By looking at the logo, what is the first word came
to your mind? Well, the logo is one of a sugar refinement companies in Malaysia
which is Central Sugars Refinery (CSR). CSR was established in 1965 under the
name of “United Malay State Sugar Industries” with a starting capacity of 150
metric tonnes a day. Now, after decades had pass, it has a melting capacity of
1,500 metric tonnes a day. CSR is located at Batu Tiga, Shah Alam in Selangor. The
sugar refinement industries can be classified as oligopoly. There are very few
of sugar refinement companies in Malaysia whereas there are many buyers or
consumers. In this industry, there are only three well known companies
consisting of Central Sugars Refinery (CSR), Gula Padang Terap (GPT) and
Malayan Sugar Manufacturing (MSM).
Oligopoly is a market dominated by a
few large producers of a homogenous or differentiated product. Oligopoly has
considerably control over their prices however each producer must consider the
possible reaction of rivals to its own pricing, output and advertising
decision. This industry has a huge barrier to entry for a new player. They can
prevent new competitor to enter the market easily or make it difficult to enter
the market. There are two key features of an oligopoly sugar refinement in
Malaysia.
First of all is the barrier to entry. There are ten
barriers of entry such as economic of scale, network economies, economic of
slope, product differentiation and brand loyalty, lower cost for an established
firm, ownership of or control over wholesaler or retailer or key inputs, legal
protection, mergers and takeovers, aggressive tactics and intimidation. The
four barriers to entry that relate to CSR are economic of scale, product
differentiation and brand loyalty, legal protection and mergers and takeover.
In term of economic of scale, there are three firms
in sugar refinement industry and all the three firms (CSR, GPT and MSM) if one
of them decides to charge it average cost, this will make it difficult for a
new firm entrant the market. Sugar refinement industry is supplying half the
industry output, they would face the demand curve to shift leftwards (refer to
graph 1). Next is the product differentiation and brand loyalty. For instance,
the three firms have a clearly differentiated product which the consumers will associates
the product with the brand. Hence, it will be a difficult for a new firm to
enter the market and in most cases brand loyalty might reinforce other barriers
too. As for the legal protection, all the three firms are under government
supervision and they are registered as public listed company. Lastly for
barrier entry is the merger and takeover. For example, CSR has been facing two
maneuvers. First was in 1968 where a corporate maneuver resulted in the
takeover of the Company by Malayan United Industries Berhad (known as MUI).
Subsequently, in early 1983, CSB was de-listed from the KLSE Main Board due to
a corporate maneuver by Perbadanan Nasional Berhad (PNB) but currently the
holding company is Tradewinds (M) Berhad, a public-listed company on the Main
Board of Bursa Malaysia.
Graph 1
The second key features are interdependence of the
firm which meant they can be mutually independent or interdependent where each
firm action will affect each firm rivals. For example, if CSR decide to lower the
price of sugar and the demand is higher than GPT and MSM, it will affect the
sales of GPT and MSM. In this context, according to “kinked demand theory”
(refer graph 4), the demand curve is made of relatively inelastic demand curve
and relatively elastic demand curve. For instance, if CSR decided to increase
the price, it will be elastic and when CSR decreases the price in the other
hand, it will be inelastic.
Graph 4
Graph 2
Furthermore, CSR is a company that is in a long run
(refer graph 2). In year 2010, domestic and export market sales has grew by 5%
to 25%, respectively where CSR attributed the good sales performance by the
ability of the company to adapt the growing need of the market. CSR profit
before tax also had double to RM266.3 million from RM135.0 million in 2009. However
in 2011, CSR profit before tax has declined by 8.4% to RM244.1 million and this
is due to higher cost of production and other operating expenses.
Besides the above factors, the sugar industry is a
highly regulated and the price of sugar in Malaysia is set by the government. Government intervenes are via subsidies and
price ceiling. Price ceiling is the maximum legal limit that the government
allows the distributor to charge for a product or services. Basically,
governments control the prices of essential products so that the unfortunate
would be able to afford and governments want to treat everyone to be equal and fair.
