The Malaysian Plantation Industry:
A Brief History to the mid 1980s
HENRY S. BARLOW
Southdene Sdn Bhd,
P O Box 10139, 50704 Kuala Lumpur, Malaysia.
This paper sets out in brief the history of the plantation industry from its earlier beginnings when Penang was annexed in 1786 through to the completion of Malaysianisation by the end of the 1980s: almost exactly 200 years.
HISTORY TO INDEPENDENCE
Crops
(a) Early Crops
The history of the Malaysian plantation industry falls thanks to the very different backgrounds of Peninsular and East Malaysia into two clearly defined divisions.
The first permanent British colonial settlements in the Malay Peninsula were in Penang(1786), Singapore(1819) and Malacca which was finally ceded to the British in 1824. Malacca had earlier been occupied by the Portuguese (1511) and the Dutch from 1641. All these settlements, Portuguese, Dutch and British were essentially driven by trade. Malacca during the seventeenth and eighteenth centuries was regarded by the Dutch as an important entrepôt, crucial to control of the highly lucrative trade in spices from the Dutch dominated Moluccas. Tomé Pires famously stated: ‘Whoever is lord of Malacca has his hand on the throat of Venice.’
Similarly Penang was settled by the British East India Company (EIC) in 1786 chiefly to act as a base and refueling stop for the EIC’s increasingly lucrative trade with China, and as a counterweight to Dutch influence in Malacca. Similar considerations motivated Sir Stamford Raffles when he established Singapore in 1819. The fact that Singapore was specifically established as a free port ensured its almost immediate commercial success as a key entrepôt for South East Asia, rapidly eclipsing both Penang and Malacca.
Given the intense interest in the spice trade in the eighteenth century, it was not surprising that many of the early Penang settlers, who had arrived primarily in pursuit of trading opportunities, took to planting (almost as a hobby) pepper, gambier, spices together with coconuts, pineapples, sugar, coffee, cocoa and tapioca. In general these enterprises seldom if ever made consistent profits. Essentially these planting efforts were undertaken by rank amateurs, whether European or local. However it should be noted that this was the first time, at least within South East Asia, that such cultivation was being undertaken within the security of a legally enforceable system of land tenure. This was to have important ramifications later in the history of the industry as will be seen.
Similar, largely amateur attempts at cultivation of various agricultural crops accompanied the early development of Singapore. Malacca made a name for itself in the cultivation by Chinese of tapioca, a crop which dramatically depleted soil fertility and left in its wake huge areas of derelict scrub and lallang (Imperata cylindrica). These areas of waste land became an increasing matter for concern to the authorities as they expanded into the neighbouring states of Negeri Sembilan and Johore.
Of the various crops mentioned above, the most notable initiatives were with sugar and gambier. Sugar planting developed in Province Wellesley on the Peninsula opposite Penang, after that territory was added to the Penang concession in 1800. The Chinese were the first to develop sugar, but, partly thanks to an extension in 1845 of the territories covered by the UK Sugar Act of 1835, it subsequently proved attractive to European investors.
A number of well known European families in Penang began to invest in Province Wellesley. Relatively sophisticated capital equipment was needed to extract and purify the sugar. This proved expensive and provided the impetus to the European investors to employ professionals for the first time in large scale tropical agriculture in the Peninsula. However day to day management of the cultivation was typically left in the hands of Chinese contractors.
After the British had firmly established their influence over Perak in the mid-1870s, in the wake of the murder of the Resident, JWW Birch and the ensuing Perak War, sugar estates also began to be opened in Perak, particularly in the Kerian area, and Lower Perak. By 1900, 260,000 ha had been alienated for sugar planting in Province Wellesley and Perak, although it was estimated that only one third of this was in cultivation.
The rapid decline of the sugar industry after 1900 can be attributed to the enthusiasm for planting rubber which developed at the time (see below) and the conflict of interest which arose when the state governments became committed to major expenditure on irrigation schemes for rice cultivation by Malay smallholders. Sugar being essentially a crop requiring dry soil was not compatible with the high water requirements of rice.
Gambier, grown largely together with pepper, mostly by the Chinese in Singapore and later extending to Johore and further north in the Peninsula proved economically significant in the middle and later years of the nineteenth century. Significant commercial cultivation of both crops dwindled by 1900, once again thanks largely to the enormous profits available from planting rubber.
