‘Friendshoring’ of supply chains puts Malaysia in sweet spot, but much needs to be done
18 Apr 2023
THAT Malaysia is not a member of the US-led “Chip 4” alliance with Taiwan, South Korea and Japan — which aims to set up a supply chain for the semiconductor industry independent of China — is viewed by some as there being a difference in technological attainment at the Asian tiger economies. Others, however, reckon it could work to Malaysia’s advantage if the country not only maintains good ties with both the US and China but also presents itself as an invaluable partner for businesses seeking to invest to build resilience in global supply chains amid heightened geopolitical tensions.
Frederic Neumann, chief Asia economist and co-head of HSBC Global Research Asia, for one, reckons that “Malaysia is in a bit of a sweet spot” currently, even though geopolitical fragmentation driven by US-China tensions — as the International Monetary Fund (IMF) predicted last week — risks shaving off 2% of global growth.
“Despite all the uncertainties going on globally, there are certain trends that will benefit Malaysia. One is that there is a structural increase for demand in commodities globally and Malaysia is a commodities exporter. So, that is already, essentially, a windfall revenue that the country can look forward to and there are reasons, structurally, that commodity prices will remain high over the next few years. A lot of that has to do with climate change.
“We also see clear movements of supply chains towards Southeast Asia [and] Malaysia is among the three to four countries that are really benefiting from this trend: Vietnam, Mexico, India a little bit and Malaysia … there is a sweet spot for Malaysia to sort of grasp. Now is the time. The issue is that we cannot sit still as the competition doesn’t sleep either. So, that would require government policies that focus on seizing the moment [and] making the most of it,” Neumann tells The Edge, highlighting the need for greater urgency in pushing through planned reforms in critical areas like digitalisation and renewable energy to achieve the UN Sustainable Development Goals (SDGs).
“Companies [we speak to] highlight that SMEs (small and medium enterprises) in Malaysia have so far been lagging a little bit in adopting digitalisation automation, for example. There is a lot more to do on the ESG (environment, social and governance) front, which is a global issue, increasingly. There is a lot we want on infrastructure, broadband … these are issues that the business community highlights that need to be addressed to make the most out of this moment. People are very bullish on Malaysia. I feel like sometimes in Malaysia itself, people doubt that story a little bit,” says Neumann, who is based in Hong Kong.
“I see a bit of a disconnect. Sometimes, people here are a bit more worried than I would be from the outside. Clients are obviously quite worried about the global outlook — there is a decline in orders from Europe, [asking when] China is going to recover, what is going to happen to US interest rates and the [US] dollar liabilities they are funding — and rightly so as exports are down [from record and multiyear highs last year. In] the second half of last year, they [exporters] may still be working off orders received three or six months earlier. So now, you see that ripple coming through. But I think this is a year of stabilisation.
“The second half [of 2023] will look better on demand from China … this is kind of the bottom, if you will. It should start to improve in 2Q and then 3Q, we will see stability coming back in. That doesn’t mean all the uncertainties are going to go away. I think we live in a world where there just are inherently more risks from all sides on higher inflation, structurally; higher interest rate volatility, issues in the commodities market. There may be long-term questions on how fast China will grow in the years to come, or how supply chains are being redirected.
“India is rising as a competitor, even to Malaysia, so there are long-term structural issues but, generally speaking, [in] 2Q you should see some stability coming back in,” Neumann elaborates, reiterating his view of Malaysia being in a “sweet spot” amid the external uncertainties.
Seizing the moment
“At the moment, Malaysia has a good run getting quite a bit of investments coming through. It’s whether [the country] can seize the moment and make it stick. Is this just a three-to-four-year moment in the sun, or something that we can really build on and push Malaysia higher?” Neumann muses.
“I do think Malaysia is broadly holding its own with Vietnam. We shouldn’t forget that Vietnam is an economy of nearly 100 million people, different from Malaysia [and] attracting different kinds of investments. So, I wouldn’t say Vietnam is eating Malaysia’s lunch.
“Malaysia, in a global context, punches above its weight in terms of FDI (foreign direct investments). If you look at manufacturing investments in Asean, two economies that stand out are Vietnam and Malaysia — not Indonesia, not Thailand, not the Philippines.
“In terms of higher value-added manufacturing in electronics, some go to Singapore, but Singapore plays on a different level. Vietnam plays in a slightly different category from Malaysia as well. [Malaysia] is competing in the middle category [and] slightly higher up the value chain. It is no longer about cheap labour, but about the infrastructure, education of the labour force, the skill sets that you bring, what’s complementary to the supply chain for new investments … do they have the right suppliers, do they get permits quickly?”
