Malaysian trade minister on industry and globalization

In this exclusive interview with Malaysia’s Dato’ Seri Rafidah Aziz, Honourable Minister of International Trade and Industry, Minister Aziz shares perspective with VentureOutsource.com on regional and global forces shaping the electronics contract manufacturing sector in Asia; Malaysia’s role in industry, trends in industry, thoughts on free trade, and more. Transcripts from that discussion follow.

VO: The economies and infrastructure for many Asian countries are expanding. Rapidly for some countries. Can you please share with our readers some of the things Malaysia is doing to attract and secure successful business engagements with multi-national companies (MNC) interested in doing business in the greater Asia region while, at the same time, other countries in the region such as India and Vietnam have also begun to compete to attract some of the same MNCs? What would you list as two (2) of the primary characteristic that help differentiate Malaysia’s value proposition the most from other Asian countries?

Minister Aziz: Malaysia achieved its best performance attracting investments in the manufacturing sector in 2006. A total of 1,077 manufacturing projects were approved with investments amounting to US$12.5 billion. Of this, US$5.5 billion (43.9 per cent) were from foreign investments. The sustained inflow of foreign investments contributed toward achievement of the investment target we set under the Third Industrial Master Plan (IMP3), 2006-2020, at US$7.5 billion per annum.

Based on the IMD World Competitiveness Yearbook 2006, Malaysia’s overall competitiveness, for countries with populations greater than 20 million, improved to the 8th position in 2006 from the 10th position in 2005.

Malaysia’s position in the four key competitiveness factors were Economic Performance (6th position), Government Efficiency (5th), Business Efficiency (6th), and Infrastructure (11th).

Despite competition intensifying, Malaysia has managed to maintain its position among leading global trading nations. According to WTO International Trade Statistics, Malaysia was the world’s 19th largest exporter in 2006, accounting for 1.3 percent of global merchandise exports.

This places Malaysia ahead of some developed countries such as Switzerland, Sweden, and Australia, and developing countries such as India, Thailand, and Brazil.

Datu’ Seri Rafidah Aziz Honourable Minister of International Trade and Industry of Malaysia

Foreign investors continue to show confidence in Malaysia through new investments and expansion / diversification in the country. Malaysia’s political and economic stability and its educated, hardworking, and multi-lingual workforce are some of the primary reasons for foreign investor confidence.

Malaysia’s success in industrial development is also due to the government’s pro-business policies and its ability to respond to investor needs by ensuring facilities and incentives for investments are in place to support smooth business operational activities in Malaysia. The government is giving greater emphasis to the continued improvement of the public sector delivery system in order to ensure the cost of doing business in Malaysia remains competitive.

Other measures introduced by the government to further promote investment include the reduction of corporate tax from 28 percent in 2006 to 27 percent in 2007 – to 26 percent in 2008.

The government has been encouraging MNCs to move up the value chain into technology-intensive industries and to undertake research and development; design and development, distribution, and marketing activities. MNCs have responded to these initiatives with many having expanded; restructured, and upgraded their operations in Malaysia.

Competition for foreign direct investments (FDI) has intensified with the emergence of China, India, and Vietnam in this region of the globe. We are, however, of the belief Malaysia has its own strength to continue to attract quality investment in areas we have targeted in the Industrial Master Plan, IMP3, launched last year.

VO: Electrical and electronic products are key to the Malaysian economy, comprising the most critical segment of Malaysia’s manufactured goods exports. The government recognizes FDI is important. What do you feel are three (3) key steps the Malaysian government is taking to protect Malaysia’s electronics outsourced contract manufacturing industry?

Minister Aziz: The electronics industry is the leading industry in the manufacturing sector in Malaysia. The industry in Malaysia today consists of more than 900 companies in operation, producing a wide range of electronics products.

In 2006, Malaysian electronics product exports totaled US$74.0 billion, representing 57.4 percent of the total manufacturing exports. During the period of January-February 2007, exports of electronic products amounted to US$10.8 billion. Malaysia’s 35 years of experience in this industry has created a pool of technical talents and expertise; and continues to attract new investments in this industry.

