Market and product

Karex Industries Sdn., the world’sbiggest condom manufacturer, will expand capacity after sellingshares next year, boosting Malaysia’s bid to rejuvenate itsrubber industry amid competition from Thailand and Vietnam.

“Demand for condoms is continuously growing,” said GohMiah Kiat, whose great-grandfather started the company as agrocery store on a Malaysian rubber plantation almost a centuryago. “It’s a very good time. With the company going public,additional funds could be raised for it to expand further.”

From trading rubber, the Gohs’ business evolved intoexporting contraceptives. Their move up the value chain mirrorsMalaysia’s as it seeks to shift from an agricultural base intomore lucrative industries, ranging from latex medical gloves topetrochemicals, as part of a strategic move to escape whateconomists call the middle-income trap.

“When we got into condoms, it was pretty much a dirtyword,” Goh, executive director at Karex, said in a Nov. 12interview. “Today, things have changed. Asia is going to createa lot of demand because our population is very young.”

The Selangor-based company, which supplies the UnitedNations and markets including Brazil, the U.S. and China, isseeking funds through a share sale to double annual productioncapacity to 6 billion pieces, Goh said. The Southeast Asiancountry is the world’s biggest condom producer, according to theMalaysian Rubber Board.

Rubber Revolution

The contraceptives business is helping Malaysia revive anindustry it once dominated as rival rubber producers Thailand, Indonesia and Vietnam gain ground. The government is looking forways to increase yields and commercialize new rubber products torejuvenate a sector that accounted for about 6 percent ofexports last year, according to rubber board data.

“We have to revolutionize the industry,” Salmiah Ahmad,the board’s director-general, said in a Nov. 12 interview. “Intwo to five years’ time, we may fall behind India and Vietnam interms of production.”

Malaysia natural rubber output may fall 4.6 percent to950,000 metric tons this year, the Association of Natural RubberProducing Countries said in a Nov. 9 report. That’s less than athird of top producers Thailand and Indonesia.

Vietnam could also overtake Malaysia this year to become theworld’s third-largest grower, with production expected to surge18 percent to 955,000 tons, the association said. India is notfar behind with output forecast to rise 3.1 percent to 920,000tons in 2012, it said.

Global Crash

Once a pillar of the economy, natural rubber has beeneclipsed by palm oil in Malaysia after a global crash in pricesin the late 1990s prompted many planters to abandon thecommodity. As well as increasing production, some SoutheastAsian neighbors have the advantage of lower labor costs,according to the International Rubber Study Group.

Automated rubber tapping would address Malaysia’s laborchallenges, though may not be an economically viable for smallplanters, according to the group. Smallholders, or those withless than 40 hectares (99 acres), account for 95 percent ofMalaysia’s production, rubber board figures show.

“On the plantation side, there is more investment goinginto the Mekong region in Cambodia and Laos,” Lekshmi Nair,Singapore-based senior economist with the International RubberStudy Group, said in a Nov. 12 interview. “More downstreaminvestments are going to Vietnam and Indonesia. Malaysia has tocompete with these countries. That’s a great challenge.”

Transformation Plan

Rubber for delivery in April rose 1.7 percent to 252.7 yenper kilogram ($3,108 a metric ton) as of 11.05 a.m. on the TokyoCommodity Exchange. Thailand, Indonesia and Malaysia, whichaccount for about 70 percent of global supply, will meet nextmonth to discuss ways to stabilize prices, Yium Tavarolit, chiefsecretary of the International Rubber Consortium Ltd., said lastweek.

Prime Minister Najib Razak unveiled a so-called EconomicTransformation Program two years ago aimed at helping thecountry achieve its long-held target of achieving developednation status by 2020. Malaysia risks being caught in a middle-income trap, no longer able to compete as a low-cost nation, norhaving moved sufficiently up the value chain to take on high-income nations, Najib said at the time.

The middle-income trap describes economies that remainstuck when the factors that contributed to strong early growth,such as low-cost labor, reach their limits and momentum slows.

To help regain its edge, there are plans to commercializespecialty rubber materials such as ekoprena and pureprena foruse in products such as eco-friendly tires, according to anApril report by the government’s Performance Management andDelivery Unit, or Pemandu.

Latex Gloves

The government also wants to encourage more value-addedindustries like condoms. The country is forecast to export 12million kilograms of condoms valued at 320 million ringgit ($104million) this year, compared with 10.9 million kilograms worth277 million ringgit in 2011, government data show.

Companies including Top Glove Corp. and Supermax Corp. havealready established Malaysia as the world’s biggest supplier ofrubber and latex gloves. The government wants to increase thecountry’s global market share in this sub-sector to 65 percentby 2020 from 62 percent under its economic plan.

To help keep manufacturers like Top Glove and Karexsupplied with sufficient raw material to grow, the authoritiesare handing out grants to smallholders to replant 40,000hectares annually and plant 18,000 hectares of new rubber areasover the next five years, Pemandu said.

“We’re constantly looking at new markets,” Karex’s Gohsaid. This includes “developing countries such as theCommonwealth of Independent States, Eastern Europe and LatinAmerica where we have less presence. We’ve embarked on a programto automate our processes.”