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A STUDY OF THE CONSTRAINTS ON ENHANCING THE LINKAGES BETWEENVENDORS ANDTHEIR ANCHOR COMPANIES

A thesis submitted to the Graduate School in partial lllillment of the requirement for the degree of Masters of Science(Management) Universiti Utara Malaysia

bY

UI WE1 LII (80062) .

(c) UI WE1 LII, 1996 All Rights Reserved

PERAKUAN KERJA TESIS SARJANA


(CERTIFICATION OF M4STERS Kami, yang bertandatangan, memperakukan bahawa We, the undersigned, certify that UI WEI LII
(nama penuhlfill

THESIS WORK)

name)

calon untuk ijazah ccndidqte for the degree of

Sarjana Sains (Pe8qurusan)

f,eiah mengemukakan tesisnya yang bertajuk has presented his/her thesis of the following title: A Study of The Constraints on Enhancing The Linkages Between Vendors and Their Anchor Companies. (seperti yang tercatat di muka surat tajuk dan kulit tesis) as it appears on the title page and front couer of thesis Sahawa tesjs tersebut boleh diterima dari segi bentuk serta kandungan, dan meliputi bitlang ihnu dengan memuaskan. that the thesis is acceptable in form and content, and th,at a satisfactory kmwledge of the fitid is couerd by the thesis. AX Tesis ?hesis Committee I;il Nama Name : Nama Nante : Prof. Dr. Peter Wyer
Supervisor)

Tandatangan Signature: Tandatangan Signatnre: Tandatangan

p. LG.q

(Penyelia Utama/Prirwipal

[ii!

Mohamad Noor Shariff

S&nature:

Tarikh
Date
I

PERMISSION TO USE

This thesis is a partial tilfillment for the Post Graduate Master of Science (A&.nagement) course in Universiti Utara Malaysia. The author permits the use of this thesis by the library of this University freely for research purpose. Permission for copying this thesis in any manner whether in whole or in part, for scholary purpose may be granted by the lecturers who have supervised my thesis work, or in their absence, by the Dean of the Graduate School. It is understood that any copying or publication or use of this thesis or parts for financial gains shall not be allowed without any written permission. It is also understood that due recognition shall be given to the author and to the University in any material use of this thesis. Request for permission to copy or to make other use of material in this thesis in whole or part should be addressed to :

The Dean of Graduate School Universiti Utara Malaysia 06010 Sintok Kedah

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ABSTRAK

Industri Kecil Sederhana(IKS) memainkan peranan penggenap kepada organisasi besar di dalarn sesuatu ekonomi. Mereka menawarkan kepada firma-firma besar komponen-komponen produk melaui sistem vendor ataupun sub-kontrak. Walaubagaimanapun, banyak kajian yang telah dibuat menunjukkan terdapat kekurangan pertalian ekonomi di antara syarikat-syarikat besar multinasional mahupun tempatan dengan IKS. Kekurangan pertalian ekonomi dan pcnyebaran faedah-faedah yang penting kepada perturnbuhan ekonomi telah membawa kepada kekenduran pertumbuhan dan peningkatan MS berbanding dengan syarikatsyarikat besar. Keperluan untuk menggalakkan dan mempertingkatkan

pembangunan IKS adalah mendesak dan perlu untuk memudahkan proses industrialisasi. Untuk mencapai matlamat ini, kerajaan telah malancarkan Program Pembangunan Vendor(PPV) sejak 1988. Fokus penyelidikan ini adalah untuk menetukan sebab-sebab ketidakcenderungan dalam menjalinkan pertalian efektif, kenapa pertumbuhan pertalian begitu terhad dan untuk meningkatkan pemahaman bagaimana pertalian ini dapat dipupukkan secara efektif. Empat kes kajian telah dijalankan dengan menggunakan instrumen temuduga yang dihasilkan daripada kajian bahan-bahan rujukan,dan temuduga

... 111

dengan pihak-pihak yang berkaitan. Satu struktur a~ ilisa yang mendalam terhadap maklumat yang didapati daripada temuduga kemudicnya dilakukan. Hasil daripada empat kes kajian itu, didapati ;ang halangan utama untuk menjalinkan per&than ialah kekurangan perhubungan peribadi ataupun rekod lampau yang baik seseorang usahawan itu. Halangan kepada pemeliharaan efektif pc~~alian pula ialah permintaan yang tidak konz.;ten dan sistem J-I-T yang d&ktikkan oleh syarikat sauh. Halangan terhadap pemupukan pembangunan vendor ialah layanan terhadap vendor sebagai satu entiti luar yang berasingan yang hanya untuk memenuhi kehendak-kehendak syarikat sauh. Dua syarat utama memelihara pertalian ialah kualiti barangan dan penghantaran yang tepat. Kurang berjayanya PPV boleh dikaitkan f&a yang syarikat-syarikat besar begitu enggan untuk mendapatkan bekalan daripada IKS yang mereka tidak begitu biasa atau kenali.

iv

ABSTRACT

SMIs play an important complementary role to large establishments in the economy. They supply many of the large firms with parts and components through vendorship or subcontrating. Nevertheless, many studies have indicated that there have been insufficient and/or ineffective economic linkages between MNCs and even local multinational corporations(LMCs) with SMIs. The lack of economic linkages and the insufficiency in the diffusion of I:he benefits vital to economic growth has Ied to the tremendous slackening in growth and upgrading of SMIs relative to MNCs. The need to encourage and upgrade the development of Skis is urgent and essential to facilitate the process of industrialization. Toward this end the Government launched the Vendor Development Programme in 1988. The focus of this research is on determining the reasons for the reluctance in forming effective linkages, why the development of linkages is so limited and on the enhancement of insight into how such linkages can be more effectively nurtured. Four case studies were conducted using interview instruments derived from relevant literature review and key informant interviews. In-depth structured analysis of information derived at interviews was then carried out. From the four case studies, it is revealed that the main constraint to forming linkages is the lack of personal contacts or track record of the entrepreneur. The hindrance to effective maintenance of relationship is the inconsitientcy of demand and the practice of J-I-T. The obstacle to nurturing the development of vendors is the treatment of vendors as just a separate entity serving the anchor companys needs. The two most inportant pre-requisites to the maintenance of a linkage are quality and delivery. The lack of success of the VDP can be traced to the fact that MNCs are reluctant to source from SMIs they are not familiar with.

..

ACKNOWLEDGEMENT
First and foremost, I would like to thank my supervisor Dr. Peter Wyer for his invaluable assistance, guidance and promptness throughout the preparation of this dissertation, without which it would have been a formidable task. I would also like to thank En. Mohamad Noor bin Shariff for his helpful comments and assistance. Acknowledgements must also be given to En. Rosh Othman of the Ministry of Entrepreneur Development, En. Ramzi Abdul Halim of the Kedah Development Authority, En. Suib and Tuan Haji Ismail of Teras Plastics, Mr. Sures of Gloss Technology, En. Wan Omar of SCRIN Technology and En. Rizal Tajudin of MOZA Precision Plastics for their graciousness and willingness in granting me the interview sessions . Last but not least, my sincere gratitude to my wife Ms. Elin Lai for her sacrifice, support and patience in seeing me through the whole programme. Not forgetting my son Jia Hao for being a bundle of joy and inspiration.

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ABBREVIATIONS
J-IT Just-In-Time Large Malaysian Corporations

LMCs z LSIS

Large Scale Industries

. :w

Ministry of Entrepreneur Development Multinational Corporations Ministry of International Trade and Industry Memorandum of Understanding

MNCS

MIT1 MOU

OEM R&D

Original Equipment Manufacturing Research and Development Small and Medium Scale Industries Vendor Development Programme

SMh VDP

vii

TABLE OF CONTENT Page PERMISSION TO USE ABSTRACT( $WASA MALAYSIA ) ABSTRACT(ENGLISH) ACKNOWLEDGEMENT ABBREVIATIONS CHAPTER CHAPTER 1 (Introduction) 1.1 Problems To Be Studied 1.2 Purpose of Research 1.3 Research Objective 1.4 Significance of the Problems and Justification of the Investigation 1.5 Probable Methodology 1.6 Validity/Reliability 1.7 Limitation D 1 3 4
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V

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4 5 5 7 8

CHAPTER 2(Literature Review & Key Infor .ant Interviews) 2.1 Definition of SMIs 2.2 Historical background of economic linkag. s 2.3 Vendor Development Programme( VDP) 2.4 Tripartite Vendor Scheme 2.5 The targetted industrial sectors 216 The role of banks and financial institutions to support the VDP 2.61 Commercial banks 2 62 Financial companies 2 63 Development banks 2.7 Technical assistance 2.8 Other related assistance 2.9 Vendor Development Committee 2.10 Factory visit P 2.11 Participation of Sub-vendors in the VDP 2.12 DeFtion of Subcontracting 2.13 Importance of subcontracting/vendor activities 2.14 Reasons for poor linkages 2.15 Suggestions for enhancing linkages 16 17 17

9 9 10 12 13 15 15

17 18 18 19I 19 19 20 20 34

2.16 Benefits of linkages 2.17 Issues relating to linkages 2.18 Interviews with key informants CHAPTER 3(HighIighting of Issues Raised 3.1 Overall view of the issues 3.11 Constraining factors 3.12 Linkage problems CHAPTER 4(Case Study - Gloss Technology 4.1 Profile of the firm 4.2 Establishment of linkage 4.3 Maintaining the relationship 4.4 Operation 4.5 Major development and future direction CHAPTER 5 (Case Study - SCRIN Technology) 5.1 Prorileofthefirm * 5.2 Establishment of linkage 5.3 Maintaining the relationship 5.4 Operation 5.5 Major development and future dii;ection 47 51

36 38 42 47 47

54 54 56 57 59 63 65 65 67 69 70 74

CHAPTER 6 (Case Study - MOZA Precision Plastic Iudustries) 6.1 Profile of the f 6.2 Establishment of linkage 6.3 Maintaining the relationship 6.4 Operation 6.5 Major development and future direction CHAPTER 7 (TERAS Plastic Precision Sdn. Bhd.) 7.1 Profile of the firm 7.2 Establishment of linkage 7.3 Maintaining the relationship 7.4 Operation 7.5 Major development and future direction CHAPTER 8 - Conclusion 8.1 Establishment of contacts 8.2 Nature of the relationship 8.3 Maintenance of relaeonship 8.4 Problems faced 8.5 Future development

76 76 78 79 81 . 84 86 86 88 89 91 93 94 94 95 96 96 97

Bibliography APFE&x 1 APPEMXX 2

99 103 112

CHAPTER 1
Introduction 1.1. General Descriution Of The Area Of Concern The 1990s will be a decade for the development of small and medium industries(SMIs) as Malaysia advances to the next phase of industrialisation. SMIs piay a very important socio-economic role in a developing country, They are not only recognised as a breeding ground for entrepreneurial development but they also act as a catalyst for employment and ancillary to the large and heavy industries. The SMIs are expected to become increasingly important in a more dynamic and competitive manuf&uring sector as supportive and complementary structures to large scale industries.(LSIs) Such linkages improve production costs for large scale industries while SMIs benefit from increasing returns to scale by supplying the sqme product/s to a number of LSIs. Strong intra-industry linkages are also necessary for import-substitution, prompting SMI development into future big * & indpstrial corporations, accelerating the process of upgrading indigenous R&D as well as creating a dyna*nic business community. SMIs are a key component in the drive towards strengthening Malaysias industrial base as they form the backbone. According to an Industrial Research study[unpublished record of THE Ministry of Entrepreneur Deveiopment(MED)], in 1988, there were 28,335 manufacturing concerns in Malaysia of which 92.6% of
r l

.-e

them are SMIs which create 40.2% of job oppor: nities for the whole industry. SMIs productivity output only amounted to RM11.900 compared to LSIs which is up to RM33,700. The capitai intensity on the other hand for each worker only reached RM12,300 compared to RM45,OOO for larger industry, A research study conducted by the Government(unpubiished record of MED) on 13,992 SM?s in 1988/89 showed that 69% of the SMIs comprise family or _ _

individually owned companies. On the capital aspect, 77% of them have capital of less than RM50,OOO while 10% are between RM50,OOO - RMlOO,OOO and the remaining 13% have paid up capital of between RMlOO,OOO - RhJ500,OOO. All this indicates that Malaysian SMIs are still far behind the pace of LSIs. In order to fulfill the governments aspiration to develop Malaysia as an industrial country in the year 2020, many approaches have been studied to develop SMIs in a systematic and well-planned manner at every level of implementation. Toward this end the Vendor Development Programme(VDP) was first launched by the government on 14 December 1988 through the PROTON Components Scheme. A VDP is an industrial marketing programme offering long term contracts aimed at developing SMls as reliable manufacturers and suppliers of industrial components, inputs, machineries, equipment and related industrial services required by LMCs and MN&. It also provides integration and linkages between SMIs with LMW MNCs and financial institutions. Though there have been some successes especially with large Malaysian corporations(LMCs), linkages with multinational corporations(MNCs) which

dominate the manufacturing sector have been weak. In the non-resourced based

industries, linkages in terms of local sourcing of inputs are estimated at only about 30% of total inputs while in the resource-based industries linkages of IocalIy sourced inputs are estimated at only about 54% of total inputs(Omar,l992). Concerted efforts are needed to integrate SMIs into the mainstream of industrial development. It is found that MNCs and LMCs are reluctant to source their products from local SMIs mainly due to their perception that most local S&Is are not capable of meeting their exacting requirements, in terms of quality pricing, on-time delivery and good management practices, In fact, the Minister of Entrepreneur Development was quoted as saying that as of March 1996, there had been only 79 vendor companies formed and only 54 LMCs and MNCs participating as anchor companies under the VDP and described this as not encouraging(New Straits Times, 1 O/4/96).

1.2. Problems To Be Studied The focus of this research is on determining the reasons for the reluctance in forming effective linkages, why the development of linkages is so limited and on the enhancement of insight into how such linkages can be more effkctiveIy nurtured. For the purpose of clarity on the study of linkages, linkages will be divided into two categories which are:- (a) subcontractors for those vendors outside the VDP and (b) vendors for those under the VDP.

1.3. Pumose Of Research It is hoped that the tripartite parties of the government, the MNCs or LMCs and the financial institutions involved in the VDP can derive better understanding of each others problems as a foundation for enhancing linkages, and that the resultant insight of the study can inform further research studies.

Specifically of value will be:i)- to gain the governments attention and support to provide incentives and implement programmes that can assist in developing SMIs ii) to highlight to LMCs and MNCs the benefits and advantages of having VDP or subcontracting for SMLs with the hope that they will start a vendor system and provide the market. iii) to highlight to LMCs, MNCs the relationship difEculties business/vendor perspective. from the small

1.4. Research Obiective 1.41 Primarv Obiective To examine the potential benefits of the small business and large company subcontracting relationship within the context of the Malaysian Vendor Development Programme and to determine the major constraints from the standpoint of both the small business and large company to effective development of the relationship. .

1.42 1.

Sub-obiectives

To determine the actual nature and form of the :DP. my) paception of the benefits

II. To determine the large companys(anchor comj

of the programme within the context of both pa: 2s pdential gains. III. To determine the small businesses perception 0 he pdential benefits. IV. To examine the constraints imposing on the et%ctive development of a VDP partnership and thus on the achievement of the pert vedbenefits.

1.5. Sienificance

Investieation

To highlight the problems faced by SMIs to be e: :%aged as subcontractors or as vendors under the VDP, the problems faced as sub :ontractors or vendors and the * s problems faced by anchor companies in the linkage relationship This will help to showcase the real issues in the hope that solutions could be found to further promote linkages as engines of growth.

1.6. Methodoloq Management research tends to be ad hoc and f?agnremed. Small business management research often communicates Corn a standpoint of insuflicient insight of the small business potential and problem-types by the researcher. Moreover, research- paradigms and frameworks evolved have, in the past, often been large company oriented. Within the context of case study research, such methodology has often been confused as little more than common sense storytelling. Thus, in order to attempt

to circumvent such methods ogy and conceptua undertake an epistemological bootstrapping appro based upon partial frameworkm8, whereby the relt

.AIEWS it is intended to i - e&ctively a methodology nt literature is reviewed and

key informants are interviewed in order to prc le the research with subframeworks of insight which raise the relevant : les t5r investigation in the research study and crucial research questions whit I need to be addressed. The frames of insight serve to inform design of a st. :ctured case study intenriew instrument and of an analytical framework for anal. ;is of data collected from the case study interviews. In outline, the methodology to be followed is: I. Review of the general small business literar-:re(from international sources

including Malaysia) (a) to clarify the definitional problem of small busis :ss and posit the small 6rm in terms of SMI as relating to the Malaysian governme CS VDP. (b) to consider the potential benefits and advantag-2s of the small business as a contributor to economic development{ i.e the advantages of being small to the individual business e.g. flexibility; and the potential inputs of small business to actual economic development of a country.) (c) to emphasise the potential unique problem types small businesses may face and which may constrain achievement of such stereotype smallness advantages as flexibility. II. Review of Malaysian small business literature foaJssed on the VDP to

determine exclusive insight and understanding of the linkages problems: (a) from

the standpoint of the small business; (b) from the standpoint of the anchor company and those non-anchor companies seeking small business linkages support. III. Preliminary interviews with key informants(relevant government

representatives; large company management experienced in the VDP issue; small business striving for vendor status) to firm up on or reC.tte/quali@ insight. Iv. Utilisation of the sub-frames of insight derived from (I) - (III) above to literature derived

design a case study interview instrument. V. Utilisation of literature and key informant insight to select participant case

studies{ anchor company, current small business vendors, prospective vendors) and identitication of key interviewees within case study firms. vi. VII. Actual case study interview. Development of an analytical framework(again using the literature/key

informant insight) to ensure in-depth structured analysis of information derived at interview. VIII. Summary of findings and conclusions.

