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Growing Champions: Malaysia’s supply chain opportunity in a shifting global landscape

Growing Champions: Malaysia’s supply chain opportunity in a shifting global landscape

07 Mar 2024

Leaders of multinational companies face unprecedented uncertainty in shaping their supply chain strategies and reconfiguring network footprints in response to global geopolitical upheaval.

Dynamics between manufacturing powerhouse China and several major trading partners have accelerated pre-existing production shifts. Technology and relative labour costs are changing. Covid-19 demonstrated the need for more resilient supply chains at a time when geopolitical tensions have created more complex considerations for global trade partners.

CEOs must also assess how to establish an ESG-compliant supply base while identifying which geographical location will be the engine of economic growth in the coming years. These complex considerations are why over 90% of global manufacturers intend to redesign their supply footprints in the next five years, according to a survey by Boston Consulting Group (BCG).

Resilient companies are twice as likely to outperform non-resilient peers in long-term total shareholder return performance. What’s more, a successful footprint transformation can improve companies’ resilience and sustainabilityandcut global manufacturing and supply-chain costs by 20% to 50%.

With companies looking to manage supply costs and mitigate risks, Malaysia could capture significant value in this evolving ecosystem, energised by new investment priorities and a focus on manufacturing opportunities.

Southeast Asia: A new centre of global manufacturing

Southeast Asia’s attractive proposition is framed by the compelling cost-competitiveness of its manufacturing landscape. BCG’s proprietary Global Manufacturing Cost Comparison Model assesses that baseline manufacturing costs in Southeast Asia are now up to 15% lower than in China — even before applying potential logistics and tariff costs — in a region boasting large volumes of skilled, low-cost labour.

Southeast Asia has already benefited from significant shifts away from China, with exports to the US soaring by 65% from 2018 through 2022, while US goods imports from China declined by 10%.

Domestic consumption in Southeast Asia is projected to reach US$4 trillion (RM19.04 trillion) by 2031. Rapid regional growth has also fashioned a large domestic market, with a GDP of US$3.6 trillion in 2022, with the share of middle- and high-income households on track to reach 84% of households by 2031.

Regionally, the Association of Southeast Asian Nations (Asean) has implemented a range of supportive policies in recent years, with measures to enhance the free flow of goods and services among member states. Expansion and modernisation of ports have been complemented by investment in energy, transport and digital infrastructure. The Indonesia-Malaysia-Thailand Growth Triangle, the Singapore-Kunming rail project and the Asean Highway Network all offer potent examples of this evolving ecosystem. These initiatives align with the wider Asean Economic Community Blueprint, which looks to embed a deeply integrated and mutually beneficial regional economy with seamless movement of goods and people.

Major trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) offer competitive trade access with countries that together account for 40% or more of global GDP.

Globally, the value-add of Southeast Asia’s manufacturing industry will double from US$748 billion in 2022 to US$1.4 trillion by 2028. The projected compound annual growth rate (CAGR) of 11% puts Southeast Asia at the forefront of global manufacturing growth, outpacing competitors India (8.4%), China (3.6%) and Mexico (3.3%). In fact, according to our latest report Jobs, National Security, and the Future of Trade, cumulative Asean trade is forecast to grow by US$1.2 trillion in the next ten years.

Manufacturing opportunities in Malaysia

Southeast Asia’s manufacturing market is dominated by six key countries, with unique considerations as to the opportunities they present. Malaysia, Indonesia, the Philippines, Singapore, Thailand and Vietnam boast diverse manufacturing opportunities across a broad range of industries.

Malaysia’s own manufacturing opportunity is evolving, but companies must make careful strategic choices to unlock the greatest share of this value, assessing local benefits and challenges.

Foreign direct investment (FDI) into Malaysia has soared in recent years, growing at 34% CAGR from 2015 to 2021. Malaysia’s FDI relative to its GDP from 2015–2019 outperformed neighbouring countries Thailand, Indonesia and the Philippines, with only Singapore and Vietnam performing better over this period.

Malaysia ranks eighth in the World Economic Forum’s Workforce Quality Index, powered by a multicultural workforce with over half the population speaking English and more than a quarter proficient in Chinese.

Low productivity-adjusted manufacturing costs — 10% to 15% lower than China — offer a compelling proposition, backed by mature infrastructure that includes over 140,000km of road network connecting Thailand in the north and Singapore in the south.

The local manufacturing landscape is dominated by three key regions — Penang-Kedah, Kuala Lumpur-Selangor and Johor — that together account for 76% of manufacturing output and 69% of manufacturing investment.

Malaysia does have local challenges to address. Its position on IMD’s World Competitiveness Rankings declined 11 ranks to 25th from 2015 to 2021. The relatively modest size of the domestic market and more limited access to foreign markets also restrict market access. The dynamic contemporary political climate could also be perceived to impact future market performance.

To address these challenges, the government of Malaysia has introduced a number of supportive investment and manufacturing policies. The National Investment Aspirations (NIA) seek to catalyse investment to boost Malaysia’s economic recovery, secure its global position in a post-Covid-19 era, and deliver on the promise of inclusive development. This will be supported by five pillars: increasing economic complexity, creating high-value job opportunities, extending domestic linkages, developing new and existing economic clusters, and improving inclusivity.

The NIA also anchors Malaysia’s New Investment Policies, which aim to strengthen Malaysia’s foundations to develop new and existing high-value growth ecosystems while ensuring that future policies and investments are targeted at delivering maximum mutual value to investors and the nation alike. A sector-specific strategy to address investment challenges and drive systemic growth will initially target electronics and electricals (E&E), digital economy and pharmaceuticals while a second wave will further support the chemicals and aerospace industries.

Key supporting strategies, including the National 4IR Policy (N4IRP) and New Industrial Masterplan, further cement intentions to invest in a maturing economic landscape with support for manufacturing. The New Industrial Masterplan sets goals to grow manufacturing value-add at 6.5% CAGR to reach RM587.5 billion by 2030, increase manufacturing-related employment from 2.7 million in 2022 to 3.3 million by 2030, and increase median salaries from RM1,976 in 2021 to RM4,510 by 2030.

Southeast Asia, including Malaysia, is an attractive destination for supply chain relocation thanks to persistent geopolitical trends, regional policy measures and a growing domestic market. While the regional opportunity is ripe, understanding the local context is vital. Those who tread this path successfully are poised to position themselves at an exciting new heart of global manufacturing potential.

Kazutoshi Tominaga is managing director and senior partner at the Boston Consulting Group (BCG). Hitesh Tak is managing director and partner at BCG. Boston Consulting Group partner and director of global trade and investment Michael McAdoo contributed his insights to this article.

Source: The Edge Malaysia