Saturday, March 13, 2010

MESTI BACA!! WENOM:Cost, Risk and Benefit

I have to apologize for not having updated this blog for a couple of days. Unfortunately, I had stumbled on Gopal Raj Kumar's website and was feeling unwell after reading his excessive pro Mahathirisms.

Anyhow, I had noticed a great deal of talk on the new this so called new economic model. Personally I cannot understand how the Government of Malaysia can come out with any model without referring to me. If I am not involved I can guarantee you whatever that is proposed will never work, or is designed not to work in the first place.

Furthermore we do not live in a commie state. If we adopt capitalism free market should dictate the movement of wealth. Ibrahim Ali says that free market is not good and discriminates against the Malay. Actually I do agree with the spirit of what he is saying, but what he is not offering any solution. I think Dato Sak clearly revealed his true intentions.

But how do the Malays actually become richer. That is a fundamental question and many people have attempted their own theories. I think the bottom line is we have 2 lines of thought

  • Anwar Ibrahim's Creative Destruction Policy of 1998
  • Dr Mahathir's Mahathirsm Policy 
AI did not have a chance to implement his creative destruction policy so we really can't know whether it will work. However, Dr Mahathir did have 22 years to implement Mahathirsm so we can now summarize his achievements

  1. National debt of RM 522 billion
  2. Ringgit at a lower by 30% against the US Dollar and by more than 50% against Singapore Dollar
  3. Education competitiveness that is completely destroyed
  4. A lack of ability to attract new FDI. In 1970s we could attract some of the hottest new companies in the world to open up shop in Malaysia. 
  5. Malays still left behind
  6. Dato Mukhriz is the Deputy Minister in charge of MITI
So unless we can be proud of achievement number 5, Mahathirism is an utter failure.

So we have to now turn to a new approach. I call it Wengers New Economic Model or WENOM.

The difference between Mahathirsm and Anwarism and Najib-o-nomics is that WENOM is actually based on reality. That means what I postulae under WENOM is completely 100% fact based. 

WENOM will be developed on a module based approach so that all those loyal followers of Wenger J Khairy and proud supporters of Tn. Hj YB KJ can follow step by step. We will cover a lot with WENOM, including things like what is the New World Financial System and how WENOM fits in it.

But the starting point is this to understand what is meant by Cost, Risk and Benefit. This is the fundamental module to understand all economic matters.

Lets get cracking

What is Cost, Benefit and Risk?

Well its quite simple really. It always starts with the

  • Benefit - what is it you want to achieve. 
  • Then how much does it cost to achieve it 
  • and lastly whats the risk that even after you pay the cost, you wont achieve your target.

But what is risk? Risk really means that the chances in the future, after you make the decision, things dont turn out to plan. Like for example, what is the chance that Zambry can be returned as MB in free election in Perak. About 2%. So what is the risk of Zambry screwing up the whole BN Machinery in Perak - well thats (1-2% = 98%).

So you can define risk by looking at a set of desired or screwed up situations. You calculate the probability of those things happenings and you get a number. If the chances of bad thing happening is greater than 30%, means this is very risky. In the case of Zambry - its almost like a certainty.

So risk is a probability of screwed up situations that will not allow u to enjoy the benefit. Remember, its a projection into the future...

Yes that is the entire rationale behind modern day finance - but it seems the supporters of that man Mahathir cannot understand this simple concept.

For example lets look at almost every single Mahathir plan.

We start with Proton. What was the benefit Mahathir wanted to achieve?

  1. Political hegemony
  2. Some strange economic benefit
I say 2 is some strange economic benefit because in truth Proton is a major drain on the country. But more on that later. Lets go to 1 - Mahathir wanted to show that he can produce a car and he was the man. Proton, I repeat is a pure political exercise by Mahathir - it has 0 economic benefit to the country, in fact its a major cost to the country. But back in 1985, Malaysians were very primitive and could not understand the finer points of globalization and trade specialization. They lapped it up - when in fact the original protons were nothing more than Mitsubishi CKDs.

