GSM 5113 Operations Management

Case Study: MMC Corporation Bhd.Transforming and Changing Core Business due to Declining ProfitsbyJahirul Islan Asif

(PBS 1321288)

Saadia Ather

(PBS 1311287)

Wong Chee Yeung

(PBS 1321243)Furkan Kapu

(PBS 1325292)Diala Takieddine

(PBS 1325293)LIm Chwee Guan

(PBS 1311217)

INTRODUCTION

First founded in London as Malayan Tin Dredging Limited in 1911, the Company transferred its headquarters to Malaysia by incorporating Malayan Tin Dredging Berhad (MTD) in 1976, then the largest tin dredging group in Malaysia. In 1981, MTD merged with New Tradewinds Sdn Bhd which had earlier taken over London Tin Corporation (LTC), the world's largest tin mining company, adopting the name Malaysia Mining Corporation Berhad to become the world's largest integrated tin producer. The Company was listed on the Bursa Malaysia on 12 July 1977.

In 1983, the Company needed some changes in mining operations in Malaysia because of increasing operational costs, low tin grades, shortage of labor and the shrinking demand for tin worldwide. It decided to stop tin mining operations in Malaysia. However, it maintained its gold and diamond mining operations in Australia. In 1997 the company went in merger with Homestake Mining Company with Plutonic which resulted in the Company's associate interest in Plutonic being replaced by an investment stake in Homestake. MMC sold its stake in Homestake in 1998 and its stake in Ashton in 2000. In 2000, Impian Teladan bought 19.9% of MMCs shares. As for MMC, it acquired 50.1% of PTP and it also acquired of 22.2% of Malakoff in 2001.

By 2000, the MMC had decided to change and rebranded itself from a mining company to a more diverse holding company. The financial year ended 31 January 2000 has been a year of consolidation for the MMC Group. Before that MMC had faced declining revenue from its mining operations as well as the financial crisis of 1997 had hit its engineering and construction operations hard. Figures for 1998 indicated MMC posted a consolidated loss of MYR186.2 million (after tax) and a loss of earnings per share of 22.3 cents. Mining assets for the year 1999 to 2000 were reduced from MYR102,789 million to MYR41,648million with nearly MYR67,526 million being written off. In the year 2000, MMC had an operating loss of about RM6million. The losses were offset by the sale of its other investments totaled at RM245million in 2000 and RM67 million in 1999. In 1998, MMC sold of its shares of Homestake Mining Corporation for RM559 million to make up for its losses. The advent of the new millennium witnessed further improvement in the Malaysian economy after the financial crisis of 1997 and indications are that recovery is firmly on track and is broad based. Mining was not a feasible option anymore due to stiff competition, limited opportunities within Malaysia, and declining profits. Therefore this lead to its transformation from a mining oriented company to a more diverse operations company. Today, MMC is focused on its vision of becoming a premier utilities and infrastructure group.COMPANY PROFILE AND OPERATIONS

MMC Corporation Berhad is currently a utilities and infrastructure company, which deals with transport and logistics, energy and utilities, and infrastructure. For the year ending 2013, MMC posted total income of MYR7.45 billion with net profit of MYR228.6 million and its total assets worth 40.3 billion. A detailed distribution of asset has been shown under Illustration 1. MMC also has about 2.94 thousand employees. We shall now explore MMC's core business projects below.

Core Businesses & Products: Their key businesses are operator of container terminal and port, largest independent power producer. Infrastructure and construction, and Peninsular Malaysia's sole supplier of natural gas to the non-power sector. On the international front, their focuses are on utilities and logistics sectors. They are the joint master developer of the Jazan Economic City in the Kingdom of Saudi Arabia.

Their main core businesses are related with Ports & Logistics, Energy & Utilities and Engineering & Construction.

1. Ports & Logistics: Their transport & logistics sector range from seaport businesses both domestically and internationally, airport & air logistics and the SMART motorway.

