Malaysia moves to maintain halal edge

The halal industry in Malaysia is fast becoming a magnet for international investment, as major players move to acquire a share of a growing global market.

Malaysia is carving a niche as a key producer and exporter of halal products. However, with regional competition growing, its domestic players have been urged to seek out new opportunities beyond their borders, in line with a national drive to boost growth and transform the industry into a pillar of the local economy.

New facilities to open

US food manufacturer, Kelloggs, announced plans in January to build a $130m halal facility in Malaysia which will create 300 jobs when the first phase is completed in the middle of next year.

The news comes after international dairy giant Nestle said it planned to expand its operations in Malaysia by opening a plant in Shah Alam in mid 2014. US confectionery firm Hershey also outlined plans in 2013 to construct a $250m plant next year in Johor.

The emergence of new players is a welcome boost for the Halal Industry Development Corporation (HDC), which is looking to position the country as an international player in the market.

The Department of Islamic Development Malaysia (Jakim), the industry regulator, hopes that a bid to have Malaysia’s M1500: 2009 Halal standard adopted as a global benchmark will raise the country’s profile across the industry.

A total of 73 organisations, comprising 57 NGOs and 16 government bodies, have been granted permission to carry the Jakim certification, which verifies the traceability of ingredients and raw materials. Muslims are required to eat, drink and take medicinal halal products in accordance with religious requirements.

“Globally Jakim is the leader in promoting halal and its standards. Its counterparts in Dubai and Indonesia are also establishing their own standards,” Mohamed Hazli Mohamed Hussain, group CEO of DagangHalal, told OBG.

DagangHalal is a digital marketplace for halal products as well as a repository of halal certificates that works closely with Jakim and international certification bodies, matching Malaysian small and medium-sized businesses with buyers around the world. The company also provides a platform for halal applicants to find alternative suppliers and download the corresponding halal certificates.

Competition on the rise

According to government figures, Malaysia exported RM32.84bn ($9.86bn) worth of halal products in 2013, making it one of the largest suppliers in the Organisation of Islamic Cooperation, an international group with 57 members.

However, regional competitors are also ramping up their activities in the sector. Indonesia, which has the world’s largest Muslim population, revealed plans last October to establish a centre for the halal industry by 2015. The market is also expanding in Thailand, where more than a quarter of food factories are now participating in halal production.

Speaking in January, HDC managing director, Jamil Bidin, suggested that local manufacturers would need to look beyond Malaysia’s borders if the country is to retain its competitive edge.

Companies based in Malaysia should invest in overseas operations to take advantage of the procurement of raw materials and the proximity of markets to catapult the export industry onto the global stage, he told the local media.

Bidin said countries such as China, India, Bangladesh and Indonesia not only offered huge potential as markets for Malaysia’s halal products, but could also provide raw materials.

However, critics believe domestic producers will need to increase their focus on developing marketing strategies if they are to compete globally.

A 2013 report published in the Malaysia Journal of Society and Space concluded that some halal food suppliers were insufficiently informed about the legal, social and cultural environment of importing countries. “They are not able to identify consumer needs accurately in terms of taste and preferences,” it said. “They enjoy little strategic and long term alliances with importers or distributors or private market agents to promote their products.”

Any marketing weaknesses are likely to be exposed further as Malaysia steps up its efforts to expand the halal industry.

Plans include a push to attract non-Muslim consumers to halal foods as healthier and higher-quality options. The strategy is already proving successful in Asia, where food scares have sparked major fears.

“Halal is no longer about religion, but rather about safety, hygiene and quality,” Hussain told OBG.

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Malaysia: Targeting tourism growth

The hospitality sector, one of the region’s largest, is continuing to see visitor numbers grow this year, boosted by better transport connectivity with large emerging markets. This development is increasingly being linked with Malaysia’s overarching strategy of raising revenues and value in key economic sectors, a theme that is set to dominate the next few years.

According to Ng Yen Yen, the minister of tourism, Malaysia registered 11.63m arrivals in the first half of 2012, up 2.4% over the same period in 2011. Receipts grew more rapidly, increasing 4% over the same period to RM26.8bn ($8.81bn). Ng attributed the continuing rise in visitor numbers in part to improved connectivity (particularly with China) and events such as the F1 Malaysian Grand Prix and the Citrawarna cultural festival.

Other members of ASEAN accounted for around 73.8% of arrivals. Singapore, which has close cultural, economic and social ties to its northern neighbour, remained by far the biggest source of visitors, with 5.83m arrivals in the first half of this year. This number is likely to have been somewhat boosted by shuttle traders, who pass over the border on a regular basis, and day-trippers.