And the rakyat lapped it up - Dr Mahathir won the 86 General Election. In 1987, he should have lost the President Election but the lights tripped and the whole country got screwed for another 20+ years. We should really be pissed at the electrician in PWTC!

Anyhow - we see the benefit is solely for Dr Mahahtir. Now we go on the cost. What is the cost of setting up Proton. Well a heck of lot of money - off hand I won't know cos I'm too lazy to dig out the AR from Proton (those guys don bother to put things in nice XLS format) but safely we can assume it was between RM 1 - 2 billion in todays terms.. This money was used to buy equipment from Japan and inventory from Japan as well.

But that alone was not the cost. Mahathir had to ensure that Proton was a 100% commercial success (for the company) so he went along and slapped punitive tarrifs on the foreign cars. So now, prices in the domestic market rose significantly to the extent it is common place knowledge you can get a  better quality Proton in the overseas market and at a cheaper price. So Mahathir was screwing the entire country, something he does all the time because by and large people buy into his race rhetorics.

But really what was the cost of Proton

I quote from myself in The Rembau Times

How much is the cost of the tarriff.
A high tariff results in higher cost for imports as well as a higher cost for domestically produced goods. For the case of Proton Berhad, it manufacturers a wide variety of cars, and the prices range from RM 33,000 to RM 100,000.

The prices are prohibitively high, and most people are forced into obtaining bank loans to fund their purchase of the car. Imported cars are of course a non-question as the tarriffs make it even more expensive.

Right now the total amount of bank loans on car purchases are RM 100 billion.

Due to the emergence of the Internet, many complain that for the same amount of money spent on buying a Proton car, one could obtain a good of perceived superior value. Or in the case of the poor, they could perhaps obtain a similar car at a cheaper price.

A back of envelope calculation, taking into current demand, seems to indicate that if car prices were 25% cheaper without this tarriff, households would RM 8 billion better off last year. Over the last 3 years, the sum was RM 21 billion.

I do not know how much consumers would be better off over the last 24 years. However I am quite sure it will be more than the RM 3 billion of property Proton currently owns.

If there had been no tariffs, consumers would not need to pay so much money. They would also need to be encumbered by such huge loans. As it stands now, on average every man, woman and child, owes RM 4,000 on account of a car.

I actually had a data table somewhere,  but the gist is this. If today you have a loan collateralized by a car, where the cost of the car is inflated so as to ensure Mahathir's political longetivity, you are essentially overpaying that premium and are absorbing the cost. A year this works out to about RM 8 billion. If use a arithmetic progression (AP), with 0 in 1985 and assume 20 years, this cost works out to about RM 100 billion. 

That money could have been spent to fund food programmes for the MRSM students, upgrade the facilities in the schools and universities, but now the cost is paid by the rakyat to ensure that Mahathir could become PM for additional 20 years. So  in a way, we can say that if MRSM students are not enjoying food or water supply, they have a right to blame Dr. Mahathir. I think there is quite a lot of basis in that.

What was the Risk
The risk of setting up Proton was huge. Without domestic protection, Proton would fail. Even today if the APs and tarriffs are removed, Proton will fail. Proton has had CEOs who are complete morons and do not even know how to value a company. Under this idiot they launched Proton Tiara which was a failure, Proton Juara which was a joke , bought Lotus without really any return on investment  and the best of all - they invested RM 300 million in secondary shares and assumed almost RM 500 million worth of debt from a bankrupt compabny. So don't blame the Japanese for being good or having a head start, Mahahtir surrounds himself with incompetents and so even if the Japs started producing cars in 1985, we still will not be able to compete because Mahahtir hates smart people. So the Proton business model is a failure from start - I think he himself knows it.

Risk Mitigation
Even when confronted with risky decisions, we can take steps to "lay off the risk". What we learn in Quantitative Finance is that you cannot destroy systematic risk.  To "lay off the risk" is like to pass the ball - you pulak yg tanggung. Mahahtir created a very risky project to save himself and then transferred the risk to 2 generations of Malaysians. Thats why I despise him to the core - this man is very smart, but he takes advantage of most of the Malaysians gullibility.

