23/03/2009 (The Star Online) - IT IS often remarked that Malaysia retains a globally competitive position in the production of palm oil, a pivotal industry in the economy.

That, unfortunately, is an age-old industry, which means the country has not nurtured another globally competitive industry over a long period of time.

There are companies that have proven to be globally competitive but they are relatively small, isolated cases, and it is not the industry that is comparatively productive.

One of the niches here is in rubber-based products. Glove makers like Top Glove Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd, and rubber hose maker Wellcall Holdings Bhd produce for the world market. They are growing companies, and achieve return on equity or ROE north of 20% or close to it.

The biggest of these, Top Glove, earned a net profit of RM110mil last year, which is a mid-cap level. As an industry, the rubber products sector is very small compared with oil palm plantations.

The furniture industry has an interesting story of how a group of modestly educated carpenters built companies with exports that totalled about RM10bil last year. It is often hailed as a success story, which it is, an export industry that grew from ground zero.

The industry is, however, typical of manufacturing in Malaysia, akin to original equipment manufacturing or OEM, a low value-add, low profit margin business. In the public-listed space, the industry is seen as fragmented, participated by small players, which could be partly due to their humble beginnings.

Unlike these manufacturers, companies in industries that require special licences fare much better. This licensing barrier prevented a proliferation of competitors that would have eroded market share and profit margins. This could be a factor that helped the companies to expand to a large size.

Almost all the 20 biggest companies on the Kuala Lumpur Composite Index (KLCI) are oil palm planters, or businesses in industries into which entry is regulated by special licences.

These are companies that are in banking and telecommunications. That also includes shipping in the case of MISC Bhd which largely serves Petronas, the national oil corporation.

There are no manufacturing companies on the top 20 of the KLCI, nor of any company in that rank by virtue of a strong consumer brand. These would be companies where there is no entry barrier in licensing, and they tend to be small companies here.

That is unlike MISC which, as a subsidiary of Petronas, remains very profitable, unusual in this industry at this time; not only that, it’s also one of the most profitable shipping companies in the world.

Elsewhere in the oil and gas services sector, there are a few companies that have Petronas vendor licences, and that enables them to have a steady business. Petronas, not being a public-listed company, does not face the pressure of quarterly earnings and hence, its capital expenditure may not be deferred, unlike its listed counterparts overseas, even when oil prices are low.

The outsized manufacturing exporters here are mainly the electronics multinational corporations or MNCs like Intel.

While local manufacturers are smallish in their exports, the local services sector is also moving in bigger ways into regional markets, although the global recession has slowed or reversed to some extent that momentum.

Colleges continue to expand their capacities in educating foreign students. These foreign students are conspicuous in condominiums in the cities.

The same progress is being made in medical services, where foreigners come to local private hospitals.

As an industry though, these export services are relatively small but they add to the diversity and provide room for growth in the economy.