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Temasek Holdings: Building a sustainable future

Ladies and gentlemen: Good evening.

Thank you all for the opportunity to meet this evening in good company and good cheer. For this, I must also doubly thank my host, Dato Dr Mohd Munir, President of the KLBC (Kuala Lumpur Business Club), for his kind invitation early last November to join you for this closed-door dialogue. 

Asia Unlimited

The 1997 financial crisis 7 years ago was a severe shock for many Asian economies, including the Asean economies. Not only were countless lives and numerous businesses sorely stressed across a huge swathe of Asia, but several governments and institutions were also shaken to their core.

Today, notwithstanding SARS and other global setbacks, the macro indicators point to a steady recovery over the last 3-4 years. Inflation and interest rates have come down sharply, as liquidity returned to Asia. Foreign reserves in Asia are at record highs, from India (US$100b) to Korea (US$155b), from Thailand (US$42b) to Indonesia (US$36b), albeit fuelled by various different reasons specific to their own economic circumstances. Malaysia (US$45b) and Singapore (US$96b) too are enjoying record levels of foreign reserve. China and Pakistan fell back slightly on their record reserves early this year. China barely dented her record reserves of US$420b through a deliberate push for overseas investments by her SOEs (state-owned enterprises), and a recapitalisation of her 2 largest banks. Pakistan chose to prepay some of her sovereign loans in recent months. 

At the business level, companies within many of the Asian economies have dramatically transformed themselves into internationally competitive players. Whether it is in India, Korea or elsewhere in Asia, companies are adopting and adapting best practices such as 6-sigma, lean manufacturing, or fast quarterly closing of their financial numbers. They have rapidly moved from rent-seeking models of the licence Raj, to the more progressive value creating models of globally competitive know-how. These leading business corporations are now pushing the performance envelope, not just against domestic competitors but also taking on international leaders in their respective industry sectors. This insatiable hunger for learning and intense commitment to strive for excellence is taking place constantly, across industries and across geographies. They point to the resilience of Asia, with her talent pool and market of 3 billion population.

At the political level, governments and the voting public are also taking note of the demonstration effects of market economies and free trade.  Countries like China and India are pushing relentlessly ahead with liberalisation, restructuring and reform of their capital markets and their real economy. Even as voters worldwide go to the polls this year as well as next year, expectations are for greater pace of structural reform post-elections, not less, when the new governments across Asia are sworn in.  Global competition, liberal and open markets, international division of labour and economic interdependence will be the norm.  There is no turning back.

Today, ladies and gentlemen, we stand at the threshold of a new Asia – a vibrant and dynamic Asia of learning and reason, a confident Asia of hope and promise, and an interconnected and youthful Asia with a clear eye to her future as she strives to deliver peace, prosperity and opportunity to her teeming billions.

Competitive manufacturing, innovative services, world class talents – these will be the primary drivers for growth, opportunities and development across Asia in the next decade or two ahead.

Temasek at an Inflexion Point

Like many corporations in Asia, Temasek has been undergoing changes since her incorporation 30 years ago. As an investment holding company, Temasek has also been evaluating the prospects and promise of Asia since the late 90s.

Let me at this juncture take a couple of minutes to introduce Temasek.

Over the years, we have been investing as well as divesting our stakes in companies, where it made commercial sense. Although the Singapore government is a shareholder, it does not direct our investment or commercial decisions.  In turn, Temasek also does not get involved in the business or the day-to-day operational decisions of our investee companies, sometimes known as the Temasek-linked companies or TLCs. SIA does not seek our approval for their aircraft or equipment purchase – nor is government approval needed. 

As Asia and the world changes, we too are changing and adapting in order to maximise our long term returns, both as a shareholder and as an investor.

Temasek as an active shareholder

As a shareholder, one way for us to add value to our investee companies is to encourage and constitute high quality, commercially experienced and diverse boards to complement outstanding management and dedicated staff. Outstanding management is not simply consistency in purpose, and discipline in operational delivery – it also requires an abiding passion and a deep commitment to people inside and outside the company, particularly to the staff and the customers of the company. 

