From Cost Cuts to Local Economic Transformation

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Malaysia presents itself to the world as “Truly Asia,” a catchy tagline encapsulating the rich diversity and cultural plurality of the nation, especially evident in its capital, Kuala LumpurThe bustling metropolis is a striking tableau of modern skyscrapers juxtaposed with old streets laden with history, mosques, churches, Chinese clan houses, and Hindu temples coexisting side by sideThis multicultural mosaic is a testament to the harmonious blending of Chinese, Islamic, and Indian cultures that characterize Malaysia's identity.

Historical records highlight the deep-rooted ties between China and Malaysia, tracing back to the Ming Dynasty when the famous explorer Zheng He made several voyages to the region, establishing connections that led to the emergence of Peranakan culture

Fast forward to today, Chinese businesses such as Mixue Ice Cream, Bawang Tea Sister, BYD, VIVO, Xiaohongshu, and Laoganma have found a friendly market in Malaysia, endearing themselves to local consumers.

With its unique geographical positioning and politically stable landscape, Malaysia has cemented its standing as a leading player in ASEAN's economic realmAs of 2023, the country's GDP per capita has surpassed a remarkable $11,000, securing Malaysia a third-place ranking within ASEANChina has consistently held the position of Malaysia's largest trading partner for the past 15 years, establishing an enduring economic partnershipAs Malaysia celebrates the 50th anniversary of diplomatic relations with China, Prime Minister Anwar Ibrahim’s recent working visit to China highlights the strengthening ties between the two nations.

Historically, waves of Chinese migrants traversed the seas to Malaya in pursuit of better opportunities, and today, Chinese companies venturing abroad are demonstrating much greater sophistication and capability

Following my reporting trip in March with UOB Bank to interview Chinese enterprises in Thailand, I am now in Malaysia to explore the new possibilities as Chinese investments make a fresh leap into Southeast AsiaWhat are the future growth engines and advantages for Malaysia?

Malaysia’s economic momentum remains robustIn the second quarter of 2024, the nation’s GDP showed an impressive year-on-year growth of 5.9%, a notable increase from the previous quarter's 4.2%. Over the past five years, investments flowing from China have significantly contributed to Malaysia's economy, amounting to 138.42 billion ringgit and facilitating trade valued at 2 trillion ringgit.

According to the UOB Bank’s Corporate Outlook Survey 2024, Malaysia stands out as a priority investment destination for ASEAN and Chinese companies over the next three years

Many respondents during my interviews pointed to Malaysia's reliance on digital economy growth, high-tech industries, and export-oriented sectors, bolstered by frameworks like the Regional Comprehensive Economic Partnership (RCEP) and various free trade agreements as key to achieving sustainable economic transformation and sustained growth moving forward.

Following his ascent to power in November 2022, Prime Minister Anwar has unveiled a series of mid-term reform plans and economic development frameworks, including the New Industrial Master Plan 2030 (NIMP 2030) and the National Energy Transition Roadmap (NETR).

NIMP 2030 aims to fortify Malaysia's manufacturing industry, targeting a yearly manufacturing value-added growth of 6.5%, reaching 587.5 billion ringgit by 2030, with a focus on electronic and electrical sectors (integrated circuit design and wafer fabrication), special chemicals, aerospace, pharmaceuticals, medical devices, advanced materials, electric vehicles, renewable energy, and carbon capture utilization and storage (CCUS). On the other hand, NETR seeks to modify energy usage patterns and forge new business opportunities.

To attain these ambitious objectives, massive investment needs are on the horizon

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Rafizi Ramli, the Minister of Economy, has projected that NETR could create investments ranging from 435 billion to 1.85 trillion ringgit (or approximately $93.53 billion to $397.76 billion) for the nation by 2050.

In an exclusive interview, UOB Malaysia's CEO, Hui Hui Huang, emphasized the congruity between Chinese and Malaysian investments in high-value industries such as telecommunications, electrical, electronics, and renewable energy, stating, “There is tremendous potential here.”

