There was a two-pronged strategy: to go into aerospace manufacturing and at the same time, to unlock the value of the land that we have had for some time in Serendah.” — Wafi. Photo by Mohd Izwan Mohd Nazam/The Edge
WHEN UMW Aerospace delivered its maiden Rolls-Royce engine fan case last November, it officially heralded UMW Holdings Bhd’s emergence as an aerospace manufacturer. But the delivery also marked a critical milestone for the group’s lesser known UMW Land division, which is driving its maiden venture into property development.
In a nutshell, the fan case plant is the critical test case for UMW Group’s planned high-value manufacturing (HVM) park that seeks to monetise its 861-acre land bank in Serendah.
“There was a two-pronged strategy: to go into aerospace manufacturing and at the same time, to unlock the value of the land that we have had for some time in Serendah,” says Dr Wafi Nazrin Abdul Hamid, UMW Land president.
He adds that the property play was not a reaction to the aerospace venture, clarifying that both ventures were decided on simultaneously by the board several years ago.
The plan is to develop the Serendah land into a hub for high-value manufacturers, particularly but not exclusively aerospace.
UMW Land declined to provide an estimated gross development value but says the development will likely span 10 to 15 years.
In August 2015, UMW Aerospace and Rolls-Royce signed a 25-year agreement to manufacture fan cases for the latter’s Trent 1000 and Trent 7000 engines.
To kick-start the venture, UMW Holdings set aside RM750 million in 2016 as capital expenditure to get the plant up and running.
The fan cases from Serendah will be delivered to Rolls-Royce’s engine assembly and test facility in Seletar Aerospace Park, Singapore. The manufacturing agreement provides for a possible five-year extension.
Helping UMW Aerospace get the plant off the ground preoccupied UMW Land for the first year and a half after the signing, says Wafi, as it is an important benchmark for future investors thinking of setting up HVM operations in Serendah.
At the same time, it fine-tuned the master plan for the HVM park in collaboration with design, engineering and project management consultancy Atkins.
Overall, roughly 60% of the 861 acres is meant for industrial use, with 15% set aside for supporting commercial elements like eateries.
Another 20% is earmarked for mixed-use developments that could include residential elements further down the road while the rest will be for public amenities.
“Of the 861 acres, we are focusing on the southern part as the first phase, which is around 300 acres in gross land area,” Wafi tells The Edge.
Apart from housing the UMW Aerospace fan case plant, the southern portion is also where Bursa Malaysia-listed T7 Global Bhd is embarking on a RM200 million joint venture with the UK-based Kilgour Metal Treatments Ltd.
The metal treatment plant, the construction of which commenced early this year, is slated for completion by end-2019 and is expected to generate RM180 million in annual revenue at full capacity in three to five years’ time, T7 had said previously.
The T7-Kilgour JV is just a taste of investor interest. According to Wafi, UMW Land has spoken to roughly 100 or so interested parties in the past couple of years.
The interested investors are evaluated using an assessment matrix developed by UMW, which generally looks at various factors to gauge the cost-benefit of having a particular investor come into the HVM park.
The criteria include job creation that benefits Malaysians, value of investment and manufacturing processes involved. UMW Land also requires investors to begin construction within two years of signing to keep the momentum going.
“We have to be selective, so the matrix is like a filter. Some met the requirements and some did not,” says Wafi.
In turn, the HVM park fits into the national aspiration to become a leading aerospace nation in Southeast Asia by 2030.
According to the Malaysia Aerospace Industry Blueprint 2030 launched in 2015, Malaysia aims for the local aerospace sector to produce RM55.2 billion in annual revenue with over 32,000 high-income jobs.
The market is there — Southeast Asia is the single largest customer of aircraft manufacturers, according to Nomura Global Research last November.
Meantime, the global order backlog of commercial aircraft is nearly 10 years — the highest ever — the CAPA Centre for Aviation said in January.
In its latest 20-year outlook report spanning 2017 to 2036, The Boeing Co said 40% of its new plane deliveries over the next 20 years, worth US$2.5 trillion, will be to Asia-based airlines.
While regional neighbours are also increasingly interested in the aerospace sector, Malaysia’s advantages lie in an English-speaking population, well-educated talent pool and good infrastructure, says Wafi.
“For example, the Rolls-Royce fan cases are delivered to Seletar by truck over 350km or so, indicating their faith in our infrastructure,” he says.
That said, while aerospace is the key target sector for UMW’s HVM park, it is also open to other industries that require advanced manufacturing processes such as rail, medical equipment and pharmaceuticals.
The challenge, however, is attracting the right investors to set up shop. Ideally, UMW Land seeks to create an ecosystem of complementary HVM activities that support each other. That extends to possibly developing local small and medium enterprises that could play a supporting role to primary HVM operators in the park, says Wafi.
To sway potential investors, UMW Land is playing a role beyond the traditional landowner-cum-developer. It also plays a facilitating role to address concerns on available incentives and human capital, among others.
Hence, UMW’s aerospace venture was critical to show interested investors that setting up an HVM operation in Serendah was doable.
Among others, the UMW Aerospace experience indicated that the availability of high-skilled talent — a top concern among interested parties, according to UMW Land — can be addressed, says Wafi.
In the UMW Aerospace case, UMW Land worked with the aerospace arm of Majlis Amanah Rakyat (MARA) to provide specialised training for the staff.
Working with the Malaysian Investment Development Authority (MIDA), among other agencies, UMW Land also facilitates talks between potential investors and relevant government bodies in terms of specific incentives being sought.
These would be on top of the usual basket of incentives such as pioneer status, reinvestment allowance and specific import duty exemptions.
UMW Land is also in the midst of negotiating some incentives for the project itself, Wafi tells The Edge.
While UMW Land seeks to court HVM players, its Serendah land also opens up opportunities for a different type of investor — property.
At present, UMW Land is selling parcels of its Serendah land to investors looking to establish HVM operations, although it has not disclosed past transaction values.
However, Wafi says many foreign investors prefer to lease instead. “Especially from a risk management perspective, you don’t want to be encumbered with assets in a foreign land, so they sometimes want to lease. We can sell to them but if we need to come in and lease, we can arrange it as well.
“So we are also talking to other parties at the moment on how we can provide that solution. That means either we ourselves own the land or another entity owns the land, and lease to the investors.”
Whichever way the cat is skinned, it may provide some boost to UMW Holdings’ earnings.
While it did not disclose past land transaction values in Serendah, UMW Holdings’ latest annual report indicates that a 732.38-acre parcel in Serendah — forming the bulk of its overall land bank there — carries a book value of RM74.49 million and had not been revalued since 1995.
Looking beyond the investments, UMW Land will eventually transition from developer to property manager for the park, says Wafi.
That includes taking care of security and access to the HVM park, common areas and other amenities for a fee.
Accessibility and security are especially important to HVM investors given the sensitivity of the activities and confidentiality involved, UMW says.
Another factor high on investors’ radar screen is having Industry 4.0 capability at the park, Wafi says. In a nutshell, that refers to automation and data exchange technology in manufacturing to improve efficiency.
“So we are already talking to some telecommunications providers and they want to partner us for the area to be Industry 4.0-ready. We are in the midst of finalising the deal,” says Wafi.