Great leap into automation, digitalisation needed to speed up recovery – IDEAS
16 Jul 2020
Malaysia’s success in flattening the COVID-19 curve has put the economy on a stronger footing to attract foreign direct investment, but it will also require a substantial leap into automation and digitalisation, says Institute for Democracy and Economic Affairs (IDEAS) research manager Lau Zheng Zhou.
The government needs to encourage more manufacturers, especially mid-tiers, to invest in automation and other digital-based productivity-enhancing initiatives, he said.
According to a survey by the Federation of Malaysian Manufacturers and Malaysian Institute of Economic Research, Malaysian manufacturers claimed that up to 40 per cent of the operations were already automated, namely in assembly, inspection and testing, packaging and warehousing.
“While there has been a general improvement in factories adopting automation, the speed of transformation is still relatively low. It is important to know what the challenges are and where there is a gap in the policy,” he told Bernama in an email interview recently.
The COVID-19 pandemic and the shock that it caused to both local and global demand have added further risks to adopting automation, he pointed out.
“For many of them, especially the low-to-mid-tier manufacturers, they lack access to a knowledge platform to develop capabilities more successfully, and also to improve local and global interoperability.”
The Industry4WRD Readiness Assessment was conceived with the right idea to help firms assess their capabilities to adopt Industry 4.0.
“But many manufacturers are limited by budget and resources to even participate in this programme. This comes in spite of the rising cost of sourcing foreign labour and the advantage that automation brings on this matter,” he explained.
On other developments, Lau said the Movement Control Order to stem the spread of COVID-19 had also highlighted the exporters’ reliance on China for a critical supply of raw materials, which resulted in higher production costs.
“Many multinationals which previously depended on China’s supply chain ecosystem have since diversified and relocated to countries such as Vietnam, Thailand and also Malaysia.
“So, there is still a need for the government to pursue open policies to continue attracting good quality investments in order to promote positive spill-overs in innovation and an increase in higher value-added exports,” he said.
The COVID-19 pandemic sent Malaysia’s exports plunging by 25.5 per cent year-on-year (y-o-y) to RM62.7 billion in May this year — its biggest fall since May 2009 and sharper than market expectations.
It was the second straight month of a double-digit drop for exports after a 23.8 per cent y-o-y fall in April.
A slew of policy measures was introduced by the government, including the National Economic Recovery Plan and the Prihatin Rakyat Economic Stimulus Package, to cushion the impact of COVID-19 on the rakyat and businesses.
Earlier this month, the Malaysian Investment Development Authority said there was no let-up in investment promotion efforts carried out by the agency and its 20 overseas and 12 regional offices to entice quality investments from their areas of coverage despite the flagging economy due to COVID-19.
Despite facing international border closures and observing the government’s standard operating procedures, MIDA has continued to be responsive in providing advice and support to the existing and potential investors.
Moving forward, Lau said, there should be an increase in manufacturing activities as seen in the Purchasing Managers’ Index’s sharp rise to 45.6 in May, from April’s record low of 31.3.
In addition, Malaysia’s major trading partners such as China have reported expansion in June’s manufacturing activities while the United States and the eurozone are also expected to see significant improvements moving forward, hence suggesting greater stabilisation in Malaysia’s recovery in trade.
However, the manufacturing downturn in ASEAN is expected to continue, thus presenting risks to the functioning of the regional supply chain, which includes the threat of trade protectionism and missed opportunities for further integration.
Lau said Malaysia’s trade for the year is expected to recover gradually but remains fragile.
Bank Negara Malaysia slashed the overnight policy rate for the fourth time this year to a historic low on July 7, against the backdrop of the COVID-19 pandemic and weakening export demand.
The central bank, in an unexpected move, reduced the benchmark lending rate by 25 basis points to 1.75 per cent. Generally, a low-interest-rate environment will allow Malaysians to have more cash in hand and the liquidity will help to spur the economy via private consumption.
This, in turn, will help to cushion the economic impact from the COVID-19 pandemic.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said additional monetary easing could help to boost economic activities via cheaper borrowing costs.
“To some degree, it does signal that the central bank is concerned about the evolving economic outlook. In the absence of a vaccine, it is highly uncertain as to the timeline for the total reopening of the economy.
“Businesses are not really fully operational especially when the borders are still closed to foreign tourists. At the same time, there is compliance cost such as (to follow) the standard operating procedures and health protocols. In that sense, profitability will take a while to normalise,” added.