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FEER: Betting the Farm
By S. Jayasankaran

24/4/2001 8:38 pm Tue

[Guthrie menerokai risiko yang amat tinggi di Indonesia dalam projek kelapa sawitnya dalam menyahut seruan globalisasi Mahathir. Ia menang tender dengan menawarkan harga yang terlalu tinggi (saingan terdekat 40% beda) sedangkan banyak perkara masih tidak pasti - sehingga perjanjian tidak ditanda tangani lagi walaupun sudah 3 bulan tender diperolehi. Megawati pula membantah tender itu kerana ia menggugat kepentingan Indonesia. Bulan ini ada krisis keselamatan kedutaan Malaysia di Pontianak pula.

Risiko: Harga yang dibayar Guthrie terlalu tinggi sedangkan 44% tanah itu tidak diusahakan lagi. Tanah itu juga dipajak sementara dalam jangkamasa pendek 30 tahun sahaja dan tiada jaminan ia akan diperpanjangkan. Lagipun kira-kira 60 pengurus asalnya telah meninggalkannya untuk berkhidmat dengan kumpulan Salim.

Apa yang membimbangkan ialah sebahagian daripada tanah itu terletak di kawasan Aceh dan Sulawesi yang tidak tenteram sehingga hari ini. Guthrie mungkin ada sedikit pengalaman di Indonesia tetapi tidak pengalaman ngeri mayat bertebaran yang pasti membuat ramai bingkas lari.

Apa kena mengena Guthrie dengan reformasi? Jawapannya ada dalam pegangan di dalam syarikat ini.
- Editor

The Far Eastern Economic Review
Issue cover-dated April 26, 2001

Betting the Farm

Depressed palm-oil prices have forced state-owned company Guthrie to take a gamble on Indonesia

By S. Jayasankaran/KUALA LUMPUR and Sadanand Dhume/JAKARTA

WITH PRICES AT EIGHT-YEAR LOWS, increased production costs at home, and an ageing crop causing lower yields, what's a 180-year-old palm-oil producer to do? Take a huge dose of risk by investing $350 million in Indonesia, where costs are about as low as you can get. That's the Guthrie solution, at any rate.

On March 13, the Malaysian state-owned company won an international tender by bidding $350 million for the right to acquire 25 palm-oil companies put on the block by the Indonesian Bank Restructuring Agency, or Ibra. With inherited debt, the real price could be as much as $390 million. Guthrie is funding the deal with a 1.5 billion ringgit ($395 million) issuance of Islamic bonds, which will bring its gearing to 70%.

The move looks extremely risky in the short term. But it could mark the beginning of a paradigm shift in the way plantations do business. Palm-oil producers are already beginning to relocate to East Malaysia, where land prices are much lower than on the peninsula. Plantations will increasingly find themselves faced with a choice between moving somewhere cheaper and changing their core business to property development.

The plan has already run into political problems. The results of the tender were announced in November, but the deal was not signed until March. The PDI-P party of Indonesian Vice-President Megawati Sukarnoputri objected strenuously to the deal on grounds of national interest. Since the signing of the agreement, farmers' groups have demanded the right to farm 70% of the plantations themselves and sell their produce to Guthrie, which has been asked to consider further commitments to community farming.

People close to the negotiations say it took continuous prodding from Kuala Lumpur and a meeting between Ibra chief Edwin Gerungan and Megawati to overcome nationalist objections raised in Jakarta's unruly parliament--mainly by members of Megawati's PDI-P.

Thomas Lembong, an Ibra vice-president who helped negotiate the sale of the companies to Guthrie, is confident, however. "A deal is a deal," he says. Currently, several senior Guthrie executives are in Jakarta and "just waiting and waiting" because "no one seems to know what's happening," according to one industry insider. The company's management declined requests for an interview.


If the deal survives the political attacks, it will give Guthrie a total plantation land bank of more than 380,000 hectares, the biggest compared with the region's other producers. But the move is still fraught with tremendous potential pitfalls. First on the list is that the company may have bid too much for the plantations; industry insiders say that the second highest bid--from Cargill-Mas--was almost 40% lower.

Second, 44% of the land it is buying has not been planted yet, while much of the rest is unkempt. The machinery and mills are in need of maintenance work. Some Malaysian plantation managers say that Guthrie will have to spend more than 500 million ringgit on refurbishments, although it could take up to two years for the purpose in order to lessen the impact on its balance sheet.

The land itself is on a short-term lease of 30 years, with no guarantees that the leases will be renewed. And around 60 senior managers have left to work for the land's former owners, the Salim Group. It's thought that they may have been the pick of the crop. It also isn't clear if Salim, which remains a powerful force in the Indonesian plantation industry and controls most of the marketing of refined palm oil, will cooperate with Guthrie in marketing. If not, Guthrie may have to go through Singapore or Malaysia, where costs are higher.

Some of the land which the company has acquired lies in the troubled provinces of Aceh and Sulawesi, although Guthrie is likely to concentrate on Kalimantan and Sumatra for the time being. Still, continued political turmoil and the threat of labour unrest may make running the former Salim plantations a nightmare for Guthrie.

"The whole thing puzzles me," says an Indonesian industry source. "They are clearly betting the farm on this. They're paying a lot, plus 44% of the land isn't producing. They have a colossal job ahead of them."

It could be, however, that Guthrie is simply taking a painful reality check, and that other Malaysian producers may be forced into similar moves. The Malaysian plantation industry is increasingly uncompetitive. It already depends on migrants, mainly from Indonesia, for 60% of its workforce. But its land and wage costs are easily three times as high as in Indonesia.

Consider the statistics: Guthrie's production costs are 700-750 ringgit for every tonne produced, compared with equivalent costs in Indonesia of around 400-440 ringgit a tonne. That means Indonesian companies can still make a profit of almost 100% even at current prices, which are around 800 ringgit a tonne, although some analysts foresee a slight improvement later in the year, as supply undergoes a slight contraction.

The price Guthrie is paying for a hectare of land in Indonesia--9,000 ringgit--is equivalent to the price of an acre, or 0.4 hectares, in peninsular Malaysia. "It's prime land and very, very cheap," says a Malaysian industry executive. "That's why, given time, Guthrie can make this work."

The company may simply have no choice. Its attempts at diversification into manufacturing and infrastructure projects have been dismal. It has managed to shore up its results to a certain extent by selling huge tracts of land, and from some initial forays into property development. Plantations still make up 60% of revenues, which have been hard hit by depressed palm-oil prices. Guthrie reported net profits for the year ended December 31, 2000 of 92 million ringgit, a fall of 63% from the previous year. If there is no recovery in prices, industry analysts say they will expect to see Guthrie make a loss.

Indonesia holds out the possibility of a fresh start, with improved yields--the palms are much younger there, with yields which are around 40% greater than that of Guthrie's ageing Malaysian trees. And Guthrie has some Indonesian experience, with 12,000 fully planted, and profitable, hectares in Palembang, Sumatra, which it nurtured from scratch.

Given that background, along with Prime Minister Mahathir Mohamad's exhortations to Malaysians to "Think Big," Guthrie seems willing to accept the risks in the hope of throwing off the mantle of gloom which has descended on the industry. "It can work but it will require massive effort and time," says a senior Malaysian plantation executive.

Some observers do not share this optimism. "Frankly, we're hoping that the deal doesn't go through, "says Noor Azwa Mohamad Noor, a plantations analyst at the Kaf Research in Kuala Lumpur