Manufacturing The situation and prospects of the manufacturing sector have changed significantly after the economic downturn after mid-1997. To move ahead towards sustained output and export growth, strategies are required to meet growing competition for foreign direct investment (FDI) and slower pace of local investment. In 1997, manufacturing output grew at 12.5 per cent and exports at 13.0 per cent. The ringgitís depreciation enhanced international competitiveness of the export-oriented industries. But, this was dampened by slower growth in demand in Asia, intense competition that forced downward adjustments in the dollar export price, and labour and capacity constraints. The sector faces the following issues: Higher exports in 1997 were due to gains from exchange rate differences rather than volume expansion. Thus, exports grew by 13.0 per cent in ringgit terms, but in US dollar the growth was marginal at 1.1 per cent. A weak ringgit cannot be the basis for sustained competitiveness. It must rest on productivity improvements. Domestic-oriented industries, particularly those with high import content, were adversely affected by higher production cost, the wealth effect from the stock market slump and decline in disposable incomes. Worst affected were those related to construction and automobiles. In 1998 manufacturing growth is expected to contract by 2.5 per cent. Investment could decline due to lower growth in the industrial countries, economic and financial fragility in the Asian region and weak local demand. With removal of tariffs and non-tariff barriers by 2003 under the CEPT, Malaysia must concentrate on industries in which it has competitive edge. Although Malaysiaís infrastructure is among the best in the region, there are serious shortcomings notably in electricity and water supply. Although Malaysiaís set of investment incentives is among the most generous, constant review is needed to keep it in line with others in the region. Presently, potential investors cannot be offered a pre-package of incentives. With MIDA now adopting a company-based approach, a pre-package of incentives can be a strong bargaining tool. Due to changes in the eligibility for reinvestment allowance (RA) under the 1998 Budget, firms are putting on hold their expansion plans. Although the ëone-stopí agency at MIDA has reduced delays in project approval, considerable delay continues to occur at the State-level. The one-stop agency at MIDA has expedited the approval of key posts for expatriates. Foreign firms, however, find the renewal of expatriate work permits cumbersome and time consuming. In the light of the economic crisis, promoting FDI is critical. MIDA requires an additional RM 13.02 million over and above the current allocation of RM 36.98 million for promotional activities in 1998. Bank credit has been channelled to electronics and textiles as well as the construction-related industries. However, others with large export potential such as rubber and palm oil-based products and transport equipment received a much smaller share. Most small and medium-sized industries (SMIs) face credit squeeze but are reluctant to approach banks for lack of collateral and perception that banks are unsympathetic. The current economic crisis is forcing many firms to downsize. SMIs could have access to machinery and factories and other production facilities at a discounted price. Reorientation of the Manufacturing Sector The export-oriented industrialisation process initiated in the early seventies has effectively and drastically transformed the economic structure of Malaysia from an agricultural nation to an industrialised nation, while contributing to rapid and robust growth. The manufacturing sector in 1997 constitutes 34 per cent of Malaysiaís Gross Domestic Product (GDP) and accounts for 81 per cent of total exports. By contrast, in 1970 the sector contributed 12 per cent to GDP and 11 per cent of exports. At present, the manufacturing sector is dominated by the electronics and electrical industries, which have contributed significantly to industrial output, employment and export growth. The electronics industry accounts for 66 per cent of total manufactured exports or 52 per cent of Malaysiaís total exports, while employing a quarter of the total workforce of 2.3 million in the manufacturing sector. However, there are some main areas of concern relating to the present situation and future directions of the electronics industry, as summarised below: Value added in electronics is still relatively low. This is in part attributed to pricing and transfer pricing of input and output. Although the absolute volume of value-added is big, more effort is needed to further increase the value-added by moving into higher technology, higher-end products, research and development (R&D), back-end and front-end operations, including marketing, distribution and customer service. The MNCs in the electronics industry have over the years spawned a number of local companies, especially in fabricated metal, plastics and high-precision plastics, machinery, high-precision tooling parts, mould and die, automation equipment. Some of these local SMI have upgraded themselves into multinational and transnational operations, forming joint ventures with foreign technology firms to produce high-quality parts and equipment. However, more effort is needed to promote more local sourcing and the growth of local SMIs. While the electronics industry was originally promoted to cater for low-skilled mass employment opportunities, labour market conditions have changed drastically, especially over the last decade. While many MNCs have moved from labour-intensive operations to more capital-intensive automated operations, thus reducing its overall workforce and increasing production and productivity, there is still considerable labour-intensive assembly work, especially within the consumer electronics subsector, which is fast losing its competitive advantage because of rising labour and other costs. There is a need for enhanced effort towards higher level of technology and automation. In the last decade, some MNCs have transferred some of their R&D activities, especially in electronics production and process engineering, into their Malaysian operations, including the design and sourcing of automation equipment