Malaysia: a Profit Center for Global Manufacturers
Although Malaysia might have slipped under the radar for some site selectors, it has all the right ingredients to make it a global economic powerhouse in the years to come.
Jennifer LeClaire  (Jun/Jul 08)
It's arguably Asia's best-kept secret, and it's indisputably a profit center to the foreign investors whose site selection skills discover it. It's Malaysia, a vibrant, westernized nation that not only offers diversity among peoples and cultures, but also diversity of industries and an abundance of resources to support them

 Malaysia gained its independence from the United Kingdom 50 years ago. Since then this Asian nation has been laying the infrastructural groundwork and executing the economic development strategies that have positioned Malaysia as an industrial force to be reckoned with in its region.

This multi-ethnic nation boasts a combination of attributes that is turning the heads of multinational firms looking for an edge on the competition in a predictable environment. Malaysia offers political and economic stability, strong economic fundamentals, pro-business government, liberal investment policies, well-developed infrastructure, harmonious industrial relations, and a trainable and educated work force that speaks English.

While Malaysia has carved out niches in a long list of industries, including chemicals and petroleum products, photonics, solar cell, food manufacturing, textiles and apparel, furniture, medical devices, automotive, machinery and equipment, biotechnology, and aerospace and aircraft, the country is perhaps best known as "Silicon Valley East" because of its strong showing in the semiconductor industry. HP, Dell, AMD, Intel, Motorola, Western Digital, and many other U.S. tech bellwethers have called Malaysia home for decades.

Malaysia continues to move away from low-value assembly to high value-added manufacturing and research and development. The government has also adopted more flexibility in economic development policies to provide greater opportunities for foreign companies than ever before.

"Malaysia is going to become an even more attractive destination for manufacturing - but high-end manufacturing," said Allaudin Anuar, Deputy Director in the Macroeconomics Section of Malaysia's Economic Planning Unit. "Our investment climate, modern infrastructure, available facilities, and skilled work force are welcoming to foreign investors. Our policies are transparent and our trade record is strong."

Malaysia by the Numbers
Malaysia's policies and promise become clear in the data. The United States is Malaysia's largest trading partner - and Malaysia is also the United States' 16th largest trading partner. Total trade between the two nations was $44.5 billion in 2007. Noteworthy is the fact that Malaysia is also the 22nd-largest exporting nation in the world.

More than 5,000 foreign companies from over 60 nations have set up shop in Malaysia, which is strategically positioned in the heart of Asia. (More than 3,000 of those companies serve the manufacturing sector.) With customized tax incentives offered to quality investments and strong supporting industries, many companies have significantly expanded their presence. In fact, the manufacturing sector expanded by 3.1 percent in 2007 and continued to expand by 6.9 percent in the first quarter of 2008, contributing to 32 percent of the country's gross domestic product (GDP). The non-government services sector grew 5.9 percent in 2007 and expanded further by 8 percent in the first quarter of 2008. This sector accounted for 50.7 percent of the country's GDP.

In terms of productivity, Malaysia registered a significant 6.3 percent growth in 2007, ranking third after China and India. The country also retained its position as the third best destination in the world for outsourcing, again behind India and China. And Deutsche Bank ranked Malaysia second, after India, among Asia's "growth stars" for the 2006-2020 period, with China in third position. The list of rankings goes on and on and the trend is clear: Malaysia is competitive in the global economy on all fronts, and the country is not content to rest on its success. Malaysia is striving for improvements across the board.

In the World Bank's Doing Business 2008 Index, Malaysia ranked 24th out of 178 economies. Malaysia's standing in IMD's 2008 World Competitiveness Scoreboard is 19th. That puts the nation ahead of Japan and Korea in Asia and Thailand and Vietnam in Asean. Despite stiff competition for FDIs, the Malaysian Industrial Development Authority (MIDA) expects 2008 inflows into the manufacturing sector to exceed 2007's record year.

"We are moving up the value chain in manufacturing," said Dato' R. Karunakaran, Director-General of MIDA. "Many companies are moving their labor-intensive operations to smaller, neighboring countries and relying on Malaysia's cost-effective, well-developed infrastructure to grow their high-end production."

Competing with the Rest of the World

Malaysia has much more competition than ever for FDI. Beyond Singapore and Hong Kong, the emergence of China and India - as well as smaller Asian economies like Vietnam, Thailand, and even Eastern European countries like Hungary and Poland - is forcing Malaysia to stay on its economic-development toes with new strategies, more liberal policies, and fiscal and non-fiscal incentives.

"Malaysia will adopt a more focused approach to attract FDIs," said Tan Sri Muhyiddin Yassin, the Minister of International Trade and Industry. "We will leverage the country's strengths in the manufacturing sector, including the development of small and medium-sized enterprises, as well as the services sector to targeted large corporations with the potential for significant investments in Malaysia."

