Positive outlook for Malaysian construction

High levels of state and private sector investment will drive double-digit growth in Malaysia’s construction industry this year with momentum likely to be maintained into 2015 as more infrastructure projects roll off the drawing board.

The Master Builders Association Malaysia (MBAM) and the Construction Industry Development Board (CIDB) Malaysia forecast growth of at least 10%, the third consecutive year of double-digit expansion. Growth will be sustained in part by transport and infrastructure mega-projects such as Tun Razak Exchange – a financial center – line two of the Klang Valley Mass Rapid Transit (MRT) and West Coast Expressway, according to MBAM president Matthew Tee. “These projects are yet to start … so I don’t think the number of construction projects will drop in the next few years. There should be a consistent growth in the industry moving forward,” Tee told local media.

The chairman of CIDB Malaysia, Tan Sri Dr Ahmad Tajuddin Ali, reiterated that the industry would benefit from increased investments in infrastructure development. “Currently, we have mega projects, particularly the light rail transit (LRT) and MRT, which involve local and foreign companies and they provide jobs to the people, directly or indirectly,” he told a media briefing in September.

Spurred on by massive capital expenditure projects, growth in the construction sector has been outpacing GDP expansion in recent years. The government’s Economic Transformation Programme (ETP) and public-private partnership (PPP) projects have spearheaded much of this growth. This led to a multiplier effect across the industry, which expanded by 11.4%, 4.7%, 18.1% and 10.1% from 2010 to 2013, respectively, according to data from Bank Negara Malaysia (BNM), the central bank.

Leading growth

In an August report, local financial services firm RAM Ratings said the construction sector would likely be the best performer in terms of expansion for the rest of the year after revising its economic forecasts and GDP growth projection to 5.6% for 2014, compared to the initially estimated 5.1%. “Construction, manufacturing and services are expected to perform better than initially expected, underscored by the continued strengthening of domestic and external demand drivers,” the report said. “In particular, construction activities are expected to lead this growth, which is projected to come in at 11.6% this year.”

Another factor that could boost construction activity in the last quarter of this year and the first of 2015 is the impending introduction of the goods and services tax (GST), set to come into force next April. Some sectors of the economy could see an uptick in activity due to “front loading”, pushing up the schedule of projects in order to beat any cost increases resulting from the GST. Fears of a rise in materials and labour costs, driving up the budgets of projects, may prompt firms to bring forward investments on plants and equipment.

In late August, Maybank Investment Bank recommended that investors move into a number of leading construction stocks, forecasting good returns on the back of projects linked to transport infrastructure. Malaysian infrastructure group Gamuda is noted, thanks to its successful bid for the Penang integrated transportation project worth RM5.5bn ($1.7bn). “The Klang Valley MRT’s construction also provides earnings visibility to the group,” said Maybank’s Lee Cheng Hooi, quoted by local media.

It is not just building firms themselves that will gain value over the coming six months; materials suppliers and construction equipment and machinery companies are also likely to benefit from the ongoing boom, with the continued flow of investments being channelled all along the industrial chain.

Cooling phase

According to data issued by BNM in mid-August, the economy grew 6.4% in the second quarter year on year (y-o-y) while the construction industry climbed 9.9%. Despite the growth, the rate of expansion was down compared to the first three months of 2014, when it recorded an 18.9% surge y-o-y thanks to a sharp rise in new real estate developments.

According to the Malaysian Institute of Economic Research (Mier), the residential segment appears to have entered “a cooling phase” in the first two quarters, with sales expected to stay “moderate” for the coming third quarter. Its Residential Property Index fell for the second quarter to 109.9 points, slipping 1.3 points from the first quarter, and 28.3 points from a year ago.

The survey also showed that total unsold new residential properties have accumulated faster than sales in recent months. However, BNM officials told local media that further measures to cool activity in the property sector were not necessary given some moderation in household debt.

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Malaysia and China look to boost two-way trade

A diplomatic approach towards regional issues has strengthened Malaysia’s efforts to boost trade and investment ties with China, setting the scene for the two countries to roll out an ambitious programme of increased financial cooperation.

Last October, China and Malaysia agreed to raise bilateral ties to a “comprehensive strategic partnership”, with a focus on boosting military cooperation and increasing two-way trade almost three-fold to $160bn by 2017.

Deputy Minister of International Trade and Industry, Datuk Lee Chee Leong, announced in July that Malaysia’s exports to China for the year had already reached $106bn (RM341bn). He added that Malaysian exports currently accounted for 23.9% of China’s total trade with Asean countries.