The success of the electronics contract manufacturing industry is due to the competitive cost of doing business in Malaysia. A wide range of tax incentives is also offered by the government to encourage investment in manufacturing activities. Companies which are given tax incentives qualify for partial or total relief from payment of income tax for a specified period of time.

Incentives for high technology companies includes ‘Pioneer Status’ which amounts to an income tax exemption of 100 percent on statutory income for five years; or an ‘Investment Tax Allowance’ which is 60 percent, on qualifying capital expenditures, for five years.

Malaysia also has strong intellectual property protection in place and is committed to safeguarding intellectual property on inventions. To ensure intellectual property protection in Malaysia is in line with international standards and provides protection for both local and foreign investors, Malaysia is a party to the following international treaties:

• Convention Establishing the World Intellectual Property Organization (WIPO), 1967 – in force on January 1, 1989;

• Paris Convention for the Protection of Industrial Property (1883) – in force on January 1, 1989;

• Berne Convention for the Protection of Literary and Artistic Works (1886) – in force on October 1, 1990;

• Trade Related Aspects of Intellectual Property Right (TRIPS) Agreement – signatory since January 1, 1995; and the

• Patent Cooperation Treaty (PCT) 1970 – in force on August 16, 2006.

Malaysia also has an abundant, highly-skilled, and trainable workforce. The government works to help ensure the availability of highly-skilled workers under the country’s respective development plans to support the growth of R&D activities and expansion of contract manufacturing.

Under the Ninth Malaysia Plan (2006-2010), investment in human capital development is given greater emphasis as a measure to sustain the country’s economic growth and move the economy up the value chain. This is done in collaboration between the public and the private sectors. During the Plan period, the government has allocated a sum of US$13.3 billion for education and training.

VO: As the need increases for technology MNC supply chains to become more global, what are some of the characteristics defining Malaysia’s current ‘infrastructure’ that help MNC executives to meet the global supply chain demands of their organizations and their customers?

Minister Aziz: The government recognizes the importance of providing good infrastructure to attract and build investor confidence. Malaysia has a well-developed infrastructure, one of the best among newly-industrialized Asian countries. Among the attractive factors include:

• well-developed physical infrastructure. For example, transportation and telecommunications facilities, excellent airport and port facilities, utilities and industrial land, to cater for the needs of investors;

• development of the Multimedia Super Corridor (MSC) to spearhead the growth of the ICT sector. Special incentives are provided under the MSC Bill of Guarantees for companies, these include:
  • Pioneer Status with a tax exemption of 100 per cent for 10 years or Investment Tax Allowance of 100 per cent for 5 years;
  • R&D grants;
  • duty-free import of multimedia equipment;
  • intellectual property protection and a comprehensive set of cyberlaws; and
  • world-class physical and IT infrastructure.

• financial infrastructure, consisting of banking systems and non-bank financial intermediaries, including development finance institutions. The SME Bank (Bank Perusahaan Kecil & Sederhana Malaysia Berhad) was established in 2005 to enhance the capacity and capability of small and medium enterprises (SME), through access to financing by SMEs;

• adequate legal infrastructure on intellectual property protection, bankruptcy and environmental protection;

• availability of broadband infrastructure at competitive costs, allowing for greater use of e-commerce platform and e-business standards, including RosettaNet, a series of e-business standards, which can be used to streamline a company’s supply chain by enabling greater collaboration and improved communication between trading partners, domestically and internationally; and

• enhanced use of electronic trade facilitation to act as common platforms to provide the necessary connectivity among the trade community, permit issuance agencies, and supply chains to interact; collaborate, and transact electronically.

As a result of this infrastructure, companies are able to lower costs of production through just-in-time production and efficient inventory management. All points of entry for goods are also now being e-enabled — making declaration and clearance of goods more efficient. Companies are thus now more integrated with global supply chains.

