TABLE OF CONTENT

1.0     INTRODUCTION                                                        2

2.0     DIAMOND THEORY ANALYSIS                              3

3.0     ASEAN FREE TRADE AGREEMENT (AFTA)          7

4.0     FOREIGN EXCHANGE RISK                                    9

5.0     CONCLUSIONS                                                          11

          REFERENCES AND APPENDIX                               12

1.0              INTRODUCTION

Sime Darby Plantation Sdn Bhd is one of the core business units in Sime Darby Berhad. Their major business activities comprise Plantations, Commodity Trading, Refining and Food Business with operations in Malaysia, Singapore, Thailand and Indonesia. The Company vision is to be a world class agriculture and food business, which builds value and enhances all stakeholders' interests and the Company mission is to continuously strengthen their core business through recognizing their customer requirements, maintaining efficient production, understanding the market environment and having international presence. Core business activities include:

Plantations: Responsible for managing over 80,000 hectares of oil palm estates in Peninsular Malaysia, Sabah and Kalimantan, as well as operating 8 mills in these areas to extract CPO. Marketing activities of CPB' s CPO is handled internally via Commodities Trading Malaysia.

Oils and Fats: Responsible for managing the edible oil refining and trading operations in Malaysia (Kempas Edible Oil), Singapore (Sime Darby Edible Products) and Thailand (Morakot Industries).

Food: Responsible for the aeroponics vegetable farm business in Malaysia, the sale and marketing of vegetable oils (palm olein, soya bean, olive, etc) and the agri-bio business such as cover crop seeds, rat baits and oil palm harvesting poles. Other activities include business development and R&D into non-aeroponic food crops, aquaculture and processed foods.

Sime Darby is one of the largest palm oil producers in the world, supplying about 6% of world supply. The company has a total planted area over 500,000 hectares and a land bank over 900,000 hectares. About two-thirds of the Sime Darby's palm oil production comes from Malaysia, and one-third from Indonesia. The company's recently developed estates in Liberia were not yet in production as of 2012.

2.0              DIAMOND THEORY ANALYSIS

The diamond model is an economic model developed by Michael Porter in his book The Competitive Advantage of Nations, where he published his theory of why particular industries become competitive in particular locations. Afterwards, this model has been expanded by other scholars.

The Diamond Model demonstrates that countries can become competitive regardless of whether they possess natural factor endowments such as land and natural resources. In the Diamond Model, the role of government is to encourage and push organizations and companies to a more competitive level, thereby increasing performance and ultimately the total combined benefit.

There are four attributes or components that shape a notion’s environment in which firms compete. For this chapter we are going to use this model to determine the competitiveness of Sime Darby Plantation Sdn Bhd in Malaysia market.

Many studies have assessed the competitiveness of Malaysian commodity exports, namely palm oil, cocoa and rubber (Md Nasir, Mohd Ghazali, Othman, 1993). There are a vast literature measuring and evaluating the competitiveness of firm, industry and also country. Michael Porter’s concept of the four determinants of national advantage is one of the profound frameworks that have been widely used to examine a country’s competitive advantage (Porter, 1990). The first determinant relates to a country’s competitiveness to firm strategy, structure and rivalry. The second and third determinants relate to factors and demand condition to competitiveness. The last determinant is related to supporting industry category. These four determinants represent the corners of Porter’s “diamond” of national competitive advantage (Fatimah and Alias, 1992).

Figure 1 is illustrating the model which are attribute to four components that known as:

           

a)      Factors Conditions

Factors condition refer to the nation’s position in terms of the presence of the factors of production. Factors may be naturally endowed (called basic factors) such as natural resources, climate, location and demographics, or advanced factors such as communication infrastructure, skilled labor, research facilities and technology. Advance factors, which are a product of investment by individuals, companies or governments, are the most significant for competitive advantage.

b)     Demand Conditions

This refers to the role of domestic demand for Sime Darby Plantation in building competitive advantage. The sophisticated and demanding domestics consumers would pressure local firms to produce innovative and high standards of product quality, thus shaping the attributes of domestically made products.

c)      Related and Supporting Industries

The third attribute of a country’s competitive advantage is the presence of internationally competitive suppliers or related industries. Suppliers will compete to produce lower priced higher quality products and technology innovations to meet the needs of the particular industry. Thus, Sime Darby Plantations which is located close to suppliers will enjoy better exchange of ideas and inventions to save costs.

d)     Firm Strategy, Structure and Rivalry

The domestics environments in which firms compete shape their ability to compete in international markets. Firstly, different nations are characterized by different management ideologies, which either help them or do not help them to build competitive advantage.

