Can we reindustrialize sustainably in 2020 and beyond? – Ong Kian Ming
Media Statement by Dr. Ong Kian Ming, Deputy Minister for International Trade and Industry (MITI), on the 5th of January 2020
Professor Rajah Rasiah, in a journal article in 2011, raised a very interesting question on whether Malaysia was experiencing negative deindustrialization i.e. whether Malaysia was prematurely deindustrializing before we could reach our ‘peak’ in manufacturing and industrial output. More recently, Finance Minister Lim Guan Eng also referred to the phenomenon of premature deindustrialization in an address at the University of California, Berkeley, in the heart of Silicon Valley.
According to figures used by Rasiah, the contribution of industry (which includes manufacturing, construction and utilities) to GDP grew from 30.7% in 1990 to a peak of 37.9% in 2000. By 2009, it had fallen to 32.5%. The share of manufacturing in the GDP calculations rose from 24.2% in 1990 to 30.9% in 2000 before falling to 26.6% in 2009. Since 2010, the share of manufacturing as part of GDP has stagnated at between 22% to 23%. Meanwhile, the share of services has grown from 52.4% in 2010 to 56.7% in 2018.
Even though the share of services in a country’s economy should grow as it matures and develops, manufacturing and industry must remain an important driver of the Malaysian economy for the following reasons:
(i) Manufacturing, especially at the higher end of the value chain, still drives productivity growth and with this, wage growth as well. The productivity level per worker in the service sector, at RM86,900 in 2018, is approximately 71% of the productivity level in the manufacturing sector, at RM121,800.
(ii) Manufacturing is still an important provider of jobs and FDI, especially in the secondary cities. For example, the largest private sector employers in places like Taiping (Toyo Tires), Ipoh (CARSEM), Melaka (Infineon), Kuantan (BASF Petronas, Alliance Steel), Muar (ST Microelectronics) and Batu Pahat (Sharp), just to name a few, are usually Multinational Companies in the manufacturing sector. Even though the contribution of manufacturing to GDP has decreased, the total employment of the manufacturing sector has grown from 2.38 million in 2015 to 2.5 million in 2018.
(iii) Manufacturing is still the largest component of our trade and also of our current account surplus. Without the value generated by the Electrical and Electronics (E&E) sector, Malaysia would not have experienced 21 years of consecutive current account surpluses (since the 1998 financial crisis).
The US-China trade conflict is unlikely to find a long term resolution soon, notwithstanding Phase 1 of the latest possible trade deal. Closer to home, Southeast Asia is growing as an attractive market in its own right, with more than 650 million people, a US$3 trillion economy, and the 2nd fastest growth area globally. Against this backdrop, Malaysia finds itself in a unique opportunity for reindustrialization. Companies that were once relocating and reinvesting in China are looking for other diversification opportunities. Chinese companies with aspirations of being global players in their own right are also expanding overseas, much like Japanese companies in the 1960s and 1970s and Korean ones in the 1990s. Malaysia is finding itself to be the focus, once again, of companies in the manufacturing sector.
But unlike in the past, Malaysia now has the ability to be more selective in the choice of investments coming to our shores. The opportunities to attract higher value added and more capital intensive manufacturing investments have been given an additional boost by the US-China conflict. There is a certain level of self-selection by investors looking at Malaysia. They know that we cannot provide the same amount of low cost human capital which Vietnam can provide. Hence, when these companies express interest to either expand their operations in Malaysia (among existing players) or to set up new operations here, they will likely bring in new technologies and processes which are less labour intensive. Such investors would seek to leverage our relatively good infrastructure and skilled workforce. In addition, we need these investments to be sustainable from two perspectives – that they must remain in the country for the long haul and they must not bring about negative environmental impact.
On the policy front, this requires a few areas of strategic planning and coordination by the government of Malaysia.
Firstly, we need to update our list of promoted investment activities so that they are consistent with Industry 4.0 technology pillars and best practices. We need to slowly but surely shift away from being sector focused to being activity focused. For example, while Malaysia may still be strong in the E&E sector, moving forward, the focus should not be on low-end and low value assembly type work. Our targets are in higher value added activities such as R&D, Design & Development, managing highly automated manufacturing processes and manufacturing services, just to name a few. Our incentive structure, including incentives recently announced in Budget 2020, should also be focused on providing customized incentives to attract the desired activities in the manufacturing sector.
Secondly, we need to update our environmental policies so that they are consistent with sustainable manufacturing processes. This includes policies to manage the influx of ‘recycling’ activities in the manufacturing sector due to restrictions on waste imports and recycling in other countries. This is not to say that the use of recycled feedstock in manufacturing is not desired in Malaysia. But we need to better control the quality of the raw materials, the technology used, and the nature of the end product. By allowing only the importation of sorted and high grade waste for use in manufacturing activity, our industry can participate in the circular economy. For example, allowing the importation of only SORTED recycled paper for manufacturing cartons and other packaging products using the latest equipment would encourage high-end pulp and paper manufacturing activities. Conversely, dirtier, UNSORTED waste paper imports may introduce not only low value-added processing activities into the country, but expose our environment to unknown harm.
Thirdly, we need to align our investment policies so that more extensive supply chain linkages can be created between foreign investors and domestic players. This has been done before in the E&E ecosystem in Penang, which has spawned local champions that have established global reputations and become key suppliers to international conglomerates. For example, companies such as Vitrox, Pentamaster and Inari are known as world-class suppliers in their respective areas, while our emerging IC design companies are building up a consortium to position themselves for growth. Such successes should be studied and replicated in other industries. This may include encouraging technology transfer to build up local capabilities, training of local workers and also encouraging locally sourced content. Investment policy also should seek to build up domestic supply chains through a strong financing ecosystem and incentives for research and development. The aforementioned customized incentives can be structured to include some degree of local commitments in business spending.
Fourthly, we need to provide customized incentives and policy direction to open up new markets for local exporters. Some of our local exporters are experiencing a boost in overseas orders because global companies are seeking greater diversification in production sources. Whether it is in the area of E&E, book publishing or furniture manufacturing, just to name a few, there are newfound opportunities for Malaysian companies to venture abroad and capture new markets. Policy alignment is needed to support Industry 4.0 investments on the part of local players – in the traditionally labour intensive furniture industry, for example – and also for customized incentives for these companies to embark in new products using new technologies for the export market. The incentives to increase Direct Domestic Investments (DDI) for the purpose of capturing new export markets have also been announced in Budget 2020.
What then is the goal of sustainable ‘reindustrialisation’ in 2020 and beyond? At the very least, the share of industry as part of the GDP should not continue on a downward trend. Perhaps there may be a slight increase in the short to medium term. More importantly, reindustrialisation is an opportunity for rapid industrial transformation and value enhancement so that the manufacturing sector can be elevated to the next level of sophistication and complexity. It is an opportunity to provide employment that matches the skills of our graduates. Sustainable reindustrialisation is an opportunity to build new global value chains (GVCs) which cannot be so easily shifted; also, an opportunity to bring in the latest environmentally friendly technologies and practices. Reindustrialisation is an opportunity to bring in Industry 4.0 technologies not just to the manufacturing sector but also to the agriculture, mining, and services sectors. These are opportunities which we must take full advantage of through quick, tactical policies and also through our upcoming New Industrial Masterplan and the 12th Malaysia Plan.