Malaysia’s key economic indicators are evolving favourably. Headline inflation is declining and unemployment has remained steady at 3.3 per cent since November 2023, returning to pre-COVID-19 levels. If the government can address some of the nation’s systemic structural inefficiencies, it could pave the way for a second economic take-off.
Ongoing competition between China and the United States, compounded by the supply chain disruption witnessed during the pandemic, has spurred both Western and Chinese companies to re-evaluate their sourcing and supply strategies. The “China+1” model and “Taiwan+1” model are direct responses and stand to benefit Malaysia.
Intense interest from multinational corporations looking to start or expand manufacturing activities that would have been done in China previously, for example, foreign semiconductor companies looking to invest in Penang, has risen.
The semiconductor industry is a case study of how Malaysia can position itself to take advantage of global trends. During the first economic take-off, the government had the foresight to introduce incentives that attracted specific steps in the semiconductor value chain. Intel opened its first plant in Penang in 1972 and by the early 1980s, there were 14 semiconductor firms operating in Malaysia.
This familiarity led to Malaysia becoming an unexpected “winner” of the geopolitical friction between the United States and China. Semiconductor industry players looked towards Malaysia when it became necessary to relocate other steps in the value chain, placing Malaysia in an excellent position to benefit from the growth of the semiconductor industry.
Efforts to create a comprehensive Semiconductor Strategic Plan are headed in the right direction, though it is crucial to incorporate appropriate incentives and create the right business climate to attract high-value operations.
This is only one example.
But other Southeast Asian countries are catching up fast. On top of generally cheaper labour, they also offer lucrative incentives to entice companies to invest. For Malaysia to stay competitive, it needs to strengthen its existing semiconductor ecosystem to move up the value chain.
China – Malaysia Relationship
China has been Malaysia’s largest trading partner for the past 15 years. In 2023, total trade between our nations reached USD98.803 billion (RM450.84 billion), with imports from China accounting for USD56.69 billion (RM258.63 billion).
These imports primarily include electrical and electronics products, machinery, and chemicals. This strong trade relationship demonstrates the depth of our economic ties.
The Belt and Road Initiative (BRI) strengthens our connectivity, both literally and figuratively. It serves as a catalyst for enhancing international connectivity and fostering greater cooperation among nations. As the pioneering BRI project, the “Two Countries, Twin Parks” initiative not only strengthens trade relations but also stimulates economic activity and creates jobs, particularly in Malaysia’s East Coast region. Other notable projects by China include the ongoing “East Coast Rail Link (ECRL)” and the “Automotive High-Tech Valley (AHTV)” which the government understands is transitioning to the usage of Electric Vehicle (EV).
These projects have contributed to the economic growth and employment opportunities in the local communities and national level as well.
In 2023, Malaysia witnessed a total of 32 high-level visits between the two countries. These visits have contributed to the strengthening of bilateral ties and promote closer people-to-people relations, which will provide impetus in nurturing the existing relations further.
Deputy Prime Minister and Energy Transition and Water Transformation Minister (PETRA), Datuk Seri Fadillah Yusof underscored the importance of expanding collaboration beyond politics and economics to encompass education, culture, tourism, and people-to-people exchanges today (May 7), during delivering his opening keynote speech at the Malaysia-China Commemorative Forum, marking the 50th anniversary of diplomatic relations between Malaysia and the People’s Republic of China.
“Looking ahead, we see tremendous potential for deeper cooperation. We can expand and accelerate our collaboration in infrastructure, the digital economy, green development, new energy vehicles and rare earth. These areas offer growth and sustainability benefits,” he said.
Investment partnerships with Saudi Arabia
Last night, The Ministry of Investment, Trade and Industry (MITI) called local companies to establish investment partnerships with companies from Saudi Arabia, especially in the services sector.
Minister Tengku Zafrul Abdul Aziz said Saudi Arabia is inviting Malaysian companies to invest in the country in order to bolster bilateral trade and investments, highlighting Saudi Arabia’s Saudi Vision 2030 plan welcomes investments from countries like Malaysia, especially in the services sector.
“We have expertise in diverse sectors, including electrical and electronics, tourism, logistics, and facility management.
