Malaysia Prepares for Global Success
An Interview with Tan Sri Muhyiddin Yassin

Tan Sri Muhyiddin Yassin became Malaysia’s Minister of International Trade and Industry in March this year but has presided over the country’s trade and economic development for more than two decades. Prior to this he was the minister for agriculture and agro-based industry, domestic and consumer trade, youth & sport and the chief minister of Johor, respectively. Under Tan Sri Muhyiddin’s watch, countries in Asia are facing inflationary pressures driven by rising fuel and food prices and slowing demand from the U.S. Malaysia has not been spared. Tan Sri Muhyiddin shared his thoughts with Forbes Asia’s programming director, Cecilia Zecha, on his government’s response and growth strategy.

 

Cecilia Zecha: How is Malaysia working through this current state of turmoil?

Tan Sri Muhyiddin: It’s been more than a juggling exercise, but we’ve had experience managing turbulent economic times. We are fully aware that a multipronged approach is necessary to manage rising fuel costs and inflation. Our goal is to mitigate the severity of the impact on our industry. Our industrialists also understand that it isn’t “business as usual” as we are facing changing global scenarios, and competition is now the norm. To deal with rising oil prices, we have decided to restructure our fuel subsidies, and we will continue to impose price controls on essential food items such as rice, cooking oil and poultry to maintain stability. Another initiative is to boost our food production. We have a plan to become self-sufficient by 2015.

Zecha: How is weaker U.S. demand affecting Malaysian exports?

Tan Sri Muhyiddin: It is a concern, and we have seen a dip in export growth to the U.S. But this is offset by an increase in exports to other destinations like Singapore, China and Japan, and we are cultivating new markets in South America, Ukraine and Pakistan.
We have to monitor the state of the U.S. economy closely, especially in an election year.

Zecha: Malaysia has large reserves of important commodities such as palm oil and natural gas, and manufacturing of electrical products and electronic components accounts for a significant portion of overall trade. Where do you see the strongest growth coming from?

Tan Sri Muhyiddin: We cannot be solely dependent on commodities but must also focus on manufacturing. Last year, exports of commodities accounted for 23% of total exports, but those of electrical and electronic goods accounted for 43.4% of total exports. We expect this sector to play a leading role in the medium to long term despite the rise in commodities prices. We see the strongest growth potential in the services sector. I chair the Services Development Council, and we are looking at ways to develop management services, logistics, tourism – especially eco- and medical tourism – construction and education.

Zecha: How competitive is Malaysia as a manufacturing and export base compared to China and Vietnam?

Tan Sri Muhyiddin: We know we have to compete with China and Vietnam, and we have been successful because of political stability, a well-developed infrastructure to meet the needs of industry, and transparent and business-friendly government policies. English is
widely spoken here; there is a good legal system, and a trainable and educated workforce. Malaysia offers a high quality of life in education, housing and recreation. We have implemented other measures such as lowering the corporate tax rate from 27% last year to 26% this year. The corporate tax rate will be further cut to 25% next year. We established PEMUDAH last year, a high-level government committee charged with recommending measures to help our companies deal with difficult times, lower costs and increase efficiency.

Zecha: Volatility in the global economic system has led to a rise in voices seeking to curb global trade through protectionist measures. What are the risks today to the global trading system? What are the best ways to foster fair and open trade so that small countries, which are efficient producers like Malaysia, can grow and prosper along with their partners?

Tan Sri Muhyiddin: The WTO will create a rules-based environment for freer and fair trade once the concerns of developing countries are taken on board. Multilateral rules are the only way to guarantee that all members adopt the same standard rules for global fair trade. Without them there would always be the risk of unilateral trade – distorting actions by members seeking to perpetuate domestic protection. Although Malaysia is actively negotiating various freetrade agreements, the WTO remains significant and relevant to us. The positive conclusion of the next Doha round of trade talks is also important for promoting the interests of smaller economies, so the system will be able to facilitate and enhance access of smaller economies into larger markets, both in stable and developing countries.

Malaysia:
The Next Chapter
Halfway through its first century of independence, Malaysia also finds itself more than halfway toward realizing the Ninth Malaysia Plan economic blueprint and its Vision 2020 target to be a first-world economy. The country has reached a critical juncture – it has amassed enough momentum to make a quantum leap up the global value chain.

