Competitive advantages: The sector has a big role to play if development goals are to be met

To meet the government’s social and economic goals of transforming Malaysia into a stable and inclusive high-income nation by 2020, gross national income (GNI) will need to register annual growth of at least 6% until 2020. This would entail lifting GNI per capita from the 2009 level of $7650 to over $15,400, and if it is to be reached the industrial and services sectors will need to make major contributions.

POLICY PLANS: Recognising the scale and complexity of this task, the government has in recent years rolled out numerous policy plans representing strategic shifts, such as Vision 2020, the 10th Malaysia Plan (10MP) and the Economic Transformation Programme (ETP), which call for increased investment and productivity, and a retooling of sector activities.

Envisioned as a road map towards reconfiguring the economy to resemble more developed nations, this new paradigm calls for a shift away from the traditional low-cost, low-value manufacturing activities towards value-added industries. Sectors such as biotechnology and renewable energy technology are coming into their own, while established industries, such as vehicle manufacturing, are moving up the value chain toward greener and more advanced electric and hybrid vehicles. According to the ETP, more than 3.3m jobs are to be created by 2020, with an emphasis on the middle- and high-income brackets.

To stimulate private investment, the government has implemented a host of incentives targeting these new higher-value-added sectors, which will complement existing enticements such as the numerous industrial zones spread across the country.

BY THE NUMBERS: Malaysia’s resilient manufacturing sector continues to show signs of a resurgence in the wake of the global economic downturn, which had a cooling effect on production across the world. Since dropping 9.3% in 2009, in constant prices the industry’s value grew 11.4% in 2010, followed by a 4.5% rise in 2011, according to Malaysia’s Department of Statistics (DoS). Excluding processed palm oil and other oil-based products, gross exports of manufactured goods continued a trend of year-on-year (y-o-y) growth, increasing from a total of $157bn in 2010 to $162bn in 2011. The electronics and electrical (E&E) sector continued to lead all industrial exports in value with $84bn in 2011, despite supply disruptions in Thailand and Japan, which contributed to a drop from the $87.5bn registered the previous year. The chemical and chemical products sector was the next-largest contributor, with $15.4bn exported in 2011 (up from $13.4bn in 2010), followed by petroleum products ($11.8bn, up from $9.4bn) and metal goods ($10bn, up from $8.5bn).

INVESTMENTS: Along with a number of other metrics, such as employment, contribution to GDP, value of exports and others, the amount of investment dollars funnelled into each sector is a commonly used indicator to determine whether or not government development programmes, such as the 10MP and the ETP, are effective and on-track.

By this measure, Malaysia has done considerably better in 2011 than it did in 2010, attracting 846 approved manufacturing projects worth a combined $18.1bn, compared to $15.2bn spread over 910 projects the previous year, according to the Malaysian Investment Development Authority (MIDA). Some 61% of the 2011 total came from foreign investments, which the government attributed to greater interest from abroad in high-growth areas such as value-added, emerging technology and knowledge-intensive industries. Of the new projects approved, the E&E sector accounted for the lion’s share with 34% ($3.6bn) of all investments, followed by basic metals with 22% ($2.4bn), chemicals with 11% ($1.4bn) and food at 8% ($870m).

Despite this quantifiable success, using only investment figures as a yardstick does have its drawbacks.

Nine of the 12 National Key Economic Areas (NKEAs), for instance, relate to the services sector, making investment more difficult to quantify. Largely devoid of substantial capital expenditure on equipment and land, investments in services do not necessarily show up in immediate tangible value but nevertheless contribute to GDP through knowledge- and service-based terms. The 10MP, which runs from 2011 through to 2015, has set an annual growth rate target for the services sector of 7.2% up until 2015, which would increase its contribution to GDP to some 61% by that year. The combined total of new investments required to reach this is estimated at $14.4bn – less than the overall value of investments in manufacturing for 2011 alone.

ELECTRONICS: Long the champion of the manufacturing sector, the electronics and electrical (E&E) segment continues to do the heavy lifting in the export market, even in the midst of a makeover that could see the industry through to the next generation in technology. Serving as a manufacturing base for many major global electronics companies, Malaysia has persevered as an electronics exporter despite increasing competition from the likes of China and Vietnam for low-cost goods and Singapore, South Korea and Taiwan for higher-value ones.

Traditional E&E products remain the sector’s backbone, contributing over half the value of all 2011 exports, at $84bn of the national total of $162.4bn, according to the DoS. The largest sub-sector was semi-conductors, with $34.6bn, followed by electrical equipment and parts, with $24.2bn. Electrical industry machinery and equipment was third, with $8.9bn, followed by industrial and commercial electrical products ($7.8bn), consumer electrical products ($7.2bn) and household appliances ($1.2bn).

