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Opportunities and challenges of China Plus One By Lee Heng Guie

Publish date: Mon, 15 Apr 2024, 09:09 AM

WE live in a rapidly changing world with global value chains connected by flows of goods, services, capital, people, data, and communication.

Countries, businesses and industries are linked through cross-border investments, logistics and communication networks, real time information exchange. It is a complex web of supply chains, digital platforms and collaborative partnerships across different time zones and geography.

The “China Plus One” strategy was long mooted since 2013, as multinational companies seek to diversify their sources of supply and production from over-dependency on China on concerns about supply chain disruptions and costs. This approach has gained more traction in recent years and will accelerate further given titanic 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 United States and China, the Covid-19 pandemic, military conflicts in Ukraine, climate risk as well as environmental, social and governance (ESG), disruptive technology as well as cybersecurity.

As global supply chain strategies evolve in global trade dynamics and geopolitical tensions shift across major advanced economies, governments and corporates have considered reshoring (bringing their supply chains home), near shoring (building supply chains with their neighbours) as well as friend shoring (trusting their supply chains to their allies).

The corporate strategies are to minimise supply chain disruptions, ensure supply chains resilience, safeguard economic security and risks.

Some emerging and frontier-market economies in Asia, especially Asean with untapped potential in the manufacturing sector have upped ante to be prime candidates for global manufacturers.

They are 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.

Malaysia, Indonesia, Thailand, Vietnam and India stand to be the potential front-runners or popular destinations for companies implementing the China Plus One strategy.

When shortlisting the potential candidates and beneficiaries, foreign investors and companies will weigh on the following factors: strategic geographical location, geopolitical friendliness, resilience economic and financial fundamentals, political stability, conducive investment climate, market openness and trade liberalisation, infrastructure, competitive and labour capabilities.

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

> Strategic geographical edge.

Situated between the Indian Ocean and the South China Sea, this places Malaysia in strategic position as a shipping and logistics hub, serving as a key intermediary point between the East and the West in global trade and business dynamics as well as global supply chains.

Port Klang and Port of Tanjung Pelepas continued to remain in the top 20 busiest ports in the world, handling 14.06 million twenty-foot equivalent units (TEUs) and 10.48 million TEUs respectively in 2023.

Kuantan Port has grown prominence to connect with East Asian markets. The port will be connected to the ongoing construction of the East Coast Rail Link, which will be operational in 2027. It is expected to significantly boost the handling capacity for both container and conventional cargo at the main shipping hub of Port Klang.

> Resilient economic and financial fundamentals.

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.

Post-Covid-19 pandemic crisis, real gross domestic product (GDP) has recovered to grow by an average 5.2% per annum in 2022-2023 (5.1% per annum in 2011-2009).

The government 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 for financial intermediation and deep capital market for the mobilisation of private funds to finance investment and capital stock accumulation.

> Ensuring political stability.

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

> Conducive business and investment ecosystem.

Post-Covid-19 pandemic, the government has enhanced the 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.

During the period 2021 to 2023, approved investment in the manufacturing, services and primary sectors averaged RM302.2bil per year.

Of the total, foreign investments averaged RM186.8bil or 61.8% of total approvals while domestic investments accounted for 38.2% of the total .

Special Task Force to Facilitate Business or Pemudah is reactivated to facilitate public and private sectors collaboration, remove administrative red tape and make Malaysia a more business-friendly destination and market.

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

> Gateway to the global and regional markets. Malaysia’s proximity to Asia, especially Asean makes it an ideal gateway for businesses to penetrate these emerging markets.

Procurement strategies can leverage Malaysia’s location to access a diverse range of products and services from across the region.

To date, Malaysia has signed and implemented a total of 16 Free Trade agreements (FTAs) -seven bilateral FTAs and nine regional FTAs.

Notably, in 2022, Malaysia has implemented two mega-FTAs, namely the Regional Comprehensive Economic Partnership and the Com-prehensive and Progressive Agreement for Trans-Pacific Partnership. Collectively, in 2022, trade with countries covered by both the regional and bilateral FTAs accounted for 67.3% of Malaysia’s total trade which was valued at RM1.916 trillion.

> Advanced manufacturing and broad-based services sector. Malaysia has an advanced manufacturing sector that is highly specialised with electrical products and electronics, machinery and equipment, petroleum products, chemical and chemical products are the long-standing pillars.

It is the sixth largest exporter of integrated circuits, contributing to 7% of global market share. It controls 13% of global market for packaging, assembly and testing services for semiconductors. It is the surprise winner of the US-China chip war, with Penang being the largest benefactor.

> Rich natural resources and abundant land. 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.

They serve as feedstocks for a diverse of manufacturing industries and food processing.

The supply and readily access to raw materials and intermediate inputs would ease the concern of supply disruptions and lower cost of inputs.

Additionally, it has great potential of developing hydrogen green energy and also many renewable energy sources that can be developed such as solar, wind, biomass, hydro, geothermal and tidal wave.

> Trainable manpower.

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

Immigration policy is a powerful tool to win global talent race. The Xpats Gateway is one of the government’s initiatives to make the application process for expatriate pass more efficient, easy and faster.

The processing of expatriate applications will be divided into two - the fast track, which takes five working days and the normal track, which takes 15 working days.

> Well-developed infrastructure. Malaysia boasts a well-developed and modern infrastructure, including ports, airports, and road networks as well as enhanced connectivity and telecommunication networks.

The infrastructure will enhance supply chain reliability, a key consideration for procurement, supporting international business activities and enhancing global accessibility for businesses.

However, it is important that the government address structural challenges that could impede our competitiveness and attractiveness as a favourable investment destination.

They include enhance efficiency and effectiveness of one stop centre, government delivery system, streamline bureaucratic complexities, remove regulatory hurdles, reduce compliance costs, skills mismatch and occasional inconsistency as well as the lack of clarity in public policies.

Lee Heng Guie is executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own. 

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