Write-up: CEO Series 31 – Natasha Kamaluddin , Managing Partner of Ethos and Co
YCM CEO SERIES 31: NATASHA KAMALUDDIN, MANAGING PARTNER OF ETHOS & Co
Writing Credits: Farhana Roslan
The below is the write up from the session with Natasha Kamaluddin, Managing Partner of Ethos and Company.
Natasha began the session assuring the crowd that she had only a maximum of 15 slides.
Natasha then informed the crowd that she has decided to talk about Malaysia, making a slight comment of her favourite topic; political economy. She joked that most of us in the room at the time were either too young or were not even born yet, to really understand the NEP and its justifications. She did not discount the fact that she was standing where she is today, as a result of the NEP.
Back when the NEP was originated, 60% of Malaysians were in poverty. Up to the year 2000, the NEP was largely successful. Economic growth was ranging between 5 to 10%. It was only after 2000 that we have come to realize and find that our growth prospects weakened considerably. Natasha notes that this was probably attributed to the two major economic recessions Malaysia suffered from (Late 90’s and 2008). She asserts that the cost was too high (cost of recovering the economy), for an economy like Malaysia (to sustain incredible growth we enjoyed in the past).
Then Natasha went on with the stimulus packages that Malaysia has had. Malaysian government debt grew (CAGR) more than 12% (federal government debt as a % of GDP). She informed the crowd that we are now at an (alarming) 74% level. However, she notes that this is true if we use national income as denominator. Arguably, the experienced economist that Natasha is, she would prefer using government income instead, which would bring the debt level to 26%. In both cases, she notes that the government debt is still considered very high.
Natasha went on to explain a chart showing that Malaysia is still very much a resource based economy; with crude oil only is making up 73% of our GDP. But, Natasha points out that investment and consumption (private investment as a share of GDP) is very low. This will one way or another translate into very low productivity growth in Malaysia, suggesting that fundamentals is very concerning.
Because productivity growth is a problem, Natasha points out that the aim for Malaysia to be a high income nation is going to be a tough pursuit. She pointed out that the middle and bottom 40% income is stagnated. Talent in Malaysia is so scarce, that there is so much room for the slightly skilled labour force to demand higher wage levels. Natasha supports with some statistics that only 5% of the Malaysian labour force earns more than RM5,000 per month. She jokingly congratulates any members of the audience earning RM 5,000 or more per month, saying they would be the top 5% of Malaysia’s income earners. Referring to these arguments, we are, she says, in deep trouble (as an economy).
REASON NUMBER 1: Execution
Natasha proposes that the ONE single most important reason this is, is execution problems.
She recollects 1970’s Malaysia, where we started off with a commodity-based economy, however most of the plantation estates and mines were still majority owned by the British colonial masters. She highlights government initiatives, citing the example of PNB, as some of the organistaions who made a considerable effort to acquire back these assets so that Malaysians will start to actually own these resources ourselves.
But then we went on to still having Multi National Companies (MNCs) develop and establish their presence in Malaysia. She poses a question to the crowd, asking us what sort of MNC-type of companies were based in Malaysia; mostly resource-based organizations and hence, there really weren’t much competition.
She supports this with another alarming statistic; 28% Foreign Direct Investment (FDI) into South East Asia went into Malaysia in the 1970’s. Now it is 11%. Natasha began explaining why this is.
Most value chains of services start with R&D then component and ingredient and manufacturing, assembly, final assembly, and then marketing.
Essentially, however thriving with FDI Malaysia was back then (being the electronics hub), we were sadly but true, only mainly the final assembly hub. The FDIs were resource seeking (namely cheap cost of semi skilled labour) and not as many value or technological know-how and substances were actually imparted onto us. This translates to only 15% value-add.
So essentially, Natasha claims that our failure was to develop ENOUGH backward linkages in the value chain of services and products. So that we had all these FDI come in and go with not enough knowledge transfer onto us.
She provided the example of Palm Oil. Palm Oil was THE Malaysian thing; most major FDIs were coming in under the pretext of Palm Oil development. This was when the government imposed rules on how each FDI must operate in the form of JV with Malaysian home-grown partners in the ratio of 50:50. This saw the establishment of major Malaysian based Palm Oil developers. Natasha uses the example of P&G, Felda, Cognaise, Golden Hope.
