Malaysia
In the sweet spot
Malaysia’s shared historical and geographical proximity with Singapore has unavoidably led to comparisons between the two countries. Some would assume that Singapore’s rise to become one of the richest countries in the world following its independence from Malaysia in 1965 is an uncomfortable fact for the latter, but Malaysia has long moved beyond that simple comparison. In fact, Malaysia has preferred to focus more on the advantages it can derive from its closeness to Singapore, its main trading partner.
When Singapore’s land became too scarce, or its costs of production too high, Malaysia became a nexus investment. Hundreds of thousands of Malaysians cross the bridge to Singapore daily to go to work, making the land border one of the busiest in the world. Though it may not have Singapore’s highly developed digital infrastructure or equally attractive fiscal framework, Malaysia contains natural resources and an abundance of land that Singapore can never offer; moreover, it has a highly skilled workforce, a mature petrochemical industry, and optimal connectivity, almost on a par with Singapore.
Malaysia has grown into both a second-best and a better-off alternative in relation not only to Singapore, but also to other countries in the region, becoming an amalgamation of everything Southeast Asia (SEA) has to offer in one country. Datuk Dr Abd Hapiz Abdullah, chairman of the Chemical Industries Council of Malaysia, the main body representing the chemical industry in the country, calls this quality a “hybrid”: “Malaysia is not a large market; therefore, it must position itself as a hybrid between Singapore, with its strong competencies in finance, Thailand, with its complementary competencies in food technology, and even Indonesia, which shares the same dominant religion with us,” he said.
Ranking 12th out of 190 countries in the World Bank’s Ease of Doing Business global ratings, and having carefully developed its economy, regulations, and infrastructure to a high standard, Malaysia can be described as an all-around favorable investment destination. Favorable, but not favorite. About half of the foreign direct investment (FDI) into SEA over the past decade was absorbed by Singapore, according to the Vietnam National Trade Repository. Vietnam and Indonesia also take big shares of FDI.
Perhaps one fault we can find with Malaysia’s “attractiveness” index is that it is too general, failing to capitalize to a greater extent on unique differentiators. Adding to Abdullah’s argument, Malaysia indeed seems to embody a mix of advantages from different SEA countries, but not without some misgivings – it has Singapore’s good location but not its R&D prowess; it offers a cheaper manufacturing base than Singapore, but not as cheap as Vietnam; it has a decently large population, but nowhere near Indonesia’s. This leaves Malaysia to be seen as a good compromise investment destination
“To differentiate itself, Malaysia must identify, capture, and harness the unique value it offers. Malaysia could attract more nearshoring investments in the petrochemical space as the availability of raw materials in the carbon chain derivatives, but also facilities for utilities, waste management, or storage, grow.”
Datuk Dr Abd Hapiz Abdullah, Chairman, Chemical Industries Council of Malaysia (CICM)
Uniquely Malaysian
Foreign direct investment (FDI) in SEA reached a record high in 2021 at US$174 billion, based on S&P data, as multinationals shift their manufacturing base to the region. The Malaysian government is keen to seize this opportunity. “Malaysia is taking advantage of trade diversions due to uncertain geopolitical tensions, including the US-China trade conflict, the tensions between Russia and Ukraine, and the shift in the global supply chain. We are promoting Malaysia as an alternative manufacturing and distribution hub,” said Datuk Wira Arham Abdul Rahman, CEO at the Malaysian Investment Development Authority (MIDA), the government investment promotions agency.
To be able to capture the flow of investments directed to the region, Malaysia must work on those subtle traits that make the country be unlike any other. Something uniquely Malaysian is the diverse population, which creates a multi-linguistic and multi-cultural talent pool. Split across two main stretches of land, peninsular West Malaysia and East Malaysia on the Borneo Island, Malaysia’s population is formed of multiple groups, including Malays (about half of the population), Chinese (one-fourth of the population), and South Asians. This ethnographically complex workforce has been a key factor for multinationals looking for speakers of different languages; moreover, the country’s cultural diversity has also appealed to foreign professionals taking jobs in the country. Matthew Barsing, the chief commercial officer for EPS Consultants, a recruitment firm, told GBR that the contract staffing service of EPS has been seeing huge demand, with large headcount orders for Korean, Japanese, and Chinese professionals from different clients. “One way to close the gap for white collars is to source candidates abroad and allow them to work remotely for the first six months before obtaining their employment pass and sorting out all the necessary logistics to bring them to Malaysia,” he said.