Consider the example of the electric vehicle (EV) sectorThe NETR sets a clear target of electric vehicles accounting for 80% of the total industry vehicle demand (TIV) by 2050, introducing a series of incentives to achieve this goalIn July 2022, Great Wall Motors established a subsidiary in Malaysia, with their ORA Funky Cat model launching in November of the same year

Additionally, Yiwei Lithium Energy has announced its plans to establish a factory in Malaysia focused on designing, developing, manufacturing, and selling energy storage batteries, thus supporting the manufacturing ecosystem for electric two-wheelers and tools across Southeast Asia.

During my stay in Malaysia, I had the chance to visit one of the main industrial parks, the Green Prosperity GroupAccording to Datuk Ho Kwei-Fong, the group’s regional general manager, Malaysia's advantages as a foreign investment destination lie firstly in its strategic geographyThe country shares a border with Singapore and boasts an advanced infrastructure network, complemented by well-connected ports and airports ensuring the safe and convenient transportation of goods across Southeast Asia, ASEAN countries and beyond.

The Green Prosperity Group operates five parks in Selangor and Johor, two of which are situated in Malaysia's major ports, with Port Klang being the twelfth busiest port globally and Johor Port located just 45 kilometers from Singapore Port.

The recent Global Opportunity Index (GOI) report released by the Milken Institute ranks Malaysia as possessing the best overall investment conditions in Asia, placing the country 27th globally, outperforming many regional competitors.

A leading firm in information and communication technology, FiberHome, has actively laid down its footprint across Southeast Asia under the Belt and Road Initiative, identifying Malaysia as the starting point for its regional expansion

Hu Jia, the vice general manager responsible for FiberHome’s international market operations, proclaimed, “Malaysia's geographical advantages enable us to develop local businesses while covering several neighboring Southeast Asian markets.”

During my field visit, one striking impression was how friendly Malaysia’s business environment is toward international firms, particularly for Chinese companies seeking to expand overseasThis supportive and cooperative atmosphere offers valuable opportunities for Chinese enterprises to establish and deepen their presence within ASEAN.

Chinese companies entering foreign markets is no longer a novel storyHowever, in the pre-pandemic era, discussions frequently revolved around leveraging local labor and land cost advantages as the primary rationale for going overseas

Now, respondents often emphasize other opportunities and advantages such as global supply chain arrangements, market penetration, brand upgrades, and facilitating local economic transformation.

Amidst shifting geopolitical landscapes, supply chain security has become a pivotal issue for many companiesConsequently, the implementation of the “China +1” strategy has pushed numerous firms to diversify their supply chains, implying that “not venturing overseas equates to being excluded from the market.

According to Datuk Mida's CEO, Malaysia plays a critical role in ensuring global supply chain security as a middle-income nationMalaysia focuses on sustainable, high-tech, and innovative industries encompassing semiconductors, electric vehicles, and renewable energy.

Take the semiconductor industry, for instance

Malaysia has emerged as a global powerhouse for semiconductor packaging and testing, accounting for approximately 13% of global semiconductor assembly, testing, and packagingMajor international companies have established testing facilities in Malaysia.

Prime Minister Anwar highlighted a national strategy to promote the semiconductor industry in May 2024, proposing to extend at least 25 billion ringgit (around $5.3 billion) in fiscal support and targeted incentives for the sector while aiming to attract a minimum of 500 billion ringgit (about $106.2 billion) in investments from domestic and foreign enterprises, focusing on critical areas such as chip design, advanced packaging, and wafer fabrication equipment.

Industry experts point out that a semiconductor landscape is gradually forming in Southeast Asia

Chinese terminal and semiconductor firms must embed themselves deep within the ASEAN supply chain to support its rapid growth.

Currently, around 60% of electric vehicle production capacity is domestic in Malaysia, providing strong support for the marketDatuk Mida expressed confidence that Malaysia “could become a critical component in the global electric vehicle supply chain.” Data from the Malaysia Automotive Zero Emission Association (MyZEVA) indicates that in 2023, Malaysia witnessed sales of 13,257 pure electric vehicles, bringing the total number to 16,763 across the countryStatistics from Malaysia's Road Transport Department (JPJ) confirm that in the first half of 2024, Malaysia registered another 10,633 pure electric vehicles, achieving a penetration rate of approximately 2.6%. In the EV sector, BYD topped the registration chart in the first half of 2024 with 4,368 new registrations, securing a market share of around 41%, surpassing last year’s total registrations.

