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A growing sweet spot

By DARSHINI M. NATHAN


 
Malaysian businessmen seeking huge opportunities are clearly turning their attention to the Middle East. Yet, finding real success in a business landscape, which by no means can be described as flawless, indicates that extreme caution, like most overseas ventures, needs to be practised.

INDIA and China have long been sweet spots for Malaysian companies looking for investment opportunities abroad. Understandably, the sheer size of the two markets makes them hard to ignore.

In the case of India, opportunities in the country served as beacons of hope particularly for local construction companies, which not too long ago, were forced out of their comfort zones to look for new businesses abroad.

As for China, there was the sense at one point that if you are not invested in the republic, then you are sure to lose out.

No doubt the general exuberance about setting up shop in China has been fuelled by the country's vast economic potential, its quick but firm embrace of capitalism and its population's rising affluence.

These two markets still hold a wealth of appeal for Malaysian companies but there is no denying that there is another region that is competing for the attention of Malaysian investors.

The truth is, Malaysian companies are carving out a sphere of influence in the Middle East, a process that is being helped along by Malaysia's status as an Islamic country.

Indeed, there has been a steady flow of news in recent times about local companies securing lucrative deals in the Gulf.

A prime example is Tan Sri Syed Mokhtar Albukhary's flagship company MMC Corp Bhd, which grabbed headlines in early November last year when it announced that it had secured the rights to develop and manage the US$30bil Jizan Economic City together with the Saudi Binladen Group.

The mammoth development that will be undertaken over a 30-year period will comprise several key components such as a port, power plant and aluminium smelter among other things.

Last week, Syed Mokhtar surfaced in news reports once again when it came to light that his private vehicle SKS Ventures Sdn Bhd will partner with the National Iranian Oil Company to develop a US$16bil gas project in Iran.

His involvement in these projects, no doubt, is expected to lead to significant spill over effects for the entities within Syed Mokhtar's diverse stable of companies.

Already, there is talk that the Port of Tanjong Pelepas, which is 70%-owned by MMC, is likely to land the port operation and management contract for the planned seaport in Saudi Arabia's new economic city.


Aminuddin Baki Esa: The Middle East and North Africa market is hard to ignore given that its ICT sector is among the fastest growing in the world.
A close aide of Syed Mokhtar says these initiatives have been in the planning stage for about five years now.

“This push to go to the Middle East is not something new. Now that MMC has grown to a certain size, it has the capabilities to go overseas to focus on its core competencies,” he says.

Limitless opportunities

Admittedly, the region's infrastructure sector holds limitless opportunities for Malaysian players.

 
“The Arabs ignored their own countries for so long while they were busy investing in Western economies. Now that many of them are bringing their money home after Sept 11, they seem to be in a rush to develop their infrastructure to make up for the lost time,” says an analyst with a local investment bank.

As a result, the optimism surrounding the region's real estate and construction boom has become almost infectious.

Local players are not worried that a bubble may be waiting to burst; some of them point out that the data on these sectors indicate that their phenomenal growth rates will continue unimpeded for many years to come.

Such optimism no doubt stems essentially from what is touted as the great Mideast oil boom. With that, the rush of petrodollars appears to have led to the inception of many ambitious projects, some with record-breaking structures that promise to transform the shores of the Persian Gulf.

A spokesperson for a local construction outfit says it helps that the Gulf states are also going all out to make foreign investors feel welcomed.


based businessman, is a close associate of Syed Mokhtar
For example, in Dubai, traditionally, only UAE and Gulf Cooperation Council nationals could purchase property there. That changed in 2002 when the government opened up the property market to foreign investment.

The change in legislation has caused large-scale developments to be planned for what seems to be in every available square foot of land the once-barren Dubai has to offer.

What's more, property consultants there say the hundreds of thousands of residential, commercial and office space that is scheduled to come on stream over the next few years are unlikely to soften prices.

Instead, they say the increasing demand for good residential and hotel accommodation as well as office and commercial space on the back of a buoyant tourism market and a projected huge growth in population should keep property prices well supported.

It is not just the big local construction and engineering companies that are flocking to these oil rich nations to carve out pieces of the Middle Eastern economic boom for themselves.

