High-value manufacturing – Malaysia’s next frontier

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Malaysia needs to focus on the manufacturing sector to improve its export numbers to make the country’s growth more sustainable. That said, Malaysia has been ranked as the world’s top manufacturing location in new suitability index by Cushman and WakefieldMalaysia needs to focus on the manufacturing sector to improve its export numbers to make the country’s growth more sustainable. That said, Malaysia has been ranked as the world’s top manufacturing location in new suitability index by Cushman and Wakefield

With Malaysia moving steadily towards a diversified service-based economy, the next wave of business and investment opportunities is likely to be in high-value manufacturing.

This area is still largely untapped by local and foreign companies, but it is vital to sustain the service-based economy Malaysia wants to achieve by the year 2020, says Performance Management and Delivery Unit Chief Executive Officer Dato’ Sri Idris Jala.

Idris raised this issue in a recent presentation on the progress of the Economic Transformation Programme with a line chart that revealed the steady expansion of the services industry and stagnation of the manufacturing sector.

Since 2005, the service industry’s contribution to the Malaysian gross domestic product has increased about 150% to RM434 billion in 2013 from RM176 billion previously.

In the same period, the manufacturing sector has only increased its contribution to GDP by 75% to RM193 billion in 2013, from RM110 billion in 2005.

Today, the services sector contributes about 55% of Malaysia’s GDP compared with the 25% contributed by the manufacturing sector. In 2005, the services sector contributed 47% of the nation’s GDP while the manufacturing sector contributed 28% of the nation’s GDP.

“Beyond 2020, I think manufacturing has to improve because services are not easily exportable,” says Idris.

“Manufacturing, in turn, is quite easily exportable,” he adds.

Interestingly, Malaysia has been ranked as the world’s top manufacturing location in new suitability index by Cushman and Wakefield while the EMEA (Europe, Middle East and Africa) region dominates the rankings overall accounting for nine of the top 20 places. By comparison, there are seven countries from the Asia-Pacific and four from the America’s in the Top 20.

The Manufacturing Index 2014 assesses factors likely to affect the successful operation of production facilities in the 30 countries with the largest manufacturing output, as defined by the United Nations Conference on Trade & Development.

Innovation in the pipeline

Although Malaysia’s GDP has been growing steadily, its net export has hovered around US$50 billion (RM163 billion) since 2006.

As the Malaysian economy relies heavily on trade, Dato’ Sri Idris believes that the country needs to focus on the manufacturing sector to improve Malaysia’s export numbers to make the country’s growth more sustainable.

This is when research and innovation plays a role as Malaysia, a middle-income going to high-income country, will find it increasingly difficult to remain competitive in manufacturing traditional products.

According to Dato’ Sri Idris (pic), some small companies have started to invest in the research and development of nanocarbons such as graphene that can be used as rubber and plastic additives, conductive inks, nanofluids and lithium ion batteries.

If successful, this compound has the potential of bringing a revenue impact of in as much as RM9 billion to Malaysia. This could translate into at least RM18.5 billion in gross national income and about 9,000 jobs, 20% to 30% of which are expected to be high-value positions.

There are a lot of opportunities and state funding made available to encourage innovation in Malaysia.

Learning institutions such as Genovasi and, more recently, the Malaysian Global Innovation and Creative Centre (MaGIC) are set up to encourage the culture of innovation. Funding is also provided through initiatives such as the National Innovation Centre and Technology Acquisition Fund.

Yet, innovation remains a challenge for Malaysia as public spending over the past decade has been focused on infrastructural developments.

Private spending on research and development has also remained low at around 1% of GDP compared with the world average of 2%.

Investing in the future

While it may seem that more investment dollars is the ingredient needed to spur innovation in the country, much more is needed to sustain the innovation culture in Malaysia.

Even with government assistance and facilitation, the key to successful innovation lies in the implementation of such plans.

Universities in Malaysia, for instance, should be empowered to develop and retain talent that are capable of conducting more commercially viable research.

Local businesses and entrepreneurs should also be encouraged seize the opportunities that are open to them.

The former requires a change of mindset among Malaysia’s academia and the latter requires a renewed respect for meritocracy and healthy competition.

What is certain is that there is political will to encourage innovation in Malaysia, and innovation in high-value manufacturing is one area that is vital to support Malaysia’s aspiration to become service-based economy.

It is now up to the government to lay down plans to promote growth in the manufacturing sector and businesses to seize emerging opportunities if it wants to sustain its growth.

“By year 2020, I think it is a challenge to continue to grow if we do not innovate,” emphasised Dato’ Sri Idris.

 

Download the 2013 ETP Annual Report here.

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