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The China Alternative – MalaysiaPosted on October 25, 2011 by China Briefing

The China Alternative is our series on other

foreign investment destinations in emerging

Asia that may soon be competing with China

in terms of labor costs, infrastructure and

operational capacity. In this issue we look at

Malaysia.

By Cindy Tse

Oct. 25 – The Malaysian government recently

announced an ambitious goal to become a

high-income nation by 2020, necessitating

equally bold changes to the country’s social

and economic policies. The state’s reform program, the New Economic Model, was launched in March of

2010 and involves ambitious schemes to restructure the economy and pull it out of low value-added

manufacturing and increase private investment.

The NEM is just one of four economic programs to come out of Prime Minister Datuk Seri Najib Razak’s

office in 2010. The Tenth Malaysia Plan will direct the state’s public sector capital expenditures, the

Government Transformation Program will address corruption and issues with Malaysia’s social welfare

provisions, and the Economic Transformation Programs will be dedicated to spurring growth in foreign

and domestic private investment.

BackgroundMalaysia’s 13 states and 3 federal territories are divided by the South China Sea into the two regions of

West and East Malaysia. West Malaysia, or “Peninsular Malaysia,” borders Thailand, while East

Malaysia, or “Malaysia Borneo” borders Indonesia and Brunei.

Malaysia is governed as a constitutional monarchy, though Peninsular Malaysian states retain hereditary

rulers who are often referred to as “Sultans.” The capital city is Kuala Lumpur, a bustling metropolis of

1.6 million.

Malaysia’s population of 28.7 million is comprised of three main ethnic groups – Malay, Chinese and

Indian. As would be expected in a society where multiple cultures and religions co-exist, relations

between various groups are not always harmonious. However, in the case of Malaysia, most policy

changes have to take into account the effect on the often competing interests of these ethnic groups.

English is widely used as a second language, particularly in the workplace, making Malaysia a relatively

easy place for foreign enterprises to operate in. Most Malays are multilingual, with Bahasa Malaysia as

the official national language. Various mother tongue languages are spoken as well, such as different

dialects of Chinese, Tamil, or Bahasa Indonesia, which is quite similar to Malaysia’s official first

language.

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EconomyThe export-led economy in Malaysia was affected significantly in 2009 by overseas declines in demand

for consumer goods brought about as a result of the Global Financial Crisis, though the country

managed to bounce back in 2010. Malaysia’s GDP reached US$414.4 billion in 2010 with a high

concentration in industrial (10.5 percent) and service sectors (48.2 percent), as well as agricultural

production (10.3 percent) in rubber, palm oil, timber, and rice. The industrial sector consists

predominantly of rubber and palm oil processing and manufacturing, pharmaceuticals, medical

technology, electronics, tin mining and smelting, logging, and timber processing. Malaysia is also a

significant oil and natural gas producer, making the country quite vulnerable to fluctuations in oil prices.

The government is noticeably dependent on the state-owned oil company Petronas to fill its coffers, as it

contributes roughly 44 percent of the government’s revenue.

The country’s account balance is in a comfortable position, with its US$34.14 billion surplus ranked 13th

in the world – though naturally a minor point when compared with China’s US$305.4 billion surplus.

Aside from the United States, Malaysia’s trading partners are highly concentrated in the Asia-Pacific

region, with Singapore, China, Japan, Thailand and Hong Kong having the highest shares of imports

and exports.

Investment climateForeign direct investment (FDI) in Malaysia has climbed modestly over the last 10 years, though growth

may reflect the reinvested earnings from existing multinationals that make up a significant share of total

FDI.

Given the highly racialized nature of politics in Malaysia, governments throughout much of Malaysia’s

recent history have been quite cautious in enacting policies to encourage FDI. Since the 1970s, there

has been a “30 percent equity rule” in Malaysia, which requires 30 percent equity of any enterprise to be

held by a Bumiputra – an ethnic Malay or indigenous person. The purpose of the policy was to increase

Malays’ share of the nation’s wealth to a fair 30 percent. And while the government maintains that it has

yet to reach this target (they claim Malay ownership is at 18.9 percent), studies on the subject say the

30 percent target may have already been surpassed.

Since 2009, there have been more and more exceptions to these Bumiputra ownership rules.

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the Iskander Development Region are exempt. Prior to 2009, all initial public offerings (IPO) on the

Bursa Malaysia were required to set aside 30 percent for purchases by Bumiputra. This 30 percent has

since been reduced to 12.5 percent for new listings of foreign-owned corporations.