DoS data indicates that domestic manufacturers produced 33.4m integrated circuits, 16.3m semiconductors, 34.2m electronic transmitters, 72.3 tonnes of insulated wires and cables, 14m television sets, 2.9m air conditioners and 47.9m radios in 2011.

Much of this production is centralised in a number of industrial zones, including the Northern Corridor (semiconductors and industrial electronics), Klang Valley (sophisticated services), Johor ( logistics-intensive E&E) and Sarawak (silicon substrate manufacturing). Production capacity in these fields is continually being expanded and upgraded, and a number of major investments have been made in recent years. Leading computer chip manufacturer Infineon Technologies expanded its Malaysian operations in August 2011 when it began construction of a $1.3bn facility at Kulim Hi-Tech Park. Expected to be complete by 2013, the Kulim 2 wafer fabrication plant will produce 200-mm and 300-mm wafers, and will complement the existing Kulim 1 plant, which can produce 120,000 wafers per month.

LOCAL NAMES: While manufacturing large quantities of foreign-branded products has long been a staple of Malaysia’s E&E sector, a number of local firms have been elbowing their way into the fray. One example is MalTechPro, which has developed its own Android-powered tablet, the 1M Pad, which is expected to compete with established global heavyweights such as the Samsung Galaxy Tab. While not as recognisable as other internationally branded tablets, the 1M Pad has a proprietary 1Malaysia messenger application which allows users to send messages, pictures and videos for free. 1M Pad may be sold at a discount to students through a deal with the government. MalTechPro is one of a number of local E&E start-ups, a group that includes Silterra, IRIS, Tenaga Switchgear, DSEM and Pensonic.

While these products contribute a healthy margin to the country’s trade balance, it is investments in newer technologies for products poised for a breakout that will likely sustain the industry’s momentum in the coming years. These are outlined in the 15 entry point projects for the E&E NKEA, along with four priority areas in the sector: solar, light-emitting diodes, semiconductors and industrial electronics.

BIOTECHNOLOGY: A poster child for the government’s value-added, high-tech industrial evolution, Malaysia’s burgeoning biotechnology sector is projected to generate annual revenue of $32bn by 2020. As of 2011 the industry contributed 2% of GDP – a figure projected to increase to 5% by 2020 – and employed 280,000 workers. The primary conduit for developing the sector is the Malaysian Biotechnology Corporation (MBC) – an agency under the purview of the Ministry of Science, Technology and Innovation, which is responsible for executing the objectives of the National Biotechnology Policy (NBP).

One of the MBC’s main responsibilities is to foster firms that meet specific criteria while operating in the biotech sector, named BioNexus companies, which are then eligible for government assistance. While the NBP and MBC are recent developments targeting growth in value-added manufacturing, Malaysia has been a biotechnology powerhouse since the 1970s, due to widespread research and development in the agricultural sector.

KEY PERFORMANCE INDICATORS: Running from 2006-10, the initial phase of the three-stage NBP was successful in capacity building, even though it did not achieve all of its developmental targets, or key performance indicators (KPIs).

In terms of investment (both public and private), the sector pulled in $1.7bn during the first phase, just short of the $1.9bn KPI target. Total revenue and contribution to GDP also came close but did not meet KPI targets of $6.5bn and 2.5%, achieving $4.4bn and 2.2%. The biotechnology sector did exceed its target in the employment KPI, with 54,776 workers in the field, well above the 40,000 objective.

Now in the second five-year developmental phase, which runs from 2011-15, the current NBP priorities are to build on the success of phase one by monetising initial investments in start-up and research projects by growing them into viable businesses. Of the 215-odd BioNexus companies, most have yet to mature into consistent profit-making enterprises. The few that have operate primarily in health care and life science, producing goods such as herbal remedies and extracts and natural sweeteners. These are in line with the applications target of the NBP, which includes health care (pharmaceuticals, nutraceuticals, pharmagenomics and gene therapy), agriculture (improved crop yields and increased resistance to environmental stress) and industrial (cosmetics, biodegradation and bioremediation). In 2011, 25 BioNexus status companies were approved to invest a total of $60m in health care, industry and agricultural biotechnology, according to the Malaysian Biotechnology Corporation.

With private funding drying up and much of the government’s funds already spent in phase one to push the sector towards critical mass, achieving phase two KPIs, such as doubling GDP contribution to 5%, could be difficult. “The days of easy money are over and they won’t come back,” the senior vice-president at BioNexus Development, Razif Abdul Aziz, told OBG. “We need to push forward with less money and achieve more. New entrants must be financially robust from the start.”