From the 1870s onwards, till the turn of the century, coffee became an increasingly important crop on the west coast of the Peninsula. Sporadic attempts to grow coffee earlier in the century had generally failed largely due to lack of planting expertise and wild fluctuations in coffee prices on the world markets, not to mention sustained competition from coffee produced by the Dutch in Java.
In the middle years of the century there had been a boom in coffee planting in Ceylon (Sri Lanka). However this had collapsed in 1869 with the appearance of a fungus, Hemileia vastatrix of African origin. This devastated the Ceylon industry. As a result a number of European planters from Ceylon appeared in Malaya, hoping to find available land, free of this fungus to plant with coffee.
Such pioneers included Heslop Hill, Ambrose Rathborne, FV Toynbee and others who were eventually to become leaders in the burgeoning rubber industry. Their early successes were sporadic, but in 1890 a minor coffee boom developed partly as a result of disruption in world the supply of coffee from Brazil when slavery was abolished. The most successful estates proved to be those where access was easy, in Selangor, areas around Klang and Kuala Lumpur, in Negeri Sembilan areas near the coastal village of Lukut, now Port Dickson, and in Perak in the area of Matang and Lower Perak.
The boom was assisted by an official government policy, which initially offered large grants of land on very favourable terms, in an attempt to diversify state revenue from mining, which was widespread in all three states. However there were noticeable delays in developing concessions thus granted, and it was not long before government officials realised that there was a considerable element of pure speculation involved. This resulted insignificant tightening of the terms of the leases issued.
Finally the fungal disease, H. vastatrix caught up with coffee in the Peninsula, appearing first in 1894. Thereafter it spread widely and devastated the crop, assisted by outbreaks of larvae of the Coffee Clear Wing Hawkmoth, Cephonodes hylas. Crows were introduced to Klang at this time in the hope that they would eat the larvae. Instead they became a pest themselves. As a result by 1905, enthusiasm for rubber planting had effectively swept away coffee as a plantation crop in the Peninsula.
However, before leaving this crop, we should note that the Ceylon coffee planters who migrated to the Peninsula brought with them agricultural expertise and a disciplined approach to the cultivation of tree crops. This, together with stable conditions, and the rule of law on the west coast of the Peninsula, together with rapidly expanding infrastructure in the form of roads and railways, laid the foundations for success of the rubber industry. All the same a serious shortage of labour, to be dealt with later, became evident. It still haunts the Malaysian plantation industry, well over a century later.
(b) Rubber
Towards the end of the nineteenth century considerable efforts were made to investigate the sap of several species of tropical trees with a view to producing rubber. Demand for such a substance was rising initially because of the need to insulate underwater telegraphic cables. Among the species whoselatex was considered potentially suitable for cultivation were several species of fig (Ficus spp.) and gutta percha (Palaquium gutta) (from which the first golf balls were made). For various reasons, none of the trees native to South East Asia were considered suitable. In the case of gutta percha for instance, problems in extracting the latex led to wholesale felling in Singapore and on the west coast of the Peninsula. This threatened to drive the tree to extinction.
Hevea brasiliensis from which latex is now tapped to producetherubber of commerce originates in the rainforests of Brazil. The qualities of its latex had been known to local tribes for centuries. However in 1736 the Royal Society of Sciences in Paris sent Charles de la Condamine on a research expedition to South America. The geophysical researches which he was supposed to undertake were rapidly overtaken by his interest, as a naturalist, in rubber and its uses, as he discovered from local tribes. On his return, his discoveries generated significant interest in France and then United Kingdom (UK). By 1827 a regular export market in rubber had developed from Brazil. One problem however remained: untreated rubber was not suited to extremes of cold, when it became hard and unbendable, and extremes of heat, when it became sticky and malodorous. It was not till 1839 that the American, Charles Goodyear discovered that vulcanisation, i.e. combining rubber with sulphur, overcame these disadvantages.
The stage was thus set for the commercial exploitation of rubber. A combination of foresight and strategy by Clements Markham of the India Office and Sir Joseph Hooker, Director of the Royal Botanic Garden, at Kew, London led to the commissioning of Henry Wickham to collect Hevea seeds in Brazil. These by various stratagems were sent to Kew. Seedlings from Kew arrived via Ceylon in Singapore in 1874. Nine of these seedlings were sent to Sir Hugh Low, then Resident in Perak, where they were planted in the Residency gardens at Kuala Kangsar. Low, an enthusiastic and knowledgeable naturalist, lavished considerable care and attention on them.
