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HOW REAL ARE MALAYSIA FDI INFLOWS AND OUTFLOWS? (PART 2)

HOW REAL ARE MALAYSIA FDI INFLOWS AND OUTFLOWS? (PART 2)
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By Charles F. Moreira, Editor

[Part 1 of the article can be found HERE]

FDI outflows versus inflows

Whilst the UNCTAD report estimated the net FDI flow into Malaysia for the whole year of 2020 totalled USD2.5 billion (around RM10.1 billion), which was down 68% from 2019, however according to DOSM data, Malaysia registered net FDI outflows in Q3, driven by the outflows from debt instruments amounting to RM9.35 billion in the stipulated period.

This was reflected in inter-company loan extensions and scheduled loan repayments, which are typical for multinational corporations’ (MNCs) operations; as well as the trade credits granted to manufacturing firms, in line with substantial exports, especially in the electrical and electronics (E&E) sector. Notably, Q3 2020 is an exceptional period for the first time since Q4 2009.

Meanwhile, equities moderated to RM13.40 billion from RM17.33 billion in January to September 2019, down 23% compared to the estimated global FDI drop of 42% in 2020.

The net FDI flows are determined by many factors including abnormal disruptions in the global economy which could result in larger repatriations due to loan repayments and borrowings from their HQ and affiliates overseas for the particular year. The decline in 2020 mirrors the situation Malaysia experienced in 2009 after the subprime crisis in the US.

“MNCs in Malaysia were repatriating higher amounts of their profits for loans repayments and retaining earnings to help their HQ and affiliates faced with financial difficulties. The same can be said for 2020 when the world was hit by the pandemic”, wrote MIDA.

MIDA also argues that Net FDI flows also indicates the maturity of Malaysia’s monetary policy which allows for the repatriation of capital, interest, dividends and profits, which is a prerequisite for a trading nation such as Malaysia, and that this business-friendly investment policy has also strengthened Malaysia’s position as a regional and global supply chain hub.

“A lower net FDI is not necessarily an unfavourable sign. For example, the E&E Industry which is one of the largest FDI recipients in Malaysia recorded a trade surplus of RM134 billion or 74% of Malaysia’s total trade surplus of RM185 billion in 2020. It is the backbone of the manufacturing sector in Malaysia, contributing 39% to total exports and 48% to total manufacturing exports, not to mention the diverse ecosystem and supply chain the industry has created. The FDI stock in Malaysia is prominently high, totalled to RM689.1 billion as at end of September 2020” wrote MIDA.

Various factors for different foreign investors

With regards Hyundai relocating its Asia Pacific headquarters from Malaysia to Indonesia and Panasonic’s closure of its solar panel plant in Malaysia, MIDA described the deeper reasons behind these companies’ decisions.

Hyundai regards ASEAN as an alternative market to China and its Asia Pacific HQ in Malaysia was incomplete without a production plant in Malaysia as well. However, with its regional HQ and production plant in Indonesia, the HQ can achieve its full role with increased production and sales. MIDA also believes that the lower demand for Hyundai cars in Malaysia also contributed strongly to their relocation decision.

With regards Panasonic, the recent announcement to close its solar panel production plant in Malaysia is in line with Panasonic, Japan’s decision to discontinue the production of wafers, solar cells and solar modules at its factory, both in Japan and Malaysia, due falling prices of solar cells in the world market and an increase in raw material costs due to  global expansion by Chinese companies, which would require higher capital investment for Panasonic to remain resilient in the solar business.

However, Malaysia remains the third largest manufacturer of PV-cells and modules in the world, after China and Taiwan. Malaysia currently hosts a comprehensive photovoltaic ecosystem consisting over 250 companies in upstream (wafers and cells) and downstream (inverters and system integrators) activities.

Amongst notable companies in Malaysia include First Solar and SunPower (USA), Hanwha Q Cells (Korea), Longi, Jinko Solar and JA Solar (China). MIDA has also recently approved a major integrated solar project that will further solidify Malaysia’s role in the global PV industry.

“For the whole of 2020, nine existing foreign-owned manufacturing companies with total investments of RM394.3 million in Malaysia had implemented business rationalisation measures. These companies have either closed their business operations in Malaysia or relocated to other countries due to technology disruption that transformed their business landscape and reduction in demand for their products. This investment is a fraction of the total approved investment in the economy for the period January-September 2020,” wrote MIDA.

Complementary role

Malaysia is not deterred by reports of tech companies moving to neighbouring countries for a variety of reasons, including lower labour costs, a large domestic market and availability of mineral resources, and whilst potential investors in the automotive industry are considering setting up their assembly plants in neighbouring countries, however Malaysia remains a major producer of semiconductors and sensors for cars and is still at the forefront of the new ICE age (Internal Computed Engine – ICE) that requires semiconductors as the driver of the Electric Vehicle (EV) Industry, so Malaysia can play a complementary role.

