Over the span of decades, the British—owned trading houses of old British Malaya
built up titanic estates of valuable palm oil, rubber, and tea plantation land.
Imported laborers worked the plantations for a pittance,
generating rich profits for the shareholders back in London.
Asked to sell a share of that wealth to the newly independent nation of Malaysia,
they hemmed and they hawed.
So Malaysia turned the turn tables on them.
One morning in September 1981, Malaysia conducted a financial dawn raid
that stunned the British business community and reclaimed hundreds of
thousands of acres of Malaysian plantation land for Malaysia.
In this video I want to talk about Malaysia’s strike against
the remaining structures of the old colonial state.
## Beginnings
Let us start - as we always do - at the beginning. In 1957,
the Federation of Malaya gained its independence from the British.
Note. It would not be called Malaysia until 1963 - when Malaya merged in federation with
North Borneo, the Crown Colony of Sarawak, and - for a little while - Singapore.
British Malaya's colonial economy went about much like that of its colonial peers. British investors
started big companies to exploit, harvest, and extract the area's rich natural resources.
From 1900 to 1950, British Malaya's total agricultural area
rose five-fold and Malayan goods like rubber, palm oil, and tea sold well in the world market.
These companies were extremely profitable. In the mid-1930s,
net margins on rubber and palm oil were over 50%.
And though the rubber business would eventually decline after
the creation of synthetic rubber in the 1940s,
plantation companies smoothly shifted to growing palm oil - which remained a profitable enterprise.
## The Plantations' Profits
These profits were generated on the back of contracted, imported labor. Most of which
hailed from Southern India due to their wages being much lower than that of Chinese workers.
Promised a reasonable wage, shelter and healthcare facilities, Indian workers
endured great hardship to come to Malaya, and were paid a pittance to work the fields.
In 1886, Indian labor rates were about 12 cents a day, Malayan currency. Furthermore,
employers could deduct their wages for even minor breaches of contract.
The British colonial government in India would later push for and win certain labor reforms.
By 1927, labor rates were raised to 50 cents per day for a man - 40 cents for women. Furthermore,
new contract terms like schools, maternity pay, and free repatriation were instituted.
However, the aforementioned decline of the natural rubber industry
would cause many of these workers to lose wages and eventually their jobs.
Anyway, this decades-long immigration trend had a lasting impact on the
country’s future racial harmony. The Malays were the majority race,
but the Chinese and Indians had a significant presence.
Furthermore, these races were not well-integrated.
The Chinese worked the tin mines and ran businesses in the urban centers.
The Malays lived in the rural villages doing fishing and subsistence farming.
And the Indians worked the massive British-owned estate plantations.
This lack of integration and racial harmony had big consequences down the road.
## Independence
Tensions during Malaya's lead up to independence caused these British-owned
and British-operated companies to get very nervous about their Asia-domiciled assets.
Many of these companies sought to diversify out of British Malaya.
For instance, one company - United Plantations - split out their Malaya assets, accumulated
British stocks and bonds, and established subsidiaries in southern Africa and Ecuador.
Unsurprisingly, many of those ventures failed.
This pullback by British investors allowed politically-connected ethnic Chinese businessmen
to gain control of incredibly valuable assets.
For instance, Lee Loy Seng - a Malaysian Chinese Association senator
and son of a tin miner - purchased many of Malaysia's biggest rubber plantations from
British interests at favorable prices and became one of the country's richest people.
One of the companies who stayed steadfast was the Guthrie Group,
the first British trading company founded in Southeast Asia.
Established in the early 1800s, the simple trading house expanded into a series of companies directly
managing plantation assets, tied together in an intricate web of cross-ownership.
In 1958, Guthrie - led by its old-school Scottish Managing
Director Sir John Hay - owned two tin mines and some 150,000
plantation acres. Assets that were altogether worth over 35 million British pounds in 1958.
Guthrie would take advantage of these socially turbulent times to actually increase their
Malaysia holdings - adding another 25,000 plantation acres throughout the 1960s
to reach a stunning 175,000 acres of valuable rubber, palm oil, cocoa, and tea estates by 1970.
## Stability?
At the start, Guthrie's bet looked like a winner. Perhaps a little surprisingly,
the new Federation of Malaya's economic structure
remained mostly unchanged throughout the first decade and a half of its existence.
This is in contrast to what happened in other countries. For instance,
in Burma - now called Myanmar - the government was nationalizing
its valuable teak forests and other natural resources within six months of independence.
Indonesia gained its independence from the Dutch in 1948. Eight years later,
the country appropriated all Dutch assets and expelled Dutch business workers from its borders.