While there are substantial incentives offered by the government to encourage foreign investment, they

are not without performance requirements, and they certainly won’t last forever. Specific requirements

are incorporated directly into each individual business license for both foreign and domestic investors.

These can include export targets, local content requirements, and mandatory transfers of technology.

In 2003, in an effort to increase investment in high value-added sectors, the government extended the

existing tax exemption from 10 to 15 years for firms that qualified for “Pioneer Status.” This status is

given to enterprises involved in specific geographical regions, as well as products or services deemed by

the government to be of high priority for development. There is also a more modest 5 to 10 year tax

holiday in some lower priority sectors under the “Investment Tax Allowance” scheme. These incentives

are said to be provisional, though it’s unclear when they will expire.

As part of the 2010 Economic Transformation Program, the state has selected 13 sectors in which to

boost private investment, though it remains to be seen how welcome foreign participation is in these

plans. These sectors include electronics, medical devices, green energy, machinery and equipment, oil

and gas, and transportation equipment. Resource-based industries and services like logistics are also

targeted sectors.

Doing business in MalaysiaMalaysia ranks relatively high in the International Finance Corporation’s Doing Business rankings in

terms of the ease of doing business. In the 2012 rankings for data up to June 2011, Malaysia is ranked

18th overall out of 183 economies; well ahead of China which is positioned at 91st, yet still behind

neighbouring Singapore, which tops the rankings.

Malaysia has been climbing in the rankings gradually, bolstered by the ease of getting credit in the

country (ranked 1st overall) and its protection of investors (4th). Its recent jump into the top 20 can be

attributed to this past year’s dramatic improvements in the ease of starting a business (from 111th in the

2011 rankings to 50th this year) and enforcing contracts (from 60th to 31st).

Starting a business in Malaysia has become significantly faster, easier and cheaper over the last few

years. In 2006, it took an average of 37 days, 10 procedures and 25.1 percent of the average

Malaysian’s income to start a business. Now, just five years later, it takes only 6 days, 4 procedures, and

about 16.4 percent to get your business off the ground. Online filing of registration documents started in

2009 with more and more procedures done online each year. As of this year, companies can register

various business and tax documents with the government’s “SSM e-lodgement” web service 24 hours a

day.

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However, as is the case with China, the difficulty of dealing with construction permits in Malaysia – where

a process like acquiring building plan approvals can take up to 90 days – contributed to keep Malaysia

behind other Asian countries including Singapore, Hong Kong (2nd) and South Korea (8th).

Another major deterrent for potential investors in Malaysia is the weak enforcement of patents. Without a

special court dedicated to dealing with patent infringements, one cannot be certain that innovations will

be protected.

LaborEmployers in Malaysia are often frustrated by issues relating to Malaysia’s labor pool and the

government’s unpredictable labor and immigration policies. The country has long been plagued with an

acute shortage of skilled, local labor, as the labor force only numbers 11.63 million, supplemented with a

foreign labor pool of 2 million legal workers and an estimated 800,000 illegal immigrants.

Aggregate numbers on the legal work force in Malaysia are slightly worrying, as their productivity growth

is low (3.3 percent) compared to that of China’s (8.7 percent), which is the highest globally and has risen

steadily. However, Malaysia’s advantage over China might be its low turnover (5 percent) and wage

inflation (5.5 percent). With China’s highly mobile workforce, some enterprises in concentrated industrial

zones in China’s manufacturing hubs complain of extremely high turnover, such that competitors are

merely swapping workers and raising salaries. Official estimates show average wage increases of 13

percent per year since 2005. Enterprises in Malaysia can expect to retain their employees longer with

more stable wage increases.

In addition to this sustained labor shortage, it’s the state’s fluctuating policies on immigration and labor

that have led many companies – local and foreign alike – to relocate their businesses outside of

Malaysia. The government has at various times cracked down severely on illegal workers. In 2006,

Malaysia saw periodic raids from government task forces attempting to flush out illegal immigrants. One

factory alone was found to be employing around 1,500 illegal immigrants. More recently, during the

global economic recession in 2009, the government enacted a complete ban on new hires of foreign

employees in the manufacturing and services sectors, which was subsequently lifted.

