Malaysia is strongly committed to attract high quality and sustainable Foreign Direct Investments (FDI) from Chinese companies

Media Statement by Dr. Ong Kian Ming, Deputy Minister for International Trade and Industry (MITI) on the 22nd of January, 2019

Last Thursday, on the 17th of January 2019, I was invited to speak at a conference organized by Deloitte Malaysia’s Chinese Services Group (CSG) and the Bank of China (Malaysia) on the government’s policy towards Chinese investments in Malaysia.

The following are some of the key points I highlighted in my presentation.[1]

Point 1: Approved Manufacturing Foreign Direct Investment (FDI) from Chinese companies will likely top the FDI table for the 3rd year in a row

In 2016 and 2017, approved manufacturing FDIs from Chinese companies totalled RM4.7 billion and RM3.9 billion respectively making China the top sourcing country for FDI in the manufacturing sector. In the months from January to September 2018, approved manufacturing FDI from China has already reached RM15.62 billion comprising 32% of total approved manufacturing FDI. More than 50% of the approved manufacturing FDI from Chinese companies came AFTER the 14th General Election showing that companies from China continue to demonstrate confidence in the Malaysian economy under the new government.

In 2016 and 2017, approved manufacturing FDIs from Chinese companies totalled RM4.7 billion and RM3.9 billion respectively making China the top sourcing country for FDI in the manufacturing sector. In the months from January to September 2018, approved manufacturing FDI from China has already reached RM15.62 billion comprising 32% of total approved manufacturing FDI. More than 50% of the approved manufacturing FDI from Chinese companies came AFTER the 14th General Election showing that companies from China continue to demonstrate confidence in the Malaysian economy under the new government.

Table 1: Approved Manufacturing FDI from China (2016 to Sept 2018)

Manufacturing
FDI
from China
(RM billion)
Total
Manufacturing
FDI
(RM billion)
As % of Total
Manufacturing FDI
Rank
Jan to
Sept
2018
15.6248.832.0%1
20173.921.618.1%1
20164.727.417.2%1

Source: Malaysian Investment Development Authority (MIDA)

Point 2: Chinese manufacturing activities are distributed across different sectors and locations across Malaysia

While some of the infrastructure and property development projects associated with certain Chinese companies have received a disproportionate amount of publicity, in and outside Malaysia, many of the realized investments in the manufacturing sector have created good jobs and helped boost Malaysian exports.
These manufacturing projects are spread out across different industries taking advantage of the supply chain, natural resources and surrounding ecosystem in strategic locations across Malaysia. Some, such as OM Materials, are one of the handful of energy intensive companies making use of the relatively cheap source of power in Sarawak (courtesy of Bakun) and the dedicated port at the Samalaju Industrial Park to bring in the raw materials required. Alliance Steel in the Malaysian China Kuantan Industrial Park (MCKIP) choose that location because of easy access to the deep water port in Kuantan and also easily available land in the industrial park. Two major float glass manufacturers, Kibing and Xinyi, chose locations in Senawang, Negeri Sembilan and Jasin, Melaka. D&Y Group, a major textile manufacturer from the Shandong province, set up their state of the art and highly mechanised yarn making factory in Sedenak, Johor, not far from Kulai and within easy access of the ports and airport facilities in Johor Bahru. Jinko set up their solar panel factory in Penang to take advantage of the already existing Electrical and Electronics (E&E) sector’s ecosystem while Longi set up a greenfield site in Kuching to manufacture silicon materials. CRRC, a major rail company, has set up a rolling stock factory in Batu Gajah, Perak, as part of the Industrial Coordination Program (ICP) involving the purchase of rolling stock by KTM as well as Prasarana. And finally, Huawei has invested in various locations throughout Malaysia as part of its regional hub strategy (more on this later). This selection of investments are highlighted in Figure 1 below.

Figure 1: Distribution of selected Chinese manufacturing investments in Malaysia

 Source: MIDA

This is not an exhaustive list. Geely’s investment in Proton has not been included because it involves the purchase and investment into an existing company rather than a new investment. But this does not mean that Geely’s investment in Proton is unimportant. In fact, if executed well, this investment can breath new life into Proton and provide a boost to the larger automotive sector in Malaysia through increased vendor capability and increasing Malaysia’s automotive exports to the region and beyond.

Point 3: China is Malaysia’s largest trading partner since 2009 and will likely hold on to this position in the foreseeable future

China’s rapid participating in global trade has been nothing short of astounding. Malaysia’s total trade with China amounted to RM23.8 billion in 2000. This represented 3.5% of Malaysia’s total trading volume. In 2009, China’s share of trade with Malaysia had increased to 13%, overtaking Singapore’s trade with Malaysia. Since then, China has been Malaysia’s largest trading partner and our trade with China reached 16.4% of total trade in 2017. (See Figure 2 below). During this time, our share of total trade with the United States, which was our largest trading partner in 2000, fell from 18.7% in 2000 to 8.7% in 2017. Japan’s share of total trade also decreased from 16.7% in 2000 to 7.9% in 2017.