Although Malaysia is China’s largest Asean trading partner, more can still be done to help the dynamic reach its full potential say Malaysian business groups in particular.

Building ties

The strengthening of bilateral ties comes against a backdrop of growing tension between Beijing and key Southeast Asian nations over maritime disputes in the South China Sea.

While the sovereignty issues simmer, however, diplomatic relations between China and Malaysia remain positive, as US state department envoy John Finkbeiner pointed out in a 2013 study. “Malaysia appears to pursue a non-confrontational approach in the sovereignty dispute, which differs markedly compared to Vietnam and the Philippines,” he wrote. “The first pillar regards Malaysia’s firm commitment to increase its trade and investment ties with the world’s most dynamic economy [China] in order to hedge its other strong economic ties, with the US in particular.”

However Malaysia’s approach has contributed to a growing imbalance in bilateral cross flows between the two countries. Malaysia has channelled almost $7bn of investment into China, but received just $1bn from the Asian giant in return.

Last year, the National Chamber of Commerce and Industry Malaysia (NCCIM) called on the government to intervene by adopting a more pro-active stance in correcting the current investment imbalance, which falls in China’s favour.

The Chinese ambassador to Malaysia, Huang Huikang, has given a reassurance that efforts to address the imbalance are making headway. Chinese interest in Kuantan Industrial Park is expected to help take the country’s investment in Malaysia past the $2bn (RM6.42bn) mark this year, he said. The ambassador added that Beijing aimed to encourage more of its companies to increase their investments in Malaysia.

While Malaysian exports to China remain dominated by agricultural products, such as palm oil, Chinese firms are strengthening their presence in the technological sector as well as in cultural initiatives such as the $91.47m Impression Melaka venture, a live theatre project, which is being rolled out jointly by Malaysia’s PTS Impression Sdn Bhd and China Impression Wonders Art Development Co. Ltd in Malacca.

A readiness to do business in the Chinese currency renminbi (RMB) is giving Malaysia’s exporters an added advantage, according to a HSBC Commercial Banking survey released in July.

“The settlement of goods and services in RMB will remove the foreign exchange risk exposure from the Chinese companies and hence allow them to reduce their cost,” HSBC Bank Malaysia Bhd head of global trade and receivable finance, Vincent Sugianto, said in a statement. “Ability to trade in RMB also allows Malaysian companies to tap into a wider customer base in China which currently does not have access to foreign currency trades.”

Containing shocks

Despite Malaysia’s healthy trade relations with China, however, external factors risk weighing on bilateral ties.

The disappearance of Malaysia Airlines’ Flight MH370 in March put a strain on the relationship between the two countries, sparking a 19% drop in visitors from China for the month of April year-on-year (y-o-y), although these figures have since rallied. The casualties included 153 passengers who were Chinese nationals.

“That the Chinese press has begun to soften its tone towards Malaysia’s government [over the MH370 search] reflects the view that China is better off swallowing a tough pill than taking any action that could provide the US with a major strategic advantage at Beijing’s expense,” the South China Morning Post said.

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Malaysia: New regulations to boost market for takaful

An overhaul of Malaysia’s Islamic finance regulations is expected to increase take-up of sharia-compliant insurance (takaful) products, although the new rules could encourage smaller operators to join forces with more established rivals.

New legislation came into effect on June 30, along with parallel laws revamping the operations and regulation of the conventional financial sector. The new Islamic Financial Services Act (IFSA) replaces previous legislation enacted over the past 30 years, strengthening regulatory oversight and boosting industry transparency.

According to a statement from Bank Negara, the central bank, the new rules will provide “a comprehensive legal framework that is fully consistent with sharia in all aspects of regulation and supervision”.

Under the new act, religious advisers will be held legally accountable for financial products. They will also be subject to monetary penalties and could face imprisonment if found to be in breach of the laws.

In the takaful sector, the IFSA will require insurers to separate their life and non-life business lines. Firms that hold composite licences will need to divide their operations within five years.

The new rules are expected to help ensure the rights of takaful consumers, setting out disclosure requirements and mandating that insurers provide a minimum level of information to customers at each stage of the contract process.

“The IFSA will lead to greater consumer protection and subsequently greater confidence in takaful,” Mohamed Rafick, CEO of Munich RE Retakaful, told OBG in an interview in mid-July. “It will also hold takaful companies accountable for their pricing strategies by ensuring that risk funds are sustainable.”

The stringent pricing accountability could put pressure on smaller operators in the industry, Rafick added. They could also face challenges in meeting the new higher capital requirements that are specified by the IFSA.