Successive Directors of the Singapore Botanic Gardens half heartedly maintained and enhanced the supply of rubber plants and seeds, until the arrival in 1888 of Henry Ridley. He remained there till 1911, and devoted much of his substantial energy into encouraging planters – and anyone else who could be persuaded, into planting rubber seeds in their gardens. He had thevision to see that rubber would become ever more important in the world economy, more particularly with the advent of the motor car requiring rubber tyres, at the turn of the century. Ridleywas derisorily nicknamed‘Mad Ridley’ because of his enthusiasm for rubber. However when the coffee crop failed at the turn of the century, many planters had cause to thank him, because, if they had not planted rubber seeds in their own garden, they had neighbours who were in a position to supply such seeds for what, in the first decade of the twentieth century was to become a massive rubber boom.
In addition to promoting the planting of rubber, Ridley was also responsible for developing the first systems of tapping the bark of the rubber trees in a way which maximised the latex yield and minimised the consumption of bark in so doing: a crucial measure of the efficient management of a rubber planting. Early attempts had consisted of random slashing of the bark to produce a flow of latex. He was also responsible for developing economic planting procedures, in terms of the ideal number of trees per acre, as well as processing methods, for coagulating the latex, followed by milling and smoking, to produce what came to be known as Ribbed Smoked Sheet (RSS) of different grades.
A measure of the extent of the rubber boom can be judged from the following figures of planted rubber acreages. A mere 345 acres were reported as planted with rubber in the Federated Malay States in 1897, whereas by 1905, these figures had increased to 43 435 acres. Although the vast majority of this increase was on European (chiefly British) owned estates, there was a small number of Chinese pioneers, led by Tan Chay Yan, with a modest estate of 43 acres as early as 1895.
The area planted with rubber in the Peninsula by 1922 further increased to 2,260,000 acres, mostly on the west coast of the Peninsula where transport and access was best. This included the areas planted by smallholders, as much as 10 per cent of the total Peninsula by acreage by 1910. By 1922, the Peninsula accounted for 53 per cent of all rubber planted in India, Ceylon and throughout South East Asia.
The massive expansion of acres planted with rubber by what essentially were European, mostly British families inevitably resulted in a shortage of capital. The raising of further capital was achieved by the flotation in London of a large number of joint stock companies. These totalled 258 between 1903-1912, variously capitalised at between £1 - >£50 per acre. The variation in capitalisation reflected rubber prices which fluctuated during this period between just under 4 shillings to over 9 shillings per pound. The smaller Chinese rubber enterprises, incorporated locally, or operating as family partnerships had less ready access to capital. As a result the Chinese operations remained relatively small, compared to those under European control.
These developments determined the structure of the industry up until the implementation of the New Economic Policy in the mid-1970s: quoted and often relatively small companies incorporated in UK owning and operating estates in the Peninsula, and, to a lesser extent in what was until 1963 British North Borneo (now Sabah). The day-to-day management of the estates was entrusted to managing agents, based for the most part in Singapore, Kuala Lumpur and Penang. These were sometimes independent, and sometimes affiliated with the offices in London which provided secretarial and corporate services to the London companies.
In some cases the managing agents also developed import/trading operations, which benefited from a near-captive market on the estates with which the agents were associated. This was a source of criticism in some circles. In the early years at least almost all rubber sales were managed from London, which was the centre of the world rubber market. The exceptions were the off-grades of cup lump (latex from the previous tapping which had dripped and coagulated in the tapping cup after the mid-morning collection,) and tree lace (the coagulated latex on the tapping cut itself). Such lower grades were invariably sold locally by the agents. Agricultural supervision was provided, in the early years at least, by independent agricultural advisers, reporting in theory direct to the London board, and known as Visiting Agents (VAs). Inevitably the local agents gradually developed this service, using senior or retired planters of proven skill and experience in estate management.
While the flotation of these companies greatly expanded the number of largely British investors in Malaya’s rubber industry, the pattern of leaving day-to-day management in the hands of the UK based secretarial companies and Malayan based agents led to an ever greater concentration of control in the hands of a small number of able and aggressive entrepreneurs who came to head these companies. The names of Arthur Lampard in Harrisons and Crosfield, and Sir John Anderson followed by the controversial Sir John Hay in Guthries spring to mind.