1.7. ValidiWReliability

To attempt to ensure validity/reliability, the bootstrapping methodology is utilised to ensure depth of enhanced insight which in turn is used to inform design of the case study interview instrument. Within the actual case study interviews, the perspective of more than one key informant of the organisation is utilised to counter bias or subjectivity.

1.8. Limitations

Given the nature of this programme which is a taught Masters course with its accompanying time constraints, the focus of the study will be mainly on clarification of understanding on and insight into the stated topic. My study will be based on a case-study of two SMI vendors involved in the VDP and two outside the VDP in the state of Kedah. As a result of this limitation, the outcome of study may only be valid for the state of Kedah or at most the northern states of peninsular Malaysia. Added to this constraint is the fact that I am a part time student with job, family and financial commitments which in one way or another could have impacts on the scope and intensity of my research. As all factories in Kedah follow the same weekends as the state where I am working, this has made it very difficult for me to set up appointments for interviews coupled with time constraints and has disrupted attempts to seek the perspective of second key informants as initially set out.

CHAPTER2

Literature Review And Kev Informant Interview 2.1 Definition of SMIs

According to Mohd. Nasser et al (1990), the definition of small industry has been varied and diverse even among government agencies. The Co-ordinating Council for Development of Small Scale Industry(CCDSI) defines a small industry as one where the total &WI assets does not exceed RMz50,000. The Credit Guarantee Corporation(CGC) specifies that a f?rm having a paid up capital and reserves of less than RMlOO,OOO(fof RM250,000(for Bumiputeras) as small business. The Industrial Co-ordinating Act(ICA) exempts a firm with less than RM250,OOO as shareholder tinds and an employment force of less than 75 111 time workers from licensing. By exclusion all firms exempted tiom licensing are called Small Business Enterprise(SBE). It is difficult to draw a common description of a small business enterprise. Another non-Bumiputeras) and

problem is that investment and employment norms change according to the output of the firm. Examples (a) An agricultural farm may employ less than 25 workers and the investment may be less than RMlOO,OOO. The output may be RMl,OOO,OOO annually if it is a fruit or a commercial crop farm. (b) In the services sector a retail shop with an investment of RM500,OOO may be a small shop and employment would be less than 5 persons. (c) In the industrial sector we can find high technology small business with an investment of RMl ,OOO,OOO but with an employment of less than 110 workers. The three examples highlight that there is an urgent need to classify small business enterprises in each sector with specific definitions. For the purpose of my research, I shall defme SMIs using the qualification guideline to participate in the VDP issued by the Ministry of Entrepreneur Development as having a shareholders fund of RMlOO,OOO to RM2.5 million.

2.2 Historical backwound

of economic linkages

Prof. Fong( 1990) explains that the major stimulus of Malaysian economic growth since the early 1970s has been the vast inflow of foreign investment into the industrial sector and the active intervention of the public sector in the economy through direct equity and managerial involvement of large industrial projects. Although this has brought about great improvement in Malaysias per capita GDP, however, there has been insufficient trickling of the benefits of this growth. Many

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studies have indicated that there were very little, if any, economic linkages between the large multi-national corporations and the rest of the domestic economy in the form of goods and services purchased or subcontracting activities. He further emphasises that this phenomenon has led to the amplification of the dualistic economic structure in the Malaysian economy created since the colonial era. While the large MNCs have generally flourished in the modem enclaves in the country, there has been a lack of corresponding growth in the SMIs employing modem and up-to-date technologies. The absence of these features in SMEs has aggravated the probiem of technology-transfer and the generation of extensive economic linkages between the modem economic sector and the SMIs. The need to encourage and upgrade the development of SMIs through linkages is urgent and essential to facilitate the process of industrial deepening. Reahsing this, The government has been taking measures to nurture and upgrade the capabilities of SMls. The Governments overall objective with respect to SMIs is to develop local entrepreneurship, create productive employment and increase the productivity and incomes of small entrepreneurs.(Andy Seo, 1992) In pursuing the said objective, the Government has introduced several tailor-made schemes to accelerate the development of successful SMIs, amongst them is the VDP. According to unpublished records of the MED, the VDP started in the automotive sector through PROTON Components Scheme which was launched on 14 December 1988. This was implemented following a cabinet decision made on 6 July 1988 to assist local automotive components manufacturers, The scheme was then carried

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forward to the Sixth Malaysia Plan with the signing of a joint-agreement with PROTON as the implementing agency on 8 June 1992. Subsequently, on 4 August 1992, the National Development Council decided the VDP should be extended to other strategic industrial sector and subsector in the development of local SMI Vendors. The programme then proceeded to include the electrical and electronics sectors through the participation of Sapura Holdings Sdn. Bhd. and Sharp-Roxy Appliances Corp. (M) Sdn Bhd.. On 8 May 1995, the government decided to shift the VDP from the Ministry of International Trade and Industxy(MIT1) to the MED in order to give it better concentration.

2.3 Vendor Develooment ProerammdVDP) From information gathered from documentation and unpublished papers of the Ministry of Entrepreneur Development(MED), the main objective of the VDP is to create an industrial market in which local SMIs can become reliable manufacturers and suppliers of industrial inputs, machinery and equipment used by the large industries and MN&. It is a system to develop and provide a steady market to contractors, suppliers and manufacturers, by offering long term contracts. The VDP also provides greater integration and linkages between SMIs, large industries and MNCs and financial institutions to tirther enhance industrial development in Malaysia. To date, the programme includes the following:a. The Integrated Concept - The programme is implemented through an

integrated concept which involved various government agencies providing technical, financial, management and advisory assistance to the Skis. Two

12

companies are involved in the programme, namely, athrie Furniture Sdn. Bhd. in wood base furniture and BESTA Distribution Sdn. Bhd in sauce and cordials manufacturing.
b.

The PROTON Components Scheme - This is a special scheme launched in

December, 1988 with Perusahaan Otomobil; National Bhd (PROTON) appointed as the anchor company to develop Bumiputera SMIs in the automotive sector.
C.

The Electrical and Electronic Component Scheme - launched in June 1992

with Sharp-Roxy Appliances Corporation(M) Sdn. Bhd. aad Sapura Holdings Sdn. Bhd. as the anchor companies to develop SMIs in the electrical and electronics sector. d. In April 1993, the VDP expanded under the new concept referred to as the

The Tripartite Concept. Under this concept, the Ministry of Entrepreneur Development assume the role of the co-ordinator, the MNCs or large companies as the Anchor Companies which provide the captive markets and the Financial Institutions which wilI provide the necessary financing. To-date, there are 54 large corporations and MNCs participating as Anchor Companies, 79 SMIs participating as vendor companies, and 18 fmancial L institutions providing financial facilities under the tripartite VDP .

2.4 Trimwtite Vendor Scheme

Under this arrangement, an agreement would be concluded between an MNWLSI, a bank and the Government. The MOU had provisions in providing various assistance including marketing,technical and financial assistance, coordination of

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activities, reporting and follow-up actions which would need to be undertaken by each party to the agreement. In addition, the agreements also prescribed the criteria in the selection of potential SMI vendors. The VDP under the tripartite arrangement would provide a platform for a good networking between the private and public sectors. It would also serve as a . * strategy to improve domestic investment. The collaboration of 3 parties wouid also improve the effectiveness of the Scheme. ? This would be due to the fact that each party would have a commitment on their own respective areas. In this respect, the anchor company would only be responsible for providing the market and other technical f&ilities such as quality

control to the vendors. The banks then would assist in the financial aspects and also provide both management and consultancy services. The Ministry of Entrepreneur Development as the lead agency would identify all potential anchor companies, banks and vendors to participate in the programme. On April 20, 1993, the first MOU signing under the tripartite arrangement was made between the government, General Lumber Furniture Sdn. Bhd.(GLFSB) and Bank Pembangunan Malaysia Bhd.. Under this agreement, GLSFB has agreed to develop and appoint SMI companies as their vendors of furniture parts and components for the export market. GLFSB would also assist their vendors to * improve their production capacity, especiahy on the aspects of production cost and quality control. .

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It is expected that more LSIsIMNCs would be under the VDP programme since several financial to participate in the programme.

.ointcd as anchor companies ~titu&ms have shown interest

2.5 The TarPetted Industrial Sectors are:? Automotive Electrical and Electronics Plastics Rubber-based Machinery and Engineering Wood-based These sectors would be expanded to other potential industries in the near future. Under this programme, the vendor companies would be eligible to apply for various types of technical and kancial assistance from bdh the private and public sectors.

2.6 The Role of Banks and Financial Institutions to Samor@

the VDP

Under the MOU Agreement between the Government of Malaysia, the Anchor Companies and the Financial Institutions in the VDP, the role of mcial institutions are: i. ii. To evaluate the financial viability of every vendor project separately. To meet the financial requirements of the vendor under the scheme with

suitable financial packages.

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... Ill.

To report the financial performance of the vendors and the overall financial

performance of the scheme to the Committee on a quarterly basis. iv


V.

To assist and provide management and consultancy services to the vendors. To obtain prior approval from the Committee for any changes made to the

concept and scope of the scheme. vi. To implement from time to time all the changes to the concept and scope of

the scheme as approved by the Corn&tee. The financial assistance and advisory services provided by Commercial Banks, Finance Companies and Development Banks can be categorised into the following: -

2.61 Commercial Banks

i.

provide the normal banking facilities such as Term Loan, Overdraft and

Trade Facilities under the normal interest rates. ii. provide financing under the special financing schemes etilished by the

government through Bank Negara Malaysia for which Commercial Ban&s are the participating banks. Some of the special schemes are the New Entrepreneurs Fund(NEF) and Bumiputera Industrial Fund(BIF).
111.

...

assist and provide management and consultancy sexvices to the vendor

companies. iv. provide regular follow-up visits to clients projects by experienced officers

to discuss progress and offer advice and assistance whenever needed.

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2.62 Financial ComDanies

i. ii.
111.

Loans to purchase machineries Hire Purchase Leasing Mortgage loans

...

iv,

2.63 DeveloDment Banks

i.

provide special schemes established by the govanment through Bank

Negara Malaysia where Bank Industri and Bank Penkngunan are also the participating Banks for NEF and BIF. ii.
ill.

..

provide special funds under the government grants project loans assist and provide management and consultancy se&es.

..*

iv.

For more details on the various fkrancial and credit facilities for SMIs offered by principal financial institutions, commercial banks and government agencies, please refer to Appendix 1.

2.7 Technical Assistance

Automation and modernisation of machinery, upgrading OE tooling and equipment, facilitating technical agreement for technology tram&r and other relevant assistance for SMI development such as technical trzming and quality improvement through the Industrial Technical Assistance Fund( kF).

. 17

The system which has been instituted so far is to fat- itate the proper handling and treatment of enquiries and applications Erom SMI vendor companies to participate in the programme.

2.10 Factorv Visit Local SMI vendors under the VDP would be individually visited by a special team comprising representatives of MED, anchor companies and financial institutions. This visit is aimed to improve the factory conditions, production, management as well as building up good mutual relationships among the parties involved. It is hoped that through such collaboration all problems involved could be identified, analysed and solved to the advantage of vendors.

2.11 Particioation

of Sub-Vendors in the VDP

In order to encourage more entrepreneurs participating in this programme, the anchor companies and their vendors are advised to also develop sub-vendors under them. This mechanism will give a multiplier effect in which more sub-vendors could be developed and later on be upgraded to vendor status in the fkture. The commitment of the anchor companies to convince their vendors to appom subvendors is very important under this approach.

2.12 Definition of Subcontracting Subcontracting can de defined as the business activities involved in manufacturing, processing, assembling, testing, packing and any other operations of parts,

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components or parts thereof, sub-assemblies and final assemblies being contracted to outside enterprises mainly SMIs with the contract giving party supporting in till or partially the raw materials, equipment, technical expertise and support to the contract receiving party in completing the desired task.(Andy Seo, 1992)

2.13 Imuortance of subcontractiohendor

activities.

The sphere of subcontracting/vendor industries are within the domain of SMIs and act as supporting and ancillary sector to the larger enterprises. They play a very vital role in Malaysias economic development as they contributed significantly in terms of employment generation, income distribution and as the necessary supporting industries in providing service, parts, sub-assemblies, components and sub-contracting to larger industries. The intense flow of foreign investments into the country over the last few years and the subsequent take off has resulted in a growing need for supporting industries. This need is forecast to gain momentum over the next few years, as more investment projects come on-stream and foreign investments continue to pour in. However, SMI performance thus far has not been satisfactory.

2.14. Reasons for uoor IinkaPeq In Malaysia, linkages between bigger industries and SMIs are marginal. Only a small number of SMIs are involved in the vendor schemes; most produce final products for the consumer.

20

Prof. Fong Chan Onn( 2990) attributes the poor linkages from the viewpoint of LMCs and MNCs as:a) Lack of quality products b) Lack of necessity for subcontracting because of suBicient self-production capacity. c) Delay in delivery d) Shortage of qualified small firms e) Instability in management. The reasons for the above could be due to the following problems as Iisted by him:i) Lack of capital resources. ii) Level of marketing knowledge and skills which are limited. iii) Biasness of some suppliers of raw materials against local SMIs. iv) Production control systems are severely inadequate. v) High labour cost, lack of skilled labour, job hopping, demand for high pay, employee absenteeism and low productivity of workers. vi) Small factory sites, tiequent machine breakdowns and power failures. vii) Owner-managed, so the quality of management and marketing depend on the background of the entrepreneurs themselves; traditidnal fiunily-type business operation. viii) Obsolete machinery and technology. ,

A survey conducted by him in 1986 showed that only 25% of the large firms and 30% of the foreign joint-venture firms offered subcontracting works to the small and medium sized firm. (No latest information was available)

21

Hj. Mohd. Shah, the president of PROTON Vendors Association( 1992) relates the problems to: Finance i) Most SMIs face difkuhy in raising finance for capital expenditure, expansion plans or diversification programmes. Financial facilities at low rates meant for new entrepreneurs provided by government financial institutions and commercial banks ark set at too low a limit, which will restrict the business and expansion plans of the SMIS. ii) Source of labour
Availability of skilIed, semi-skilled and even unskikd lahour has been a problem

among Skis in areas with a lot of industrial activities. iii) Sub-vendors Not all SMIs enjoy good support from their sub-vendors(die makers, mouid makers, hardware suppiiers etc.) in terms of tie quality of supplies. iv) Sub-contractors The services of sub-contractors(painting, plating, chroming, coating etc.) are vital, unfortunately there are not many good and reliable ones around. v) Imnort dutv and Customs urocedures The bureaucratic procedures and high import duty caused difiiculty or delay or hassle in importation of machines, equipment, materials or goods.

22

vi1 Testinst facilities Special&d testing equipment to meet the quality requirements as specified by clients is expensive or not even available locally. vii) Comnetition LMCs, MNCs, State Economic Development Corporations(SEDC) and sometimes

even the anchor companies form joint ventures and subsidiaries to become vendors thus posing competition to existing vendor programmes. viii) Government incentive Pioneer status and tax incentives are not granted to deserving SMIs in the promoted industries. ii) brernment atzencies and denartment
su~oort

Genuine support from government agencies and departments like Ministry of Industrial Development Authority(MIDA), Ministry of International Trade and In-mMinistry o f Finance(MOF), Mini&y o f E n t r e p r e n e u r Development, Customs, Immigration, Municipal councils are much desired but are not always efikctive.

Dr. Ghazie Ismail of Sapura Systems(l992) pointed out that while the government has put a great deal of effort into encouraging the growth of SMIs, there have been difkulties for them to integrate into the main stream of industrial deveiopment. He gave the following reasons:-

23

-1

i) Most government programmes are targeted at er.

:prenauial skills development

and the industries covered are small scale, cott :e in&try e.g. tourism and retailing, batik and garment rather than medium SL address the creation of linkages. ii) Elaborate procedures and rigid criteria that ar imposed for SMIs by Bank Pembangunan to qualifjl for assistance. iii) The creation of special free trade zones in which MNCs operate with minimal cxistoms and tarifFrestrictions have discouraged the xeation of linkages. In general American MNCs appear to be most responsive to iocal sourcing if an adequate irhstructure of SMIs is available to meet theit reqtiements. Japanese and 2. These programmes do not

Taiwanese MNCs, however, tend to tavour bringmg their overseas vendors to Malaysia so that there is continuity and quality requirements are Ufilled quickly. iv) A long term relationship between buyer and supplier must be established in order to nurture SMIs to continuousiy improve their product quality and delivery time. The buyer must be prepared and committed to devdop the supplier so that the profits can be ploughed back to improve the quality of the product. It also encourages longer term planning with the aim of better quality R&D.
products

through

24

Prof Peter Wyer further elaborates on the issue by al!uding to:i) Organisationai Culture Owner-managed businesses usually reflect the personality traits and agenda of the owner-manager which can either positively or negauvely tiect the firm.(Wyer and Smallbone, 1995) ii) Management Resource Base Autocratic style of owner-managers who are reluctant to delegate responsibilities, inability to attract specialist management due to limitations in terms of wage and promotional prospects and unwillingness or inabiliq to avail upon external advice are constraining factors{ Smallbone et al, 1993 in Wyer et al 1995) iii) Human Resource Problems .* Small fnms have problems in attracting experienced, well qualified labour force and human resource maintenance due to constraints of wage and career development opportunities.(Curran, iv) Marketing DifEcuhy in adapting to a fast changing environment and responding to customer needs due to lack of marketing capability.(Carson,1991). For Carson, the informality prevailing in the management processes of small firms and the lack of marketing knowledge resulted in a gap between real small firm marketing and the expounded theories of marketing.(Wyer et al 1995) 1988)

25

.>

Nawawi et al(1990) state that the main hindrances that prevent SMIs from contributing to the national economy are the : inaccessibility and poor adoption capacity to modem technology; lack of marketing skill and market information; inability to attract and retain skilled workers and professionals; lack of financial and capital resources.