Also, Malaysia being a major supply chain hub in the region would further encourage Malaysian companies and industries to undertake investments to supply technology, products and services to these MNCs investing in ASEAN countries.

“The FDI inflows into neighbouring countries should not be viewed negatively as Malaysia stands to benefit from the spillover effects of these investments. Malaysia has one of the most comprehensive ecosystems in the region in the electric and electronics (E&E), Machinery and Equipment (M&E), aerospace, automotive, and medical devices industries, to name a few”, wrote MIDA.

With regards the statement by EuroCham’s CEO, MIDA argues that his views may not necessarily reflect the views of all its members. The Chamber also does not represent all foreign MNCs operating in Malaysia. MIDA has been working very closely with all the international chambers in Malaysia to assist and facilitate the concerns of their members.

In a media release dated 2 March 2021 on its website about both domestic and foreign investments approved in 2020, MIDA quoted YB Dato’ Seri Mohamed Azmin Ali, Senior Minister and Minister of MITI (Ministry of International Trade and Industry of which MIDA is an agency) as saying, “Malaysia recorded a total of RM164 billion in approved investments through 4,599 projects in the manufacturing, services and primary sectors in 2020. These investments are expected to create 114,673 new jobs in various sectors of the economy once implemented.”

Whilst total investments approved in 2020 are down from 5,287 projects with investments worth RM211.4 billion were approved in 2019, however MIDA attributes this drop as being due to declines in the services and primary industries sectors due to declines in global demands due to the pandemic and the series of Movement Control Orders (MCOs) to contain the pandemic.

In 2020, domestic direct investments (DDI) accounted for the bulk of the total approved investments with a contribution of 60.9% (RM99.8 billion), while foreign direct investments (FDI) made up the remaining RM64.2 billion (39.1%).

Whilst RM64.2 billion (US$15.55 billion) inward FDI into Malaysia could be higher, however it certainly is around six times the US$2.5 billion (RM10.32 billion) which UNCTAD estimated for Malaysia in 2020, and RM164 billion in both approved domestic and foreign investments approved in 2020 despite the ongoing pandemic is not bad, really.

More particularly Amongst high-value investments approved in 2020 were Lam Research Corporation, whose over 65,000 square metres facility is due for completion this year, will supply innovative wafer fabrication equipment and services to the semiconductor industry.

British medical technology company Smith+Nephew’s 23226 square metre in Batu Kawan will support its orthopaedics franchise throughout the Asia Pacific.

US-based Keysight Technologies’ new regulatory test laboratory in Penang will provide accredited electromagnetic compatibility testing for manufacturers of electronic devices and mission-critical industries across wireless communications, IIoT, automotive, healthcare and medical applications.

Medical technology company B.Braun’s 193,285 square meters facility in Penang will expand its testing capabilities for healthcare solutions related to intravenous access, surgical technologies, central venous puncture and pain control.

Bosch will begin construction of its facility this year and when completed in 2023, it will be Bosch’s first of its kind facility in South East Asia to conduct final testing of semiconductor components and sensors manufactured by Bosch Automotive Electronics’ fabrication plant Dresden, Germany.

US-based DexCom Inc’s proposed manufacturing facility in Batu Kawan, Penang will be its first facility outside the United States to produce continuous glucose monitoring systems for diabetics. DexCom expects its facility to create jobs, including in manufacturing, facilities management as well as manufacturing-related research and development activities over the next 10 years.

Multinational professional audio products and musical instruments producer Music Tribe will expand its operations by establishing and Industry 4.0-driven, fully robotised manufacturing facility in Kulim Hi-Tech Park, Kedah, due to be completed expectedly this year.

Construction of US-based Ultra Clean Holdings Inc’s  27,871 square metre facility in Batu Kawan, Penang began last year and it provide jobs for 650 persons over the next five years. The company is a leading developer and supplier of critical subsystems, ultra-high purity cleaning and analytical services primarily for the semiconductor industry, and it expects that its facility will link across Malaysia’s established electrical and electronics supply chain.

Speciality glass manufacturer, Nippon Electric Glass (Malaysia) Sdn Bhd in Shah Alam, Selangor has expanded the group’s manufacturing capacity of speciality glass, including of high-grade pharmaceutical glass tubing used for pharmaceutical containers such as tubes and vials by about 1,000 tons per month, about a 30% increase the company’s production capacity, especially during the pandemic.

The Germany-based life science company, the Eppendorf Group produces testing laboratories and test kit manufacturing facilities and its new office in Petaling Jaya, Selangor features a fully equipped demonstration area, a comprehensive on-site service and repair department as well as application laboratories and testing areas. The integrated centre will be home to its shared services hub, also covering functions such as IT, human resources, as well as finance and control of the operations in the Asia Pacific (excluding China),  the Middle East and Africa.   