MIDA anticipates that under free trade agreements like RCEP and the ASEAN-China Free Trade Area Agreement (ACFTA), Malaysia will experience deeper supply chain integration and accelerated technology transfer.

It is apparent that after several consecutive years of exceeding a GDP per capita of $10,000, the Malaysian government is set to prioritize research and innovation further

“The Malaysian government is actively promoting the enhancement of the domestic innovation ecosystem to establish the country as an ideal destination for Chinese investors pursuing technological innovations,” noted Datuk Mida.

According to the Emir Research Institute, Malaysia's future trajectory involves transitioning from a labor-intensive to a technology-empowered manufacturing and assembly process through initiatives like numerical control automationThis shift raises Malaysia's expectations for the quality of incoming investments from China, emphasizing the importance of helping elevate local economic transformation rather than merely capitalizing on lower-cost labor compared to China.

Chinese enterprises are keenly involved in supporting local societal advancementsHu Jia shared that his company’s internationalization proceeds in three phases: firstly, selling Chinese products to Malaysia; secondly, introducing solutions involving services to the Malaysian market; and thirdly, deeply embedding its industrial layout in Malaysia’s technological advancements, underscoring that “we are currently in the third phase.”

Datuk Mida highlighted that while creating employment opportunities, Chinese companies also bring advanced technologies that enhance Malaysia’s competitive edge and spur GDP growth

Malaysia and China have recently inked a new five-year agreement to deepen cooperation in robotics, entrepreneurship, innovative companies, and R&D.

All respondents during my trip emphasized the significance of digital economies and green economies as the pathway to Malaysia’s economic developmentIn a joint statement released on June 20, both China and Malaysia expressed their commitment to seizing opportunities for developing new productivity in digital economies, green development, artificial intelligence, and energy, exploring collaborations in advanced manufacturing, technological innovation, small and medium enterprise entrepreneurship, and financial services.

Countries like Thailand and Malaysia in Southeast Asia are undergoing economic transformations, providing opportunities for Chinese firms facing rising costs and geopolitical uncertainties

However, linguistic barriers, cultural differences, management practices, nuances in business environments, and market insights present substantial challenges for these “gold miners”.

Currency fluctuations significantly impact overseas profitsGiven the relatively small economies within ASEAN and their dependency on external trade and investments, currency stability remains somewhat limitedHowever, the Malaysian ringgit has shown remarkable strength against the US dollar this year, appreciating by more than 7% since early 2024.

As outgoing enterprises expand, there is an urgent demand for funds among investorsNotably, the stock markets in the ASEAN nations are relatively small and thinly traded, while bank lending rates surpass domestic levels, with Malaysia’s rates presently exceeding 5%.

Finding partners familiar with the financial systems and regulatory frameworks of both countries is essential during overseas ventures

UOB Bank Malaysia, for instance, provides a “one-stop” cash management solution for Chinese-Malaysian businesses that includes offshore trade financing, cross-border cash pooling, and multi-currency funding and settlements“This approach helps clients manage and centralize their cross-border liquidity more effectively,” asserted Huang Hui Hui.

Through UOB’s corporate digital bank UOB Infinity, customers can conduct and monitor cross-border payments online, submitting financing requests digitally during various supply chain stagesTo date, UOB has supported over 200 Chinese enterprises investing in Malaysia, assisting 51 companies last year alone.

As the largest foreign bank in Malaysia and the first in Southeast Asia to sign and upgrade a memorandum of cooperation with the China Council for the Promotion of International Trade, UOB Malaysia has established a dedicated business unit for Chinese operations.

To attract foreign investments, including from China, MIDA tirelessly rolls out various support initiatives, such as the STF-TF talent program and the establishment of the Malaysian Investment Promotion Centre (IMFC), with branches now in Beijing, Shanghai, and Guangzhou.

Industrial parks like Green Prosperity Group also offer “one-stop business solutions” encompassing company registration, environmental pre-assessments, MIDA manufacturing license applications, local authority business permit applications, employee visas, tax incentives, and financing services.

Integrating with local culture is an essential lesson for companies venturing abroad

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