Friday, September 18, 2020

Silterra: Selling local or foreign, where is Khazanah's national objective?

Back in November 2018, after the fall of BN government and under the early part of PH government, there was news report by Malaysia Reserve that a Chinese microelectronic producer selected Silterra as a key strategic partner to produce 8-inch wafer. 

Wafer is a thin slice of semi-conductor used for fabrication of integrated circuits and in photovoltaic, to manufacture solar cells. 

Despite facing heavy critique as one of the many big idea failures of Tun Dr Mahathir, the Khazanah-owned wafer fabrication plant in Kulim was being acknowledged by China for its 20 years experience for independently running a fabrication plant. 

It is a testimony of Malaysian can do spirit. Silterrra inked a technology transfer partnership with a Singapore based technology developer in December the same year. They are exploring for opportunities in new areas of application. 

Money pumped under Najib administration began to generate profitability. However, the accumulated losses left by Mahathir administration was in the billions and it haunted Khazanah. 

Khazanah failed

In his departing statement that same year, former Khazanah CEO, Tan Sri Azman Mokhtar highlighted Silterra as one of his many failures to fulfill his turnaround assignments. 

The other being Malaysia Airline. For that matter, Khazanah also failed to operationally turnaround Proton, and UEM. 

The problem seemed to be Khazanah's. It was expected because the expertise of Khazanah is not in the operation, but purely in banking and financial restructuring. The turnaround route undertaken are usually focused on debt and corporate restructuring. 

In the case of UEM, the troubled company was delisted and a profitable subsidiary tookover its listing status. While, for the case of Proton, Geely was brought in as JV partner. 

For MAS and UEM, the accumulated problem remained unresolved. 

Proton has a better fighting chance with R&D input from partner and hopefully, upgrading its marketing ability could eventually turn it into profitability and rid off its losses. 

However, Najib administration faced a barrage of critique for "selling out" national asset to China. Ironically, it was under PH that there was massive sales of national assets. 

Foreign investors bailed out across all financial markets that led to deficit in mark-to-market accounting compliance and exacerbated by political witch hunting. 

PH Economic Affairs Minister, Dato Seri Azmin Ali politicised Khazanah's losses by nitpicking issues. 

Dato Najib responded to criticise Azmin for failing to understand that returns from other investments balance out losing portfolio and sustain operations like Silterra as turnaround efforts are undertaken.

Divesting Silterra

Since 2016, Najib said government was open to having foreign partners. New CEO Dato Shahril Ridza Ridzuan insisted to carryout PH's divestment program to sellout non-core assets such as Silterra. 

The Star reported two local companies - Dnex and Green Packet put their bids, but late entries by semi-conductor giants, Foxcomm from Taiwan and X-FAB from Germany brought about a change of thought on the part of Khazanah and government.

The two bids came at a higher price but unfairly, with different conditions allowed than the one set for local bidders. The significantly higher bid changed Khazanah's mind from minority stake to majority control for foreigners. 

Geeen Packet's minority shareholder is Dongfang Huijia, a China state-owned central financial enterprise. While, DNex partner is a fund manager that is a proxy of China's IC industry.

Public uproar for the sales of another national asset to foreigner is beginning to emerge again. Perikatan Nasional-led government should reconsider and not repeat the mistake of the failed PH government.

Two newspapers reported to express opposition to the sales. NST titled the article outrightly demanding to keep it local. 

The argument put forward is the replacement cost of US$1 billion to build another wafer fabrication plan maybe out of reach for Malaysians in the future. Malaysia could be left out completely from the electronic sector. 

Berita Harian argued wafer fabrication is essential for Malaysia to remain relevant in the electric and electronic sector. 

Both newspapers argued that Malaysia stand to benefit more through the two local bidders with minority China partner than direct foreign bidder. 

Both will purchase Khazanah's equity and inject  working capital and payoff debt. For instance, Dnex will be pumping RM500 million.

Missing the next wave

Unlike the other Khazanah turnarounds, Silterra is in an industry, in which Malaysia had always a leading position. Malaysia was one of the largest exporter of semiconductor chips. Despite the ups and downs, Malaysia still have a flourishing semiconductor industry.

There was a slack in the 1990s as new countries begin to catch up. Silterra was part of the effort to revitalise the industry. To stay ahead, Malaysia need to develop indigenous technological capability. 

The initial problem with Silterra was "a revolving doors of CEOs" and that hampered its progress. It has begun to turn the corners thus rather foolish for Malaysia to bailout from the sector purely to address Khazanah inability to turnaround companies.

An interesting trend in semiconductor, as told by Silterra CEO, Firdaus Abdullah in a conference last year, is the opportunity to go into physical domains such as life science.

Malaysia has lots of IC design engineers. Silterra could enable SMEs to develop new technologies. With the political will for nationbuilding and room for technologist to innovate and participate, an ecosystem from researchers to chip makers, could be developed.

The planned implimentation of 5G in Malaysia is expected to generate RM12.9 billion to GDP growth and generate 39,000 new jobs. Without platform such as Silterra to retain the money spent in the country and increase national wealth, it is an effort that will only benefit other countries. 

Policymakers and financiers must shift their mindset from marketing someone else's technology to thinking more about real technology. Foxcomm and X-FAB are still contract manufacturers for major companies. There is no added value to Malaysia.

The sale would mean Malaysia will be out of the industry and miss out on the development in the IoT (Internet of Thing), 5G, and increasing digitalisation. 

The current pandemic crisis created a new normal condition or precisely abnormal condition, in which human interaction and travel will be significantly lessen and ICT will play a more significant role in every aspect of life.

Rethinking Khazanah

Khazanah was originally established to acquire and develop technology needed to increase the nation's technological capability to remain relevant industry player and give it the edge. 

At the end of Mahathir's first term as 7th Prime Minister and under Tun Abdullah, it was made into warehouse to store forced acquisition of privatised companies and the term GLC became the buzzword. Come Najib administration, Khazanah was transformed into a sovereign wealth fund. 

Azman Mokhtar's annual report repeatedly emphasised its asset growth and highlighted its return. The accountants and investment bankers were unable to appreciate the nation building emphasis on developing capability, capacity and growth potentials. 

The overemphasis on meeting set numbers for portfolio return, asset size and quality, and return on investment will not reflect the total benefit to the nation in term of jobs, expertise, SMEs, industry development, and local and national economic spillover. 

Khazanah became more myopic in its role to be merely contributor to the government coffer. However, their contribution was pittance compared to other GLCs and fund manager. 

Foxcom valuation of US$125 million looks attractive, but it is short termish and myopic to merely sell Silterra away. It is still giving away a bargain to foreigner for asset with replacement value of US$1 billon. 

Since Khazanah failed to do it, let them take the hit. Pass Silterra to other locals with the capacity and capability to carry it through and make it beneficial to the nation. Khazanah should not deny Malaysia of Silterra's potential benefit.

Khazanah is wholly owned by the government, thus the new administration as shareholder need to look beyond the financial of only Khazanah but the nation interest as a whole. 

Tan Sri Muhyiddin should set his eye beyond the current problem and challenges directly related to the health issue arising the Covid Corona virus. Whether the pandemic is over or not soon, he should have a plan to face the long drawn crisis, keep the economy chugging and continue the nation's development.  

WHO predicted the pandemic will be around for the next 4 to 5 years. So Malaysia must be looking towards being self sufficient and self reliant. It means the trading nation economic model that prospered the Malay archipelago since the Melaka empire need a rethink.  

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