So Malaya's government definitely took a very different path. The
reasons for this stability were largely twofold.
First, Malaya's first generation of leaders were - and I say this without negativity
or prejudice - anglophiles. They descended from royalty,
were educated in the United Kingdom, had British friends, and liked to golf and smoke.
Beyond this, Malaya's first prime minister Tunku Abdul Rahman and his administration
were also rightfully hesitant of making widespread, disruptive changes to society.
Most notably, those that would affect the area's powerful Chinese business leaders.
While it was true in 1970 that British foreigners owned some 63% of all Malaya/Malaysian
corporate assets, the ethnic Chinese also owned a significant 34.4% share.
The ethnic Malays for their part owned just 2.4%. The Chinese were parlaying that wealth
into political power, and they would not take a rampant nationalization scheme lying down.
Considering all this, one can make a valid point why the new
country's leadership sought a less radical decolonization arrangement.
Foreign-owned corporations avoided nationalization. But in return,
they were expected to "indigenize" their technical and management
posts as well as move their headquarters to Malaysia itself.
Some might see this arrangement as favoring stability while
others might call it "neo-colonial". In the end however, racial tensions forced the issue.
A massive race riot in May 1969 between the ethnic Malays and the ethnic Chinese
revealed the structure's shortcomings. The first generation of Malaysian leaders lost favor and
stepped back. Shortly thereafter, the government announced the New Economic Policy or NEP in 1971.
## The NEP
To describe Malaysia's New Economic Policy as a piece of economic policy greatly
understates its impacts. The NEP was an attempt to restructure the entirety of Malaysian society.
I did a video long ago about this policy which I feel gives a good overview of what happened.
Go check it out, but this is the brief summary.
The goal of the NEP was to eradicate poverty and improve racial harmony by
creating a category of ethnic Malays and indigenous people
called the "bumiputra" - literally meaning, "people of the soil".
The new Malaysian government crafted policies to favor the bumiputra and "lift up" their
economic status. In one of those, they set an explicit goal of having Malaysians own 70%
of economic assets - with the bumiputra owning 30% - by 1990, 20 years in the future.
The vehicles for giving the bumiputra equity stake in their country's businesses were Bank Bumiputra
and a national equity fund called Permodalan Nasional Berhad. Thankfully shortened down to PNB.
They would be tasked with meeting the equity share goals by purchasing shares of
non-compliant companies - either through private negotiation or directly from the public markets.
Such share sales were made legally compulsory by the Industrial Coordination Act, passed in 1975.
## Guthrie during the NEP
As the largest of the foreign-owned plantation companies, Guthrie had
long expected since 1965 - 6 years before the NEP - that it would have to undergo
some form of "Malaysianisation", and they informed their investors back in London as such.
However, they and the other foreign companies had a plan to keep financial control
of their one-of-a-kind assets in London and avoid a takeover either by Malaysia,
the Malaysian Chinese or any American-funded interests.
Guthrie's plan was to found a subsidiary - called Guthrie Ropel - with a selection of Malaysian
rubber and palm oil assets. The subsidiary would have Malay management and have 49%
of its shares listed on Malaysian stock markets. But ultimate financial control would
still remain with the London-based parent company, as they held 51% of the shares.
This scheme was worked out in concert with the Central Bank of Malaysia
and in a different time it might have worked. But times were changing.
Feelings of Malaysian economic nationalism had started to strengthen.
Despite this, Guthrie's London board still insisted that they continue to own a majority
share of their Malaysian assets, a direct contradiction of the government’s 70% directive.
Things got worse when it was discovered that Ropel had not received all of the
plantation estates - only the less valuable inland estates.
This led to the general impression that the British were not acting in good faith.
Maybe they were. Maybe they weren’t. Regardless, it was not a good look.
## The First Attempt
In 1976, the British chairman of a large foreign-owned plantation firm called
Sime Darby resigned. Company management was found to have been stealing millions
of dollars from the company, resulting in an audit partner's suicide.
In the aftermath of the debacle, the chairman was replaced with the former Malaysian Minister
of Finance Tun Tan Siew Sin. The firm's British board of directors were tossed
and replaced with Asian ones, and in 1979 the whole company re-domiciled itself in Malaysia.
Sime Darby then launched an audacious takeover attempt of the core London-traded
Guthrie company - purchasing nearly 30% of the shares in the open market.
However, this attempt failed to gain control of Guthrie.
After the incident, Sime sold the shares that they were able to get to PNB,
the aforementioned Malaysian national equity fund. Net of some dilution,
PNB now had 25% ownership of Guthrie - the company's single largest minority shareholder.
