1. Although the weak ringgit has made Malaysia an inexpensive market for foreign investors, the country remained a resilient economy despite having been affected by global financial volatilities. Oil and gas, biotechnology and electrical and electronics are among the sectors on a list of National Key Economic Areas.
2. The government has singled out chemicals, E&E and machinery and equipment under the 11MP to drive the manufacturing sector’s transition to high-value, high-technology production. Along with these industries, other industries such medical devices and aerospace have been identified as segments with potential for substantial levels of growth. 11MP targets the manufacturing sector to grow at 5.1% per annum and contribute 22.5% to GDP, as well as 18.2% of total employment by 2020.
BIOTECH
1. The biotechnology industry is one of the growth sectors under the National Key Economic Area (NKEA) plan, which will drive and contribute towards Malaysia achieving its goal of becoming a developed nation by 2020.
2. Currently, the biotechnology industry which includes agriculture, healthcare and industrial, contributes about 2 percent of the GDP. It is estimated that by 2020 the industry will contribute approximately 5 percent of national GDP with total investments of about RM8.0 billion (US$2.6 billion) and create 280,000 new jobs. (MIDA)
3. Malaysia endowed with mega diversity, has all the ingredients for a successful biotechnology industry. Cognizant of the immense potential benefits which biotechnology can bring, the government has identified biotechnology as the next engine of economic growth for the country.
OIL AND GAS
1. Malaysia's oil and gas sector is a major contributor to national GDP and can become the regional hub for the oil and gas sector, similar to Texas for the United States.
2. The government established Malaysia Petroleum Resources Corporation (MPRC) in 2011 to further develop the infrastructure and human capital necessary to support growth of the sector and introducing new incentives for energy companies, including petroleum trading companies, to locate operations in Malaysia rather than elsewhere in the region.
3. Global manufacturers and service providers such as Aker Solutions, FMC, Halliburton, Cameron, Technip, Schlumberger and Baker Hughes have operations in Malaysia benefiting the oil and gas sector and the machinery and engineering sector, in terms of technological progress, skills development and outsourcing requirements.
4. There is potential in sustaining its current production and to grow its services sector via the establishment of a trading and petrochemical hub and developing downstream services to attract investors.
5. The Global Incentives For Trading (GIFT) program for petroleum-related trading companies registered with the Labuan International Commodity Trading Company, provides a 3-percent corporate tax on chargeable income, full exemption of director fees paid to non-Malaysian directors and 50-percent exemption on gross employment income for non-Malaysian traders and tax exemption of stamp duties for Labuan transactions.
ELECTRONICS AND ELECTRICAL
1. This industry saw considerable growth in 2011 with investment in new projects jumped 20 percent From 2010. More than 90 projects with investment of more than RM100 million (US$30 million) were approved, 11 of which were valued at over RM1 billion (US$330 million).
2. In 2014 the E&E segment produced a gross national income of RM44.1bn ($10.9bn), up from RM38.7bn ($9.6bn) in 2013. 23.7% of the working population were employed in the subsector either directly or indirectly (MITI). E&E is accounted for 24.5% of the manufacturing sector’s contribution to GDP in 2014 (MATRATDE). E&E exports over the first 11 months of 2015 at RM253.12bn ($62.7bn), up 8.7% on the same period in 2014 and representing 44% of total manufacturing exports and 33.4% of all exports in 2014 (MITI).
3. Major overseas markets include Japan (E&E exports up 9.3% over the first 11 months of 2015 to RM16.77bn ($4.2bn); and the EU (contributes 50.4% of Malaysia’s total exports).
4. E&E is also a major importer, given that much of the trade is assembly or manufacture of products using materials sourced overseas with RM183.6bn ($45.4bn) in imports in the year-to-November 2015, which equated to 36.8% of all manufacturing imports (MITI).
5. Multinational corporations (MNCs) active in the segment are based in Malaysia, including Intel, Texas Instruments, AMD and STM icroelectronics. Local outfits include Silterra, Unisem, Inari and Globetronics. In consumer electronics, the major Japanese and Korean firms are present, such as Sony's largest TV production plant in Kuala Lumpur.
6. The future focus of the industry in Malaysia is on green and smart technologies such as LEDs and the solar industry. New products such as advanced integrated circuits, high brightness light emitting diodes (HBLEDs); radio frequency (RF) and Microelectromechanical Systems (MEMS) devices has growth potential.
7. Crucial to the technology sector’s supply chain and highlighted as one of Malaysia’s strongest and most competitive segment under the Economic Transformation Programme’s 12 National Key Economic Areas, E&E’s economic contribution has gone from strength to strength in recent years.