One of the few successful non-British investors at this time was Henri Fauconnier, a Frenchman who established extensive rubber estates in northern Selangor in the years up to the outbreak of the First World War. They were subsequently combined with Belgium interests to form the Socfin Group. Fauconnier himself achieved distinction with his novel Malaisie (Soul of Malaya) which won the Prix Goncourt in 1930. It remains a remarkable study of the Malay psyche. Interestingly, the other literary product of distinction to come from twentieth century Malaysian plantation industry was written by Pierre Boulle, at one time also a planter with Socfin. His Sacrilege in Malaya is a light hearted, but scarcely fictional account of life on a Socfin rubber estate.
A further significant development in improving latex production lay in the adoption of budgrafting. Originally developed in the Netherlands East Indies (NEI), it was first practiced in Malaya in around 1920, and became widespread by the end of the decade. Henry Gough, fresh from World War I pioneered the research, ably assisted by his wife Kathleen, who had learned the technique and passed it on to a Chinese foreman. Shortly afterwards Gough sold his estate called Prang Besar (Great War) to Harrisons & Crosfield, who maintained and expanded it to produce some of the best and highest yielding Malaysian clones. It now lies under the Kuala Lumpur International Airport.
As the 1950s advanced, a gradual process of consolidation became evident among the many estates companies. Some of the original European families decided to reduce their financial commitments due to the Emergency, others due to the prospect of Malayan independence. In almost all cases this resulted in a strengthening of the Secretarial and/or Agency house control. Moreover the Bank of England in the late 1950s actively encouraged mergers, to create large corporate entities which would attract investment from pension funds, insurance companies and unit trusts.
The heydays of the early rubber industry were 1910-1913, with high rubber prices and massive expansion. The years which followed witnessed a steady slide in average rubber prices, from a little over 2 shillings per pound up to 1919, then a sustained slump in prices, to as low as 2-3p per pound in the great depression years 1931-1933. Prices then recovered to just over 1 shilling per pound by the outbreak of World War II in South East Asia in 1941. This was largely due to strong demand from American producers anxious to maximize their rubber stockpile in anticipation of the outbreak of war.
The industry responded to the drop in prices with significant retrenchments, and, after earlier abortive attempts, in April 1922 with the Stevenson compulsory restriction scheme, backed by the British government. This aimed to restrict rubber production in the hope of increasing prices. These efforts proved ineffectual, due to problems in restricting smallholder production, and more particularly failure to obtain support for the scheme from the Dutch government, controlling the NEI, where costs of production were generally lower.
From 1934 to 1938 a further restriction scheme, the International Rubber Regulation Agreement was instituted. This forbade any new planting of rubber during the period, and limited rubber replanting to 5 per cent per annum on any estates or smallholding. Since the economic life of the rubber tree was deemed to be 30 - 33 years after planting, this was not a serious limitation in the rubber sector. The scheme had the added advantage of Dutch support from NEI, and although it gave rise to certain tensions, it was regarded as an improvement on the Stevenson scheme.
The outbreak of WWII in South East Asia against the Japanese resulted in the burning of massive stocks of rubber, to prevent them falling into Japanese hands. Production plummeted due to general disruption and the forced recruitment of huge numbers of estate workers to work on the Thai railway. Although the estates were not maintained and became very overgrown, the 3 - 4 years rest fromtapping invigorated the trees, which yielded handsomely once tapping resumed after the war.
The postwar years were overshadowed by the outbreak of the communist Emergency in 1948 with the murder of expatriate planters in Sungei Siput, Perak. The estate managers and tin mine managers in outlying areas bore the brunt of the Emergency, in which 58 planters lost their lives. This dire situation was only reversed when in 1952 Churchill appointed Sir Gerald Templer as High Commissioner. Templer recognised that the conflict with the terrorists could only be won by winning the war of the hearts and minds of the people. He and his wife set out with very considerable success, and often in ways regarded as unconventional by the British administration to win the affection of the public. Ironically the industry, and thus the government in its allocation of resources to combat the Emergency was helped by the surge in prices for rubber caused by the Korean War in the early 1950s.
