International trade was one of the early victims as Covid-19 took hold around the world just over a year ago, although it is now leading much of the recovery as public lockdowns start to ease and governments roll out huge fiscal packages.
Southeast Asia’s exporters were early beneficiaries when China was first to exit its own lockdown last year and the region’s economies are hoping to maintain their gains as economic activity picks up further.
That was one of the main messages from a meeting in Fujian province this month between Chinese Foreign Minister Wang Yi and his Malaysian counterpart Hishammuddin Hussein in which both men looked beyond the pandemic to a period of renewed trade and investment. The rebound from the worst days of the virus is already well underway with Malaysia’s trade with China surging by nearly half in February in year-on-year terms to RM28.76 billion ($6.96 billion). WiC talked to Andrew Sill MBE, head of commercial banking for HSBC Malaysia, for more on how trade ties have been deepening between China and Malaysia.
What are Malaysia’s main exports to China and how is the trading relationship changing?
China was Malaysia’s largest trading partner for the 12th consecutive year in 2020 and China is Malaysia’s largest export destination, with exports expanding by 12.5% to RM158.6 billion last year, which was the highest value ever.
Most of the growth came from exports of iron and steel, sales of electrical, electronic and other manufactured goods, and shipments of metals, palm oil-based products, rubber, paper and pulp.
Overall, sales to China contributed 16.2% of Malaysia’s total exports and companies here are confident that sales will grow further in future.
HSBC’s Navigator: Growing with China report, published last November, highlights that sentiment very clearly: respondents from Malaysia were the most bullish in the survey with 93% expecting to increase their supply chains in China over the next two years and 88% bullish on growing sales or exports to China.
Among the main reasons are increasing speed-to-market and growing consumer demand in China.
China was also Malaysia’s largest source of imports, accounting for 21.5% of total imports in 2020, worth RM171.18 billion. The pandemic did have an impact, with imports from China contracting by 2.6% compared to 2019, but the longer-term trend looks healthy for sales of goods such as electrical and electronic products, as well as machinery, equipment and parts, and chemicals and chemical products.
Overall, the upbeat outlook reflects the strong bilateral trade between the two countries. HSBC’s expertise in facilitating international trade, coupled with our long history in both countries, also means that we are ideally positioned to support our customers in this area.
What type of companies does HSBC work with in supporting cross-border trade?
HSBC works with multinational subsidiaries in 55 countries and territories, including markets like Malaysia. That includes subsidiaries of Chinese companies, who we support with regulatory and market guidance post-entry to the Malaysian market. Other assistance includes working with government agencies like MIDA and InvestKL to help the subsidiaries get the best experience in Malaysia; product support where we leverage the relationship with company headquarters; and new digital solutions, which allow our clients fuller visibility and control over their subsidiaries and their finance operations.
Malaysia is a rising force in the electronics supply chain. Which parts or products does it make?
The E&E (electrical and electronic products) industry in Malaysia is broad, with different applications such as automation, plastics, electronics, software development and packaging. Some of the notable mentions are microelectronic components (microchips, printed circuit boards), consumer electronics (audio-visual products and storage devices) and electrical products (household appliances).
Malaysian firms are also active in industrial electronics (telecommunications equipment) and renewable energy (solar panels and solar cells).
With this broad base, Malaysia has emerged as one of the top 20 trading nations in the world in which E&E exports accounted for RM372.7 billion or 37.8% of its total exports in 2019.
Since the 1990s Malaysia has been one of the world’s major exporters of semiconductors and memory chips, becoming a global hub for back-end semiconductor output, especially Penang, which is one of the leading centres for microelectronics assembly, packaging and testing. This has helped to position Malaysia in the global supply chain of electronics manufacturing, outsourced semiconductor assembly and testing, and R&D.