And the systematic risk in the Proton project example is the following
  1. Technology backwardness of Malaysia
  2. Top Management that is incompetent
  3. Declining standards in technical education
  4. No economies of scale
  5. Project is failure in business model
  6. Mahahtir

So the risk is huge. But what Mahathir did was to "lay off the risk" to the people. Proton will not assume the risk of its failure. The people, i.e. you and me will do so. He did this by
  1. Enforcing huge tarriffs on foreign cars
  2. Using ISA to imprison people who criticize him
  3. Make sure no newspaper editor will write anything bad about Proton 
So essentially Dr. Mahathir just mitigated risk point no 5. By doing this, Proton will register a profit. The other risks are completely ignored. For example in 2003, Proton CEO bought 51% common equity of a bankupt company for RM 350 million, 

I hope you get the point

Benefit - Achieved or Not
So now we have made the decision. We screwed the rakyat. We implemented Proton. We took notice of all the risks but we only sorted one of them out. 

So 20 yrs later - did we achieve the desired benefit. Was the cost paid greater or less than the benefit received.

Well of course not. The benefit received was far superior. That man Mahathir could stay on as PM for an additional 20 years. He was the sole stakeholder in this plan. Proton was just meant to sustain his Prime Minister position. The RM 100 billion borne by the rakyat, the endless billions spent monthly to fix everything from faulty power windows to auto gear boxes is borne by the rakyat.

Extending the Cost, Benefit Risk
But now the rakyat is smarter. In fact they are very smart. They know not to trust all these politicians. We can similiarly extend this Cost, Benefit Risk to another fiasco whereby in this case, the scums will probably lose.

Lets look at the case of Perak. 

To be honest, what was the benefit of having of all people Zambry Abdul Kader installed as MB?

I mean you could throw a ball down a lane in Madras and get somebody who is more likeable. Look at him - he is so pathetic he has to engage a fellow mamak (Paprukari) to do his media machine. Issues like orphaned children going to this house for free food are played upon - when it is so obvious not a single kid was bothered to even look at Zambry. They all were looking at the food.

But i'm degressing.

I tell u what,
Why not u fill out the following

  • Direct cost
  • Indirect cost on judiciary
  • Indirect cost on integrity of the election process
  • Indirect cost on having to face the Zambry - Parpu cartel

  • Benefit to Parpu
  • Benefit to Najib
  • Benefit to UMNO
  • Benefit to BN

Is he updating Parpu on the CRB Matrix?

Risk of Perak Fiasco
  • Perak issue will dominate PM Najibs rule
  • A lot of specatuclar things will happen. The business of Government is to avoid the spectacular
  • Rakyat will see that BN is willing to ignore the results of the ballot box
  • BN will piss off a large segment of the voters for as long as they see Dok Zam as the MB of Perak (his face reminds them of this terrible episode)
  • BN will lose the next GE

This level of anger is now going to be felt by a lot of UMNO MPs. Congratulations for supporting Zambry.  Now go and plan your retirement

PS Nightcaller: To me GST is another product of a person who has 0 knowledge of practical finance and economics in the Malaysian context. Its the worst decision and will provide a Raya, Deepavali, Christmas and Chinese New Year bonanza for the Opposition. You guys are lucky!

FYI FYI: Chedet is censoring my comments. It seems Tun is very upset with my comments. I am so glad I could sock it to that scumbag


Anonymous said...

good ...complete. mahathir is bad news. i hope he realizes people hate him

Anonymous said...

grk is a jerk. a pompous twat that just appeals to a few misguided. hes nothing compared to u. yes i heard about the storm u kicked up chedet. bigdog had told dm to tell his papa not to try and fight u. they are so scared of u bro

Anonymous said...

Che Det censoring your comments?

Oh much for the so called last bastion of free speech.

Wenger J. Khairy said...

Its free speech as long as you dont jam the owner with the truth