A Time of Opportunity that Penang Must Not Miss

By Dato' Seri Lee Kah Choon

August 2021 FEATURE
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ON THE GLOBAL stage today, the attention-grabbing issues are the technology and trade wars between China and the US.

The Biden administration is set to continue the escalation of the disputes, surpassing the animosity during Trump’s administration. Beyond the tensed relationship, the world’s two biggest economies are recovering from the pandemic.

The US’ GDP growth was at a respectable 6.4% in Q1 of 2021, with the full year growth forecasted at 7% by the International Monetary Fund (IMF). The US economy is also seeing an accelerated hiring rate, too.

On the Chinese side, the shortage of raw materials and semiconductor components has somewhat dampened the country’s manufacturing activities. Nevertheless, the general trend still points towards a recovery. In fact, the Chinese government has pegged GDP growth at a comfortable 6.5% in 2021.

On the pandemic side, the high vaccination rate in the US has boosted business confidence as Covid cases are brought under control. The same has happened in China as well.

However, the same cannot be said for the large developing countries, such as Brazil, India and Indonesia. The outbreaks in these countries are unleashing devastating damage to their economies and lives alike.

Malaysia Losing Opportunities

Malaysia too is mired in pandemic containment. Economic activities, especially in the service-related sectors, have been shattered, and there is no clarity as to when activities in these sectors will pick up again.

On the manufacturing front, factory activities have also been affected during the various MCOs put in place since March 2020. As a result, the country’s growth rate was adjusted downward from 6.5% to 4% lately. At the same time, it is expected that Malaysia will be running a deficit budget of at least 6.5% for 2021, if not worse.

On the foreign direct investment front, Malaysia’s traditional drawing power had always been her political stability. However, this traditional advantage has been seriously undermined by the fragmentation of the ruling elites whose sole focus is currently their mere political survival.

The pastime of politicians nowadays is the alignment of personal interests instead of the greater interests of the country. The decision-makers of government agencies and GLCs are appointed not on their capabilities but on their ability to provide political support to keep the government in power.

This has seriously shaken the business community’s confidence in the traditional political stability, and in the leaders’ ability to ensure Malaysia remains competitive in the challenging global environment.

This shortcoming is made even more telling in the failure of the government to contain the pandemic. According to Bloomberg’s Covid resilience ranking, Malaysia has plunged from 16th to 51st placing out of 53 countries surveyed.

The various lockdowns since March 2020 and the inability to surmount the pandemic challenges have seriously eroded the confidence of investors who are already here. The chorus of dissatisfaction and frustration that has been aired openly by business chambers and foreign missions about how the government handles the pandemic challenges are but just a tip of the iceberg.

It goes without saying that this negative sentiment will prevail for potential investors too, which will make the effort of attracting investment harder in the years to come.

While Malaysia focuses on political skirmishes, the confluence of the pandemic and trade war is shaping a new world order.

As more automation and digitalisation are adopted in the work place, more jobs are expected to be replaced by robots and artificial intelligence technology. At the same time, with greater efficiency and productivity, less traditional jobs will be created.

While the pandemic has accelerated the adoption of these new technologies, a few new trends have emerged:

  1. Shifting of human resource to adopt these new technologies means new skills need to be acquired by the workforce.

  2. Cost equalisation of production locations is expected to intensify. The weightage of determinants of investment location will shift from land and labour costs towards the availability of talent and access to supply chains.

  3. More manufacturing and supply chains will move nearshore and on-shore for political considerations, and to ensure supply chain security.

Regionalisation will be more prevalent going forward. Examples are the North American Free Trade Agreement (NAFTA) that involves the US, Canada and Mexico; and China with adjacent Southeast Asia countries such as Myanmar, Vietnam, Laos and Cambodia.

The international border lockdown initially opened up opportunities for Malaysia to tap into the disrupted supply chain but being prolonged, this shuts the window of opportunities for Malaysian companies at a time when alternatives appear and need to be embraced.

“Made in China 2025” strategy is a great opportunity for Malaysian companies to be part of the supply chain, but a serious threat is at hand for Malaysia if the country in actual fact misses the boat. Once the post-Covid supply chain and ecosystem stabilises, it will become very difficult for outsiders to get into the act.

A Great Reset for Penang

The pandemic and the trade war present Penang with great opportunities as well as dangers. Penang is well positioned to seize the opportunities by tapping into disrupted supply chains that were closed to us previously. However, time is of the essence; this window of opportunity is closing fast.

While Penang must continue to attract high quality investments to create high income jobs, it must also support homegrown entrepreneurs to manufacture products that can compete globally, using its manufacturing excellence in the E&E industry as the base.

In other words, apart from being a global manufacturing hub in the E&E industry, Penang has to be an international innovation hub as well.

To achieve this vision, the state should set up a billion-Ringgit industry investment fund to invest in these innovating businesses and nurture them to become global players. For a Penang global innovation hub to succeed, the current talent pool is clearly too small. A net growth of 30,000 knowledge workers per year to the State’s talent pool is a must.

To thrive on the great reset, Penang needs bold initiatives to achieve a different outcome. “The same old, same old” mentality is not an option in these challenging times.

Whether Penang progresses or regresses in this Great Reset will depend on the strategic decisions the State Government makes today.

Dato' Seri Lee Kah Choon

is Special Advisor to the Chief Minister of Penang on economic affairs and a director of InvestPenang. He is also Distinguished Adjunct Researcher of Penang Institute.