MACHINERY
1. The machinery, appliances and parts segment of the manufacturing sector is also a strong export leader. Figures for the first 11 months of 2015 show RM32.73bn ($8.1bn) in exports from the segment, up from RM27.3bn ($6.8bn) in the same period of 2014 (MITI). The subsector is an even bigger importer – with the corresponding figures standing at RM54.27bn ($13.4bn) and RM52.1bn ($12.9bn) for the same two periods.
2. Machinery and equipment (M&E) accounted for RM36.6bn ($9.1bn) in production and RM30bn ($7.4bn) in exports in 2014 (MIDA). Some 1250 companies were active in M&E, and a total of 1103 firms were involved in engineering support industries.
3. The four areas of the segment are power generating machinery and equipment, metalworking machinery, specialised process machinery, and general industrial machinery, components and parts. Some incentives already exist for targeted M&E production, including a tax exemption on 100% of statutory income for up to 10 years or an investment tax allowance of 100% on certain capital expenditures.
CHEMICAL
1. With the decline in oil and gas prices, third-placed chemicals and chemical products in terms of export revenues is catching up towards Malaysia’s second-largest export, petroleum products. Figures for the first 11 months of 2015 show this subsector accounting for RM50.45bn ($12.5bn) in exports, up from RM46.73bn ($11.6bn) in the same period of 2014 (MITI). The 2015 figure represented around 10% of all manufacturing exports, up from 9.4% in the same period of 2014.
2. The subsector’s exports for 2014 is broken down into 43.6% petrochemicals and 21.9% oleochemicals, with the oleochemicals’s share, at RM112.9bn ($27.9bn), up 21.4% on 2013 while the petrochemical’s share rose 7.2%, to RM224.6bn ($55.6bn) (MATRADE).
3. In 2014 the sector built 75 new, approved projects around the country, with a total capital expenditure on these of RM26.7bn ($6.6bn). This created some 121,763 jobs. (Chemical Industry Council of Malaysia)
4. Oil and gas is the foundation of the Malaysian sector, with the country’s abundant hydrocarbons resources being channelled increasingly downstream into higher-value-added areas. Malaysia now possesses one of the largest oleochemicals sectors in the world, alongside its major petrochemicals and polymer industries.
5. In petrochemicals, a wide variety of products are manufactured, with some of the most significant by value being polymers of ethylene in other forms, p-Xylene, methanol and urea. In oleochemicals, industrial fatty alcohols, palm fatty acid distillates, stearic acid and soap noodles are among the top products. Major MNCs operating in the sector include BASF, Eastman Chemicals, Mitsubishi, Idemitsu and Shell.
MEDICAL SECTOR
1. Only 13% of MNCs manufacture their products domestically with 7% sourcing products from local companies (PhAMA). The MNCs rely heavily on imported finished products, with as much as 70% of local demand for pharmaceuticals being met by imports. The government and sector professional bodies have been trying to encourage more R&D in Malaysia and investment in local product development thus the 11MPincludes a major focus on chemicals research, with chemicals one of the plan’s catalytic subsectors.
2. Under the 11MP, the medical devices subsector is identified as a key growth area, medical devices achieved export growth of 15% over the 2014-15 period.
3. With RM651m ($161.4m) of investments secured for the medical sector in quarter one 2016, up from RM194.7m ($48.2m) in the same period of 2015, and strong links to supporting industries such as manufacturing, Malaysia is well-positioned to become a medical devices hub in Asia, particularly if export revenues hit the RM26bn ($6.4bn) figure projected by the National Export Council for 2020.
4. The pharmaceuticals sector has also been experiencing robust growth in recent times. The subsector breaks down into two broad streams – largely local companies focusing on traditional medicines, vitamins, supplements, over-the-counter drugs and generics, while MNCs bring in internationally tested and proven drugs that are made available by pharmacies and health centres. These MNCs include Bayer, GlaxoSmithKline, Johnson & Johnson, Pfizer, Roche and many others.
RUBBER
1. A long-standing producer of natural rubber, Malaysia is also now one of the world’s leading manufacturers of both natural and artificial rubber products. The country is the world’s largest producer of natural rubber and nitrile, or synthetic, gloves.
2. In 2015 Malaysia exported 52% of all the world’s rubber gloves, a trade which was worth RM13bn ($3.2bn), 22% more than in 2014 (Ministry of Plantation Industry and Commodities).
3. Most of the exports go to Europe and North America with demand for rubber gloves has been increasing worldwide at a compound rate of 5.74% since 2005, with this set to hike to 6-8% in the next few years. The rubber gloves segment employs 41,000 workers, while the subsector is to receive RM7bn ($1.7bn) in further investment up to 2020. Local outfits in the subsector include Kossan Rubber Industries, Hartalega Holdings, Top Glove and Supermax Corporation (Malaysian Rubber Export Promotion Council).
