PDC’s new plan to attract MNCs: Build and lease

GEORGE TOWN, Aug 3 — As the global economy grows more and more uncertain, the last thing the Penang Development Corporation (PDC) needed was a multinational corporation telling them it was considering moving its operations out of Penang. But that was the situation they found themselves in when Malaysian Automotive Lighting (Alma) told them its plans earlier this year. Alma is the Penang branch of Germanybased AL-Automotive Lighting, a sub-brand of Magneti Marelli, itself a subsidiary of the Fiat Group.

Alma is a key player in the local automotive lighting industry, producing all of Proton’s headlamps and 85 per cent of its cars’ rear lamps, as well as headlamps for Perodua’s Alza and Viva models. Half of the company’s business involves Japanese carmakers such as Suzuki, Honda, Mitsubishi and Mazda.

Alma’s customer base continues to grow, and so has the company. In fact, it has grown too big for Penang. Its present plant in Bayan Lepas which has 960 employees will not be able to cope with the growing global demand. “Our business plan is showing an increase in volume and customers,” said Mario Corsi, managing director of Alma, “and this plant is becoming too small.” And even if business weren’t great for the company, it would still have to move out; its building is actually owned by Bosch, and Bosch said it wanted it back. Alma isn’t the only company looking to grow. Bosch is growing as well.

Then the Fiat Group instructed the company not to buy new land or build its own plant. “Our business is not real estate,” said Corsi.

Alma had to find investors willing to buy land and build a new plant to rent to Alma for the long term. Their options included Thailand, where their Ford customers are based; China, where Automotive Lighting already has one plant and another on the way; and Kuala Lumpur, where it can be closer to Proton and Perodua. Furthermore, Penang labour, according to Corsi, is relatively more expensive compared to China or Thailand. While Alma searched for potential suitors, it was already busy designing the new plant. The move, like it or not, was happening.

The new plant under construction. — Picture courtesy of Penang Development Corporation

And that might have been the end of Alma’s involvement in Penang, if the PDC had not raised its hand and said, “We can do it for you.” And that was how the PDC’s build-and-lease programme was born.

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The PDC had never done anything like this before. Normally, it sells land to companies. But Alma didn’t want to spend money on land and buildings anymore — it wanted to pour resources into production and R&D.

That’s where build-and-lease came in. It’s a simple idea: the PDC builds the plant according to the client’s specifications, then leases it to the client for a number of years. The client doesn’t have to pay millions for land and a plant (just the rent), and the PDC gets to ensure the client remains in Penang. Everybody wins.

All of this was dependent on the PDC’s own skills and technical knowledge, which the PDC Consultancy (PDCC, a subsidiary of PDC) chairperson Iskandar Basha assures it has plenty of. “The PDC and PDCC have a wealth of knowledge and resources in terms of land and financial ability to cater to the needs of the customer. We can actually build according to the specification of the customer,” he said. “And for this, they are prepared to pay a fair rate, which in turn gives us a very handsome return.”

A “handsome return” may sound a little strange for the PDC, which, as a state agency, rarely ventures into profit-making enterprises, a recent exception being its Bayan Mutiara luxury properties. But Iskandar sees a potentially strong revenue stream in the build-and- lease programme. The PDC can see a good annuity return over the long term, while still holding onto the land. “It gives the PDC a very good return on investment because the rate is packed in such a way that it adjusts to inflation.”

But Iskandar said that profit isn’t why they are doing this. “Profit is a return that we look for in the risk that we are taking. But we are not embarking into this because of profit. We want to facilitate industries to come into Penang in a manner attractive to them.”

A key contributor to the programme’s success, according to Iskandar, was how quickly a deal was done. Discussions with Alma began in February, and an agreement was locked in place the following month. It was the first demonstration of the PDCC’s ability to fast-track and deliver something quickly. As Iskandar said, “Time kills deals.”

Iskandar credits Chief Minister Lim Guan Eng, also the chairperson of the PDC, for pushing the agency in this direction. “The PDC had the skills all along,” Iskandar said. “It was at (Lim’s) urging that we began exploring options like this and finding workable solutions. He encouraged us to see how we can work with and facilitate the industries, and at the same time gain something out of it.”

The PDC can indeed stand to profit from this new venture. After the agreement with Alma was announced, several companies expressed an interest in exploring build-and-lease options with the PDC. Motorola has just signed a build-and-lease agreement for its Mobility division worth close to RM100 million in Bayan Lepas. But the PDCC is being very selective about who they work with. It’s not about whether the company is local or multinational, Iskandar explained, noting at the same time that the PDCC’s evaluation criteria are very stringent. Among the factors considered are the market acceptance of the company’s product, the company’s market share, profitability, its long-term R&D investments and its current balance sheet.

Artist’s rendition of the new Alma plant in Batu Kawan. — Picture courtesy of Alma

And while getting the PDCC to build a plant for you based on your own designs is an appealing idea, there are limits to how unique or specialised it can be. While calculating the cost of a project, the PDCC would factor in retrofitting cost, which is the cost of retrofitting the plant so that another company can use it once the lease is up. “If the degree of uniqueness is anything close to about 70- 80 per cent, I think we would stay out.”

If the build-and-lease programme does become a successful revenue generator over the long term, an industrial real estate investment trust (Reit) is on the cards. “The Reit helps unlock value and has some advantages in terms of tax breaks. It also gives us a possibility to improve our liquidity, so that we can use the funds to do more build-and-lease and inject them back into the Reit.”

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On March 16, Alma and the PDC signed an RM117 million agreement to build an RM70 million facility in Batu Kawan, on Penang’s mainland. Alma will lease the facility for 20 years, with a renewal option for an additional 10. The new plant, scheduled to be ready by the beginning of 2013, is 33 per cent larger than its present facility and will employ 1,200 people. More importantly, Alma gets to stay in Penang.

The real winners, both Iskandar and Corsi say, are the local talent. “Our skills didn’t get created overnight,” said Iskandar. “Here’s an opportunity for us to tap into the expertise and the experience that the PDC has built over the years. And the people who gain are the consulting firms, civil and mechanical engineers, the contractors and the architects.” “We don’t want to lose the expertise of our people here,” said Alma’s Corsi. “A lot of them have 20 years’ experience with us. Our major asset in this company is our people.” Everybody wins. — Penang Monthly

* This article is taken from the August 2012 issue of Penang Monthly (www.penangmonthly.com), out now at all good bookshops and newsagents.