Malaysia’s electric and electronic (E&E) sector has attracted a lot of attention – as well as capital – in recent years, becoming Malaysia’s main FDI magnet. Malaysia’s E&E sector is concentrated in the state of Penang, which accounts for about 5% of global semiconductor exports, according to Malaysia’s Department of Statistics (DOSM). The E&E sector accounts for 40% of Malaysia’s exports and is also the largest recipient of FDI. In 2022, US$6 billion out of the total US$59.9 billion in approved investments went to the E&E sector, compared to around US$3 billion in chemical and petroleum products, based on data from MIDA. Economic affairs minister Mustapa Mohamed was quoted to say that he wants to make Malaysia the leading center for the E&E industry in the region and “nothing less.” Malaysia announced the largest national budget in the country’s history this year, allocating US$86.8 billion to enhance the country’s competitiveness, and the main sector that will benefit from tax incentives will be E&E. E&E foreign manufacturers looking to relocate to Malaysia will benefit from a preferential tax rate of between 0-10% for the first 10-15 years, depending on their level of investment, while existing manufacturing companies will see a tax allowance of up to 100% for five years.
The E&E sector is not competing with petrochemicals, but on the contrary, it is a key customer for specialty chemicals and industrial gas suppliers.
Besides electronics in Penang, Malaysia is the world’s second-largest palm oil producer and the sixth-largest rubber producer. But its most important natural resources are crude oil and natural gas, which have propelled the country to becoming the second largest oil producer in SEA, and the third largest exporter of LNG in the world.
“One of the most dynamic industries in Malaysia is electronics, with more than half of registered FDI over the past year going to the northern region of Malaysia. It is an important semiconductor hub, where seven out of the top 14 biggest semiconductor companies can be found. Similarly, 11 of the top 20 photovoltaic producers are located in Malaysia too.”
Kenny Teh, Managing Director, Air Liquide Malaysia
Rigid policies
Standing at 452 meters tall, the Petronas Towers are more than a staple landmark of Kuala Lumpur’s skyline; the twin towers are also more than a headquarters for the country’s state-owned oil and gas company, Petronas - Malaysia’s only Fortune 500 company. In their perfect symmetry and commanding presence, they are a vestige of pride and a gesture of nationalistic zest, symbolizing Malaysia’s greatness – one of its own makings, using its own resources, and under its own control.
Petroliam Nasional Berhad, or Petronas, answers directly to the Prime Minister and it controls all exploration and exploitation rights in the country. Petronas was created in 1974, at a time when growing economic nationalism in Malaysia coincided with a global interest in sovereign control over natural resources due to the OPEC oil embargo and the resulting energy crisis. As the sole custodian of the country’s oil and gas resources, Petronas renegotiated the lease with existing international firms (like Shell and Esso) through production-sharing contracts (PSCs). Up to this day, O&G companies wanting to participate in exploration and production activities must obtain a license from Petronas.
Through its subsidiaries, Petronas is involved in almost every aspect of the petroleum and petrochemical industry – from upstream exploration to oil and gas production, refining, processing, gas network and LNG marketing, petrochemical manufacturing and marketing, as well as diversified shipping, automotive engineering, and property investments. Via Petronas, Malaysia has sought to control the country’s resources, provide energy and petroleum products at affordable prices to support the country’s economic development and encourage upstream-to-downstream integration.
But Malaysia’s governance model and policies have also been criticized for limiting the country’s competitiveness. Malaysia’s New Economic Policy (NEP) is now more than 50 years old and has become a centerpiece of the country’s politics. The more time goes by without reform, the more it is considered to be creating barriers for foreigners, investors and otherwise. The NEP was introduced in 1971 to institutionalize advantages for indigenous people (called bumiputra, meaning “sons of the soil”). In practice, the NEP translates to affirmative action policies in favor of the bumiputra majority, such as discounts on housing and property, special university quotas, and a requirement that all listed corporations on Bursa Malaysia must allocate 12.5% of shares to bumiputra investors.
There are multiple bumiputra equity conditions for companies wanting to enter the petrochemical space in the country, such as obtaining an agreement with domestic companies licensed by Petronas, forming a JV with a local company or individual, or setting up a local subsidiary. Informal conversations held by GBR reporters with Malaysian sources support the view that setting up a foreign entity can be challenging, especially in the petrochemical space, mediated to an overwhelming extent by Petronas and guarded by bumiputra laws. Despite the flaws of the current system, resented by both bumiputra and non-bumiputra, the NEP remains in place, unchanged.
