Malaysia: Manufacturing growth

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Malaysian officials are confident the country’s manufacturing sector will continue to post strong growth throughout this year and beyond, on the back of an increasing swell of both foreign and domestic investment. There are some suggestions, however, that a general slowing of the global economy and the prospect of sharp wage increases could take some of the momentum from industrial expansion.

According to data issued by the Malaysian Industrial Development Authority (MIDA), the manufacturing sector accounted for just over half of all foreign direct investment (FDI) inflows last year, almost double the 27% drawn in by the services sector. With FDI in 2011 increasing by 12.3% to around $11bn, manufacturing’s share of that total came to around $5.5bn.

Total investments in the sector also surged in 2011, with 846 manufacturing projects carrying a total value of $18.57bn approved last year, a 19% increase over the $15.6bn recorded in 2010. Of these investments, locals’ contributions numbered $7.3bn, or 39% of the total, while the balance came from FDI. A full third of new projects approved were in the electrical and electronic industry, followed by basic metal products, and chemicals and chemical products.

Commenting on the latest manufacturing sector figures, the international trade and industry minister, Mustapa Mohamed, said investors were upbeat over the opportunities in Malaysian manufacturing.

“Foreign and domestic investors continue to respond positively to the government’s initiatives to invest in new growth areas and emerging technologies, high value-added industries, high technology and capital-intensive industries, and research and development activities,” he said.

While Malaysia is well placed to post solid growth this year, there are some signs that the national economy, and with it the manufacturing sector, could be easing back a gear. Total exports in January 2012 came to $18.2bn, the lowest level in a year, according to data released in early March. The year-on-year rate of growth for the manufacturing sector as of December 2011 was 4.5%, somewhat better than the 4% recorded in the previous month but a long way off the 8.2% of September or the 6.2% in October.

The long-running uncertainty over the state of Europe’s economy also ate into January’s export figures, which were released on March 7. Shipments to the EU plunged by 14.5% to $1.6bn, with falling demand for electrical and electronic goods and metal products being cited as the main factors in the slump. Though the decline was slightly less dramatic, exports to China also dropped in January, down 12.2% year-on-year, again with electrical and electronics products leading the retreat.

Overall, Malaysia’s economy expanded by a creditable 5.1% last year, in line with the rate of expansion of the manufacturing sector but below the 7.2% posted in 2010. The 2011 result was one that some analysts saw as stemming from the easing in overseas demand for Malaysian exports, a trend that will probably continue through the first half of 2012 but start to reverse itself mid-year and beyond.

According to Lee Heng Guie, the head of economic research at CIMB Investment Bank, it was the volatile external environment that resulted in stagnant demand for consumer electronics, though this could be offset to some degree by domestic demand.

“The question is how sustainable is consumption going to be and this will depend on key drivers such as commodity prices and income,” Lee said in an interview with The Star in Malaysia late February.

Many manufacturers are also somewhat wary of the government’s plans to increase the minimum wage at a time when there is uncertainty over sales abroad and growing competition from other regional producers. There have been calls for the raise, which will see the base wage increase from $215 to between $265 and $330 a month, to be implemented in stages, rather than all at once so as to lessen the impact on the manufacturing sector.

On March 6, Lim Kok Boon, the president of the Malaysian Plastic Manufacturers Association, said at a press conference that the government had to consider what the impact of a sudden implementation of minimum wage would have on the manufacturing sector.

“Almost all manufacturing companies in Malaysia rely on the export market and when we offer a higher price to our export market, they will not absorb our access cost and will look at other countries for cheaper supply,” Lim said.

While suggestions that up to 4m jobs, the majority of which are in manufacturing, could be put at risk by the wage increase may be somewhat alarmist, employers’ concerns are real. Mindful of the importance of the sector to the national economy, Mukhriz Mahathir, the deputy minister for international trade and industry, said on March 8 that a balance needed to be struck between the expectations of workers and industry.

“The minimum wage policy has become an ongoing debate, and the important thing is, the ability of the government to strike a balance between increasing the income of the people and ensuring higher productivity,” he said.

How the government will achieve this balance has yet to be determined. If an increase in manufacturing output can be assured, the result would offset higher labour costs, though something of a question mark remains over whether there are markets for the stepped up production the government is hoping for.

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