Malaysia focuses on offshore services
KUALA LUMPUR - Malaysia has increased its focus on the service sector as it attempts to develop a second string to its export bow. Malaysia's long-time Minister for International Trade and Industry, Rafidah Aziz, said that while the manufacturing sector remains a main source of growth for Malaysia, it is imperative that Malaysia broadens its economic base. "Feedback from various sectors indicates that Malaysian service providers are expanding the export of their services overseas," she said.
Rafidah listed three key sectors - construction, healthcare and educational services - pointing out that international management firm AT Kearney in a recent report described Malaysia as a rising alternative to India and China for offshore services. Malaysia particularly wants to attract companies for shared services and business process outsourcing.
Last year, based on Construction Industry Board Development data, Malaysian companies secured eight infrastructure projects worth RM1.587 billion (US$417.7 million) in India, Cambodia, the United Arab Emirates, Singapore, Qatar and Sudan. These projects included highways, airport upgrading, waterworks and structural steel works.
Rafidah said Malaysian hospitals treated almost 130,000 foreign patients in the first nine months of last year, generating an estimated RM65.5 million in revenue. The figure was 103,000 in 2003. And Malaysia had almost 26,000 foreign students. Export revenue generated from the educational sector in 2004 was about RM778 million.
Malaysia hopes to target China for its services. Many Malaysian companies are keen to undertake construction and management of wastewater treatment plants, water supply work and city gas distribution projects on a Build-Operate-Transfer basis. She said that with the 2010 Asian Games being held in the southern Chinese province of Guangdong, Malaysian companies can find opportunities to help finance and construct facilities there. These projects could be undertaken in joint venture with Chinese companies. Other areas of possible business collaboration with China include infrastructure, especially projects related to the 2008 Beijing Olympics.
On education, Rafidah said twinning programs with foreign universities in the United Kingdom, the United States and Australia could enable Chinese students to obtain foreign degrees in Malaysia at a lower cost. And while Chinese may not be ready to travel overseas for medical care today, she sees China's large population as a strain on the healthcare budget. With improvement in standards of living, many Chinese will eventually demand better medical care in modern hospitals as they will be able to afford it.
China's rise as a global manufacturing base has siphoned off much foreign investment that in the last decade was originally destined for countries like Malaysia. Said Rafidah: "As Malaysia is no longer a cost-competitive location for labor-intensive operations, the government is encouraging labor-intensive manufacturing to relocate to cost-competitive countries like China. Malaysia sees China as a mutually beneficial business partner."
China has become a significant market for Malaysian products, especially edible oils, rubber products and electronic and electrical parts and components; and China's high rate of growth continues to create demand for consumer goods, industrial and infrastructure goods. Malaysia's exports to China rose 24.2%, reaching a new record of RM32 billion in 2004 - up sixfold since 1997.
Malaysia's exports to China grew 30.7% in the first nine months of 2004. Malaysia is seeking to expand trade with China, Japan and Korea through bilateral and regional initiatives. Trade between Malaysia and these three countries totaled $43 billion from January to September 2004.
The timetable for an ASEAN-China FTA is 2010. But China has concluded what is known as an "early harvest program" with ASEAN. This was implemented at the start of last year, and, in the first 11 months of 2004, Malaysia's total exports to China under the program amounted to RM2.1 billion.
Malaysian companies invested $3.1 billion for the period 1996-2003 in China, while cumulative Chinese investment in Malaysia totaled $1.2 billion. Rafidah said China is among the countries from which Malaysia hopes to attract more investment. She said Malaysia's investment rules have been liberalized to allow foreign companies to own 100% of a company, and that manufacturing companies no longer have to comply with equity or export conditions. Other relaxations include expatriate employment policies for manufacturing and related services sectors. "The Malaysian government continues to provide a conducive and cost-competitive environment for foreign investors."
Between 1996 and 2004 (January to November), total investment in Malaysia averaged around RM25.3 billion, of which 55% was foreign direct investment. Foreign investment mostly went into electronic, petroleum and base metal products. Rafidah said the government is promoting new growth areas to diversify its manufacturing base and to counter competition from China in traditional manufacturing activities. Growth areas include information and communications technology, biotechnology, optics, photonics, nanotechnology, medical devices and advanced materials. She said foreign investment remains crucial for Malaysia's industrial development, since foreign investors bring technology transfer, capital and access to international markets.
Despite increased competition, especially from China and India, Rafidah said Malaysia remains competitive. In 2000-2003, the main foreign investors were the US with $4.2 billion; Germany $2.5 billion; Japan $2.2 billion; Singapore $1.7 billion and the UK $1.3 billion. Together, they accounted for almost 70% of the total foreign investment in Malaysia.
Exports remain Malaysia's lifeblood. Rafidah says merchandise trade has grown an average by 8.8% annually since 1994. In the nine months to September last year, exports to almost all markets showed strong growth. West Asia was the fastest-growing market - up 40% over the previous period, but from a small base of RM9.6 billion. While key markets remain the US, Japan and the EU, Malaysia has experienced its best growth from intra-ASEAN trade, which grew 23% last year compared with a growth of 21.5% with the EU, 17.8% with the US and 15.3% with Japan. Malaysia has also started tapping new markets in Russia, West Asia, India and Hungary.
As a member of the ASEAN, Kuala Lumpur supports the trading bloc's negotiation for individual free trade areas (FTAs) with China, Japan, Korea, India, Australia and New Zealand. On a bilateral level, Malaysia is working on an economic partnership with Japan and a US trade and investment framework agreement with the US. As the minister sees it, Malaysia has a role as a gateway to the ASEAN market and is offering incentives, including pioneer status and investment tax allowances, to foreign companies that use Malaysia as a gateway to ASEAN. As a market itself of 20 million, Malaysia also offers economy of scale.
Rafidah expects trade with ASEAN to expand further now that the ASEAN Free Trade Agreement (AFTA) has been implemented. ASEAN has identified 11 sectors for accelerated tariff reduction - to be completed in 2007, instead of 2010. She said ASEAN is strengthening the dispute settlement mechanism and also cooperation in trade facilitation measures. Under the AFTA agreement, ASEAN will become a free trade bloc with a population of 530 million.
Malaysia's ASEAN neighbors absorbed a quarter of its total exports last year - a percentage that is set to grow with further liberalization of intra-ASEAN trade. Under what is known as the Common Effective Preferential Tariffs (CEPT) scheme, Malaysia's exports last year rose 58.2%. Thailand remained its major export destination under this scheme. Rafidah expects exports to Indonesia, the Philippines and Singapore, which have also increased under the CEPT scheme, to show further growth in future.
Growth in exports to ASEAN offset the decline of Malaysia's share in its key markets - the US, Singapore and Japan. The share of Malaysia's exports to these markets declined from 46% in 2003 to 43.9% in 2004. But Rafidah said this was due to significant expansion in exports to other markets. Malaysia's good export performance was buoyed by high global demand for electrical and electric products. Higher prices and volumes of commodities such as palm oil, crude petroleum and LNG also played a role.
With strong fundamentals, said Rafidah, the economy is expected to grow 6% this year, but its performance will be influenced by global events. The unemployment rate is low at 3.4%, and Malaysia's international reserves stood at $55.5 billion in September 15, 2004 - sufficient to finance 7.2 months of retail imports.
(Asia Pulse/Asia Today)
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