Perwaja The Perfect Example Of Government Tak Tahu Niaga

For those of you who are confused about my "sudden" severe criticism of government owned businesses, GLCs, government monopolies and such please read my very first book 'To Digress A Little' which was published in 2005 - that was FOURTEEN years ago.

In that book I mentioned (and criticised) a long list of failed government projects including 

• Perwaja
• Proton 
• that Arab conman who ripped off the Malaysian taxpayer of a few hundred million Ringgits. 

In fact I wrote a whole chapter devoted to the failure of Proton. 

That was FOURTEEN YEARS AGO. 

So I have not suddenly started criticising government projects, GLCs, government granted monopolies and oligopolies. 

All of these failed projects were the brain "children" of Dr Mahathir.

Now listen to this short video. This man is standing in front of the completely abandoned Perwaja factory in Gurun, Kedah.  

I will explain to you a large part of the reason WHY I think Perwaja failed. 

But first please listen to the video.

Billions of Ringgits of taxpayers money were wasted on Perwaja. 

Let me give you my conclusion now : The government does not understand anything about business. Dr Mahathir does not understand business. 

Dr Mahathir's genius was that he developed the infrastructure of this country. Without a shred of doubt every single major infrastructural development until now was initiated by Dr Mahathir. 

And Dr Mahathir's greatest achievement was that he made Malaysians 'think big'. 

Do not think small.  There is something called a 'Mahathir sized project'. It means a mega project.  

But building highways, railways, airports, ports, entire cities (Putrajaya, Cyberjaya, Kulim Hi Tech) and developing an entire island (Langkawi) are very different from running a simple business like say a car factory or a steel mill. 

Dr Mahathir built the NS Hiway - which easily added 1% or 2% to the GDP of the country - until today. No one can deny that. That NS Hiway unlocked so much development and growth potential along its entire length. 

Ok lets stop for a minute. What does this mean? The "NS Hiway unlocked so much development and growth potential along its entire length"? 

Were there secret Martians hiding in the lalang grass along the hiway who come out mysteriously at night to unlock our development potential?  

Certaily not. What it means is that the NS Hiway unlocked the economic potential of the people living along the hiway.   It is people who produce things and grow the economy. 

And that is exactly what government policy must do.  Government policy must unlock the economic potential of its people - human beings. Remember it is always 'people first'.  

But running a car factory or even a supermarket needs a completely different set of skills. It needs market skills. This the government (and the Malay folks - to a large extent, until today) still do not have.  

Correction : government cannot know business skills. The nature of government (the capacity to print money, access to easy project approvals, unlimited license approvals, waivers from anything (taxes, EIAs, compliances)) makes the government inherently 'not market oriented'.

If one Proton model failed, no problem. 

Just get Petronas to bail them out. 

Then try another Proton model.

So - let me repeat - building infrastructure is NOT of the same skill set as running a business.  

Now let me speak a little about why Perwaja failed. 

I think this was the main reason.  

Perwaja was doomed from the beginning - long, long before Eric Chia.  

They built two steel mills - the bloom plant in Terengganu. 

And the billet plant in Kedah. 

This was commercial suicide.

Bloom, billet, slab, ingot, long product, sheet product, hot briquette iron ore etc etc are just product information. Big deal. You can Google all these in five minutes.

But they did not understand simpler things.   Ok here is some of my own background which may be relevant.   At the university in the United States in the early 1980s I studied industrial management, logistics, finance, business management and also did a minor in Industrial Engineering.  

Even in the early 1980s my school had  really advanced robotics and automation labs and we learned to "program" robots - for cutting steel and other metals. We did not write code but we programmed coordinates into the CNC machine. At that time the big name in CNC cutting tools in the US was Cincinatti Milacron (CNC means computer numerical control). 

In Industrial Engineering we also learned about factory layouts - which is actually common sense.  There were job shops and process shops.  Those of you who are mechanical engineers or process engineers will smile at the basic A, B, C here.

1. A job shop layout could be a situation where two machines located beside each other in a factory may be cutting different steel or metal products that are for different customers or different usages. One machine is not dependent on the other.
   
