The Perwaja debacle: Part 1

The Japanese used the Malaysian company as a guinea pig to test new technology.

COMMENT

By Iskandar Mohamad

The story of Perwaja is the story of a loss so great that it goes down the annals not just of Malaysian history, but world history. It is enough to shock the most ardent Mahathirists into silence.

It all started on April 22, 1982. With a paid-up capital of RM250 million, Perwaja Terengganu Sdn Bhd was born. The construction of the plant began six months later.

By the end of 1986, Perwaja Terengganu was already in the red, with a total loss of RM131 million due to management problems and also the appreciation of the yen.

One doesn’t have to be a rocket scientist to figure out why Perwaja ran into trouble.

The plant at Kemaman is just a big steel factory planted smack in a plot surrounded by jungle and far from the sea. Economically speaking, it is an impossible location due to a DNA deficiency of export competitiveness from Day 1.

Secondly, why would any sane person want to open a steel factory in the east cost of the peninsula when steel is consumed in huge volumes on the west coast? Anyone with common sense would locate the steel plant in the west coast to save transport costs. However, Mahathir justified the decision by claiming he was taking industrialisation to the east coast.

To make matters worse, Perwaja had a management team that lacked experience. In fact, this was a major blunder.

Perwaja’s Japanese partner, Nippon Steel, as well as the Korean company POSCO and the Korean government engaged BHP, an Australian mining firm, to review the engineering plans. Apart from that wise and calculated move, a Korean consultant was also engaged to check on the Australian firm.

Whom did Perwaja hire to check on its plans? No one.

Perwaja did not take any precautions in its strategies and believed wholesale in a proposal from Nippon Steel to produce Direct Reduced Iron (DRI) to use a new gas-based technology to convert ore into sponge iron for making steel, bypassing traditional and proven iron ore sintering and blast furnace procedures.

Such a move proved costly and detrimental to Perwaja.

In other words, one can surmise Malaysia foolishly paid for this new and untested technology because Perwaja foolishly trusted the Japanese who enjoyed the benefits of the new technology on the Perwaja bill. Hence, it was not a case of Perwaja learning from the Japanese, but the Japanese using Perwaja to learn the new technology.

When the technology failed, the one-third paid back by the Japanese in 1987 as compensation was not enough to take Perwaja out of deep waters.

Caught in a bind, Perwaja had to use scrap metal for a few years. Obviously, with the plant in the east coast, costs escalated, as the company had to bring in scrap metal from the west coast.

It was too little too late again when Mahathir realized the management failure of Perwaja. In February 1987, instead of turning to experts in the downstream steel industry, due to his pride, he set up a new management team headed by Eric Chia, who was then UMW chief, to steer Perwaja out of troubled waters.

That was the beginning of the second merry-go-round, the first being the one created by Nippon Steel, that spelled doom for Perwaja .

To be continued

Iskandar Mohamad is an FMT reader.