And over the broader E&E value chain, Malaysia is well diversified with different manufacturers at different points of the supply chain. Of course, there is room for growth, with the 12th Malaysia Plan prioritising progress towards a knowledge-based economy that helps the country move up the value chain. That effort will be helped by renewed interest from Chinese investors in Malaysia, especially in the sizable E&E supply chain that already produces vacuum cleaners, memory chips, solar panels, printed circuit boards and processor chips used in next-generation computers and gaming consoles and more.
Longer term, could the Sino-US trade and tech rows see more factories built locally by international firms as alternative locations to China, or as part of the ‘China plus one’ strategy?
We have seen an increase in the number of queries from Chinese companies interested in investing in Malaysia, in particular in sectors such as infrastructure, construction, electronics, e-commerce, education, renewable energy, and paper and printing. But there are reasons for international corporates to invest in Malaysia too. This year’s national budget confirmed incentives for non-Malaysian companies to invest through special tax rebates and the rollout of the Regional Comprehensive Economic Partnership (RCEP) should prove to be another pull factor in trade terms.
What sectors are getting most of the Chinese investment?
The main recipient of Chinese investment is still largely the E&E sector, although Chinese companies are investing in a wide range of industries such as e-commerce, education, renewable energy and paper and printing.
In addition many of our Chinese clients are in the construction sector, with projects in railways, ports and residential and commercial property.
Penang is still one of the prime locations for investment. It has been described as the Silicon Valley of the East since the 1970s, welcoming early adopters like Dell, Motorola and Intel. That has helped it to develop a competitive edge in its skilled workforce, robust supply chain and top-notch infrastructure, making it one of the most attractive destinations for the China Plus One strategy.
In 2020 there were 18 companies from China investing there, for instance, mostly in precision engineering and plastic engineering, EMS, machine and metal parts manufacturing, and injection moulding.
In fact, as of September 2020, China topped the FDI rankings in all of Malaysia’s economic sectors, with much of the investment concentrated in five main trade and investment corridors. For instance, the Northern Corridor (Penang) specialises in technology/E&E. The Southern Corridor (Johor) focuses on manufacturing and the East Malaysia Corridor (Sabah and Sarawak) prioritises agriculture, oil and gas, and palm oil.
In 2021 the Malaysian government is continuing with some short-term stimulus measures in response to the economic impact of the pandemic. But the overarching priority is going to shift from short-term damage control to sowing the seeds of a nascent recovery. And here Malaysia is well positioned from an export perspective, due to its high share of electronics and semiconductor production. Companies have also gained critical market share in some types of chip exports (such as analog chips), thanks to fresh FDI around Penang/Kedah.
The Malaysian market is a battleground in areas like cloud computing, digital payments and e-commerce. What scope is there for local firms to compete with the Chinese majors?
While the Chinese tech giants are market leaders in their respective segments, Malaysian companies have a very important role to play in the local tech ecosystem. Firms like eGHL, iPay88, Lazada and iflix are pioneers in their respective fields in Malaysia and they have been able to leverage their knowledge of the landscape to grow rapidly into local leaders. Their sound infrastructure and rapidly growing customer bases have made them attractive acquisition targets for China’s tech companies as they expand into Southeast Asia too. Two examples are Alibaba’s acquisition of Lazada in 2016 and Tencent’s acquisition of iflix in 2020.
Beyond acquisitions, there is strong interest from the Chinese tech giants in collaborating with local firms as well. Alibaba has combined with Touch ‘N Go to launch the Touch ‘N Go digital e-wallet, for instance, while Tencent Cloud is working with Green Packet Berhad to set up internet data centres.
A huge reason for the success of the local tech firms is the support on offer from the Malaysian government and agencies such as the Malaysia Digital Economy Corporation (MDEC). Various initiatives have been launched to encourage local entrepreneurs to promote the digital economy and new communications technology. Of course, this can also provide opportunities for the Chinese tech giants, who are keen to expand their own footprint. But they aren’t always keen on building everything from the ground up, which creates opportunities that are being very capably filled by local firms. That can lead to plenty of chances down the line for them to collaborate with the Chinese tech majors, not just compete with them.
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