Rethinking manufacturing for a second economic take-off

Rethinking manufacturing for a second economic take-off

29 Aug 2023

By Liew Chin Tong

Malaysia’s manufacturing sector is sometimes marked by bizarre contrasts. On the one hand, it is the principal driver of the country’s trade and investment, making up 84% of total exports and 66% of net inflows of foreign direct investment in 2022. Yet, the median wage in the sector is just RM1,976, well below the national median wage of RM2,250 as of the latest 2021 data, despite the technical skills, experience and education that manufacturing work should require.

Manufacturing also contributes to nearly a quarter of Malaysia’s gross domestic product and 16% of total employment, but its decades-old model of labour-intensive production, low value addition and over-reliance on unskilled foreign workers have limited its potential for growth and high productivity. Indeed, according to the Department of Statistics Malaysia’s Quarterly Labour Force Survey Report, skill-related underemployment (defined as the share of tertiary-educated workers in semi-skilled and low-skilled jobs that do not require tertiary education) has risen since the pandemic, clocking in at 37% in the second quarter of 2023, with many opting for informal work in the gig economy due to the low manufacturing pay.

It is high time to rethink Malaysia’s industrial development policies. For Malaysian industry to move up the value chain and be globally competitive with the ultimate goal of producing high-quality jobs and better pay for Malaysians, the government needs to lead the way in a “whole-of-society” approach to have a paradigm shift in its thinking, including moving away from the old model that no longer serves our aspirations.

Technology adoption is the way forward to reduce reliance on unskilled foreign labour and increase manufacturing productivity and competitiveness. This also serves as an opportunity to upskill local talent, which would in turn push up wages for these skilled workers. Malaysian society needs to be transformed from the current economic model where the bottom is huge, to a middle-class society.

In October 2018, the government launched Industry4WRD, the first national policy on Industrial Revolution 4.0 (IR4.0), which attempts to address the low adoption of digital technology and limited use of automation by small and medium enterprises (SMEs) and other manufacturing firms.

When Tengku Zafrul Tengku Aziz took office as Minister of Investment, Trade and Industry (Miti) in December last year, his initial comment was that the current model does not move the needle.

At Zafrul’s instruction, Miti began redrafting the New Industrial Master Plan 2030 (NIMP 2030) to bring forth a new approach. As part of the rethinking process, Miti is also working with Bank Negara Malaysia and Malaysia Productivity Corporation (MPC) on TechUP to ensure Malaysia’s manufacturing sector will adopt more automation, digitalisation and technologies, and move away from the labour-intensive model.

The “Workshop on TechUP and GreenUP for the Next Industrial Revolution 2023” held on Aug 14 and 15 by Bank Negara and MPC brought together businesses, industries and bankers to deliberate on the way forward.

To move the needle, a few challenges have to be addressed.

Challenges

(i) Isolated approaches towards IR4.0 and automation

IR4.0 and automation are treated as though they are different concepts. In reality, they should both be part of an overarching “TechUp” effort to enhance technology adoption, automation and digitalisation. Put simply, initiatives towards technology adoption, be it IR2.5, IR3.0 or IR4.0, are crucial to propelling our industry forward.

It is important not to adopt a binary, one-size-fits-all approach in digital transformation; not all firms need to strive for IR4.0, some would benefit significantly by automating part of their processes in the style of IR2.5.

Being able to identify the strengths, capacity and gaps in the existing manufacturing processes would allow the appropriate technological recommendations to be made.

(ii) Insufficient coordination between implementation bodies

Miti’s trademark programme to strengthen IR4.0 adoption among SMEs is the Industry4WRD Readiness Assessment Intervention Programme, which is also known as the Industry4WRD Intervention Fund.

The process starts with a Readiness Assessment (RA), coordinated by MPC and conducted by assessing bodies including Sirim, which assesses firms’ preparedness to adopt IR4.0 processes.

SMEs that have completed the RA exercise are then entitled to apply for a grant of up to RM500,000 from the Malaysian Investment Development Authority (Mida) under the Industry4WRD Intervention Fund, to put in place IR4.0 solutions.