“I don’t think we need to be shy about [Malaysia’s] innovative potential [even though] technology adoption is still very low among SMEs in terms of automation. Part of the reason is that some of the telecommunications infrastructure are not as good as they could be to enable the 4IR (Fourth Industrial Revolution) innovations to automate a lot of processes. So, at the micro level, there is still quite a bit to be done, but I wouldn’t say that you compare unfavourably with your next-door neighbours,” Neumann reiterates.
To determine if Malaysia is seizing the moment to build lasting strategic capacity in the longer term, Neumann is paying attention to soft indicators, such as what companies say about the availability of skilled labour as well as the quality of investments flowing into the country.
“[I’d look at] how the education sector is catering to certain types of vocational skills and technical jobs, [whether] the types of investments coming in are purely for natural resources processing or are they moving up the value chain from semiconductor packaging and wafer production,” he says.
“It’s interesting that Malaysian businesses engage in a healthy dose of self-questioning because they operate in a very competitive global environment and need to stay ahead of competitors. It’s healthy to be questioning if we are doing well enough to keep our position in the global markets.
“What I’m telling them [Malaysian businesses] is that when I talk to foreign companies and ask where they want to invest, Malaysia is up there with the top three or four destinations at the moment. But that may not last forever. We need to continuously improve but, at the moment, when you talk to American, Japanese or South Korean companies, [ask them] where they invest and the three to four markets that keep coming up and that’s Malaysia. So, there is genuine interest. It doesn’t mean that you can rest on your laurels but you’re in a sweet spot, [having] a moment in the sun … but of course, to stay in the sun, you need to have an ambitious agenda to continue staying in the sun. I do think from what we heard from the government that there is the understanding and the willingness [to do the necessary].”
There is no denying, though, that Malaysia’s fiscal consolidation post-Covid-19 has been slower than that of its peers and there is a need to expand federal government revenue to not only comfortably fund sticky operating expenses but also invest in capacity building during this critical window in the sun.
“I think the realisation [of fiscal challenges] is there. We also have to [recognise] that this is the effect of cumulative spending over recent administrations. So, the current admin is inheriting that legacy and it’s actually very disruptive to completely dismantle that overnight,” says Neumann.
“Last year, you had 3.8% of GDP (gross domestic product) in social assistance and subsidies. Our forecast on the current budget is 3.1% of GDP — that is a 0.7ppt (percentage point) reduction. Ideally, I would like to have seen a faster decline … but if you move too fast, it could be disruptive as well. Take fuel subsidies. In an ideal world, you don’t subsidise fuel but we do this for certain reasons and supply chains have built around low energy prices. And if you remove it immediately, you have this economic impact.
“So, the best thing is to move it up gradually … I hope we will see some improvement in that direction but for the first budget, I would say at least they are moving in the right direction.”
He notes that the revised Budget 2023 tabled on Feb 24 was from an administration that had held office for only three months.
“Yes, I’m more forgiving on this, and Malaysia has high debt relative to its peers [but] it has a slight advantage because it also has strong commodity revenue streams … We think commodity prices are going to remain quite high in years to come, so you have a bit of a buffer. But that doesn’t mean you can’t improve [on] that,” says Neumann.
Any extra fiscal space should come in handy, especially with the global economy potentially going through a prolonged period of high prices and slower growth.
The world economy will grow less than 3% in 2023 and global economic growth in the next five years is expected to remain around 3% — the IMF’s “lowest medium-term forecast since 1990, well below the average of 3.8% in the past two decades. This makes it even harder to reduce poverty, heal the economic scars of the Covid crisis and provide new and better opportunities for all”, IMF managing director Kristalina Georgieva said on April 6 in her “curtain raiser” speech ahead of the IMF-World Bank Spring Meetings in Washington DC this week.
“As you will see in our World Economic Report [this] week, growth remains weak by historical comparison — both in the near and medium term. There are also stark differences between country groups,” she said, referring to the update slated for release on April 11.
In January, the IMF forecast global growth to slow from 6.1% in 2021 and 3.4% in 2022 to 2.9% in 2023 before recovering to 3.1% in 2024. Nine out of 10 advanced economies are expected to experience slower growth this year as the economies digest the impact of higher interest rates. China and India — which it expects to grow 5.2% and 6.1% in 2023 — are seen to contribute half of global growth this year, while the US and eurozone only 10%. As it is, the IMF expects Malaysia’s economy to grow 4.4% in 2023 and 4.9% in 2024, down from a two-decade high of 8.7% in 2022.
Even if Malaysia benefits from “friendshoring” — essentially the rebuilding of strategic supply chains with only allies or friendly countries — with risks to global growth still tilted towards the downside, measures to expand the revenue base and ensure longer-term fiscal sustainability would enable the government to do more should another crisis hit.
Source: The Edge Markets