Nidec, a Japanese motor supplier, said moved part of its production out of China in 2018. Nidec is not the only supplier that walked out of China: Companies such as Panasonic, Yokowo, Pegatron relocated their factories to Southeast Asian nations and Mexico.
Among the relocation, we can see that Malaysia is a significant heat. It’s a relatively open state-oriented and newly industrialized market economy. Many companies believe Malaysia offers benefits that its Asian counterparts currently can’t provide. This article will do some analysis and quick explaining of the pros and cons of relocating manufacturing to Malaysia.
1.1 Advantages of moving to Malaysia
1. Why move to Malaysia?
Good location and infrastructure: International trade, facilitated by the shipping route in adjacent Strait of Malacca, and manufacturing are the key sectors of this country. So there are seven international ports delivering products around the world. Also, the overall infrastructure of Malaysia is one of the most developed in Asia. Therefore the shipping fee will be cheaper than that of China’s.
Friendly policy and foreign relations: Malaysia newly sworn-in Prime Minister is hard on anti-corrosion, which could ensure a wholesome, healthy investment for foreign companies. Also, Malaysia’s foreign policy is quite neutral that will limit the affection from the trade war.
Fewer taxes: The corporate tax in Malaysia has reduced to 24%. All products manufactured in Malaysia and imported goods have taxed at a rate of 5 to 10%. However, Malaysia has canceled import duties on various raw materials, machinery and parts. As comparing, China has a value-added tax, which is charged on non-Chinese companies and can reach to about 4%. It is part of the reason why Malaysia is a preferabler destination than China.
Lower labor attrition rate: High labor attrition is a problem more pronounced in China than Malaysia. Because migrant workers (40% of total labors) in Malaysia often come from other countries where they are not going back usually.
Natural source: Malaysia is an exporter of natural and agricultural resources, and petroleum is a major export. Also, Malaysia has once been the largest producer of tin, rubber and palm oil in the world. Apart from that, Malaysia has lower electricity prices ($0.05USD per kWh), which is about 1/2 cheaper than China. So that will minimize the manufacturing cost if you move the supply chain to Malaysia.
1.2 Disadvantages of moving to Malaysia
Small local market: Malaysia has less population and coverage, so the local market is lower when compared to China. Most of the products are exported to the rest of the world. Also, the government wants to diversify the economy and make it less dependent on export goods. So the government has pushed to increase tourism to Malaysia. Therefore, the local market is getting smaller.
Not much raw materials: Malaysia doesn’t have all the raw materials for clothing, machinery and parts. So many raw materials can only be imported. That will cost more shipping fee.
Short of labors: Low-end industrial workers and service workers in Malaysia are relatively scarce. It is hard for labor-intensive enterprises to find and keep the labor force.
Higher minimum wage: Malaysia introduced a minimum wage aimed at helping the lowest paid workers meet the rising cost of living. The new law would see workers receive a minimum salary of at least 800 ringgit to 900 ringgit (US$255 to US$287).
Other factors: There is a certain degree of illegal employment of foreign workers (around 1 million people) in Malaysia. Also, pay attention to protecting your reputation and young workers. Because there were some pieces of news tarnished the reputations of some companies in recent years.
1.3 Before moving to Malaysia
Understand local racism issue: Malaysia is a multi-ethnic country, with a predominately Muslim population. Accusations of racism stem from racial preferences embodied within the social and economic policy of the Malaysian government, as well as broader tensions between various ethnic groups. That will be a problem to manage people from different background.
Keep the skilled workers and Managers: Because the foreign labors have limited years visa (5 to 10 years), the companies need to pay more attention to the term of office. That will cost more for Human Resources to manage the workers and keep the labor force at the same level.
2. Why stay in China
2.1 Advantages of staying in China
Reducing the tax and policy: The Chinese government just announced the plan to reduce the tax burden of small and micro manufacturing enterprises. So, the tax rate for manufacturing industries drops to 13% and the tax rate for transportation, construction, and other companies will be 9%. Read How will the tax cut affect the manufacturing industry.
Also, the government sets up the Greater Bay Area to promote economic growth. So the manufacturing companies will get more opportunities and accelerate the circulation of goods.
Hi-tech companies and talents return: Due to the targeted measures and convenient environment, more and more talent return. Many of them starting their own business or improving the old system. Also, machinery automation manufacturing is very comment.
Huge market: Not only the GDP is getting higher, but the purchasing power of this large population is also increasing.
High product circulation: Due to the high paced production rate and various raw material market, the research and development for a product will have hist circulation.
2.2 Disadvantages of staying in China
Policy: The government encourages green manufacturing plant to remain in China. So those low-end industrial and high pollution plans are probably welcome elsewhere.
Trade war: According to Chinese statistics, the country’s exports to the U.S. surged in September 2018 ahead of the latest additional tariffs on $200 billion worth of products. No one knows when is the end of the trade war. Traffic, anti-dumping and adding-tax are changing time by time.
The high labor attrition rate in China: On average, the industries see as little as 30 % their labor force return after the Lunar holiday. Also, those super cities attract many labors to be couriers by higher wages.
2.3 Stay in China and manage the business better
Keep communication open with local government: The government is trying to keep economic growth. So there will have some incentives for green industries and hi-tech companies. Such as lower interest, lower land rent, and faster council identification process.
Set eyes on the third world market: Although the US is the biggest electrical products country, China is helping and opening the third world market. So it will develop other markets to limit affection from war trade and increasing traffic.
Management better: There always have ways to manage the business better. Such as saving more money by efficiency supply chain management, reducing the labor attrition rate and using more automotive mechanics.
3. Conclusion
You need to aware that there were eight big companies (Samsung, Rubicon, Seagate) moving out of Malaysia and divestment as well. Every industry is trying to upgrade their product, manufacturing and supply chain. No matter where is your preference, there are always pros and cons. There is no place having cheap labors or cheap source forever. Automotive machinery is a future trend that no one can avoid it or you will be left behind.
However, managing your business can help you make through this kind of hard times. We, Insight Solutions Global, are always willing to help you out. Reach out to us and see how we can help you reduce risk and cost for your supply chain, and drive your supply chain performance up to the next level.
Above all, that’s the issues you can concern about your next movement. We hope it’d be helpful. Please feel free to leave your comments below, if you have any questions.
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