   
2. A process shop layout means the output of one machine becomes the input of the next machine. Then the output of that machine becomes the input of the next machine etc. A moving manufacturing line - where the product moves from station to station for completion - is a process shop (car factory, steel mill etc).
   

Rule Number One of any factory is you want to reduce material handling. Material handling costs money and more importantly it costs time. You want to reduce both. Especially when your product can weigh a few tons - like in a steel mill.

You would think that all this is common sense but in real life even super duper engineers can make the simplest but humongous mistakes.

Lets digress again - as another example - in that gas turbine power station that my company owned in Kulim (which was later 'hijacked' by JJ and now makes up more than half his RM2 BILLION "fortune" over which his family is disputing) the design engineers initially made a huge blunder, which we found out in time. 

They had positioned the huge GE Frame 6 gas turbines A FEW FEET ABOVE the floor level. Each gas turbine and its casings weighed tens of tons.  During maintenance and inspections, we would have needed permanently installed heavy duty cranes to lift up the gas turbines.  Plus the safety risks  to men, equipment and the gas turbines of being 'moved around' so much. 

Fortunately my clever boss paid for a "design and technology audit" (by an independent engineer) to go over the entire design of the power station - before we built it.  The  engineering audit pointed out this costly design error. 

So the design was changed in time and the gas turbines were placed much lower so that inspection and maintenance could be handled with least lifting and handling. The turbines could be jacked down - much safer and cheaper - no need for heavy lift cranes. You want to really reduce material handling costs.

I feel that the same problem (to a large extent) - material handling - killed off Perwaja. 

To me, Perwaja was another classic example of not knowing the difference between a job shop and a process shop and not even giving due respect to the melting temperature of steel (which is about 1300 degrees Celcius).

Perwaja manufactured steel blooms and billets.  It is just shop talk for large pieces of steel. 

In the picture below the steel bloom has the larger cross section (14 inches or so) whereas the smaller steel billet may have a width of 4 inches or thereabouts.

The steel mill will first cast the bloom. 
Then the blooms are stretched (in rolling mills) and made into thinner billets. 
• The billets can then be stretched further in rolling mills and made into long products like deformed bars (for construction), I - beams (to build buildings, bridges etc).
  
  
  

From the beginning Perwaja had a rocky start. 

First of all Perwaja became the guinea pig for an untested Japanese reduction method of melting hot briquetted iron  (Hot Briquetted Iron (HBI) is the product of reducing iron ore with natural gas.)

That new Japanese technology failed. 

The Japanese paid a huge compensation (hooray) and walked away.  

But still no steel was produced. 

Plus the entire project was delayed for years. 

So what is so clever about that? 

(To digress again, I once wrote a Training Manual for a course on Project Risk Management which I taught to loan officers at the bank. One of the biggest risks I taught was technology risk - and Perwaja was a classic example.)

• But this was a government project. 
• Money was no obstacle. 
• Plenty of taxpayers to help cover up bungles. 
• Just fork out more billions.

The real killer was the initial design to divide Perwaja into two separate factories or plants. I believe this was a political decision. This is what killed the Perwaja project.

The smelter and bloom production was in Kemaman, Terengganu. 

They melted iron ore, made steel and poured the molten steel into copper moulds to make those huge blooms.  

I have visited the Perwaja plant in Terengganu.  A group of us bankers were taken in a bus. When they poured the white hot molten steel into the moulds to make the blooms, we could feel the flash heat inside the airconditioned bus - like when you sit under a spotlight. 

Then after the white hot blooms had cooled down they were stored in an open storage yard. 

From the open storage yard in Terengganu the steel blooms were put on flat bed trucks and transported to Perwaja's Factory No. 2 ie the billet plant which was located in Gurun, Kedah.  That is the plant the man is complaining about in the video above.

Google Maps says the shorter driving distance from Chukai (Kemaman) to Gurun (today) is 564 km. and the drive is 8 hours. 

This was the really insane part of Perwaja's  "process shop" layout.  

Perwaja had become  the longest steel mill in the world. 