At the June midterm review of the Ninth Malaysia Plan, Prime Minister Abdullah Ahmad Badawi had an excellent report card for the country. He said since the plan’s inception in 2005, economic growth has been maintained at 6.1% per year; per capita income has risen from US$5,797 to US$7,097 in 2007; and the fiscal deficit has been reduced from 3.6% of gross domestic product (GDP) to 3.2% in 2007.

Clearly, the country has stayed on course for growth. Out of 55 countries, its world competitiveness ranking improved from 26th position in 2005 to 19th position in 2008 (source: IMD World Competitiveness Yearbook 2008); its global competitiveness ranking improved from 25th position out of 125 countries in 2005 to 21st position out of 131 countries in 2007 (source: WEF Global Competitiveness Report 2007-2008); and, it improved from 25th position out of 175 countries in 2006 to 24th position out of 178 countries in 2008 in regard to ease of doing business (source: Doing Business 2008, World Bank).

The political process has been peaceful through the years, with both ruling and opposition parties maintaining pro-business agendas.
Macro-level plans are in the cards for five development corridors: Iskandar Malaysia (South), the Northern Corridor Economic Region (NCER), the East Coast Economic Region (ECER) in Peninsular Malaysia; and in East Malaysia, the Sarawak Corridor of Renewable Energy (SCORE) and Sabah Development Corridor (SDC) – which would drive growth and bring opportunities throughout the nation by drawing investment and creating jobs in high-value services, petrochemicals, agro-based industries, electronics and tourism.

The Iskandar Malaysia zone in the southern state of Johor particularly is expected to lead the way in attracting investments to Malaysia in the areas of financial, logistics, health, education and creative services.

Despite intense global competition, in the next chapter of growth, a flood of foreign direct investments (FDI) is likely to pour into Malaysia. So far, FDIs in 2007 were the highest recorded to date. The economy registered a strong GDP growth of 7.1% in the first quarter of 2008.

A raft of incentives has been introduced to enhance the investment environment. These include a government-established Cabinet Committee on Investment and reducing the corporate tax rate from 27% to 26% in 2008. In 2009, the tax will be reduced to 25%.

The Knowledge-Based Economy Development Index, which monitors the progress of the economy toward becoming knowledgebased,
increased by 227 points from 2,413 in 2000 to 2,640 in 2007. The most significant improvement was in computer infrastructure, which registered an increase of 220.5%. Research, development and technology increased 24.1%, and education and training increased 6.5%. Malaysia was among the top five countries that registered the largest progression in this area.

Business leaders say current pressures are a mere blip in a broader story of inevitable growth. Fundamentals such as natural resources will provide ballast in the turbulence of global sky-high fuel and food prices and rising inflation. As a small and open economy, Malaysia’s economic outlook will be influenced by these global uncertainties, but resilience is expected because of the country’s diversified export base and low exposure of local financial institutions to the U.S. subprime market.

And, as the top global exporter of palm oil, currently a high-value commodity as its prices track petroleum prices, Malaysia will always have a stable foundation from which to move forward.

Magnet for Investment

In the escalating competition for foreign investment dollars, the government’s dedicated agency for promoting investments in the manufacturing and services sectors gives a good accounting of itself: Statistics for January to June 2008 show 417 manufacturing projects were approved with investments amounting to US$10 billion. In comparison, 949 manufacturing projects involving investments of US$18.4 billion were approved for the whole of 2007. The 2008 figures exceed the target for the manufacturing sector of US$8.5 billion per annum, set under Malaysia’s Third Industrial Master Plan.

The Malaysian Industrial Development Authority (MIDA) can claim much credit for seeking out these foreign investors and serving as a one-stop agency for these investors’ needs.

Director General Dato’ Jalilah Baba says, “Being stable and transparent is our strength. As a friend to investors, we have been accepted as the first point of contact, and we have a professional staff with experts from all fields.”

As a sign the business community is sitting up and taking notice, the share of private investment to total investment in Malaysia has gone past the halfway point to 53.5% in 2007, while the contribution of private investment to GDP was 11.9% in 2007.