Figure 2: Share of Total Trade (%) with Malaysia (2000 to 2017) – China, Singapore, USA and Japan

Source: MATRADE

From the months from January to November 2018 compared to the same period in 2017, Malaysia’s total trade has increased by 6.2% with total exports increasing by 6.9% and total imports increasing by 5.3%. During this same time period, our total trade with China has INCREASED by 8.5% with a 11.3% increase in total exports and a 6.3% increase in total imports (Table 2 below). Even with the spectre of the US-China trade war looming, our trade with China continues to grow at a rate that is higher than our trade relationship with the rest of the world.

Table 2: Growth in Malaysia’s Total Trade, Exports and Imports, Jan to Nov 2018 vs Jan to Nov 2017 (World versus China)

2018 (Jan to Nov)WORLDCHINA
% Increase in Total Trade6.28.5
% increase in Total Exports6.911.3
% Increase in Total Imports5.36.3

Source: MATRADE

Point 4: Malaysia is poised to attract more investments and benefit from import substitution as a result of the US-China trade war

A number of recent studies have shown that Malaysia could be one of the main beneficiaries of the US-China trade war through import substitution trade diversion as well as FDI diversion. 
Nomura estimated that Malaysia would be the top ranked country in the Nomura Import Substitution Index (NISI), in particular, from the exports of “electronic integrated circuits, liquefied natural gas and communication apparatus”.[2] (See Figure 3 below).

Figure 3: Countries that could benefit from import substitution by the US and China based on aggregated NISI scores

 Source: Financial Times quoting Nomura Global Economics

The Economist Intelligence Unit (EIU) also projects Malaysia to be a beneficiary in diverted production and investment in the Automotive as well as Information and Communications Technology (ICT) products.[3] (Figure 4 below)

Figure 4: Winners and Losers in the Automotive and ICT sectors due to the US-China Trade War

 While a prolonged US-China trade war would not be welcomed by a small and open economy like Malaysia, there are mitigating factors that will somewhat cushion the impact for us.

Point 5: Malaysia remains a natural and strategic location for long term investments by Chinese companies

As Chinese companies seek to expand their global footprint, many of them will follow the model employed by Japanese, European and American companies by investing in South East Asia. Among the countries in South East Asia, Malaysia has many natural and strategic advantages including a stable political environment, a well-developed logistics infrastructure such as roads, ports and airports, a relatively skilled workforce, a cost-competitive environment for doing business, a good quality of life and access to a large pool of Chinese speaking workers and managers, just to name a few.

Point 6: The nature and type of Chinese investments in Malaysia will continue to evolve

The nature and profile of Chinese investments in Malaysia is and will continue to evolve, just like the other multinational companies which have set up in Malaysia. The speed at which many of these companies invest and start their operations in Malaysia (and in other countries) may necessitate an initial influx of Chinese workers, especially at the construction and technology transfer phases. Over time, because these workers have to be deployed back to China or to other parts of the world, these Chinese companies will inevitably localised their staff including at the upper management levels. The more innovative and forward looking companies will look to Malaysia as more than just a manufacturing and export base. They will capitalize on the diverse human resources and the domestic market in Malaysia to establish their regional innovation, procurement and training hubs.
A good example of such a company is Huawei which started its operations in Malaysia as far back as 2001. In 2006, it set up a shared service center for Finance and Accounting for Asia in Malaysia. In 2012, it opened its first global ICT training center outside China in Cyberjaya in June 2012  to train Malaysian ICT workers & its customers from Asia Pacific, the Middle East, Africa & South America. In 2015, it set up an Asia Pacific Digital Cloud Exchange in the Iskandar Malaysia development hub in Johor.  In 2016, it opened its regional ICT innovation hub in Kuala Lumpur.  In 2018, it signed an MOU with edotco, a regional telco infrastructure provider, to look into 5G readiness.  And it has partnered with many Malaysia universities including the University of Malaya , UTAR , Universiti Malaysia Sabah (UMS)  and Xiamen university Malaysia Campus  to carry out Research and Development (R&D) projects with an eye on talent identification.
I am confident that more Chinese companies will follow Huawei’s model of utilizing strategic locations throughout Malaysia and capitalizing on the diverse human capital resources as part and parcel of their long term investment strategy in Malaysia. An estimated 300 out of the top 500 Chinese companies, as listed by Fortune Magazine, have not yet invested in Malaysia. These are the companies which we want to entice to Malaysia by showing off our natural and strategic advantages as an investment location. The message that Malaysia welcomes high quality investments from China (and other parts of the world) must be sent loudly and clearly!


[1] http://www.focusmalaysia.my/Snippets/a-hotspot-of-opportunities-for-chinese-investors
[2] https://www.ft.com/content/2de5582a-ec75-11e8-89c8-d36339d835c0
[3] https://www.eiu.com/public/topical_report.aspx?campaignid=TradeWar