This article first appeared in City & Country, The Edge Malaysia Weekly on February 24, 2020 - March 1, 2020
Malaysia’s strategic location made it one of the most important logistics destinations in the region in the past. Today, with the advent of IR4.0, it continues to leverage the same advantage to establish itself as a preferred logistics and e-commerce hub destination.
Besides its location, there are other factors in its favour, such as the availability of properties and incentives, a modern infrastructure, lower cost of doing business, huge market size in the region and digital readiness.
With large international retail brands setting up their national and regional distribution centres in Malaysia, its potential in IR4.0, especially in the logistics and e-commerce sectors, can be seen.
Nestlé’s national distribution centre at Axis Mega DC in Teluk Panglima Garang occupies the entire Phase 1, which has a built-up of 515,000 sq ft. Further to the west are the Ikea Regional DC in Pulau Indah Industrial Park, Klang, the Lazada Regional DC in Sepang and the Continental Tyres Regional DC in Kuala Selangor.
Advantages
Landserve Sdn Bhd managing director Chen King Hoaw tells City & Country that Malaysia’s 30 highways, five international airports and seven international seaports are linked to all major cities and growth centres in the country. Malaysia is also served by a telecommunications network of digital, fibre-optic and satellite technology, which is crucial to the industrial, logistics and e-commerce sectors.
“According to the Malaysian Communications and Multimedia Commission’s 2018 statistics, there were 39.4 million broadband subscriptions in the country, and 3G and 4G/LTE network had expanded to reach 94.7% and 79.7% population coverage respectively, signifying that the nation is ready to take digital growth to a whole new level,” he says.
“Besides, Malaysia has one of the lowest rents for Grade A offices in Asia and is also rated as the least expensive Asean country to live in. Above all, it has political stability, established legal and financial systems with comparatively low tax rates.”
Datuk Jeffrey Ng, chairman of the Malaysian REIT Managers Association (MRMA) notes that the country’s developers and construction companies are experienced in developing industrial properties, and that capital is also available from investment funds and real estate investment trusts (REITs).
The country’s designated industrial zones also attract foreign industrial players to invest in duty-free import and export businesses as they can enjoy certain tax benefits. The industrial zones include Port of Tanjung Pelepas, Bayan Lepas Free Industrial Zone, Port Klang Free Zone and KLIA Aeropolis Digital Free Trade Zone in Sepang.
Ng adds that Malaysia allows up to 100% foreign ownership of businesses, and offers incentives for foreign direct investment.
“However, these advantages may not be unique to Malaysia, and it faces strong competition from regional players such as China, India and Vietnam. Thus, while Malaysia’s industry may be robust in certain areas such as petrochemicals, electrical and electronic manufacturing and agricultural-based products, the country has not achieved developed industrial status, owing to insufficient focus on innovation, automation, digitisation and technology,” he explains.
Challenges
Malaysia is facing challenges both internally and externally. Chen notes that Malaysian companies need to adapt to the rapid technological changes that affect the way businesses operate in order for Malaysia’s digital economy to prosper. Companies must embrace the changes to stay competitive.
“The Ministry of Communications and Multimedia, more particularly its Malaysia Digital Economy Corporation (MDEC) that was established in 1996, has been doing a great job by organising seminars in the country and abroad, and coming up with incentives and funding to promote the adoption of IR4.0,” he says.
Ng says talent, regulation, economies of scale and the lack of technology innovation are some of the challenges. He explains that there is a shortage of people skilled in science, technology, engineering and mathematics (STEM) and insufficient focus on digital literacy and innovation, which result in a workforce that is less adaptable to fast-evolving technology.
Furthermore, he adds, red tape and, to some extent, perceived endemic corruption and abuse of power continue to weigh on multinational corporations and small and medium enterprises alike, dampening investments, innovation and industrial competitiveness. Certain industries, pending liberalisation and deregulation, continue to be tightly controlled by state-owned monopolies and government-linked companies, he says.
“While the government has taken the effort to promote technical and vocational education and training, response remains slow, owing to a traditional mindset. Graduate unemployment and under-employment because of unsatisfactory wages, and racial and political issues have also resulted in a brain drain to other countries, reducing Malaysia’s competitiveness in high-tech, high-value industrial production,” Ng says.
“The lack of innovation may also be attributable to the higher interest costs compared with those in developed nations, which reduce business risk appetite, shortage of STEM talent, investment infrastructure and business ecosystem, limited local economies of scale and continued reliance on unskilled and semi-skilled foreign workers despite tightened work visa policies.”
Solutions
Chen says the challenges are the political uncertainty; the rising cost of doing business compared with other rapidly growing economies in the region such as Vietnam, Cambodia and Myanmar; Malaysian seaports’ inefficiency compared with some other ports in the region; and labour and talent shortage.
“To overcome the challenges, the government needs to focus on building the economy and continue to project Malaysia as a progressive yet friendly nation. It should ride the growth momentum resulting from the various initiatives introduced by MDEC to assist companies in their digital transformation journey,” he says
He suggests that Malaysia look into developing human resource programmes through collaboration with the local universities and government agencies to provide a semi-skilled and skilled workforce that is able to meet the requirements of the industry.
“Malaysia must put all the pieces together: overcoming the political and economic uncertainties, containing the rising cost, improving the efficiency at our seaports and airports, and building a vast pool of reliable workforce and talent that meets the requirements of industry players.”
Ng concurs, emphasising the importance of the development of human capital with an increased focus on STEM and digital literacy to boost the domestic talent pool and make it ready for IR4.0, alongside strict regulation and enforcement, innovation and technology as well as promoting further integration with Asean to benefit from the economies of scale and to access regional markets.
He notes that the government can seize the opportunity for Malaysia to become a major spot for the industrial sector by providing incentives for developers and REITs in developing land banks for the purpose of industrial developments as well as providing tax incentives for the relevant sectors.
“Malaysia occupies a unique position as a developing economy, where basic and digital infrastructure are already in place and human capital is more developed than that of its Southeast Asian peers,” he says.
“There is now high potential for the regeneration of old industrial sites. They can be redeveloped into modern, gated and guarded industrial parks, similar to the evolution of residential and commercial areas. These parks can be configured in standard formats or built-to-suit units to attract large local and multinational manufacturers to set up operations. In the long term, this will have the trickle-down effect of attracting the sub-contractors of these large manufacturers, who will prefer to be closely located to the supply chain.”
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