While there are around a dozen takaful operators in the market, the sector is dominated by a few firms that, between them, account for about 90% of the estimated combined $6bn worth of assets held.

Some of the larger players have expressed interest in acquiring smaller outfits in the wake of the new regulations.

In July, Hassan Kamil, group managing director of Syarikat Takaful Malaysia, the second-largest Islamic insurer, told Reuters his company might be in the market to absorb smaller rivals. “If their portfolio is attractive, we could be buying up business,” he said.

However, analysts are confident that the new regulations will help the sector to expand.

Ahmad Rizlan Azman, CEO of Etiqa Takaful, said the improved regulatory environment, alongside growing public understanding of takaful products, would help the sector to develop into 2015 and beyond.

“Recent reports indicate that the Malaysian takaful industry is expected to grow by 20% per annum for the next two years as consumer acceptance grows and regulatory changes provide a stronger and more stable infrastructure for the shariah-compliant insurance industry,” he told a conference in Kuala Lumpur in late June.

However, the takaful sector still lacks the level of consumer acceptance required to underpin strong growth. Many products in the takaful range, as yet, have limited exposure in the Malaysian market. The penetration rate for life takaful stands at 13%, considerably lower than that of conventional life insurance, at 55%.

According to a recent survey commissioned by Swiss Re, about 30% of Muslims in Malaysia have a good understanding of takaful, while 16.5% hold policies. Though this is a far higher rate than in Indonesia, where only 5% of the population were found to be familiar with takaful and 1% choosing to hold the sharia-compliant product, the survey indicates that more work needs to be undertaken to boost penetration rates.

By tightening up the regulatory structure of its takaful segment, Malaysia will further bolster confidence in both the product and the broader Islamic financial sector and may well set the benchmark for other countries seeking to boost accountability and transparency in their own sharia-compliant markets.

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Malaysia: Auto sector looks to pick up speed

Automotive sales in Malaysia slipped down a gear in the second quarter, with both April and May showing a deceleration in the figures, though experts believe activity in the industry will pick up in the latter half of the year after the government unveils a new policy aimed at reducing vehicle price tags.

On June 18 the Malaysian Automotive Association (MAA) report on May vehicle sales showed a 5.4% drop in roll-outs from dealers’ lots compared to the previous month, which had also seen a decline in sales. The report said there had been a 15% dip in trade year-on-year for May, though 2012 had set the bar high, with record sales of 627,753 units for the full year.

While the April and May figures were down on the corresponding months in 2012, overall sales are up 6.2% for the first five months of the year, with just under 260,000 units sold compared to 244,000 over the same period in 2012. This was thanks to a strong performance in the first quarter, the MAA report said. The association noted that, despite uncertainties in the market, it expected year-end sales to top 640,000 units.

One of the key reasons given by analysts for the easing sales figures is a wait-and-see approach adopted by potential car buyers stemming from a promise made by the government in the lead-up to the recent national elections to reduce vehicle prices by 20-30% over the coming five years. This commitment was repeated by Prime Minister Najib Razak at the end of May, three weeks after the polls closed.

While the government has reiterated its promise to lower vehicle costs, it has not made clear how it will do so. The government has said the price cuts will stem from a revision of the National Automotive Policy (NAP), the blueprint for the direction of the industry first drafted in 2009 and amended last year. The NAP aims to boost competitiveness and liberalise the sector in the lead-up to the ASEAN Economic Community launch in 2015, when most of the region’s tariff borders will be removed.

The revised version of the NAP is due to be released some time in the third quarter, after it is reviewed by the Cabinet, by which time producers and dealers hope there will be more clarity over how the cuts will be achieved. The government is reluctant to reduce its automotive taxes at a time when it is trying to narrow the state deficit to 4% in 2013 from last year’s 4.5%, and down to 3% in 2015.

Trade Minister Mustapa Mohamed said on June 24 it was impossible for the government to cut the automotive excise tax, which brings in RM7bn ($2.18bn) to the Treasury annually.

“Our budget is in deficit,” Mustapa said. “If we sacrifice RM7bn, where are we going to find it? At this point of time, it is not something the government is considering.”

If this position is maintained, it would appear to limit options on how to reduce costs for the consumer, though the NAP may open up new avenues and help stimulate sales when released.

Another reason given for the slowdown has been weaker consumer sentiment, a reflection of concerns the Malaysian economy may be cooling. On June 24 OCBC Bank lowered its forecast for economic growth to 5% for this year, a reduction from its earlier estimate of 5.4%. The bank’s projection was in line with that of other analysts, who have tipped GDP expansion of between 4.5% and 5.5%, down from last year’s 5.6%. If the economy does move towards the lower end of market expectations, this may curb Malaysians’ appetite for new vehicles, at least until the position on new tariffs is made clear.

