This article first appeared in The Edge Malaysia Weekly on August 1, 2022 - August 7, 2022

BUSINESS activities in the country have been in full swing for several months now, after two years of pandemic-induced movement restrictions. Demand has been strong since borders reopened, but the rising cost of raw materials, global economic uncertainties and, more pressingly, labour shortages have impacted the business growth of small and medium enterprises (SMEs).

Usually, strong orders from clients mean that business owners will start thinking about making investments to meet the demand. However, at this point in time, very few SMEs are considering capital expenditure.

“Many of our members are holding back on capital investment despite the pandemic seemingly coming to a tail end. Without certainty in our ability to deliver on orders, or for that matter, whether the orders are sustainable, it is quite difficult to make substantial investments,” says Small and Medium Enterprises Association (Samenta) chairman Datuk William Ng.

Besides, many SMEs are still operating under tight cash flow conditions, which was exacerbated by the long-drawn pandemic, says SME Association of Malaysia president Ding Hong Sing.

“Very few are thinking of investments now because cash flow is tight. I believe the government should help to support us more,” he adds.

The SMEs’ hesitance to make new investments could exacerbate the moderating trend in approved domestic direct investments (DDIs), as compiled by the Malaysian Investment Development Authority (Mida). DDIs are viewed as a barometer of the SME sector as these businesses are the ones most in need of incentives from the agency.

Comprising 98.5% of the total establishments in Malaysia, the SME industry is often seen as the backbone of the local economy. In 2019, it contributed about 38.9% to the country’s GDP and 17.9% to total exports, while employing 7.3 million people.

Notably, approved DDIs fell from RM148.9 billion in 2016 to RM100 billion in 2021. On the other hand, approved foreign direct investments (FDIs) had grown by leaps and bounds, from RM59 billion in 2016 to RM208.6 billion in 2021, according to Mida.

For the first quarter of 2022, approved DDIs stood at RM14.98 billion while FDIs amounted to RM27.83 billion, having fallen 41.7% and 49.3% year on year respectively. The Ministry of International Trade and Industry (Miti) is targeting RM100 billion worth of DDIs for this year.

A moderating trend in approved DDIs raises concerns because of the significant role such investments have in the economy.

“We need strong DDIs to support the [investment] ecosystem. More often than not, FDIs [flow into] the country because we have a good ecosystem and a local supply chain to support the industry they are in,” says Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s (ACCCIM) Socio-Economic Research Centre (SERC).

In a recent DDI survey done by SERC for the National Chamber of Commerce and Industry of Malaysia (NCCIM), which looked at issues and factors that have contributed to the weakening DDI trend, 58.9% of the 227 respondents cited bureaucratic hassles as the most critical obstacle in government-business interactions.

“While businesses would want to comply with the regulations at ease and spend less resources and time, over-regulation would hold back the economy and dampen private investment,” NCCIM and ACCCIM president Tan Sri Low Kian Chuan said in his keynote address at Mida’s Domestic Investment Seminar last week.

According to him, the government’s Economic Planning Unit, the Ministry of Finance and Miti will review the proposals made by NCCIM to revive DDIs. “Among these include reform initiatives to reduce 50% of bureaucratic constraints, consolidate investment incentives, review the management of foreign workers and prepare an action plan to expand stronger linkages between SMEs and FDIs,” he added.

In the post-Covid-19 environment, the three main issues faced by SMEs today are labour shortages, rising costs and uncertain economic conditions. Of these, their biggest challenge is the shortage of manpower.

“We have demand but just not enough workers. It is not that we don’t pay a fair wage, we pay more than the RM1,500 minimum wage. And with overtime, workers can get RM2,000 or more,” says SME Association’s Ding.

After a long wait, Putrajaya recently agreed to allow the three major sectors — manufacturing, construction and services — to hire workers from 15 source countries. While this is great news, SMEs say the applications need to be processed quickly to minimise further disruptions to production.

Notably, the applications for foreign workers have been moved online. However, says Samenta’s Ng, many of its members have said the response for interview dates — part of the approval process for hiring foreign workers — has been slow.