In short, the best we can do for our companies is to find the best people to lead, and then get ourselves out of their way.

Of course, if the need arises, we will not hesitate to engage our investee  boards and their management to ensure that we preserve or maximise shareholder value, or create a sustainable position for our companies.  

In general, we are, and have been, very fortunate to have active board members who take their responsibilities seriously, some at considerable personal sacrifice, no different than if they had economic ownership of their companies. 

One of the critical and probably most difficult responsibilities for the investee boards, is the selection and performance review of CEOs and their management teams, including succession planning and removal of non-performers. As a long term shareholder, it is in our interest to ensure that the investee boards exercise this single most important responsibility with full authority and clarity.

Our focus on board governance is not an end in itself, but really as part of our on-going commitment to institutionalise best practices and sound systems and processes, as they form the foundation for scalable growth and a sustainable future.

Apart from robust and scalable systems for sustainable growth, the other key success factors of interest to us would be:

• The core values and culture underpinned by integrity;
• The clarity of business focus and value drivers;
• The development and nurturing of human capital; and
• The strategic directions and developments.

Like other institutional shareholders, we are keen to maintain an open and regular dialogue with our investee companies on their strategic framework to maximise long term shareholder returns.   

Temasek as an active investor

As an investor, we are interested in 5 investment themes:

1. Global networks
2. Asian services
3. Asean resources
4. Scalable intellectual property, or IP
5. Emerging Leaders

As Asia recovers and grows, as she expands her middle class, there will be consumer demands and business opportunities for various services. Services such as banking and finance ride on the back of general economic growth. Telecommunications, healthcare and education are proxies for the increasingly sophisticated demands of the growing middle class and mass markets.  

As the two emerging giants, China and India, grow and develop, they will fast become net resource importers. We have already seen the impact of China’s demand on the prices of commodities like oil and steel.  India too is one of the largest importers of palm oil. On the other hand, Asean is a resource rich region of 500 million people. Investments into Asean economies, particularly Asean resources, would thus serve as a proxy for the growth and demands of China and later India. 

In terms of scalable IP and emerging champions, our focus is on promising companies and businesses with distinctive intellectual property, world class competitive strengths and scalable potential to expand regionally or replicate globally.

There are a few investment approaches which we may use. 

First, we may take an independent view on the sectoral opportunities in a particular economy, and invest directly in the relevant companies. For such investments, we may have a different posture or view from our investee companies, and may invest in their competitors.  This is not new to us. We have stakes directly and indirectly in the competing telecommunications firms in Singapore. We have also invested with different partners into two independent Indonesian banks. The idea is to increase or broaden our portfolio exposure to an attractive sector. Commercial confidentiality is preserved between competing entities. Conversely, our investee companies also make their own commercial judgement and investment decisions independently of Temasek within the ambits of the Companies’ Act. 

An example of an independent Temasek investment is our recent investment into Telekom Malaysia. This is purely a Temasek investment initiative, nothing to do with any of the Temasek portfolio companies in the telecoms space. This investment emanates from our view of Malaysia’s potential in the medium to long term. Of course, our transaction team was all very pleased with this rare opportunity to participate in the TM placement by Khazanah. It also served as a welcomed opportunity to renew old ties and make new friends between Khazanah and Temasek, between Malaysia and Singapore.

Second in terms of the investment approach we may take, is that we may co-invest with companies who are interested to invest internationally, away from their home base. Such co-investors may include our TLCs or partners from other parts of the world. 

An example would be our co-investment with Korea’s largest bank, Kookmin Bank, into Bank Internasional Indonesia (BII), alongside Malaysia’s ICB Financial Holdings and UK’s Barclay Bank. Where we co-invest with our TLCs, such as when Temasek co-invested into Brazil with Natsteel in the late 90s, we will consider the merits of such opportunities independently of our investee companies. 

Third, we may invest in promising Asian or Asean companies, which have the potential to scale beyond their domestic markets to reach into the region or into the world. Such investment opportunities could include investments into the emerging regional or global players, with or without co-investments with them into third countries. 

