THOMAS WHITE INTERNATIONAL
Capturing Value Worldwide
KEY TAKEAWAY
Like the colonial
shackles that the
country shook off,
Malaysia has long
since overthrown
its dependence on
commodities and
has diversified into an
industrialized nation,
with a gross domestic
product (GDP) that
has grown at a rate
of almost 8% to 9%
from 1991 to 1997. The
Chinese, one of the
wealthiest communities,
comprise around 23% of
the population.
COUNTRY PROFILE | SEPTEMBER 2014
Malaysia: Manufacturing Drives Growth
The saga of its transition from a commodities producer to an industrialized nation
Sandwiched between immense
MALAYSIA AND THE WORLD
stretches of the South China Sea are
Nominal GDP ($) 312 billion
the twin regions of Malaysia, with one
peninsula bordering Thailand and GDP Rank 35/191
Singapore in the east, and the other Per Capita GNI - Nominal ($) $10,400
half neighboring Indonesia and Brunei. Per Capita GNI Rank 88/213
One of Asias most vibrant economies,
Population Rank 43/228
Malaysias 26.6 million populace is
dominated by ethnic Malay who make Geographical Area Rank 67/252
up 60% of the population. The Chinese, Global Competitiveness Rank 20/144
one of the wealthiest communities in Economic Freedom Index Rank 37/178
the nation, comprise around 23% of the
Human Development Index Rank 64/187
population, with Indians forming a tinier
Major Industries Electronics, Palm
section.
Oil, Natural Rubber,
Chemicals, Machinery,
A TUMULTUOUS HISTORY & Tourism
Most likely, Malays arrived on the peninsula in the first millennium BC. Their first cultural contact was with
sea-faring Indians who left behind a permanent footprint on the countrys shores. Centuries of Hindu-
dominated Indian rule followed. Later, Indians also brought with them, the religion of Islam, which
remains the dominant religion in this officially Islamic country.
The nation then was juggled by a series of colonial hands, with the Portuguese, Dutch and later the
English staking claims on the riches of Malaysia. During the initial British rule, many Indians and Pakistanis
were brought over to work in Malaysias tin industry and plantations. Chinese migrants from southern
China also arrived in droves to work in the tin mines of Perak and Selangor. Occupied by the Japanese
during World War II, and then taken over by the British again, Malaysia finally claimed its independence
in August 1957. The path to independence was not easy, although the nation has made rapid strides in
improving the economic and social status of its people. War with Indonesia, coupled with the secession
of Singapore, has caused teething pains for a growing nation.
SYSTEM OF GOVERNANCE
With a constitutional monarchy, Malaysias current head of state is Sultan Mizan Zainal Abidin, who
became the countrys 13th king in 2006. However, real authority is vested with the prime minister, who
at present is Najib bin Abdul Razak. His predecessor, Mahathir Mohamad Badawi, unveiled Vision
2020, an ambitious plan calling for the globalization of Malaysia. With a goal to put Malaysia on the
developed nation map, the plan envisions a Malaysian economy eightfold stronger than that of the
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 COUNTRY PROFILE | SEPTEMBER 2014

early 1990s.

AN ETHNIC DIVIDE

Malaysias tumultuous history has created an ethnically

fractured society. With the Chinese long viewed as the
wealthier community, unrest has sparked among the more
deprived Malays and indigenous peoples. Clashes between
the Malay and Chinese reached their zenith in 1969, which
witnessed large-scale rioting.

Today, the countrys ethnic fusion of Chinese and South

Asians has created a colorful and diverse culture. A rich
kaleidoscope of Chinatowns, Little Indias, Confucian
temples, and Mariamma temples stand amidst the mosques The Leong San Tong Kongsi
that dot this officially Islamic nation. On the surface, these Temple in Penang is a beautifully
communities exist in relative harmony, but racial undertones ornamented Chinese clan house
still smolder. The latest uprising by Indians earlier this year built in 1906.
(2008) is a vivid reminder that diversity and harmony are often separated by a thin borderline. Although
English is one of the official languages, Chinese, Tamil, Malay, and Malayalam are widely spoken.
KEY TAKEAWAY
COMMODITIES TO MANUFACTURING-LED EXPORTS
Mirroring Malaysias
economic transition, Economically, the former British colony of Malaysia had nothing much to boast about except
the country transformed commodities such as tin, rubber, and palm oil which only served to enrich the coffers of its imperial
itself from a low-income master. That was then. Political independence came in 1957 and along with it the freedom to explore
country to a middle- new avenues of economic growth. Like the colonial shackles that the country shook off, Malaysia has
income one, thanks long since overthrown its dependence on these commodities and has diversified into an industrialized
to steady economic nation, with a gross domestic product (GDP) that has grown at a rate of almost 8% to 9% from 1991 to
growth over the last few 1997. The post-war period saw the production of consumer items such as batteries, paints, tires, and
decades. In the three pharmaceuticals. A range of industries emerged, from textiles, rubber and food products, chemicals,
decades beginning in and telecommunications equipment, to electrical and electronic machinery/appliances, car assembly
1970, Malaysia registered and some heavy industries, such as iron and steel. According to an economic overview report on
an average growth rate Malaysia published by the government of Australia, manufactured goods accounted for 67% of the
of around 7%, despite countrys exports in 2012, while electronic and electrical products contributed 32.9%.
the Asian financial crisis
of 1997-98. Today, Malaysia is one of the biggest exporters of semiconductors and electronic goods and devices.
With about 40 semiconductor companies currently operating, the semiconductor industry contributes
about 30% of Malaysias total manufacturing sector output. International multi-national companies have
set up assembly and testing units in Malaysia.