Mr. Andy Seo(1992) enunciates that MNCs and LSIs are reluctant to source their products from local SMIs mainly due to poor quality and unreliiihty of delivery. In fact these companies are encouraging their home-based SMIs to set up operations in Malaysia to meet their demand. He further explains that because of Malaysias relatively short history of industrialization, vertical linkages of SMIs to the larger industries are rather weak. This he attributes to the fact that local SMIs have still to be educated on the importance of total quality control, price competitiveness and delivery schedules.

Faridah et al( 1990) elucidate some of the factors that constrain the growth of SMIs as due to capital shortage, inaccessibihty to markets and raw materials, lack of managerial and entrepreneurial skills, and poor production techniques. Shortage of capital among SMIs can be traced to the low savings among owners of SMIs and also the problem of inaccessibility to credit and financial institutions. Difficulty in obtaining raw materials arises due to lower bargaining powers and lack of working capital as compared to large firms so SMIs are usually discriminated against in the allocation of raw materials. Inaccessibility to markets is

26

posed by limitations due to the inferior designs, unattractive packaging, low quality . finished products and poor marketing strategies. , Lack of managerial and entrepreneurial skills surfaces as a result of entrepreneurs being too involved in daily problems such as handling unmotivated, less disciplined, unskilled and low productivity workers * therefore less attention is given to production quality, inventory, financial control and also long term planning. Most of the local Skis are very much dependent on old production techniques and machines. This situation is further aggravated by the high concentration of low skilled labour in the SMIs
.

A research study conducted by the Faculty of Economics, UKM in 1988(Hasnah Ali et al, 1990) on the problems in promoting linkages reveals the following facts:-

(i)

Most SMIs have a chronic shortage of capital. This may be partly due to

the entrepreneurs inability to attract or have access to sufficient capital or credit for his company and partly to an imbalance between fixed and working capital. Poor inventory control was also noted. Shortage of France may prevent an enterprise from operating efficiently and imposes additional costs when short term credit has to be raised. It was explained that the lower business credibility, liited security and high risk of failure of SMIs make it difficult for them to raise capital from the usual sources and often forces them to secure loans at higher interest rates from other lenders. *

. 27

ii)

Lack of quality control in SMIs production, market changes and lack of

enterprise and skills in product design also contribute to low quality of output. Low quality products is due to the fact that most SMIs are still relying on old machineries and production techniques. ii) Most SMIs are located far from city centres so they are less exposed to any kind of information and business contacts. iii) Governments intention has not been translated or followed by effective

action. Most of the support services and policies are in real practice benefitting LSIs. For instance, tariff exemption can only be given to LSIs as they are the ones who could meet the requirements. Programmes and advisory services are done in a very inefficient manner due to lack of funds and resources to finance these services.

At the Asian Pacific Development Centre Forum on ASEAN SMI Co-operation held in Bangkok in 1989 Dr. Chee Peng Lim in his paper on the potential and problems of SMIs published in 1992 stated that SMIs play an important complementary role to LSIs in that they supply parts that would be uneconomic for large firms to produce However, this potential has not been fully realised due the constraints plaguing SMIs pertaining to the problems of lack of access to commercial bank credit, technology, management, training, discriminatory government policies and practices, sub-contracting, and a shortage of suitable sites and premises for SMI operations as elaborated below:-

28

Lack of Credit A study in Malaysia estimated that Skis required :u& loans valued at RM4,800 million but received less than RM300 million in j !33(Chee,1986 cited in Chee,

1992). Denied of institutional credit, many SW. are forced to finance their operations using their own capital, with shortfalls tr:>m relatives, friends, or other non-institutional sources(e.g. unlicensed money lentiers). of finance are generally more costly. Nbt only do SMIs receive a smaller proportion of bank loans, the value of such loans is also much smaller. When access is available, Skis find that they have to pay a higher rate of interest for their bank loans compared to their large counterparts(Chee, 1975 cited in Chee, 1992). There is also another aspect of the financial problem f&&g SMIs and that is Wcial mismanagement arising fi-om the lack of proper financial management. In the absence of an appropriate accounting system as a basis for control of current operations and planning, SMIs have little control over their operations. Non-institutional sources

Technoloaical Problems One of the most obvious problems fa?ing ASEAN SMIS is their utisation of % d traditional technology, Many SMIs use little or low level technology in their production. For example, a study of SMIs in four industries in Malaysia found that the majoety of SMIs(78 to 82%) were still using a low level of technology&JPISSI,1988 cited in Chee,1992). The use of traditional technology is manifested in

29

their low productivity and in the low quality ot defective or have a high rejection rate.

5r poducts which are ofien

Management Problems Management problems in LSIs arise partly becaus, nest SMI entrepreneurs have neither a high Ieve of education nor any profes. xraI qualification. In addition many of them lack the basic skills needed to mana; ! an enterprise successfully. In Malaysia, a study of SMIs in selected * industr, -2s showed that in terms of . manufacturing management techniques, most SAE: did not use statistical quality control and inspection was carried out by sasnp, :q or whenever there was a problem(Ismail, 1988 cited in Chee, 1992) In addition to the lack of basic management know-bow, Sh4I entrepreneurs tend to adopt an autocratic approach in managing their enterprises. In many cases, they also manage their enterprises along family lines and often appoint reiatives and fiiends to management positions with little regard to their competence. t

Labour and Training Problems Most SMI workers have no or only little formai education and practically ao practical training. They are trained at the workplace by the entrepreneurs or one of the few qualihed workers, SMIs generally do not have the resources to conduct any formal
training

programmes or send their workers for out-of-plant training.

More seriously, SMIs have problems recruiting workers or even keep the good ones. Workers are generally reluctant to work in SMIs which of&r relatively lower

30

pay and inferior terms and conditions of work compared to large enterprises. For the same reasons, workers tend to leave Skis as soon as they have acquired a certain level of skill or experience.

Marketing Marketing problems include seasonality of demand, customer problems, delivery and keen competition. Most SMIs have problems in marketing their products because of a number of factors such as poor designs which are both inefficient and inartistic, low quality of finished products due to the use of poor quality raw materials and insu&ient quality control, lack of after-sales service and precision due to inadequate equipment and lack of skilled personnel.

Discriminatorv Government Policies and Practices Generally, government policies, regulations and practices do not deliberately L discriminate against SMIs. Nevertheless, the nature of these policies and regulations and the way they areimplemented oftenimpose a penalty on SMIs. For example an analysis of the major investment incentives described in Chees( 1986) work indicates that most of them are biased in favour of large, capital-intensive enterprises. Firstly, only firms producing priority products are eligible for investment incentives. A glance at the priority products indicates that since 1970, it has been increasingly restricted to products which involve large-scale and capitalintensive firms.

31

Secondly, pioneer status incentives tend to favour large-scale and capital-intensive firms because the incentive system attempts to link the value of incentives with the level of investment and thus provides greater benefits to large enterprises in terms of investment. For example, large enterprises with capital investment exceeding RMl billion or more than 350 full-time paid employees are eligible for a maximum of ten years of tax exemption. Small firms with capital investment below RM250,OOO or less than 101 employees are eligible for a maximum period of five years of tax exemption. Besides this, even the Labour Utilisation Relief or locational incentive favours the large establishments as it is only given to firms employing more than 50 workers. Other forms of discrimination are less subtle but not less effective. For example, government regulations on zoning. Due to inadequate capital, a number of SMIs often first set up shop in a residential area. Initially local authorities tolerated then existence but subsequently regulations were tightened up and more strictly enforced. At the same time, the lo&l authorities failed to appreciate the locational problems of SMIs and did not provide alternative sites before evicting these enterprises. As a result a number of SMIs, particularly in the larger towns have seen then business disrupted and in some cases have been forced to close shop. Inf?astructural facilities and technical assistance provided by the government are generally used by larger enterprises compared to small ones. For example, an analysis of industrial estates developed with governmental assistance in Shah Alam and Senawang showed that SMIs in these two towns were allocated only 22% and 19% of the total available sites in the two towns respectively(Chee, 1986). i

32

Sub-contracting Problems Sub-contracting provides a useful mechanism for developing linkages between SMIs and LSIs. Unfortunately, the level of sub-contracting within the manufacturing industry in the ASEAN region is relatively low. For example, a study of sub-contracting in the transport equipment and machinery industries in Malaysia concludes that most of the assembly firms prefer to import their components rather than purchase them from local suppliers(Chee and Fong,1983 cited in Chee, 1992). Fortunately, the government is aware of the above problems and has instituted a local content policy whereby primary firms in selected industries are required to achieve a certain proportion of local content by a given target date. The problem with the local content policy is that it has not been effectively implemented. For example, THE Malaysian Industrial Development Authority(MlDA) which is responsible for its formulation and implementation does not have sticient personnel to monitor im$znentation. In addition, various other f&tors discourage

the promotion of closer linkages. which are: i. ii. The imposition of sales tax on sale of components by other Grms. Lack of incentive for primary firms to purchase components or provide

training to ancillary firms. ... 111. Lack of mechanism to identify potential ancillary firms and bring them together with primary firms.

33

Sites and Premises SMls have a narrower choice of sites and premises for their operations because of a shortage of capital. In most cases SMIs are located in places which are not suitable for industrial purposes. In Malaysia, it is estimated that about 70 to 80% of all small industrial firms operating in urban areas have an illegal status because they are working without a license from the state or local authority. Relocation of SMIs is not easy because the government often fails to make provisions for SMIs in planning industrial estates. Even if land were available, the . cost might deter SMIs. For example, the Malaysian SMI with about RMl million to RM1.5 million working capital cannot afford to acquire land costing more than RMlO per square foot since it would need to be able to make at least 20% profit on its capital before it can buy land costing RMlO per square foot. Therefore it is obvious that the SMI entrepreneur faces a very real constraint in the case of land and building.

2.15 Suenestions for enhancine linkaees Mr. Andy Seo, Chairman of Federation of Malaysian Manufkturers Selangor Branch( 1992) suggests: (i) Support assistance such as financial, upgrading of technology and managerial skills for SMIs whose products have been identified for subcontracting. (ii) Extension and liberalisation of the existing investment incentives to promote linkages for companies using local components. (I

34

(iii) Selective tariff measures to discourage the implxtation of components and at the same time encourage setting up of local import-substitution industries. (iv) Soft loans or easy payment scheme to facilitate the relocation of local SMIs to proper industrial land.

Dr. Ghazie Ismail( 1992) suggested that the government needs to play a leading role in establishing a super vendor who should have the capabilities to acquire and to- negotiate technology agreements easily by its sheer size. The super vendor, should of course then develop other smaller supporting vendors thus creating the linkages as well as transferring the acquired technology.

Haji Mohd. Shah( 1992) gave the following proposals and recommendations(i) That the government gives more attention, support and continue to provide incentives toward the development of SMIs and organ& SMIs in a more integrated manner to ensure their growth and development. (ii) That the LMCs and MNCs, in collaboration with MED start and implement the VDP with more vigour and seriousness so as to provide long term and steady markets for the SMIs. (iii) That the government reconsiders the ceiling . of RM2.5 million for SMI status. Presently, it prevents the SMIs from getting further incentives when they reach this ceiling, but actually they are still financially weak to grow to become a big company. A ceiling of PM10 million will spur more SMIs to expand, diversify and grow. It should be good for the economy of the country. 5

2.16 Benefits of linkaees

Hasnah Ali et al{ 1990) exemplify the interdependence between LSIs and SMIs in their relationship where :i) SMIs acting as ancillary industries is advantageous in reducing the cost of production for the mother plants because procurement of parts or components and services from the ancillaries would be much cheaper. This also enables the large industries to concentrate on resources or essential elements of the production process and to increase production flexibiity. ii) Special products or small production batches can be handled by small units. ShdIs are also able to mob&e resources which a larger unit might not be able to mobilise in an economically justified way. iii) SMIs working as ancillaries would be benefited through various kinds of assistance from the mother ptants mainly through an assured market for their
.

products. iv) The LSIs being the single customer placing large orders and generally located nearby reduces the marketing costs for the SMIs to the minimum. v) That larger units often use more sophisticated technologies implies potential learning effects for SMIs. The most important assistance provided is on quality improvement and testing besides technological help by giving specifications, drawings and standards. In fact, quite a number of SMls have been set up by entrepreneurs who acquired their know-how and skills while working with larger enterprises.

36

Hj. Mohd. Shah( 1992) highlighted the many benefits and advantages of SMIs as:(i) competitive prices of locally manufactured items :;ompared to imported goods, (ii) ability to control price increases and fluctuauons because vendors have to justify price changes. (iii) ability to ensure quality of goods supplied by regular inspection, checking and monitoring at vendors premises, quality inspection at LMCIMNC local parts receiving section. (iv) ability to get consistency in supply because vendors have to stock enough tinished goods. (v) reduce inventory levels and warehouse storage space if LMUMNC implement just-in-time(JIT) (vi) consistency in design specification and manufacture, as opposed to yearly tender system. (vii) reliability of supply because of long term contract, vendors will invest and have dedicated manufacturing lihes. (viii) reduced administrative workload as inherent in a tender system. (ix) can conduct quality audits on a regular basis at vendors premises

Masaaki Saito, the general manager of Sony TV Industries and Sony Video (M) Sdn Bhd. was quoted in The Star newspaper of 10 February 1996 as saying that it was Sony Corporations policy for its audio/video division to source 20% of its components from countries where its factories are located. He explained that

37

. ?.

sourcing components locally had its advantages in that parts could be delivered faster and at lower costs. S&o also said that Sony was planning to buy more low technology parts from its Malaysian vendors. It may also consider increasing the number of vendors under the SMIs VDP which currently stands at 15.

It was reported in The Star newspaper of March 22, 1996 that Sony Corporations chairman Norio Ohga stated that he was satisfied with the quality of industrial components supplied by vendors from Malaysia and added that Sony would export the Malaysian-made products to its tictories in Germany and Spain. In the same article, Dr. Mahathir urged SMI entrepreneurs to grab opportunities provided by Sony to manufacture and supply industrial components used by it. Sony will provide assistance to set up factories and if the products meet their standard, they will buy. This means that SMIs will have a permanent market as Sony has its factories all over the worId.

2.17 Issues rclatine to linkaq Has& et al( 1990) though admitting that the division of labour between large and small units is in principle mutually advantageous, there are issues to be addressed which are:* Should assistance to SMIs be based on the needs of large industries or should focus first and foremost be on the needs and abilities of SMIs?
l

SMIs are not always able to meet delivery schedules and product specifications. On the other hand, the larger size of its partner also implies

.
38

greater bargaining power, so that large industries can often virtually dictate conditions to MIS. The big industry shifts the responsibility of stock holding to the small firms by using schedules of delivery and Just-in-Time(JIT) concepts. The big industry also reduces its investment and manpower by making the small businesses invest in machinery that cannot be loaded to Cdl capacity by the large firm. Assistance given by the big industry seems self-centred as all the help is to improve product quality rather than improving production capability of the small firm.

The Minister of Entrepreneur Development in a press statement(New Straits Times, 10/4/96) lamented the fact that:
l

the process of appointing new vendors is too slow and this prevents ne5 vendors f+om joining the programme.

some anchor companies have not made any proposal to the VDP on the appointment of new vendors.

vendor companies receiving insu.&ient, inconsistent and unreasonable volume of orders from anc$or companies.

lack of guidance by anchor companies which slave hindered the growth of vendor companies.

39

some anchor companies do not give priority to he VDP in their annual work plan and there is no strategy to identify and develop a certain number of * vendors annually.

some banks did not provide complete informarion on the financial facilities available to vendor companies, thus most vendor companies are not aware of the soft loans.

En. Mohd. Nasser et al( 1990) warns of the dangers of SMIs being totally dependent on their anchor companies as that of slaving where the big customer by providing seemingly altruistic assistance makes the small firm a slave and starts dictating on all aspects of the fir&s activities. While the small firm is capable of innovation on its own, the big firm dictates and takes over the innovation as its own. The second danger is that small firms are expected to serve the industry at large. By this total dependency, what should be an internal activity of the big tmn is done on an external location without any investment. This means that the big industry seeks small firms to risk into investment which the big firm should have logically gone into.

