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First world quality at third world prices


The Smart Manager (India), Dec 2004-Jan 2005


SMART LEADER: Francis Yeoh Sock Ping


“Competitiveness is not about keeping costs to the bare minimum, it is about keeping the intellectual abilities and the integrity of staff to a maximum,” says Yeoh, Managing Director of YTL Corporation Berhad, Malaysia, which serves 10 million customers globally.


By Tan Sri (Dr.) Francis Yeoh Sock Ping


This ethnic Chinese businessman hit the headlines on his acquisition of Wessex Water beating formidable rivals like Royal Bank of Scotland, Abbey National and Goldman Sachs. He won his spurs by pushing down the cost of electricity to US3.8 cents per kWh in his home country – the cheapest private power in Asia. A quick mover his group grew tenfold over the past decade into a property, infrastructure, and technology giant with assets of $6bn. The worldwide per employee productivity ratio of his group is $56,600. His father was a construction company owner who was denied even tertiary education. The son graduated in civil engineering in England with honors. Joining the family business was inescapable destiny and today he can detect the amount of sand in concrete merely by the feel. The eldest of six siblings he is determined to beat the Chinese maxim that wealth cannot endure beyond three generations. First in a long line of Buddhists to embrace Christianity, he opens business lunches by saying grace and closes deals with prayers. He considers Jesus Christ as his wise advisor. The walls of his Kuala Lumpur headquarters are lined with pictures of him meeting leaders such as Li Peng, Zhu Rongji, Nelson Mandela and Robert Mugabe. His critics credit his success to his close relationships with politicians.


Francis Yeoh: Corruption Buster


“India still doesn’t get it,” says Francis Yeoh with exasperation. “In countries like yours and mine, we have to offer first world quality at third world prices.” In Bangalore for a board meeting, Yeoh stayed at the Taj. “I paid $150 for a night. In the Ritz-Carlton in Kuala Lumpur, which is a group company, you would pay $75 for a way better room, with every amenity,” he explodes. The point Yeoh makes is worth listening. The promoter of the YTL group, one of the biggest in Malaysia, won his spurs by pushing down the cost of electricity to US3.8 cents per kWh in his home country. Since the he has been wooed by politicians across the globe to do the same in their countries, much the same way Laxmi Niwas Mittal of Ipsat International has transformed badly run steel mills from Kazakhstan to Mexico.


How does Yeoh perform this miracle? The short, quick answer is by unbundling costs and searching for innovations to push down costs; by playing the currency game right; by removing corruption within the organization; and by luring morally upright and incredibly bright people through wonderful salaries. Read on…

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Leaders and organizations have to help people avoid becoming corrupt.


Many parts of Asia, and Malaysia is no exception, have a reputation for crony capitalism and corruption. Especially in the utilities sector, the businesses I am in. But it is possible to avoid corruption. Let me give you a small illustration. In Malaysia, there is no capital shares whereas if you give people cash they will be taxed 28% by the government. So stock options, especially for performing companies, is a good way to reward people. From the time we listed in 1986, we have grown at 55% compounded. $1,000 invested then is worth $55,000 today. An average staff member working in YTL can retire nicely with a nice home by selling his stock options. My top leaders, I call them my cabinet, are millionaires, many of them are multimillionaires, and that is one of the reasons they are not corrupt. They work for the organization, they do not need the kickbacks, the brown envelopes to enrich themselves and pay for the studies of their children. A lot of corruption happens because employers do not pay their people well. With the share options put in, I think we are quite unbeatable as paymasters. Yet, as statistics show, we are among the most profitable employers in the world, with one of the highest productivity levels in our business anywhere in the world.


Helping people not become corrupt has interesting results. Take cost competitiveness as an illustration. I do not believe competitiveness is about keeping costs to the bare minimum, it is about keeping the intellectual abilities of staff to a maximum, about keeping staff whose mindset is flexible enough to adapt to change and is armed with integrity. The last is most important. Like Nick Leeson, the banker who caused the failure of Barings Bank, there are too many smart people with wrong moral values, even from universities like Oxford and Cambridge or MBAs from famous b-schools. When you are able to find intellectually good and morally anchored people, then you get an organization like YTL and I am blessed in this aspect. I have very few complaints about the moral standing of my staff irrespective of their religious beliefs.


Intellectual firepower is the key to success.