Investors are currently waiting on legislation proposed in June of 2011 to offer amnesty to the existing

illegal workers in Malaysia, thereby increasing the legal labor pool. For the state, the dramatic move will

raise much-needed tax revenues, improve national security, reduce human trafficking, and most

importantly, attract more foreign investment. Naturally, this proposal has faced staunch opposition from

Malay nationalists, whose interests lay with the rights of local workers. Nonetheless, until a decision is

made official, employers should be cautious in knowingly hiring illegal migrants, as the government

reportedly performs approximately 16,000 canings per year, many of which are on illegal migrants

working in Malaysia’s manufacturing, agricultural and services sectors. The law also stipulates caning as

the maximum punishment for an employer who hires illegal workers, though an offending employer has

yet to receive the brutal lashing.

In addition to shortages in low-skill labor, Malaysia’s labor force also suffers from a sustained “brain

drain,” as talented and highly-skilled professionals have been lured overseas by seemingly better job

opportunities. From March 2008 to August 2009 alone, an exodus of 304,358 Malaysians did little to

help the growth of the nation’s economy, as the majority of those who left were professionals.

The newly established Talent Corp Agency under the Prime Minister’s office will create programs and

incentives to encourage the country’s nationals engaged in key sectors and professions to return home.

The World Bank estimates that approximately 1 million Malaysian nationals are currently working

overseas, with 60 percent of those surveyed by the World Bank citing “social injustice” as the primary

cause for Malaysia’s brain drain. Many of Malaysia’s most talented and experienced professionals settle

in Singapore instead for its stable and financially promising work environment.

It remains to be seen how the government will balance the need to build a highly-skilled labor force

when higher education levels remain relatively low compared to the former East Asian Tigers, such as

Korea, Taiwan and China.

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Free trade zones and free trade agreementsThere are currently a number of free industrial zones (FIZs) and free commercial zones (FCZs) in

Malaysia that facilitate manufacturing and trade activities. Imports coming through these zones are duty

free and face limited customs procedures.

In order to make use of the ASEAN free trade area’s Common External Preferential Tariff rates, there is

a procurement requirement that 40 percent of a product be sourced from ASEAN member states.

Manufacturing and storage activities in these FIZs and FCZs can often be difficult, as approvals from the

zone’s administrators are required for different activities. Operating factories and warehouses outside

these zones gives a greater range of freedom.

Malaysia is a member of the ASEAN Free Trade Area, and has seen significant growth in trade with

AFTA member states, which include Indonesia, the Philippines, Singapore, Thailand, Brunei

Darussalam, Cambodia, Laos, Myanmar, and Vietnam.

Through ASEAN, Malaysia has also signed multilateral trade agreements with a number of trade

partners such as China, India, Korea, Japan, Australia, and New Zealand. A few promising FTAs with

Chile (2010) and the European Union (under negotiation) bode well for the country’s hopes to improve its

trade surplus and find comparative advantage in high value-added sectors.

TransportationMalaysia’s ports are integral to its economy, as 90 percent of the country’s international trade is by sea.

The country operates seven major ports connecting Malaysia to various shipping routes. However, the

International Maritime Bureau reports that shipping vessels are at high risk of piracy and armed robbery

in the territorial and offshore waters of the South China Sea and Strait of Malacca. Though incidents in

the past have resulted in the deaths of crew members, naval patrols have been stepped up in the region

since 2005 and 2010 saw no reports of incidents of robbery.

Real estateInvestors in the region with plans to purchase residential property will be pleased to know that

Malaysia’s regulations on foreign property ownership are extremely liberal. In fact, there are no federal

restrictions on residential purchases of property over RM500,000 (approximately US$160,000), and

previous requirements for approval from the government’s Foreign Investment Committee have been

removed. Nonetheless, individual state governments may impede the process with various formalities.

The Malaysian government has started a program to induce foreigners to relocate to the country with the

“Malaysia, My Second Home” program, which offers 10 year visas with property purchases above

RM400,000 (approximately US$128,000). Other privileges under the program, like duty-free car

purchases, sweeten the deal further for those whose investments in the country might keep them there

for a long period of time. While prices are on the rise, particularly in Kuala Lumpur, they are nowhere

near the prices one can invariably expect to find in nearby Hong Kong, Singapore, and Shanghai.

ConclusionThus it seems that Malaysia’s lofty goal to become a high-income nation by 2020 bodes very well for

foreign investors in the region. Despite losing competitiveness – particularly in low-wage manufacturing

– to neighboring countries, the government’s New Economic Plan and Economic Transformation Plan

indicate a much more inviting investment climate in Malaysia than one might have found in the past. As

is the case with China, Malaysia’s state-led push into high tech industries and emerging sectors offer

investors a wide range of incentives that are sure to improve the profitability, attractiveness, and ease of

doing business in Malaysia.