Natasha claims that this is quite counterproductive, because the FDI sides were the ones to design their processes so as to ensure minimal transfer of technology.
What we could have done instead, was to collaborate with MPOB/ PORIM, do collaborative research products, and impose the Malaysian ownership of the end legal entity since we had a hand in the development of the end product.
As a result, Malaysians high end technical skills were not created, which brings to exactly why now, there is no reason for any FDI to come into Malaysia and establish value-added services in Malaysia!
REASON NUMBER 2: Privatization of Government Linked Conglomerates
Natasha recalled the era of this privatization of conglomerates back in the 80’s to 90’s period. She explains that this was the time when the experimentation of the creation of mega entrepreneurs such as the likes of Tan Sri Halim Saad and Tan Sri Tajuddin Ramli.
The government had these major entrepreneurs buy these entities in order to privatize them. But, Natasha points out again, that because of breakdown (between government ran organizations and privatization, corporate governance and ability to establish economic relevance as a private company), almost all these organizations had to had the government come back in to re-nationalize those assets.
Natasha however, does not discount how Khazanah Nasional, for example, had done a successful transformation to some of these assets. This brings us to today, where we allow entrepreneurs to manage these assets again.
Natasha then digresses, stating that she acknowledges that the intention to rejuvenate corporate Malaysia was not wrong; it was again back to the execution issue.
Natasha said that the government of Malaysia actually does care about Malaysia a lot, proposing a less cliché outlook than what is probably on most of the Gen-Y minds sitting in this room today. This brought grins amongst the audience.
She simplifies this concern of our government with a few illustrations:
Foreigners taking our resources
Foreigners steal our jobs
Infant industries not getting a level playing field to grow
Consumers’ rights are not protected
These were all fears which justified the protectionist policies that the government establishes.
Hence, Natasha says, these brought about the forced JVs (that the government imposed on FDIs), control of expatriates, and the need for JPPD to sign off assuring the job given to this expatriate employee absolutely cannot be done by any Malaysian, as well as trade barriers, citing the case of Proton as the typical example.
This, she says, is where the government “failed”.
These coupled with of course, the usual inconsistency, corruption, lack of financial discipline, Natasha mentions briefly.
Tun Razak, she says, was the era where the government was deemed to know best and where government protectionist policies were needed to protect the rakyat. Through time, the private sector capabilities become better, leaving the government policies being left in the hands of people with comparatively (arguably) less capabilities.
Natasha compared (simplistically) that the Singapore approach was simple and effective- “Hey, actually we just want to create growth, an environment that supports (incoming and creation of) talent, and an environment for businesses to thrive.”
This is in contrast with the Malaysian approach; we take the approach of jump starting a few industries which we think is the next big bet. She lists down a few examples of our previous attempts and big investment themes; steel, Proton, Information and Communication Technology (ICT), Biotechnology, and then of course, there was the Halal industry.
By the way, Natasha does not discount that these could (individually) have been right, but we (Malaysia) just wanted to kill too many birds with one stone.
What should we have done instead?
(1) Use top-down approach
But be efficient, minimum level is only this size. She illustrates by giving an analogy; If, for example, we need only 3 why create 13? (referring to capital expenditure (CAPEX) orders of National Oil Integrated producer, Petronas). This is why as a result; Petronas gives licenses to about 300 companies, when only 30 are needed.
The Innovation Ecosystem in Malaysia is very very weak, Natasha argues. This means that only very projects translate into executable projects from idea generation stage. And this is referring to the best government projects funded!
Natasha points out another statistic; Only 10% of the ideas made it to commercialization stage and only 3% managed to reach profit-generation stage.
She then rhetorically asks the audience: What do we need to create a conducive environment for innovation?
She names deal flow as one of it. She uses the example of the U.S. where high quality scientists are able to come up with a solid market value adding product to sell. More importantly, they have a strong fund management expertise, which can really tell the value of a firm and its projects.
This makes it easy to consummate a deal.
In our case, Natasha says, we have very poor quality deal flow. (One reason is probably the fact that) only 8% of entrepreneurs have degrees in Malaysia.