Secondly, strong domestic competition pushes Sime Darby Plantation to look for ways to improve efficiency, which makes them better international competitors. They are pressured to innovate, improve quality, reduce costs and invest in upgrading advanced factors.

Porter’s Theory combines the findings of previous theories and argues that the presence and interactions of all four components is usually required to boost competitive performance. Governments also influence each of the four components, such as providing subsidies for factors, setting product standards for consumer goods, regulate suppliers and competition.

3.0              ASEAN FREE TRADE AGREEMENT (AFTA)

AFTA is a trade agreement by the Association of Southeast Asian Nations in supporting local manufacturing in all 10 ASEAN countries, which are Malaysia, Singapore, Thailand, Philippines, Indonesia, Brunei, Vietnam, Laos, Myanmar and Cambodia. AFTA is created to enhance ASEAN's competitiveness as a production base in the world markets by constructing a free trade area among member countries and attract foreign investors to invest in ASEAN country. This objective can be done by abolish the non-tariff barriers, reduce intra-ASEAN tariffs and limit the imports quantity (SEACON, n.d.). Imported goods will be taxes on reduce tariff to 0% to 5%.

Due to the reduction of intra-ASEAN tariffs, the ASEAN countries tend to trade and import more among members. Decreasing of tariff causes the import to increase. AFTA indirectly causes an unfavorable effect on the competitiveness of traditional export industries. This poses a big challenge and reduces the competitiveness of local companies, Sime Darby. This is because the goods are cheaper now due to the lower rate of tax on the imported raw materials.

In order to protect Sime Darby automobile competitiveness against imported product, Sime Darby Tyre Group (SDTG) set up a tyre join venture with Continental AG of Germany into a new company call SDC Tyre Sdn. Bhd in January 2002. This action causes Sime Darby to give 30% of share to Continental because of the initially investment 31 million USD to enhance the R&D facilities and production. SDC Tyres appear to be more efficient, lower cost and using advance technology of Continental to maintain their competitiveness and continue to have a leading position in local market. The Sime Darby's profit generated from automobile sector is decreased from RM 257.8 million in 2003 to RM 204 million in 2004. However, there is a continuous profit increased for year 2005 with RM 300 million to RM 360 million in year 2006 (Sime Darby annual report, 2006).

On the other hand, AFTA also affect the plantation sector. After the tariff reduction, Malaysia palm oil price is still much more expensive than other palm oil exporter countries such as Indonesia and Thailand. This proved that free trade caused the domestic palm oil price increase. This makes Malaysia palm oil market share forecasted a loss of approximately 46 million USD as Malaysia is the largest producer in the world. Plantation sector is the main revenue of Sime Darby. Since the palm oil market forecast a huge loss, Sime Darby will be affected. As shown in Annual report (2004, 2006), there is a drastically drop of profit in plantation sector from RM 285.1 million in year 2004 to RM 272.8 million in year 2005 followed by RM 249.8 million in year 2006.

Today in Malaysia, the AFTA currently pursued with selected countries are not limited to liberalization and market opening measurement only. They are comprehensive and included investment, trade facilitation and intellectual property rights (IPR) as well as economic cooperation in several areas such as (MITI, 2011):

1)      the competition policy

2)      the standards and conformity assessment

3)      the information and communication technology

4)      the science and technology

5)      the education and training

6)      the research and development

7)      the financial cooperation and

8)      Small and Medium Enterprises (SMEs) development

The main objective of AFTA negotiating are to; i) obtain better market access by addressing tariff and non-tariff measures, ii) further facilitate and promote trade, investment and economic development, iii) enhance the competitiveness of Malaysian exporters and iv) build capacity in specific targeted areas through technical cooperation and collaboration.

