Reconsidering your supply chain? How about Malaysia?

Over the past half a century, Malaysia has developed from a commodities exporter to becoming an industrial base for multinationals in the electronics and petroleum sectors. Government strategies such as the Malaysia Digital Economy Blueprint and MyDIGITAL show the country’s aspirations to be a regional leader in the digital economy. Over the past decade, initiatives like these have helped it become an attractive option for global services such as manufacturing.

The fallout from Covid-19 means many companies are reconsidering or looking to diversify their supply chain and, perhaps, not be so dependent on one country. Malaysia has a well-developed infrastructure. Its government is pro-business. And its business environment is vibrant. Malaysia is a very credible country for foreign direct investment as it’s not directly related to any of the current geopolitical turmoil embroiling the U.S., China, and India. 

While there are many good options for electronics manufacturing, Malaysia is certainly very attractive for four big reasons.

Language and Culture in Malaysia

In business, it’s really important that the companies you work with ‘speak your language’. We generally understand this as meaning people ‘get you’. But when working with manufacturers overseas, actually speaking your language is a huge bonus. While in China, for example, conversational English is only spoken by 1% of the population, English is widely spoken in Malaysia, with around 55% of the population having English language skills.

There is even an expectation that Electronics Manufacturing Services (EMS) speak English in Malaysia, and this can be a dealbreaker for Original Equipment Manufacturers (OEMs) who want to feel comfortable that their outsourcing partner understands their products. 

Speaking a customer’s language is important—it’s part of their culture. But there are additional features that make U.K. businesses feel comfortable working with Malaysian partners. These run from the aesthetic—the fact that Malaysians drive right-hand-drive vehicles—to the profound cultural reality that people from the U.K. and Malaysia share a similar attitude towards uncertainty avoidance

Malaysia scores 36 and the U.K. 35, which indicates a relaxed attitude in which practice is more important than principles. These two countries hold a shared belief that there should only be rules when essential and hard work should be undertaken when needed but not for its own sake. 

The regulatory environment in Malaysia

Malaysia has a strong regulatory environment, and the country is governed by many regulations that are designed to keep the private sector competitive. The following are among the most important business regulatory frameworks:

Free and fair competition: The Malaysian authority investigates any complaints of anti-competitive behaviour and imposes sanctions on any company perceived as having committed an offence. 

Price control and anti-profiteering: The authorities can penalise any business that makes “unreasonably high profits” on any goods or services supplied.

Intellectual Property (IP) rights: Malaysia conforms with international standards and protects local and foreign investors. The country has signed several international treaties to protect IP rights, including:

There is also a host of national legislation to protect IP, including:

  • Patents Act 1983 and the Patents Regulations 1986
  • Trade Marks Act 1976, Trade Marks Regulations 1997, and the Trade Descriptions Act 2011
  • Industrial Designs Act 1996 and the Industrial Designs Regulations 1999
  • Copyright Act 1987
  • Geographical Indications Act 2000 and Geographical Indications Regulations 2001
  • Layout-Designs of Integrated Circuits 2000

The World Bank reports positively on the regulatory framework in Malaysia. The institution claims that Malaysia’s experience with Good Regulatory Practices (GRP) has provided remarkable results. The country has shown that more business-friendly regulations and a more favourable regulatory environment can contribute to economic growth and investment.

The advantageous regulatory framework, which has been globally recognised, is undoubtedly a boon for any OEM considering diversifying their supply chain. 

Ease of doing business in Malaysia

Malaysia was classified as being 12th out of 190 countries by Doing Business 2020, a World Bank Group flagship publication. The country scored 81.3 out of a possible 100. To put this result into context, China placed 15th, Cambodia 144th, and Vietnam 70th.

There is a conducive environment to doing business in Malaysia. It ranks as the second most developed competitive country in Southeast Asia and is renowned for being open to foreign investments. As a result, there are more than 5,000 foreign companies from more than 40 countries in Malaysia, which had a cumulative investment of US$162 billion in 2019.

Additionally, the country’s parliamentary system follows the Westminster tradition, and the legal system follows the U.K. legal system, so companies doing business in Malaysia will find a familiar political and legal context.

Malaysia’s focus on manufacturing 

The advanced electrical and electronics industries have been identified as sources of new growth for Malaysia as part of the Twelfth Malaysia Plan (12MP) (2021 to 2025). The government has announced that business-friendly investment policies will be introduced to attract foreign direct investments into the country. 

Moreover, to support the manufacturing and manufacturing-related services as part of the country’s transition to Industry 4.0, the government introduced Industry4WRD, a national policy that aims to transform the manufacturing sector from 2018 to 2025. This policy consists of three arcs to make Malaysia a:

  • Strategic partner for smart manufacturing and related services in the Asia Pacific region
  • Primary destination for high-tech investment 
  • Total solutions provider for cutting-edge technology

Industry4WRD is designed to increase productivity in the country, create jobs, and attract highly-skilled workers to the manufacturing sector. Additionally, tax incentives have been announced to promote high-value-added activities in the electrical and electronics industry to transition towards a 5G digital economy.

Facilities are also being built to encourage automation and digitalisation. Malaysian SMEs in the manufacturing and related services sectors are being financially supported by the Industry4WRD Intervention Fund. And the government has implemented the Digital Transformation Acceleration Programme, which seeks to help businesses adapt to disruptions and achieve their digital transformation goals.

Tax and trade

Malaysia has numerous free trade and special economic zones around its coasts, including joint ventures with Singapore and China. These areas are valuable structures for anyone considering having an export manufacturing base in the country and benefit from attracting tax incentives and alleviating the need to budget for VAT cashflow requirements. 

The following are examples of Malaysia’s favourable business environment:

  • For five years, 70% of the statutory income for general manufacturing is exempt from corporate income tax.
  • For general manufacturing, investment tax subsidies within five years are 60% of qualified capital expenditures.
  • One hundred per cent of high-tech enterprises’ statutory income is exempted from corporate income tax for five years. 
  • Within five years, 60% of the qualified capital expenditure will be offset against 70% of the statutory income of the tax year.

Additionally, the country is located next to the Straits of Malacca, one of the world’s busiest shipping lanes. This gives the country access to the global supply chain via two key ports—Port Klang and Port of Tanjung Pelepas. Port Klang has recently changed to a paperless document workflow system for exports and imports, making trade much more efficient as traders do not need to interact with customs and port officials. 

Conclusion

Malaysia’s rapidly developing infrastructure and dynamic business environment make the country an attractive option for major electronics and machinery manufacturers. The country’s workers have recognised skills and a large number speak English. These factors position the country as an excellent place to sell to the world’s three biggest markets: North America, China, and Europe. Very few countries have this potential. 

The country also has a pleasant climate all year round and is far less polluted than China to the north. Anyone reconsidering or wanting to diversify their supply chain should seriously consider Malaysia as a high-quality option. 

 

An Introduction to Outsourcing Your Electronics Manufacturing

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