of the UMWbranches. However, UMW did not have full control over its dealersas they are separate companies. And so, the level of services atthe dealers, in regard to sales and after sales service was moredifficult to control.

UMW’s automotive spare parts manufacturing and industrialequipment businesses were mainly involved in trading. UMW’sautomotive spare parts manufacturing business served two types ofmarkets: the OEM (original equipment manufacturer) market (whichmanufacturers included Perodua, Toyota, and Proton) and thereplacement equipment manufacturer (REM) market. The businessexpansion within this business was heavily dependent on itsmanufacturers’ partners. The company had anticipated someincrease in sales for some of its spare part, lubricant and alsoabsorber businesses, under its manufacturing and engineeringcore.

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While at the initial stage of its oil and gas operations,UMW was not focusing on specific activities, by 2010, itsactivities were more focused on the up-stream activities, servingas a drilling contractor in the oil and gas industry in Malaysia.By end of 2011, it had about more than 30 subsidiaries orassociate companies in the oil and gas business. The groupexpected significant growth for this business in 2012 due to themobilization of many of its equipment and facilities in multiplelocations. The company also had plans to develop its in-housecapabilities for supporting its oil and gas business. The companyalso had developed a comprehensive retention program as part ofits effort to develop more depth into the oil and gas business.Parts of developing in-house capabilities and retaining itsemployees, the group had planned to further develop its trainingcenter into a full pledge academy that involves in operating adegree granting program, short courses and certificate grantingcourses.

By the end of 2011, the management of the group decided thatall new businesses that support their growth and expansion wouldcome from the four core businesses that were made up ofautomotive assembly and distribution, automotive spare parts andlubricants manufacturing, industrial equipment franchisee, andoil and gas drilling. Since then, all new business venturedecisions were made based on the synergistic relationship withinthese core businesses. By then, the automotive businesscontributed about 75% to the overall company revenues. Theremaining 25% were shared amongst the other three corebusinesses.

For the near future, at the end of 2015, the company plannedto increase its non-automotive businesses to 50% of the group’sentire revenue, and the remaining 50% encompassed of revenue ofthe automotive business. This means that the group had to furtherdevelop its non-automotive sector from its current 25% to thetargeted 50%. By late March 2012, Datuk Syed Hisham Syed Wazir,the Group’s CEO and his management team knew that they need toact fast, to strategize to realize its 50:50 plans, by the year2015. They knew that the planned strategies were critical toensure the company’s progression into its next century.

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http://www.mida.gov.my/env3/uploads/events/InvestMalaysia2012/4-Oilngas_Halliburton.pdf

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http://www.accessmylibrary.com/article-1G1-54401743/umw-corporation-reduces- stake.html 18 January 2013.

Bernama (20 March, 2012) MAA: 44,013 Motor Vehicles Sold in February http://www.malaysiandigest.com/business/41603-maa-44013-motor-vehicles-sold-in- february.html18 January 2013.

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%202011.pdf

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UMW Holdings Bhd. 2011 Annual Report. Print.

Wong, 20 July 2012, MAA sees better car sales in second half of 2012.

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EXHIBIT 1: UMW GROUP CORPORATE STRUCTURE, END OF 2011

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UMW Malaysian Ventures Sdn. Bhd

UMWAustralia Ventures (L) Ltd.

UMW Petropipe (L) Ltd.

UMW Oil & Gas Berhad

UMW Corporations SdnBhd

UMW HOLDINGS BERHAD

Automotive

Oil & Gas

Equipment

Manufacturing &

EngineeringSupport

Operations

Source: UMW Annual Report, 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)

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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

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