Hicom-DRB senior vice-president Datuk Tik Mustafa cautioned in The New . Straits Times dated April 15, 1996 that PROTON vendors will find t&lves out of the automotive industry should they fail to reduce their production costs, improve quality of their products and upgrading after sales service. In addition, he pointed out that there must be strong synergy and cooperation among the vendors

40

..

as if one component of a car is incomplete, it will disrupt the production of the entire car production process and the efforts of other vendors& fact Tik said that PROTON had been telling the vendors to be more competitive and they were told that they would be taken off the vendor programme if they failed to meet aspirations.

The Malaysian Association of Bumiputera Manufacturers and the National Bumiputera Chamber of Commerce have called for a reassessment on the
rd

effectiveness of the vendor development programme. They claimed that some MNCs under this programme do not even have a specsc development plan for their vendors. As such, the associations felt that these MNCs need to show a firm commitment to developing the vendor programme encompassing all aspects of management and operations to ensure that vendors can stand on their own. In the same article, the Federation of Malaysian Manufacturers(FMM) pointed out that manufacturers should be given access to competively priced and long-term loans for expansion, as reengineering and expanding capacity operations are costly ventures. In this respect, FMM urged the Government to expedite the operation of the RMl billion Domestic Investment Fund.

Mr. Abdul As Othman(1995) was quoted as saying that when the VDP was first introduced, new vendors were very contused as most of them waited for parts and components to be contracted before deciding on purchase of any machineries. He explained that Anchor companies do not offer any contract nor guarantee the sales

41

of vendors products and they only purchase parts and components from their qualified vendors. He further mentioned that every vendor aspirant has got to undergo a qualification process before he is eventually qualified as a vendor to an MNC This means that he has to be involved in the industry first before he can be admitted as a vendor. The process of ge Iting qualified might take months before the potential vendor is approved. There are instances that the MNCs might Simply reject the company to be their vendor due to inadequate facilities or the potential vendor is very new and has not produced any parts before.

2.18. Interviews With Kev Informants

1)

Mr. Rosli Othman, the assistant secretary for the VDP in the MED said that

for an SMI entrepreneur to participate in the VDP, he will have to seek linkage by himself with any of the anchor company participating in the VDP. The MED, in no way will be the marriage broker in this endeavour. Whatever initial help given is
l

limited to only providing a list of participating anchor companies. The rationale is that the entrepreneur must prove his worth with the LSI first before being helped and to weed out entrepreneurs out to get a fast buck. Thus according to him, most entrepreneurs face the greatest hurdle in this initial stage to convince the LSI that they are capable of being reliable in supplying quality components and timely in delivery as they are strange bedfellows and there is no track record to show. To aggravate the situation, most of these SMIs have never been vendors or even worse have never produced anything, so it makes convincing doubly hard. Furthermore, these SMIs have very little capital and are technologically backward.

42

In this scenario, there is a conflict of expectations, as the SMIs when approaching the LSIs will tell them that once they are given the vendorship, they will be given the necessary help in terms of loans and guidance. On the other hand, the LSIs *a want them to prove they are worthy first before they are given the vendorship. Most of the time, when they are rejected, they come back to MED and expect MED to intervene which it wont do. These SMIs go all out to get the vendorship b as they feel that it is a secure and lucrative business to be in. He did mention an important ingredient to succeed in getting vendorship is true grit and perseverance, He quoted the case of an entrepreneur who did not even own a factory himself when he approached PROTON for vendorship. Naturally, he was turned down, Undaunted, he contacted some of his t?iends who are in the manufacturing line to loan him their machinery so that he could carry out product development of a car part that PROTON required and samples were given to PROTON. This was done under the cloud of uncertainty that PROTON would give him the vendorship and also market uncertainty for the product. It took him a year to fmally convince PROTON that he could meet its stringent quality standards and today his factory, TRACOMA is one of the iargest suppliers of parts to . PROTON. Nevertheless, he did not discount the possibility that some SMI entrepreneurs have managed to obtain vendorship through inside contacts. This certainly smoothens and speeds up the establishment of the linkage. The main problem that arises when the linkage has taken off is that orders keep fluctuating depending on the anchor companys demand. At times this does affect

43

the production capacity and worker needs of the SMIs, so a tot of juggling has to be done to dance to the tune of the anchor company.

11)

Mr. Ramzi Abdul Hahm, a public relation officer for SMIs with the K&h

Development Authority said that the main obstacle to securing vendorship is to have a proper factory located strategically near highways or preferably in an industrial estate. He gave the example of two engineers who resigned from Sony to venture out into the subcontracting business, thinking that as they were ex-Sony staff, they would have the necessary contact to easily obtain vendorship from Sony. To their shock, they were turned down, simply because the Japanese were not happy with the location of their factory. This, according to him is because the Japanese take into consideration easy transportation and cost of transportation. He, however, acknowledged the fact that some intluential politicians are able to use their political clout to secure vendorship even though they are not in the business of subcontracting. What they normally do is they will hire engineers Corn the anchor factory to help set up the business. This is to ensure efficient production of the expected quality. He further explained that once an entrepreneur secures the vendorship right, there 0 is little problem as training, quality control, machines and market are taken care of by the anchor. company, The anchor company will go out of its way to ensure that the products are of quality as any compromise will affect them too.

44

ml

Mr. Suib, a managing director of Teras Plastics, a vendor company

participating in the VDP for Sony Mechatronics related that being a vendor is not without problems as he has to ensure that the products produced are of the required strict quality standard. This is because if any random samples from a consignment are rejected then the whole consignment will be rejected and must be redone. And if the anchor companys production line is a.Ewed due to the rejection, the vendor company by agreement will have to compensate for all losses. He also emphasised the fact that every product has critical points which involve expensive gadgets to test each point and this resulted in SMIs incurring heavy overhead investment, He is thankful that his factory is under the VDP which means that he gets the privileged rate of 4% for financing from Bank Pembangunan which otherwise will be around 10%.

IV)

Tuan Haji, his partner in Teras Plastics mentioned that it took them two

years to be given the vendorship which is still not too bad compared to most who took longer. He said that anchor companies are very particular about factory infrastructure and a management team resembling that of ISIS which he feels is quite difiicult for SMIs to fulfill as all this requires heavy capital investment. He is very proud that his factorys products have never been rejected by the anchor company and this has won the confidence of Sony Mechatronics to sub-contract more components manufacturing to Teras Plastics. However, Teras Plastics is facing financial constraints to expand as the privileged bank loan rate cannot be further given for expansion as the present loan has not been settled and anyway

45

there is no such scheme. This, to him shouldnt be the case as he has never defaulted and based on his track record, he should be given another such loan.

v>

Mr. Suresh, manager of Gloss Technology, a subcontracting company

outside the VDP, said that his factory is provided with machinery, equipment & training by the anchor company as part of the agreement, so the vendor can only charge for labour and other variable costs for the products sold back which again is fixed between the two parties. This system is practised as the anchor company wants to ensure quality compliance. Questioned about rejects, he said that it is not a problem as most consignments are sent a week ahead, so there is sufficient lead time for any rectification. The main problem that he faces is delay in supply of raw materials which may cause production lines to be stalled and workers have to be reshufned or even forced to take leave. He explained that though there is the advantage of market security in this business, the disadvantage is that they are at the mercy of the anchor company in terms of raw materials and demand size. Thus expansion or progress is at the dictates of the anchor company. He confessed that it is the plan of Gloss Technology to be one day an independent manufacturer.

46

CHAPTER 3

Hinhliahtinn Of Issues Raised From Literature Review And Interviews 3.1 Overall view of the issues. The conceptual framework of the issues raised is as shown beiow. Fig;. 1 .O : Framework showing the external and internal constraints in enhancing . linkages between SMIs and MNCs/LMCS.
.,

Constrainine; Factors 2 i)Finance ii)Labour 4 iii)Technoiogy v)tiastructure & Location --------;z


.,.. ,.,..

Linkage P r o b l e m s sAnchor-bias Vendor Reluctance in sourcing 1 # Inconsistent sourcing ; -..-- *1J-I-T concept
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MNW LMCS

: :

(Anchor)
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*Management 3.11 Constraining factors 3.111 Finance Many SMI entrepreneurs in Malaysia are those who have worked in the manufacturing sector as artisan or professionals and have saved enough to strike out on their own to seek for better fortune as their own boss knowing that th&e is a limit to being wage earners. Their customers are normally those who have been patronising their previous
4

47

companies of employment and through the years :: acquaintance, relationships and networking would have developed between them. In tkir tenure of working they would have accumulated sufficient tricks*of the tracie to give them the coniidence to venture out on their own. The capital that they have :s their savings and probably loans from friends and relatives to provide them with t4e minimum capital to operate a business. In this regard they have problems in approaching MNCsiLMCs for subcontracting work as they realise their financial constraints which limit their capacity to cope with large orders. Any form of financial assistance for SMIs by financial institutions require collateral in the form of land or property which they seldom have, Real&g this they are just content with supplying their network of small customers which still brings in returns better than as wage earners. Some of them may approach an MNC for vendorship with the hope that once thay have secured the right, hnancing fiom banks will be easy. But in the first place MNC wants them to show from the beginning that they have the necessary financial strength before they are given the vendorship. So SMIs are again caught in a vicious circle. 3.112 Labour With limited f5nancial strength, they are naturally not able to offer attractive employment packages with good Iiinge benefits normally provided by big companies. Under such conditions, the workers employed are mostly cor&ed to those non-skilled or limited-skilled workers with skeletal qualified staff to help in operation and administration. The owner managers are involved mainly in overseeing that the daily operation is in order. The works sub-contracted by MNCs/LMcs are usually in component manufacturing requiring a certain level of tech&al know-how or skills. Thus SMIs with limited skilled manpower are constrained irr securing vendorship. Furthermore, motivating the workers to meet company targets is another sore point with the kind of pay package given. In fact, in certain tight l&our areas like Penang and the Klang Valley, SMIs have problems in even hiring the non-skilled workers as they have to compete with the giant companies. Training centres run by the Ministry a

of Human Resource for workers from the manufacturing sectors are limited only to the big firms who have to contribute a certain percentage of their turnover annually to The Human Resource Development Fund. To send their workers for training is also a risky move as once they have acquired the skills, they will move on to greener pastures. One of the criteria imposed by MNWLMCs for vendorship is having sufficient skilled or trained manpower in the company to ensure compliance to the strict quality control standard. In this regard SMIs certainly fall below expectation. This criterion of skilled manpower is also the reason why some professionals attached to factories quit to set up SMI of their own in the belief that they would have the advantage of having the necessary skills and experience to secure the vendorship right.

3.113

Technology

Technology here again is an expensive afftir. As mentioned earlier, with the SMIs limited capital resources and financing diiculty, the kind of technology that many are able to aquire is old or at best second-hand. As technology is at a low ebb, the production process would take longer and therefore productivity is also low. This could be aggravated by the frequent breakdowns of the second-hand machinery used which would upset production schedule. Technology is again closely connected to quality so with the kind of technology, the quality of the products produced may stier. There are two criteria closely related to technology which are normally imposed by MNWLMCs for vendorship which are delivery schedule and quality standard. This can be a tall order for many SMIs to &lfill considering the level of technology that they have. Technology can also be a sticky issue as the technology required by one anchor company may not be the same as that required by another company, so this is certainly taxing for the small-time vendor to keep up if they are ambitious in securing multiple vendorships. In frustration they may become resigned to just producing for their network of other SMIs.

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3.114

Management

As mentioned earlier the management of SMIs is basically the owners themselves who often run the whole show from handling human resource, accounting, finance, operation to marketing. So management can be quite bogged down, aggravated by the fact that most of them do not have any experience or training in management. As the owner-manager lacks training, one glaring weakness of SINIs is the poor acdounting system and procedures which makes evaluating the capability of SMIs tiased on paper difkult. The management being burden%d with so many tasks may be slack in the quality control aspect. The issue of sole-proprietorship or partnership also raises the question of continuity of the business as even any personal crisis could disrupt the : survival of the company and an anchor .comp&ry just cant take chances by subcontracting to an SMI whose management is uncertain. Poor management in terms of operation and fmance can also lead to a lot of wastage and make the cost of production high and of course lead to a high price of products sold to the anchor company thereby making sub-contracting non-viable.
3.115 Infrastructure and Site

Further again due to financial constraints, many hard-pressed entrepreneurs cant afford the luxury of industrial estates except those lucky few who are given the privilege of renting at Incubator sites or special zones for SMIs. The rest have to practically scout around for the cheapest location. To cut cost, most of these SMs are normally located in unstrategic places in the outskirts without proper electricity and water supply. This condition is certainly not convincing to the anchor company as without proper infrastructure, the production schedule cannot be assured. Worst still, some of these factories could be located on illegal land or unapproved locations with the long arm of the law lurking over them. Many of the factories built are also of the ramshackle type to cut cost which raises the question of safety. Unstiategic location gives rise to the problem of accessibility and transportation costs. We must again bear

50

in mind that strategic siting of an SMI with proper infrastructure is one of the main conditions laid down for vendorship selection which could even at times overrule the other factors.

3.12 Linkage problems 3.121 Anchor bias By right a meaningful linkage will be one where the rdationship between anchor and vendor is for mutual development and benefits but what is actually happening is that normally the anchor adopts a very patronising stand. This stems from the attitude of the anchor who feels that the vendor should be very grateful in being selected to be its vendor and therefore should- comply to its every demand or face being axed. A lot of emphasis is put on quality control by the anchor company but little on helping the vendor to improve its production process to achieve greater quality. It appears that this could be done by providing constant training or leasing of equipment or machinery but what is actually happening is that the anchor only rejects consignments that are not up to mark. The anchor can even sue for losses if their production line is affected. As most SMIs faced technological shortcomings, quality is a persistent problem. In terms of negotiation on prices or other agreements the vendor is also not on equal footing as the anchor company holds the upper hand in setting the terms and condition. In the annual planning of the anchor company the vendors are not featured as part of the
.

anchors strategic considerations. In actual fact, this linkage is treated as a cost-cutting and cyclical risk-shifting strategy rather than a genuine holistic production process. Even at the preliminary stage before the linkage it seems that evaluation is done only from the side of the anchor on the suitability of the vendor with little consideration of the right of the vendor to evaluate the anchor on its objectives and expectations to see whether it is in alignment with those of the vendor. The legal recourse of the vendor if the anchor defaults on its terms is not an integral part of the relationship. The whole exercise seems to be anchor-biased. .. .-

3.122 Reiuctance in sourcing

If the MNCs could have it their way they would from their home countrys Skis or home-count!

.*efer to source their components SMJs operating locally. This is

because of the high level trust that the anchor cork. any has regarding the quality and delivery schedules of these SMIs having worked w h them in their country of origin, Also similarity in culture appears to play an imps xant role in this attitude. Current levels of insight into the VDP suggest that many MNCs who are involved in this linkage with local SMIs are purely paying lip servxe to be in the good book of the government. This could probably explain why there appears to be little genuine interest in developing the local SMIs. As for LMCs, they too prefer to source their components from the newly industrial&d nations like South Korea and Taiwan as they are more competitive in prices and qua&y-wise better. It is only those giant LMCs like Proton, Perwaja, HICOM. where the government has a stake or some influence which are actually involved in the vendor development programme while the other LMCs are either not involved at all or only in small numbers.
3.123 Inconsistent sourcing

As mentioned earlier, the attitude of the anchor towards the vendor system seems to be that it is a cheap way of sourcing for components that are not viable for him to produce, and that it serves as a cushion for the cyclical nature of demand for its endproducts rather than as part and parcel of its whole production process which needs care and nurturing. Here, again the fate of the vendor is at the the mercy of the anchor. In ,other words, the vendor cannot effectively plan or endeavour to achieve the optimum level of production as its life-line is hooked to the anchor company. To intensify the difficulty, the vendor cannot simply produce to sell to other buyers as its products are specifically made to cater to the needs of that.particular anchor company. This inconsistency in demand can affect the overhead costs and profitability of the

52

vendor. This demonstrates how the security of market in a vendor system can also act as a double-edged sword in times of inconsistency in demand.
3.124 Just-in-time(JIT) concept. w

The concept of XT as practised by most anchor companies to save on cost means that the exact number of required units is brought just in time to the anchor factory for assembly operations. This system results in the vendor being caught with huge inventory stock when orders are down thus incurring high hold-up costs and jamming up the production line. This again leads to the issue of anchor bias in the linkage relationship. The concept is all well and good for the anchor company butputs undue operating pressures on the vendor when .acaught with excess stocks. There apperas to be a case for the anchor company being made to shoulder some responsibility if this concept is to be practised.

The above highlighted issues are now utilised to inform design of a case study interview instrument by raising relevant research questions for investigation, Thus, the above is an integral part of the bootstrapping process which forms the foundation methodology of this research. A structured case study interview instrument has been developed(inciuded in sample form in Appendix 2) and has been applied to derive depth of insight into four case studies, that insight having been analysed and presented in a common structure throughout Chapters 4 - 7.

CHAPTER 4

Case Study 1 - GLOSS TECHNOLOGY (MI SDN. BHD.

4.J Profile of the firm 4.11 Address of firm Lot 5, Taman Perindustrian, Bandar Darulaman 06000 Jitra Kedab Tel: 04 - 9179951 Fax: 04 - 9179952

4.12 Date of establishment Initial establishment in Alor Setar : August 1995 Present establishment in J&a : 8 January 1996

4.13 Type of vendorship Non- VDP

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4.14 Ownership of firm Partnership : 4 partners

4.15 Name and address of anchor company Matsushita Electronics Taman Ria Jaya Sungai Petani K e d a h

4.16 Location of vendor company outskirts

4.17 Type/s of product/s Fifteen Models of Stepping Motors for use in computers, typewriters and photocopying machines. Classified as mechanical components.