(On the asset management side), the major institutional players in Malaysia are really only essentially the involvement of pension funds. She points out that of course, these funds generally like the dividend story, not so private equity and “growth-type” stories.
Furthermore, Natasha informs us that in Malaysia one would struggle to get a 10- to 20 times return on your investment (ROI), whereas other countries can churn out more than 1000 times returns for investors. Again, she explains, this is why there is no reason (for FDIs) to want to come to Malaysia, for her lack of scale and ability to generate these kind of (return) multiples.
Natasha points out that specialization needs scale and generalists cannot really come up with a value proposition. Malaysia lacks content, depth, competitiveness have traditionally been anchored on cost. As liberalization of prices and markets intensifies, it is going to be even harder for Malaysian industries to compete. She also notes that although our trade deficit is still positive, it is declining.
There is Good News!
Since 2004, Natasha notes that there has been a concerted effort to transform Malaysia (by various parties).
Phase 1, she notes, was the revamping of GLCTs, with names like Khalid and Wahid Omar taking leadership. These leadership positions also, she says with subtle hint of gladness, are contract-based. This means that these top positions are well governed with KPIs, paid well but possibility of being replaced is always there in case of non performance. She quotes that between 2004 and 2006, most senior management positions (in corporate Malaysia) were converted to contractual based positions.
These makes salaries become more adjusted to the market. Also, because of this move, it is (more likely) that these companies have the right people (at helm) which allowed the company-level sort of transformation (that Malaysia so badly needs to complement industry and country level transformation plans). This is done through proper rationalization and execution of strategy.
This then allows for the not only domestic but also international growth of these companies! Why? Natasha says that this because economies of scale in these growth sectors have been exhausted, so now it’s about finding economies elsewhere, which brings Malaysian companies to the strategy of expansion abroad.
Now, Natasha points out, it’s about the government using legislation to actually force rationalization and liberalization. This PM, she assures, has made some efforts to address key enablers which did not happen before.
She points out the NEM reform initiatives which included Talent Corp. Natasha says in all seriousness, there has been a demonstration of some form of success. We have seen a number of sectors which have undergone and seen industry consolidation, enabling building blocks for this industry to move forward.
Essentially what we were doing, Natasha says, that a few years ago we compared ourself against giants like Singapore, Japan and the west. Now we are struggling to compare (our competitiveness) against the likes of Vietnam.
Natasha speaks about her the subscale fabrication industry, which happen to be a subject she’s passionate about.
First it’s the labs. Then move forward. When it is more rational to consolidate, Malaysia says OK, we consolidate.
But she says there are no economies of scale. For example, how do we consolidate one north plant and another one down south? She points out the problem with merging 2 players with similar capabilities is that it is hard to extract consolidation benefits and economies of scale when these assets were not in the first place created strategically and holistically looked at in the country wide perspective.
Also, Natasha highlights the fragmented delivery system, on the government side. She asks rhetorically how it is possible for the government, when the delivery system is so fragmented, say want to support a company. She points out (based on experience) one to go through 22 different government agencies to coordinate across just to set up a business in Malaysia. This does not only apply to foreign ventures, but also for Malaysian initiatives.
The problem with government bodies is that nobody wants to give up their power for all these processes. So the idea of a one stop centre cannot happen.
What in the NEP started off with pure objectives, Natasha points out, over time became a Bumiputera agenda. She acknowledges that however this may be debated; she does not believe that this is the true spirit of the NEP. She claims that (arguably) the NEP now has been widely misunderstood. (Unfortunately), some members of the citizen have tended to believe they are entitled to different privileges just because they are Bumiputeras.
Natasha recalls that when we had the 30% equity allocation for bumiputera ruling, it started from the intention of transferring ownership from foreigners to locals. Now, these resources are owned in joint by Malaysians, so that the transfer now can only go from non bumiputeras to bumiputeras (which were not the intention).
Natasha then touched on the topic of the Malaysian education system. The difference is that we are so content driven (that we have forgone method of gaining the knowledge itself). She asserts that the point (of education) is not to cram content into a few years of education).
She cites the example of a British example, where only 2 things are meant to be achieved at the end of a 2-year learning period. (She recollects her experience undergoing her A-Levels in the UK).