Pelabuhan Tanjung Pelepas: MMC's strategic acquisition of a 70% equity interest in PTP is expected to drive the Group's long-term earnings growth in the Ports & Logistics sector. It has also given MMC a controlling stake in a world-class port and Malaysia's leading port operations. PTP has recorded a phenomenal growth since commencing operations in 2000, and handled 7.7 million TEUs in 2012. A historical sales data of PTP has been illustrated in Exhibit 1 Johor Port: With the acquisition of Johor Port, MMC owns two strategic ports located in Johor, with a potential combined capacity of 10 million TEUs. Johor Port started operations in 1977 and is today, Malaysia's leading multi-purpose terminal, handling both containerized and bulk cargo. Senai Airport Terminal Services: In 2009, following the acquisition of Senai Airport Terminal Services Sdn Bhd (SATS), MMC widened its involvement in the transport and logistics business into the area of air logistics. Sultan Ismail International Airport, also known as Senai International Airport is the main gateway to Iskandar Malaysia.

Red Sea Gateway Terminal: Red Sea Gateway Terminal (RSGT) is the third and latest world-class container facility at Jeddah Islamic Port, Saudi Arabia's No. 1 port. RSGT's strategic location makes it an obvious choice for shipping lines with large transshipment volumes which also require easy access to Saudi Arabia.

2. Energy & Utilities: MMC is a key player in power generation. They are also Malaysias sole supplier of natural gas to the non-power sector and the largest supplier of treated water in Johor. They are also a leading gas engineering consultancy to the oil & gas and petrochemical industries in Malaysia and the region.

Malakoff: MMCs involvement in the Energy & Utilities sectorsis spearheaded by Malakoff, the nations largest Independent Power Producer(IPP) with an extensive network of power plants strategically located throughout the Peninsular Malaysia. In May 2007, MMC completed the RM9.3 billion purchase of Malakoff businesses, which is the largest in the history of Malaysias merger and acquisition. With the completion, MMC owns 51% of Malakoff shareholding.

Gas Malaysia: MMC is involved in natural gas distribution via its 30.93% effective interest in total energy solutions provider Gas Malaysia. Gas Malaysia Berhad provides a clean, efficient, cost-effective and uninterrupted supply of natural gas and liquefied petroleum gas to industries, commercial businesses and homes. Exhibit 2 shows the historical sales data of Gas Malaysia. Aliran Ihsan Resources Berhad: MMC established its footprint in the water industry with its wholly-owned subsidiary Aliran Ihsan Resources Bhd (AIRB). This allows MMC to leverage on AIRB's expertise to grow its utilities business both locally and internationally and enable it to be an integrated water and power producer. AIRB is one of the largest suppliers of treated water in Malaysia, with a portfolio of 16 water treatment plants with a combined capacity of 616 MLD.

3. Engineering & Construction: MMC has a strong track record in the engineering & construction sector. They are currently undertaking the RM12.5 billion electrified double tracking railway project between Ipoh and Padang Besar, Malaysias largest infrastructure project.

Klang Valley Mass Rapid Transit: The Mass Rapid Transit (MRT), part of the Economic Transformation is owned by the Government of Malaysia through MRT Corporation. MMC GAMUDA KVMRT (T) SDN BHD was awarded to design and construct the underground works of MRT. MMC GAMUDA Joint Venture Sdn Bhd is a joint venture company between two Malaysia largest engineering construction groups. Electrified Double Tracking Railway Project: The Electrified Double Tracking Railway project is a 329-km northern railway project that integrates with Keretapi Tanah Melayu Berhads main line from Ipoh to Johor Bahru. The project is carried out by MMC-Gamuda Joint Venture Sdn Bhd, is a 50:50 joint venture company between MMC and Gamuda Berhad.

Stormwater Management & Road Tunnel (SMART Tunnel): SMART- The first and one of a kind dual-purpose tunnel in the world. SMART represents an innovative and unique solution to the Malaysian capitals long-term traffic and flooding problems.

Power plants and infrastructure: The Company is also involved in power transmission lines, substations, airports, hospitals, marine engineering structures, highways, bridges, foundation and geotechnical works.