4.18 Fiicing Provided fully by the four partners.

4.19 Number of employees 150


.

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4.2 Establishment of linkage

4.2 1 Contact
.

Dr. Subra with an engineering background and a PhD in management is the major shareholder and one of the managing directors and has worked in Japan, and can speak Japanese. He is presently working at Adaptive Micro System(Digital System) has an accumulative 20 years of experience in the manufacturing sector and had little difficulty when he approached a Japanese concern for vendor status. ,

4.22 Requirements of the anchor company for vendorship 4.221 Availability of qualified personnel in charge of the different departments/sections e.g. production manager, materials manager, engineers, accounts executive etc.. These key personnel are the contact persons as and when needed. 4.222 The location of the factory should preferabiy be in an industrial park/estate with proper infrastructurai support facilities. ,

4.223 The structural building of the factory is also considered important as components to be manufactured could be sensitive to dust. In fact Matsushita visited AMS where Dr. Subra worked to gain an insight, 4,224 The anchor company also emphasises on the production system to be used and it specifies ah procedures.

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4.23 Binding conditions laid down on vendor The company must have the capacity to produce the desired demand levels at all times. The quality of the products produced must be according to the specified standards and deiivery must be timely, failing which the vendor will not be paid for
.

rejected

consignments. The rejection rate should not exceed 0 5%. The

components can only be sold to Matsushita and if any other linkage is to be formed, the anchor company must be consulted first.

4.24 Government requirement The vendor must obtain the custom sales license in order to be able to sell the components to the anchor company. This is probably to enable the government to keep control over import and export figures.

4.3 Maintaining the relationship and development of the firm

4.3 1 Problem &pes 4.3 11 Maintaining quality It has been a problem trying to maintain the quality set by the anchor company as equipment provided by the anchor company is outdated, whereas the more sophisticated equipment is kept at the anchor company and equipment necessary to check on quality is very expensive. This problem is fUrther compounded by the fact that parts provided by the anchor company on a JIT basis are at times defective and detecting is + difficult without ample lead time.

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4.3 12 Flow of demand Demand for components manufactured is also not consistent depending on the market of the anchor company.When orders are low, the production line has to be rescheduled and some workers have to be forced to take leave, If this happens too often, optimum production level wiil be affected and workers might leave due to disillusionment.

4.3 13 Human resource constraints This is particularly pertinent when starting a new production line as it is dicuh to get workers and to train them afresh. Nevertheless this problem is eased by the fact that currently employed workers can be relied upon to recommend then friends or relatives to join in advance of the start-up of new production lines.

4.32 Input from anchor company 4.321 Decision-making process Personnel from the anchor company visit the firm every month to cheek on the current situation and to give comments for further improvements. On the other hand, the vendor is also contractually bound to inf%m the anchor company of any actions/changes such as new approaches towards the production process and seeking new linkages with other anchor companies. However the vendor is given a free reign in being innovative in production. The vendor is also required to attend the anchor companys monthly quality
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meeting which is normally attended by either the Production Manager or Materials Manager or engineer.

4.322 Training of workers The anchor company does help out in training of operators and quality control circle leaders on quality improvement and new product processing methods, If major defects are detected in any consignment then production operators of vendors will be asked to go to the anchor company for retraining. Advice to the Production Manager is also given for enabling the rectification of any defects.

4.4 Operation

4.4 1. Labour When the firm first started, only 70 workers were hired and currently there are 150 workers. The proportion of male to female workers is 3:7. The reason for this is that working as an operator with an income of around RM350 is s&icient for a female but not for a male who has to support a family. Workers are encouraged to give suggestions toemanagement to help in decision making through their line leaders. Production operators are trained to be able to work in all production lines thus making it easy to reshuffle workers especially when orders are down and some workers have to be asked to take leave. However, when orders are exceptionally high additional workers have to be found. This situation is normahy eased with the

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help of current workers who could recommend their friends or relatives in advance so training could start prior to the high orders. Salaries and fringe bene!ts provided are similar to those paid by other companies in the same region so there is no problem in hiring workers except the fact that there is a shortage of workers. The main problem encount>red with workers is with attendance. However this is
/ l ,

being dealt with by the provision of an attendance allowance which pays a worker ti allowance of RM50.00 for till attendance in a month and RM25.00 for a day short. This in a way helps solve the problem but as with human nature there is still b bound to be some hard core unreliable workers.

4.42 Management The backgrounds of the four managing directors are diverse: engineering, marketing, fmance and management. This of course makes the top management a good team with each in charge of a portfolio based on his strength and thus giving the management structure a clear division of responsibility. .r

There are 3 key personnel at the management level consisting of the production manager, materials manager and an engineer. Supporting the management are 3 technicians, 1 finance clerk and 1 administration clerk. The staff at middle management level are also very well experienced and qualified. The Production Manager has a Diploma in Engineering with 7 years of manufacturing experience while the Materials Manager has 3 years experience and the engineer has 10 years experienye. .
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Basically Dr. Subra, the main shareholder and the most experienced Managing Director decides on the scope of the organisations activities as being still employed in a big electronic manufacturing concern he is always in touch with ail the developments and trend of the manuf~turing industry. In other words he has his fingers on the pulse of the industry. At the factory level, the Production Manager decides on internal resource requirements and makes critical on the spot decisions without having to refer to top management. However, for some very significant decisions, which the Production Manager lacks the confidence to make, then top management is referred to.

4.43 Marketing Even though Gloss Technology is a vendor with secmity of market, the management still felt that they should undertake marketing to seek linkage with other anchor companies particularly in the electronics industry. A single linkage is considered a double-edged sword with security on the one hand but riskiness on the other. Furthermore it is more lucrative producing electronics components. There is no formal marketing Cmction in the firm as marketing is purely done by * Dr. Subra with his experience and networking with his industry f?iends. Marketing is mainly done through word of mouth to scout for new sub-contracting opportunities. As far as product development is concerned, it is the prerogative of the middle management St&and the directors are only referred to on very important issues.

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4.44 Finance . Financial matters are purely handled by the Managing Director in charge of finance and as the person interviewed was the Production Manager, not much information could be extracted on this. As far as the middle management is concerned the firm is on the safe side ifit can produce 5,000 units per shift. Nevertheless, according to the Production Manager, the tum is financially sound as the firm is backed by the faur well-off Directors and he has never encountered any problem with regards to request for finance for improvement of the firm.

4.45 Production Since inception, the firms production methods have undergone changes in terms of arrangement of line operators, modification of machines, training method!! and model change system. This was done to improve productivity, reduce costs, increase competitiveness, and to respond to customer needs and the labour shortage problem. Nevertheless, there has not been any technological change due to a high cost factor. The initiation of the decision process to consider change and the timing for change is normally done by either the Engineer or Production Manager or both. It must be noted that changes have been continuous rather than one-off. The main barrier to , change has been the problem of having to bear in mind the specification given by the anchor company. i

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4.5 Major developments and future direction

One major development has been that productivity has improved f?om 150,000 units per month in 1995 to 300,000 units per month in 1996. The other major development is that the rejection rate has fallen from 5% to 2% for the same period. This could be attributed to the fact that the firms pricing policy is based on man hour rate so in order to be more cost effective productivity has to be improved and the rejection rate has to be reduced. This is the driving force behind the Production Managers vigour in ensuring that his training method has been effective in increasing productivity and the engineer in constantly improving production methods. Some of the intended or planned developments have been the cost-cutting measures, recruitment of additional workers and:better production methods. The unintended development has been that productivity has overshot the targetted increase. This can be traced to the fact of workers having improved faster and better as a result of their training than expected, better production methods for the comfort of workers producing Eringe effects and good treatment of current workers resulting in them recommending their fi-iends or relatives to join in advance of start-up of new production lines. To &rther develop the business in the fbture the objective is to look for other anchor customers. The strategy is to approach the Electronics sector as it has better value-added and the top management is more familiar with this sector. So far the Director of Marketing I has approached Phillips and Nikko for vendorship. In the distant Wure they hope to go into independent manufacturing after hating acquired the necessary experience.
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Nevertheless, there is no dear written plan or framework to achieve the aim as it is purely done within the circle of the top management level adopting a mental or framework for their desired future development. At present there are 2 to 3 competitors and though these competitors are not on a par to be a threat to the firm, the firm is not resting on its laurels. The firm is constantly monitoring the competitors performance by keeping watch on the anchor companys graph for all vendors under it. The firm is endeavouring to be more competitive by continuously training their workers to be more productive, improving production methods and reducing labour cost. The constraints on the future development of the company according to the Production Manager hinges on opening up the country further to more foreign investments as they will provide the opportunities for vendorship and the economic condition of the present anchor company. In fact, the present anchor companys growth is considered a key economic impact.
plan

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CHAPTER 5

Case Study 2 : SCRIN TECHNOLOGY (M) SDN. BHD.

5.1 Profile of the firm

5.11 Address of firm Plot 73-74, Dar&man Industrial Estate Mukim Naga, Kubang Pasu District 06000 Jitra Kedah Te. No. : 04-9 177548/g . 5.12 Date of establishment 1994

5.13 Type of vendor status 1994 (VDP) - production of audio components with raw materials supplied by Grundig.Felt insecure merely producing components as once linkage is cut off the firm would be left in the lurch. So, having won qver

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the confidence of the anchor company with regard to capability, decided to opt out of VDP and applied instead to be a turnkey vendor.

1995 (Non-VDP) - Appointed turnkey subcontractor - original equipment manufacturing through independent sourcing of parts.

5.14 Name and address of anchor company Grundig (MI) Sdn. Bhd. Phase 11, Bayan Lepas Free Industrial Zone 11900 Penang

5.15 ownership of firm Partnership : 2 partners Names of partners: Mr. Chiam and Ms. Rosabella Whim

5.16 Location outskirts

5.17 Types of products Audio gadgets ( Original equipment manufacturing): Hi-fi sets, Cassette players and Compact disk players. .

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5.18 Financing Self financing

5.19 Corporate mission S - sensitive to customers needs C - committed to quality R - realistic, humble, wise and disciplined I - Improve on todays mistake for a better tomorrow N - Never be negative, think positive, for you know not what you can achieve

5.20 Corporate philisophy Excellence in ALL aspects of business with commitment and ownership to customer satisfaction through continuous improvement in Quality, Cost, Delivery and Belief in Humanity.

5.2 Establishment of linkage 5.21 Contact The two owner Directors Mr. Chiam and Ms. Rosabeila had worked for more than 4 ten years with manufacturing concerns, Phillips and Grundig and a few other American firms, before venturing out to form their own companies and finally

67

SCRIN Technology. With their vast experience, making contacts was not a problem.

5 22 Requirements of anchor company for selection as vendor (a) Financial soundness (b) Skilled labour (c) Management Expertise (d) Location of operation (e) Evidence of capacity (f) Able to produce quality products (g) Able to deliver timely (h) Capability regarding handlmg new technology.

5.23 Binding conditions laid down on vendor The vendor must agree to sell to the anchor company at an agreed price subject to a yearly review. Also, delivery of products must be timely and quality of products must be according to the standard set. Payment by the anchor company will be based on consignments accepted after quality auditing and for those consigments rejected, payment will be deducted. However the vendor can regain the payment after re-work has been done.

5.24 Government requirements Must obtain Customs Sales Tax License to qualifjr for tax free status for the export of products and customs approval for the import of raw materials. As for the installation of machines, Workers Safety Approval must be obtained from the Ministry of Laboour.
. l

68 .

5.3 Maintaining the relationship 5.31 Problem types Except for the slowing down in demand this year due to the slackening of the electronics industry worldwide, the liiage is said to be running smoothly. This could be attributed to the mature relationships of the anchor and vendor company. Nevertheless, the &-m should not be too complacent with this kind of singular relationship as the firm could be seriously affected if orders consistently drop or if the market of the anchor company faces a slump. Under the current arrangement all marketing, including depth of interface with the iirms external environment, is undertaken by the anchor company. This seems to bring into question the firms ability and intention to derive deep understanding of its wider environment, and thus the unearthing of opportunities available to it beyond those associated with the current anchor relationship. Furthermore the vemior cannot market the products under the anchor companys brand name to be sold in the open market. So this all eggs in one basket relationship is very precarious.

5.32 Input of anchor company As with regard to quality assurance, the anchor company does yearly audit checks on all the suppliers of the vendor plus a final product audit in Germany. The machinesused are also of the types recommended and used by the anchor company itself In fact, the anchor company sent its men over to install the machines and trained the workers on the usage of the machines so this in a way ensures quality.
,

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Towards this end, the anchor company also helps out in terms of advice on production design and systems. As for decision making, the vendor has full independence even to seek linkage with other anchor companies.

5.4 Operation 5.41 Labour There were only 50 workers employed when the firm started out in 1994 and now there are 200 workers in just a short span of 2 years with a ratio of 10: 1 females to males. In future they plan to have 500 workers. At the clerical level there are 5 workers and at semi-professional level there are 5 technicians. Workers suggestions are taken into account for production decision making. Workers are in fact rotated monthly at diferent production lines to make them flexible and to avoid boredom. This also enables other workers to take over when orders are down and some workers have to be asked to take leave. The workers are paid the same salary and fringe benefits as those of the other firms whether small or big operating in the area so they dont have problems in hiring workers, As the cost of workers here is relatively lower than in Penang, Grundig has plans to shift total production of their products to SCRIN Technology to be more cost effective. The major problem faced with workers is to inculcate in them the corporate mission and philosophy. To overcome this problem the management has been conducting monthly talks or briefings for their workers on the companys

70

achievements, progress or weaknesses with tangible statistics or data---to demonstrate areas which need improvement. This is to nurture a sense of ownership of their contribution.

5.42 Management The background of the two Directors is manufacturing management and having worked for so many years in the manufacturing environment they have also acquired the necessary technical knowledge. There are 5 personnel at the management level namely the Production Manager, Materials Manager, Quality Control Manager, Logistics Manager and Purchasing Manager. Though Ms. Rosabella as the Operations Director concentrates on the operational aspects and Mr. Chiam as the Managing Director on the the managerial and marketing aspects, they both work in tandem. Thus they both decide on the organisations areas of concentration and future direction. The management structure practised is that of a layered management style,so that decisions can be made faster and this has been the style since establishment. Though they are a vendor to Grundig, the management is independent on decisionmaking or any changes. There is hardly any linkage as far as management is concerned.

5.43 Marketing Even though they are a vendor to Grundig with security of market, they still feel that marketing is necessary to seek other linkages as they cannot afford to be

71

. complacent in terms of ovet6 ,

-concentration or over-dependence on a single

customer. There is no formal marketing department in the firm and marketing is basically done by Mr. Chiam with his personal contacts, and a wealth of experience as credentials and SRINs track record. In fact they have been approached by Sony and Philips to do sub-contracting work but the firm has not been able to accept yet due to capacity constraints. It is for this reason that it is trying to acquire land to expand its factory size. Probably when its expansion plan has materialised it will be able to do so. Overseas market development is basically taken care of by the anchor companys home based company in Germany known as Luxor which focuses on the European market without any involvement of the vendor. This shows that SCRIN TECH is

still inward looking as it has not endeavoured to look at overseas markets. This could be probably due to the fact that it would like to establish itself locally first before venturing abroad, or that the local market has not been fully tapped yet. The issue mentioned above about the current relationship not encouraging or pressuring the firm to fully interface with the external environment may be a valid one within the context of the home and the overseas markets - however, as discussed later, this firm is by no means blind to the external environment of the industry.

5.44 Finance Financing is fully provided by the two owner partners, with bridging <loans from Hong Kong and Shanghai Bank as and when necessary. Thus the firm is not unnecessarily burdened with high interest rate loan servicing.

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With the good track record that the firm has obtaining loans from banks is not considered a problem. In fact the firms good track record has been attracting the undesired attention of some parties to offer loans in exchange for equity partnerships which is greeted with apprehension by the vendor as this amounts to I dig the hole and you drink the water. Finance has never been a constraint in holding the firm back. Financial matters are basically handled by Mr. Chiam and as the person interviewed was the Human Resource Manager, not much of information on this matter was divulged. The management practises the concept of planning ahead in the development of the business and the philosophy of plan your work and work your plan.

5.45 Production To make workers more flexible and to prevent monotony the line set-up with regard to alignment, listening, manual insertion and touch-up jobs is changed every month. Other than changes to supervision and the training system, production methods have basically remained the same as the firm believes in Why Change? when productivity and quality are already to the satisfaction of the customer. The key personnel who will decide on any change to production processes are the Production Manager and the Maintenance Manager. The firm also believes in the fact that any change in the production process should also be relayed to other management staff for their knowledge so that everybody is in the know as to the goings-on.

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The firm has not invested in new technology simply due to the People factor as workers take time to adapt and adopt. As rework means losses to the firm, quality control has been strict with checks being done through every production line. Reject rates at every line has been less than 5%. The main problem with quality control has been with intermediate components which are not visible to the naked eye.

