March 22, 2004

MIGHTY MOKHTAR STRIKES OUT

He was one of Mahathir Mohamed's closest business allies. Now a new Prime Minister has cut the mogul down to size

SEVEN MONTHS AGO SYED MOKHTAR Al-Bukhary sat in a modest teahouse on the outskirts of Kuala Lumpur and talked expansively about his business plans.

It was midnight, and as the 52-year-old Mokhtar cradled a mug of teh tarik and spoke in a soft voice, he hardly seemed the master of one of Malaysia’s most powerful business empires. He said he wanted to add a media division to his privately held company, which generates $4 billion a year in revenues from its ports, banking, and trading operations. And he predicted that Malaysia Mining, his flagship listed company, would triple in size in the not too distant future.

"We want to go to the international stock markets," he fizzed. "First Malaysia, then Singapore, maybe London, New York." How quickly things change. A favorite of Malaysia’s longtime Prime Minister Mahathir Mohamed (and a major political donor), Mokhtar suddenly found himself last fall without a patron in a country where business success has traditionally been built on good political connections and government largesse.

The new Prime Minister, Abdullah Badawi, who took office in November, has a different set of friends, and Mokhtar isn’t one of them. One of Badawi’s first decisions was to ditch a pet Mahathir plan to sell Mokhtar a controlling stake in the unfinished Bakun dam, a $1.5 billion hydroelectric project on the island of Borneo. Next came the shelving of Malaysia’s biggest public-works contract, a $4 billion deal to upgrade the railway system that Mahathir had handed Mokhtar in the dying days of his reign. The rail improvements were superfluous to national requirements, Badawi declared, and too expensive to boot.

The twin shocks couldn’t have been more damaging to Mokhtar’s ambitions, even though one of
Badawi’s top advisors insists, "It’s nothing personal." But the question many Malaysians are asking is
whether Mahathir’s favorite Malay businessman, a bumiputra from his own hometown and a benefactor to Islamic charities, is permanently on the outs.

The answer depends on how far Badawi goes in overturning the system of crony capitalism built by
his predecessor—a system that helped Malaysia’s economy grow rapidly over the past three decades
while lining the pockets of a chosen few. After just a few months with its new leader, corporate Malaysia is wising up.

For starters, Mokhtar’s harsh treatment has signaled that Mahathir’s era of cozy backroom deals is over. "Any new projects will be properly costed and open to general tender, and not just restricted to ethnic Malays," says the Badawi advisor.

Also gone is the easy government money that marked Malaysia under Mahathir. "It’s almost like Badawi’s ticking off items on an agenda," says Uday Jayaram, head of Malaysia research for Dutch banking group ING. "There is a breath of transparency blowing through this country that’s very refreshing."

Mokhtar isn’t the only one feeling Badawi’s heat. Consider Mahathir’s pride and joy, the Proton. With
generous state subsidies and high tariffs on imports, Malaysia’s national car built a 70% market
share. But Badawi has demanded that it wean itself off state aid and favors. With Malaysia negotiating regional free-trade agreements, Badawi has denied Proton a request to maintain high tariffs on imports for 20 more years. Another close Mahathir business ally, Abdul Khalid Ibrahim, chief executive of the state-owned plantation group Kumpulan Guthrie, was fired in December for poor results.

And in February, Malaysian-Chinese businessmen Eric Chia Eng Hock, also a Mahathir favorite and the CEO of state-owned Perwaja Steel, was arrested on embezzlement charges.

Mokhtar’s eclipse signals an end to the era of megaprojects as well. Mahathir summoned up a new capital, Putrajaya; a much-hyped Asian answer to Silicon Valley, the Multi-Media Super Corridor; and the world’s tallest buildings, Kuala Lumpur’s signature Petronas Towers. There were others too: a north-south freeway, a new airport, a Grand Prix circuit, a light-rail system for Kuala Lumpur, and Mokhtar’s own state-of-the-art Tanjung Pelepas container port near Singapore. Vanity projects some may have been, but they were the bedrock of Mahathir-nomics, each adding a few points to GDP growth.

Another plank of Mahathir’s platform was the New Economic Policy, a controversial affirmative-action program that provided commercial advantages to the majority Malay community over the more economically aggressive Chinese and Indian minorities. Contracts for the megaprojects were often awarded by fiat, and certain Malay businessmen, some with no track record, became tycoons overnight. "I am one of the persons who has benefited from the NEP," Mokhtar said last August, "but I am not a crony."

Mokhtar is not one of those lacking in business experience. He made his first money as a rice trader,
learning business skills by studying Chinese merchants as a teenager. "I basically then became a Chinese businessman," says Mokhtar, who is of Arab origin.

"I watched how they bought the rice, how they ran the store and the accounts, how they developed a feel for the quality of the rice." He formed his first company in 1976, borrowing $3,000 from a government agency to buy two trucks, and began extending his rice trade across northern Malaysia. By the late 1970s he had set himself up in the capital and, like many of Malaysia’s Chinese businessmen, bought himself a warehouse, trading sugar, tea, and rice from the street level while living on the floor above. "We did very well going for government contracts," he says.

By the early ’80s Mokhtar had expanded into shipping. He soon realized the potential of Johor, the southern Malaysian state that neighbors prosperous Singapore. Cultivating a local politician, he secured control over Johor’s main port.

That coincided with the acceleration of Mahathir’s infrastructure development plans. Envious that Singapore had a near monopoly on international shipping traffic in his own backyard, Mahathir made it a priority to build a port in southern Malaysia. Mokhtar’s success and political connections in Johor gave him a leg up. With Mahathir’s blessing (and as much as $1 billion in Malaysian backing), Mokhtar built Tanjung Pelepas on swampland just 30 minutes’ sail from Singapore. "I was given that project because I took the risk," Mokhtar says.

Now owner-operator, Mokhtar grabbed as much as 20% of Singapore’s port traffic by luring from Singapore global shipping giants Maersk of Denmark and Taiwan's Evergreen. Next in Mokhtar’s sights was Singapore’s Changi airport. He was planning to set up a lower-cost competitor in freight and passenger services at Senai, the airfield Mokhtar owns in southern Malaysia, a few miles from the city-state. "We want to give the Singapore passengers some choice," he told FORTUNE last year.

Those same Singaporeans, he suggested, could be transported on a light-rail system he wanted to build from Singapore to Senai—only 20 minutes from check-in downtown, with immigration procedures completed onboard.

Officially those plans remain in place, but Badawi seems to have other ideas. In January he made a state visit to Singapore vowing to put past differences behind the often sparring neighbors. Now the talk is not of taking on Singapore but of cooperation. A Mokhtar aide even suggests selling a slice of Tanjung Pelepas, still his principal project, to the Singaporeans, who had turned down a share when first approached in the mid-1990s.

Mokhtar wouldn’t talk to FORTUNE about Badawi’s moves, but aides say he’s taking things in stride.

He may have lost two massive deals, but state approval came through in January on a smaller, $98
million proposal to buy the scandal-ridden Bank Muamalat from a state-owned investment agency. And Badawi recently visited Tanjung Pelapas. "I don’t think there is any specific intention to target Mokhtar," says ING’s Jayaram. "The loss of those deals was symbolic for Badawi, a broader attempt to set an agenda different from his predecessor."

Still, with so much uncertainty, Mokhtar has retreated from the limelight. "We are keeping our head down, consolidating," says Mohamed Sidik, CEO of Tanjung Pelepas. And being very nice to the new folks occupying Seri Perdana, the leadership palace in Kuala Lumpur.