The process is not seamless and unified. Applicants have to separately walk through the MPC processes, which usually take four months, and then the Mida processes, which take another six weeks. There also often exists a mismatch between the expectations of SMEs and the RA outcome.

Since Industry4WRD was launched five years ago, MPC has received 2,409 applications, of which 1,375 were approved for the RA. Out of these 1,375 firms, 545 went on to apply to Mida for intervention funds. Subsequently, only 345 of these 545 grant applications were approved, with just 99 firms receiving full disbursement of the grant.

The maximum grant amount of RM500,000 per firm — bearing in mind that not all successful applicants receive the maximum amount — is hardly enough to support the acquisition of new capital in the pursuit of IR4.0. Besides, government grants must not be the only financing option to advance technology adoption and the RA programme should mobilise the larger ecosystem of banks, financial institutions and capital market to truly be transformative.

Additionally, MPC and Mida need to present themselves to the applicants and the public as a single window representing Miti and the government.

Way forward

(i) NIMP 2030 as the true north, with TechUP as a major supporting pillar

Time and again, it is often said that ministries and agencies work in silos, leading to resource duplication and poor coordination.

Under the NIMP, which will soon be launched by the prime minister, Miti attempts to consolidate all industry-related initiatives via a “whole-of-government” approach.

NIMP 2030’s overarching goals are aligned with the National Investment Aspirations (NIA) of increasing economic complexity, creating high-value jobs, extending domestic linkages, developing new and existing industry clusters, improving inclusivity and enhancing ESG (environmental, social and governance) practices.

Moving away from the sectoral approach adopted in Miti’s previous industrial master plans, NIMP 2030 emphasises a whole-of-nation, mission-based approach. It encompasses four missions, one of which will focus on creating a digitally vibrant nation supported by the cross-cutting concept of TechUP.

A shift from the hands-off approach of yesteryear, TechUP encompasses a set of strategies to empower SMEs to achieve greater sustainability, competitiveness, productivity and prosperity through technology upgrading as follows:

•     Targeting the right technology for SMEs, which must be frugal, affordable and fit for purpose at the baseline;

•     Targeting suitable, scalable technology solutions for SMEs with specific needs;

•     Streamlining and simplifying SMEs’ financing journey through capacity building, diversified financing options, credit assessments, and so on, in order to crowd in private sector financiers and reduce the dependence on grants.

(ii) Enhancement of the RA process

The RA can be a powerful tool if recalibrated. To improve its effectiveness, a working committee with representatives from the government, government agencies, financial institutions and industry players will formulate the method to integrate financial parameters and ESG-related capacity building into the assessment criteria. This initiative will not only facilitate the financing journey for SMEs by exploring alternative financing solutions other than government grants but will also provide financial institutions with a reference point for evaluating potential clients, preparing these local SMEs for emerging business opportunities.

The enhanced RA process should not exclude other important stakeholders, such as technology solution providers alongside assessing bodies and financial institutions in order to reach a credible consensus on the use of RA for capital mobilisation and utilisation.

(iii) Streamlining of the automation ecosystem

As the government steers the nation’s trajectory towards high technology and high-skilled manufacturing, it is crucial to streamline the automation ecosystem. To this end, Miti is actively exploring a new modality to govern TechUP through a centralised process to ensure better coordination among the government agencies.

Through TechUP, NIMP 2030, cross-ministry collaboration and other relevant policies, the government aims to strengthen Malaysia’s industrial capabilities in order to create better jobs and better pay for Malaysians in support of a vibrant middle-class society.

In its glory days in the late 1980s and 1990s, the manufacturing sector effectively ushered in a new middle class and transformed Malaysia from an agrarian society into a newly industrialised country. But since the Asian financial crisis in 1997, the political crisis in 1998 and the entry of China into the World Trade Organization, Malaysia’s growth has stagnated. Now through TechUP and NIMP 2030, we have the opportunity to truly transform the scene and make Malaysia’s second economic take-off a reality.

Liew Chin Tong is the deputy minister of international trade and industry

Source: The Edge Malaysian