VO: What changes or developments in Malaysian infrastructure currently underway, or yet to take shape, do you believe will further enhance Malaysia’s infrastructure in the future and help to improve the competitiveness, or cost of doing business, for MNC supply chains with operations in Malaysia? What are two (2) challenges Malaysia faces as she works to continue to provide MNCs an economically stable business environment that deals judiciously with legal disputes and corporate corruption while also working with other nations focused on doing what is necessary to help keep possibilities for terrorism at bay?

Minister Aziz: Continuous efforts are taken to develop and upgrade Malaysia’s infrastructure, including airports; seaports, road and rail networks, industrial parks, specialized parks, telecommunications, electricity and water supply.

In 2006, the government launched the Ninth Malaysia Plan (2006-2010) and the Third Industrial Master Plan (2006-2020), to spearhead development and further improve the competitiveness of Malaysia. Total development budget for projects to be implemented during the Ninth Malaysia Plan period amount to US$60 billion.

Some developments in Malaysian infrastructure geared toward improving competitiveness and reducing cost of doing business in Malaysia include:

1. Development of special economic zones: In November 2006, the Iskandar Development Region (Southern Johor) was launched as the first new growth center in Malaysia. It will be developed as a special economic zone focusing on manufacturing; trade and services, education, multimedia industries, business and finance, cultural and medical tourism. Plans to develop similar zones in the Northern and Eastern region are being finalized. Special incentives will be provided to promote the growth of these zones.

2. Technological infrastructure: New sources of growth in the ICT sector are digital content development, e-commerce, and shared services and outsourcing (SSO).

Digital content development, measures include creation of the Digital Media Zone in Cyberjaya as a digital content development hub and review of the legal framework for intellectual property registration (IPR) for patents; trademarks, and copyrights for ICT-related products and services.

Looking at e-commerce, measures include encouraging industry to drive initiatives to access online information on products and services, as well as improve supply chain efficiency, and establishing business-to-business (B2B) and business-to-consumer (B2C) e-commerce and networking applications.

SSO measures include improving requisite infrastructure facilities and services to attract SSO businesses while constant reviewing investment incentives to ensure they remain relevant and effective.

3. Government delivery systems: A Special Task Force to Facilitate Business (PEMUDAH), chaired by the Chief Secretary of the Government, has been established by the Government to improve the public delivery system. PEMUDAH has identified institutional constraints and will propose measures to reduce bureaucracy in handling business-related systems and procedures, towards making the country more conducive to the business and investing community.

4. Services sector: Under the IMP3, eight services sub-sectors have been identified for promotion and future development. These are business and professional services, distributive trade, construction, education and training, healthcare services, tourism services, ICT services and logistics.
The Malaysian Services Development Council and the Malaysian Logistics Council have been formed to coordinate the promotion and development of the targeted services sectors. The infrastructure requirements of the services sub-sectors will be identified and implemented to supplement the existing infrastructure.

As for challenges, one challenge we face is to maintain a conducive business operating environment providing companies with the opportunities for growth and profits. The Malaysian government deals with this through constant consultations with the business community such as regular government-private sector dialogues.

Additionally, the Malaysian Ministry of International Trade and Industry also holds an annual dialogue with the private sector to receive feedback on how to improve the business operating environment. Over 160 industry organizations are represented in this dialogue. Industry organizations and business associations are also encouraged to contact the Ministry directly to find quick solutions to pressing issues.

VO: Malaysia is a member of ASEAN, the ten-member Association of Southeast Asian Nations which also includes Brunei Darussalam, Cambodia, Indonesia, Laos, Myanmar, Philippines, Singapore, Thailand, and Vietnam. With regards to the electronics contract manufacturing industry, in looking at emerging technologies in the industry and other developing markets in industry, what three (3) trends do you see taking shape in the electronics contract manufacturing sector that will help the ASEAN member nation region, as a whole, accelerate economic growth, social progress, and cultural development for the ten-member region?

Minister Aziz: According to research on the electronics industry, electronics output in Asia Pacific increased to 37 percent of the global output in 2005, compared with 20 percent in 1995 and 32.5 percent in 2002.