HEAVY METAL
1. Malaysia’s home-grown metals industry achieved RM31.6bn ($7.8bn) in exports in the first 11 months of 2015, up from RM23.6bn ($5.8bn) in the same period of 2014. This was less than the imports accrued by the sector, which stood at RM40.59bn ($10bn) in 2015 and RM37.4bn ($9.3bn) in 2014. These figures excluded imports of iron and steel products, which were valued at RM20.24bn ($5bn) and RM23.2bn ($5.7bn), respectively.
2. Despite cheap Chinese steel continuing to push prices and demand downward, M&E is expected to grow at an annual rate of 4% up to 2018. Bars, wire rods, and coated sheets and strips were the three most produced products in the sector’s portfolio in 2014.(MISIF)
3. One of the sector’s chief challenges is the relative expense of manufacturing steel from a lack of raw materials. While there is coal, it lacks the quality needed for steel-making, and iron ore deposits are widely dispersed. The recent hike in electricity prices, due to a switch to a new form of billing also compressed margins. Despite this, the market continues to show promise as the economy expands. In late 2014 Brazil’s Vale opened a $1.4bn port terminal at Lumut, which can receive and export 30m tonnes of iron ore every year.
AEROSPACE
1. US's aeropsace industry is expected to grow in 2020 as mentioned by MAPI.
2. Aerospace is another sector targeted in Malaysia with new and improved investment promotion programs and other resources particularly in the areas of maintenance, repair and overhaul (MRO); parts and components manufacturing; avionics and systems integration; and aerospace training and education.
3. Public and private institutions in Malaysia are producing the sector's required human resources, ranging from pilots and air traffic controllers to graduate engineers, technicians and mechanics.
SMES
1. Constituting over 99% of business establishments, SMEs makes up more than 90% of Malaysia’s industrial firms.
2. The government introduced performance-based incentives for SMEs in 2016 to increase productivity and innovation and boost growth in the sector via enhanced incentives, in addition to those already available for SMEs.
3. In 2014 SME growth of 13.6% continued to outpace the expansion of the overall economy, with SMEs’ share of GDP rising to 35.9%. SMEs’ contribution to GDP grew due to strong domestic demand and a revised definition of SMEs which came into effect in January of the same year, putting 8000 larger companies into the SME category.
4. The SME Development Council is urging SMEs to become export-ready so as to take advantage of the AEC. “SMEs’ share of exports stands at 17% and is targeted to increase to 23% by 2020.
OTHER AREAS OF INTERESTS
1. Greenfield and Brownfield Investment - Trends of investors and developers moving from brownfield to greenfield investments are beginning to appear. Brownfield investment is focused on areas where infrastructure already exist. Greenfield investment can be classified as a completely new area of investment with land and infrastructure development is undertaken by the investor.
2. Forest City - the US$42 billion (S$60 billion project in Johor developed by Country Garden includes office buildings, parks, hotels, malls, and an international school—all on four artificial islands four times the size of Central Park. This project has attracted investments totalling RM10 billion (S$3.2 billion), and is expected to propel the economy and create jobs for the manufacturing, high tech, services and financial sectors. Synergic partners include seven companies listed under Fortune 500: Huawei, Cisco, Accenture, Midea, China Construction Steel Structure Corporation, Deutsche Bank (Asia Pacific) and Bank of China (Malaysia).
3. Islamic Financial Hub - An investment fund will be established for Islamic fund managers and attract participation of institutional and global investors. This fund will invest primarily in multi-currency syariah-compliant investment products and help to build performance track record. It will help to develop the different segments of the fund and asset management industry and and diversify the different investment strategies achieving economies of scale.
OTHER AREAS OF INTERESTS
1. Greenfield and Brownfield Investment - Trends of investors and developers moving from brownfield to greenfield investments are beginning to appear. Brownfield investment is focused on areas where infrastructure already exist. Greenfield investment can be classified as a completely new area of investment with land and infrastructure development is undertaken by the investor.
2. Forest City - the US$42 billion (S$60 billion project in Johor developed by Country Garden includes office buildings, parks, hotels, malls, and an international school—all on four artificial islands four times the size of Central Park. This project has attracted investments totalling RM10 billion (S$3.2 billion), and is expected to propel the economy and create jobs for the manufacturing, high tech, services and financial sectors. Synergic partners include seven companies listed under Fortune 500: Huawei, Cisco, Accenture, Midea, China Construction Steel Structure Corporation, Deutsche Bank (Asia Pacific) and Bank of China (Malaysia).
