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World Class Products And Services At Third World Prices

Excerpts of Managing Director of YTL Corporation Berhad, Tan Sri Dato’ Francis Yeoh's speech at Siemens Global Power Generation Symposium 2002 in Orlando, Florida

I appreciate this opportunity to speak to so many executives in the global power industry. It is a distinct honour to be here. We at YTL, and I personally have enjoyed a long and harmonious relationship with Siemens. We have been doing business with the Siemens organization, in many capacities, for years. I can say without reservation that their commitment to quality and their high degree of professionalism have been demonstrated in every project with which we’ve been involved.

The Chinese have an ancient saying that is very appropriate today, especially in the power generation sector: “May you live in interesting times.” Whether that saying is a blessing or a curse depends on how we are prepared to meet the challenges of interesting times.

I prefer to call our times “exciting” times – filled with so many opportunities we could never have imagined just a few years ago. To me, it is exciting to think of expanding the power grid, and taking electrical power to places in the world where no electric light has ever shone before. Because of entrepreneurs such as you, millions of people are emerging from the darkness, are being warmed against the cold, and can enjoy a quality of life that was heretofore impossible.

If you are preparing to enter the power market in Asia, or are even considering such a move, you may have heard that such opportunities are filled with complication and high risk, poor workmanship and even, it has been rumoured, occasional corruption. My message to you today is this: you can afford to do business in Asia. You can demand and get quality performance at every level of your development, and do so at costs which make profitability more easily achievable than you might think.

For years, we at YTL have been using a development strategy that has been extremely successful, whether we apply it to hotel and resort industry, transportation enterprises or power generation. In the next few minutes, I want to share this strategy with you. As the title of my presentation implies, it is the secret that will enable you to provide world-class products and services at third-world prices.

But first, allow me to acquaint you with YTL. Our organization was established in Malaysia in 1955. Our business origins go back to my grandfather, who opened and operated a construction business after World War II. The Yeoh family is a family of building engineers. Our core competency is construction. When we were kids, my brothers and I were taken sightseeing to construction sites – not Walt Disney World. We learned early on the language of construction – and the strategies of cost control.

During the Sixties, we built defence and security installations for the government of Malaysia. During the Seventies we became active in educational and agrobusiness construction and development. In the Eighties, the Malaysian government introduced the privatisation concept, enabling the private sector to drive the engine of economic growth. For the first time, we could own and grow what we had built. In this new environment, motivated by new incentive, we introduced the turnkey concept in Malaysia, using what I call infrastructure development. We designed, raised the capital for, and built hospitals, universities, residential properties, high-rise office buildings, industrial facilities and other infrastructure projects..

In 1993, we created YTL Power and began building Malaysia’s first IPP power plants. We also got into cement production and high-speed rail. Our focus for the new century will expand into high technology and new development wherever we perceive opportunities.

Today, we are vertically organized into many subsidiary companies, all under YTL Corporation Berhad. By the way, we first became acquainted with Siemens during the construction of hospitals, which we equipped with the latest Siemens medical equipment.

Right now, let’s discuss keeping development costs down, and why it’s especially important to keep your costs as low as possible in Asia.

Strategies to keep costs down are not new. Henry Ford discovered that if he mass-produced the same black Model-T, economies of scale would enable him to produce a car that, for the first time, average Americans could afford. More recently, in the 1960’s, Japanese car makers used the principles of Total Quality Management and other quality processes to reduce their costs, and produce affordable, good quality automobiles for the rest of the world.

Our first secret at YTL, then, is “Keep products affordable to your customers.” If most people can afford to buy from you, then you will sell more products. It sounds simple. And here’s the other side of the coin. If your costs are so high that your product is too expensive, your customers can’t afford you. This is especially true in third world, or developing nations where median incomes are much lower than in the developed countries of the West.

This lesson applies as much to electric power as it does to automobiles. In the power industry, especially in a free enterprise, unregulated market, you will be hard-pressed to build a profitable IPP plant in a developing nation, by using development strategies that work in developed countries.

At YTL, three generations of our family have constantly found new ways to cut capital costs without sacrificing quality, so that our Asian customers can afford our products – and we enjoy a profit.

Look at these figures.

During the decade between 1989 and 1998, we achieved some exciting numbers in our average annual compounded growth rate.

Our turnover, or revenues, increased 26% annually, from 22 million ringgit, or an average of about $5.8 million, to 1.2 billion ringgit, or $315 million over ten years. The Malaysian ringgit is currently pegged at 3.8 RM to the US$.

Pre-tax profits rose 47% annually during those same years, quoted in U.S. dollars, from $3.3 million to approximately $157 million during the same ten years.

Net profits increased 41% and our adjusted EPS was 33%. One ringgit invested in YTL in 1989 is worth 42 ringgit by 1998… and our compounded annual return was 59%. Last year, in FY 2001, in spite of a global economic downturn, YTL earned $100 million out of a turnover of $650 million.

As you may recall, in late 1997, the Asian economies imploded, their currencies devalued rapidly, and the “Miracle of the Pacific Rim” came to an end. Nevertheless, throughout that slump, YTL has continued to make a profit.

