Boustead Heavy Industries in Malaysia – The Diplomat
In 2011, Malaysian shipbuilder Boustead Heavy Industries was flying high. The company made a profit of 28 million ringgit ($ 6.6 million) on a turnover of 301.7 million ringgit and ended the year with more than 289 million ringgit in cash. Modest debt and other liabilities have contributed to a healthy capital cushion and generated solid value for its shareholders, including majority owner Lembaga Tabung Angkatan Tentera, a pension fund for the Malaysian armed forces.
That same year, the Malaysian Ministry of Defense informed Boustead’s associated company, Boustead Naval Shipyard, that it would be awarded a contract to design, build and commission six next-generation coastal combat vessels. The contract was finalized in 2014 and was worth up to 9 billion ringgit ($ 2.13 billion).
If you thought of Boustead Heavy Industries in 2011 – profitable, cash rich, and with an associate company that just got a huge contract to lead the Malaysian Navy’s modernization efforts – you’d probably wonder what could go wrong? In the end, a lot.
By 2020, Boustead Heavy Industries’ turnover had halved to 145 million ringgit and posted a negative profit of 50.6 million ringgit, its third consecutive annual loss. Cash available at the end of 2020 had fallen to just 3.5 million ringgit. This was in large part due to the dire financial situation of the Boustead Shipyard, which had to contend with cost overruns and delays in the littoral combat ship program. The losses have continued to eat into the balance sheet of Boustead Heavy Industries.
According to the annual report, Boustead Shipyard recorded a loss of 277 million ringgit out of 998 million revenue in 2019, and posted negative equity of 625 million ringgit, which means their assets cannot cover their liabilities. Last year, The Edge reported that none of the six contracted vessels had been completed and the shipyard may need several billion ringgit more on top of the contract value of $ 9 billion just to complete the work already in progress. There were allegations of missing funds and the government considered canceling the contract before finally deciding to fend for themselves.
Obviously, it did not go as planned. But why did it happen like this? Why did the Malaysian government give the contract to this particular shipyard, whose shareholder structure and the board of commissioners are closely linked to the state and the armed forces? On the one hand, it is not uncommon for privileged defense contractors to have pleasant relations with the government. The logic is that because it is a strategic industry at the national level, it must be managed in a way that benefits the national interests of the country rather than the purely financial interests of the shareholders. This is a point of view that, in theory, I support.
But it’s a fine line to walk, especially when the need to balance national and commercial interests is overtaken by rent-seeking and incompetence which results in a situation that does not benefit anyone’s national or commercial interests. , as in this case. Perhaps, given what we now know, it would have been better for Malaysia to rely more on an established foreign builder and develop its littoral combat vessel program in partnership with them.
This is what Indonesia has done by modernizing its fleet of submarines. In 2011, Indonesia signed a contract with South Korean company Daewoo Shipbuilding & Marine Engineering to purchase three submarines for around $ 1.1 billion. The first two were built in Korea and the third was built by PT PAL, a Surabaya state-owned shipbuilder who is the government’s main shipbuilding contractor.
PAL is in many ways the Indonesian equivalent of Boustead Heavy Industries, and its finances do not mirror its health either: it recorded a net loss of Rs 304 billion in 2018 and relies quite heavily on credit. public banks. But it absorbed the transfer of some essential skills and technologies from its Korean partner and was finally able, with a few hiccups, to successfully deliver a locally built submarine. Despite Indonesia’s penchant for economic nationalism, this is a strategy they have become accustomed to, as PAL has also recently partnered with Dutch shipbuilder Damen to assemble a pair of guided missile frigates, and there is apparently another 10 trillion rupee contract pending to develop two more frigates with a foreign partner.
In the end, PAL’s finances might look only slightly better than Boustead’s, but from a national interest perspective, that’s fine as long as it results in a buildup of skills, technology and skills. shipbuilding know-how that can be used in the future. projects. As the sole shareholder of PAL, the Indonesian state is not really looking for a cash dividend. The spread of more advanced knowledge and technology is the kind of value she really wants to capture. And while it’s too early to say for sure PAL’s long-term success in this regard, at the moment it certainly seems to be doing better than at least one regional competitor.