## Worsening Ties
Anglo-Malaysian relations were souring throughout the 1970s
but the 1980s saw new turmoil - headlined by a new generation of government leaders.
In July 1981, Dr. Mahathir Mohamad became Malaysia's fourth prime minister.
Dr. Mahathir was a very different prime minister from his predecessors.
He was not Malaysian royalty, attended college in Singapore rather than the United Kingdom,
and had no fondness for the British.
The British did themselves no favors with a condescending, cavalier attitude
towards their former colony. In 1979, the Thatcher government withdrew financial subsidies for some
16,000 Malaysians studying abroad in the United Kingdom - triggering a diplomatic kerfuffle.
Amidst of all this, PNB was unable to get representation on Guthrie's board.
As Guthrie continued on its financially questionable diversification strategy,
Malaysian officials found themselves unable to let their voices be heard
despite being the largest minority shareholder.
So in light of everything, they decided that they had to make a move.
## The Dawn Raid
A dawn raid refers to a company's surprise takeover, where an acquirer purchases a large
block of shares right after the stock market's opening bell so to clear the magic 50.1% mark.
Malaysia’s dawn raid of Guthrie had long been in planning. And it demonstrated deep familiarity
with how London's stock markets worked. The upside of a British education, I would say.
Guthrie, unlike its peers, was uniquely vulnerable to a dawn raid because its shares were widely
dispersed. PNB managed to find large blocks of Guthrie shares held by investors like the Kuwait
Investment Office and enlisted London bank NM Rothschild to negotiate for their purchase.
They struck a price - about 9 pounds per share - and on the morning of September 7th, 1981, they
announced that they had bought more than enough of the company’s shares to assume majority control.
By mid-day, Malaysia had won back control of what they considered to be the company’s
colonial legacy: A massive land bank containing over 200,000 acres of valuable plantation estate.
The whole scheme was entirely legal,
played by London's rules - which I reckon gave the Malaysians a great deal of satisfaction.
And Malaysia paid money for the shares they purchased, so I wouldn't call it stealing either.
## The Rest Fall in Line
Guthrie had been the leading British-owned plantation firm,
and its fall into Malaysian hands shocked the business community.
Management had no time to react and complained to the press of a backdoors nationalization.
London modified its rules to make such dawn raid takeovers in the future
more difficult. The Malaysian government called
this economic nationalism on behalf of the British and threatened other actions.
Nevertheless, the message had been delivered. Two other leading agency houses - Barlows and
Harrisons & Crosfield - waved the white flag. They entered in direct negotiations
and sold a majority share of their Malaysian operations to the government.
PNB eventually merged Guthrie's assets with that of the others it acquired
including Sime Darby to create the country's biggest plantation company.
The company would expand into other markets to become a large conglomerate.
The remaining European-owned plantation companies - much smaller - also sold themselves
to Malaysian-owned interests - including the aforementioned United Plantations in 1982.
However, friendlier relations between the Scandinavian-owned United Plantations and the
Malays led to more preferential timing and a very favorable price. The company remains a respected,
high-performing player in the palm oil industry to this day.
## Conclusion
These British companies walked away with a pile of money for their Malaysian assets. But after the
sale, hardly any of them spent or invested that money well. For decades, they were plantation
landlords tending to a passed-down legacy. What did they know about starting something new?
In the famous words of Michael Dell,
I reckon they should have shut it down and given the money back to the shareholders.
During the first days of the New Economic Policy, the old British agency houses complained
about the difficulties of finding bumiputra management candidates.
But the plantations did just fine after the British got the boot,
churning out immense profits at high growth rates for their new owners.
Fueled by exports of palm oil and later petroleum, real GDP in Malaysia accelerated to 7% each year
throughout the 1970s. Poverty rates drastically across the country declined.
Malaysia continued to welcome foreign investment - even from the UK - but only
if it was invested on their own terms. And the investors still came. From 1975-1980,
Malaysia was a top four destination for investment amongst developing countries. That
investment helped build refineries for palm oil and petroleum - adding value to the raw products.
Amidst of all this winning, what about the Indian plantation workers? The Guthrie Raid
spawned hopes of higher wages and changes in working conditions. This failed to occur,
as the plantation real wages in 2003 have stayed largely unchanged from what they were in 1975.
When the workers complained, the plantations and their Malay managers
imported workers from Thailand and Indonesia.
The Indian workers aged out of the system, and found themselves with little left.
Raiding the rich might have brought Malaysia's plantations back home,
but not every Malaysian benefitted from it in the same way.