Malaysia and Singapore are both ranked among the top ten countries globally in terms of production. Industry market intelligence reports estimate that contract manufacturing output in Asia will reach US$155 billion in 2009 from US$70.2 billion in 2004, with a compounded annual growth rate of 17 percent over the 2004 – 2009 period. This strong growth is driven by the availability of skilled and cost-competitive labor and the increasing pool of technical expertise available in the ASEAN region.

Within the region, there are different levels of economic development. The region is therefore able to accommodate a whole range of manufacturing operations / activities from labor-intensive operations to high value-added activities. By establishing high value-added operations in Malaysia, companies can also outsource their labor-intensive operations to other low-cost countries within the region, and thereby enjoy the benefits under ASEAN Free Trade Agreement (AFTA).

The electronics contract manufacturing industry is now becoming an increasingly important business strategy for original equipment manufacturers (OEMs). Three trends taking shape in the electronics contract manufacturing sector are:

1. more OEMs are outsourcing production activities to contract manufacturers, who have now moved into higher value-added products;
2. OEMs are now undertaking other activities other than mere assembling products, such as systems integration and testing functions; and
3. some OEMs are outsourcing their entire operations, encompassing R&D; production, testing, marketing, distribution and their after sales services (repair activities).

Trends in the electronics industry also indicate more product segments are being outsourced specifically for medical devices; automotive components, telecommunications, and consumer products. These trends will benefit ASEAN countries through an increase in the level of technology; improvement in product quality and, the creation of business and job opportunities.

VO: What are your thoughts on free trade and fair trade?

Minister Aziz: There is no ‘free’ trade in the real sense of the word. While a goods or service exported may not be subject to import duty, there may be other forms of impediments or non-tariff barriers that hinder such exports.

‘Fairer’ trade is a more practical and pragmatic approach by which the international trading system could cater to the differing needs and levels of development of the global trade community.

Malaysia subscribes to the general principles of the World Trade Organisation (WTO) to develop and strengthen international trade rules to improve market access for goods and services between member countries. These rules are aimed at an open and fairer multilateral trading system.

One such rule is multilateral ‘rule-making’ that will guarantee members will adopt the same standard rules for global trade — thus helping ensure ‘fair’ trade.

Liberalization has led to the reduction and elimination of barriers to trade among countries and more open markets. This has not only led to increased market access opportunities but also increased competitiveness among countries.

However, technical requirements and procedures, such as sanitary and phyto-sanitary measures as well as other similar measures to ensure the quality and safety of products, can become impediments to trade if their use is unjustifiable.

The WTO assumes a significantly important role in this as it deals with these non-tariff barriers to goods and services as well as distortions arising from dumping and subsidies.

Multilateral trade negotiations seek to further propagate a fair and open trading system: one that allows the benefits of globalization to flow to both developing and developed countries.

Developed countries have a responsibility to build the global trade system in ways that enhance participation of developing countries by enabling developing countries to enjoy a fair share of the potential gains that arise from trade. Developing countries and especially the least developed countries will have to be given assistance in building export trade capacity to take advantage of these opportunities.

The results of the Doha (1) Negotiations must reflect effective and operational special and differential treatment. If the Doha Round is to be a developmental round, the needs and aspirations of developing countries have to take center stage. The outcome of the Round must result in developing countries benefiting from global markets opening, and that their responsibilities and obligations commensurate with their level of development.

VO: Thank you for your time, Minister Aziz.

Minister Aziz: You’re welcome. Thank you.

(1) The Doha round of WTO negotiations began in November 2001. This round was to have begun at the WTO Ministerial Conference of 1999 in Seattle, and was to have been called ‘The Seattle Round’ but some developing countries refused to launch the second round by blocking the ‘explicit consensus’ needed at the final Heads of Delegation meeting. Severe demonstrations distracted attention from the refusal of developing nations to expand the WTO after having been devastated by the Uruguay Round. The new round could only be launched at a meeting in Doha, Qatar.