Malaysia’s tourism sector targets niche markets

A tourism leader in the region, Malaysia has seen its position challenged in recent years as nearby rivals have stepped up efforts to attract more visitors.

Official statistics show that just over 25m visitors arrived in 2012, a rise of around 300,000 compared to the prior year. Despite this increase, Malaysia saw its ranking fall on the 2012 UN World Tourism Organisation (UNWTO) list of most-visited countries, published in August. The country dropped one place on the UNWTO ladder to 10th, being overtaken by Russia.

The sector nonetheless remains a major source of foreign currency earnings, second only to the manufacturing industry, as well as the seventh-largest overall contributor to the national economy. The 2013 World Travel and Tourism Council report noted that tourism employs 1.7m people, or 13.6% of all jobs, when taking into account positions indirectly supported by the industry.

While the 1.3% increase in the number of visitors was a modest improvement on the 0.6% rise recorded in 2011, growth in the market has been slow in comparison to Malaysia’s neighbours. Thailand saw arrivals go up 16% last year, and fast-movers Cambodia and Vietnam posted increases of 24% and 14%, respectively, though both are coming off a far lower base.

In terms of arrivals, Malaysia remains number one in the South-east Asian region, but it faces challenges when it comes to capitalising on arrivals volume. Though it attracted just over half as many visitors, Singapore generated similar revenue from its tourism sector, while Thailand received almost 3m fewer visitors than Malaysia in 2012, but earned 50% more from them, according to UNWTO data.

This suggests that Malaysia needs to do more to encourage greater spending by tourists. The country may also need to look further afield when expanding its client base, with around 75% of all arrivals coming from neighbouring states such as Singapore, Indonesia, Thailand, Brunei and the Philippines, with Singaporeans making up well over one-third of all arrivals.

One of Malaysia’s appeals as a tourism destination for fellow members of the ASEAN bloc is its proximity, Tan Kok Liang, a vice-president of the Malaysian Association of Tour and Travel Agents, told the local press on August 6. By not having to endure long-haul flights, ASEAN visitors can easily take short breaks in Malaysia, he said. However, Tan also acknowledged that the predominance of tourists from nearby countries also has a downside.

“Because many of these are still developing countries, tourists’ purchasing power will be lower than those from developed countries,” he said.

One answer to the comparatively low per-capita earnings power of the Malaysian tourism industry is to develop high-spending niche markets. On August 15, Prime Minister Najib Razak told delegates attending an international insurance congress in Kuala Lumpur that such events would become increasingly important for the tourism industry. Najib said inbound business tourist numbers are set to rise from the present level of 1.2m to 2.9m by 2020, with the government’s Malaysia Convention and Exhibition Bureau aiming to have the country recognised as a leading business destination.

Other niche segments that have been targeted under the government’s development programme are medical, spa and wellness tourism, as well as shopping and duty free sales, though regional rivals are also offering similar projects, potentially narrowing the scope for Malaysia to fully capitalise on these markets.

Despite strong government support and a solid improvement in arrivals this year – inbound tourists numbered 6.5m for the first quarter of 2013, compared to 5.5m for the same three months last year – it may be difficult to achieve some of the goals set by the state, which has identified the sector as one of its 12 National Key Economic Areas. Tourism Malaysia, the agency tasked with promoting the country as a travel destination, has targeted 26.8m inbound visitors this year and 28m in 2014, rising to 36m by 2020.

In the shorter term, the slowing of the economy in China – the third-largest source market for Malaysia – could have a negative impact on the sector, both in terms of a reduction in the number of Chinese visitors as well as any knock-on effects on regional economies. Further down the track, the increased competition posed by other south-east Asian nations could also cut into Malaysia’s tourism growth unless it is able to broaden its appeal.

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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: 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: 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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