Published by Malay Mail, image from Malay Mail.
The post-Covid 19 supply chain landscape offers us an opportunity to take advantage of the coming reconfiguration — one that strikes the balance between protectionism and the pre-Covid situation.
This is especially true of manufacturing, which is one of our economy’s top three foreign exchange earners and exporters.
With the Trump administration becoming all the more gung-ho about “reshoring” opportunities, i.e. the pulling out of American manufacturing operations based in China post-Covid 19 back to their home base, we should also be thinking now about how we could tap and plug into the changing global supply chain landscape.
Indeed, Malaysia’s positioning as a pivotal and integral player in the global supply chain of manufacturing through the electrical and electronic (E&E) sector means we are well-poised to:
Leverage on relocation by multinational companies (MNCs) from China (and elsewhere) which has already happened as a result of the US-China trade war — with even Chinese companies looking here as an alternative base; and at the same time
Move towards a much more and highly integrated production networks across the Asia-Pacific region by getting our base transformed into original design manufacturing (ODM) with homegrown design and specifications as well as original brand manufacturing (OBM) with homegrown “Dell and Intel”.
According to the Oxford Business Group, there would be long-term shifts in the global supply chain. Manufacturing activities will have to undergo a shift that is neither protectionist nor too dependent on a geographical agglomeration outside the country.
In either case, the manufacturing supply chain is too dependent on a single source — whether domestically or externally.
Rather, the argument is that the MCO/Covid-19 has exposed our supply chain as not diffused or diversified enough. Post-MCO/Covid-19, it has to be even more extensive and expansive than ever before. This applies domestically as well as externally (regionally, globally).
We should be increasing and not reducing inter-dependency.
This would still keep the supply lines and global value chain and logistics open as much as possible despite the prolonged impact of Covid-19.
So, for example, plastics manufacturers can still produce fibre-reinforced plastics (FRP) materials classified under essential services such as Covid-19 clinical testing stations.
Even import-substitution industrialisation (ISI) can now be given a new twist, whereby we endeavour to produce what we need but also exporting the surplus as well as re-exporting the value-added components (semi-finished) of the product.
Tariffs and non-tariff barriers (NTBs) such as quotas (quantitative restrictions) will not be deployed. In place would be government incentives and subsidies such as enhanced or accelerated capital allowances tax.
In terms of FDI, we need to ensure that our SMEs can take advantage of the relocation by tapping into the supply chain (“crowding-in), and that knowledge transfer is localised in the long-term through digitalisation, sub-contracting, research and collaborations.
Externally on the other hand, we can also provide competition to other countries by offering more in terms of both quantity and quality of the same products, e.g. clinical gloves manufactured during the MCO period.
With this, we can increase our market share, and in turn, this would also allow us to increase our foreign exchange earnings.
On the other hand, our production and direct investments abroad (DIA) have had also been subject to similar stringent MCO-like measures. Our DIA in terms of manufacturing are also well-integrated into the global and regional production networks and linkages.
Our DIA are mainly in South-east Asia, including Papua New Guinea. Investments range from banking (regionally), oil palm plantations (Indonesia, Cambodia), mining and logging (Papua New Guinea), to manufacturing and services (Singapore).
Singapore and Indonesia are the two main destinations of our DIA, accounting for 18 per cent and 9 per cent respectively according to a 2018 report by the Bank Negara’s Economics Department.
Looking at the figures, regional integration is still a long way to go.
The idea here, therefore, is to maintain our DIAs in manufacturing but enhance regional integration including reviving the idea of cross-border listing, boosting cross-border trade and investment.
In pursuing a “reshoring” strategy, we need to ensure that our country remains an attractive FDI destination. At the same time, we need to strengthen our SME base so as not to be over-reliant on FDI.
And not least, we also need to promote and nurture an alternative supply chain closer to home based on regional integration but without de-coupling from our traditional exports markets.
In addition to knowledge transfer and moving up the supply chain, part of the objectives of our “reshoring” strategy should be to promote the following:
Redressing the balance of payments (BoPs) deficit in terms of our current and capital account flows, and not least food imports;
Nurturing and developing import-substitution industries both for domestic consumption as well as to spur exports; and
Stabilising the ringgit.
In conclusion, “reshoring” (much like digitalisation of the SMEs) is a trend that we cannot afford to overlook much less leave out of the equation of a long-term exit strategy.
Moving forward, Malaysia is simply capitalising on its base advantages (pre-existing economic fundamentals) but reconfiguring them in such a way that reflects the changing broader external environment.
Jason Loh Seong Wei is Head of Social, Law and Human Rights at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.
