Regional Production Networks and their Implications on Malaysias Trade and Investment Policies and...

Regional Production Networks and

their Implications on Malaysia’s Trade and

Investment Policies and on Regional Cooperation in Asia

Lai Mun ChowSenior Research Officer

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Outline of the Presentation

• Malaysian industrial clusters

- Electrical and electronics industry

- Automobile industry

• Implications of the Multimedia Super Corridor

• Implications of China and India

• Technological advancement and its strategic resources

• Conclusion

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Malaysian Industrial Clusters

Electrical and electronics industry

Production

1985 1990 2003

Integrated circuits 2,561 6,084 23,269

(million units)

Semiconductors 1,468 2,565 15,932

(million units)

Electronic transistors 3,450 5,956 24,206

(million units)

Television sets (units) 568,387 2,168,817 9,915,171

Air-conditioners (units) 148,424 212,018 184,485

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Exports, in RM million

1985 1990

2003

Semiconductors 4,4,39 11,685

78,540

Electronic equipment & parts 454 3,670 72,828

Consumer electrical products 581 5,531 19,774

Industrial electrical products 356 3,342 20,253

Electrical industrial machinery 608 2,144

13,838

Household electrical appliances 54 130

1,882

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• The industry is still mainly dominated by foreign multinational corporations.

• Imports still dominate most of the stages of production activities.

• The number of technology driven SMIs is small.

• The industry continues to face growing ‘innovation deficits’.

• There is a serious shortfall in the supply of skilled human capital.

• Most of the electronics firms in locations outside Penang do not have strong inter-

firm links and business networks.

• Most of the local firms have yet to develop their own market prospecting and

development capabilities.

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Automobile industry

Sales of motor vehicles, in unit

1996 2000

2003

Passenger cars 275,615 282,103 319,847

Commercial vehicles 89,173 61,071 74,847

Total 364,788 343,174 405,010

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Automobile industry

• Malaysia’s automobile industry has been highly protected by both tariff and non-

tariff measures over the years and these include import tariffs, import licenses, local

material content policy and mandatory deleted item policy.

• While the local material content policy had been totally abolished in 2002, the

mandatory deleted items policy had also been completely phased out on 1 January

2004.

• On 31 December 2003, the government announced the details about new import

tariffs and excise duties that were to take effect from 1 January 2004.

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Automobile industry

New tariffs on CKD passenger cars (with effect from 1 January 2004)

ASEAN Non-ASEAN

Import duty Excise duty Import duty Excise duty

Old New Old New Old New Old

New

< 1,800 42 25 55 60 42 35 55 60

1,800 to < 2,000 42 25 55 70 42 35 55 70

2,000 to < 2,500 60 25 55 80 60 35 55 80

2,500 to < 3,000 70 25 55 90 70 35 55 90

3,000 or higher 80 25 55 100 80 35 55 100

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Automobile industry

New tariffs on CBU passenger cars (with effect from 1 January 2004)

ASEAN Non-ASEAN

Import duty Excise duty Import duty Excise duty

Old New Old New Old New Old New

< 1,800 140 70 0 60 140 80 0 60

1,800 to < 2,000 170 90 0 70 170 100 0 70

2,000 to < 2,500 200 110 0 80 200 120 0 80

2,500 to < 3,000 250 150 0 90 250 160 0 90

3,000 or higher 300 190 0 100 300 200 0 100

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Implications of the Multimedia Super Corridor

Number of MSC status companies

1997 2000 2004*

Malaysian 47 276 680

Foreign 44 144 283

50-50 Joint Venture 3 9 26

Total 94 429 989

* Up to 1 March 2004

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Majority shareholding by country and region for MSC status companies

Country/region Number %

Malaysia 680 68

Europe 91 8

North America 37 4

Singapore 35 4

India 36 4

Japan 23 2

Asian 15 2

Australia 17 2

Others 55 2

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MSC status companies by sector

Sector Number %

Software development - business applications 197 20

Software development engineering and specific applications 159 16

Internet based business - e-commerce service 106 11

Content development 98 10

Internet based business - application service provider 62 6

Education and training 62 6

Systems integration 57 6

Hardware / electronics design 48 5

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Growth of sales in the MSC, in RM billion

Year Number of companies Local sales Export sales Total

2001 292 2.30 0.703.00

2002 403 3.26 0.673.93

2003 528 4.81 1.045.85

2004 500 6.16 1.82 7.98

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Number of patents, industrial designs and trademarks filed by MSC status companies

2002 2003 2004

Patents 197 151 288

Industrial designs 14 41 93

Trade marks 167 188 192

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Market reach by export destination

0 50 100 150 200 250

South America

African Countries

Canada

South Korea

Japan

Middle East

Australia

Other Asian Countries

China

Indonesia

Singapore

Number of Counts

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• The MSC Impact Survey 2003 generally shows that there are both economic

impacts and technological effects arising from the MSC.