“Some travelled all the way to Putrajaya only to be told that their interviews had been postponed. Some have had no choice but to resort to agents to expedite the matter, which we do not encourage and, frankly, should not happen. We urge the relevant ministries to investigate this matter urgently,” he adds.

The foreign worker hiring process takes an average of three to six months before they can set foot in the country. According to Ng, after taking into account the necessary training and sorting out workers’ accommodation, the earliest the industry will be able to see a resolution to the labour crisis will be in the first half of 2023.

“In the meantime, we are losing orders by containers to neighbouring countries such as Indonesia and Vietnam. We have already missed out on parts of the global supply chain following our extended lockdowns. Getting back into the system is already difficult as it is, without being constrained by these bureaucratic challenges,” he says.

Senior Minister (International Trade and Industry) Datuk Seri Mohamed Azmin Ali has acknowledged that the labour shortage is something that needs to be resolved quickly. He told reporters on the sidelines of the Mida event that the current challenge is with the entry of foreign workers and the Ministry of Human Resources (MoHR) is working hard to ensure the processing of foreign workers being brought into the country can be done as quickly as possible.

“Demand from the industry is high. The majority in the industry have already paid the foreign worker levy. But the question that the industry is asking now is, where are the workers? It is a serious matter and it has become a topic of discussion at almost every cabinet meeting, as we want to resolve this quickly in order to revitalise and generate economic growth in the near term,” he said.

A piece of good news for employers would be the lifting of restrictions on the entry of Indonesian workers into the country effective Aug 1. The MoHR announced last Thursday that a three-month pilot project for the recruitment of domestic workers and labourers would be implemented with the integration of the existing system between the Malaysian Immigration Department and the Indonesian Embassy in Kuala Lumpur.

Last month, Indonesia temporarily froze the entry of the country’s workers into Malaysia for not using the single system as previously agreed upon.

One solution that has been frequently thrown at SMEs in response to their labour woes is to automate. While automation would certainly help to resolve some of the manpower constraints, business owners have pointed out that not all jobs can be automated.

Some are willing to automate, but the investment required could be a turn-off to SMEs that are already dealing with rising costs and tight cash flows.

“It is really difficult for small businesses to put in such a big investment for automation. If you talk to them about a return on investment in seven years, it is just too long for them. They would rather use foreign workers, which are cheaper. It is a difficult problem to solve,” says Koong Lin Loong, treasurer-general and chairman of the SMEs committee at ACCCIM.

Ding suggests that the government step up to help SMEs more in terms of automation. Currently, there are loans and grants available to SMEs interested in automation, but businesses say more needs to be done.

Meanwhile, the cash flow constraints that severely impacted many SMEs during the pandemic are said to have eased a little as economic activities pick up. However, this varies, depending on the segment the business is operating in.

According to Ng, those in the travel, trade and retail as well as food and beverage sectors have been dipping into whatever savings they have to reboot their business, with credit difficult to obtain due to poor financials caused by the lockdowns. “We are hopeful that a further moratorium from legal actions can be extended to SMEs until end-2022, while further government guarantees are provided to them so they can obtain the necessary credit to hire people, buy supplies and restart their businesses,” he says.

Koong believes that SMEs today have less cash in hand, considering that the cost of doing business has increased.

A businessman laments that even when great opportunities are available in these times, financial aid continues to be a big barrier for small businesses like his.

“Let’s say I have a company with RM2 million in paid-up capital that has won a job five times the size of my paid-up capital. No matter how skilled my company is in performing the job, we will have difficulty in getting a loan to fund it,” he says.

“I understand that banks need to calculate the necessary risk. But at the same time, it stifles SMEs’ opportunity for growth when small companies like mine that actually need the loans can’t get it.”

So, how do SMEs view their business prospects this year in the light of such challenges?

“Business is definitely better than last year because economic activities are fully back on. But many of us are facing really high costs now and have little to no margin. We either just break even or see a contraction in the bottom line,” says Ding.

Ng is a bit more optimistic, as he believes it is still possible for the country to reach the GDP growth forecast by the central bank. However, he points out that there will be huge gaps in recovery between businesses in different sectors, such as semiconductor versus services, or other labour-intensive industries.

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