Over the years, YTL has developed and used two key strategies to keep products affordable to our customer – and profitable to us.

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! Across Asia, overnments and economies rise and fall. 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. And, of course, our friends at Siemens and the German Development Bank - KFW - stood by us, for 11 straight months while we put the deal together. Like most of our successful projects, this one combined the benefits of state-of-the-art technological partners and friends with innovative financing.

And speaking of friends, let me offer a side note about doing business in Asia – the importance of developing personal relationships. Too often, companies rush into Asia to close a deal with a potential partner, without perceiving that company as an organization run by individuals. In Asia, we put a high premium on relationship business. We like to find commonalities with our business partners… to regard and be regarded as people much like you who may enjoy similar interests. We like to see your face before we see your contract.

When we were looking for a partner for our first power plants, Mr. Von Pierer personally came to Malaysia. He took time off, as I recall, from his holiday to come meet us face to face and express Siemens’ interest in our project. In large part because of that personal interest, Siemens became our partner in the power generation business.

We finished our first combined cycle gas-fired power plant in 22 months, a world record. Heinrich von Pierer said yesterday that you need a hard-working team to be successful. I can tell you that Siemens and YTL worked together 24 hours a day for months to achieve this success. We significantly cut our costs, and, today, we’re selling electricity for 3.8 cents per kilowatt hour – a lower average-per-kilowatt than anywhere in the United States. We’re producing affordable electricity at prices in line with local incomes.

But what about quality, you may ask. I’m happy to report that those two power stations – at Paka and Pasir Gudang – were the first to achieve the new ISO 9001 Year 2000 Quality Standard Award, based on quality management systems. This was in addition to the ISO 9002 certification for excellence in operations and maintenance YTL Power Services received in 1996. Yesterday, Claus Riedle mentioned that the availability of our two power plants was at 97% - a milestone in efficiency. It is no wonder that Tenaga Nasional Bhd, the Malaysian government’s electric utility, has since signed a Supplemental Power Purchase Agreement for the purchase of 1400 GWh per year for the next three years.

Let me give you another example. We were also the first Malaysian company to use non-recourse local financing to capitalize a high-speed rail project. The Express Rail Link, or ERL, was completed early this year, connecting Kuala Lumpur with its international airport. Built with Siemens rail transportation technology, 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 157 million ringgit per kilometre. We did it for 35 million ringgit per kilometre!

How did this reduction of costs impact service? Just compare the two rail systems. A ticket to ride the British rail link, a 15-minute trip, is about US$15. By contrast, by cutting capital costs and using a local funding source, the ERL travels twice as far, about 57 kilometres, in 28 minutes, but for the equivalent of only about US$8. This is the cheapest fare-per-kilometre in the world for rapid rail transit. But more important, Malaysians can afford to ride this train, and keep it profitable.

In 1996, YTL was the first non-Japanese Asian company to be listed on the Tokyo Stock Exchange…
and the first Asian company to issue Zero Coupon Euro-Convertible Bonds, 15-year 1.5 billion ringgit bonds that provided us with financing on very advantageous terms.

As part of its hotel, resort and leisure property investments, YTL developed the Ritz Carlton Kuala Lumpur. Due to our construction expertise, we cut the costs of construction and thereby reduced the amount we required of our construction loan. Then, due to innovative financing, we were able to control the costs of borrowing that capital. Our building costs ran 100,000 ringgit per room, or about US$26,315, about a third of the per-room costs of other hotels. As a result, a room night in this luxury, Five-Star hotel runs only about $75, compared to more than $300 or $400 or more in most comparable hotels in Europe or the U.S. As you can see from this list of awards and recognitions, affordable pricing does not affect quality.

Another one of our investments, also priced for Malaysian incomes, is the Marriott Kuala Lumpur, another award-winning, showcase hotel. Again, a fine hotel acquired for less capital, financed at lower rates using local currency, and kept affordable.

My favourite is our Pangkor Laut Resort, on our exclusive and private island off the coast of Malaysia. In 1999, readers of Conde Nast Traveller rated it as the second most popular island destination in the world.

As you can see, then, we are using capital cost containment plus creative financing at the outset of a project to help ensure financial success long after the doors open for business. And yet, as our ISO certifications and international awards reflect, our developments in every area have passed international scrutiny and maintained a level of excellence equal to similar projects anywhere in the world.

Finally, in closing, you may be asking, “What’s Pavarotti got to do with all this?” A few years ago, I was honoured to have the great Italian tenor entertain a select group of 200 friends and associates at Pangkor Laut Resort. He said to us later, “I almost cried when I saw how beautiful God had made this paradise.”

The truth is that we cannot really expect paradise on this earth. But we do have the power to make life so much better for millions of our fellow travellers on this earth. And that is our most noble challenge.

By the way, Mr. Pavarotti is coming back to Pangkor Laut Resort this September, once again to perform for 200 selected guests. You’re all invited, and you can stay at our hotel for just $75 a night. It’s a real bargain, but I advise you to make reservations now. I’ll see you in Malaysia.

Delivered by Tan Sri Dato’ Francis Yeoh, CEO of YTL Corp.
at the Siemens Global Power Generation Symposium 2002
in Orlando, Florida
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