A knowledge worker is a thousand times more productive than an ordinary worker. We look for businesses that need vision, tenacity, intellectual capital and a lot of financial capital. If you want to attract incredible human capital, you have to pay and have incentives like staff options. It is a very potent formula. We have grown 55% compound and have beaten even Warren Buffet’s performance between 1986-2002. We pay the global best wages to get the best people. In the UK, we pay the world’s best rates. Just because we are Malaysians we do not say, you are going to get Malaysian rates. For Malaysians, we pay the global best for Malaysia. In each country, the country best for every person in every job is our management philosophy. We should not begrudge high stock option payouts. If you have to payout $2mn, don’t be greedy and suddenly snatch it off saying,” Hey now you are worth only a $100,000”.


Today we have to continuously look for global solutions at a more competitive price. Every great global company does that. Toyota’s Lexus is a good example where the Japanese asked two key questions. Are we good enough globally? Are we preempting the customer’s needs enough? When people they are gifted, they always look for opportunities, read a lot, ensure they are in touch with the world. This makes them very productive. When you are productive, you can always find ways to make more profits and at the same time offer products and services at a reasonable level.


First world quality at third world prices.


We constructed the Express Rail link (ERL) connecting Kuala Lumpur with its international airport in the year 2002. The ERL is virtually identical in design to the high speed rail system that runs between Heathrow Airport and Paddington Station in London. Normally; to build a high speed rail system would have cost approximately 157mn ringgit per kilometer. But we did it for 35mn ringgit per kilometer. This reduction in cost allows us to gives us world class service at third world prices. Let me illustrate this better. A ticket to ride the British rail link, a fifteen-minute trip, is about $15. In contrast, by cutting capital costs and using a local funding source, the ERL travels twice as far, about 57 kilometers, in 28 minutes, but for the equivalent of only about $8. This is the cheapest fare-per-kilometer in the world for rapid rail transit. But more important, Malaysians can afford to ride this train, and keep it profitable.

Yeoh speaking at the London Business School Forum held at the Infosys campus in Bangalore.

This has been possible for us because of two main strategies that we have adopted over the years. The first strategy is the development of creative financing using local lenders, and borrowing in local currencies. Rather than working in dollars to finance Malaysian projects, for example, we’ve financed our projects in ringgit. Why? Because conventional thinking and conventional lending in world money markets is based on the premise that we in the Third World are risky business! Business deals are seen to be greased with corruption and under-the-table schemes.


In order to accelerate repayment of their capital, the major global lending institutions build in what I call a “hedge.” Among other banking practices, in order to mitigate their risk, they typically charge higher interest rates on Asian loans. These practices drive up costs considerably, and, of course, reduce the profitability of any project.


The second strategy is “build for less, so you can borrow less”. So when, in the early Nineties, we sought capital funding to build our first two power plants in Malaysia, we first designed a plant that was 40% less to build. Remember – after all, we’re building engineers who understand construction from the ground up, know our market, and maintain subcontractors we can count on for reliability. Then we went to Malaysian banks and borrowed in Malaysian currency. In fact, we were the first company in Asia to fund an IPP in this way, and set a new industry standard.


Have ready cash handy.


The last three years have taught me that you just cannot sit still. Global competitiveness has shaken every paradigm. Every parameter of business philosophies that you think you can rely on, or hang on, has been shaken to the core. Because of IT and changing demographics, change is so demanding at the customers level. If you do not have all the wherewithal – the intellectual capital, the physical capital, and the monetary capital to invest or acquire at the right time and the right opportunities – you may miss an important window to make a quantum leap and that opportunity may not come again.


Take, for example, our growth in the power business. We did not want to be a hostage to Malaysia’s economic cycles. We were confident that we could replicate globally what we had done in Malaysia. We knew how to work in a regulated business. And we had the capital. Given these factors, it was evident that only mature economies like the US, UK and Australia could offer plentiful business. And then came Enron. The upheaval presented the prefect opportunity to acquire our business in Australia and the UK.


It is no good not having the capabilities to take advantage of the cycle when there is upheaval. You must have the cash and support from the cities of New York or London. When you want to raise capital, it has to be there.


There’s no magic figure about how much cash you should have. Many countries regulate the amount you can use from the country’s reserves for strategic acquisitions. Basically you can gear $1bn ten times in the right kind of business for regulated assets. So if we have $6bn in cash, theoretically we could acquire $60bn worth of assets. In the end, the amount of cash you keep handy depends on your vision and capability: you will want to tailor your cash to the ability to strike at the right time. If you gear too little, you restrict yourself, if you gear too much, you are vulnerable to the environment.


Buy currencies cheap.


