Malaysia: Manufacturing Powerhouse of Southeast Asia

With Its Skilled Workforce, Business-Friendly Government and Strategic Location, Malaysia has Long Been a Manufacturing Hub of Choice

Deep in the heart of Southeast Asia, businesses from around the world are tapping into one of the region’s most significant advantages: Malaysia’s manufacturing prowess. With its skilled workforce, business-friendly government and strategic location, the country has long been a manufacturing hub of choice. Now, it’s turning its competitive advantage into a comparative advantage.

Central to that transformation is Shared Prosperity Vision 2030—the Government’s plan to turbocharge the economy. Therein lies a strategic focus on manufacturing, which accounts for roughly a quarter of annual GDP and 2.2 million jobs. The Government’s commitment to helping manufacturers embrace Industry 4.0, bolster their technical know-how and add value promises to propel the economy and deliver significant benefits for businesses. 

Ease of doing business, top talent, the depth of its connectedness, tax and investment incentives, and its commitment to innovation make Malaysia an attractive manufacturing hub

This emphasis on manufacturing is not new. Malaysia’s long track record of investment secured its position in the top quartile of the 2020 Global Manufacturing Risk Index due to its cost competitiveness and ability to bounce back in the face of disruption.

Both proved crucial amid the fallout from COVID-19. Manufacturing led Malaysia’s economic recovery late last year, driven by exports from the electrical and electronics (E&E) segment. The sector will continue to fuel the economy in the year ahead, which is forecast to grow 6.5-7.5%.

As global businesses get back on track, many see Malaysia as an attractive manufacturing hub. Beyond durability, several other factors make it the ideal location, including the ease of doing business, top talent, the depth of its connectedness, tax and investment incentives, and its commitment to innovation. Likewise, its strategic location creates vital opportunities for supply chain diversification amid the ongoing pandemic and lingering U.S.-China trade uncertainty. 

Malaysia’s cost competitiveness and ability to bounce back in the face of disruption secured its position in the top quartile of the 2020 Global Manufacturing Risk Index

Three Mainstays of Manufacturing

Source: Malaysia External Trade Development Corporation

While Malaysia’s robust manufacturing sector boasts several advantages, the “3+2” high-growth segments standout. Three mainstays—E&E, machinery and equipment (M&E) and chemicals—are long standing economic pillars, while two other growing segments—medical devices and aerospace—offer huge potential. 

E&E is the single largest contributor to the manufacturing sector. Over the past few decades, the segment attracted tremendous foreign investment into the country. It quickly climbed the value chain, moving from high-volume low-mix to high-mix low-volume operations. Today, it produces 13% of global back-end semiconductor output and accounts for roughly 40% of Malaysia’s annual exports. With end uses linked to 5G, autonomous vehicles and the Internet of Things (IoT), chips made in Malaysia power the most innovative products in the world.

Penang’s contribution stands out. The state is one of the most significant microelectronics assembly, packaging, and testing hubs in the world, positioning Malaysia as both a vital link in electronics supply chains and an ideal location for research and development (R&D). This has attracted global tech heavyweights companies to continue investing. Last year, for instance, U.S. chip-gear giant Lam Research (LAM) invested USD225 million to build a new manufacturing facility in Batu Kawan Industrial Park, Penang, while German engineering company Bosch announced its plans to set up a manufacturing facility at the same location. Bosch also announced its expansion project in setting up the manufacturing facility park for testing of semiconductor components and sensors in Penang.

Meanwhile, M&E contributes around 4% of Malaysia’s annual exports. The segment accounts for roughly 85% of the country’s Small Medium Enterprises (SMEs). 

Together, they comprise a sophisticated eco-system offering world-class R&D, design, and engineering capabilities. These SMEs produce everything from metalworking and power generating machinery to specialised parts. Increasingly, they use Industry 4.0 technologies including robotics, factory automation and predictive maintenance to deliver best-in-class products consistently.

