One trillion and counting

The Malaysian Government's recent announcement that the country's total trade for 2006 had passed the RM1 trillion mark whipped up quite a bit of excitement. To give the average Malaysian a general idea of how much that amount could actually buy, local newspapers equated it, among other comparisons, with the cost of purchasing 1,000 units of the Airbus A380. Majella Gomes writes

According to official statistics, Malaysia exported RM588.949bn worth of goods while its import bill for 2006 totalled RM480.493bn. Total trade value was RM1.069 trillion (£1:RM6.5; US$1:RM3.5), an unprecedented amount that was 10.5% higher than the 2005 figure.

Malaysian mainstream media had preceded this announcement with reports of the state of the nation's economy, claiming that income per head, for instance, had risen 66.9% over the past seven years, from RM12,079 in 1998 to RM18,039 in 2005. The GDP recorded a healthy 52% spike, from RM182.2bn in 1998 to an estimated RM277.2bn in 2006. Foreign direct investments too showed an increase of over RM4bn.

However, once the figures had sunk in, reality did too, and the questions on many minds were: how did they do this, and - more importantly - can it be sustained?

Reaching the magic trillion mark was the result of a number of internal and external dynamics. Externally, the world in general demanded more, which accounted for the increase in exports of electrical and electronic (E&E) goods. The global appetite for electronic consumer products like digicams, MP3 players, laptops and mobile phones grew in 2006.

RM281.006bn worth of E&E products was exported from Malaysia last year. This constituted 62.2% of all manufactured goods, which, at 76.7%, was the largest slice of the export pie. The total amount of exported manufactured goods was RM451.747bn.

They may be smiling, but E&E manufacturers cannot afford to laugh all the way to the bank just yet. The 'what if' question should be uppermost in their minds right now: what if there is a drop in global demand? Malaysia's biggest E&E markets are China, Hong Kong, Japan, Singapore and the US. Together, these five countries bought up nearly 70% of Malaysia's E&E products.

With relatively few customers making up the bulk of the clientele, even a slight decrease in demand in the Chinese, Japanese or US markets may impact significantly on Malaysian manufacturers.

'If there is a drop in demand, the E&E industry will decline because Malaysia produces primarily components, not finished goods,' says Julian Ding, director of First Principles, a business and economic consultancy.

He pointed out that the numbers reflect the performance of large companies, most of them multinationals, which produce E&E components in Malaysia to feed their subsidiaries abroad. 'We are in fact losing out to countries like Vietnam and China,' Ding adds. 'They have more effectively widened their niche in the value chain in a shorter time by producing finished goods, not just product components.'

Hesitant

Many observers are of the opinion that while the Malaysian Government does recognise the need to move up the value chain, the manufacturers themselves are hesitant because of a combination of factors. For a number of reasons, producers are very wary of taking risks.

Supporting this observation, Yeo Teck Hooi, Senior Vice President of investment bank Hwang DBS (M&A Advisory), says: 'Malaysians in general exhibit short-term investment behaviour, as opposed to people elsewhere who tend towards long-term investment when they set up businesses.' Like Ding, Yeo attributes this in part to the way regulations are made in Malaysia.

While manufacturing gave a stellar performance in 2006, the global rise in petroleum prices also helped boost the Malaysian economy. From January to December 2006, more than RM32.5bn worth of crude petroleum was exported. Together with LNG (RM23.2bn) and refined petroleum products (RM22.05bn), it made up approximately 13.5% of exports.

Palm oil and crude rubber too enjoyed higher demand in 2006, compared with previous years. Surprisingly, even with the anti-palm oil lobby, exports of this commodity to the US registered a 21.1% increase, nudging it past the RM1.6bn mark for the first time ever. Besides the US, Malaysia's main markets were the EU, Japan, China and its ASEAN neighbours.

Considering its main markets and exports, both Ding and Yeo agree that Malaysia may be vulnerable to even a regional recession. This may mean that its citizens will not be reaping the benefits of their labour as soon as they would like.

'It is likely that the Government will disburse some of the profits through bonuses and increases in salaries of civil servants,' says Yeo. 'But the current Prime Minister differs from his predecessor in that he wants to reduce the budget deficit, so he may channel more funds towards servicing the country's borrowings and, in doing so, make it easier to raise funds in the future.'

What can be done to ensure the figure stays above the trillion mark? 'Long-term, the focus may have to shift from manufacturing to services,' says Ding. 'This is one way of moving up the value chain without incurring major capital investment.'

One area that may already be making inroads - albeit quietly - is tourism. Tourism Malaysia, the government body that oversees the development of the local tourism industry, has been increasing its efforts lately to promote the country as a multifaceted destination, beyond the holiday staples of sun, sea and sand.

In the short-term, however, analysts generally agree that the government machinery could do with some adaptation. While the Malaysian External Trade body (MATRADE) has been doing good work abroad, making inroads and providing information for Malaysian businesses looking for new markets, Malaysia's sometimes arbitrary internal regulation could benefit from review.

This tends to stifle business, especially when enforcement is similarly arbitrary. Improving on the trillion figure means finding ways of increasing competitiveness in the international arena. Government intervention is usually bad news for business, even when it is instituted with the best intentions. Done arbitrarily, it completely snuffs out the spirit of enterprise on which commercial success is built, and should therefore be avoided at all costs.

Majella Gomes is a business writer with a background in corporate communications and IT.