Tiong Nam Logistics Holdings Berhad, one of the largest logistics companies in Malaysia who began as a small scale cargo business in 1975 is successfully recognized as the leader of the domestic logistics service provider (Ong, 2007). It has gone through a period of lack of capital, global economic recession and Asian financial crisis. Now, it is a listed company on the second board of Bursa Malaysia (formerly known as the Kuala Lumpur Stock Exchange) (KLSE). It has more than five subsidiaries and successfully expands its business to Singapore, Thailand, Vietnam and China. What is the market structure of Tiong Nam in Malaysia which makes it succeed in today market?
Monopolistic competition market structure is defined as a market structure with many firms selling products that are similar but not identical. According to information provided by yellowpages, there are approximately 350 transportation companies in Malaysia and Tiong Nam Heavy Transport & Lifting Sdn Bhd is one of the famous companies which practices a monopolistic competition market structure. As a result of insignificantly small share of market, Tiong Name has independence in making decison because its rivals will not react about it.
In this market structure, the companies are selling the similar services that they must make their service unique by providing certain distinguishing features. In term of physical differences, Tiong Nam uses orange color as their representative color for their heavy transportation as showed in figure 1. Their employees are also required wear uniforms provided as showed in figure 2. Besides that, Tiong Nam has also differentiated their service by providing special services such as e-Tracking which customers can track the status of their shipment online (Tiong Nam).
In this market, non-price competition exists between Tiong Nam and its rivals. Advertising is one of the most important marketing strategies applied to compete with each other. As showed in figure 1, name and website of Tiong Nam are written on its transportation body and as showed in figure 3, a large billboard is placed beside road. These large billboard have the most frequent chance to let people pay attention on it in the purpose of persuading consumer to consume this service. It also uses social networking such as YouTube, Facebook, Twitter and LinkedIn to advertise its service (Tiong Nam).
In this market structure, companies have limited influence on market price because they are providing close substitutes service. A company’s influence on the price depends on the consumers’ preference. With the success of product differentiation, Tiong Nam has established brand loyalty that clients would like to appoint it to deliver for big projects such as Delivery of Stainless Steel Tanks for Vinyl Chloride Malaysia, Delivery of Fuel Gas Heat Recovery System to East Malaysia and so on (Tiong Nam). Tiong Nam is able to charge a slightly higher price than other company will, but it does not raise the price too high because it may lead to loss of consumers.
Just as monopolists, Tiong Nam as a monopolistic competitor faces a downward sloping demand curve but its demand curve is more elastic as showed in diagram 1 because it competes with others who produce close-substitute products. When there is a slightly increase in price of service provided from P1 to P2, it will result a big decrease of quantity demanded by consumers from Q1 to Q2. The demand curve is not perfectly horizontal as in the perfect competition because Tiong Nam has succeeded in gaining product loyalty that its consumers who prefer Tiong Nam’s services are willing to pay a slightly high price as reported by Bloomberg (2013) that Tiong Nam is able to grow revenue from 296.9 millions MYR to 334.1 millions MYR compared with last year due to many reasons and one of the reasons is increased in transportation charged rate (Chong, 2013).
In this market, profit is maximised at the output where MC=MR as showed in diagram 2. In the short run, Tiong Nam is able to earn a supernormal profit (economic profit) showed as the shaded area due to little competition and its services has successfully differentiated from its competitors .
Since the existing logistic companies can earn a supernormal profit, new companies would like to enter this industry. Therefore the demand for existing companies will be reduced, AR curve and MR curve will shift to the left. At the same time, it will reduce supernormal profit earned. The new companies will continue entering in this industry until there is only normal profit (zero economic profit) is earned , the long run equilibrium is reached as showed in diagram 3.