Malaysia-wide integrated logistics services company GDex began the expansion and diversification of its domestic and international logistics services to business-to-business, business-to-consumer and consumer-to-consumer markets in Malaysia on 1 November 2020 to cater to the booming e-commerce market in Malaysia. The company also expects its expansion to create 1,000 new jobs.

Turning to some recent specific foreign investments, in a media release on 14 January 2021, MIDA reported that the Volkswagen Group had set up its new regional parts distribution centre in Port of Tanjung Pelepas in Johor and that the 50,000 square metres strategically located facility would store and supply up genuine spare parts for the group’s brands of passenger cars such as Audi, ŠKODA and Volkswagen, as well as Volkswagen commercial vehicles in 21 markets across the Asia Pacific region.

On 18 January 2021, MIDA announced that Japanese Conglomerate, the Sankyu Group would build its first Human Resources Training Centre outside of Japan in the Medini Central Business District, Iskandar Puteri, Johor. The centre due to begin operations in 2022 will be amongst its global centres to provide training for the groups diverse personnel worldwide. Sanku has over 30,000 employees globally and 41 overseas subsidiaries. Earlier in August 2020, Sankyu announced that it would build a logistics centre in Port Klang, Selangor which would be the hub for shipments from Japan and East Asia transiting to the Middle East and Northern Europe.

Also on 18 January 2021, MIDA announced that it had signed a Memorandum of Understanding (MOU) with AmBank to offer Small and Medium Enterprises (SMEs) and Mid-Tier Companies (MTCs) the opportunity to be part of MIDA’s Smart Automation Grant (SAG).

This partnership aims to help companies refine their knowledge particularly SMEs and MTCs on matters relating to automation and digitalisation. AmBank will be undertaking a series of simulation trainings and classroom sessions that are specifically designed to help companies identify business pain points and prioritise automation and digitalisation solutions.

“Understanding the needs of investors, SAG will not only improve Malaysia’s industrial competitiveness and capabilities but also reduce our reliance on low-skilled foreign workers while creating new job opportunities in high value-added sectors. We trust that this partnership will result in driving Malaysia’s businesses and accelerate economic growth towards continuous adoption of automation and digitalisation” said Dato’ Azman Mahmud, Mida Chief Executive Officer.

The SAG initiative is part of the RM100 million allocation approved within the National Economic Recovery Plan or PENJANA. This grant will be awarded to eligible SMEs and MTCs on a matching basis or 50 per cent of total eligible expenditures, up to a maximum grant cap of RM1 million per company.

On 26 January 2021 MIDA wrote that SK Nexilis, a copper foil producer for electric vehicle (EV) battery manufacturer SKC, announced its first overseas production base to be in KKIP Industrial Complex, Kota Kinabalu, Sabah, Malaysia.

With proposed investments of around South Korean Won (KRW) 650 billion (RM2.3 billion), SK Nexilis looks to construct a copper foil manufacturing facility with an annual production capacity of 50,000 tons.

Construction of the facility is tentatively planed to begin in the first half of this year and commercial operations to begin in 2023. Once operational, the new plant is expected to triple the company’s global copper foil production capacity to about 100,000 tons. This copper foil is used to make batteries.

On 22 February 2021, MIDA announced that it had signed an MoU with CETIM (the French leading Technical Centre for Mechanical Industry) to encourage, promote and facilitate cooperation in the niche engineering and manufacturing technology including in emerging fields such as Smart Manufacturing, Industry 4.0 and Circular Economy.

This partnership is expected to further strengthen Malaysia’s technological ecosystem by attracting quality investments. Both parties will undertake joint initiatives such as applied research activities, training and attachment programmes; exchange technical information and expertise in the research and development of industrial technology; as well as facilitate collaboration with local higher learning institutes and research organisations in the field of industrial development.

On 22 February 2021 MIDA reported that optical sensor producer Leuze electronic GmbH + Co. KG had identified Malaysia for its first production plant in Southeast Asia. During a virtual press conference in January 2021, Leuze officially announce its new manufacturing plant in Malaysia which is currently under construction.

On 24 February 2021 MIDA announced that that Denso Malaysia Sdn. Bhd. a subsidiary of Denso Corporation, Japan, a leading global mobility systems and components supplier will be expanding its production capacity in Selangor, Malaysia in an RM160 million investment project which had been approved by MIDA and is scheduled to commence in April 2021. Denso Malaysia’s product portfolio   includes air conditioning systems, radiators, engine control units, airbag electronic control units, electric power steering and other products.

In recent years, electronic controls have been increasingly adopted in various vehicle systems . T he semiconductors ’ performance evolves continuously to enhance the safety standards of growing demand s for semi conductors to full autonomous electric vehicles.