A key aspect of Templer’s hearts and minds campaign was his assurance that the British government wished to ensure that a fully independent Malaya would be able to resist Communist threats. This astutely harnessed Malay nationalism, a growing force since the 1930s, to the successful resolution of the Emergency, although the final conclusion was not to come till 1989.
Independence for the Malayan Federation was achieved on 31 August 1957, significantly earlier than many in the British establishment had anticipated. With it came a shift in emphasis within the plantation industry, from rubber to oil palms.
(c) East Malaysia
The expansion of the Federation in 1963 to include Sabah (formerly British North Borneo), Sarawak and briefly Singapore calls for a consideration of East Malaysia’s very different earlier plantation history.
In Sarawak, under the rule of the Brooke family since 1841, foreign agricultural investment was discouraged, although pepper and gambier were grown extensively by the Chinese in the middle of the nineteenth century, and in a small way, sago. However smallholders were given every encouragement to plant rubber. This state of affairs continued till the Brookes handed over Sarawak to the Colonial Office at the end of World War II.
Sarawak’s policy contrasted with that of British North Borneo, which fell under the control of The Chartered Company of British North Borneo in 1881. The Company was supposed to return a profit to its shareholders, and although it did not generally itself become involved in commercial ventures, it had a vested interest in encouraging others to do so profitably. Agricultural development started with tobacco, on the east coast of Sabah, largely under Dutch and German management. However, after peaking in 1890, the tobacco industry in British North Borneo, which produced around 2 million lbs of tobacco per year from an alienated though not necessarily planted area of 235 000 acres fell into decline. This was caused by the passing of the McKinley Act in USA in 1891, imposing a high discriminatory tariff against imports of foreign tobacco, in order to protect home production.
In the early years of the twentieth century, British North Borneo embarked on planting rubber. This was encouraged by the construction of a rickety railway line from Jesselton, the capital (now Kota Kinabalu) up the Padas River gorge to Tenom, thus opening up large areas in the Interior Residency for rubber. This together with smallholders planting was, with timber, to form the chief source of revenue in the state, until, like Sarawak, the Chartered Company ceded control to the Colonial Office in 1946. With the advent of Malaysia in 1963, both Sabah and Sarawak joined the Peninsula states in what was to develop into an oil palm boom. Brazil failed to develop a comparable industry from its native grown trees, because Hevea brasiliensis is susceptible to a fungus, Oidium hevea (South American Leaf Blight) when grown as monoculture. So far both South East Asia and Africa have avoided this pathogen, at least in its fatal South American form.
(d) Oil Palm
The oil palm, Elaeis guineensis is a palm native to the tropical coastal areas of West Africa. The first palms to reach South East Asia were planted as ornamentals in Java and Sumatra in the middle of the nineteenth century. The first Malaysian commercial planting of 80 ha took place in 1917 under the supervision of Fauconnier on Tennamaram Estate north of Kuala Lumpur. The first oil palm factory was built on the same estate in 1922.
The early expansion of oil palm plantings was relatively slow compared to that in the NEI. By 1925 there were 3 400 ha planted. This rose to 20 500 ha in the next five years, and to 31 600 ha by 1941. This increase was very largely due to the planting of oil palm in Johore by Guthries, under the forceful Sir John Hay, together with Socfin’s expansion in that state. The nascent oil palm industry, like rubber, was hit by the financial depression of the early 1930s. To some extent this was addressed by developing bulk shipping for palm oil, as opposed to the earlier expensive wooden barrels.
A major technical advance was achieved by the oil palm industry in the late 1930s, but too late for practical application before WWII. This was the development by Guthrie’s Chemara Research Station through plant breeding which had been initiated in the Belgian Congo, of tenera seeds. This maximised the oil producing mesocarp, and the kernel, which produces a somewhat different oil, and minimised the thickness of the kernel shell, thus potentially increasing oil yields. At the same time, plant breeding efforts identified the ‘dumpy’ palm, as one which increases in height more slowly, thus facilitating harvesting of shorter palms for a longer period.