locally. However, there is still insufficient higher-level R&D activities related to product and technology within MNCs located in Malaysia and even less so within Malaysian SMI operations. Greater emphasis is, therefore, needed to promote technological transfer and R&D capability. This can only be achieved by creating a conducive environment for R&D, convincing the MNCs to commit R&D activities locally and producing enough local technological manpower with the required quality and productivity. Import content in the electronics industry is still significant, inclusive of imported parts, components and equipment. Moreover, the 80 per cent export requirement (which has recently been relaxed) for wholly foreign owned companies have led to exporting and re-importing of intermediate parts and components which are manufactured locally but required as inputs into end products and other intermediate products. Such re-importing adds to the reported figure on imports. There is hence a need to further reduce import content and increase local content in Malaysiaís electronics industry. While there has been substantial new investment and re-investment in recent years into the electronics industry, the outflow of investment income has also been substantial. It is also generally perceived that transfer pricing and raising the price of imported components and equipment are rather common practices aimed to lower tax incidences. Greater efforts should be made to target and convince particular MNCs presently operating in Malaysia with good track records to increase their re-investment, especially in R&D, technology, management, international procurement, marketing and customer service which will also increase local value-added. Recommendations The present economic conditions require that the potentials of the manufacturing sector be maximised to generate growth, exports and employment. It is timely to review its industrialisation thrusts to explore the potentials of promoting industries that promise maximum returns to the country. The strategy for the manufacturing sector should consist of three prongs: Upgrading technology, further enhancing automation and deepening local linkages in the electronics and electrical products industry. Promoting actively IT-related industry and business in accordance with the development of the Multi-Media Super Corridor (MSC) and the National IT Agenda. Promoting actively industrial diversification into resource-based and other export-oriented industries with high local content and other spin-offs where Malaysia can derive maximum returns. Some of the specific strategies that should be implemented to maximise growth and contribution of the manufacturing sector are as follows: Suspend the present foreign equity ruling for all projects approved and implemented between now till 31 December 1999, excluding industries where local firms have adequate capabilities and strategic industries. Authorise MIDA to use a pre-packaged set of incentives to negotiate with foreign firms in selected industries. MIDA should focus on the industries that have export potential. Allocate an additional RM13 million for MIDA for promotional activities in 1998. MIDAís programme should take into account the Governmentís concern to promote industries that have strong export potential. Review the investment incentive system to bring it in line with that of the neighbouring countries. Require Menteri Besar and Chief Ministers to be responsible for speedy approval of projects at the state level. Instruct the Immigration Department to approve expatriate working permits for key posts for a minimum 5 years, but taking into consideration the growing pool of professionals in the country. Suspend the conditions of eligibility for the reinvestment allowance for 1998 and 1999. Ensure that bank lending is channelled to industries that offer the greatest potential for exports and where local firms are concentrated. Provide SMIs information on funds and review conditions to allow drawdown for operations and working capital. Instruct MITI and SMIDEC to explore the possibility of larger SMIs acquiring excess production capacity created by downsizing by MNCs. Request State Governments to set up Working Committees to monitor and resolve problems related to water and electricity. Encourage strategic alliances between local firms and foreign firms to effect the transition from assembly-type to higher value added industries. In line with the reorientation of the manufacturing strategy, the following measures are recommended: Human resource development and skill training should be further enhanced in order to upgrade the workforce in various sub-sectors in manufacturing, especially in skills related to IT, computer, automation and computer integrated manufacturing. Manufacturing firms should be encouraged to take advantage of the slowdown in production to train their staff in-house. In the meantime, school leavers and retrenched workers and not able to find jobs can also be given training in public and private institutions so that they can be better equipped and prepared for employment opportunities during the economic recovery process. SMIs would be encouraged to exploit opportunities as vendors and suppliers. There is considerable scope for expanding SMI involvement in manufacturing as suppliers to large firms in electronics, automobile and other mechanical products. A study should be conducted to identify the potentials for promoting export-oriented industries. The main tasks for the study include: analyse the demand pattern for manufactured goods in developing countries, not only in the region but also in South America and Africa for which Malaysia has comparative advantage. examine the marketing chain of the suppliers and determine how Malaysia can position herself to enter into the market and how to increase market share in products already exported from Malaysia. identify the gaps in Malaysiaís production capabilities, determine the range of products for concentration, and propose policies and strategies for the promotion of these products, and identify investors, both foreign and local, to undertake investment in the selected industries.

Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4 | Chapter 5 | Chapter 6 | Chapter 7 | Chapter 8 | Back to Contents Page