The other largest contributing countries were: Indonesia, with 1.11m arrivals; China (758,000); Thailand (639,000); Brunei Darussalam (588,000); India (365,000); Australia (243,000); the Philippines (238,000); Japan (216,000); and the UK (197,000). Arrivals from China were up 34.2% on the first half of 2011, India (6.9%) and Russia (28.2%). There was also impressive growth from established markets, including France (20.6%); the US (18.9%); South Korea (18%); Japan (32.5%); and the UK (5.9%).

Analysis of the figures by Tourism Malaysia, the official promotion and development agency under the Ministry of Tourism, indicates the importance of enhancing air connectivity in stimulating this growth. The organisation partly attributes the rise in arrivals from China to an increasing number of flights between Beijing and Kuala Lumpur, and Hong Kong and Penang and Kota Kinabalu, two major regional tourism centres.

Similarly, the increase in Japanese and Korean visitors is partly due to more flights between provincial cities in those countries and Kuala Lumpur and Kota Kinabalu. By the same token, Tourism Malaysia attributes declining visitor numbers from New Zealand, Australia and South Africa to fewer flights being operated. Meanwhile, Vijay K Gokhale, India’s high commissioner to Malaysia, said that if AirAsia restored flights to Delhi and Mumbai, which were suspended in March, Indian visitors to the South-east Asian market could rise to 1m annually by 2015 from around 693,000 in 2011.

With the importance of connectivity and tapping expanding markets in mind, the tourism authorities are continuing to work with Malaysian Airlines and AirAsia, the country’s two main carriers, to develop links internationally, and will continue to seek bilateral agreements with countries such as Russia to increase visitor traffic.

However, increasing visitor volumes is not the only priority. Indeed, over the coming years, this strategy seems likely to become less important than efforts to boost value and diversification. Malaysia’s Economic Transformation Programme (ETP), the government’s overarching strategy to push Malaysia towards developed-country status by 2020, notes that the country is a “high arrivals, low yield” tourism market.

The aim is to keep visitor numbers rising while building considerably greater value in the sector to increase earnings per tourist arrival. Tourism has been identified as a National Key Economic Area (NKEA) under the ETP, with the goal of attracting 36m visitors and generating RM168bn ($55.26bn) in tourism receipts by 2020.

In practical terms, this means focusing on high-value niche segments. The ETP has identified five such segments: luxury; nature adventure; family; events, entertainment, spa and sports; and business tourism. To develop these niche areas, a number of existing segments will need to be promoted, such as ecotourism and meetings, incentives, conventions and exhibitions (MICE). Malaysia will also need to be rebranded to well-heeled visitors as a “luxury” destination, leveraging the increasing number of top-end hotels, resorts and shopping malls.

Malaysia is in the fortunate position that it already has existing business in these high-value areas, as well as a strong international brand as a destination. But to meet the ETP’s targets, considerable investment will be needed, particularly from the private sector, in keeping with the plan’s priorities.

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Malaysia: Speculation over real estate levies

With the aim of maintaining real estate prices at a reasonable level and to rein in any property speculation, the government is considering the use of tighter fiscal policies that have met with a mixed response from industry players.

Speaking on the sidelines of the 15th National Housing and Property Summit, held in Petaling Jaya on August 28, Chor Chee Heung, the minister of housing and local government, said there was a strong need for better government policies to maintain reasonable and affordable property prices, and to ensure sustainability in the real estate sector as Malaysian property prices steadily increase.

“The government has to mitigate excessive investment and speculative activity in the property market so as to prevent a property bubble,” said Chor. “To ensure sustainable housing development, all parties – including the state government, developers and government-linked companies – must keep abreast of real demand and the affordability level of locals for housing, especially in the Klang Valley.”

One of the tools the government has at its disposal to cool the real estate market is the Real Property Gain Tax (RPGT). As of January 1, charges under the RPGT were set at 10% on profits for real estate owned for two years or less and 2% for those owned between two and five years, with no tax on gains for properties sold after that term. Previously, a 5% tax was imposed if a property was sold within five years, with no tax levied on the capital gains if the sale was made following five years of ownership.

The tax on capital gains from property sales has undergone several adjustments in recent years. Prior to 2007, when the tax rate was cut to 5%, it reached as high as 30% for sales conducted within the first two years of ownership.

Jeffrey Cheah, the chairman of Sunway, a local property developer, said it was important for the government and the real estate industry to work together, adding that it was vital the government did not implement drastic measures that could slow down the property market.

“The government should not increase the RPGT. I also hope it will not further restrict lending to the property sector or introduce new measures that will make it more difficult for home buyers to purchase properties,” Cheah said at the end of August.

Unlike some in the industry, who are concerned that Malaysia’s real estate sector is overheating, Cheah said he was confident that no bubble was emerging. “Our property prices are still affordable compared with neighbouring cities in the region,” he said.

Another organisation to urge caution is the Real Estate and Housing Developers Association (REHDA), which said that the capital gains tax on property should either be left untouched or be lowered to its former level.