After the disruption caused by the war had been sorted out, by the mid-fifties, it became clear that the Emergency was unlikely to cause a change of regime in Malaya. Attention focused on both independence, and the threat which the rise of synthetic rubber, derived from the mineral oil refining process posed to the natural rubber industry. There had long been a realisation that the rubber industry constituted an enormous monoculture, which could be susceptible to plant pathogens such as South American Leaf Blight (SALB) which had prevented the development of an estate rubber industry in South America. Oil palms were increasingly seen as a diversification from rubber, more particularly as they thrived on low lying coastal soils. The newly independent Malayan government also favoured such diversification, and in 1959 set-up the Federal Land Development Authority (FELDA), whose aim was to settle landless poor (and generally Malay) on oil palm smallholdings throughout the country. The result was to open up vast areas of the previously untouched hinterland in the Peninsula and later East Malaysia. FELDA has come to be regarded as one of the major success stories amongst tropical rural resettlement schemes. In addition to areas run on an estate basis, FELDA also specialised in developing smallholder schemes. Each smallholder family was provided with a basic house and 10-15 acres of oil palm, planted and ready for harvesting. Each settlement scheme was run on estate lines, and the settlers worked on the scheme, or in the mill. From the monthly payment due to each settler for his fresh fruit bunches delivered to the mill, a deduction was made, fluctuating with the price of palm oil. This enabled the outlay on each settler’s house and 10-15 acres of palm to be fully repaid, often within 10 years. Indeed it proved so successful that in many cases settlers were able to send their children for professional education, to become doctors, lawyers, and accountants. This has left a residual problem of how to replant, and man such schemes in the second generation, after 25 years.
As may be imagined, the development by FELDA of what eventually totalled some 850,000 ha including 500,000 ha of smallholder schemes had a massive impact on the country and the palm oil industry. State governments also became involved, developing their own state land into major schemes of 5,000–10,000 ha, partly financed by Federal government grants, and implemented in the early years by the Agency houses who had expertise to clear and develop large areas of logged over secondary forest. Between 1975-1990, annual crude palm oil production rose from just over 1 million to over 6 million tonnes.
Labour
At least since the establishment of large scale rubber plantations in the early years of the twentieth century, up to the present day, the supply of labour to estates has been a serious problem.
When rubber estates were first opened, it proved impossible to recruit Malays from nearby villages, and estate managers were obliged to rely on recruitment of, chiefly, Tamils from southern India. They were regarded as best suited to estate life. Many such Tamil villages were afflicted by abject poverty and recruiters often transported whole village communities to the estates opening up on the west coast of the Peninsula. In certain areas Indians still form, if not the majority, then a substantial percentage of population in such areas. By contrast Chinese immigrant workers were generally brought in by Chinese businessman to work in the tin mining industry. The numbers of immigrant Indian workers fluctuated with the fortunes of the rubber industry until the Second World War. During the war the Japanese forcibly sent many thousands of such workers to work in inhuman conditions and often to their death on the Siam railway. Of those who returned alive, some were repatriated after the war to India, while others returned to the estates.
By the late 1960s, the Malaysian government, under pressure from significant levels of unemployment of Malaysians, introduced a policy of restricting employment to those with Malaysian passports and citizenship. Others, whose families had failed to obtain Malaysian citizenship were obliged either to return to India or face significantly increased bureaucratic hurdles getting their papers in order.
At the same time as the lower labour demands in oil palm estates converted from rubber put people out of work, the demand arose for large numbers of young, able bodied men capable of working as oil palm harvesters under hot and demanding conditions.
The end of Konfrontasi with Indonesia thus opened the way for a flood of Indonesian migrant workers both legal and illegal. In Sabah many migrant workers also came from the southern Philippines. In the following decades, Malaysian workers flocked to the comfort of air-conditioned factories set up in duty free industrial zones, to be replaced on estates by immigrants, chiefly Indonesian, but with an increasing admixture of Burmese Rohinggas, Cambodians, Indians and Nepalese. Overall the Malaysian plantation industry now depends 70 - 80 per cent on foreigners. This is an alarming state of affairs, particularly when one considers that in Indonesia, agricultural wages are now almost on par with those in Malaysia. It is clear that one of the major problems of the Malaysian plantation industry in the future will be securing adequate labour: exactly the same problem as the rubber industry faced 100 years ago.
