Podcast – Manufacturing in Malaysia – Volker Friedrich
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Hello, everybody, welcome to the Asian insiders podcast, where we share valuable insights on current trends and business opportunities across the Asia Pacific region. My name is Jari Hietala and joining me today is our Malaysia expert and Asian insiders partner, Mr. Volker Friedrich. Together with Volker, we discuss about manufacturing in Malaysia. The related risks and opportunities for primarily European companies. With this introductory word, I would like to ask the first question from Volker.
Could you please give us a short overview about the situation of manufacturing in Malaysia?
Hello Jari, thank you very much for the introduction. I have been living and working in Malaysia for most of the last 20 years and so we have a very good overview, what is happening in Malaysia and how it has developed over time.
Malaysia is in a very strategic location among the Southeast Asian Nations between Thailand in the north and Singapore, in the south. And in order to understand the manufacturing sector, you have to also look where it comes from Malaysia was originally an agricultural country, and it was developed as what we call extended working bands for mainly Japanese industrial companies in the 60s and 70s.
And then it developed further and a lot of electronic companies went to Malaysia for manufacturing. Today Malaysia is continuously upgrading its economy and they are not just a cheap production location anymore and they are really pushing for a knowledge economy.
So, all the buzzwords in modern manufacturing technology like artificial intelligence, Internet of Things, big data, just in time, these are the topics which are really hot in Malaysia today.
And besides the location, there are other factors, which are supporting the manufacturing industry, we have a wide variety from automotive supplier to electronic components manufacturers, but also service provider companies… Malaysia has a very interesting and good infrastructure, which has been developing, so all the manufacturing companies Finding a very good foundation for their manufacturing processes.
Malaysia also has what we call a regional hub because of the free trade agreements among the ASEAN nations. So quite a number of companies are using Malaysia as the Centre for the activities in Southeast Asia altogether. On top of that, we see the latest developments in everything digital, e-commerce centers are developing. So Malaysia is a very solid country when it comes to providing a location for manufacturing companies from Europe.
Yes, thanks Volker. Of course, Malaysia is not alone with these efforts, their neighboring countries like Thailand, Vietnam, which has been quite successful in attracting foreign manufacturers to their country. For different reasons, many companies are lowering their perceived risks, moving production, or balancing the production portfolio with China. China’s expenses have gone up quite a bit and Vietnam, Thailand, even Malaysia offer price competitive alternatives for manufacturing. So, yeah, but we can come back to the kind of comparison a little bit later, I would actually first like to ask you, what do you think are the biggest challenges for Malaysia to develop the manufacturing sector further?
Well, there are plenty of challenges in any country. And especially as we talk today, early June, we still have the challenge of the coronavirus, and how the companies are getting back to a new normal, but apart from the corona impacts…For the last couple of years, there were internal challenges, as well as external challenges. The internal challenges, I would highlight and emphasize the human resource factor. And we are working together with a lot of stakeholders and every now and then we do surveys among companies. And without exceptions, the answer to the question of what is the biggest challenge for the companies on the operational side is always a highly educated workforce at a reasonable price.
And we see that in China or in any other Southeast Asian country, the qualified engineers, high-level management skills, that is the bottleneck for most of the companies and we, we see a lot of job-hopping that companies are investing in training and education. And then once the workforce or the people are having received the training, then they are poached by the competitors for 100 or 200 dollars more.
So that is one of the challenges I would highlight. There is no easy answer to that one. And in terms of external challenge, of course, it’s about the competition among the ASEAN countries. And that is a very interesting story to analyze. Because on the one hand, we see ASEAN as a bloc of Southeast Asian countries trying to create more negotiation power towards that, say, the European Union or China, or the US in terms of trade deals, they are negotiating.
But on the other hand, every country is looking after its own interest first. So there is this continuous battle, I would really like to say when we see roadshows in Europe. One day Malaysia is promoting its location the next day it’s Singapore the week after that you have a seminar by Thailand.
So everybody is trying to do their own marketing. And each and every company is running into a competition who is giving the better tax rate who is giving the cheaper land, who is giving research grants and stuff like that. So that is not going to stop.
And Malaysia is, I would say position somewhere in the middle. If I compare the quality of the roadshows the quality of the presentations, Singapore stands out to be the best, followed by Hong Kong. And then you have all the countries following after that Malaysia, Thailand, Vietnam, Indonesia, they all sent their ministers of International Trade and Industry. And everybody is trying to convince investors to go and set up their shop in Malaysia. And at the end of the day, that’s my experience. It’s about personal relationships. And of course, big companies, they have their think tanks and they do the benchmarking of cost of doing business, quality of labor…
It is also a soft factor to present a framework, a basket were also let’s say the family of the expatriates who is going to send to Asia for good quality of life. And that is one of the soft factors which is also interesting to consider.
Absolutely, and I guess that since we have been doing essays and insiders, quite many location related assignments for European companies, where we benchmark and compare the conditions from the point of view of a single company, that there is no easy answer, there is no standard answer to the question that where which country or were in inside the country, the best locations can be found. It’s very much dependent on the business we are talking about. And perhaps the importance of the domestic market of the location of the factory, that would be that.