Related Reading

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Our complete series on other manufacturing destinations in Asia that are now starting to

compete with China in terms of labor costs, infrastructure and operational capacity.

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This unique book is an introductory study of all 14 of China’s neighbor countries:

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Afghanistan, Bhutan, India, Kazakhstan, Kyrgyzstan, Laos, Myanmar, Mongolia, Nepal,

North Korea, Pakistan, Russia, Tajikistan and Vietnam.

Operational Costs of Business in China’s Inland Cities It is widely held that land and labor costs in inland provinces offer quite significant cost

savings over major east coast and southern cities. In this issue, we take a quick look at the

numbers behind these beliefs.

This entry was posted in Business, Economy and Politics, FDI and Foreign Trade, Featured, Markets,The China Alternative and tagged China Alternative, China Alternative Series, China Competitors, ChinaLabor, Emerging Asia, Foreign Direct Investment, Government Incentives, Kuala Lumpur, Malaysia.Bookmark the permalink.

4 Responses to The China Alternative – Malaysia

« China’s Net InternationalInvestment Position Hit US$2 Trillion

in Mid-2011

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Nicole says:

October 25, 2011 at 11:56 pm

Thank You very much for your insights into Malaysia, as compared to China. Malaysiahas been a major catalyst for transformation in the south east asia region and willcontinue to be.

ghl says:

October 27, 2011 at 5:14 pm

Ask an authentic Malaysian like me about the so-called business-friendliness of Malaysiainstead of some lofty experts & my conclusion is :boycott Malaysia’s racist Malay-ledgovernment!.crime rate:Malaysia’s petty crimes are now absolutely out of control due to incompetent& corrupt police force.severe labour, skilled & unskilled, shortage as Chinese & Indian Malaysians are fleeing indroves from institutionalized racial discrimination while Malays are either absorbed intothe civil service or simply too lazy to work. You have to pay heavy levies to importforeign labour to do these jobs.corruption is systemic so much so that you need to grease the system all the way fromminute to important details.inflation is rising so fast & estimated at at least 15% in real term rather than thegovernment’s cooked up figure of 3.5%, thus seriously sapping up the purchasing powerof domestic consumers.rising racial & religious tension due to the racist policies & enforced Islamisation.political uncertainty as the ruling party may be facing its most severe electoral test inhistory.most of the leadership are tainted with scandals & thus held in such low esteem that,barring an expected deliberate electoral cheat, most are expected to be voted out.get a real feel of the conditions on the ground by not reading all the loftily manufacturednews churning out from the much discredited government-controlled mainstream newsbut please read news from the alternative internet portals like The Malaysian Insider,Malaysiakini, Malaysia Chronicle, Malaysia Today etc..

JSVY says:

The China Alternative – Malaysia | China Briefing News

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October 27, 2011 at 7:15 pm

You only need to talk to anyone of the more than 800,000 talented Malaysians who leftMalaysia to work in Singapore and other countries in the world to know how sick is thiscountry of mine. Any foreign investors must look into the Malaysian Government’s racialdiscrimination of the more than 30% of the country’s non-Malays, corruption, religioustensions, mismanagements and so on, before you make your investment decisions.

Overseas Malaysian Chinese says:

November 5, 2011 at 11:06 am

I am a Malaysian Chinese residing and working in China for an MNC.

The various comments about Malaysia having a racist government is true. But this articlespeaks of investment specifically in comparisons to China;

Malaysia is friendly to foreign investors – TRUE. Mal has good English languagebackground, legal, governmental and biz regulations follow closely his Britishbackground. Recent decade of low GDP makes Mal very friendly to foreign investments.Legal rule for foreign investments are much respected.

Malaysia could not offer the domestic market size of China. If an investors would onlywant a maf base, Mal is not bad but don’t count on its domestic market, which is smalland rife with discriminations.

Mal has lost a decade of good managers. Bring your own experts mgmt, otherwise localMalays (Chinese Mal in specific are very hardworking) are lazy and has never tasted hardlife and would general not resolve difficult situtions for investors…. unless one countsworking on bribery is also a virtue.

China is not for all investors, there are many hidden costs and for certain small to midsize investors, Mal could offer a better mgmt climate. In a low start-up I would say Malis cheaper. Only Investors with large market demands and high synergy could efficientlycapitalized the advantages of China.

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