In this episode, Jari Hietala and Volker Friedrich discuss Malaysia’s manufacturing trends, and what makes it an attractive destination for international companies planning to establish a new factory in Asia.
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Manufacturing In Malaysia Overview
Hello everyone, welcome to the Asian Insiders Podcast, where we provide valuable insights into current trends and business opportunities in the Asia-Pacific region. My name is Jari Hietala and today our Malaysia expert and Asian Insiders partner, Volker Friedrich, is talking to us. Together with Volker we discuss production in Malaysia and the associated risks and opportunities mainly for European companies. With this introductory words I would like to ask Volker the first question. Could you please give us a brief overview of the production situation in Malaysia?
Hello Jari, thanks for the introduction. I have lived and worked in Malaysia for almost 20 years and so we have a very good overview of what is happening in Malaysia and how it has developed over time. Malaysia is in a strategically very good location among the Southeast Asian nations, between Thailand in the north and Singapore in the south. And to fully understand the manufacturing industry, you also have to look where it all started. Malaysia was originally an agricultural country and developed in the 1960s and 1970s as an extended working group for mainly Japanese industrial companies. And then it continued to develop and many electronics companies went to Malaysia to manufacture. Today Malaysia is continuously improving its economy and is no longer just a cheap manufacturing base, but is really pushing for a knowledge-based economy. All the buzzwords in modern manufacturing technology such as artificial intelligence, the Internet of Things, Big Data … are the topics that are really relevant in Malaysia today. In addition to the location, there are also other factors that support the manufacturing industry.
GBP International cooperates with a large number of automotive suppliers, from manufacturers of electronic components to service companies. By now Malaysia has a very interesting and good infrastructure. This provides a very good basis for all manufacturing companies trying to produce there. Malaysia also has a so-called “regional hub” due to the free trade agreements between the ASEAN states. A number of companies use Malaysia as a hub for doing business in Southeast Asia. Additionally, we are currently seeing exciting developments in the areas of digitalization & e-commerce. Malaysia is therefore a very solid country when it comes to brokering production sites for companies from Europe.
Yes, thank you Volker. Of course, Malaysia is not alone with these visions. Neighboring countries such as Thailand or Vietnam have also quite successfully managed to convince foreign manufacturers of their country. For various reasons, more and more companies are relocating production abroad or balancing the production portfolio with that of China. China’s spending has increased significantly and Vietnam, Thailand, or even Malaysia offer inexpensive alternatives for manufacturing. But we can come back to country comparisons later. First of all, I would like to ask you what, in your opinion, are the greatest challenges for Malaysia in order to further develop the manufacturing industry.
Well, there are many challenges in every country. And most importantly, as we speak today (early June), we are still grappling with the challenges posed by the coronavirus and how businesses are returning to a new normal. But apart from the effects of Corona … In recent years we have seen both internal and external challenges.
I would like to discuss the internal challenges first. We work with many stakeholders and regularly conduct surveys among their companies. Without exception, the answer to the question of what is the biggest operational challenge facing companies is always getting a well-trained workforce at a reasonable cost. We see that in China or any other Southeast Asian country, skilled engineers and high-level management personnel are the biggest problem for most companies. We see a lot of job hopping and a lot of companies investing resources in training and education and once the workforce is through they are being lured away by competitors for $ 100 or $ 200 more. This is one of the challenges I want to highlight because there is no easy answer to this problem.
Regarding the external challenge, it is of course about the competition between the ASEAN countries, which is a very interesting phenomenon that needs to be analyzed more closely. On the one hand, we see ASEAN as a bloc of Southeast Asian countries that are trying to create more bargaining power, for example with regard to trade agreements between the European Union, China or the USA. On the other hand, every country first cares about its own interests.
So there is constant competition to attract European companies. One day Malaysia is promoting its location, the next day Singapore, a week after that you have a seminar from Thailand. Each country tries to operate its own marketing, and they are often in strong competition with one another. Who gives the better tax rate, leases the cheaper land or offers the best research grants and the like …
It won’t stop either. And Malaysia is, I would say, positioned somewhere in the middle. When I compare the quality of the roadshows with the quality of the presentations, Singapore stands out as the strongest, followed by Hong Kong. And then there are countries like Malaysia, Thailand, Vietnam and Indonesia. They all have their ministers for international trade and industry. And all of them try to convince investors to set up their business in their respective country.
At the end of the day, that’s my experience: it’s about personal relationships. Because, of course, large companies relocate their main locations to countries where the cost of doing business and the quality of the workforce are in the best proportion to each other. The fact that the respective countries allow their partners an appropriate framework is just as much a soft factor as the quality of life of the employees, with or without family. That is also interesting to observe.