3. Islamic Financial Hub - An investment fund will be established for Islamic fund managers and attract participation of institutional and global investors. This fund will invest primarily in multi-currency syariah-compliant investment products and help to build performance track record. It will help to develop the different segments of the fund and asset management industry and and diversify the different investment strategies achieving economies of scale.
CHALLENGES
1 Manufacturing accounted for RM55.3bn ($13.7bn) in January 2016, according to the DoSM. While this was down on the previous month, it was within the norm for 2015, which saw monthly sales peak at RM58.6bn ($14.5bn) in October, with a yearly low of RM50.8bn ($12.6bn) in May. The decrease in January was also due to falling oil and gas prices, which affected sales in the petroleum, chemicals, rubber and plastic products segment.
2. Manufacturing accounted for 81.5% of Malaysia’s total exports in 2016 (MATRADE). Figures show that the number of people directly employed in manufacturing in January 2016 was 1.03m – 0.4% down on January 2015, although up on the previous month, by 0.3% (DoSM).
3. Salaries and wages have also been rising in the sector, indicating the industry’s important role for household consumption growth throughout the Malaysian economy. However the average salary or wage paid to employees in the Malaysian manufacturing was at RM3156 ($781). Average salaries for the sector in Singapore at the start of 2016 were around S$6653, or $4851, although in Thailand, they stood at some BT12638.90 ($358).
4. Raising productivity is a key challenge for the sector. Measured as average sales value per employee, productivity has been stable in recent years, with the Malaysian Productivity Corporation measuring labour productivity at RM61,708 ($15,300) in 2014, up from RM59,622 ($14,800) in 2013. However productivity declined 3% in January 2016 in comparison to January 2015.
OUTLOOK
1. With much of Malaysian industry focused on exports, the state of the global market is clearly key to its fortunes. Potential sectors for growth in Malaysia are consumer, technology, banking, construction, oil & gas, export-oriented industries and small-cap companies.
2. The country’s industry relies on imports and retooled for re-export, or sold to the domestic market. This exposes the sector to foreign exchange risk while energy and labour costs have been rising, even though the costs of many raw materials have been falling.
3. Malaysia has a well-educated workforce, infrastructure superior to many of its ASEAN neighbours and a strong base of government incentives and schemes aimed at pushing the sector to the next stage of higher-value-added products. The 11MP makes this an explicit goal but all eyes is on the private sector to take the initiative in raising the bar.
4. There is still an appetite for the emerging market –current investors are underweight on emerging markets, which account for 11% of the global indices and 36% of global gross domestic product. Big institutional investors on average have only 5% to 6% invested in emerging markets.
5. Emerging markets are relatively inexpensive, with the MSCI Emerging Markets Index trading at a significant discount to the MSCI World Index on a price-to-book-earnings-multiple ratio.
6. Foreign direct investment into the country, will not only have ripple effects in terms of a spill over of economic activities but also assist in the socio-economic development of the people in the long-run. The chances of getting recognised by these foreign companies are better and paved the way for more opportunities to arise as they learn to appreciate local talents here. Local talents too can learn from the foreign companies and support the industries via SMEs.
7. Changes in US Interest rate would indirectly affect emerging markets. If rate hikes is due to growth, there will be a positive impact for emerging economies. Whereelse if rate hikes due to inflation, it will dampen the growth of emerging markets. However the risk of emerging-market currencies falling further is lower than the opportunity for them rising higher and although Commodities was an an important part of Malaysia, but it has reduced significantly with other sectors taking lead causing the volatile commodity prices to have less impact on the economy.
4. There is still an appetite for the emerging market –current investors are underweight on emerging markets, which account for 11% of the global indices and 36% of global gross domestic product. Big institutional investors on average have only 5% to 6% invested in emerging markets.
5. Emerging markets are relatively inexpensive, with the MSCI Emerging Markets Index trading at a significant discount to the MSCI World Index on a price-to-book-earnings-multiple ratio.
6. Foreign direct investment into the country, will not only have ripple effects in terms of a spill over of economic activities but also assist in the socio-economic development of the people in the long-run. The chances of getting recognised by these foreign companies are better and paved the way for more opportunities to arise as they learn to appreciate local talents here. Local talents too can learn from the foreign companies and support the industries via SMEs.
7. Changes in US Interest rate would indirectly affect emerging markets. If rate hikes is due to growth, there will be a positive impact for emerging economies. Whereelse if rate hikes due to inflation, it will dampen the growth of emerging markets. However the risk of emerging-market currencies falling further is lower than the opportunity for them rising higher and although Commodities was an an important part of Malaysia, but it has reduced significantly with other sectors taking lead causing the volatile commodity prices to have less impact on the economy.
(SOURCE: MIDA, OXFORDBUSINESSGROUP)