Aziz indicated that due to credit tightening, new BioNexus companies will have to meet more stringent requirements, including RM250,000 ($81,000) minimum paid-up capital. Despite these challenges, Aziz is optimistic about the future of biotechnology in Malaysia, as the third and final “Global Business” stage of development takes the programme to its conclusion in 2020 and beyond. “The challenge is the lag time in developing the business environment from scratch and achieving critical mass,” he said. “Things are changing but it is taking longer than we thought. The main thing is not to stop.”

RUBBER: As the world’s leading producer and exporter of catheters and surgical and examination gloves, providing 80% of global supply of these items, Malaysia’s rubber industry is well entrenched. Exports of rubber products – excluding footwear – hit $5.6bn in 2011, up 12% from $5bn in 2010 and nearly four times the $1.4bn of 2001 according to the DoS. In 2011 Malaysian rubber companies produced a combined total of 30.3m tyres and inner tubes, 30.9bn pairs of rubber gloves, 140,812 tonnes of rubber compound and 4542 tonnes of rubber sheets.

Malaysian Rubber Board (MRB) data indicates that most of the country’s exports are made from standard Malaysian rubber, accounting for 94.7% of the 69,937 tonnes of natural rubber exports in March 2012, followed by latex at 4.5%. According to the MRB, the industry’s rise in value over the past decade is the result of factors including gains in rubber yields due to successes in research and development, and an emphasis on downstream development leading to the growth of value-added industries.

PHARMACEUTICALS: Malaysian pharmaceuticals companies produce a wide range of prescription drugs, over-the-counter (OTC) medicines, herbal preparations and health supplements, including traditional medicines. Of the 250 or so firms registered with the Drug Control Authority, 34 are members of the Malaysian Organisation of Pharmaceutical Industries (MOPI), including major domestic manufacturers. These include large, international brands led by Braun, which produces primarily infusion fluids in Malaysia, and GlaxoSmithKline, manufacturing OTC products such as Panadol and Ranbaxy.

Total pharmaceuticals exports for 2011 tallied $222m, according to MIDA, mostly in the form of generic drugs in a wide variety of delivery forms, including tablets, capsules, liquids, powders, creams, ointments, sterile eye drops and small-volume injectables. According to MOPI, prescription drug exports rose by 10% in 2011, with domestic sales growing at a rate of 8%. The domestic market consumes 85% of local production, with exports accounting for the remaining 15%. This output includes simple repackaging of OTC and prescription drugs, which are categorised as a manufacturing activity.

Exports to South-east Asia remain strong for Malaysian companies, particularly to the faster-growing markets of Vietnam, Myanmar, Cambodia and the Philippines. These are complemented by Singapore, Hong Kong and, increasingly in the past five years, Africa and the Middle East.

A significant amount of the recent domestic investment has been made by larger local companies such as CCM Pharmaceutical, Hovid, Kotra Pharma, Pharmaniaga and Ain Medicare, partly due to plant upgrades resulting from the introduction of stringent quality requirements in compliance with international standards. These include those adopted by the EU, Australia and Canada, such as the Pharmaceutical Inspection Convention and the Pharmaceutical Inspection Cooperation Scheme.

In 2011 MIDA approved seven investment projects in the pharmaceuticals segment worth a combined $106m, with domestic investments worth $91m of the total. Three of the seven, accounting for $92m, were expansion and diversification ventures, with the remaining $14m going toward new projects.

HALAL: With the global halal food market estimated in excess of $800bn and a domestic halal market valued at more than $9.5bn in 2011 by the World Halal Forum, Malaysian halal producers are tapping a substantial and growing market at home and abroad. To facilitate the growth of halal industries in Malaysia and enable them to serve both the domestic Muslim market and a growing global market, the government has set up a host of agencies dealing with halal and other Islamic affairs. These include the Halal Industry Development Corporation (HIDC), The Department of Standards Malaysia and the Department of Islamic Development Malaysia.

According to the HIDC, there were 4785 halal-certified companies active in Malaysia in 2011, many of which operated out of dedicated halal parks. One of the most significant production centres is Penang International Halal Hub, which has an array of halal-certified business clusters, including manufacturing, agro industries, life sciences, logistics, research and development, hospitality and tourism, human capital, marketing and promotion, and financial services. There are nine Halal Parks currently operating across the country, along with another nine under development and two more in the planning stages.

Of the certified companies, approximately 700 of them exported some $11.4bn in halal goods in 2011, contributing 5.1% of all exports, according to the HIDC. Of this, the largest proportion was ingredients for other products, which represented 34.8% of all halal exports. This was followed by food and beverages, (33.7%), palm oil derivatives (19.8%), industrial chemicals (5.8%), cosmetics and personal care (5.1%), and pharmaceuticals (0.8%).