Dato’ Jalilah assumed her current post in June 2008, following 30 years of experience in MIDA. Her extensive negotiation skills and business networking exposure to relevant federal government and state authority officials is a bonus for investors working through the system of approvals.

 

 “We realize the way forward is to maintain manufacturing in capital-intensive, high-valueadded and high-knowledge content industries, while pushing for the services sector.
— Director General Dato’ Jalilah Baba,
Malaysian Industrial Development Authority (MIDA)

 

“We are very aware processes must be done quickly. A fast-track system is in place to ensure applications for manufacturing licenses go through in just seven days,” she adds.

In February, MIDA introduced an online application system allowing applications such as manufacturing licenses, duty exemption and expatriate posts to be processed online. An inter-agency Business Licensing Electronic Support System has also been introduced, allowing investors to track application status. At a higher level, the government has established the Special Taskforce to Facilitate Business (PEMUDAH) to ensure its delivery system meets private-sector expectations.

More tangible incentives are utilized too, including corporate tax exemption and import duty exemption on raw materials and
components/equipment. Of 1,200 cases approved recently, about 500 were approved with incentives.

“Malaysia is currently emphasizing the services sector as an important source of growth in the future. Manufacturing-related services such as operational headquarters, international procurement or regional distribution centers, and IT service centers, alongside other service industries, are projected to contribute about 60% to GDP until 2020.

“We want to reserve our workers’ skills for higher-value-added projects to get a better return in the long term. Malaysia wants projects that come in with high IP and knowledge content, such as Honeywell UOP, which specializes in downstream oil and gas equipment. Business outsourcing is also a target area.

“We have been stepping up efforts to attract investments from Middle Eastern countries. They are contributing largely to the halal and oil and gas sector, and in downstream products,” Jalilah says.

MIDA recently signed a Memorandum of Understanding (MoU) with the Federation of GCC Chambers (FGCCC) – the association representing all federations and chambers of commerce of the Arab Gulf States (GCC) – to establish its GCC-ASEAN Economic Centre (GAEC) at MIDA headquarters in Kuala Lumpur. This will help the GAEC coordinate its interests in Malaysia and serve as its springboard into ASEAN.

The agency is taking a holistic approach to the projects it assists, seeking investment in areas that will have spinoff benefits for
Malaysia. For example, the GAEC has already appointed Honeywell UOP as its regional outsourcing center, and according to Dato’ Jalilah, “Honeywell UOP in turn came in because it saw potential to work with companies in Penang.”

While targeting the services sector, MIDA is not turning its back on manufacturing. Foreign investments in manufacturing projects
approved from January to June 2008 amounted to US$7.2 billion, while domestic investments reached US$2.9 billion.

Malaysia, an emerging area for technology, has been able to attract the solar energy industry, where leading companies, such as First Solar, Q-Cell and Sunpower, have had projects with substantial investments for the manufacture of solar cells and modules.

Alternative energy is high on MIDA’s agenda, and these companies were given customized incentives, illustrating the agency’s willingness to be flexible on projects with a high impact on the Malaysian economy. MIDA is also talking to downstream manufacturers of related products to build related businesses domestically.

 

“We realize the way forward is to maintain manufacturing in capital-intensive, high-value-added and high-knowledge content industries, while pushing for the services sector. We are building the capacity of domestic industry to offer, via strategic alliances, the opportunity to take advantage of incoming technologies. The spillover of knowledge to local industries will spur economic growth in the country,” says Dato’ Jalilah.

In its bid to have global reach, MIDA will have 26 overseas offices by year end, including three that were recently established in Guangzhou, Mumbai and Dubai.

Economic Turbines Are Fully Charged
Investors may be attracted by incentives and benefits, but their favors are likely to be hastily bestowed elsewhere should they find no market for the goods and services they produce.

While MIDA is revved up to attract investments, the Malaysia External Trade Development Corporation (MATRADE) is equally prepared to drive demand for the export products these companies generate.

The agency played a role in growing Malaysian trade by 11.2% between January and May 2008, despite slow growth in global trade over the same period.

