• Introduction
• Exchange Rate
• Dependence on the US Market
• Obstacles to economic independence
• Future Manufacturing FDI
• Competitive Pressure from China
• Any Opportunities in the Billion-dollar Food Sector?
• A Green and Fun Malaysia

A financial crisis is traumatic and costly; such experience ought to be put to good use. These lessons should lead us to ask tough questions of ourselves, and spurs us on to actions, which ordinarily would be extremely difficult to implement.  Now more than 3 years into the crisis, many businesses once again have their heads above water. Although many badly affected Malaysian businesses are still trying to find their footing and searching for a clearer vision, we should have had a long enough period to reflect on the reasons that got us into these difficulties. Going forward we should not make the same mistakes of being myopic again.  Focusing on high growth in the short term does not mean much if we don't restore the fundamentals in the economy that make us competitive. Hence, this perspective will focus on issues of sustainability.

The market should be sufficiently prepared by now for an inevitable adjustment of the ringgit peg. The issue is no longer whether the rate will be adjusted, but by how much and how. Weakening surplus position, falling reserves, declining FDI, and withdrawal of portfolio investment (One estimate put withdrawals for 1999 as 31 b ringgit and 2000 as 46 billion respectively), since May last year, reserve as fallen US$5 billion, 15%. These negatives are creating pressure on the current exchange rate. If you have not already done so, you should begin immediately to think in terms of a new rate. Now we should urge the government to move from a point rate to a range rate or band; allowing the market to fix the value of the ringgit. While stability is a priority, it is also important to base operation on the real price of the ringgit; the new measures, when put in place, should not be too limiting; a range of 3.5 to 5 ringgit to one U.S dollar may be appropriate.

The Malaysian economy has been dependent on the external sector; starting from the days of a primary commodity economy based on tin and rubber. When we moved into a mixed economy of industries and plantation agriculture; the dependence continued; Malaysia become a production base of foreign multinationals and OEM operators.  Even with industrialization, the Malaysian economy has not been able to shake off this dependence primarily because of:

1. Slow development of a Malaysian owned industrial cluster; where we own the design, technology, and the brand; i.e. the entire value chain. Scanning Malaysia's industrial landscape, there are few companies, which have such command the Royal Selangor Pewter is one of the very very few Malaysian Company that has such accomplishment. Even in the furniture industry, which once showed promise, many factories are OEMs.

 
2. The globalization of the world's industrial economy; where multinationals organize their production requirements in a tightly coordinated supply chain; siting factories or contracting factories in countries that offer the best competitive conditions to make their products.  If the cost competitiveness of your country does not meet the floor requirement of the company giving out the order, you are not even chosen for them to site the factory in your country to begin with. Any devaluation or appreciation of your country's currency relative to your closest competition will enhance or weaken your competitiveness. In addition to this, the degree to which currency value is significant depends on how much domestic input is used in the overall value and content of the export products.

In the electronics sector, very high proportion of input contents are imported from other more advanced Asian countries to be final assembled in Malaysia and then exported to the final markets. 27% of Malaysia's GDP is contributed by the electronics export bound for the US, clearly showing the weight of final products from Malaysian factories.  This situation of dependence, no matter how much political and government leaders complain, will not change.

How can we build independence in our economy? An independent or a self-reliant economy is one that can, i.e. have the ability to make choices. For example, if we think that exporting to a certain market will not bring us the best benefits, we can refuse to do so. And that is only possible if our product and services have a place in the world; our economic well being will not be decided nor dependent upon external forces totally beyond our control. In other words, we have unique products and offerings that the world wants.  The present state of our manufacturing sector is clearly far away from this position. 

Let’s examine the issues surrounding our present manufacturing sector. 

There are now two significant development in this FDI dominated industrial sector:

a.   FDI to Malaysia has slowed. One estimate reveals the decline: before the crisis, Malaysia receives on average 28 - 35 billion ringgit (US$14 b) of FDI, after the crisis, this is only averaging 13-15 billion ringgit a year (US$4 b), a drop of US10 billion, a 70% drop.

b.   Repatriation of profits by foreign companies from their Malaysian operations also changed significantly after the crisis. Before the crisis, this averages between 18-19 billion (US$4.7 b) to after the crisis; in 1998, 26 billion, 1999, 27 billion, 2000, 29 billion, averaging US$7 billion.