Despite the transition to a manufacturing-based economy, Malaysia, along with Indonesia and
Thailand, still account for 72% of the worlds natural rubber production. The country is also the worlds
second largest exporter of palm oil. Significant reserves of oil and gas have also been found, with
current oil reserves estimated at around three million barrels. Oil production occurs near Peninsular
Malaysia as well as the regions of Sabah in east Malaysia and Sarawak. Natural gas production has
been steadily rising, with several companies engaged in its production.

Mirroring the economic transition was Malaysias transformation from a low-income country to a
middle-income one, thanks to steady economic growth over the last few decades. A World Bank report
points out that real growth in GDP per capita has averaged over 3.6% since 1980, rising to $11,700 in
2013. In the three decades beginning in 1970, Malaysia registered an average growth rate of around
7%, despite the Asian financial crisis of 1997-98. Even the Asian crisis was handled well by Malaysia as it
implemented a number of sweeping reforms, in contrast to the inadequate responses of its neighbors
Thailand and Indonesia. The restructuring of the nations banks involved injecting billions of ringgit -- the
Malaysian currency -- into their coffers in return for agreeing to merge with bigger, well-capitalized

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 COUNTRY PROFILE | SEPTEMBER 2014

banks. The clean-up also involved putting controls

on capital flows and foreign exchange and the
introduction of a dollar peg for the ringgit.

However, for the export-dependent economy,

which has the U.S., Japan, and Singapore as its
main trading partners, the financial crisis of 2009
came as a rude shock. The economy slumped
1.7% in 2009, though it bounced back the next
year with 7.2% growth, thanks partly to the
governments $16-billion economic stimulus and
the nascent global economic recovery. Malaysia
grew 5.1% in 2011 and 5.6% in 2012, thanks to
good domestic demand as well as private and
public sector spending, though the external
environment remained weak.

RACIAL POLICIES SAP COMPETITIVENESS

KEY TAKEAWAY Ever since the launch of the New Economic
Policy (NEP) in 1971, the bumiputras (sons of
Though services the soil) who comprise 65% of the population,
contribute more than have continued to enjoy positive discrimination
42% of the countrys Even during bad times, Malaysia stands compared to minorities such as the Chinese (25%)
GDP, most of this activity to gain when the demand for natural and Indians (7%). The rationale given at that point
occurs in traditional rubber, an essential ingredient in tire- of time was that the Chinese and Indians had
services, not in modern, making, goes up. gained handsomely under the British dispensation.
high-margin businesses Initially, the privileges offered ranged from basic
such as technology reservations in schools and entitlement for government jobs to specific employment guarantees and
services where other even equity shareholding stipulations for Malays in publicly-traded companies. It has been pointed out
Asian economies such as that the NEP encouraged crony capitalism by making cheap credit and large contracts available only
India have made much to ethnic Malays. However, despite the disadvantage, non-bumiputra entrepreneurs such as Francis
headway. Moreover, Yeoh and Ananda Krishnan run successful businesses in Malaysia.
the productivity gap
between manufacturing SERVICES SECTOR NEEDS A BOOSTER DOSE
and services in Malaysia
has widened in recent The transition to a knowledge-based economic model is a natural progression in the evolution of any
years. economy. Malaysia, too, has taken baby steps in this direction, though much more still needs to be
done. Though services contribute more than 42% of the countrys GDP, most of this activity happens
in traditional services, not in modern, high-margin businesses such as technology services where other
Asian economies such as India have made much headway. Moreover, as a World Bank report pointed
out, the productivity gap between manufacturing and services in Malaysia has widened in recent
years.