As each economy restructures or liberalises, the better adapted companies will widen their gap against their competition. These leaders will be the potential regional or international champions. As with the other economies, the Malaysian economy too has its fair share of potential world beaters, operating first as domestic champions and perhaps later expanding abroad. For instance, JPMorgan has recently identified 9 of these future world beaters among the Malaysian corporate scene in a strategy note to investor clients (11 Mar 04). This is by no means an exhaustive list.

Finally, our collaboration with various companies need not just be in the form of direct investments. We are also open to selling or rationalising our existing shareholdings with other companies.  Such opportunities also exist at the operating company level, as TLCs refocus and reposition themselves. An example would be NOL selling its profitable 100% home-grown subsidiary, Amercian Eagle Tankers, to Petronas subsidiary, MISC, in 2003, in a mutually beneficial transaction. We are also not averse to diluting ourselves to become a small shareholder of a larger and more successful regional or global enterprise.

Asean’s Promise

Given the verve and vitality that is re-emerging in Asia, it is not a surprise that Temasek should be looking to transform itself from a Singapore overweight portfolio manager into an Asian equity house. We are looking to leverage on growth in Asia and the world, anchored on a home base of Singapore and Asean.

For more than 10 years, since 1992, Asean has been the single largest trading group for Singapore, surpassing USA, Europe and Japan, the 3 traditional trading giants for Singapore in the 70s and 80s.  We see this strong intra-Asean trend continuing. Pre-97-crisis, Malaysia herself was the largest trading partner country for Singapore for 2 years in 1994/95, surpassing USA and Japan, not to mention the individual European countries. 

Post the 1997 crisis, Malaysia has once again emerged as Singapore’s largest trading  partner for the last 4 years (since year 2000) – the US$77b of Malaysia-Singapore trade last year took top spot, versus US$72b with Europe, US$64b with USA, and US$43b with Japan. Trade between Malaysia and Singapore grew robustly at more than 9% compounded annually between 1998 and 2002, before it was hit by SARS last year. Among the Asean partners, Malaysia is the biggest and second fastest trade growth partner in Asean for Singapore post crisis. 

Outside of Asean, China and India are the 2 fastest growing trade partners for Singapore – the 1993-2003 10-year compounded annual growth rates or CAGR were 18% and 11% respectively, with 2003 trade growth over 2002 standing at 31% and 16% respectively.  

It is against this backdrop of vibrant intra-Asia and intra-Asean trade and business, that Temasek is likewise focused on Asean and Asia for investment opportunities in the near and medium term. 

Temasek will be selective in its investments and partnerships in Asia, with Singapore and Asean as our base. Our theme will be on the emerging champions of Asean and Asia.

Certainly, we have a keen interest to work with many of you in this room to explore opportunities both in Malaysia as well as outside of Malaysia. Perhaps, win-win successes such as the sale of AET to MISC, our co-investment into Indonesian BII, and our investment into Telekom Malaysia can point the way. 

Through such bilateral and multilateral opportunities over the next 5, 10, 20 years, we hope to both participate in and contribute to Asia’s growth and development, in our own small way, as a responsible and responsive long term investor and shareholder. 

Conclusion

In the 70s, the Asian Miracle was Japan. The 80s saw the emergence of the 4 Asian Tigers – Korea, Hong Kong, Taiwan and Singapore. In the early 90s, Asean was booming, never seeming to sleep. Malaysia-Singapore trade, for instance, was growing at a fast clip of more than 15% CAGR between 1992 and 1997. The late 90s saw China and now India pushing ahead boldly with liberalisation and market reforms, bringing life and opportunities to their people and businesses. Cousin China and cousin India are enthusiastically joining the global world trade community with vigorous self-confidence.

Today, brother Asean too is beginning to stir again, having survived the meltdown of 1997, the dot-com bubble-burst, 911 and SARS. With an AFTA (Asean Free Trade Agreement) market of 500 million, and the early commitment towards free trade and market economies, Asean has much promise and potential waiting to be harnessed and realised. But hard work and smart partnership by top leadership and officials both in governments and businesses will be required to unlock and realise Asean’s full potential. Asean’s future of promise is ours to lose, for our people and for our future generations.

Thank you.