Others: MCC also involve with other activities but may not be considered as their core activities like airport operations, freezone development, and operator of Tusder container terminal at Jeddah port.Market Analysis

Since MMC has diverse business operations, a market analysis of its three core operations will be done. This is in power generation and electricity, construction and infrastructure, and logistics (in particular port facilities). According to Business Monitor International (BMI), electricity generation in Malaysia will continue to grow by 4.7% in 2014. The results are lower than 2013 due to poor economic outlook as well as an impending increase in the price of electricity. Long term outlook remained optimistic at 4.5% growth per annum from 2013 to 2023 due to modest economic growth to drive the consumption of electricity. This growth potential is encapsulated in the government's Economic Transformation Program (ETP). The program is aimed at attracting economic investment between 2011 and 2020. Should this be realized then, the electricity demand for the region should raise. This bodes well for MMC as it is one of the IPP companies (via Malakoff). Therefore MMC's outlook remains optimistic in this field.

Logistics field is expected to grow by 9.5% in Malaysia according to Ministry of International Trade and Investment (MITI). Malaysia's total cargo volumes are expected to grow at a moderate pace and cargo sea volume is expected to grow by 5% in 2013. However it was noted that majority of Malaysia's cargo was concentrated in Port Klang. However MMC expects that the port and logistics branch of their business will continue to grow but with decreased income from its operations due to rising costs. The continued importance of the port is assured due to the closeness of Port of Tanjong Pelepas to the Iskandar Economic Zone. However we have to take into account of competition from Port Klang as well as the competition from Singapore. How this plays out will depend largely on strategies employed by all these entities and the requirements of local industries. From now its role in the logistics sector remains competitive and subjective to the economic conditions of the region and rising costs of operations.

The construction and infrastructure industry of Malaysia depends largely on the government of Malaysia especially on large infrastructure projects (e.g. MRT, tunnel constructions, high speed rail, etc.). Projected construction growth for Malaysia, done for Asia Construction Outlook, is at 4.5% per annum with India leading at 8.9%, China and Japan at 7.6%. In a survey conducted for a long term outlook (about 10 years) construction industry in Asia will remain robust and strong. Locally, infrastructure growth is expected to be sustained by mass affordable housing schemes as well as economic development corridor programs. In addition, the Economic Transformation Program (ETP) projects including the Klang Valley Mass Rapid Transit system, Light Rail Transit extensions, Petronas Rapid Transit complex, and Iskandar development region in Johor which will be enhanced by RTS transit link between Woodlands, Singapore and Johor Bahru, will further provide growth for the construction and infrastructure industry. All these projects will provide impetus for growth for MMC as it has stakes and contracts in these projects provided by the government. However over the coming years, the impact of these works will need to be monitored particularly in terms of how increased activity will affect the availability of engineering and construction companies and resources, as well as the availability and prices of materials and labor (pg 14, Asia Construction Outlook 2013 report). Long term growth in construction is expected to be at 5% per annum and the focus to the end of the decade is on improvements to the transport infrastructure in Peninsular Malaysia with several large projects in Kuala Lumpur and outlying states. The market outlook for the construction and infrastructure to be robust and positive due to attractiveness of these projects to the international market for materials and expertise. MMC is expected to benefit from these largesse due to its close connections and experience with the current government.

In addition to a market analysis of the industries that MMC is involved in, we have also conducted a SWOT (Strength, Weakness, Opportunity, Threats) assessment. Below is the table for the SWOT.

LOGISTICS & PORT - SWOT ANALYSIS

Strengths

Strategic location

Good connectivity with roads and rail

Serving a populous and dynamic economic area

Receives financial assistance from Government

Weaknesses

Lack of maintenance of port facilities

No space for expansion

Absence of assistance from the Federal government to dredge channels

Limited capacity and capability to handle greater volume and more variety of cargo

Opportunities

Growth prospect of intra-Asian trade

Growing transshipment volumes

Lot of Expansion plans for all Malaysian ports

Logistics field is expected to grow by 9.5% in MalaysiaThreats

Proximity to Singapore Port whose dominance as a mega hub port in the region poses keen competition

Illegal landing points and private jetties

ENERGY & UTILITIES - SWOT ANALYSIS

Strengths

Good physical infrastructure

The government has recently given the go-ahead to begin identifying suitable sites for thecountrys first nuclear power plant Malaysias sole supplier of natural gas to the non-power sector and the largest supplier of treated water in JohorWeaknesses

The countrys energy sector is set to become more competitive

Increase in electricity prices Lot of governmental restrictions

Opportunities

Gas production increased in the 1990s (11%/year), from 17 bcm in 1990 to 45 bcm in 2000.