The blooms were cast in Terengganu. 

The billets were rolled 564 km away in Gurun, Kedah.  

The difference  between Kemaman and Gurun was not just the 564 km distance, the 8 hours driving time or the massive time and costs of logistics - flat bed trucks, fuel, drivers wages and heavy lift material handling at both ends.

What was more insanely expensive was the 1300 degrees Celcius temperature. 

Steel melts at around 1300 degrees Celsius.

The blooms that were cast in Terengganu cooled down to room temperature in the storage yard. 

They were transported to Gurun and had to be re-heated to 1300 degrees Celsius all over again - so that they could be rolled and converted into those smaller billets.

This cost an insane amount of money - burning insane quantities of gas to heat the blooms to 1300 degrees Celsius again.

Back in Japan, to save material handling costs and to save re-heating costs the Japanese steel producers built continuous casting steel mills. 

This means from the melting furnace - the steel is poured out and before it cools down and solidifies - the steel is pulled through the rolling mills to produce the final end products. No need to transport the blooms 500 km, no need for trucks and truck drivers and no need for expensive reheating. 

Continuous casting, also called strand casting, is the process whereby molten metal is solidified into a "semifinished" billet, bloom, or slab for subsequent rolling in the finishing mills. Prior to the introduction of continuous casting in the 1950s, steel was poured into stationary molds to form ingots. Since then, "continuous casting" has evolved to achieve improved yield, quality, productivity and cost efficiency. It allows lower-cost production of metal sections with better quality, due to the inherently lower costs of continuous, standardised production of a product, as well as providing increased control over the process through automation. This process is used most frequently to cast steel (in terms of tonnage cast). Aluminium and copper are also continuously cast.

To avoid all the expensive material handling and insanely expensive reheating in the manufacture of steel - Allahu subhaanahu wa taala in His infinite wisdom -  gave the human race the Chiba Perfecture in Japan. Which Dr Mahathir has certainly visited. 

Chiba in Japan was (at one time - I don't know now)  the centre of their heavy engineering industry, especially steel manufacture. There is a place called Kawasaki-Cho in Chiba which was home to Kawasaki Steel.

Here is a cutout from Google Map's satellite image  of Kawasaki-cho in Chiba Perfecture in Japan.

This is a man-made island, reclaimed from the sea in Chiba.  Please go to Google Maps and look at Chiba Perfecture. Their entire coastline was converted into this type of man-made islands for heavy engineering industries.  (This was done during the Japanese zaman jahiliyah of the 60s and 70s - before EIAs became mandatory).

If you zoom in, you can see ships at berth at the top and right sides of this man made island. 

This is how they did it. 

First they designed the process shop layout for their steel plants. Starting from unloading iron ore, coal etc at the ship berths. Then to the melt shops, moulding shops or continuous cast rolling plants etc and finally for loading onto ships for export - continuously - with least reheating and material handling costs.

After they designed the plant - they went out and reclaimed the land from the sea to suit the layout of their steel plant. Hence you get that man-made island in Kawasaki-cho above.   

All this was done to avoid the white hot steel from cooling down from 1300 degrees Celcius to room temperature. To save re-heating costs, save material handling and logistics costs for those heavy steel blooms and billets.

The whole idea is to save costs.  

The Perwaja plant did not care too much for these basics about the steel industry.

Today that man is complaining in the video.   

"Apa sudah jadi?" he is asking.   

Berpuluh bilion Ringgit sudah rugi.

Well he is taking advantage of hindsight. 

Today he is complaining.  

But at that time he did not see it. 

My guess is at that time when Perwaja Gurun was built, he would have been super duper proud that Dr Mahathir had built  a steel mill in his front yard. 

Everyone has hindsight. 

What we need is foresight. 

You see for decades now I have been saying these things. As I said I wrote my  book To Digress A Little in 2005 - ie FOURTEEN YEARS ago.  No one listened then.

I am still saying a lot of things now.  

About a lot of things. 

Keep reading the blog.

No one is listening either.

Well, you can always make another video. 

Say 20 years from now.

If I am still alive, I can say again "I told you so".