While there may be some uncertainty hovering over the immediate situation of the sector, a number of foreign manufacturers appear to be taking a positive position on its longer-term prospects. Chinese manufacturer Chery has announced it intends to set up a production plant in Malaysia, targeting both the domestic market and using it as a stepping stone into the region. Japanese rival Mazda has also unveiled plans to spend some $30m to expand its production capacity through acquiring an existing facility and constructing a new factory.

Another seeing improved potential in the Malaysian market is German carmaker BMW, which is targeting a 10% increase in sales in 2013 over last year’s 7000 units. The manufacturer reported in early June that sales for the first four months of the year were up by 5%, with hopes a new release of the Mini Cooper would push them even higher.

Some producers, including local manufacturer Proton, moved to lower the prices on some vehicles, though this can be linked to marketing pressures to increase sales and promotional activity leading into Ramadan, the end of which is traditionally linked with higher consumer spending, Malaysia’s carmakers may overall also adopt a wait and see attitude to pricing until after the NAP is rolled out.

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Malaysia: New year looks bright for construction industry

While 2013 will produce a number of challenges for Malaysia’s construction sector, including a degree of uncertainty surrounding the approaching election and a shortage of workers, the industry is still expected to post a decent performance this year.

Malaysia goes to the polls in June at the latest, with most pundits predicting a win for Prime Minister Najib Razik’s ruling Barisan Nasional and his coalition allies, although there have been suggestions that the race could be close.

Analysts remain divided, however, about whether nerves among investors prompted by the forthcoming election will produce knock-on effects of any significance across the construction industry.

In an advisory note to investors issued in mid-December, market analyst Nomura International said it remained bullish on construction, energy and banking. The firm’s confidence was shared by Alliance Research, which on December 17 gave a buy recommendation to construction shares.

JP Morgan Securities, however, was more cautious, placing a neutral buy advisory on Malaysia, due to what the firm’s executive director of equity research, Mak Hoy Kit, called election overhang. “Investors will be worried if the opposition wins. When there is uncertainty, investors typically act negatively,” Mak said on December 12. An opposition victory could leave question marks hanging over the current government’s infrastructure programmes, he said, which would likely go ahead as planned if the Barisan Nasional is returned to power.

A similar muted warning was also sounded by the government, when, at the end of November, Deputy Finance Minister Datuk Donald Lim said that although the construction sector’s contribution to the economy would remain significant, the new year would bring a slight reduction in activity.

Construction’s contribution to GDP is expected to fall to 13.5% in 2013 from 15% in 2012, with tourism and the services industry earmarked for a bigger role. “In 2013, we believe domestic demand will still be there but we expect the construction sector to slow down a little. Other industries would contribute to our growth,” Lim said.

The minister said that the slight drop in construction activity could be attributed to the completion of key, large-scale projects, which the government drove through to help the economy recover from a flat patch caused by the global financial crisis.

The industry is set to receive a further boost from a wave of new developments earmarked for 2013, including rail projects worth an estimated $52bn that should be launched in the coming year, prompting some analysts to suggest that while growth in other sectors will largely drive Malaysia’s economy, the construction sector’s contribution to GDP could still remain stable. Malaysia’s GDP is forecast to grow by at least 4.5% this year.

However, while the construction sector is expected to have a solid 2013, it remains hampered by a shortage of skilled labourers, with rapid growth in recent years triggering a drain on its workforce. In late November, the Master Builders Association Malaysia (MBAM) called on the government to do more to facilitate the training of building workers or run the risk of supply-side bottlenecks delaying new projects.

MBAM’s president, Matthew Tee, said that with over a third of the industry’s existing workforce approaching the age of 50, measures needed to be taken to replenish the ranks of the sector. Suggestions include the association’s proposal that the government set up vocational schools that would train construction workers. However, a programme will take time to produce results, and cooperation with the private sector would also be essential for providing work experience and training to students.

In the short term, the government is acting on a proposal floated by MBAM and other industry groups to bring in foreign workers to bolster the ranks of Malaysia’s construction sector workforce. At the beginning of December, the government announced the signing a memorandum of understanding (MOU) with Dhaka that set out the terms for Bangladeshi workers to be employed in Malaysia. The first wave of foreign labourers is due to arrive in February.

If, as is widely expected, Malaysia’s current government wins the forthcoming election, the country’s construction firms should benefit from a wave of new, state-backed infrastructure projects which, combined with rising demand for residential properties, suggests that predictions of a bright 2013 for the sector appear to be well founded.