However in the long run, government is planning to removes sugar subsidies due
to majority citizens of Malaysia have diabetes. This is one of the actions
taken by the government as reported in the Star newspaper in 2012.
Graph 3
Based on Graph 3, in 2013 the price of sugar with
subsidies is RM1.60 and 2012 on the other hand is much higher which is RM2.30. The supply has shift downwards due to
subsidies while on the other hand, price ceiling is also been applied by the
government. Not only that, when subsidies are imposed, supply and consumer
prefer to be more inelastic in order to gain more from the subsidies. Besides,
when there is a price ceiling, a shortage will occur and to overcome this, the
government must ration the product.
Another key factor is the determinant of demand and
supply of a sugar. There are a number of determinants of demand and supply for
sugar. Determinant of demand are taste, income, number of buyer, price of
related goods and consumer expectation. First, taste is a favorable change in
consumer behavior (preferences) for a product. For instance, increasing demand
of dessert or sweet drink will directly increase the demand of sugar for
beverage companies or bakers. Second is income and number of buyer. A rise in
income causes an increasing in demand as more people can afford to buy dessert.
As sugar can be categories under inferior goods, it does not inversely relate with
money. The increase in the number of buyers or consumers in a market is likely
to increase the demand. Third is price of related goods. Sugar can be
categories under complementary goods where most food and drinks needed sugar to
make them taste better. But there is a substitute for sugar which is honey.
Nowadays honey is slowly been implemented in a healthy lifestyle.
Lastly, there are also determinants of supply of
sugar. First changes in taxes and subsidies. Business or supplier treat taxes
as a cost where subsidies and taxes have reverse relationship. If the
government subsidized the production of goods, it in effect will lower the
producer or supplier cost and helps to boost supply. Second, changes in
technologies will help the supplier to produce more goods and increase their
supply. Lastly is change in producer expectation. For example price of sugar is
currently being subsidized by the government and that is why it is quite cheap.
However, if government decides not to subsidize sugar anymore, this will make
the price of supply higher and will affect the demand of the sugar itself.
In conclusion, the sugar industry is a highly
regulated industry where the government play a major role by providing
subsidies and controlling the price. Therefore, it has few key producers to
enable the government to manage and regulate the industry. This factor is the
main factor for the barrier to entry as any new producer need to get approval
from the government. Since sugar is a necessity product, the volume of demand
is very much predictable unless during festive session such as Hari Raya or
Chinese New Year where there is a sudden increase in the demand of sugar for
people to make cookies and other traditional foods. In term of the sugar
consumption, there is a concern from the society at large on the increasing
number of obesity in Malaysia. On that note, there are campaigns to promote
reducing the sugar intake for a healthy lifestyle.
References :
McConnell, R., Brue, L., Flynn, M., Grant, R (2012) Global
Edition, McGraw-Hill Irwin.
Bursa Malaysia, Tradewinds Annual Report. Malaysia. (2009)
(2010) (2011) (2012) (p 59 and above) (Accessed 21 October 2013)
Central Sugars Refinery (CSR), (2008). Available from
http://www.central-sugars.com.my/about.htm (Accessed 19 October 2013)Sloman, J,
Wride, A, Garratt (2012) Economics. 8th ed. Global, Pearson
Ruban, A., The Star Online : Muhyiddin – Removal of Sugar
Subsidy a possibility in the long run term (2012). Available from http://www.thestar.com.my/News/Nation/2012/02/04/Muhyiddin-Removal-of-sugar-subsidy-a-possibility-in-the-long-term.aspx
(Accessed 22 October 2013)
Shah Anup, Globl Issues : Sugar (2003). Available from
http://www.globalissues.org/article/239/sugar (Accessed 21 October 2013)
Wei See, C., Freedon of Expression, Fairness in Articulation
: Industry rep questions ‘high’ price of subsidized sugar (2013). Available
from http://www.fz.com/content/industry-rep-questions-high-price-subsidised-sugar (Accessed 20 October 2013)
( This blog is for assignment purposes)