5.5 Major development and future direction Through the undying efforts of the management in inculcating the companys philosophy and mission, the firm has established a good reputation of producing high quality products. Word has in fact spread through the manufacturing grapevine and the firm has been approached by Sony and Philips for subcontracting work. This development though welcome is certainly unexpected. As the firm is presently constrained by capacity it is yet unable to accept such potential orders. Though the relationship thus far has been singular with Grundig, the directors have not been blind to the external environment of the industry. In fact, they have been keeping watch on market trends by reading Trade News and other related journals besides keeping an ear on the grapevine of the industry circle. The objective for the future is to go into Disk-drive production which promises better returns and prospects and to attain the quality standard of IS0 9000. The company also has the intention of setting up a Research and Development centre so as to be able to produce fully indigeneous products which can be truly called

74

Malaysian. Going into independent manufacturing will then enable the comi>any to . spawn and develop other SMIs. Nevertheless, there is yet no clear written plan or mental framework as to how this could be achieved. The main constraints on future development are the economy of the country, ability to maintain quality at desired cost, intervention of politicians in decisionmaking in the manufacturing sectors and costs of utilities (electricity tariff and telephone rate) which have seen a rising trend due to privatisation. The key economic impact is rising labour costs not matched by increased productivity. Currently the company is having problems in getting land in the existing industrial estate for its expansion. Though the company can move elsewhere where land is available, the company is holding out as it is committed to developing the socioeconomic status of the local people by providing jobs. This is an example of a smaller business having wider social objectives which provides a constraining framework within which it chooses to operate. The company is hoping that the government could help out by providing a piece of land in the vicinity to help realise its social mission.

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CHAPTER 6 Case Strudv 3 : MOZA PRECISION PLASTIC INDUSTRIES

6.1 Profile of the firm 6.11 Name and address of the firm MOZA Precision Plastic Industries Sdn. Bhd. Lot 6442-6443, Lorong Ayam Didik 3 Kawasan Perindustrian Taman Ria Jaya 08000 Sungai Petani Kedah

6.12 Date of establishment June 1994

6.13 Year of Vendor status March 1996

6.14 Type of vendorship Mixture of VDP and non-VDP as the anchor companies orders under the VDP are not big enough to meet the full capacity of the company. Thus the company has also to seek sub-contract jobs in the open market to

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optimise production capacity. This is because the same moulds can be used to produce other plastic components.

6.15 Name and address of anchor companies Sharp-Roxy Appliances Corporation (M) Sdn. Bhd. Lot 4 & 6 Jalan 225 Seksyen 5 IA 46100 Petaling Jaya Selangor

Perodua Manufacturing Sdn. Bhd Lot 1896, Sg. Choh, Mukim Serendah Locked Bag No. 226 48009 Rawang

6.16 Ownership of firm Partnership : 4 partners

6.17 Location Urban

6.18 Types of products Plastic components for audio players, toys, pharmaceutical, automobile and home appliances.

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6.19 Financing Financial Institutions - 90% Own capital - 10% The high level of financing was made possible through the VDP financing package.

6.2 Establishment of linkage

6.21 Contacts Contact with Sharp-Roxy was established by one of the Managing Directors of MOZA who knew the former Managing Director of Sharp-Roxy. MOZA has since the beginning been producing plastic components On the other hand, establishment of contact with PERODUA was through formal enquiry after learning from personal contact that they were looking for vendors.

6.22 Requirements of the anchor companies for vendorship (i) Skilled labour (ii) Management expertise (iii) Location of operation (iv) Quality of products (v) Timely delivery (vi) Technology

6.23 Binding conditions laid down on vendors The vendor must compensate for any rejection of consignments. However in this respect, MOZA also made it a condition that it reserves the right to be

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l . .*

compensated if it is found that the rejection is due to the poor quality of the parts supplied by the anchor company. Also the vendor is not allowed to sell components of the anchor companys specifications to other customers.

6.24 Government requirements The firm must have the necessary manufacturing license and environmental approval.

6.3 Maintaining the relationship

6.31 Problem types A significant problem is inconsistent demand especially from Sharp-Roxy; for example last year demand dropped by 40%. This has led to excess capacity and MOZA had to to look for customers in the open market to mop up the excess. It should be borne in mind that MOZA produces 70% of its production capacity for Sharp-Roxy, 10% for PERODUA and the balance for the open market. Thus, whenever either of the anchor companies reduces its demand, then MOZA will be left with excess capacity which will have to be filled by open market demand. In fact demand of both the anchor companies could not meet the vendors total production capacity and so as not to be over- dependent on them MOZA is producing not only for the two anchor companies but other companies in the open market as well.

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6.32 Input from anchor companies There is very little input from the anchor companies except that whenever new parts are introduced the anchor company will send its quality control and engineering personnel to check on test runs. The models from these test runs will serve as the bench mark for future production. Other than this the anchor companies supply only some of the parts or components needed for production. The rest are sourced from other established suppliers whose quality standard is already well known to the anchor companies. Even though he anchor company does not specifically stipulate that sourcing from other sources unknown to the anchor is not allowed, the vendor is not prepared to take unnecessary risks as the specifications from these sources may not exactly fit or suit the anchor companys requirements, thus posing a possibility of a higher rate of rejection. As part of a cost cutting measure and diversification plan the firm has gone into mould making for the production of some of its parts and this move has also enabled the firm to have more control over the quality of the parts.

6.3 3 Reactive management The continued escalating cost and pinching of labour has forced the management to go into semi-automation using robots. The firm does not face any problem in adopting this new technology as workers can be easily trained to handle it.

6.4 Operation 6.41 Labour There are altogether 80 production workers with 50% males and 50% females. At the supporting level, there are five clerks and five technicians. As the factory is semi-automated, not many operators are required after taking into consideration the monthly turnover. Production workers can partake in decisions by making suggestions to their supervisors in weekly meetings, To cope with fluctuating demand, the company only manipulates the shifts rather than resting or increasing the number of workers. When demand is high, the company produces using three shifts, otherwise it uses two shifts. As competition for workers is quite intense due to the large number of factories in the area, the company has decided to offer better fringe benefits rather than compete on a pure salary basis.

6.42 Management The backgrounds of the owner Directors are one with a degree in business administration while the rest are businessmen with many years experience. There are five departments: human resources , accounts, operations, purchasing and quality control each headed by a manager. The management structure is layered with all the five managers reporting to the Managing Director who is then answerable to the Board of Directors. Basically the Board of Directors decides on the scope of the organisations activities. The management team is then collectively bound to undertake whatever decisions or proposals are made by the Board.

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6.43

Marketing

As mentioned earlier marketing is still necessary as the total demand from the anchor companies is only about 80% of the total production capacity. Furthermore, the company would not want to depend too much on the anchor companies for its markets and its intention is to go into independent production in the near future. There is no formal marketing department in the firm as it is the collective responsibility of the whole management team. According to the Executive Director, the major constraint on overseas market development is to gain an initial contract as the company has yet to attain the IS0 9000 quality standard. It is very difficult to sell in the international market without this quality mark. According to the Managing Director interviewed, he claims that the companys products are already of international quality but are not able to attain the quality mark as the firm has only been in operation for about a year. The quality mark requirement is at least two years of continuous operation and maintenance of standard. The pricing of products is determined through negotiations with the anchor companies after taking into account the machine rate per hour. So, if the firm could improve on this rate then its profit will be higher.

6.44 Finance As the company is highly geared, servicing financial loans is encroaching on profitability especially at this initial stage of operation even though the interest rate is much lower than the market rate as the firm is under the VDP package. It could

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be worse for those who do not enjoy such a privilege. Nevertheless, the firm is never short of financing to expand production capacity. There are various financial institutions like the Malaysian Industrial Development Finance Bhd., Bank Pambangunan Bhd., Bank Industri Malaysia Bhd. and various Government

agencies providing soft loans of up to 85% for purchasing new machinery or for project expansion cost. As the financial institutions are parties to the package and some with grants provided by the Government the terms are very relaxed. For details on eligibility, interest rate and other relevant details please refer to Appendix 1. Payment from anchor companies has been good so far with 30 days credit; however, payment from customers in the open market is a problem with their delaying tactics. A solution to this payment problem is to get 50% payment upfront. Basically decisions on financial matters are done by the Board of Directors and as the person interviewed was the General Manager of Administration, not much information was revealed.

6.45 Production Production methods have basically remained the same since start-up - the firm is more machine oriented - except for the acquisition of an extra 4 machines. Technology too has remained the same as the machines that the firm acquired were already state-of-the-art With the purchase of new equipment, the firm has been able to go back to the anchor companies to get bigger orders to meet the extra capacity. However the anchor companies are not obliged to comply. It is just an

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attempt to inform the anchor companies of their bigger capacity in the hope of attracting more orders from the anchors, The vendor in endeavouring to expand cant be too dependent on the anchor to increase its orders as a basis for expansion. As quality checks are by means of random sampling, defects at times can miss detection and if the defects are minor, rework is normally done at the anchor companies premises. So far, the company has not experienced any major defect rejection. The rejection rate is a mere 0.4%.

6.5 Major developments and future direction. When the firm first started out, it had only 6 machines and now it has 10 machines which are all semi-automated. The firm is also already going into mould making. This is actually a strategic step towards reducing its dependence on sourcing parts or components. Furthermore mould making is essential if a company wants to go into its own finished product manufacturing. The next step will be to go into ml1 automation and then into Research and Development(R&D) for the development of its own products. Even though the company is quite confortable with 80% of its products having a secure market as a vendor to Sharp-Roxy and PERODUA; it faces stiff competition in the marketing of the remaining 20% of its products with 80 competitors in the open market. The quality of the products among all the competitors is almost the same so the only focus of competition is on price. MOZA monitors its competitors through informal information obtained from associates and uses its trade secrets to compete.

It is this realisation that competition is too stiff in the plastic components industry that prompts the firm to go into own production of computers, electronics or other related products with its own brand name five years down the line. This is because the firm foresees that information technology will be an important facet of life in the future. However, there is no clear written plan or framework to go about achieving this. The foreseeable and worrying constraints on future development is the withdrawal of the Generalized Special Preference(GSP) status on Malaysian made products by the United States as most of the products are sold to that market. Another worrying phenomenon is the trend of foriegn investors moving to the new economies like Cambodia, Vietnam and China where labour costs are much cheaper, A shortfall in foreign investors will reduce the demand ,for sub-contracting work from local SMIs. The key economic forces that impact on the firms business are rising labour costs and the anchor companys growth. However, it has to be noted that the key to this firms future is its ability to become strategically aware of the relevant change forces in its environment and also the potential opportunities for diversification.. It is all well and good to be thinking of going into computers or electronics manufacturing given its potential but the firm should know about the enabling environmental forces and threats on these products markets. The firm should also be working through such insight in terms of required strategic and operational change to take advantage of the opportunities bearing in mind resource and management ability implications.

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CHAPTER 7

Case Studv 4 : TERAS PLASTIC PRECISION SDN. BHD.

7.1 Profile of the firm 7.11 Name and address of the firm TERAS PLASTIC PRECISION Sdn. Bhd. AZ- A3, Lot 55, Skim Kilang Bimbingan, Kawasan Perindustrian Mergong Barrage, Jalan Lencong Barat 05 150 Alor Setar Kedah.

7.12 Date of establishment May 1992

7.13 Year of vendor status Obtained VDP status - October 1994 Operation as VDP - October 1995 ( one year lapse due to red-tape )

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7. I4 Type of vendorship Mixture of VDP and non-VDP as the firm started off as a sub-contractor.

7.15 Names of anchor companies. VDP - Sony Mechatronics Non-VDP : PERNEC SAPURA MAS

7.16 Ownership of firm Partnership : S partners The partnership is arranged by Bank Pembangunan.

;1

. -i

7.17 Location i.. Outskirts

7.18 Types of products SONY MECHATRONlCS - Computer part( front panel ) SAPURA - Telephone parts MAS - In-flight plastic cups. AIC - Car wiper plastic parts.

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7.19 Financing Self financing : 50% Financial institutions : 50%

7.2 Establishment of linkages 7.21 Contact The owner directors learned about the VDP through the Ministry of International Trade and Industries(MIT1) while the other sub-contract works were established by approaching the anchor companies concerned. After approaching the anchor companies visits were arranged for audits at the vendor company to assess suitability.

7.22 Problems in establishing linkages The main problems in establishing linkages are in terms of logistics(location) and pricing. According to the Managing Director interviewed for this study, he claimed that if the MNCs were to have their way, they wouldnt want to sub-contract to local

SMIs, preferring to source from their home-country or home-based SMIs. This is particularly the case of the Japanese MNCs as they do not &lly trust the quality of local SMIs, with the possible co-existence of strong nationalistic feeling to ensure the flow of funds back to the home-country.

7.23 Conditions laid down for vendorship (i) Skilled labour (ii) Management expertise (iii) Location (iv) Quality of products (v) Timely delivery (vi) Technology

7.24 Changes undertaken to tilfill conditions of the anchor company The firm was required to invest in Quality Control equipment to ensure quality is according to specifications.

7.25 Binding conditions laid down on vendor Failure in delivery or quality which results in the anchor companys production line being held up will have to be compensated at the rate of RM5000 per hour. If rejects are minor defects re-work has to be done. The vendor is not allowed to sell products with similar specification to the anchor companys to other customers.

7.3 Maintaining the relationship 7.3 1 Problem type The only problem faced is fluctuating demand. However, this problem will be addressed as the anchor company under pressure from the government has promised that in titure demand will be more consistent. In fact, according to the Managing Director interviewed, a circular to this&ect has been received from the anchor company. The question is how would the anchor company reconcile this in

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the event of worldwide slump as is currently happening to the electronics sector. Probably there are conditions attached to this promise.

7.32 Input from anchor company The anchor company will train the vendors workers whenever there is any new product to be produced or assist in retraining when there is any problem with production. Suppliers of raw materials or parts to the vendor must be those appointed by the anchor company, particularly in the case of the Japanese anchor company. This it is felt is to ensure that the flow of currency goes back to the home-country. The anchor company will also carry out unannounced audit checks on production flow, material flow and material sourcing. Guidelines are given if such checks reveal opportunities to improve the production process. Representatives from the vendor will only be required to attend the anchor companys meeting if there is any problem. Any major decision by the vendor must be conveyed to the anchor company; such as for example, when the firm bought a piece of industrial land in the Dan&man Industrial Park, the anchor was told and it seemed that the anchor company was not too pleased that the vendor is moving fiuther away logistically. This has influenced the vendor to maintain production of the anchors products at the same site while shifting the rest of its production. Also, whenever there is any manufacturing flow change the anchor company must be informed. Thus, considerable constraint is imposed upon the vendor by the anchor companys rules and this is a potential restriction on future strategic development of the vendor in totality( including non-anchor market development ).

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7.4 Operation

7.41 Labour
There are altogether 35 general workers with 80% female. Workers do participate in decision-making processes through the weekly production meeting. Manipulation of workers is not necessary to meet rising or falling demand as work, especially that involving simple manual work, can be sub-contracted to domestic or cottage industries to meet rising demand. This poses the problem of quality and delivery and in fact the anchor company SONY Mechatronics does not allow this. Salary and fringe benefits provided are better than those offered in the area. However, there are still workers who resign due to personal reasons. Nonetheless, the turnover rate is not significant. However, with a better pay package, recruiting of workers especially when there is an immediate need, is still difficult as jobs are aplenty.

7.42 Management All five owners have vast experience in the manufacturing and business line. Three of the shareholders are also Directors. There are five areas of activity at the management level: Production, Material, Purchasing, Accounts and Quality

Control and these managers report to the Directors. All the management personnel have attended management courses organised by various agencies; namely the National Productivity Centre, Bank Pembangunan and MITI. Basically, the Board of Directors decides on the brganisations scope of activities : and management implements the policies decided upon.

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7.43 Marketing The firm does not do any marketing as it has its hands full already supplying to its five anchor companies. This appears to be a potential constraint on future development in that marketing skills which non-vendor small businesses must develop when they have to stand independently on their own two feet may not be developed in such an anchor-vendor relationship whereby the rules of the game and parameters of the external environment are dictated by the anchors.

-. 7.44 Finance Servicing financial loans is not really a burden as most of the firms capital costs have been recovered already particularly since securing the Sony Mechatronic vendorship as its profit margin is good. Finance is not a problem in the firms expansion plan as it enjoys the financial package offered under the VDP. The firm also does not face any cash flow problem as all its customers are anchor companies whose credit terms are 30 days.

7.45 Production Production methods have not changed since inception as the firm started off with semi-automated processes using robots. Production line methods do not change as the firm charges the anchor companies on piece rate, not man hour rate. So far the firm has only had to redo rejected products on one occasion when workers were sent to the anchor company to do the rework.

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7.5 Major developments and future direction The firm has recently acquired a piece of industrial land at the Darulaman Industrial Park for future expansion as the current factory site is considered too small. This indicates that the firm is growing. Its future plan is to expand into plastic related finished product manufacturing and seek a Second Board listing in the Kuala Lumpur Stock Exchange. However, it has no clear Mitten plan though it is looking at a mental framework of five years down the road to achieve its vision. It foresees constraints on future growth as coming from established giant firms competing for sub-contracting work. There are many such giants surviving purely on sub-contracting work. The other constraint is the performance of its anchor company with its sensitivity to its overseas markets, Competition from the other sub-contractors supplying to the same anchor . company also cannot be discounted. The firm ensures its competitive edge by taking care of its delivery and quality which it feels will ward off the competitive threats.

