Malaysia attractive to foreign firms eyeing SEA, HSBC says

Malaysia attractive to foreign firms eyeing SEA, HSBC says

08 Nov 2023

AMID shifts in the global supply chain after the pandemic, Malaysia has emerged jointly with Indonesia as the most attractive new market in Asean for international firms seeking to expand in or into the region, says HSBC.

“Businesses are anticipating growth in the region as almost a quarter of the companies we surveyed are intending to do some form of acquisition here in the region. They are telling us they see good targets and [businesses] that can augment their existing businesses,” Amanda Murphy, head of commercial banking for HSBC South and Southeast Asia (SEA) tells The Edge in an interview in Kuala Lumpur.

Murphy is referring to data from HSBC Global Connections, a survey polling 3,509 businesses in nine markets — China, India, the UK, France, Germany, the US, Australia, Hong Kong and the Gulf Cooperation Council (GCC) countries (United Arab Emirates, Saudi Arabia, Bahrain, Qatar, Oman and Kuwait) — which showed that 27% of firms in Malaysia intend to prioritise further growth here in the next two years while a quarter of international firms without a presence in Malaysia plan to do the same.

“Key attractions here include its skilled workforce, rising consumer prosperity as well as the network for free trade agreements (FTAs).  For Indian companies in Malaysia, the ability to test new products and solutions is a winner as 46% of businesses polled cite this as an especially attractive reason for expansion [here], while for GCC countries, 34% of respondents find Malaysia’s growing digital economy to be most attractive. Technology is predicted to drive a substantial increase in economic growth over the next 10 years,” adds HSBC Malaysia’s head of commercial banking, Karel Doshi.

Murphy says HSBC’s economists project that Asean will be the fourth-largest economy in the world, given that “17% of global FDI (foreign direct investment) has come into this region, which is twice the amount as before the pandemic”.

HSBC’s views on the shift in supply chain woes during the pandemic were echoed last Thursday by Investment, Trade and Industry Minister Tengku Datuk Seri Zafrul Abdul Aziz, who was quoted in reports as saying that Malaysia and the 10-country Asean have emerged as the biggest beneficiaries of the supply chain realignment caused by rising US-China tensions, even if they may disrupt Malaysia’s trade activities.

“One of the things that has changed this year is that companies are far less concerned about supply chain constraints after the pandemic. Concerns about the cost of supply chain,  availability of containers and storage costs have abated significantly,” Murphy says.

Murphy and Doshi also point to inter-governmental trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) being instrumental to growth as about two-thirds of corporates surveyed intend to use those FTAs.

Officially ratified by the Malaysian government on Sept 30, 2022, the CPTPP, which removes 95% of tariffs between its 11 members, gives Malaysian businesses wider access to new markets such as Canada, Mexico and Peru, which are not covered by any existing FTA.

Businesses in other CPTPP economies, such as the UK, will in turn have greater access to the Malaysian market, providing access to a wider range of high-quality raw materials at competitive prices, which is seen to strengthen Malaysia’s attractiveness as an investment destination.

“For Malaysia, pump-priming activities such as the New Industrial Master Plan and National Energy Transition Roadmap, and other digitalisation and sustainability work that the government is bringing together have been supportive for FDI,” Doshi adds.

According to the United Nations Conference on Trade and Development World Investment Report 2023, Singapore in 2022 led FDI going into Southeast Asia by a mile, registering a new record of US$141 billion (up 8% from the year before), followed by Indonesia (US$21.97 billion), Vietnam (US$17.9 billion) and Malaysia (US$17.1 billion).

In addition, Malaysian Investment Development Authority (Mida) data shows that Malaysia attracted RM132.6 billion (US$28.4 billion) worth of approved investments for 2,651 projects in the services, manufacturing and primary sectors from January to June this year. These investments are expected to generate 51,853 job opportunities here.

When asked for HSBC’s views on Malaysia’s FDI paling in comparison to Singapore’s, Murphy says: “Both countries have different roles. The power is in the bloc; not in being in competition with each other but it’s the power of Asean and how we use those trade agreements to support the opening of trade and seeing that happen.”

Murphy observes that with Malaysia’s relatively favourable policy environment, strategic geopolitical location, modern and well-connected infrastructure as well as strong legal system, the country stands out as an ideal and cost-effective gateway to  Asean.

And HSBC sees potential in several areas, chiefly automotive and electric vehicles, oil and gas and petrochemical-related industries, as well as the semiconductor value chain.

Doshi says the semiconductor industry remains at the heart of Malaysia’s manufacturing might. As at 2022, the country had 45% of the global semiconductor market share.

“As one of Asia’s few net energy exporters, Malaysia continues to benefit from the recent commodity upcycle, which is expected to create significant opportunities for investors looking to invest in the commodities sector here. We’re also seeing the arrival of professional services companies,” she adds.

Volatile currency, skilled labour challenges

But Malaysia is not without challenges for international companies.  “Ranking equally as the primary challenges (31%) are financial stability, staff quality and regulatory change(s). Businesses are not really experts in handling currency volatility, so this stands out as a key concern for many. And some pockets of high inflation in certain Asean countries continue to be a concern,” says Murphy.

She also notes that the International Monetary Fund has said major central banks such as the Bank of England will have to hold rates high into 2024 to curb inflation, a move that will make the cost of borrowing much more expensive for some companies.

“On top of that, Malaysia’s ability to attract skilled labour can be challenging, particularly those with skill sets in new tech or sustainability because they are highly in demand,” she adds.

Data from the Department of Statistics Malaysia’s revealed that while the country’s labour force strengthened 1.4% in 2022 to a record 16.02 million persons (from 15.8 million in 2021), the bulk or 58.4% were semi-skilled workers, followed by skilled workers (29.6%) and low-skilled workers (12%).

Industry players where workers with tech or manufacturing skill sets are needed have routinely lamented the talent shortage. This was seen in the Malaysia Semiconductor Industry Association (MSIA) 2022 E&E Survey produced in collaboration with Deloitte Malaysia, which showed almost half of the 93 MSIA members polled struggling to attract new talent (read: engineers) while over half of them expected to suffer from high employee turnover rates of above 10%.

“International businesses have high expectations for Malaysia’s technology sector, with 37% predicting that technology will drive a substantial increase in economic growth over the next 10 years. Over a quarter (26%) of foreign firms operating in Malaysia believe its growing digital economy makes it an attractive market for further expansion. This is especially true of GCC-based companies. For 34% of them, the digital economy is the leading attraction of the Malaysian market,” says Murphy.

Source: The Edge Malaysia