4.0       FOREIGN EXCHANGE RISK

The foreign exchange risks are generally category into three types of risk that faced by Sime Darby such as transaction risk, economic risk and accounting or translation risk. Firstly, transaction risk is a risk that associated with foreign currency denominated transactions that have already been contracted. Generally, Sime Darby enters a contractual obligation, the receipt or payment of which is predict on a future date. During that time, it will reveal the company to transaction risk if occur differ in the foreign exchange rate. As Maurice (2005) once said, transactions risks can get more attention from the financial manager in MNCs and also easier to identified. If Sime Darby is expecting a payment from the Liberia’s subsidiary in January and the invoice was made in June, the exchange rate is cocksure to have changed on that period. In recent exchange rate, 1 Liberian dollar (LRD) is equals to 0.0343788 Malaysia Ringgit (MYR). Based on the graph (Appendices), the exchange rate between Liberian dollar and Malaysia Ringgit is significantly decreasing within a month. The time lag extends between settlement and implication will increase the transaction risk. For example, there is a 5 days’ lag between implication and settlement. Sime Darby is collecting payment in LRD which they need repatriate into their local currency, MYR. Thus, the LRD-MYR exchange rate will unfavorably fluctuate during this 5-days lag.

Other than that, economic risk also is other category of exchange rate which results from the dealing of a global company into a foreign market. This is a direct outcome of the rate fluctuates for the MNCs as well as by product of the movement rate in foreign currencies. However, the economic risk always an indirect outcome for local companies. The variable that most affected the operating performance of MNCs such as price, financing and marketing cost, and unit sold or total profit as well as any variable costs. As Fernando (2011) once said, as the cash flows are related to the risk are not certain to occur, the economic risk will be hard to determine and influence of the long-term exchange rate movements on a future expected cash flows of the company.   Exchange rate fluctuate are bound to influence the prices on exports and imports as well as to affect the company’s competitiveness. Also, instability economic may affects Sime Darby on the market value and also the competitive position on a global company.

Below the diagram show that the two path ways of economic risk:-

5.0       CONCLUSIONS

As we know that, there are lots of benefits when multinational corporation going globally. Many multinational firms try to diversify their risk and reduce materials costs by having subsidiary in many countries or regions. However, at the same time the firm will encounter with different risk for instances, foreign exchange rate risk and economic risk especially interest rate risk because fluctuation of interest rate will directly impact on other rate like exchange rate. All these risks are not controllable by the firm thus the firm must be able to manage those risk. In case one of the risks above occurred, it will greatly impact the cash flow of firm. Thus corporation should have some risk reduction techniques or instruments to minimize the risk that expose on it.

For instances, when the corporation predicted that the future prices of securities will be increase, it can purchase future or forward contract to gain benefits on seller of securities. Furthermore, swap also is a good financial instrument to reduce the foreign exchange rate risk. Both companies can exchange the currency with predetermined exchange rate thus win-win situation could be achieved. As a conclusion, when Sime Darby intends to invest in a particular country, it must survey the business environment of that country and able to take that risk before making investment decision.

ATTACHMENT

REFERENCES

Nasir, S., Ghazali, M., Fatimah M. A (1993); Competitiveness of Cocoa Exports

Mohd Hj. Alias, Fatimah Mohd Arshad, Abdul Aziz Abdul Rahman, (1992). Market share analysis of Malaysia’s Palm Oil Exports: Implication on its Competitiveness; Journal of Economic Malaysia, Vol. 26, pp 3-20.

Maurice. D. Levi. (2005). International Finance. 4th ed. New York: Psychology Press

Sime Darby (2014) Sime Darby History [Online]. Retrieved from: http://www.simedarby.com/History  [Accessed 30 September 2015].

Sime Darby (2014) Sime Darby Corporate structure and information [Online]. Retrieved from: http://www.simedarby.com/corporate_structure_and_information

            [Accessed 30 September 2015].

Source: Colmill.com