Malaysianisation
On 13 May 1969 serious racial riots broke out, chiefly in Kuala Lumpur, leaving, by government admission, some 200 dead. Others consider this to be a significant underestimate. This was to deliver a major shock to the plantation industry. In response to the riots, the government set-up a National Economic Council to consider the ultimate reasons for the racial violence. The Council concluded that the chief reason was that although the Malays had political control over the country, economic control was divided approximately 60 per cent in the hands of foreigners, (this was largely due to foreign control of the plantation and mining industries), and some 40 per cent in the hands of the Malaysian Chinese. Malays owned less than 1 per cent. Under the New Economic Policy (NEP), formulated by the NEC, expansion was between 1970-1990, to be directed primarily into, or for the benefit of the Malay community, such that by 1990, the Chinese would retain their 40 per cent, but the Malays would increase theirs to 30 per cent, leaving foreigners with 30 per cent. Moreover Malays were to be promoted so that they comprised 30 per cent of the total at all levels of employment.
Coincidentally, but very fortunately, it was at about this time that extensive mineral oil deposits were discovered off the east coast of the Peninsula, and off the Borneo coast of Sabah and Sarawak. Petronas, the government corporation established to exploit these reserves at a time of rapidly increasing oil prices, helped provide central government with the necessary finance to carry out what amounted to a wholesale reconstruction of the plantation industry.
It rapidly became apparent that financial resources within the Malay community were totally inadequate to finance the Malaysianisation of the plantation industry at market prices. The government therefore established and financed a number of organisations to acquire on behalf of the Malay community such assets, at close to market value, generally in a time of favourable rubber and oil palm prices. FELDA, the Pilgrim Fund (Tabung Haji), the Armed Forces Pension Fund (Tabung Tentera), the National Equity Corporation (NEC) and the Employees’ Provident Fund (EPF) as well as state economic development corporations, were amongst the largest of the government organisations which spearheaded Malaysianisation. Malaysian groups outside the government, generally Chinese controlled, which also played a significant role in the Malaysianisation process were Kuala Lumpur Kepong (KLK), led by Tan Sri Lee Loy Seng, from a mining family in Ipoh. In the early 1970 he acquired control of the Kuala Lumpur Kepong group of companies, transferred its tax residence and place of incorporation to Malaysia and worked closely with the Malaysian government authorities to acquire stakes in targetted foreign plantation companies (notably the Highlands and Lowlands Group). Later, Tan Sri Lee Shin Cheng (no relation) acquired the Dunlop estates, and pursued a similar course, as did Tan Sri Lim Goh Tong of the Genting gambling group. They, after abortive negotiations with Harrisons and Crosfield, eventually bought up from Hong Kong the Kadoorie controlled Shanghai- Kelantan group. The Malaysian government authorities developed a number of measures to convince the boards of foreign controlled companies to Malaysianise. Amongst the first and most important were the establishment of the Capital Issues and Foreign Investment Committees. The first was headed by the redoubtable and formidable Tun Ismail Mohd. Ali, the first Malaysian governor of the Central Bank, the second by the suave and charming Raja Tan Sri Mohar. It was a classic case of ‘hard cop, soft cop’. Both committees were purely ‘advisory’. Any company contemplating any transaction in excess of RM1 million was required to seek their ‘advice’. Woe betide any company which failed to consult or heed the advice. Such advice was invariably to the effect that the transaction would only be approved on receipt of a plan, deemed by the two committees to be satisfactory, which provided for the change of place of incorporation to Malaysia, combined with a commitment to ensure 30 per cent Malay equity participation by 1990. This could involve raising further capital to be placed with one or more of the Malay organisations mentioned above, or sale of assets or shares. In all cases, asset and share valuations had to be at a price agreed by the Committees. This was generally agreed at a modest discount to market price. However at no stage was there any restriction on the repatriation of the proceeds overseas. This policy was to stand Malaysia in good stead in the late 1980s and 1990s, when foreign manufacturing firms were encouraged to invest in the country. They did so in the knowledge that earlier investors had been well treated.