The chemicals segment is another economic engine and accounts for 5% of annual exports. With abundant natural resources, the country has become a major contributor of petrochemicals and oleochemicals products often used as raw materials in the production of electronics, plastics, automotive parts, pharmaceuticals and construction materials. Meanwhile, specialty non-fuel products including catalysts, aromatics and white oil offer exciting opportunities, especially as digitalisation creates new possibilities.  

Malaysia’s 240 aerospace companies export over USD2 billion worth of goods annually, reflecting the segment’s strength in maintenance, repair and overhaul (MRO) services

Two Budding High-Growth Segments 

Malaysia’s less mature high-growth segments are equally important. The medical devices industry, for instance, comprises more than 200 manufacturers. Thirty, including Abbott, Boston Scientific and B. Braun, are among the top multinationals that established bases in Malaysia to capitalise on the country’s unique advantages. Together, these companies export 90% of the devices they make—around USD5.6 billion worth—annually, shipping more than half to the U.S., Germany, China, and Japan.

Historically, Malaysia’s medical devices industry encompassed a broad range of consumable products including examination gloves, catheters, syringes and dental implants. Now, the country is climbing the value chain, manufacturing complex products including pacemakers, defibrillators, endoscopes, radiographic equipment and in-vitro diagnostic devices. With a commitment to adopting advanced manufacturing processes powered by Industry 4.0 technologies, it is fast becoming a medical manufacturing hub and outsourcing destination.

The same commitment to innovation underlies advances in the aerospace manufacturing segment. Last year, border closures and travel bans stemming from the COVID-19 pandemic devastated the industry worldwide. While the prospects for an immediate recovery remain tenuous, Malaysia’s manufacturers remain well-positioned to capitalise when travel returns. 

Malaysia is home to 240 aerospace companies. Together, they export over USD2 billion worth of goods annually, reflecting the segment’s strength in maintenance, repair and overhaul (MRO) services. Their primary exports are fuselages, empennages and wing components. Now, the Malaysia Aerospace Industry Association (MAIA) together with MIDA and other relevant Government agencies are on a quest to transform the country into Asia’s premier aerospace hub. If the Digital KLIABC 2020 conference to reach the industry players, secure potential sales of USD34 million is anything to go by, that quest is well in progress.

Business-Friendly Government Initiatives

Establishing manufacturing operations abroad is challenging. To make that easier, the Malaysian Investment Development Authority (MIDA) launched the Project Acceleration and Coordination Unit (PACU) to accelerate the approval and implementation of manufacturing projects. In efforts to accelerate the necessary approvals to expedite the execution of projects, MIDA launched the e-Manufacturing Licence (e-ML) module and the enhanced e-ML 2.0 module. For instance, eligible applications submitted through this module will be approved within two business days for non-sensitive industries and up to four weeks for sensitive industries. 

PACU assists and accelerates the application process, identifies challenges that an applicant may face, monitors the progress of implementation and facilitates collaboration with all parties involved. The process is hassle-free. With generous tax and investment incentives already in place, the latest effort provides a strong impetus to invest. 

The Government is also quick to respond when businesses and investors are in need. COVID-19 has made it difficult to travel. To balance public health, livelihoods and economic sustainability, MIDA set up a One Stop Centre (OSC) to ease the movement of business travelers. This ensures both the legitimacy and health of travelers before they enter the country, while supporting the growth of business and industry.  

Amid the disruption stemming from the pandemic, the Malaysian Government also introduced a series of stimulus packages dubbed PENJANA to help businesses recover and to incentivise foreign investment. The packages include several measures aimed at foreign companies. Those in the manufacturing sector who invest USD70-USD116 million are eligible for tax exemption for ten years. Larger investments could earn a 15-year exemption. 

The latest measures are a few of many reasons why Malaysia ranks 2nd for ease of doing business within ASEAN region. As the country realises its comparative advantage in manufacturing, businesses around the world will soon find a new home from which to make their greatest products. Whether they tap into one of the “3+2” manufacturing segments or discover new opportunities, one thing is clear: Malaysia is the manufacturing powerhouse of Southeast Asia.

This article was first published by Bloomberg