While growth in the electrical and electronics products (E&E) sector is expected to be soft in the near term, Malaysia’s exports earnings will instead benefit from the resulting rise in global prices of palm oil, crude petroleum, LNG and refined petroleum products, which figure strongly in Malaysia’s export earnings.

MATRADE CEO Dato’ Noharuddin Nordin says, “Malaysian companies are present throughout the value chain. In the products sector, Malaysian companies can design, prototype, test, manufacture and distribute a wide range of components and finished products. In the services sector, Malaysian companies are strongly represented in upstream and downstream activities in industries such as oil and gas, education, healthcare, construction and ICT.

According to Deputy CEO Dr. Wong Lai Sum, Malaysia strives toward providing higher-value downstream products such as pharmaceuticals, petrochemicals and food additives, while enhancing intra- and intersectional linkages.

E&E exports in 2007 accounted for 43.4% of Malaysia’s total exports.

“The Asian market is receptive to Malaysian products because they are comparable in terms of quality, reliability and design to those from Western countries. Malaysian companies are also reputed for providing efficient pre- and post-sales services.”
— Dato’ Noharuddin Nordin, CEO,
Malaysia External Trade Development Corporation (MATRADE)

For the first five months of 2008, the exports of E&E totaled US$31.1 billion, which contributed to 37.6% of total exports for the corresponding period. MATRADE has begun promoting products in new areas such as test machinery, halal goods and jewelry. Professional services in sectors such as construction, education, healthcare, information communications, franchising, oil and gas, and Islamic finance have been deemed priorities. In the Third Industrial Master Plan, business and nongovernmental services are targeted to grow at an average annual rate (AAR) of 7.5% from 2006 to 2020 and the construction sector at 5.7% for the same period.

The country’s wide spread of trading partners also provides insurance. With the exception of the U.S. and Germany, its top partners are Asian. Exports to Northeast Asia and ASEAN in 2007 constituted 58.9% of total trade. For the year 2007, India and China collectively composed 13.1% of Malaysia’s external trade.

Initiatives to strengthen exports to emerging economies, including those in the Middle East, Eastern Europe and Africa, are paying off. Trade with Africa and West Asia expanded by 59.18% and 32.11% respectively for the first five months of 2008.

January to May 2008 figures showed developing country exports growing at triple-digit growth. Case in point, Malaysia’s exports to Yemen, Jordan and the Ukraine had grown 133.3%, 569.5% and 340.6% respectively. Meanwhile, for the same period, exports to the Russian Federation (98.3%), Pakistan (64.1%), Egypt (67.6%) and India (18.8%) saw double-digit growth.

“Halal products and services are a tremendous market. The West Asian market for medical treatments illustrates this. They come to
Malaysia because they don’t have to worry about the clothes they wear as patients, the food they eat or the medicine they take – all are part of a broad halal chain,” says Dr. Wong.

“And where healthcare is concerned, Malaysia can provide the total package. We can export our ability to run state-ofthe- art medical facilities and hospitals and pharmaceuticals and medical devices for the healthcare industry. Malaysia is also the top manufacturer of surgical gloves and catheters,” she added.

As for the next chapter, the manufacturing and service sectors, which collectively account for 83.59% of Malaysia’s GDP in 2007, are expected to continue to drive exports in the near future. While exports of E&E products will continue to be the largest export contributor, there will be some changes in the profile of exports, which include not only large components of semiconductors, but also micro devices as well as energy-saving and solar applications.

Dato’ Noharuddin says, “The Asian market is receptive to Malaysian products because they are comparable in terms of quality, reliability and design to those from Western countries. Malaysian companies are also reputed for providing efficient pre- and post-sales services. A
major strategic advantage that Malaysia offers to other Asian countries is its extensive ties with markets in other parts of the world.”

Malaysia has already signed free trade agreements (FTAs) with Japan and Pakistan. It is negotiating FTAs with India, Chile, the U.S. and Australia/New Zealand, and enjoys the FTAs the ASEAN economic grouping has with Korea, China and Japan.

These agreements, coupled with Malaysia’s strategic location in one ASEAN Free Trade Area and in the Asia Pacific, create tremendous opportunities in terms of trade and investments.

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