• As a regional hub just for ICT and multimedia technologies, the MSC has

distinguished itself from other S&T parks in the region which mainly focus on high

technology manufacturing.

• It is important that the MSC threads its way around carefully and strategically so as

not to compete just in software development, for that is India’s forte.

• It is imperative that the Malaysian MSC status companies form strategic partnership

with world class Indian ICT and software companies.

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Implications of China

• The Chinese companies are probably prepared to ‘invest in market share’ and live

with no returns or losses in the initial years.

• The emergence of China has slowly threatened the leadership position traditionally

occupied by the Japanese manufacturers, especially in the E&E market segment.

• Indeed, China provides Malaysia with the necessary catalyst to spearhead its

knowledge-based, export-led industrialisation, the fourth phase of the national

industrialisation process.

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Implications of India

• India has not only emerged as a major software exporter, but it has also become the

main destination for business process outsourcing in the world.

• There is growing evidence that Indian manufactured goods, especially electronics

hardware, are capturing significant share on the global market.

• Due to the increasingly competitive tax regime, many leading global contract

manufacturers are also expanding their operations in India.

• The export market share of Malaysia would be possibly eroded as more and more

low-cost Indian exporters venture into the manufacturing sector.

• One of the possible ways of minimising the adverse effects arising from India is to

form smart partnership with them.

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Technological Advancement and its Strategic Resources

• Regional production networks would exert pressure on local suppliers to upgrade

their industrial capabilities.

• Technical knowledge that is transferred by flagships can only be internalised and

translated into the capability of the local suppliers if they are in good resource

positions, for there is a link between a firm’s resources and its sustained competitive

advantage.

• The necessary strategic resources are technically skilled human capital, R&D

capability, well established government research institutes, effective foreign

technology transfer and strong venture capital growth.

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Human capital

• Malaysia’s human capital remains scarce and significantly pales in comparison with

the NIEs.

• The increase in human capital over the years is not sufficient for the industrial

upgrading to take off.

• The problem is mainly due to the manpower that fails to have the right quality and

knowledge.

• The output of degree courses shows a continued preference for arts and humanities.

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Research and development

• With a gross expenditure on R&D that is less than 0.5 per cent of the GDP, R&D

investment in Malaysia is considered not significant.

• The government attributes the low GERD/GDP to limited financial resources, lack of

skilled R&D personnel and inadequate market research.

• The country’s R&D productivity remains low as capital expenditure constitutes a

larger share than labour cost in terms of R&D expenditure by type of cost.

• Most of the R&D incentive schemes are offered to only to the locally owned

companies and such a shareholding restriction is a disincentive for foreign companies

to carry out R&D activities in the country.

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Government research institutes

• While there are now over 33 GRIs in Malaysia, only both SIRIM and MIMOS are

fully devoted to industrial technology research.

• Some of the local GRIs are not being run according to scientific discipline and

technological specialisation.

• Many GRIs seem to have difficulties in collaborating synergistically with the local

universities to come up with commercial research.

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Foreign technology transfer

• FDI has been acting as an important catalyst for foreign technology to be transferred

to the local industries.

• The technology inflows are not broad-based and mainly concentrated on the

electrical and electronics industry, transport equipment and chemical products

industry.

• The number of technology inflows has been on an upward trend and most of them

are transferred via technical assistance. Licence, trademark and patent are seen to be

fast catching up.

• Malaysia still lacks a strong technology-based SMI sector that can fully engineer

positive spillovers from the MNCs that operate in the manufacturing sector.

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Venture capital

• It is highly possible that VC investment would be the main driving force behind the

country’s future industrial development.

• Besides MDV and MSC Venture Corporation, the government also offers the

following financial schemes to the VC industry: Financing for High Tech

Industries,

Commerce Technology Venture Funds, High Tech Ventures Capital Fund and MSC

Venture One.

• While both entrepreneurship and venture capitalism are vital to the success of the

VC industry but these two remain scarce in the country.

• Due to the government restrictions on investment by pension funds, insurance

companies and private banks into VC funds, the sources of capital available to the

industry is limited.

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Conclusion

• The present regional production networks are now evolving in response to the

emergence of both China and India, and a new form of regional cooperation is

expected to be born in the next couple of years.

• The current mode of development in the region presents both opportunities and

threats to Malaysia.

• The most worrying issue is the strategic resources that are presently employed to

enhance the local industrial capability.

• In order to gain a comparative advantage in the future regional production

networks, Malaysia has no choice but to focus on its strengths.

• Considering that Malaysia has already successfully carved out a niche for itself in

chip manufacturing on the global market, the country should focus on just the

microelectronics industry.

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Thank You

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