These two are the aims to impart students with the knowledge of how to learn by themselves, and the love or learning.
She rekindles her deciding to take a History paper in her A-Levels (she was the only Malaysian to, as pointed out by her course advisor).
To illustrate how she as a Malaysian has been taught to concentrate too much on content and text; she recalls an examination question: The Wars of the Roses between the York and Lancasterians. The question was “Why did the duke of York become king of England?” She laughed while telling the audience how she tried looking for the answers to that question frantically.
She couldn’t find the answers.
Upon realizing that the answers really are not there, she then points out that the British system is a system that forces you to find the answer for yourself, instead of memorizing.
Natasha explains that only 0.4% students are sponsored to study abroad every year. This translates to only a few of the currently High-performing Bumiputeras (who earn RM20,000 to RM40,000 a month). These, she pointed out are foreign graduates (which makes it unfortunate, given the earlier statistic).
The sad thing is that such a small minority gets a foreign education. She recalls recruiting for clients, a national cause that attracted 900 resumes (all local grads), and they only made 1 hire for the client.
Natasha then claims that we are only improving because we are an open economy. This means, we improve as the world improves. In 15 years time, which country will be comparing ourselves to?
When I was in Accenture there were a bunch of women managers, the sad thing is that, I was kind of the only one left. All decided to part time, then not to work at all, but work in an environment and consciously allowed their careers to plateau. 8 years later there are still managers, so my journey is very relevant to all of you here. (That’s why I want to share with you my story).
Only 13% of women in Malaysia are in professional and managerial positions.
Where I am, it is lonely. They are all men. I even find that the women at my level, do not have kids.
I went to boarding school, got a Petronas scholarship to study at Millhill High Barnet for 2 years. I learned absolutely nothing but it was good fun. Got into Cambridge, and learned a lot of things.
In 3rd year in Cambridge, I decided that they wanted to further mankind’s knowledge and have PhD and work for World Bank. I missed the application deadline.
Accenture, which was then Anderson tracked me down and had an offer. I spent my time in Accenture for 8 years. I was fortunate that was the time when people were willing to pay a premium for Accenture–type skills.
Now there is Tatas and the other IT consultant Indian companies (which costs much less). On top of that, the lack of competition afforded new people like me, time. What now is sold for 3 months, was sold for a year.
American firms are good at documenting their knowledge capital. Most companies were at the time to automate a lot of things, so consultants get a good overview of how the company works. Nowadays, we’re only working for very specific solutions you don’t get the end-to-end picture.
Because I am the type to put myself into what I’m doing passionately, I got my PhD plan canceled.
After a while I got bored, I met the partners of the then start-up Ethos. It had lovely red carper in 900 sq feet office. I liked the people, they had a journey in mind, not a destination. I knew after a few minutes into the conversation that they could not afford me. I proposed to them ok, I didn’t mind being paid 5000 a month but compensate me when you land big deals.
Ethos itself has been an interesting journey. We were struggling to find meaningful work.
In the GLC transformation phase, we were lucky to get our big break, Nor Yaakob awarded contracts to start up Malaysian consultants: Bina Fikir took MAS, and Ethos was given the MAB contract.
That’s how we built the firm. We were ambitious, in 2006 we wanted to venture into finance and started Ethos Capital. Since then, were happy that it has come to a point that the same clients employing BCG and mc Kinsey giving us the same work. We’re now at time where even companies would want to buy us. Our aspirations grew us by 5 fold in 5 years, and it was all through hard honest work which was fulfilling.
Back to life story- 2006 had my 2nd child boy in the middle of project. In 2009-while we were working on PEMANDU and EQUINAS, my 3rd child is born so now I have a 13 year old, 4 year old and 1 year old. My advice:
Have kids early, get married early (you meet no one)
Always do what you’re over qualified for
To succeed as a woman:
1) Emulate male behavior
2) Be a woman, use charm and influence and getting your way all the time
Always realize the male ego is most important- must be willing to use that to your advantage
Always have options, always be prepared to walk away (career and relationships)
Financially independent, so I can move out of my marriage. I know I am there for the right reasons. It’s because I love my husband and my family, and not because I am there for the financial support.