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CHAPTER 8

Conclusion
8.1 Establishment of contacts It can be seen from three of the four case studies that personal contacts of the owner Directors with their years of experience in the manufacturing sector facilitated much of the establishment of contacts. The Directors before becoming entrepreneurs had been dealing with the key personnel in the anchor companies and in fact were fully acquainted with each other. Naturally in this scenario the establishment of linkage was easier. The case of TERAS PLASTIC proves this point as in the process of establishing linkages, it was subjected to many audits and checks before being granted the vendorships as its linkages were done by aknocking-on-the-door approach. However it has to be qualified that personal contacts alone are not sufficient to succeed in establishing linkage without fulfilling the condition of having skilled labour, management expertise, good location, the necessary technology and the proven capability of timely delivery and quality production. This is because the anchor company needs to be assured that the quality and delivery schedule can be maintained. The owner Directors handle the day-to-day running of the

company by pinching experienced management staff from established factories while they take care of policy matters and financial aKair.s.

8.2 Nature of the relationship As can be seen from the linkage agreement of the four case studies, the terms are all biased to the favour and advantage of the anchor company without any clause or recourse(except for MOZA) to the vendor for compensation. There is also no provision of any structured long-term programme to help upgrade or develop the vendors. The training programmes offered, the meetings held and whatever guidelines given were merely to protect the interest of the anchor companies, Thus, this relationship is more of a marriage of convenience as the anchor companies need to cut cost by sub-contracting and the SMIs need the security of markets with the marriage founded on vows essentially developed at the dictate of the more powerful anchor company. The case studies also reveal that the anchor companies do not look upon the relationship as one of symbiotic existence - dependence on each other for growth. It is more of a case of the SMIs needing the big companies for their markets and the big companies exploiting this need. The fear that the relationship may be cut off when the need is over is always hovering over the head of the vendors which explains why they are always looking for other anchor companies to establish multi-relationships instead of a singular focus.

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8.3 Maintenance of relationship From the case studies it was discovered that the relationship is quite good save for the minor hiccups in the form of recent drops in demand and the rare rejection of consignments which is still below the accepted rate of 0.5%. The vendors track record is so good that they have already been given additional orders or approached by other anchor companies for other sub-contract work. In fact, SCRIN technology has been entrusted to fully manufacture GRUNDIGs electronic product following their phasing out from Penang.

8.4 Problems faced The main problem faced is that when orders are down, particularly for those with a singular linkage, work shifts and work schedules have to be rescheduled and workers forced to take leave. Production will be below capacity and, if this happens too frequently, it might even affect profitability. Another problem faced is for those vendors who have to rely on the parts or components from the anchor companies to be assembled. As this is done on a J-I-T basis, the vendor will not have the lead time to check on the condition of the parts supplied. Sometimes rejection is caused by the defective parts supplied by the anchor companies but the vendor will still have to do the re-work if a consignment is rejected. Re-work means man hours lost and extra costs incurred. Another uncontrollable problem is that demand is based on the market of the anchor companies and, if the market of the anchor company is hit, then the vendors will be affected too. Furthermore the vendors are not allowed to sell to other

4 .

customers the products or parts with the specification of the anchor company. So in this respect the vendor is helpless as far as marketing existing products to new customers is concerned. Surprisingly, finance or cash flow is not noted to be a problem even for expansion purposes for all the four vendors studied.

8.5 Future development All the four vendors realise that they shouldnt feel comfortable merely as subcontractors and they all aspire to develop into finished goods manufacturing in their own right. However, the main constraint is that they are still far off from having their own Research and Development function which is not easy to set up as it means hiring personnel who are very creative and with relevant expertise. These highly qualified individuals are in the first place rare and secondly prefer to work for big companies where the facilities and perks are much better. Furthermore these vendors except for SCRIN are only involved in producing parts or components for their anchor companies, so this means that they dont even have the capability to produce imitation products. Notwithstanding, it should be noted that three of the SMIs SCRJN studied: GLOSS,

AND TERAS have either planned, or already acquired land for, future

expansion which is indicative of success in their undertakings. In conclusion, we can see that there are many opportunities for those with the right contacts to secure vendorship, and big companies feel more comfortable to give out vendorships to those they know are familiar with the exacting requirements of

an anchor-vendor relationship rather than merely the introductory procedure of the VDP vendors. Furthermore, vendors under the VDP do not enjoy any clear advantage over those non-VDP. One remaining issue which warrants further investigation is that of the vendoranchor relationship possibly fostering a rather cosy or insular oriented position for the vendor. In short, those vendors whose anchor companies provide the monopoly of insight into external environmental issues which impact on the vendors activities (usually via effects on the anchor) are under little pressure to strive to seek wider in-depth understanding of the external operating environment, Usually SMIs of a non-vendor nature are forced alone to scan their external

environment and attempt to understand new unfolding opportunities and/or threats. It is questionable whether the vendor-anchor relationship requires the same analytical rigor of the small firm vendor - and thus the need for that small firm to continually develop skills in this respect.

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BibliomaDhy

Abdul As Othman(1995, October) : Suggestion From Vendor Companies That could Further Improve The VDP In Creating More successful And Resilient Vendors. Paper presented at VDP seminar organised by the Ministry of Entrepreneur Development at Hyatt Regency Saujana Subang, Selangor, Malaysia.

Andy Seo( 1992, December) : Subcontracting Activity In Providing Dynamic Market Opportunities to SMIs. Paper presented at SMI seminar on Industrial Linkages - Targetted Specifically at the Industrial Inputs Market, Kuala Lumpur, Malaysia.

Carson D( 1991) Research into Small Business Marketing. Euronean Journal of Marketing Intelligence Planninn Vol. 9 No. 6.

Chee Peng Lim(1986) Small Industry In Malaysia. Kuala Lumpur: Berita Publishing Sdn. Bhd. p. 58

Chee Peng Lim( 1992) Potential and Problems of SMIs. in Kim S. J. and Suh J.W.(eds.), Cooperation in Small and Medium Scale Industries in ASEAN. Kuala Lumpur: Vinlin Press Sdn. Bhd. pp. 40-51.

Curran, J.( 1988) Trading and Research Strategies for Small Firms. Journal of General Management Vo. 1.3 no. 3 Snrina.

Faridah Shahadan et al(1990, May) Growth Constraints of Small and Medium Enterprise in Malaysia - Myth or Reality 7 Paper presented at the International Conference on Small and Medium Scale Enterprises organised by UUM, MCCM AND DBM in Langkawi Island, Malaysia.

Fong Chan Onn(1990) Industrialisation in Malaysia: Role of Small and Medium Scale Industries. in The Malaysian Economy : Transition, Kuala Lumpur, Malaysian Institute of Public Administration,

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Ghazie Ismail( 1992, December) Industrial Standardisation As a Guarantee Toward Market Expansion Through Industrial Linkages. Paper presented at SMI seminar on Industrial Linkages - Targetted Specifically at the Industrial Inputs Market, Kuala Lumpur, Malaysia. Hasnah Ah et al( 1990, May) Linkages of SMIs : Where Are They Heading ?,, Paper presented at the International Conference on SmaIl and Medium Scale Enterprises in Langkawi Island, Malaysia. Hj. Mohd. Shah(1992, December) l[ndustrial Sub-contracting Activity Experience of a Malaysian Vendor. Paper presented at the SMI Seminar on Industrial Linkages at PWTC, E&ala Lumpur, Malaysia. Mohd. Nasser Md. Noor et al(1990, May) A Small Business Linkages - A Marketing Approach. Paper presented at the International Conference on Small and Medium Scale Enterprises in Langkawi Island, Malaysia. Nawawi Hj. Mohd. Jan et al( 1990, May) Strategies Toward Improving SMIs in Malaysia - With A Particular Reference to the Manufacturing Sector. Paper presented at the International Conference on Small and Medium Scale Enterprises in Langkawi Island, Malaysia. Omar Hj. YusufT 1992, December) Government Policies and Strategies on SMI Development. Paper presented at the SMI seminar on Strengthening SMI Industries Through Industrial Linkage at PWTC, Kuala Lumpur, Malaysia. Smallbone D., Cumbers A and Leigh R(1993) The Use of External Assistance by Mature SMIs in the U.K. : Some Policy Issues. Entreureneurial and Repional Development. The Star, February 10, 1996: Factories to increase procurement of Local compenents. The Star, March 22, 1996: Supply Parts to MNCs, says Mahathir. p.2. The New Straits Times, April 10, 1996: More Vendor Companies Wanted Under Development Programme.

The New Straits Times, April 15, 1996: Cut Costs, PROTON Warns Vendors. p.24. The Star, May, 1996: Group Seeks Re-assessment of Vendor Development Programme. Wyer P(undated) Enhancing Small Business Development Within the Franchise Relationship, source unknown. Wyer P and Small Bone D.( 1995) Export Activity in SMIs: A Franchise Analysis. Paper presented to 6th ENDEC World Conference on Entrepreneurship..

APPENDIX 1 The Role of Banks and Financial Institutions To SUDDOI-~ the Vendor Develonment Proaamme *Source: Ministry of Entrepreneur Dvelopment
SPECIAL OAN SCHEMES UNDER BANK E :GARA MALAYSIA(BNM) NEW ENTREPRENEURS FUND BUh4IPUTER.A INDUSTRIAL Stimulate growth of small and bumiputera medium size enterprisis. Encourage benture in business of supplying to or established working with e.g. Umbrella corporations concept and Vendor Development Programme 100% bumiputera-owned. with shareholders companies funds of RM2.5 million and below. Encourage the growth of entrepreneurs(SMIs) under theumbrella Concept.

OBJECTXVE

ELIGIBlLITY

( AMOUNT

RM 600 million Maximum: RM2 million 85% of project cost 5.0% p.a. Maximum 8 years

i. Existing SMIs operating under the Umbrella Concept. ii Bumiputera individual or corporation with at least 70% bumiputera equity and management control. RM 100 million Maximum: RM2.5 million 85% of project cost 5.0% p.a. Maximum 8 years

-INTEREST RATE REPAYMENT PERIOD TYPE OF FINANCING GUARANTEE COVER PARTICIPATING FlNANCIAL INSTITUTIONS

Term loan, Overdraft & Trust Term loan Receipt CGC guarantee up to 80% of unsecured portion of NEF loans All commercial banks All commercial banks

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FINANCIAL AND CREDIT FACILITIES FOR SMIs OFFERED BY PRINCIPAL FINANCIAL INSTITUTIONS, COMMERCIAL BANKS AND GOVERNMENT AGENCIES INSTITUTIONS FINANCE AND CREDIT FACILITIES AVAILABLE CREDIT GUARANTEE CGC - Credit Guarantee Scheme CORPORATION(M) * New Principal Guarantee Scheme(NPGS) BHD.(cGc) BANK PEMBANGUNAN Loans available to bumiputra enterprises MALAYSIA * Project Loan BHD. (BPMB) * Share Financing Scheme * Leasing * Special Scheme for Furniture and Food Industries Industrial Adjustment Fund(IAF) Small and Medium Scale Industry Promotion Programme(SMIPP) Engineering Facilities BANK INDUSTRI * New Engineering Projects MALAYSIA * E.xpansion/Replacement of existing production line machineruy BHD.(BIMB) and Equipment Leasing E.xport Credit Scheme - Capital goods * Suppliers Credit * Buyers Credit Trade Financing Facilities * Import Trade * Long Term Trade Financing Scheme MALAYSIAN MIDFs Scheme INDUSTRIAL * Project loan * Machinery loan DEVELOPMENT * Factory Mortgage loan FINANCE BHD.(MIDF) * Lease Financing ASEAN-Japan Development Fund(AJDF) Industrial Adjustment Fund(IAF) Small and Medium Scale Industry Promotion Programme Soft Loan for Modernisation and Automation of SMIs The Swedish Fund for Environmental Protection and Control Bank Negara Malaysia - Special Loan Schemes ALL PARTICIPATING * Special Fund for Tourism( WI) FINANCIAL * Fund For Food( 3F) INSTITUTIONS * New Entrepreneurs Fund(NEF) * Bumiputera Industrial Fund(BIF) Bankers Export Finance Insurance Policy(BEFIP) MALAYSIA EXPORT CREDIT INSURANCE BHD.(MECIB) MARA Loan Scheme MAJLIS AMANAH RAICYAT(MARA) Industrial Technical Assistance Fund(ITAF) BANK * ITAF 1 - Consultancy Services Scheme PEMBANGUNAN(M) * ITAF 2 - Product Development And Design Scheme BHD * ITAF 3 - Quality And Productivity Improvement Scheme SIRIM * ITAF 4 - Market Development Scheme MATRADE

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CREDIT GUARANTE E CORPORATION MALAYSIA BHD (CGC) NEW PRINCIPAL GUARANTEE SCHEME(NPGS) Provide entrepreneurs with viable projects but without any or inadequate OBJECTIVE collateral ready access to a wider range of credit facilities. Launched on February 1, 1994 to replace the PGS. ELIGIBILITY i. Malaysian owned and controlled business with net assets or shareholders fund not exceeding RM 1 million or RM 5 million for business in the priority sectors and not exceeding RM 2.5 million for the manufacturing company. ii. In case of partnership, cooperative society or a company, the majority of the members must be citizens of Malaysia. Priority Sector : RM 5 million Non-Priority Sector : RM 3 million Manufacturing Sector : RM 7.5 million Priority Sector : BLR +- 2% p.a. Non-Priority Sector : BLR + 2% p.a. Priority Sector : Maximum of 3 years unless term loan Non-Priority Sector: Maximum of 3 years unless term loan Priority Sector : 80% clean; 90% partially secured Non-Priority Sector : 70% clean; 80% partially secured For small loans below RM 5,000 : CGC coverage to be under Block Guanrantee Scheme where maximum coverage is 80% * Fixed/Term Loan * Overdraft * Trust Receipts(TR) * Letters Of Crcdit(LC) * Bills Purchased - Domestic Bills of Exchange Purchased - Foreign Bills of Exchange Purchased * Shipping Guarantee * Performance Guarantee - Contracts - Customs Duties * Export Credit Refinancing(ECR) * Bankers Acceptances

LOAN AMOUNT

INTEREST RATE REPAYMENT PERIOD GUARANTEE COVER

CREDIT FACILITIES ELIGIBLE FOR GUARANTEE

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Project Loan

GUNAN MALAJ ILE TO BUMIPU Share financing Leasing

Eligibiiity

Bumiputera
individual and

bumiputera designated cooperatives with at least 5 1% of equity owned by bumiputera

Eligible Sectors

Loan Amount

Manufacturing and service sectors RM 100,000 RM 12 million

Interest Rate Repayment Period

Purpose

Market rate. negotiable *Maximum 12 years - Fixed assets loan *2 to 4 years working capital loan * Fixed asset loan * Working capital loan

Option 1: Bumiputera individual employed on a full time basis or a member of the Board of Directors of a company Option2 Companies registered in Malaysia with at least 5 1% of its equity owned by bumiputera Option3 : Bumiputera employees of any company that has an approved share ownership scheme. Manufacturing and service sectors Option I: RM10,000rm500.000 OptionI : RM50,000-RM3 million Option III: RM50.000-RM 1 million Market rate, negotiable Maximum 7 years

Bumiputera individual and bumiputera designated companies/cooper atives with at least 5 1% of equity owned by bumiputera.

Special Scheme for Furniture and Food Industries Registered companies with paid-up capital not more than RM2.5 million, with more than 70% equity owned by bumiputera.

Manufacturing and setvice sectors RM100.00-RM12 million

Furniture and food industries RM30,000-RMl million

Market rate. negotiable * 3 years primary * 2 years secondary

4% p.a. Ma.ximum 10 years

Share financing

Leasing financing of machinery/

* Fixed asset loan * Working capital loan *Leasing financing of machinerv

105

BANE; PEMBANGUNAN MALAYSIA BHD(BPMB) INDUSTRIAL SMALL AND MEDIUM

ADJUSTMENT FUND(IAF)

ELIGIBILITY

ELIGIBLE SECTORS LOAN AMOUNT

Companies which are registered in Malaysia with at least 51%equityownedby Malaysian citizens Wood-based sub-sectors RM100.000 - RMlO million

INTEREST RATE REPAYMENT PERIOD PURPOSE

7.75% p.a. Maximum 8 years Fixed asset loan

SCALE INDUSTRY PROMOTION PROGRAMME(SMIPP) Companies with paid-up capital of RM5 million or less withatleast51%equity owned by Malaysian citizens Manufacturing, services and tourism sectors Minimum: RMlOO,OO Maximum ; RM5 million or 75% of project cost 7% pa. Maximum 15 years * Fixed asset loan * Lease financing of machineryiequipment

Percentage Of Financing

Interest Rate Lease

BANK INDUSTRI MALAYSIA BHD.(BIMB) ENGINEERING FACILITIES New Engineering Expansion/Replacement Of Projects Edsting Production Line Machinery & Equipment Up to 85% of the project Up to 85% of the intrinsic cost(excluchng land) but value of the machinery and subject to a debt/equity equipment subject to the ratio of not exceeding companys debt equity ratio 3.5:1 3.5:1 7.0% - 9.0% p.a. 7.0% - 9.0 p.a.

Machinery And Equipment Leasing 90% of the intrinsic value of machinery and equipment

Loan Period

Security

Maximum of 15 years, inclusive of 5 years grace period. depending on cash flow of the period. * First fixed charge on plant. machinery and equipment financed by the bank * Fixed and/or floating charge on all other assets. * Guarantee by Shareholders, Directors. or corporate guarantee. whichever is applicable.