Total energy consumption increased at a rapid pace of 4.4%/year

Electricity generation will continue to grow by 4.7% in 2014Threats

Petronas is the main player both in natural gas production and on the LNG market

CONSTRUCTION & INFRASTRUCTURE - SWOT ANALYSIS

Strengths

The New Development Policy and Vision 2020 (from 1991 onwards)

MMC has a strong track record in the engineering & construction sector

Specialist contractors for power plant projectsWeaknesses

High dependence to governmental regulation Power of competitors

Opportunities

The growth of the construction industry fell from 14.2 percent in 1996 to 9.5 percent in 1997. Construction growth further fell to 24 percent in 1998

Construction of new infrastructure projects between 2007-2011 resulted in an average growth rate of 5.9%

For 2012, the sector expanded strongly by 18.9% in the first half of the year supported by strong activities in the residential and civil engineering subsectorsThreats

From 2000 to 2006 the construction sector grew marginally by 0.7%

Similarity with some competitors

In conclusion of this market analysis of power, logistics, and infrastructure, MMC is expected to grow and benefit from these forecasts. It is well positioned and has the experience from its previous projects to grow in these areas.

Competitor Analysis

Since MMC has a few core businesses it is necessary to divide its competitors to a few companies according to industry. Namely we will concentrate on key players in Malaysia of these industries. For the port industries MMC's key competitors is Westport and Northport. Both of these are located in Malaysia. Apart from due to its closeness to Singapore, Port of Tanjong Pelepas faces stiff competition from Singapore. However we will be only concentrating on Northport and Westport because we will need to discuss about its other competitor in other fields as well. To do a competitor analysis of MMC when it comes to construction and infrastructure we will take an example of IJM Bhd. as well as YTL Corp. Bhd. YTL Corp Bhd. Is also similar to MMC as it is also an IPP producer in Malaysia as well. MMC and YTL are both key players in IPP in Malaysia. By doing a competitor analysis of these companies we will see how good MMC is performing. First we will see how much capital they have and how they are doing in relative to MMC. As MMC is a holding company it is beyond the scope of this paper to analyze all its financial and operational operations. We are well aware of the limitations of our competitor analysis as will be comparing in certain instances a holding company as compare to a company concentrated in a certain field. For example, Northport and Westport are concentrated on port management and does not have other known core operations, unlike MMC.

According to market evaluation of Financial Times (on 29 March 2014), MMC Corporation Bhd. has about 305 million common shares issued in the KLSE (Average Price: RM2.60 per share). Net income for MMC is at RM 228.66 million down from previous year's forecasts which is due to increasing costs, with total revenue of about RM7.45billion. Return of equity (ROE) at 3.21% and Return of investment (ROI) at 1.34% Consensus forecasts by its analyst suggested that it will outperform the market and advised investors to keep its shares. Therefore MMC is doing comparatively well for a company that size.

YTL Corporation Bhd. is similar to MMC. YTL has operations in utilities as well as construction and represents a holding company with another interest as well. It also has interest in information technology, hotel and restaurant operations, cement manufacturing and trading, property investment and development, and management services. In power utilities, it and MMC represent two major key players as an IPP and a competitor in the field of infrastructure and construction development. YTL has about 1,074 million common shares issued in the KLSE (Average Price: RM1.50 per share) generating about RM19.9billion and net income of RM1.34 billion . The ROE and ROI for YTL is 10.56% and 5.03% respectively. Consensus among analyst is that YTL will outperform as well. YTL has international operations around the world.

Another competitor for MMC in the construction and infrastructure industry is IJM Corporation Bhd. Compared to MMC, IJM has better ROE and ROI (14.9% and 10.16% respectively). It's strength lies in construction, property development, and investment holding activities. It has 1,383 million shares being traded at an average of RM6 per share. In terms of capital it outstrips both YTL and MMC. Analyst suggested that IJM is a good company to invest in and will remain strong in the construction market therefore a stiff competitor to MMC. It has more experienced in construction projects compared to MMC and better position financially to compete with it.