What can we infer from the above two trends?

1. Traditional forms of FDI is not coming to Malaysia because:
1. These industries are not expanding because demand has plateau or there is already excess capacity in these sectors.
2. Malaysia no longer has the best conditions for locating these operations; as many of these operations are labor intensive; and the availability of dependable labor with competitive wages is not longer available; any new operations will have to be sited elsewhere. China has moved up very quickly as an attractive choice in this respect because of its vast labor pool and the allure of a huge potential domestic market.  Infrastructure facilities in China are also improving very rapidly. Many western multinationals have admitted to this shift of preference.
2. On the increase in the repatriation of profit; it seems like the logical thing to do given the prevailing conditions. If operations are no expanding, they don't need this surplus fund. Besides, the sluggish KLSE, stagnant real estate sector and low deposit rates, there aren't many attractive investment opportunities in Malaysia. In addition to that, overhanging many people's head is the uncertainty of the ringgit. Unless and until clear directions emerged in the exchange rate and returns on investment, it is better to store profit values in a chosen currency. 

At this juncture of Malaysia's economic development, FDI is still much needed; for the technology and market they bring; and the employment they create for Malaysians.  The government has been working on attracting FDIs in the higher value added sectors; the MSC was created with one of this intent in mind. Recent reports from the government shows that Malaysia has not had much success attracting this type of FDI; and the reasons are obvious to everyone. We lack the conditions; especially skilled human resources, research infrastructure and entrepreneurs who understands value creation, compared ones who are skilled at trading or managing by holding cost down to produce a profit. 

The Malaysian economy is in a very awkward position; we have lost the competitive conditions for traditional forms of FDI; and we lack the conditions to bring in the value-added FDI. So what kind of industrial future do we have?

A niche in the global industrial economy is what we need to find. What this is requires deep and thorough survey of the global industrial landscape and a critical review of our own skill and technology level. Our interviews with Malaysian businesses produce no clear direction in this area.

China's pool of cheap labor, better technology; newer equipment and infrastructure and the promise of a large domestic market will take away jobs from Malaysians and other Southeast Asians who are currently working in labor intensive industries. For industries such as furniture, toys, textiles, shoes and many other light industries; no other nation will be able to match China's competitiveness. With WTO, there will be greater liberalization, bringing reduced tariffs in imported inputs; further boosting China's competitiveness in this sector. Already more and more Malaysian operations in this segment are cutting down or closing home productions; either moving their operations elsewhere; to Vietnam, or switch to outsourcing production in Chinese factories. To serve Malaysia's home market; they switch to trading; bringing in cheap imports to sell in Malaysia. One apparel maker that specializes in the traditional Malay dress Baju Kurung is contracting Chinese factory to produce according to designs supplied from Malaysia.

For now and until Chinese labor costs move upwards (which would be a long time as there is such an abundant supply of labor in China); a manufacturing sector utilizing high labor content will be over for Malaysia. 

The government wishes that Malaysia can have a turnaround in our food supply; reduce import, expand home production to boost food security.  Since the crisis, the government has been coaxing the private sector to examine the food production sector; urging businesses to exploit opportunities in the $10 billion food bill. The private sector has been lukewarm to this call for the following reasons:

1. Malaysia has lost the competitive conditions for the production of agricultural produce for the food industry. Farmers who used to farm found it more attractive to sell their land for real estate development; the country has neglected the education and training of agriculture expertise; the agriculture university; Universiti Pertanian has even been renamed Universiti Putra; appearing to be more interested in the fashionable business of IT than farm science. 
2. Agriculture needs labor; and Malaysia has great shortage. Already there are 2 million foreign labors working in Malaysia, the government estimates that each year they take home some 6 billion ringgit.  The presence of large numbers of foreign labor also brought enormous social and security problems to Malaysian society. It is hard to imagine the government would prepare to allow in more labor to boost the farm sector. The Malaysian population has also been rapidly urbanizing; few young people have much interest in farming.
3. Competition from imports. Agriculture products from Indonesia, Thailand and China are fiercely competitive; lower in price and better in quality. Malaysian food processing companies are importing raw materials to support their food processing operations. The livestock industry; poultry, pig and cattle are produced with imported feed. The Federation of Vegetable Growers Association has complained, blamed and criticized the government; calling for a ban on imports. The fact is this will never happen as agriculture imports are cheaper and of better quality; and the Malaysian farm sector is too small to receive protection; as in Europe or Japan. Malaysia has two other large export sector; electronics and palm oil, for it to jeopardize itself if it were to protect its own farm sector; although clearly the farm sector needs more time and protection to become competitive.

