Setting the foundation blocks for Industry 4.0

We are entering the Fourth Industrial Revolution, which, as eloquently described by Professor Klaus Schwab, chairman of the World Economic Forum (WEF), is “characterised by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres”

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WE are entering the Fourth Industrial Revolution, which, as eloquently described by Professor Klaus Schwab, chairman of the World Economic Forum (WEF), is “characterised by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres”.

The phrases “Fourth Industrial Revolution” and “Industry 4.0” are used interchangeably to describe a future state where the world is interconnected and machines interact with one another; where robots are able to perform tasks that were once solely performed by humans; where machines work together through the Internet of Things; and where big data and analytics are used to allow real-time decision-making.

Between the 1970s and the mid-90s, Malaysia was seen as the preferred manufacturing location for many MNCs.

Subsequently, with the development of the manufacturing sector in other locations such as China, Myanmar and Vietnam, there were concerns about Malaysia’s attractiveness as a manufacturing hub. Malaysia is no longer considered a low (or lowest) cost location for setting up manufacturing operations. Whilst we continue to retain and attract investments in this sector due to the availability of good infrastructure, highly experienced and skilled talent, and availability of generous tax incentives, cost continues to be a major concern.

Incentives for Industry 4.0 and automation

The Government has always been consistent in its objective for Malaysia to move towards more value-add activities in the manufacturing sector and has been encouraging the private sector through various incentives. In Budget 2018, we see the setting out of the basic, yet essential, foundations for Malaysia’s evolution towards Industry 4.0.

To support and encourage early adoption of Industry 4.0 and automation by businesses, the Government has proposed various tax incentives, including the extension of the 200% Accelerated Capital Allowance (ACA) and Automation Equipment Allowance (AEA), which were previously introduced to encourage automation in the manufacturing industry. The extension is focused on certain labour-intensive products within the industry. Further, a separate ACA and AEA have been proposed specifically to encourage the manufacturing sector and related services activities to transform to Industry 4.0. It will be interesting to see how these two sets of incentives interplay with one another.

In addition to enhanced incentives on automation, capital allowance is also proposed for ICT equipment and the development of computer software.

Lack of financing could be a barrier for many businesses, especially SMEs, to adopt Industry 4.0.

Recognising the importance of financing, the Government has allocated RM245mil under the existing Domestic Investment Strategic Fund (DISF), where eligible businesses will be able to apply for a matching grant to upgrade to Smart Manufacturing facilities.

A “Futurise Centre” will be formed in Cyberjaya as a one-stop centre for companies and universities to develop prototype products and elevate innovation; test new products, services or solutions in a live environment; and develop ways of doing things better and smarter.

The measures proposed are fairly comprehensive. It is hoped that these measures will provide the necessary support to Malaysian manufacturers in dealing with their challenges, in particular, the reliance on foreign unskilled labour and a general increase in the cost of production.

What more needs to be considered?

Research and development (R&D) is a key success factor for Industry 4.0. In fact, the entire concept of Industry 4.0 is premised on innovation and development. Let’s consider the R&D spending to GDP statistics by some of the early adopters of automation and Industry 4.0:

The first few countries that initiated Industry 4.0 were Germany, Japan and the United States. These countries recorded a significant level of R&D spending as a percentage of their GDP. In contrast, Malaysia has only recorded 1.30% in 2016. If Malaysia were to successfully move to Industry 4.0, it will need to consider measures to further assist and encourage R&D spending. Talent is the other major challenge. The success of Industry 4.0 is highly dependent on the capability of the workforce to innovate and apply advanced knowledge and technologies.

The Government has recognised the importance of human capital development. In Budget 2018, we note the plan to set up a Science, Technology, Engineering (STEM) centre to develop the latest learning methods to train STEM specialist teachers.

There is also the enhanced computer science module to now include coding in the primary and secondary school curriculum. These are good mid-term and long-term measures. In the immediate short term, perhaps we may need to attract targeted foreign investments and import talent to jump-start Industry 4.0. Special incentives should be considered for these targeted investments.

We have a stable and mature manufacturing sector with good quality infrastructure and resources, and well-thought policies to help propel the country into the new era of industry 4.0.

The call for the day is a razor sharp execution of these plans. We need to get out of our comfort zones and disrupt ourselves before others disrupt us.

Amarjeet Singh is Partner and Malaysia Tax Leader, Ernst & Young Tax Consultants Sdn Bhd. The views in this article are those of the author and do not necessarily reflect the views of the global EY organisation or its member firms.

Source: The Star

Posted on : 30 October 2017
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Last Updated : Thursday 2nd April 2020