I mean what at what we also if I like to add one point what we also see that over the last 20-30 years, certain industries have been building clusters. For instance for automotive supply, I would say Thailand is a good place because you have many, many companies from anywhere in the world setting up manufacturing in the Rayong area…
In Malaysia you have very strong electronic components manufacturing and medical device factories.
Singapore is attractive for everything related to r&d or insurance and finance. So, each and every country has comparative advantages and disadvantages depending on the industry you are working in.
Exactly And if any of you listening if you would like to dig deeper and get perspectives into your business, feel free to contact us anytime. We’re very happy to discuss this with you… Let’s move on to the next question.
In these countries, not only Malaysia, but Malaysia included, the government’s play quite an important role in in this Investment Promotion activity and inviting foreign investors into the country. How would you describe the role of the Malaysian government in this respect?
No. Yes, Malaysia has a very liberal policy in principle to when it comes to are you allowed to have a hundred percent ownership of your subsidiary or the joint venture company, whether you can have a majority but there are always exceptions to the rule. For instance, in Malaysia, if you want to do business in the oil and gas industry, you have to deal with the incumbent PETRONAS, which is 100% government-owned organization.
If you want to do tenders, for let’s say ministries or railways, there’s always hurdle were what we call the Bombay put route policy in Malaysia. Where it is maybe not written in the law. But from a practical point of view, it is always good to have a local partner who is attached and linked to the government organization.
I think it goes without saying if you go into the defense sector, for instance, the same rule applies, you have to deal with the government. And therefore, you need to have people who are close and working with them for many, many years. So, Malaysia has a strong government role in the overall economy and the share of the GDP created and distributed by the government.
But if you are a small medium-sized company, for instance, and you want to produce let’s say, furniture or you are in the food sector, there is no restriction which is stopping 100% free market activity, without any government interference.
And if I look at the overall promotion in Malaysia specifically, we have an organization called Maya. They have offices all over the world and they do regular trade shows, seminars. They are also very helpful in providing all kinds of information. Most of it is available also on the website. We have a lot of other stakeholders like chambers of commerce or the embassies. They are all helpful in providing information when it comes to these questions. But we always say as Asian insiders, we start working operational where the other people stop. And this is where we are also distinguishing ourselves, we know what is happening really on the ground and where you have to get your hands dirty in inverted commas. And this is where we advise companies to collect each and every information from all angles, and then choose the best partner you can you like to have.
Indeed, indeed. Final question. Well, again, we’ve touched upon this a little bit already. I would like you to comment on the question of comparing Malaysia as a manufacturing location to the other ASEAN countries. We all know that countries like Vietnam have a much lower cost base than Malaysia.
Also, Indonesia, which is the largest potential market in ASEAN has a quite drastically lower cost base. Thailand is a much bigger market. Many people say that Thailand is probably the most introverted market so if you want to sell from Malaysia to Thailand, it’s probably more difficult than selling from Thailand to Malaysia. Yeah, because Malaysia is a more open economy and the fact that everybody speaks fluent English makes it comfortable for most European people and doing business there, but how would you compare Malaysia? What are the pros and cons of Malaysia compared to the other ASEAN countries?
Yeah, I would like to start with saying, on my experience when we talk to, let’s say, European companies, and we say, why don’t you expand your business into Asia… And one of the most common mistakes is that companies believing doing business in Southeast Asia is one market.
And like you explained perfectly well, it’s, it’s a combination of 10 very different markets… Very different in culture and language, and structures in how you need to develop your sales channel. Everything. And so if you want to compare Malaysia to the others, you have to compare one by one.
For me the most critical point in being successful that and that for me is really the language and the understanding of the local language the documents the text and messages, and Malaysia is basically because of their colonial history and English speaking and English writing country and not only in the capital of Kuala Lumpur, but also if you go to the second and third-tier cities outside of the capital. And that I believe is sometimes forgotten when you are trying to overcome challenges in a, in a smaller village outside of Bangkok or outside of Ho Chi Minh you always have to have a translator. And these languages are also not easy to learn.
So if you want to send your plant manager for instance to Vietnam, or Thailand, it is very unlikely that he or she will be able to pick up the language quickly. So the language advantage of Malaysia is underrated and for me, it’s one of the biggest advantages overall. And of course, if you compare the other factors like infrastructure, cost of living, cost of doing business, we all have the rankings of news magazines like the economist or even the World Economic Forum.
There you always see rankings of countries in terms of competitiveness, ease of doing business, international network, and so on. Malaysia is always ranked, at least among the top 20. So globally, not only among Asia, and Singapore stands out in most categories, apart from the cost, of course. And then among the ASEAN countries, Malaysia is usually number two or number three. So usually we see Singapore being number one and there’s always a little bit of a battle for position between Malaysia, Thailand. Then we have in the same category Vietnam, Indonesia, Philippines. And then we come to the third tier group so to say we call the Mekong countries which include Laos, Cambodia, Myanmar, Brunei, of course, a small country not to be forgotten. So this is my sort on how to position all these 10 ASEAN countries.
Right. Thank you, Volker. And I think with those wise words, we wrap up our session on manufacturing in Malaysia. And if you would like to know more about these opportunities, if you have questions to our expert, Volker Friedrich, you can contact us online through Ace and insiders calm. And Please also check out our other podcasts on a number of sectors and countries across the Asia Pacific region. Stay tuned. Thank you very much.
Okay. Thank you.