Relatively speaking, with a small population, generous physical resource endowment, plentiful sunshine and rainfall and a good geographic condition; and modern physical infrastructure in place; Malaysia has the comparative advantage for the following:

1. Production of higher value raw materials best grown in tropical conditions; examples are tropical hardwork nurtured in a sustainable way, as in plantation forestry. Prosperous China holds a lot of promise for Malaysia in this respect. Barring no major accidents, and China continues on its reform path, in 2010 China will once again double its income to reach US$2000 per capita. The pressure on China's environment is tremendous, already Beijing has put in place a policy of "abandoning agriculture to return the forest," and China will need to keep the forest to preserve water to alleviate its critical water shortage problem. China's problem is Malaysia's opportunity; our abundant sunshine and rainfall, if we have the will and discipline, to manage our ecology, which is also fast deteriorating because of careless development, will enable us to produce a lot of the raw materials China needs. This year, the biggest FDI Malaysia receives is a 4.8 billion-ringgit paper and pulp mill from China. Is this symbolic of the kind of future FDI we will get?
2. High value food products; such as natural produce and organic food. As Asia's urban population becomes more and more health conscious and yearns a return to natural food produce in the big way; the demand for organic food in Asia will grow. Already the demand for organic food in Taiwan has exceeded its home supply capacity. More food scare and accidents like the current livestock disease epidemic in Europe will drive greater demand for food produce by natural processes. Green food; those produce in an environmentally friendly, chemical free way is today's fastest growing food sector in the world. Modern farming is a knowledge intensive business; the knowledge-functions in the food production chain must be organized differently; for example a host of agricultural services industry must be created to support the farm sector. Whether it is better seeds, soil science, compost, post harvest technology and processing, quality standards, safety traceability, branding, marketing and export promotion; these activities are beyond the competence of any traditional farmers. If Malaysia is serious about a modern farm sector, its university must focus on producing young professional farm managers and experts needed by the farm sector. 
3. Tourism and shopping:  With Malaysia's blue sky and abundant places for retreat and relaxation, this country has enormous potential to be developed into Asia's playground. To date the country has put in place modern infrastructure and a good network of hotel facilities; although their management needs urgent strengthening; Malaysia tourism operators need to develop the "content" the activities and themes that make holidaying in Malaysia, apart from an eating and idling experience. Malaysia talks about the attraction of its multi-culturalism; to sustain interest and bring repeat visitors; we need to actualize the offering of "Truly Asian." " We ought to answer the question: What makes it fun to spend my well-earned holiday in Malaysia?"

There is a need to breathe life into the many shopping malls completed in the country, and the Ministry of Tourism is set on building up Malaysia's shopping offering for tourists. But it is hard to imagine how can one build a shopping hub on the "Mega Sales' label. Not many people buy things because it is cheap, and nobody becomes rich selling cheap things. 

Today the largest group of Malaysian tourists come from China, we would be most mistaken if they are attracted here to buy things cheap; the fact is there is no way we can be cheaper than they buying within China. 

We need to work harder selling our wares; first of all, much of those wares are not made in Malaysia (so they are not so unique, only found in here), even souvenirs; many on sale today come from Thailand and Vietnam. Pirate VCDs may be the only exception. 

We need to create a unique "shopping offering' and deepen our "retail management," retailers need to learn better window dressing skills; more imaginative themes and also build better merchandize clusters such as specialized malls. In most of the major cities; there are places where you find concentration of shops selling the same type of merchandize; like in Tokyo there is a special market for electronics and computers, book malls in China for all kinds of books and magazines, streets selling household wares etc or cultural streets such as Insadong in Seoul.

What all these means is Malaysians need to strengthen their skills, acquire greater knowledge and deepen their skills in marketing, communication and management.

Feedback Welcomed!

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