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Malaysia: Investing in health

Investment in human capital has been identified as a key driver in boosting the quality of Malaysia’s health care standards while seeing growing economic returns from the industry. However, underinvestment in health services continues to pose a risk.

Under its Economic Transformation Programme (ETP), unveiled in September 2010, the government aims to transform the country into a high-income economy bracket by 2020, with the health sector targeted as central to this plan. As one of the 12 national key economic areas (NKEAs), health care is targeted to become a significant economic enabler by generating revenue through health tourism, as well as manufacturing drugs and equipment. The sector also aims to create 180,000 new positions in health care and attract up to 1m overseas health tourists annually by the beginning of the next decade.

To achieve that goal, however, spending in the sector will need a significant boost. Currently, Malaysia dedicates the equivalent of 4.7% GDP on health services. This is lower than most middle-income nations’ spend, which averages 6.5%, according to the World Health Organisation.

One of the core areas for that increased investment is human capital. The Health Ministry has set a series of targets to increase the ratios of health sciences professionals to the general public. Once the ETP has completed its term by 2020, officials believe Malaysia will have one doctor for every 400 citizens, compared with the present rate of around 1:800, and one nurse for every 200 people, up from the current level of 1:384.

To achieve this, Malaysia is boosting its health education training schemes. In late July, Muhyiddin Yassin, the deputy prime minister, said the government was planning to increase the number of higher education institutions in the field of health science to 150,000 by 2020, up from the present 55,000.

According to Muhyiddin, who is also Malaysia’s education minister, “I believe Malaysia can play a central role in answering the need for more health professionals in the region. As such, health sciences students, who are considered highly skilled and employable, can expect a brighter future in this field.”

On July 14, in a speech delivered on her behalf at a graduation ceremony at a health training institute in Sabah, Rosnah Abdul Rashid Shirlin, the deputy health minister, said the government was moving to accelerate the pace of improvements in sectoral education. The ministry was committed to ensuring that graduates have the knowledge and skills required, as well as providing training institutions equipped with modern facilities and qualified teaching staff.

“If we see the development of global health at present, the world needs specialists to develop public health,” Rosnah said.

The minister of health, Liow Tiong Lai, recently acknowledged that the task of increasing the number of specialists was a difficult one. Health education is a rapidly evolving segment, meaning the health sector and educators must move quickly to keep pace with needs of the industry.

“Although the system has been quite successful, we must not rest on our laurels but work tirelessly to ensure that our medical staff will be able to meet the demands of the market, which can change quite rapidly,” Liow said at an international health care conference in Kuala Lumpur on July 17. “However, quantity alone is no longer sufficient because quality also matters in the industry to achieve the excellence in not only curing but also caring.”

There are many challenges that Malaysia’s heath sector faces, including rising costs and more demanding and knowledgeable consumers, Liow said. One of the answers to these challenges will be the industry’s ability to train, attract and retain qualified personnel.

The issue of retention is a vital one, according to Dr Ismail Merican, the former director-general of health, as is the ongoing process of improving the skills base of those already in the system. In particular, Merican told local media, the government needs to step up investments in the public health care sector, strengthen its teaching role and ensure professionals are better compensated to keep them within the local system.

If Malaysia is to achieve its goals, it will need a strong health sector to underpin growth, both to ensure the wellness of society but also as a foundation for sectoral expansion. Increased spending, as well as further encouraging the already active private health services sector to ramp up investments along the training and development chain, will be required.

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Malaysia: Going for green

Malaysia has announced plans to boost its automotive sector through the production of electric cars, hoping to both develop a lucrative export trade while actively combating carbon emissions at home. The industry will face competition, however, from other countries in the region whose green automotive initiatives are more developed.

At present, there are 11 completely electric vehicles on Malaysia’s roads, according to government figures. Hybrid cars – which use both conventional fuel and an alternative power source for their engines – are more popular, with around 8000 hybrid vehicles currently on the roads.

This is set to change, however, with the government planning to announce a major policy shift that will promote the production and domestic use of electric vehicles. The highly anticipated revision of the National Automotive Policy (NAP), the government’s long-term plan for the industry, will introduce several new reforms and regulations.

Since late 2011, the Malaysian government has been promoting the establishment of a local electric vehicle manufacturing capacity. Both the government and industry lobby groups believe such a move will help broaden the base of the sector.