Malaysia continues to improve its infrastructure. A new bridge, for example, is under construction to connect the industrial island of Penang to the mainland. Malaysia and Singapore are also cooperating on cross-border developments, making the southern region of the state of Johor a more attractive location for companies that need fast access to Singapore's business center. New initiatives are also being developed in the metropolitan city of Kuala Lumpur.

Malaysia, of course, will continue to play to its strengths. The nation's largest industry is electronics, and MIDA continues to attract investment from this sector. Dell, Intel, AMD, Western Digital, Motorola, Seagate, Agilent Technologies, Fairchild Semiconductor, Freescale Semiconductor, Texas Instruments, OSRAM Opto Semiconductors, and Plexus are among the largest U.S.-based electronics and electrical manufacturing companies operating in Malaysia. Unlike in nearby countries like Vietnam and Thailand, running a semiconductor plant in Malaysia doesn't demand a large investment in training workers because the skilled labor is readily available. What's more, American technology companies report low turnover and low wage-inflation in Malaysia.

On the intellectual property (IP) front, foreign companies in Malaysia find protection of patents, trademarks, industrial designs, copyrights, geographical indications, and layout designs of integrated circuits. Malaysia is a member of the World Intellectual Property Organization (WIPO) and a signatory to the Paris Convention and Berne Convention that govern IP rights. Malaysia is also a signatory to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), signed under the auspices of the World Trade Organization (WTO).

American Companies Explain the Benefits
The investment climate in Malaysia doesn't have to speak for itself. American companies are speaking for it. Nick Zefferys, governor and past president of the American-Malaysian Chamber of Commerce (AMCHAM), points to initiatives like PEMUDAH, a special task force to facilitate business in Malaysia, as a boon for U.S. companies looking to set up shop there. PEMUDAH has reduced the paperwork and the red tape for FDI in Malaysia.

"Foreign companies used to have to fill out stacks of paper and make trips back and forth to wade through the bureaucracy," Zefferys explained. "Now, many of the unnecessary licensing procedures and outdated laws have been discovered and eliminated. Approvals are much faster because the delivery system is streamlined. What used to take months now takes days - and the government is committed to a policy of continual improvement toward being competitive."

Malaysia may be getting more competitive, but the country has always enjoyed political stability, an attribute that American companies cite again and again as a reason for locating and expanding there. A market-oriented economy with a well-developed financial and banking center and low overall inflation is another. There's also a developed infrastructure of well-maintained seaports, airports, highways, and railways, along with high-quality telecommunications networks, fully developed industrial parks - including free-trade zones - and an enviable quality of life.

Chow Chiu Mei, general manager of TRW Automotive, an automotive supplier headquartered in Livonia, Mich., said the telecommunications infrastructure in Malaysia is better than what China and Thailand have to offer, and qualified labor is available with low turnover. TRW employs 130 at its facility in Cyberjaya. "We've found the skills we need here, and the people are multi-lingual, which makes it easy to do business in multiple countries," Mei said, noting that the company employs Malays, ethnic Indians, and ethnic Chinese, all of whom also speak English.

Entegris, a materials integrity management company headquartered in Billerica, Mass., moved most of its production from Germany to Kulim, Malaysia, which is near the island of Penang. The company is also moving more of its U.S. production there. Entegris is located in the Kulim Hi-Tech Park. The park was opened in 1996 and is the first high-technology industrial park in Malaysia. The vision of the park is to become the "Science City of the Future." BASF, Fuji Electric, Infineon Technologies, and First Solar are also among the tenants.

"Malaysia is investor-friendly, with tax holidays and other incentives for firms expanding here," said Chai Eng Leng, plant manager for Entegris' Kulim facility. "We plan to move two or three of our product lines to our facilities here each year until the transition is complete."

Western Digital has been expanding throughout Malaysia for decades. Its U.S. headquarters are in Lake Forest, Calif., but the firm has facilities in Johor, Sarawak, Penang, and Kuala Lumpur to produce millions of hard drives for PCs, DVRs, game consoles, and MP3 players. "What's been most important to us is the economic stability and growth we've seen over the decades," noted Thomas Fong, director of finance for Western Digital. "It's too expensive for us to do most of our business in Singapore. Malaysia is more expensive than Thailand, but the knowledge workers here - along with the availability of power and water and the stable government - have caused us to continue to grow our operations in Malaysia."

With thousand of companies producing world-class products across Malaysia, it's almost difficult to call it Asia's best-kept secret. Still, with China and India getting so much media attention, Malaysia has slipped underneath the radar screen for many site selectors. But Malaysia has all the right ingredients that promise to make this nation a recognizable powerhouse of global trade in the years ahead. And as the "Gateway to Asia," Malaysia is poised to give foreign investors direct access to coveted markets with the lower risks that come with a political stability the country has enjoyed for 50 years.