Smaller and lesser-known companies in other sectors like information communication technology, healthcare, interior design and logistics are also making a beeline for the region.

Green Packet Bhd is one of them. The company, which specialises in providing mobile broadband network solutions, recently teamed up with its strategic investor, the Saudi Economic and Development Company (Sedco), to incorporate a joint venture company in Bahrain to spearhead its investments in the region.

Green Packet group managing director and chief executive officer Puan Chan Cheong says the region will be a key growth centre for the company for the next few years at least.

“We are looking at recognising profit contributions from that area of operation starting from the second half of this year,” he says.

For SCAN Associates Bhd, its chief executive officer Aminuddin Baki Esa says the Middle East and North Africa market is hard to ignore given that its ICT sector is among the fastest growing ones in the world.

To put things in perspective, he points out that Saudi Arabia's spending on ICT has ballooned to US$10bil, from about US$7bil a year ago.

“If you include other countries in the Middle East region, the amount is a staggering US$27bil. In Malaysia, it is only in the region of US$4bil - US$5bil,” Aminuddin says.

Vital links

Yet, it would be pure folly to assume that any company can easily find success in the region.


Puan Chan Cheong: It is a very close business network there, so if you are alone, it’ll take a long time just building up the company’s reputation.
Puan from Green Packet admits that the company's initial experience in Saudi Arabia had its share of hiccups. “We found it difficult to get things moving, partly because of the cultural differences,” he says.

“We managed to attract an important strategic investor Sedco, which took up 10% equity in the company. This has been a big help.”

This need for a local partner or “sponsor” is not unique to Green Packet. Rather, the official from the construction firm says it is rather the norm when conducting business in the Gulf.

“It helps to move things along. In most cases, the local partner will take an equity stake in the company and the company will subsequently ride piggy back and go where the local partner goes to look for new business,” he says.

Says Puan, “You need a local partner to inspire confidence and comfort among the people there wanting to do business with you. It is a very close business network there, so if you are alone, it'll take a long time just building up the company's reputation.”

In Syed Mokhtar's case, his connections to important personalities in the region cannot be understated.

He is closely associated with Mohamed Ali Alabbar, a Dubai-based businessman as well as trusted aide and confidante of Dubai's ruling Al Makhtoum family.

The two are partners in the Gulf International Investment Group, which several years ago, was set to play a significant role in the Bakun hydroelectric project.

Observers say this vital connection in the Middle East must play a hand in Syed Mohktar's spate of recent successes in the region.

This is a strategy that PECD Bhd too clearly employed when it ventured into Dubai.

Dubai-based Investment Office LLC (IOL), a state-owned investment vehicle, emerged as PECD's third largest shareholder with a 6.1% stake.

The idea was that PECD would tag along with IOL and pitch for jobs in countries where the fund is keen to invest.

Still, the strategy undoubtedly makes one vulnerable to the whims of the local partner.

Competitive bids

Many would agree that PECD's foray in the Middle East has not been particularly inspiring. In fact, several analysts are prone to use the company as an example of how overseas ventures, particularly for construction firms, can go terribly awry.

It is true that the company managed to secure some prestigious projects in Dubai but cost overruns has seen to it that the company is barely breaking even on those jobs now.

A construction analyst with a foreign research house says contracts in the Middle East usually come with fixed prices.

So, it is left to the companies to manage their costs to ensure that there are no overruns.

“If you are not familiar with the logistics or procurement aspects and you miscalculate, the overruns can be quite severe especially if you are working on razor-thin margins of between 3% and 5%,” she says, adding that the rate of returns are just not commensurate with the amount of toil and trouble the companies have to pour into the ventures.

But PECD is not the only one that is suffering this fate.

In fact, the analyst points out that foreign markets have proven to be far too challenging even for bigger and more established players like Road Builder Holdings (M) Bhd and Ranhill Bhd.

Even Tanjong plc, known for its conservative nature, failed in a liquified petroluem gas venture in China about six years ago and had to pull out.

Nevertheless, it bodes well for local companies keen to do business in the West Asian region that Malaysia has also emerged as an investment destination of choice among Arab investors.

The move by the likes of Kuwait Finance House, Al Rajhi Bank and Asian Finance Bank to set up shop here has ensured that the flow of investments is equally significant on both sides.


 


 

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