For the next competitor analysis we will look at competitors in the port facilities. Firstly we will look at Westport Holdings Bhd. Westport Holdings Bhd. is the operator for Westport in Port Klang. Westport Holdings Bhd. Has about 341 million common shares being traded at an average price of RM2.50 per share with analyst predicting the Westport to hold its status. Westport Holdings Bhd. was just recently listed on KLSE on 18th October 2013 and therefore has no relevant ROI and ROE data. NCB Holding Bhd. is the holding company for Northport. Northport (Malaysia) Bhd. which operates Northport is a subsidiary of NCB. Its core operations are port and logistics operations. It has 473 million shares being traded and has seen a drop in its shares' prices to RM3.19. Analyst is of the opinion that NCB are having problems with its logistics division and the consensus is to hold the shares for long term investment.

Trend analysis of their share market performance for YTL, IJM, and MMC indicated that MMC and IJM are doing slightly better than YTL. Profit margin (taken from http://www.malaysiastock.biz) shows that MMC has a steady increase in profit margin until last year where it drops probably due to increase in costs and revenue sources. YTL has posted continued steady growth in profit margin although total revenue has dropped in 2013 while IJM continue to do well and has continued to post consistent profit margin with increased margin in 2013. NCB posted continued growth that has taken a sharp drop last year probably due to contract renewal of port lease with the government and non-performance of their logistic division. Westport trend remain stable since its listing on the stock exchange. Trend analysis of all of MMC and its competitors revealed that this industry depends on a monopolistic competition and governmental support of infrastructural projects.

MMC core operations are capital intensive and can be said monopolistic competition. Monopoly is defined as a market structure with significant barriers to entry. In this case, power utilities, infrastructure, and port facilities are capital intensive and the market share is divided by a few companies with the capital, assets, and the experience to do so. Barriers to entry is high for these industries and services. The monopolistic competition is also mainly due to the economies of scale of the industry there are in. Therefore the market for these operations depend largely on company strategies to maximize profit and minimize costs. Returns to these projects will always depend largely on market forces, forecasting, and company strategy. Market forces dictate the cost and if the costs go up (for example fuel price) it will affect the net income of the company. MMC and its competitors are always faced with these challenges and the ability to circumvent these challenges will see which company can profit the most.Strategy of Changing Operations Successfully

The principal activities of MMC before the year 2000 were mining and mineral exploration, engineering, infrastructure and utilities. MMC also has stakes in manufacturing and processing as well as other investments, for example in Sime Darby. As we can observe from its operations, the change from mining to infrastructure, utilities, and logistics did not happen overnight but started gradually but picked up after the millennium. During the economic crisis of 1997, MMC experienced a sharp drop in its business especially in engineering. The economic crisis is better known as 1997 Financial Economic Crisis. In July 1997, within days of theThai bahtdevaluation, the Malaysianringgitwas "attacked" by speculators and the ringgit had lost 50% of its value, falling from above 2.50 to under 4.57 on (23 January 1998) to the dollar. As a result the countrys real annual GDP plunged 7.4% during 1997-1998 and the overall economy was affected including MMC. To make situation worse the further drop in metal prices did not help the situation. As the core revenue of MMC were obtained from mining this particularly hit MMC hard that was mentioned above.

In the year 2001, MMC decided to do a business consolidation and divest its interest in mining to concentrate on its other business activities. It decided to concentrate and shift its core businesses to power and infrastructural sectors. It disposed of its 49.9% stake in Ashton Mining Ltd. totaling about RM407.19 million and bought over Malakoff Bhd., an Independent Power Producer (IPP). MMC also ventured into a conditional share sale agreement with Seaport Terminal (Johor) Sdn. Bhd. to acquire interest in the Port of Tanjung Pelepas therefore venturing into the business of logistics and port management. This was financed through the issuance of shares to raise the capital to acquire it. In 2002, MMC acquired 19.6% of IJM and 100% stake of Zelan, both construction companies. During that year, MMC managed to successfully bid for the construction of the SMART project, a storm drainage and road structure project in Kuala Lumpur. This project enabled it to make good profits and assured its reputation in the infrastructure field. By 2003, it had a recorded net profit of RM222.8 million which was lower than expected because of its consolidation of Port of Tanjong Pelepas. In 2004, MMC generated RM1.1 billion of revenue with 65% coming from Malakoff and saw MMC divest its shares in Sime Darby. By 2005, MMC rebranded itself to concentrate in the field of utilities, port facilities, and infrastructure based company. In 2011, MMC celebrated its 100 years in incorporation and became a project delivery partner for MRT. It is reported by 2013, mining represents less than 1% of its revenue and MMC has managed to change from a mining type company to a more diverse business holding company with its core operations in infrastructure, utilities, and logistics.