Absolutely. I think, after doing studies and comparing insider information, there are quite a few location-based challenges for European companies where we have to compare conditions from the perspective of a single company and match them to the local situation. So there is no simple standard answer to the question of which country has the best opportunities for a company. It depends very much on the company we’re talking about. In addition, the importance of the domestic market is of course decisive for the location of a factory.
I would like to add one more thing. Because we also see that certain industries have built up clusters in the last 20 to 30 years. For example for automotive supply, I would say Thailand is a good place because there are already many companies from all over the world manufacturing in Rayong area … Malaysia has very strong factories for manufacturing electronic components and medical Equipment. Singapore is attractive for anything that has to do with R&D or insurance and finance. So every country has comparative advantages and disadvantages depending on the industry in which you work.
I agree. By the way, if someone from you is listening and you want to find out more and get prospects for your company, you can always contact us. We look forward to discussing this with you.
Let’s move on to the next question. In many countries, not just Malaysia, the government plays an important role in promoting investment and inviting foreign investors to the country. How would you describe the role of the Malaysian government in this regard?
Malaysia basically pursues a very liberal policy when it comes to the fact that you are allowed to have a 100% interest in your subsidiary or the local joint venture company, regardless of whether you have a majority stake. But there are always exceptions to the rule. For example, if you want to do business in the oil and gas industry in Malaysia, you will need to look to the well-established company PETRONAS, which is 100% state owned. If you want to advertise, for example at ministries or in railways, there is always a hurdle in Malaysia that we call the Bombay Put Route Policy. While it may not be in law, from a practical point of view it is always good to have a local partner affiliated with a government organization.
We have many other interest groups such as chambers of commerce or embassies. They are all helpful in providing information on these issues. But we always say as Asian Insider: we start working where other people stop. That is why we distinguish ourselves, we know what is really going on on site and where you have to get your hands dirty in quotation marks. That is why we always recommend companies to collect information from all angles and then choose the best partner they want.
As a matter of fact. Last question. Well, we’ve already touched on that a bit. I would like to ask you to compare Malaysia as a production location with the other ASEAN countries. We all know that countries like Vietnam have a much lower cost base than Malaysia. Indonesia, the largest potential market in ASEAN, also has a drastically lower cost base. Thailand has a much larger market. Many people say Thailand is probably the most introverted market. So if you want to sell from Malaysia to Thailand, it is probably more difficult than selling from Thailand to Malaysia.
While the fact that Malaysia is a more open economy and almost everyone is fluent in English makes it comfortable for most Europeans to do business there, how would you compare Malaysia? What are the advantages and disadvantages of Malaysia compared to the other ASEAN countries?
First of all, I would like to share my experience with European companies when we ask them why they are not expanding their business into Asia … One of the most common mistakes is that companies see Southeast Asia as a market when doing business locally. And as you have explained quite well, it is a combination of 10 very different markets … Very different in culture and language and in the structures of how you have to develop your sales channel. Everything.
So if you want to compare Malaysia with others, you have to compare one by one. For me the most important point to be successful is really the language. Understanding the national language, documents, texts and messages. Malaysia is an English-speaking country largely because of its colonial history. So not only the capital Kuala Lumpur, but also when you travel to the second and third tier cities outside the capital. I think that is sometimes forgotten. Because if you try to master challenges in a smaller village, outside of Bangkok or outside of Ho Chi Minh, you always have to have a translator on site. In addition, the national languages are not easy to learn.
For example, if you plan to send your plant manager to Vietnam or Thailand, it is very unlikely that he or she will learn the language quickly. Malaysia’s language advantage is underestimated and for me it is one of the greatest advantages overall. And when you compare the other factors like infrastructure, cost of living and the cost of doing business, of course we all have the rankings of news magazines like the Economist or even the World Economic Forum in mind.
There you will always see rankings of countries in terms of competitiveness, ease of doing business, international network and so on. Malaysia is always in the top 20 in the world, not just in comparison with Asia. Singapore stands out in most categories, apart from cost, of course. And then Malaysia is usually number two or number three among ASEAN countries. We usually see Singapore as number one and there is always a bit of a battle for position between Malaysia and Thailand. Then in the same category we have Vietnam, Indonesia and the Philippines. Then we come to the group of the third level, as Mekong countries so to speak, which of course include Laos, Cambodia, Myanmar and Brunei, a small country that should not be forgotten. This is how I would position the 10 ASEAN countries.
Thank you, Volker.
I think with these wise words we will close our session on manufacturing in Malaysia. If you would like to find out more about the possibilities on site or if you have any questions for our expert Volker Friedrich, you can contact us online via Ace and Insider-Calm. Also check out our other podcasts covering various sectors and countries in the Asia Pacific region. Stay up to date. Many Thanks.