In this market, neither allocative efficiency nor productive efficiency are achieved. Monopolistic competitors provide lower quantity of services with a higher price. As showed in the diagram 4, the market cannot achieve productively efficiency because P is not equal to the minimum LRAC, the output is underproduced at QL. and each services are not produced at the minimum cost therefore they operate excess capacity. It is evident when some drivers are required come to company even they did not receive delivering order so they are often idle for waiting any order. Besides that, the companies cannot achieve allocatively efficient because the P is larger than MC. The services provided are not the most preferable by the society. However, Tiong Nam is one of the biggest transportation companies in Malaysia who can achieve allocatively efficient because its services is preferable by its customers even a higher price is charged (Ong, 2007). In fact, Tiong Nam is able to earn supernormal profit in the long run due to some cost advantages by achieving economic of scale.
According to Ong (2007), Tiong Nam was set up in 1975. Ong, owner of Tiong Nam started this company with a capital of only RM5000, one truck and no more than 10 employees. In the short run of the first 2 years, its business volume was only in the region of RM200000 to RM300000 per annum.
After 32 years of establishment, Tiong Nam has more than 1000 trucks and 2000 employees (Ong, 2007). Now, it operates by providing four main segments including transportation & related services, investment, property development and property letting & warehousing. Many years of expanding its business, Tiong Nam has successful gained benefits of economies of scale due to economies of scope. Not only transporting service, Tiong Nam also provides diverse range of services including crane or forklift services, forwarding, warehousing, project cargo, property development, technology deployment and cold chain. The various services provided can share the financial and organisational economies. Tiong Nam group has only one marketing and operation department which managed by Mr. Ong Yong Nyok ( bloomberg, 2013). Besides that, Tiong Nam has many offices located at Johor Bahru, Batu Pahat, Melaka, Bangi, Seremban, Shah Alam, Port Klang, Ipoh, Butterworth, Padang Besar, Kuantan, Kuala Terengganu, Kota Bahru, Kuching, Kota Kinabalu and Padang Besar in Malaysia (Tiong Nam). This helps to save costs by rationalising the transportation activities. For example, if Melaka officer receives an order of transporting a good from Port Klang to Melaka. The officer will contact Port Klang officer to receive this order because if the Melaka officer arranges their lorry from Melaka to Port Klang to receive this order and deliver the order from Port Klang to Melaka, this will lead to duplication of cost.
In addition, Tiong Nam is not only benefited from internal economies of scale but also benefited from external economies of scale. When the business started operating, it faced limitation of business expansion because the banks were reluctant to approve loan to Tiong Nam, a small set-up company (Ong, 2007). Now, Tiong Nam is growing to become one of the largest logistics company in Malaysia, it is easily to get financial support from banks to expand its business. Furthermore, when Tiong Nam set up a new branch in a new location, the new branch is able to get skills and experience support. Tiong Nam main office will assign their experienced employees to the new branch to train and help the new branch’s employees.
On the other hand, Tiong Nam also face diseconomies of scale. Their workers may lack of motivation to work because they feel the job is boring and repetitive. The only job of drivers is driving that makes them feel it is not challenging after a long period. As a result, it will decrease work efficiency. Moreover, when Tiong Nam has become larger and more complex, it may lead to management problem of co-ordination. For example, there are five non-independent and two independent non-executive director in Tiong Nam (Thomson Reuters, 2013). Since there are many leaders work together, they have to communicate and use a long time to make an important decision. This results lack of personal involvement by management and waste of time.
Furthermore, Tiong Nam also faces an external diseconomies of scale. When its business is expanding, it will need to increase demand of labor especially drivers who have heavy transportation licenses. Tiong Nam may employ a driver with a higher wages because it is competing with other companies for the demand of drivers. If there are not enough drivers, Tiong Nam may increase expense in training a worker to get a heavy transportation license.
Tiong Nam has been successful in the market of Malaysia. It is continuing expanding its business from domestic logistics service provider to international provider. As the economic is growing globally, international trade is increasing, the demand of logistics service is increasing, so there is a lot of business opportunies globally.
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