Why did MMC decided to change its core operations? This may be due to the fact that in the face of dwindling profits and the declining mining industry in Malaysia has forced it to re-evaluate it business practices. Tin mining in Malaysia was a declining industry in Malaysia since the 1980s and there was no significant discoveries of other precious or economical metals in Malaysia might have forced its hand. Perhaps it felt that it cannot compete with other mining companies in the international field like BHP or Rio Tinto. Another reason was that it may want to concentrate on business that it is in already, business like engineering and construction. With its experience in highway construction, for example Butterworth - Kulim Highway Privatization Project, it felt that it had better chance to profit for the infrastructure industry in Malaysia in the face of infrastructure growth spurred by the government to counter the 1997 financial crisis. The opportunity to help Malaysia grow may also be a reason for MMC to concentrate on its other business operations.

Changing a company's core operations is not something new and a few international companies had done so and succeeded from it. Minnesota Mining and Manufacturing (3M) is one such company that changed from mining conundrum to processing sand paper to being a leader in paper products worldwide. Nokia started out as a paper mill company with operations in rubber works and cable works that morphed to selling mobile phones and games. Dupont used to manufacture black gun powder in 1802 before and now specializes in various chemical products like polymer adhesives, insecticides, fire extinguishers, and weatherization systems. These companies, like MMC, in face of decreasing profits and increased competition decided to change. The ability to transform and change successfully will be important and how MMC Corporation managed to do that successfully will be discussed. First of all, MMC had reserves of revenue (retained capital) and managed to raise new capital that had enabled it to invest in other projects. In addition, as mentioned before, MMC already has some expertise in engineering and construction. These two factors helped tremendously as well as support from the Malaysian government. The ability of the company's leadership and their vision to change and rebrand MMC had been successful in helping it transformed. With these factors and advantages MMC had managed to successfully change from a mining oriented company to a more diverse company with strengths in utilities, infrastructure, and port facilities. In the face of declining profits, stiff competition, and limited opportunities MMC had taken the step to transform and with a combination of successful management, good leadership, good investment, and government encouragement had done so successfully.CONCLUSION

Change is rarely easy. People resist change and it is quintessential that leaders have to guide and be on the ground with the rank and file of the company to help it change. MMC probably faced this problem when it announced that it was changing its core businesses. Through a combination of good leadership and the pressure to change it had managed to transform its operations. However these are not the only causes for it to change. The financial capability and business acumen were the other two reasons. Financial capability by selling off the operations that it did not want to concentrate on and using the capital to invest in opportunities that it thinks will make good returns and investment. The vision and good forecasting in seizing this opportunity is another reason for its successful transformation. Another reason why it managed to transform its operations is government encouragement in the form of port facilities and investment. We can observe that through these steps MMC had managed to transform its operations from a mining based company to a diverse company with core operations in logistics, utilities, and infrastructure. From the market analysis and competitor analysis the market will remain competitive but analyst remain hopeful and optimistic about MMC's profitability in the future.Illustration 1

Exhibit 1

Exhibit 2

References

It should be noted various reports and references are done by using MMC Corporation Annual reports obtained from the company website. Various annual reports and analyses of competitors as well as MMC Corporation Bhd. are obtained from the Financial Times website through Putra Business School subscription."MMC Corporation" MMC Corportaion Bhd. April 2014.

"Financial Times" Financial Times. April 2014

"Malaysia Power Report" 27 March 2014, March 2014

"Asia Construction Outlook 2013" 4 April 2014, March 2013 < http://www.aecom.com/ deployedfiles/Internet/Geographies/Asia/Asia%20News/Asia%20Construction%20Outlook_2013%20_%20final2%20_%20small.pdf>"200 Companies to Participate in ASEAN Logistics and Transport Show" Ministry of International Trade and Investment 4 April2014, September 2013

Putra Business School. Operations Management GSM 5313 Custom Created Textbook. 2014McGuigan, James R., Moyer R.Charles, and Harris, Frederick H. deB, Economics for Managers (12th edition), Canada, 2011. 14