A miaximum of 15 years, inclusive of 5 years grace period. depending on project casMow

Rental payment is calculated based on minimum interest rate of 8.5% Maximum of 12 years, inclusive of 2 years grace period. depending on project cashflow.

106

l .* l

MALAYSIAN INDUSTRIAL DEVELOPMENT FINANCE BHD.(MIDF) ASEANINDUSTRIAL SMALLAND SOFTLOAN T H E JAPAN DEV. ADJUSTMENT MEDIUM FOR SWEDISH SCALE MODERN-BAT FUND FOR FUNWmF) FITND(IAF) INDUSTRY ION ANDD ENVIRONME PROMOTION AUTOMATIO NT-AL PROGRAM N OF SMIs PROTECTION CONTROL A US15 million Swedish Fund aimed at manufacturing companies for the acquisition of Swedish machinery and equipment for environmental projects Manufacturing companies purchasing Svvedish manufactured plant and equipment controlprotecti on

Objective

Eligibility

The RM500 million IAF was launched byfie Government in Jan. 1991. MIDF is responsible for financing the textile and garment industry Malaysian E.xisting incorporatedke companies with gistered 5 1% Malaysian enterprises with ownership in paid-up capital the textile not exceeding industry i.e. RM5 million -spinning and not less -weaving than 51% of the -finishing equity ownee by -garments Malaysian

Introduction in Dec. 198Sby the Government for SMIs

Introduced in A RM50 May 1992 by million fund the Government aimed at for SMIs promoting the modernisation and automation of MSIs through the utilisation off new technology

Malaysian incorporate&e gistered enterprises with paid-up capital not exceeding RM5 million and with not iess than 5 1% of the equity owned by Malaysian

Loan Amount

uptoRM5 million

Interest Rate Loan Period

6.5% pa. Maximum 15 years

Minimum: RM100,000 Maximum: RIM10 million 7.75%p.a. Maximum 8 years, including grace period

up to RM5 million

Malaysian incorporatedke gistered enterprises engaged in manufacturing activities with shareholders fund not exceeding RM2.5 million and with not less than 70% of the @uity owned by Malaysians up to RMl million

Not more than the equivalent of US5 million 5% p.a. Maximum 8 years including grace period Up to 75% of the cost of financing machinery and equipment

7.0% p.a. Maximum 15 years

Percetage of Financing

60%-70% of the cost of fixed assets

60%-70% of up to 75% of the cost of fixed the cost of fixed assets assets

4% p.a. 5-10 years inciuding 6- 12 months grace period 85% of the cost of machinery

107

objective

Implementing Agency Amount Allocated Maximum Grant

INDUSTRIAL TECHNICAL ASSISTANCE FUND ITAF lITAF 2- Product ITAF .3- Quality Consultancy Development And And Productivity Service Scheme Improvement Scheme Scheme * For expansion * To undertake * To help the and/or product company improve diversification development and its quality * For design assurance system modemisation and * To apply in line with the upgrading of indigenous requirements of technical & technological the National management know-how. so as Certification capabilities to develop new Scheme. the IS0 * For improving products or 9000 and other quality and processes standards scheme productivity * To improve its of SIRIM e.xisting * To encourage product/process SMls to upgrade management quality. BPMB SIRIM SIRIM RM5 million RM40.000 RM20 million RM250.000 RM20 million RM250.000

ITAF 4- Market Development Scheme To assist the company to export its products and build up export marketing e.xpertise

MATRADE RM5 million RM40.000

108

SCHEME TO PROMOTE BUMIPUTERA JOINT-VENTURES BY CONSORTIUM OF BANKS

sized Bumiputera companies. * For Equity Financing, an applicant must be Bumiputera individual or a 100% Bumiputera-owned company. a joint-venture company must have not d must have been granted financing for

ating to the provision of infrastructure b) relating to the provision of electrical power(in particular independent power plants with production not exceeding 1OOMV) c) manufacturing(in particulkar the production of components) d) privatization projects on a joint-venture basis(in particular management

Information Required

Participating Financial Institutions

Basic information required includes compoany background financial statements, project economics with casMow projections, directors/shareholders profiles and any other information that may be deemed necessary by the participating banks. * Maybank * Bank Bumiputera * Bank of Commerce * DCB Bank * Public Bank * United Malayan Banking Corporation * Arab Malaysian Bank Bhd. * Bank Utama(M) Bhd.

109

INTEGRATED LENDING APPROACH(ILA) UNDER CREDIT GUARANTEE :GC) IN COLLABORATION WITH BANK INDUSTRI MALAYSIA BHD. CORPORATb Io assist SMIs gain greater access to financing for both their capital Objective expenditure and working capital requirements, with CGC/Bank Industri acting 1s a One Stp Agent Eligibility c Borrowers who are involved in the following businesses:: . Metal based - Plastic . Electrical and electronics - Chemical - Pharmaceutical manufacturing * Borrowers maybe in the form of sole proprietorship, partnership or limited zompany r Business should bc Malaysian owned or controlled with net assets or shareholders funds not exceeding RM 1 .S million. * Borrowers credit facilities including those granted under ILA should not exceed RM5 million Loan Amount Total credit limit elibible to a single borrower under the ILA shall not exceed RMS million. Maximum of BLR + 2% p.s./ABM rates Interest Rate I Gurantee Cov er Clean loans: 80% Loans secured by collateral: 90% The maximum aggregate guarantee cover to any single borrower is RMl 1.5 million Duration of Term Loan: Cover - Up to tenor of the loan Overdraft and other credit facilities: - 3 years from date of letter of guarantee 0.5% p.a. based on the monthly outstanding amount. Guarantee Fee: The guarantee fee is payable on a quarterly basis and to be paid to CGC within one month from the date of advice by CGC * Maybank Panel of Participating * Bank Bumiputera Malaysian Bhd. * Overseas Chinese Banking Corporation Bhd Banks * Hongkong Bank Malaysia Bhd.

110

MALAYSIAN INDUSTBIAL DEVELOPMENT FINANCE BHD.(MIDF) Project Loan Machinery Loan Factory Mortgage Lease Financing Loan Objective Financing of new fixed assets to all new industrial ventures and existing enterprises undertaking modern&&ion and/or expansion. The facilities are tailored to meet the specific needs of each individual borrower, whether small, medium or large, domestic or foreign controlled so long as the manufacturing operation is in Malaysia %of up to 70% Up to 75% of the Up to 70% of the up to 100% lease Financing financing of the cost of plant and cost of the land and financing to assist fued asstes machinery factory building in acquiring plant together with baisc and machinery. It is installations such as an alternative to the electrical machinery installations. fire loantailored to fighting equipment assist small and air operators who conditioning. require higher percentage financing than is possible with machinerv loans 9.5%-10.5% p.a. 9.5%-10.5%p.a. 9.5%-10.5% p.a. 6.5%-7.5% p.a. flat Interest yearly rest for loans Rtae/Repayme reducing yearly rest repayable monthly repayable monthly ofrmjOO.000 balancetrepayable nt quarterly for loans of 6.0%-7.0% p.a. flat RM250.000 and for loans above RM500.000 below: repayable quarterly for loans of above RM250,ooo * A first charge on A first fixed charge Guarantee by * A first fixed Secwity the plant/machinery on the land and directors. charge on the land to be financed factory financed Third party and building. * Guarantee of all plus guarantee of guarantee or other * A first fixed directors/shareholde collateral may be charge on the plant directors/major rs required in certain and machinery, shareholders cases. both present and future. * A first floating charge on the current assets, raw materials. stock intrade and trade receivables subject to a postponement in favour of the commercial banks providing the working capital * Guarantee of directorsishareholde rs and/or corpoarte guarantee of major shareholders

111

. _ , . _ . - _ C . _ - _ _ - _ . . . - -

- _ .

APPENDIX 2
SAMPLE OF INTERVIEW INSTRUMENT
A Profile of firm 1 Name of firm:

2. Address of firm:

3 Date of establishment:

4 Year of vendor status:

5 Type of vendorship: VDP (

Non-VDP(

6 Name and address of anchor company:

7 Ownership of firm: Sole -. Proprietorship ( ( ( ) 1 > p a r t n e r s

Partnership Private Limited

8 Location: Urban Outskirts Rural

( ( (

1 ) >
112

4.

9 Type/s of product/s:

10 Finance: Self-financing(%): Financial Institutions(%): Name:

Partners(%): Government agency(%): Name:

11 Number of employees: Temporary: Permanent :

12 Firms objective/s:

B Establishment of linkage 1, How did you know about the vendorship programme?

2. Did you encounter any difficulty in making contact with anchor company initially? Why?

113

3, How many anchor companies did you approach before you were given the vendorship?

4. Why do you think you were successful in getting the vendorship?

5. What are the conditions laid down by the anchor company for selection of vendorship? (a) Financial soundness ( > (b) Skilled labour ( ) (c) Management expertise ( ) (d) Location of operation ( )
>

(e) Evidence of capacity

>

(f) Quality of product/s

>

(g) Timely delivery

(h) Technology

6. Did you have to make any changes to your firm in order to fiAfil1 the above requirements?

7.What are the conditions laid down by the anchor company in the establishment of this linkage?

8. In securing the vendorship, do you have to fulfill any government requirement?

114

9. Describe briefly the process that you had to go through to get the vendorship:

C. Maintaining the relationshiD

and development of the firm

1. Since the establishment of this linkage, what have been the main problems? a. maintaining quality d. flow of demand

b. maintaining delivery schedule

e. resource constraints

c.management ability constraints

2. What have been the main changes/development occurring in the firm since the linkage?

3, Does the anchor company have any say in your firms decision-making process in terms of a. approach to production

b. recruiting/training of workforce

115

..

c. choice of other anchors.

d. others

4. Does the anchor company offer any form of help to your firm?

5. What have been the external factors which have shaped the business since the establishment of the linkage?

6. Which particular factor aforementioned caused the management to take reactive actions?

7. In developing your business towards the future, have you had a clear set of aims/objectives and a clear strategy of f%iIling those aims?

8. What are those aims with regard to: a. Market( Why and how)

b. Product( Why and how)

116

c. Profit levels

d. Growth(sales? employees?)

9. Have you developed a clear written plan or framework of how you are striving to achieve your aim?

10. Have you changed your emphasis of business recently?

11. What do you foresee as the main constraints on future development: a. Economy of the country

b. Internal management constraints

c. Availability of reasonable cost finance

d. Lack of technical expertise

e. Demand from anchor company

f Uncertainty of contract with anchor company

g. Others

117

12. What key economic forces impact on your business

a. Interset rates

d. Others

b. Labour Cost

c. Anchor companys growth

13, To what extent is competition a major force on your development?

14. How do you monitor competitors activities?

15. How do you attempt to make your products competitive vis-a-vis your competitors:

16 What are the changes/development in the company which are realised intendedly and what are those realised unintendedly?

OPERATION I. Labour 1. How many employees has the firm employed: a. during establishment

b. currently

2. What are the reasons for the above change?

3. Current proportion of male/female employees and the reason?

4. Proportion of employees in a. management d. clerical

b. Skilled

c. Unskilled

5. Is decision making responsibility delegated in any areas of activity to the workforce?

7. Do workers participate in major(strategic) decision making processes?

8. Are the workers organised on a flexible basis to be able to undertake a variety of work tasks?

*9. What do you do with your workers when orders are down from anchor company?

* 10. How do you mobilise your workers when orders are suddenly high?

119

* 11 Does the anchor company provide any form of training for your workers? If so, how often or when?

* 12 Does the anchor company stipulate the proportion of skilled workers that you must hire?

* 13 Do you provide the same salary and fringe benefits as those of your anchor company to your workers?

* 14 Do you have any problems hiring workers with the kind of salary and fringe benefits that you are offering?

15. What is/are the major problem/s that you faced with employees?

16. What are the steps that you have have taken to overcome worker problems?

II. Manapement 1. What is the background of the owner/managing director a. Craft b. Technical c. Sales/Marketing d. Finance/Accounting
120

e. General Management E Others

2. what is the current management structure of the firm a. No clear division of responsibility b. Clear division of responsibility c. Hierarchical d. Layered

3. Has the management structure changed throughout the firms development a. Change in type of management(from owner to professional)

b. Tasks to be carried out by management

c. Increase in the number of managers

d. Change in division of responsibility

e. Others

*4. Has any of the management staff received formal management training from anchor company?

5. Are you aware of any particular weaknesses in terms of management resourcefulness or experience at present?

121

6. Who decides on the scope of the organisations activities(i.e. the area to concentrate on)

7. Is the external environment formally scanned for opportunities/threats and who is rsponsible for this?

8. Who is responsible for determining internal resource requirements?

9. Are key external and internal change issues clear to management?

10. Are external opinions sought on major changes(e.g. anchor company, financial institutions, government agency etc.) a. If so who and how?

b. If not, why?

* 11 Have you been invited by the anchor company to attend any of their meeting. If so, what type and how often?

* 12 Are you bound by formal agreement to consult your anchor company in any action that you take?

122

6. Who decides on the scope of the organisations activities(i.e. the area to concentrate on)

7. Is the external environment formally scanned for opportunities/threats and who is rsponsible for this?

8. Who is responsible for determining internal resource requirements?

9. Are key external and internal change issues clear to management?

10. Are external opinions sought on major changes(e.g. anchor company, financial institutions, government agency etc.) a. If so who and how?

b. If not, why?

* 11 Have you been invited by the anchor company to attend any of their meeting. If so, what type and how often?

* 12 Are you bound by formal agreement to consult your anchor company in any action that you take?

122

13. What length of time-frame is it reasonable to think in terms of development of your business( given the nature and pace of change) and why?

14. Overall what are the main constraints in management with regards to fulfilling development aims of the firm?

III. Marketing * 1 .As a vendor with security of market, do you still feel that marketing is still necessary?

2. If so, then is there a formal marketing function/department in the firm to determine market, customer needs, product development issues etc.?

3. How is understanding of the above issues linked in to the operation of the firm: a. Formally(through marketing manager or other responsible person)

b. Owner Manager interface with external environment -

c. Other feedback actitivities

d. Others

4. What are the major constraints on overseas market development( e.g. management ability, resource constraints etc.)

123

5. Does the firm have a formal marketing plan?

6. If not, how are decisions made regarding: a. Market development

b. Product development

c. Tactical changes such as pricing, promotion etc.

7. Overall would you say the firm is fully oriented towards customer needs?

8. To what extent do day-to-day activities crowd-out the ability to identify external change issues?

IV. Finance 1, What is the capital structure of the firm(e.g. own finance, borrowings etc.)

*2.Do you feel that servicing financial loans is eating up on your profitability? why?

124

* *

*3 Does the privilege of obtaining Government agency loans help to lighten financial burden? Are you benefitting from such loan? ,

*4 Do you feel that such soft loans are easily accessible? 5. Has shortage of finance held the firm back: a. In obtaining a better premise

b. In obtaining machinery

c. In obtaining technology

d. In obtaining skilled labour

e. In obtaining management expertise

*5. What do you think the government could do to help overcome the financial constraints of your business?

_ 6. Does the firm suffer from cash flow difficulties? If so what is the cause of this?

7. Are there any formal management systems to control financial activities?

8. Who makes decisions on fixed and working capital issues?

125

9. Does the firm undertake a. budgeting

b. forecasting

c. long term planning d. strategic financial management

10. To what extent are day-to-day decisions made within the context of long term development of the business?

11, What financiaVfinancia1 mangement skills is the business lacking in currently?

12. How have financial mangement capabilities had to change throughout the development of the firm?

13. Has the firm formulated financial objectives: a. in terms of return on capital employed

b. sources of funds in terms of external borrowing/own finance

c. levels of external borrowings

d. levels of cash to be held

126

14. Who contributes to decision-making in the above decision areas?

15, Is finance a formal planned activity or an informal activity in the firm?

V. Production process 1. In what ways have the production methods changed during the past 5 years?

2. Which areas are new technology changes?

*3 Does the anchor company provide any assistance in theproduction process change?

4. Why did you decide on the change to the production process: a. To improve competitiveness

b. To respond to customer demand(e.g. quality, delivery)

c. To allow for Gxther response to customer demands

d. To allow for the development of new market/s

e. To reduce production cost


127

f. To respond to labour shortages

g. Other reasons

5. What/Who initiated the decision process to consider the change?

6. Who contributed to the decision regarding the timing and form of change?

7. Has the process change been major one-off type change or has the change emerged gradually?

8. What are the main barriers to the change: a. lack of technological know how/knowledge b. finance c. workers resistance d. work pace e. others 9. Are your adjustments to the production process part of a longer term development of the process?

128

10. Who assesses the viability of the investment in the change process?

11. Has the new process effectively served its purpose or are there limitations?

12. If the firm has not invested in new technology, the reasons are: a. Technical reasons related to the type of product

b. Workforce constraints

c. Lack of finance

d. Limited staff knowledge

e. Scale of production

f. Other reasons

* 13. In your production so far as a vendor, how often have you had to redo your products to suit anchor requirements?

* 14. Does the anchor company help in any way in rectifying the rejected consigments?

* 15. So far, have you ever had to compensate your anchor company for rejected consignments?

129

* 16. Do you feel that your anchor company has been overly strict in determining quality standard?

* 17. What is the main problem in meeting delivery schedule and quality standard of anchor company?

130

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