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China Plus One: Nine opportunities yet challenges for Malaysia to derive maximum benefits By Lee Heng Guie

Publish date: Sat, 13 Apr 2024, 11:05 PM

THE “China Plus One” (C+1) strategy was long mooted since 2013 as multi-national companies (MNCs) seek to diversify their sources of supply and production from over-dependency on China over concerns about supply chain disruptions and costs.

This approach has gained more tractions in recent years and will accelerate further given tetanic shifts in global economic landscape and economic security.

The significant drivers of de-globalisation and protectionist policies have been fuelled by the years of rising trade and technology tensions between the US and China, the COVID-19 pandemic crisis, the military conflicts in Ukraine, climate risk and ESG (environment, social and governance), disruptive technology as well as cybersecurity.

Some emerging and frontier-market economies in Asia, especially ASEAN with untapped potential in the manufacturing sector, have upped the ante to be prime candidates for global manufacturers seeking more resilient and conflict-free supply chains as well as diversifying their operations and establishing additional lines in other countries in addition to China.

While Indonesia, Thailand, Vietnam and the Philippines will rival Malaysia to be one of the prime beneficiaries, Malaysia still has the right ingredients and advantages by presenting herself as an attractive alternative location for MNCs and businesses looking to diversify their production and sourcing activities.

Below are some of the advantages:

Situated between the Indian Ocean and the South China Sea, Malaysia is strategically positioned to act as shipping and logistics hub to serve key intermediary points between the East and the West in global trade and business dynamics as well as global supply chains.

Port Klang and the Port of Tanjung Pelepas (PTP) continue to remain the top 20 busiest ports in the world. The Kuantan Port has also grown its prominence to connect with East Asian markets. The operational of the East Coast Rail Link (ECRL) in 2027 will significantly boost the handling capacity for both container and conventional cargo at the main shipping hub of Port Klang.

Malaysia’s diversified economic sectors, products and markets as well as export structure has had contributed to its economic resilience amid weathering through the years of economic and financial shocks.

In the post COVID-19 pandemic crisis period, real GDP (gross domestic product) growth has recovered to grow by an average growth of 5.2% per annum in 2022-2023 (5.1% pa in 2011-2009). Putrajaya remains committed to reduce its fiscal deficit and contain debt and liabilities through the implementation of fiscal reforms in phases.

The financial sector is strongly-capitalised and provides a well-developed capital market for financial intermediation.

Malaysia has had more than three years political instability until the formation of a unity government after the 15th General Election (GE15) in late November 2022. Political stability and good governance are critical factors in ensuring the effective implementation of public policies and attracting foreign investment.

Post the COVID-19 pandemic, the government has enhanced investment climate through improving the ease of doing business, targeted tax incentives and strategic industrial funds, simplification of investment application and approval processes as well as better coordination between the Federal government, state and local authorities.

The Special Task Force to Facilitate Business (PEMUDAH) has been re-activated to remove administrative red tape and make Malaysia a more business-friendly destination.

Additionally, the government has launched (i) the Madani Economy Framework to put Malaysia in the top 30 of the world’s largest economies and top 12 in the Global Competitiveness Index; (ii) the New Industrial Master Plan (NIMP) 2030 to transform the manufacturing sector of high value added, high tech and ESG compliant; and (iii) the National Energy Transition Roadmap to catalyse green investment in renewable energy (RE) for achieving zero carbon emission.

Malaysia’s proximity to Asia - especially ASEAN - makes it an ideal gateway for businesses to penetrate these emerging markets. To date, Malaysia has signed and implemented a total of 16 Free Trade agreements (FTAs) - seven bilateral FTAs and nine regional FTAs.

Notably, Malaysia has implemented two mega-FTAs in 2022, namely the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Malaysia has an advanced specialisation in the manufacturing of electrical and electronics (E&E) products, machinery and equipment, petroleum products as well as chemical and chemical products.

It is the sixth largest exporter of integrated circuits, contributing to 7.0% of global market share. Malaysia controls 13% of global market for packaging, assembly and testing services for semiconductors. Malaysia is the surprise winner of the US-China chip war.

Malaysia has a diverse range of rich natural resources, including minerals such as crude oil, natural gas, palm oil, rubber, copper ore, iron and steel, rare earth and advanced materials.

The supply and readily access to raw materials and intermediate inputs would ease the concern of supply disruptions and lower cost of inputs. Additionally, Malaysia has great potential of developing hydrogen green energy in addition to access to numerous RE sources.

While Malaysia has a smaller pool of workforce compared to Indonesia, Thailand and Vietnam, the country’s working age population (23.4 million individuals or 70% of total population) is diverse, well-educated, multi-lingual, and trainable workforce.

The country’s immigration policy is a powerful tool to win global talent race. Its Xpats Gateway is an initiative to make the application process for expatriate work pass more efficient, easy and faster.

Malaysia boasts a well-developed and modern infrastructure, including ports, airports, and road networks as well as enhanced connectivity and telecommunication networks. These infrastructures enhance supply chain reliability, and global accessibility for businesses.

Notwithstanding all the above-mentioned advantages, it is imperative for Putrajaya to address structural challenges that could impede Malaysia’s competitiveness and attractiveness as a favourable investment destination.

These include enhancing the efficiency and effectiveness of one-stop centre; government delivery system; streamlining bureaucratic complexities; removing regulatory hurdles and reducing compliance costs; skills mismatch and occasional inconsistency; and lack of clarity in public policies. - April 13, 2024

Lee Heng Guie is the executive director at Socio-Economic Research Centre (SERC) Malaysia.

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