According to projections from the Malaysia Automotive Institute (MAI), reforms to the industry, coupled with higher local and international demand, will see the sector’s contribution to the economy triple by 2020. In a statement issued in early May, the MAI said it expected the industry’s share of GDP to rise from the present rate of 2.4% to 6.8%, largely due to an increased focus on the production of electric and other energy-efficient vehicles. This growth would be underpinned by a higher level of foreign direct investment and government efforts to encourage original equipment manufacturers (OEMs) to set up operations in Malaysia.

“Meeting vehicle standards for energy-efficient vehicles in Malaysia means bringing new technologies into the country,” Madani Sahari, the CEO of the MAI, told OBG. “As a result, OEMs are being targeted. Before this happens, however, the sector must be liberalised by allowing both local and foreign OEMs to qualify for manufacturing licences, which is expected to happen with the pending second revision of the NAP.”

While there is the potential for Malaysia to break into the regional and international market with a locally produced electric car, it will face stiff competition from both China and Thailand, which have established automotive sectors that include electric car production plants.

With this in mind, Malaysian officials are aware of the need to develop a domestic market for electric cars and their hybrid counterparts. In early May, Mustapa Mohamed, the minister of international trade and industry, announced that the government would offer incentives to Malaysians to buy electric or hybrid vehicles. While there is already a 100% import duty exemption for electric or hybrid cars below 2200 cu centimetres, the minister said additional measures would be enacted to promote the use of electric vehicles.

“We will continue to introduce incentives to accelerate the move towards zero-emission mobility,” Mustapa said. “Our goal is to increase the number of hybrid and electric cars on our roads by 10% by 2020. By then, we hope to be living in a much cleaner and greener environment.”

The government is also encouraging private firms to put in place the necessary infrastructure for these vehicles to operate. On May 29, Peter Chin, the minister of energy, green technology and water, said his department was developing regulations and standards for firms that plan to set up charging stations for electric vehicles. Such measures are needed to create an environment that would generate an interest in the use of alternatively powered cars.

“Until we have charging stations, we are not ready. Once the infrastructure is up, then people will be tempted to buy electric vehicles,” Chin said. “If we want to make it commercial, certain infrastructure must be in place, such as credit card facilities for consumers to pay for charging services.”

The minister also said that an electric vehicle infrastructure plan to enable pilot demonstration projects would be a part of the new NAP.

Local and international manufacturers are likely to wait until the latest version of the NAP is released before making any decisions on whether or not to tap into the electric vehicle sector. However, Malaysia-based vehicle producer Proton and Japan-based Nissan and Mitsubishi are all running trials of battery-powered cars in the country to raise awareness of the plug-in option and test their viability.

If Malaysia is to achieve its ambitious target of cutting emissions by 40%, it will need to move quickly to generate industry interest and acceptance of the new product among the public.

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Malaysia: Technology to the fore

With data use growing strongly and existing capacity under pressure, Malaysia’s broadband network is undergoing necessary expansion to keep up with demand. Indeed, as penetration growth slows, improving speeds and service quality have become a priority.

The Malaysian Communications and Multimedia Commission (MCMC), the industry regulator, expects household broadband penetration to rise to 65% by the end of 2012, up from 62.9% in 2011, the local press reported on April 16.

Mohamed Sharil Tarmizi, the chairman of the MCMC, stated that broadband growth would be driven by demand for higher internet speed in both the fixed-line and mobile segments. According to Sharil, the market may be nearing saturation, but there remains substantial scope for improving capacity.

Sharil cited the largely state-owned Telekom Malaysia’s UniFi high-speed broadband services as a market leader in strengthening broadband infrastructure. He said that lowering costs and broadening awareness would also support further penetration growth.

Malaysia’s new 2.6-gigahertz (GHz) spectrum for long-term evolution wireless communication (LTE), expected to be introduced in 2013, will be central to efforts to increase capacity. Sharil asserted that the new spectrum would complement those in the lower band, particularly those of 1 GHz and below.

In December 2011, the MCMC allocated spectrum in the 2.6-GHz band to nine companies, including the country’s four GSM operators. The development is expected to help support the expansion of mobile broadband services and ease existing bottlenecks in the system, as well as provide faster connectivity.

LTE comes none too soon, as current networks may be finding it harder to cope with the rapid expansion of data traffic driven by the increasing use of smartphones, tablets and other internet-reliant devices. According to Nitin Bhat, a partner and the head of consulting at Frost & Sullivan, data volumes are doubling every 12 to 15 months.

Sharil has said he expects the rollout of LTE to increase cooperation between operators on sharing infrastructure. He anticipates that some firms will opt to use mobile virtual network operator (MVNO) technology on existing infrastructure, rather than building extensive new network equipment, which is capital-intensive. This would be particularly useful to newcomers to the segment, who lack infrastructure of their own.