Dato’ Azman Mahmud, Chief Executive Officer of MIDA, expressed “We are honoured ” to be selected as the country outside Japan to produce the advanced product s as a result of continuous research and development (R&D). Moreover, we acknowledge the operational expenditure of over RM20 million in the next five years would benefit the local business ecosystem, from insurance, legal, banking, information and communication technologies (ICT) as well as transportation industries”.

On 26 February 2021, MIDA announced that global speciality chemicals and performance materials company Cabot Corporation will continue its strategic investments to expand its manufacturing as well as research and development (R&D) capabilities at its plant in Port Dickson, Negeri Sembilan, Malaysia.

Cabot had announced the launch of its Engineered Elastomer Composites (E2C) solutions in 2020 as part of its efforts in raising the bar within the tire and industrial rubber industry. To further expand manufacturing of its E2C solutions, Cabot is increasing its staff strength by more than 30% as well as installing enhanced digital controls and automation systems. The company is also signing a long-term extension and expansion of its land lease in Port Dickson.

Cabot’s Port Dickson site has led the industry by developing the first industrial scale, continuous liquid mixing process for natural rubber latex. With Cabot’s expanded R&D capabilities, it will continue to lead and advance rubber technology through specific innovations such as new tools for modelling and optimisation of liquid mixing, novel methods for characterising elastomer composites as well as automation of continuous rubber processing.

On 2 March 2021, MIDA wrote that YAB Tan Sri Muhyiddin Yassin, Prime Minister of Malaysia, received a courtesy call from Nine Dragons Paper (Holdings) Limited led by its Chairlady, Madam Cheung Yan, at his office in Putrajaya today. The meeting was also attended by YB Dato’ Seri Mohamed Azmin Ali, Senior Minister and Minister of International Trade and Industry (MITI); YBhg. Dato’ Azman Mahmud, MIDA Chief Executive Officer and Mr. Zhang Cheng Fei, Deputy CEO of Nine Dragons Paper.

In welcoming the Group’s latest overseas venture into Malaysia, YAB Tan Sri Muhyiddin acknowledged that, “As of December 2020, a total of 572 manufacturing projects with China interest with investments of RM78.61 billion have been approved by MIDA. Nine Dragons Paper (Holdings) Limited and its subsidiaries are among the major paper and paperboard producers in Asia, engaging in the manufacturing of containerboard products, including linerboard, high performance corrugating medium, coated duplex board and carton box.”

The Group’s investments in Malaysia consists of two (2) manufacturing facilities, namely ND Paper (Malaysia) Sdn. Bhd. in Bentong, Pahang involving the acquisition of an existing pulp and paper mill with total investment value of RM1.2 billion; and ND Paper Malaysia (Selangor) Sdn. Bhd. in Banting, Selangor with investment value of RM4.2 billion that will focus on test liner, kraft liner, corrugated medium paper, paper and pulp. These projects will create a total of 2,180 job opportunities of which, nearly 90% will be Malaysians. The project in Banting, Selangor is expected to be in operation by 2022.

Both factories will be fully automated and equipped with Industry 4.0 technology such as system integration, Internet of Things (IoT), big data analytic and cloud computing from Europe and China.

On 8 March 2021, MIDA announced that its dedicated unit, the Domestic Investment Coordination Platform (DICP), in facilitating local SMEs to develop further, has enabled a Malaysian financial technology (Fintech) start-up, Neurogine Sdn. Bhd. to conclude a deal to acquire Hadigy Limited, an investment holding company based in the UK.

The shareholders’ agreement would allow Hadigy to acquire a 30% stake or 1.929 million ordinary shares of Neurogine which specialises in the digitalisation of mobile banking, mobile payment and digital asset solutions.

“Amongst the major challenges for SMEs and start-ups to scale up include limited access to funding. MIDA has taken a proactive approach through DICP in supporting local companies, SMEs and start-ups in addressing the funding gap. The presence of foreign funders such as Hadigy Limited in this space would certainly help in accelerating the adoption of technology and stimulate the growth of fintech services in Malaysia,” said Dato’ Azman Mahmud, MIDA CEO.

Domestic Direct Investment

Most of the above has dealt with issues and examples of approvals of FDI but MIDA regards domestic direct investment (DDI) as equally important.

“While inflows of FDI are crucial for the continued development of the economy, the role of DDI is not to be underplayed, as outlined in the 11th Malaysia Plan”, wrote MIDA.

“Domestic investments will continue to assume a leading role in the growth of the economy. Amongst the major strategies include creating Malaysian conglomerates by identifying potential companies to provide the necessary support; harnessing on outsourcing opportunities created by MNCs operating in Malaysia; enhancing the current incentive schemes to assist Malaysian companies to scale-up; and intensifying technology acquisition by Malaysian-owned companies”, MIDA concluded.

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