The largest purchaser of Malaysian halal goods in 2011 was China, with $1.3bn worth, followed by the US with $1.1bn, Singapore ($936m), the Netherlands ($742m) and Japan ($710m).

STANDARDS: While the country has long had halal standards in place for food and other products and services, the Department of Standards Malaysia only recently enforced similar requirements for the drug industry, through the Halal Pharmaceutical Standards developed by the Industry Standard Committee on Halal Standards and launched in April 2011.

Only a few manufacturers have so far ventured into production, with some products, such as gel caps, achieving certification. “There are constraints because you must have a complete plant dedicated to halal production, rather than just one line,” MOPI’s executive director, Y S Tong, told OBG. “Because domestic demand for halal pharmaceuticals is relatively weak and most Malaysians are content with non-halal pharmaceuticals, the cost of constructing dedicated halal facilities often cannot be justified.” There is, however, room for growth in the halal export market, as Malaysian companies explore new destinations for their products. “The recent development in local standards for halal pharmaceuticals producers will give players an edge in the global halal market,” the director-general of the Department of Standards Malaysia, Fadilah Baharin, told OBG.

AUTO: A diverse array of vehicle manufacturers operate in Malaysia, including most of the world’s top brands and a few home-grown firms. Domestic producers Proton and Perodua operate three assembly plants and foreign firms another nine, for a combined annual installed capacity of 795,850 units in 2011. Car manufacturing is supplemented by three composite body sports car manufacturers, along with 11 motorcycle and scooter manufacturers and assemblers with a combined capacity of 995,000 units. These facilities are supported by more than 700 automotive component manufacturers and 112 motorcycle and scooter component manufacturers, over 80% of which are Malaysian-owned.

After a banner year in 2010, when 567,715 vehicles were sold across the country, sales dipped 6% in 2011 to 533,515, according to the Malaysian Automotive Association (MAA). Of these, 488,261 were passenger vehicles. While much of this can be attributed to production shortfalls in the wake of two regional natural disasters affecting supply lines, the MAA’s president, Aishah Ahmad, placed some of the blame on a loss of financing on the domestic market. Fearing credit implosion after the European debt crisis, the government ratcheted up scrutiny on large loans (including mortgages and car loans), which has resulted in a lower number of approvals since 2011. These stringent new policies had the most significant impact on domestic producers Proton and Perodua, which target primarily lower-end models.

Sales were projected to rebound in 2012, with yo-y unit sales inching up 1.7% as of August 2012 to 412,575 units from 405,837 units a year earlier. Ahmad expected a boost in sales by year’s end as new models were introduced and government elections potentially loosened purse strings. The sector looks likely to meet its predicted new vehicle sales target of 615,000 units, as forecasted by the MAA.

There is certainly room for increased production, with factory utilisation capacity currently at around 60%. This is especially true for Proton, which runs two factories at only around 40% of capacity. There is guarded optimism for the company’s future, however, following the sale of Khazanah Nasional’s 42.7% stake in the firm to DRB-HICOM. The acquisition, which shareholders approved in March 2012 at RM5.50 ($1.80) per share, gave DRB-HICOM a slim majority stake of 50.01% after purchasing a 7.7% share on the open market earlier in the year. The automaker had previously courted General Motors, but was unable to consummate the partnership. In October 2012 Proton signed an agreement with Honda, Japan’s third-largest carmaker, as a foreign strategic partner after alliance talks with Volkswagen and Peugeot proved unsuccessful.

Other long-term goals to boost both the quantity and value of the Malaysian automobile offering are laid out in the National Automotive Policy (NAP). One of the key strategies in the NAP is a new emphasis on green technology for the manufacturing of hybrid and electric cars. By providing incentives and other support to the sub-sector, it is hoped that Malaysia can eventually become a centre for higher-value exports of electric/hybrid vehicles.

The Malaysia Automo tive Institute (MAI) projects that industry reform, coupled with higher local and international demand, could see the industry’s contribution to the economy triple by 2020. In May 2012 MAI said it expected the industry’s share of GDP to rise from the current 2.4% to 6.8%, largely due to increased focus on electric and other energy-efficient vehicles, underpinned by a higher level of FDI.

OUTLOOK: Concerted government efforts to accelerate Malaysia’s transformation into a modern economy driven by value-added industries have shown some early signs of success, but its ultimate targets are still some years off. The global downturn has restricted the flow of foreign investment somewhat and could have a cooling effect on plans, resulting in delays in meeting the sector’s aims, although a continued strong government commitment to development should help to keep things on track. Steady consumption on the domestic front and a strong showing by the traditional stalwarts, such as the automotive and E&E industries, should help provide the manufacturing sector with sufficient momentum to see the country through until its knowledge- and service-based businesses reach a critical mass.