26 December 2017

Belt and Road – The Malaysian Advantage

Malaysian companies are in an enviable position to take advantage of Belt and Road business opportunities.

China’s Belt and Road Initiative (BRI) is an ambitious scheme to boost the flow of goods and services by reviving historic trade routes that stretch from Asia all the way to Africa and Europe. Many countries lie along the Southeast Asian part of the initiative, known as the Maritime Silk Road, but Malaysia stands out due to its potential to make a major mark on the scheme.

“Malaysia occupies an important strategic position along the straits of Malacca, one of the busiest shipping routes in the world,” said Andrew Sill, Managing Director, Country Head of Commercial Banking Malaysia. “This gives Malaysia an incomparable advantage in bringing to reality the vision of a 21st Century Maritime Silk Road.”

Mr. Sill was speaking at HSBC’s 2017 Belt and Road Forum. Held in Kuala Lumpur in December 2017, the event brought assembled business and finance experts to share their thoughts on BRI, with a focus on how Malaysian companies can get involved.

For many people, BRI is primarily about building infrastructure. New international railway lines, upgraded port facilities, and extensive highways, will all be part of realising the initiative. But these tangible elements do not tell the whole story. Thriving towns along the route will create new markets for consumer companies, while financial institutions will find new business in providing projects funding.

“What makes BRI potentially transformative is not merely the investment in infrastructure, but more important are the new values and philosophy that form the Belt and the Road,” said Ernest Li, Managing Director & Head of Corporate, Greater Northern and Central Commercial Banking, HSBC. “They embody the spirit of peaceful cooperation, openness and inclusiveness, as well as mutual learning and mutual benefit.”

For the Malaysian entrepreneur, BRI offers a larger playing field. In addition to the home market, it creates openings to do more business with partners in Mainland China, while the greater regional connectivity will generate trade opportunities in other countries. The local effects that come from constructing large infrastructure projects should not be ignored.

“There is no doubt that there will be roles for Malaysian companies,” said Remi Degelcke, Director, Infrastructure and Real Estate Group, Global Banking, HSBC Malaysia. “The overall country will enjoy social and economic benefits. You will have more jobs, better infrastructure and that will translate into helping the government meeting its objective of becoming a high-income economy.”

Connecting with Chinese companies

In reality, getting involved in an international trade initiative can be a daunting prospect. A medium-size Malaysian business might not know how it fits into the scheme, especially when the headline deals are billion-dollar infrastructure projects undertaken by large-scale companies.

But it is important to remember that BRI is inclusive, and therefore is able to create new openings for companies of all sizes. How this is possible was the subject of a panel discussion at the forum, which provided practical information on how Malaysian companies can get involved.

Malaysia has the advantage its language capabilities and a Chinese population that has practiced Chinese traditions for decades. However, there are cultural differences and unique aspects of doing business with the Mainland Chinese that need to be understood and adapted to, said Teoh Kok Lin, Founder and Chief Investment Officer of Singular Asset Management and Chairman of the Digital Economy Committee of the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM).

“It is very important to understand their culture and their point of view, only then will you have a real connection in communication,” he said.

Technology is now an integral part of business culture in China, where the smartphone is used for everything from messaging to e-commerce. Mr. Teoh pointed out that not only should a company’s website Chinese version be in simplified characters rather than traditional characters, it should also be mobile-optimised for smartphone readers.

Furthermore, Malaysian businesses with an interest in China should embrace WeChat, said Mr. Teoh, the mobile messaging platform that now has more than 900 million users1, and is a major communication tool in both personal and professional life. Official accounts on the platform, an important channel to reach out to a Chinese audience have surged in recent years: with the number currently standing at 14.5 million, from 1.4 million in 2013, according to iiMedia Research2.

Communication is a two-way activity, and Chinese parties involved in BRI need to understand how to do business in Malaysia. In the past, overseas projects were typically completed by hundreds of Chinese workers who were sent to the host country. The mindset is changing however, and Chinese companies are realising the value of working more with local partners to get things done, said Ian McElwain, Country Head, International Subsidiary Banking Malaysia at HSBC.

“The opportunities in Malaysia are there for the people who can actually create that kind of relationship,” he said.

Malaysian companies should therefore promote their unique skills, especially to Chinese companies with limited experience of executing infrastructure projects overseas, said Paul Lim Pay Chuan, Executive Director and Group Chief Executive Officer of PESTECH International Berhad – a company that designs, manufactures and installs power transmission infrastructure.

“It is rare to find a company in China to have a complete Engineering Procurement Construction (EPC) contract,” he said. “It gives us an opportunity to provide them with a service so that they don’t have to worry about the risks of completing a project overseas.”

The role of banks

Financing will play a key role in BRI, as both governments and companies will need capital to realise their plans – something that is particularly evident in resource-intensive infrastructure projects. The panel discussed the abundance of capital available to the initiative, as well as the wide range of players that can act as lenders.

At one of end of spectrum are state-run institutions – such as the Asian Infrastructure Investment Bank and the Silk Road Fund. These well-funded organisations are involved in many of the largest infrastructure projects in Asia, often on terms that it might not make sense for a commercial bank to get involved. Private-sector lenders, by contrast, will find themselves working on the entire spectrum on BRI projects, both large and small.

“The sheer scale of the financing required means that there will be an awful lot of options out there for commercial banks to play,” said Mr. McElwain. “Healthy competition is good. It helps you be more innovative, it makes you drive down costs, and do more for your clients.”

He stressed the need for banks to be smarter in how they deploy capital, with an emphasis on finding the right funding channel for a company. This will likely be a blend that will incorporate bank lending, fixed income, and equity financing. A company should not find itself in the position where it is dependent on a single source of financing where possible, he said.

Traditional banks and government-run institutions are not the only source of funding, as technology companies are making inroads into finance, with small to medium sized enterprises among their target clients. Mr. Teoh highlighted how Chinese tech giants are using big data on a borrower’s e-commerce activity or social media accounts to make effective and rapid lending decisions.

“They are able to understand the business model of smaller companies and are more willing to lend without collateral, in a way that a traditional bank would not be able to, or would not consider cost-effective,” he said.

With so many players involved in financing BRI, there was a consensus among panellists that there is no shortage of funding. The most important thing is how viable a project is, which stresses the importance of presenting projects in the best possible light.

In fact, BRI was presented as an exceptional combination of demand for relevant projects, along with a substantial amount of available capital. It is an opportunity that Malaysian companies should not slip through their grasp.

“We are in the right time and place,” said Mr. Lim. “We should take advantage of it now, otherwise it could fly past. Five years later, it could be too late.”

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