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
- 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.
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
- 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
- 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
- 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.
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
- 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.