Ultimately, there is one last thing that the Petronas Towers stand for, and this is the country’s reliance on oil and gas money, for they were financed by this, much like other emblematic infrastructure projects. Remembering that Malaysia’s natural resources are exhaustible is a humbling but necessary reality for the country. Based on the most recently available data, Malaysia has oil reserves of 2.7 billion barrels and gas deposits of 32.1 trillion cubic feet, mostly located near the coasts of Kelantan, Terengganu, Sarawak, and Sabah in the South China Sea. At the current rates of production, with 655,000 b/d of liquid fuel production (556,000 b/d crude oil and 49,000 b/d natural gas GNPL, based on the US Energy Information Administration,) Malaysia could run out of its oil and gas reserves by 2029, estimated the Economic Affairs Ministry in 2019, sending a sense of alarm. Petronas, however, has since indicated its reserves could last for another 28 years, maybe 38 if contingent resources are accounted for.
Petronas’ ability to fuel the country’s growth while also investing in exploration, R&D capabilities, modernization, and the energy transition to stay competitive in the future, has been put into question, as the natural resources shrink. Petronas fell to the 216th position in the Fortune Global 500 list in 2022, having once been 68th. Its contributions to the state have halved in the last decade. In 2009, the company supplied 40% of the government’s revenue; this will be down to 22.4% this year, according to official sources. Petronas will be paying a RM40 billion dividend to the government in 2023, lower than last year’s RM50 billion, when the average Brent price was higher. It has surfaced in the past that Petronas officials called for the introduction of a stipend dividend policy to allow the oil and gas player to reinvest more of its profits, but this has never materialized, nor is it likely to do so very soon.
“Frequent changes in government have led to periods of instability and policy inconsistency. With each government, we see a reset which naturally slows down policy implementation. However, the investment community views the current unity government positively, and we hope to see more stability from here on.”
Paul Fong, Managing Director, Dow Malaysia and Singapore
However, calls to curtail fuel subsidies were finally paid heed to this year. This should alleviate the cost burden on national coffers, a burden which grows higher when the price of oil appreciates; for an oil-producing country, it is an awkward situation to suffer when the price of crude goes up.
Some things are, however, changing. After six decades of continuous rule by a single party (the United Malays National Organization or UMNO), Malaysia has had four new governments formed since 2018. After none of the contestants managed to secure a majority in the November 2022 election, Malaysia formed an unlikely coalition, or coalition of coalitions, between diverging parties, including the Pakatan Harapan (PH) coalition, the Barisan Nasional (BN) coalition, and an East Malaysian block of three parties. Few expected the full-term survival of the unity government steered by Prime Minister Anwar Ibrahim, but, more than half a year since its establishment, and after various mechanisms were introduced to secure continuity, including an anti-party-hopping law, there is more optimism. “Even though the government has changed several times in the last couple of years, every new government has been supportive of business. The investment community views the current unity government positively, and we hope to see more stability from here on,” commented Paul Fong, managing director, at Dow for Malaysia and Singapore.
The political tumult has also led to the delay in the publishing of the Chemicals Industry Roadmap (CIR), the government’s 10-year masterplan for the industry. Commenting on the matter, Datuk Wira Arham Abdul Rahman, the CEO of the Malaysian Investment Development Authority (MIDA), told GBR: “The aim of the CIR is to ensure that the industry and its players remain responsive to global trends while maintaining supply and value chain sustainability and stability. The roadmap will address important issues in the chemical industry like manpower, infrastructure, and the environment.”
Petrochemical companies in Malaysia are not waiting for the government’s guidance to prepare for their future. For example, Kaneka has initiated a comprehensive digitalization (DX) project, together with R&D and sustainability initiatives, with the goal of transforming the Malaysian base, already its biggest complex outside of Tokyo headquarters, into a regional support or excellence center for APAC: “Ultimately, we would like to see Kaneka Malaysia offering IT, HR, and business support to other sister companies in ASEAN, like Singapore, Thailand, Indonesia, or Vietnam,” said Hiroyuki Nishimoto, managing director at Kaneka Malaysia.
Article header image by Zukiman Mohamad at Pexels