By sharing transmission networks, base stations and towers, operators can potentially lower capital and fixed costs, which will allow them to bring down prices to the consumer, strengthen services, or both. Joint investments could also reduce capital risk.

“Infrastructure rationalisation” is a relatively new trend in the competitive Malaysian information and communications technology (ICT) market, but one that could bear fruit.

In 2011, mobile firms Maxis and U Mobile agreed to share the former’s 3G radio access network (RAN), following an announcement in 2011 that Celcom Axiata and DiGi, the country’s other mobile operators, would look to collaborate on networks and infrastructure.

Some analysts have been critical of the decision to award so many players access to the 2.6-GHz spectrum, arguing that it could lead to a fragmented market, with some players under-utilising their allotted capacity, and the more successful finding their limited bandwidth pressured.

However, it is still unclear how many of the operators will actually commence operations in the near future. Overall, the introduction of LTE, with its capabilities for speed and volumes, is an important step forward for the sector.

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Malaysia: A farmer’s market

Recent efforts to upgrade Malaysia’s agricultural sector that include increased incentives for farmers to learn new techniques and adopt advanced technology are expected to lead to greater harvest yields and help meet rising domestic demand for food products.

While the sector contributes around 12% of GDP and provides employment to some 16% of the national workforce, most of this is concentrated in two key segments, palm oil and rubber production. The contribution of the rest of the agricultural sector is estimated at 4%, though its share of employment is higher, as much of Malaysia’s farming is still labour-intensive. At present, the input of the non-oil and rubber farming sectors is approximately $6.5bn a year, but the government wants to see this more than double by 2020 to $16bn.

To achieve this, Malaysia is trying to adopt smarter farming techniques. Agriculture was one of 12 separate National Key Economic Areas (NKEAs) identified under the Economic Transformation Programme (ETP), launched in late 2010 as part of the government’s efforts to increase national income to more than $500bn by 2020 and achieve developed nation status. The ETP made a clear distinction between agriculture and the palm oil and rubber industries, which fall under a separate NKEA.

The ETP set out a number of initiatives to boost the sector, including a growing focus on export cash crops (tropical fruits), tapping into the global herbal products market and increasing the usage of advanced technology to improve yields.

Though the government’s master plan for agriculture foresees a doubling of revenue, it only projects a modest increase in employment, with technology replacing labour-intensive practices and a shift in rural employment structures. While it is unlikely that agriculture employment levels will lift substantially over the coming decade, the growing pool of rural labour is expected to be taken up by a rise in food-processing operations, with the value-added component of agriculture seen as one of the segments to record the highest level of expansion.

On April 5, Muhyiddin Yassin, the deputy Prime Minister, said it was important for farmers to explore value-added agriculture activities, rather than just limiting themselves to cash-crop production. Farmers should look at venturing into food processing or producing material from by-products to earn extra money, he said during the opening of a fertiliser plant.

“To move forward, farmers must find new opportunities to enable them to earn long-term income,” Muhyiddin said.

In early April, Noh Omar, the minister of agriculture and agro-based industry, stated that the government was trying to create an environment in which farmers become businessmen and view agriculture as an industry, rather than merely growing produce.

“Our role is to facilitate the process and invest in capacity building in order to grow the agri-industry to become a key contributor to the nation’s economic wealth,” he said when speaking with the New Straits Times. “This has created opportunities for farmers to practice high-value agriculture and reach markets at all levels.”

Another opportunity recently unveiled by the government aims to protect local fruit and vegetable growers. In late March, the state announced that as of 2015, farmers’ markets and National Agribusiness Terminal (Teman) outlets will no longer be allowed to sell imported fresh produce.

According to data issued in late March by the Ministry of Agriculture and Agro-based Industry, some 40% of vegetables sold at the Teman outlets – centres set up by the state to market agricultural products – are imported from neighbouring countries.

As most of these vegetables are grown in Malaysia, the move by the government may not encourage the development of new product ranges, but it should help growers by reducing competition and giving them a stable market. A possible downside of the new policy, however, especially if it was extended to restrict fresh food imports beyond the limited scope of the farmers markets and Teman outlets, is that retail prices could be pushed up, as some of Malaysia’s neighbours have lower production and labour costs.

This could be offset to a large degree by improvements in economies of scale and efficiency, with higher production and turnover, as well as technological advances, helping to push down costs. These savings could then be passed on to the consumer.

Over the past 50 years, the Malaysian economy has become far more diverse, moving away from a time when agriculture accounted for 30% of GDP and provided employment for half the workforce.