“This opens up opportunities for Malaysian companies to expand their business into the country,“ he said after a dinner reception in honour of the Saudi Arabian delegation’s visit to Malaysia yesterday.
In this regard, Tengku Zafrul said the Malaysia-Saudi Business Council has been established to boost business-to-business activities between the two countries.
Meanwhile, Saudi Arabia’s Minister of Commerce Dr Majid Abdullah Alkassabi encouraged Malaysian companies to come to Saudi Arabia to explore potential business opportunities in the country. The visit was of significant importance as it was a fact-finding mission where the parties sought to build connections and jointly discover the multitude of opportunities available.
“So, we are preparing a comprehensive plan… a cooperation plan based on Saudi Crown Prince Mohammed bin Salman’s direction to prepare a joint plan and to enhance the bilateral trade cooperation,” he said.
The drastic depreciation of the Malaysian ringgit, comparable in magnitude to the 1998 Asian Financial Crisis, has spooked many and triggered debates on the nation’s economic performance. External headwinds such as persistent high inflation in the United States, sluggish economic prospects in China, and ongoing geopolitical tensions are significant influencing factors. Still, some see the weaker ringgit as a sign of the nation’s dwindling competitiveness.
Trade Catalysts
In light of these possible catalyst to trade endeavours such as the formation of the Penang Automation Cluster in the Batu Kawan Industrial Park illustrate strategies aimed at providing one-stop supply chain hubs for multinational corporations.
They also enhance knowledge sharing and capacity building for local small- and medium-sized enterprises and supply chain integration. The lower-value tasks that make up most of the sector in Malaysia, such as assembly, packing, and testing, will gradually become automated or are at risk of moving to lower-cost locations.
Structural reforms are needed to strengthen the nation’s fiscal position to promote catalytic investments, build a highly paid and highly skilled workforce, and enhance the overall industrial ecosystems. Thriving industrial ecosystems are a necessary condition to move up the value chain, and also anchor industries in the country. The April 2024 announcement of what will be the largest integrated circuit design park in Southeast Asia is a testament to the government’s ambition.
Another example is Johor — which instead of merely serving as a hinterland to Singapore’s seaport — is ambitious enough to build its own capacity and capture some of the maritime shipping business. In doing so, it increases its economic complexity by diversifying into logistics services and in turn improves the attractiveness of the state to investors. The Port of Tanjung Pelepas’ free trade zone model smooths the shipping trade, and at the same time increases economic development through the provision of ancillary services and support.
But a second take-off will not be achieved through competition alone. Against the backdrop of the U.S.-China trade war, two major free trade agreements were signed and ratified — the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — both of which Malaysia is part of. This underlines the country’s commitment to freer international trade. Prime Minister Anwar Ibrahim’s intention to facilitate discussions on a Malaysia–EU Free Trade Agreement further signals the administration’s ambition to cooperate and partner on a global scale.
Malaysia must act fast. The economy already has the necessary components to move into the production of electric and autonomous vehicles, establish artificial intelligence hubs, build more smart factories, and enhance decarbonization efforts. Malaysia’s mission-oriented approach introduced in its New Master Industrial Plan 2030 showcases a holistic way to guide strategic directions to channel industries’ purposes and trigger innovation that produces solutions with spillover effects for the economy. Penang’s semiconductor supply chain success can and must be emulated in other sectors.
On the ASEAN Front
Malaysia hopes to collaborate with other Asean member states to strive for better regulation of the communications and multimedia industry and work closely together as a regional bloc, said Communications Minister Fahmi Fadzil.
In his opening remarks at the inaugural International Regulatory Conference (IRC 2024) yesterday, he noted that as the chair of Asean in 2025, Malaysia aims to invigorate Asean-led forums and achieve significant milestones.
Fahmi said the regional regulatory framework on online safety is anticipated to facilitate coordination and collaboration among Asean member states in addressing common challenges related to online safety, as well as building regional consensus on Asean’s commitment to safeguarding the digital environment.
“With that aspiration, let us channel our collective efforts towards fostering a more integrated and resilient Asean.’
All these within the last two days.