Naturally enough, it took some time for foreign boards, based mainly in UK, to understand the reasoning behind this policy. They were significantly helped by two remarkable individuals. John Skrine was a lawyer, the founder and senior partner of Skrine & Co. He had spent his whole professional career in Malaya/Malaysia and on setting up his own firm had caused raised eyebrows amongst the British expatriate legal community by taking in, initially as trainee lawyers, and in due course as partners, the children of senior Malaysian politicians, notably Hussein Onn, son of the UMNO founder, Onn bin Ja’affar, and later himself Prime Minister and two sons of independent Malaysia’s first Minister of Finance, Tun Sri Henry Lee. He was thus particularly well qualified to bridge what otherwise might have been a dangerous gulf. Tan Sri Sir Claude Fenner, formerly Inspector General of Police (IGP) in Malaya up to 1963, had a deep involvement in Malayan intelligence activities during the Emergency. On his retirement, the London based Rubber Growers Association (RGA), which also came to look after the interests of oil palm growers, was instructed by the then Malaysian Finance Minister, Tun Tan Siew Sin, to appoint Fenner as its Special Representative in Malaysia, with quasi-diplomatic status. Tun Tan and his colleagues were anxious to retain in Malaysia the services of a popular and enormously knowledgeable former IGP. They did not realise what a key role Fenner was to play until his sudden death in 1978, in explaining to foreign investors the importance of complying with NEP, and to Malaysian leaders, that they should not press too far, too fast.
These two individuals played a remarkable and hitherto underestimated role in Malaysianisation of the plantation industry. It was against this background of facilitators, facilities and controls that Malaysianisation took place.
Guthries were the first to take modest steps towards compliance, by transferring certain of the estates to a Malaysian incorporated and quoted subsidiary in the early 1970s. The goodwill then generated was modified when it became apparent that they had intentionally transferred their less profitable properties to the company. This was compounded by the discovery that without consulting the Malaysian authorities, they had opened negotiations with a private Malaysian Chinese organisation. The response was slow in coming, but spectacular, for on 7 September 1981, Permodalan Nasional Berhad (PNB) headed by Tun Ismail Ali, conducted entirely legally, a dawn raid on Guthrie’s and established immediate control of the Group, to the consternation of the City of London.
Meantime there had been significant developments elsewhere. In the early 1970s, Sime Darby had an energetic and aggressive Chief Executive Officer in the form of Dennis Pinder. He greatly expanded what until then had been almost exclusively a plantation group into a conglomerate. He was already stalking the Highlands & Lowlands Group. Unfortunately however, about two weeks before a bid was to be announced, he was arrested in Singapore for theft of money from the company’s pension fund. He was subsequently convicted and served a prison sentence. This prompted Malaysian government interests to buy into Sime Darby shares. In 1976 the company held its Annual General Meeting in Kuala Lumpur, where representatives from Rothschilds, acting for Malaysian government interests voted out certain senior expatriate executive directors. Tun Tan Siew Sin was shortly thereafter appointed as the Group’s first Malaysian chairman.
The Highlands & Lowlands Group were sufficiently concerned at the prospect of being taken over, if not by Sime Darby, then by another group, that they followed the advice of their merchant banking advisors as well as Skrine and Fenner and moved to transfer tax residence to Malaysia. There had at the same time been significant purchase of Highlands shares on the London market by KLK and other Malaysian interests. The move was justified, to the UK Treasury, by the argument that the group controlled extensive land in the Klang Valley, which was ripe for development. These assets could never be realised at their full value as long as the Group failed to Malaysianise. The UK Treasury therefore agreed with Board a relatively modest sum of possible capital gains which were likely to be realised in the future if no steps were taken to Malaysianise, and discounted this to current values to produce a modest exit fee, on payment of which the group was allowed to move its tax residence. By this time, well over 50 per cent of its shares were Malaysian owned.
Unilever by contrast simply sold its plantation assets to Malaysian investors.
The last major group to Malaysianise was Harrisons & Crosfield. Protracted negotiations had been underway between the Board and Genting. However one of the largest UK shareholders in Harrisons was the M&G Pension Group, headed by one David Hopkinson. He had long been urging Harrisons and other companies owning Malaysian estates to comply with the NEP. He was invited to become chairman of Harrisons, and rapidly concluded a deal with PNB under which the parent London company retained 30 per cent of a Malaysian incorporated company, Golden Hope Plantations, to which all the Malaysian estate assets were transferred. Shortly thereafter and soon after he retired as Chairman the remaining 30 per cent was also sold to Malaysian interests.
CONCLUSION
This paper has traced the history of large scale agriculture from the earliest years after the settlement of Penang till the completion of Malaysianisation in the late 1980s, almost exactly two centuries later.
A full account of the Malaysianisation of the plantation industry remains to be written. Since that Malaysanisation, the industry has served the country well providing significant employment and substantial tax revenues. While today’s problems in the industry are far different from those of the 1980s, the plantation industry has the potential to contribute much more to Malaysia in the future.
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