While the government wants to see agricultural output increase, it is likely that other sectors of the economy will continue to outstrip rural production. By promoting smarter farming, and seeking to supply niche markets, Malaysia will come closer to achieving food security and increasing earnings.

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Malaysia: A farmer’s market

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Malaysia: Manufacturing growth

Malaysian officials are confident the country’s manufacturing sector will continue to post strong growth throughout this year and beyond, on the back of an increasing swell of both foreign and domestic investment. There are some suggestions, however, that a general slowing of the global economy and the prospect of sharp wage increases could take some of the momentum from industrial expansion.

According to data issued by the Malaysian Industrial Development Authority (MIDA), the manufacturing sector accounted for just over half of all foreign direct investment (FDI) inflows last year, almost double the 27% drawn in by the services sector. With FDI in 2011 increasing by 12.3% to around $11bn, manufacturing’s share of that total came to around $5.5bn.

Total investments in the sector also surged in 2011, with 846 manufacturing projects carrying a total value of $18.57bn approved last year, a 19% increase over the $15.6bn recorded in 2010. Of these investments, locals’ contributions numbered $7.3bn, or 39% of the total, while the balance came from FDI. A full third of new projects approved were in the electrical and electronic industry, followed by basic metal products, and chemicals and chemical products.

Commenting on the latest manufacturing sector figures, the international trade and industry minister, Mustapa Mohamed, said investors were upbeat over the opportunities in Malaysian manufacturing.

“Foreign and domestic investors continue to respond positively to the government’s initiatives to invest in new growth areas and emerging technologies, high value-added industries, high technology and capital-intensive industries, and research and development activities,” he said.

While Malaysia is well placed to post solid growth this year, there are some signs that the national economy, and with it the manufacturing sector, could be easing back a gear. Total exports in January 2012 came to $18.2bn, the lowest level in a year, according to data released in early March. The year-on-year rate of growth for the manufacturing sector as of December 2011 was 4.5%, somewhat better than the 4% recorded in the previous month but a long way off the 8.2% of September or the 6.2% in October.

The long-running uncertainty over the state of Europe’s economy also ate into January’s export figures, which were released on March 7. Shipments to the EU plunged by 14.5% to $1.6bn, with falling demand for electrical and electronic goods and metal products being cited as the main factors in the slump. Though the decline was slightly less dramatic, exports to China also dropped in January, down 12.2% year-on-year, again with electrical and electronics products leading the retreat.

Overall, Malaysia’s economy expanded by a creditable 5.1% last year, in line with the rate of expansion of the manufacturing sector but below the 7.2% posted in 2010. The 2011 result was one that some analysts saw as stemming from the easing in overseas demand for Malaysian exports, a trend that will probably continue through the first half of 2012 but start to reverse itself mid-year and beyond.

According to Lee Heng Guie, the head of economic research at CIMB Investment Bank, it was the volatile external environment that resulted in stagnant demand for consumer electronics, though this could be offset to some degree by domestic demand.

“The question is how sustainable is consumption going to be and this will depend on key drivers such as commodity prices and income,” Lee said in an interview with The Star in Malaysia late February.

Many manufacturers are also somewhat wary of the government’s plans to increase the minimum wage at a time when there is uncertainty over sales abroad and growing competition from other regional producers. There have been calls for the raise, which will see the base wage increase from $215 to between $265 and $330 a month, to be implemented in stages, rather than all at once so as to lessen the impact on the manufacturing sector.

On March 6, Lim Kok Boon, the president of the Malaysian Plastic Manufacturers Association, said at a press conference that the government had to consider what the impact of a sudden implementation of minimum wage would have on the manufacturing sector.

“Almost all manufacturing companies in Malaysia rely on the export market and when we offer a higher price to our export market, they will not absorb our access cost and will look at other countries for cheaper supply,” Lim said.

While suggestions that up to 4m jobs, the majority of which are in manufacturing, could be put at risk by the wage increase may be somewhat alarmist, employers’ concerns are real. Mindful of the importance of the sector to the national economy, Mukhriz Mahathir, the deputy minister for international trade and industry, said on March 8 that a balance needed to be struck between the expectations of workers and industry.

“The minimum wage policy has become an ongoing debate, and the important thing is, the ability of the government to strike a balance between increasing the income of the people and ensuring higher productivity,” he said.

How the government will achieve this balance has yet to be determined. If an increase in manufacturing output can be assured, the result would offset higher labour costs, though something of a question mark remains over whether there are markets for the stepped up production the government is hoping for.

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Malaysia: Manufacturing growth

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