Lai Mun Chow Senior Research Officer

Regional Production Networks and their Implications on Malaysia’s Trade and Investment Policies and on Regional Cooperation in Asia Lai Mun Chow Senior Research Officer

Outline of the Presentation • Malaysian industrial clusters - Electrical and electronics industry - Automobile industry • Implications of the Multimedia Super Corridor • Implications of China and India • Technological advancement and its strategic resources • Conclusion

Malaysian Industrial Clusters Electrical and electronics industry Production 1985 1990 2003 Integrated circuits 2,561 6,084 23,269 (million units) Semiconductors 1,468 2,565 15,932 (million units) Electronic transistors 3,450 5,956 24,206 (million units) Television sets (units) 568,387 2,168,817 9,915,171 Air-conditioners (units) 148,424 212,018 184,485

Malaysian Industrial Clusters Electrical and electronics industry Exports, in RM million 1985 1990 2003 Semiconductors 4,4,39 11,685 78,540 Electronic equipment & parts 454 3,670 72,828 Consumer electrical products 581 5,531 19,774 Industrial electrical products 356 3,342 20,253 Electrical industrial machinery 608 2,144 13,838 Household electrical appliances 54 130 1,882

Malaysian Industrial Clusters Electrical and electronics industry • The industry is still mainly dominated by foreign multinational corporations. • Imports still dominate most of the stages of production activities. • The number of technology driven SMIs is small. • The industry continues to face growing ‘innovation deficits’. • There is a serious shortfall in the supply of skilled human capital. • Most of the electronics firms in locations outside Penang do not have strong inter-firm links and business networks. • Most of the local firms have yet to develop their own market prospecting and development capabilities.

Malaysian Industrial Clusters Automobile industry Sales of motor vehicles, in unit 1996 2000 2003 Passenger cars 275,615 282,103 319,847 Commercial vehicles 89,173 61,071 74,847 Total 364,788 343,174 405,010

Malaysian Industrial Clusters Automobile industry • Malaysia’s automobile industry has been highly protected by both tariff and non-tariff measures over the years and these include import tariffs, import licenses, local material content policy and mandatory deleted item policy. • While the local material content policy had been totally abolished in 2002, the mandatory deleted items policy had also been completely phased out on 1 January 2004. • On 31 December 2003, the government announced the details about new import tariffs and excise duties that were to take effect from 1 January 2004.

Malaysian Industrial Clusters Automobile industry New tariffs on CKD passenger cars (with effect from 1 January 2004) ASEAN Non-ASEAN Import duty Excise duty Import duty Excise duty Old New Old New Old New Old New < 1,800 42 25 55 60 42 35 55 60 1,800 to < 2,000 42 25 55 70 42 35 55 70 2,000 to < 2,500 60 25 55 80 60 35 55 80 2,500 to < 3,000 70 25 55 90 70 35 55 90 3,000 or higher 80 25 55 100 80 35 55 100

Malaysian Industrial Clusters Automobile industry New tariffs on CBU passenger cars (with effect from 1 January 2004) ASEAN Non-ASEAN Import duty Excise duty Import duty Excise duty Old New Old New Old New Old New < 1,800 140 70 0 60 140 80 0 60 1,800 to < 2,000 170 90 0 70 170 100 0 70 2,000 to < 2,500 200 110 0 80 200 120 0 80 2,500 to < 3,000 250 150 0 90 250 160 0 90 3,000 or higher 300 190 0 100 300 200 0 100

Implications of the Multimedia Super Corridor Number of MSC status companies 1997 2000 2004* Malaysian 47 276 680 Foreign 44 144 283 50-50 Joint Venture 3 9 26 Total 94 429 989 * Up to 1 March 2004

Implications of the Multimedia Super Corridor Majority shareholding by country and region for MSC status companies Country/region Number % Malaysia 680 68 Europe 91 8 North America 37 4 Singapore 35 4 India 36 4 Japan 23 2 Asian 15 2 Australia 17 2 Others 55 2

Implications of the Multimedia Super Corridor MSC status companies by sector Sector Number % Software development - business applications 197 20 Software development engineering and specific applications 159 16 Internet based business - e-commerce service 106 11 Content development 98 10 Internet based business - application service provider 62 6 Education and training 62 6 Systems integration 57 6 Hardware / electronics design 48 5

Implications of the Multimedia Super Corridor Growth of sales in the MSC, in RM billion Year Number of companies Local sales Export sales Total 2001 292 2.30 0.70 3.00 2002 403 3.26 0.67 3.93 2003 528 4.81 1.04 5.85 2004 500 6.16 1.82 7.98

Implications of the Multimedia Super Corridor Number of patents, industrial designs and trademarks filed by MSC status companies 2002 2003 2004 Patents 197 151 288 Industrial designs 14 41 93 Trade marks 167 188 192

Implications of the Multimedia Super CorridorMarket reach by export destination

Implications of the Multimedia Super Corridor • The MSC Impact Survey 2003 generally shows that there are both economic impacts and technological effects arising from the MSC. • As a regional hub just for ICT and multimedia technologies, the MSC has distinguished itself from other S&T parks in the region which mainly focus on high technology manufacturing. • It is important that the MSC threads its way around carefully and strategically so as not to compete just in software development, for that is India’s forte. • It is imperative that the Malaysian MSC status companies form strategic partnership with world class Indian ICT and software companies.