When we bought Wessex and ElectraNet, we bought those assets at very low rates. The Australian dollars was AUS$53 to the US dollar and now it is 75 something. And the pounds we bought at the time were also cheap. The pound to the US dollar was at 1.5, and now it is hovering around 1.85. This means that you have bought an asset that has appreciated even in currency terms. It is no longer just the asset, it is the currency. When you go global, it is the currency that becomes an important aspect, the timing when you buy that asset becomes very important.


We do not suffer the tyranny of the minority.


The leader represents the values of the organization, and people join the organization because of what the leader stands for. We will never go into the gambling business no matter what, because we believe that gambling destroys the social fabric of the family. It makes people become criminal out of desperation and makes them unproductive. We do not like corruption as a way of life, so we reward well, we pay well so that you don’t have to be corrupted. But you have got work for yourself, we are not going to mollycoddle you. You have to learn to think and to understand that when you have to fight, you must fight for your neighbors, fellow staff and the customer.


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Who is Francis Yeoh?


A self assured British trained civil engineer, the fifty year old Francis Yeoh took over his father's company at 25 and turned it into one of Malaysia's leading construction firms in ten years. Listed in Kuala Lumpur and Tokyo, YTL Corp – the initials stand for Yeoh's father and company founder Yeoh Tiong Lay – is now an infrastructure player with cement, property development and hotel operations with revenues of $234mn and a market cap in excess of $4.2bn.


Yeoh heads a diversified group and is a key player in sectors such as

  • utilities: owns the Paka & Pasir Gudang power stations in Malaysia which have a combined capacity of generating about 1,212 MW of power; a 35% stake in ElectraNet Pty Ltd, which owns and operates the power transmission grid for the State of South Australia; and owns Wessex Water, one of the most efficient water and sewerage operators in the UK.
  • cement manufacturing: owns state-of-the-art plant with an installed capacity to manufacture 1.2 million tons of portland cement per annum and is also the largest ready-mixed concrete company in Malaysia, with over seventy batching plants and 700 mixers.
  • construction contracting: has strong reputation for high quality construction for buildings ranging from schools, army barracks, hospitals, hotels and high rise office blocks and building large scale infrastructure projects on time and on budget. YTL's civil engineering expertise include building a gas fired combined cycle power plant in a record 22 months, a world record.
  • property development: has a land bank of more than 2,000 acres of strategic development land in Malaysia.
  • hotels and resorts: owns two leading, multi-award winning hotels in Kuala Lumpur – JW Marriott and the Ritz-Carlton Hotel.

But Yeoh does not feel that his group is diversified. According to Yeoh, "Engineering, hotel, cement is the same business as construction. Our skill sets of construction are used in the cement business and the same are put to use to build hotels. So we are not diversified. Diversification to me means entering the pharmaceuticals or the plantation sector." And Yeoh believes that construction or more specifically the group's ability to design and build anything that can stand in a competitive manner is its core competency. Because it is these skill sets that allow the group to build hotels or houses at the most economical price and thus gives them the competitive strength when compared to other hoteliers or builders in the market.


An articulate businessman who likes to read management books, Yeoh takes a hands-on approach to the running of his companies. One example of his style: Yeoh holds "cabinet meetings" with his team of thirty senior managers every Monday at 10am on the dot. He praises his executives' capabilities. "But I would not want to be so professional that you lose entrepreneurship," says Yeoh. "An organization must always have a balance between enterprise and management."


Many attribute Yeoh's success to his proximity to former Malaysian Prime Minister, Mahathir Mohamed. "Yes, he considers me like his son," admits Yeoh, "but a son who pays taxes." Mahathir has a soft spot for achievers, and Yeoh makes it a point of honor to be one. "He delivers," said Asiaweek, "Perhaps that's why the PM likes him so much. In 1997, he was conferred Panglima Setia Mahkota," one of Malaysia's highest honors – which carries the title "Tan Sri" by the King of Malaysia.


Yeoh plays down his ties with Mahathir, saying: "Many people still think that YTL's success hinges on the PM. That's not fair to the man or to the company. The perception was that we had a fantastic power purchase agreement with Tenaga. But it's absolutely not the reason for our success." The key was raising funds from Malaysian state institutions and in Malaysian ringgit, avoiding the cost of hedging for foreign exchange or political upheaval.


In the corporate circles, people either love or hate Yeoh. Those who like him probably do so as he kept his promise that YTL Corporation would always reward its shareholders. Initial shareholders who invested 1,000 dollars when YTL listed in 1986 today have got a return of 55,000 dollars on the same. Yeoh is respected because he always delivers what he has said – much to the happiness of not only the shareholders but also those in the political arena. -- by The Smart Team

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