“Under the current market conditions, such as the softening market, early signs of better growth of the economy, and the uncertainties of the US and eurozone economies, we urge the government not to interfere with the existing policies, which are business friendly,” REHDA said in a statement in The Malaysian Star on August 21.

The Malaysian Developers’ Association (MDC) also spoke out against any increase in the RPGT or in stamp duty – another policy option available for use by the government – stating that much of the rise in property prices could be attributed to higher materials costs, rather than speculation.

“Increases in basic building materials, which are major components of construction, land and compliance costs, will ultimately lead to higher selling prices of homes,” the MDC said in a statement issued in early August.

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Malaysia: Forecasting growth in insurance

The insurance sector is forecast to see substantial growth in the next few years as continued diversification, consolidation and international activity spur rising premiums and uptake of new services. Moderate GDP growth for the rest of the year, however, could pose a challenge to growth as the effects of a weakening global economy trickle down to private consumers.

Gross direct premiums are expected to reach RM14.3bn ($4.48bn) in 2012 and rise to RM17.5bn ($5.49bn) in 2015, according to the Malaysia Rating Corporation (MARC), a full-service ratings agency, which released its forecasts in a research note in June. This represents a compound annual growth rate (CAGR) of 7%, which is likely to outstrip broader economic growth.

MARC expects new business premiums in the life insurance segment to reach RM10.2bn ($3.19bn) this year, rising to RM13bn ($4.08bn) by 2015. The non-life (general) segment is also forecast to grow from RM4.1bn ($1.29bn) in 2012 to RM4.5bn ($1.41bn) in five years’ time.

The agency said that the life insurance market would benefit from rising incomes, as well as increased deployment of “new and innovative products”. General insurance would see growth stimulated by the implementation of mega-projects, leading to greater demand in a number of segments, including workers’ compensation, employer liability, contractor risk and engineering. The medical and personal accident segments will also continue to perform well, MARC said.

Other observers are even more upbeat about the sector’s outlook. In May, the local press reported that the Life Insurance Association of Malaysia (LIAM) said the life sector could grow by 10% in 2012. Growth would be driven by “the large and growing middle-income population in the region with higher levels of disposable income and who are also financially literate,” Donald Joshua Jaganathan, the assistant governor of Bank Negara Malaysia, the central bank, has said.

The market’s recent growth and promising outlook have led several major international players enter the market. In 2009, the government lifted the ceiling on foreign ownership of insurers to 70% from 49%, allowing greater participation from international firms, which have brought an increased level of dynamism to the industry.

Competition is expected to rise further following the pending auction of the insurance joint venture between the UK’s Aviva and Malaysia’s CIMB Bank. Aviva is selling its 49% share in the local firm as it withdraws from non-core markets, partly to raise cash to offset its exposure to the eurozone crisis. CIMB may also sell a substantial portion of its 51% stake in the venture.

Competition, greater international participation and a new risk-based capital (RBC) framework are also driving consolidation in the industry, as players look to pool resources and capitalise on economies of scale and strategic fits. The RBC regulations require firms to have a minimum 130% of supervisory capital-adequacy ratio (CAR).

According to Matt Harris, the CEO of Chartis Malaysia, the local branch of the international insurer, “RBC implementation helped accelerate the pace of consolidation, with seven mergers and acquisitions taking place in 2011. Many of the local conglomerates took RBC as an opportunity to consolidate. It is widely known that other existing players in the market would entertain potential suitors if approached, so more consolidation is expected.”

Harris told OBG that he expects the sharia-compliant Islamic insurance segment – known as takaful – to continue to grow strongly. In June, the local press reported that Etiqua Insurance & Takaful, the insurance branch of Maybank, the country’s largest bank, has forecast that the family takaful market, which accounted for 80% of the Malaysian takaful segment in 2010, could grow to RM7.2bn ($2.26bn) in two to three years from the current RM4.2bn ($1.32bn).

CAR regulations for the takaful segment similar to those rolled out for conventional insurance are being introduced and are expected to be in effect by the beginning of 2013. While the Malaysian Takaful Association is confident that existing industry players will be able to meet the new requirements, Tunku Dato’ Ya’acob Bin Tunku Tan Sri Abdullah, the CEO of MAA Group (MAAG), which has interests in the takaful sector, told OBG that he expected the new legislation to catalyse mergers and acquisitions in the segment.

According to Abdullah, conventional insurance firms owned by banks have survived better since the CAR regulations were tightened, as the high profits of the banking divisions have funded the increased capital requirements of the insurance business. The insurance divisions, which tend to make a smaller contribution to profits, are not able to meet the significant increase in CAR themselves.

With the insurance market in the process of dynamic change, due to rising demand and regulatory changes that aim both to increase solidity and allow greater international participation, consolidation, diversification and the rise of the takaful segment look set to transform the sector over the coming years.

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