Implications of China • The Chinese companies are probably prepared to ‘invest in market share’ and live with no returns or losses in the initial years. • The emergence of China has slowly threatened the leadership position traditionally occupied by the Japanese manufacturers, especially in the E&E market segment. • Indeed, China provides Malaysia with the necessary catalyst to spearhead its knowledge-based, export-led industrialisation, the fourth phase of the national industrialisation process.

Implications of India • India has not only emerged as a major software exporter, but it has also become the main destination for business process outsourcing in the world. • There is growing evidence that Indian manufactured goods, especially electronics hardware, are capturing significant share on the global market. • Due to the increasingly competitive tax regime, many leading global contract manufacturers are also expanding their operations in India. • The export market share of Malaysia would be possibly eroded as more and more low-cost Indian exporters venture into the manufacturing sector. • One of the possible ways of minimising the adverse effects arising from India is to form smart partnership with them.

Technological Advancement and its Strategic Resources • Regional production networks would exert pressure on local suppliers to upgrade their industrial capabilities. • Technical knowledge that is transferred by flagships can only be internalised and translated into the capability of the local suppliers if they are in good resource positions, for there is a link between a firm’s resources and its sustained competitive advantage. • The necessary strategic resources are technically skilled human capital, R&D capability, well established government research institutes, effective foreign technology transfer and strong venture capital growth.

Technological Advancement and its Strategic Resources Human capital • Malaysia’s human capital remains scarce and significantly pales in comparison with the NIEs. • The increase in human capital over the years is not sufficient for the industrial upgrading to take off. • The problem is mainly due to the manpower that fails to have the right quality and knowledge. • The output of degree courses shows a continued preference for arts and humanities.

Technological Advancement and its Strategic Resources Research and development • With a gross expenditure on R&D that is less than 0.5 per cent of the GDP, R&D investment in Malaysia is considered not significant. • The government attributes the low GERD/GDP to limited financial resources, lack of skilled R&D personnel and inadequate market research. • The country’s R&D productivity remains low as capital expenditure constitutes a larger share than labour cost in terms of R&D expenditure by type of cost. • Most of the R&D incentive schemes are offered to only to the locally owned companies and such a shareholding restriction is a disincentive for foreign companies to carry out R&D activities in the country.

Technological Advancement and its Strategic Resources Government research institutes • While there are now over 33 GRIs in Malaysia, only both SIRIM and MIMOS are fully devoted to industrial technology research. • Some of the local GRIs are not being run according to scientific discipline and technological specialisation. • Many GRIs seem to have difficulties in collaborating synergistically with the local universities to come up with commercial research.

Technological Advancement and its Strategic Resources Foreign technology transfer • FDI has been acting as an important catalyst for foreign technology to be transferred to the local industries. • The technology inflows are not broad-based and mainly concentrated on the electrical and electronics industry, transport equipment and chemical products industry. • The number of technology inflows has been on an upward trend and most of them are transferred via technical assistance. Licence, trademark and patent are seen to be fast catching up. • Malaysia still lacks a strong technology-based SMI sector that can fully engineer positive spillovers from the MNCs that operate in the manufacturing sector.

Technological Advancement and its Strategic Resources Venture capital • It is highly possible that VC investment would be the main driving force behind the country’s future industrial development. • Besides MDV and MSC Venture Corporation, the government also offers the following financial schemes to the VC industry: Financing for High Tech Industries, Commerce Technology Venture Funds, High Tech Ventures Capital Fund and MSC Venture One. • While both entrepreneurship and venture capitalism are vital to the success of the VC industry but these two remain scarce in the country. • Due to the government restrictions on investment by pension funds, insurance companies and private banks into VC funds, the sources of capital available to the industry is limited.

Conclusion • The present regional production networks are now evolving in response to the emergence of both China and India, and a new form of regional cooperation is expected to be born in the next couple of years. • The current mode of development in the region presents both opportunities and threats to Malaysia. • The most worrying issue is the strategic resources that are presently employed to enhance the local industrial capability. • In order to gain a comparative advantage in the future regional production networks, Malaysia has no choice but to focus on its strengths. • Considering that Malaysia has already successfully carved out a niche for itself in chip manufacturing on the global market, the country should focus on just the microelectronics industry.

Thank You

Lai Mun Chow Senior Research Officer