Nov. 19 (Bloomberg) -- Karex Industries Sdn., the world’s biggest condom manufacturer, will expand capacity after selling shares next year, boosting Malaysia’s bid to rejuvenate its rubber industry amid competition from Thailand and Vietnam.
“Demand for condoms is continuously growing,” said Goh Miah Kiat, whose great-grandfather started the company as a grocery store on a Malaysian rubber plantation almost a century ago. “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 into exporting contraceptives. Their move up the value chain mirrors Malaysia’s as it seeks to shift from an agricultural base into more lucrative industries, ranging from latex medical gloves to petrochemicals, as part of a strategic move to escape what economists call the middle-income trap.
“When we got into condoms, it was pretty much a dirty word,” Goh, executive director at Karex, said in a Nov. 12 interview. “Today, things have changed. Asia is going to create a lot of demand because our population is very young.”
The Selangor-based company, which supplies the United Nations and markets including Brazil, the U.S. and China, is seeking funds through a share sale to double annual production capacity to 6 billion pieces, Goh said. The Southeast Asian country is the world’s biggest condom producer, according to the Malaysian Rubber Board.
The contraceptives business is helping Malaysia revive an industry it once dominated as rival rubber producers Thailand, Indonesia and Vietnam gain ground. The government is looking for ways to increase yields and commercialize new rubber products to rejuvenate a sector that accounted for about 6 percent of exports 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. “In two to five years’ time, we may fall behind India and Vietnam in terms of production.”
Malaysia natural rubber output may fall 4.6 percent to 950,000 metric tons this year, the Association of Natural Rubber Producing Countries said in a Nov. 9 report. That’s less than a third of top producers Thailand and Indonesia.
Vietnam could also overtake Malaysia this year to become the world’s third-largest grower, with production expected to surge 18 percent to 955,000 tons, the association said. India is not far behind with output forecast to rise 3.1 percent to 920,000 tons in 2012, it said.
Once a pillar of the economy, natural rubber has been eclipsed by palm oil in Malaysia after a global crash in prices in the late 1990s prompted many planters to abandon the commodity. As well as increasing production, some Southeast Asian neighbors have the advantage of lower labor costs, according to the International Rubber Study Group.
Automated rubber tapping would address Malaysia’s labor challenges, though may not be an economically viable for small planters, according to the group. Smallholders, or those with less than 40 hectares (99 acres), account for 95 percent of Malaysia’s production, rubber board figures show.
“On the plantation side, there is more investment going into the Mekong region in Cambodia and Laos,” Lekshmi Nair, Singapore-based senior economist with the International Rubber Study Group, said in a Nov. 12 interview. “More downstream investments are going to Vietnam and Indonesia. Malaysia has to compete with these countries. That’s a great challenge.”
Rubber for delivery in April gained as much as 2 percent to 253.4 yen a kilogram ($3,120 a metric ton) on the Tokyo Commodity Exchange, the highest level since Nov. 5, before trading at 252.6 yen at 5:0.8 p.m. Thailand, Indonesia and Malaysia, which account for about 70 percent of global supply, will meet next month to discuss ways to stabilize prices, Yium Tavarolit, chief secretary of the International Rubber Consortium Ltd., said last week.
Prime Minister Najib Razak unveiled a so-called Economic Transformation Program two years ago aimed at helping the country achieve its long-held target of achieving developed nation status by 2020. Malaysia risks being caught in a middle-income trap, no longer able to compete as a low-cost nation, nor having moved sufficiently up the value chain to take on high-income nations, Najib said at the time.
The middle-income trap describes economies that remain stuck 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 commercialize specialty rubber materials such as ekoprena and pureprena for use in products such as eco-friendly tires, according to an April report by the government’s Performance Management and Delivery Unit, or Pemandu.
The government also wants to encourage more value-added industries like condoms. The country is forecast to export 12 million kilograms of condoms valued at 320 million ringgit ($104 million) this year, compared with 10.9 million kilograms worth 277 million ringgit in 2011, government data show.
Companies including Top Glove Corp. and Supermax Corp. have already established Malaysia as the world’s biggest supplier of rubber and latex gloves. The government wants to increase the country’s global market share in this sub-sector to 65 percent by 2020 from 62 percent under its economic plan.
To help keep manufacturers like Top Glove and Karex supplied with sufficient raw material to grow, the authorities are handing out grants to smallholders to replant 40,000 hectares annually and plant 18,000 hectares of new rubber areas over the next five years, Pemandu said.
“We’re constantly looking at new markets,” Karex’s Goh said. This includes “developing countries such as the Commonwealth of Independent States, Eastern Europe and Latin America where we have less presence. We’ve embarked on a program to automate our processes.”
To contact the reporter on this story: Liau Y-Sing in Kuala Lumpur at firstname.lastname@example.org