However, Malaysia is trying its best to develop its services sector despite the severe shortage of skillsets
required to deliver high-end services. An electronic business park christened Cyberjaya, a part of the
ambitious Multimedia Super Corridor (MSC), is the crowning jewel in the governments efforts to give
a boost to high-tech services. The initiative seems to have borne fruit, judging by the big global tech
firms and banks that have set up data processing centers and customer service points within the MSC.
Though the jobs created so far are mostly at the lower end of the value chain, software developers
have also set up shop, encouraged by low wages, affordable rent, and tax breaks.

Skilled workers, it is said, are the best resource any country can have. A shortage of skilled professionals
seems to be the key factor which stands in the way of the development of the services sector in
Malaysia. This may sound surprising for a country with a population of 30-million mostly educated and
English-speaking citizens, but the quality of higher education in Malaysia leaves much to be desired

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 COUNTRY PROFILE | SEPTEMBER 2014

despite the government earmarking 20% of its

budget on education.

The bulk of Malaysias workforce consists of

low-skilled Indonesian immigrants who produce
cheap goods as well as Malaysians who do back-
end jobs at data processing centers. Moreover,
Malaysia seems to be losing out to Vietnam and
Indonesia on labor costs. Thankfully, Prime Minister
Najib Razak seems to have a good vision for
the economy, aimed at the creation of millions
of middle and high-income jobs. Still, Malaysia
may have to go back to its schools to address
the shortage of skilled labor and to bring back
investor interest of the kind last seen in the 1990s.

The Najib Razak administration which has been

at the helm of affairs in Malaysia since 2009 has
focused its attention on reforming the services
sector. This, included the scrapping of 30% equity
KEY TAKEAWAY ownership requirement for bumiputras or the
ethnic Malays and other such groups in 27 service
The government is The majestic Petronas twin towers sub-sectors. New licenses were issued to foreign
focused on developing symbolize Malayasias towering commercial banks and insurance companies.
services sectors such aspirations.
as tourism and its Efforts are being made to encourage private-public
corollary, medical partnerships in businesses to fast track Malaysias economic growth. The government is also focused
tourism, offering quality on developing services sectors such as tourism and its corollary, medical tourism, offering quality health
health care, banking care, banking on in its reputation as a low-cost alternative to Singapore or Hong Kong. Education,
on in its reputation as widely seen as the economys Achilles heel, has received some attention as well, though much more
a low-cost alternative remains to be done. Thanks to liberalization in the sector, foreign universities from Australia and Britain
to Singapore or Hong have set up full-service campuses in the country, competing with colleges and universities established
Kong. Education, widely by Malaysians. Here too, lower fees relative to western universities attract people from elsewhere in the
seen as the economys Asian region to seek education in Malaysia.
Achilles heel, has also
received some attention As a World Bank report on Malaysia pointed out, skilled workers and professionals are integral to
though much more the development of modern manufacturing and services sectors. Encouraging productive foreign
remains to be done. companies to set up their manufacturing bases in the country and attracting firms to develop the
services sector to its full potential would increase productivity in both sectors. More workers would need
to be hired and the wages would go up substantially, which would also help Malaysia escape the
middle-income trap.

BANKING ON DOMESTIC DEMAND, NATURAL RESOURCES

For all the progress the country has made on other fronts, Malaysia primarily remains an export-oriented
economy with a focus on manufacturing electronic goods. The obvious consequence of this over-
reliance on exports is that a slowdown in its overseas markets would derail the countrys economic
growth as seen during financial crisis of 2009. But Malaysia has a leg-up over others as the economy
can still fall back on natural resources such as palm oil, which is gaining in value thanks to increasing
prosperity in India and China and consumer preference for healthy vegetable oils. Malaysia also stands
to gain when the demand for natural rubber, an essential ingredient in tire-making, goes up.

As well, Malaysia enjoys a unique advantage compared to its neighbors such as Hong Kong and
Singapore when it comes to size. The large domestic market offers a cushion when the external
environment gets tough. Domestic demand, spurred by consumer spending, helps to keep the boat
steady even in rough weather. As an Asian Development Bank report pointed out, Malaysia is a middle-

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 COUNTRY PROFILE | SEPTEMBER 2014

income country with a record of good economic performance and poverty reduction. Domestic
demand and investments have been driving the countrys growth over the years.

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International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with
respect to, a particular security, issuer or market on our own behalf or on behalf of a client account.

FORWARD LOOKING STATEMENTS

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differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White
International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.

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 THOMAS WHITE INTERNATIONAL
Capturing Value Worldwide
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Thomas S. White, Jr.,
Portfolio Manager
Are You Positioned for
a World of Opportunities?
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