Manufacturing accounts for 27.4% of Sarawak’s economy and employs about 11.2% of the total workforce, a contribution that based on current trends and future development priorities is expected to expand significantly. In 2013, the value of approved manufacturing investment into Sarawak rose by 75% to RM8.3bn ($2.5bn) compared to the RM4.7bn ($1.4bn) recorded the year prior. According to the state Ministry of Finance, the manufacturing sector is expected to grow at 5% per annum up until 2030.
Endowed with forests and vast plantation resources that are at risk of being depleted in the long term, the state is aiming to transition its production base away from basic resources and commodities extraction into value-added manufacturing as part of Malaysia’s Vision 2020 mandate to attain high income status by the turn of the decade, leveraging its competitively priced and sustainable energy resources in order to expand into heavy industry.
Geographically separated from Peninsular Malaysia and with a limited local market, the state is also looking to attract investment into export-oriented industries that are integrated into global supply chains. The authorities are offering generous and tailored incentive packages for investments into manufacturing segments like aluminium, polysilicon and petrochemicals, that improve downstream potential for small and medium-sized enterprises (SMEs) and the strong uptake of local support services.
RENEWABLE OPTIONS: “Definitely, the availability of renewable energy is what gets investors interested. However, in my opinion, the major strength of Sarawak that investors appreciate is that we have a proactive, unified and supportive state government that will go out of its way to accommodate them,” Abdul Karim Tun Abang Haji Openg, the president of the Sarawak Chamber of Commerce and Industry (SCCI), told OBG. Central to the effort to access these resources is the Sarawak Corridor of Renewable Energy (SCORE) programme, which was launched in 2008 and has a master plan running until 2030 that aims to expand the real GDP of the state five-fold to RM118bn ($35.8bn), while adding 300,000 jobs. As a means of alleviating socio-economic inequality between rural and urban areas, SCORE’s ambitions are premised on providing affordable and abundant clean hydropower to attract energy-intensive industries into new growth nodes. So far the programme has achieved early successes, with 19 approved projects at an estimated investment value of RM30.4bn ($9.2bn) secured as of July 2014. During the first five months of 2014, Sarawak attracted RM7.5bn ($2.3bn) in foreign direct investment (FDI), ranking it first among Malaysia’s 13 states for foreign capital received over the period.
The bulk of SCORE’s industrial investments (15) are taking place in Bintulu’s Samalaju Industrial Park (SIP), creating a strong impetus for the construction of new ancillary infrastructure, such as a deep-sea port and wastewater facilities, to keep pace. As the state shifts from primary to secondary and eventually tertiary sectors, human capital constraints also risk tempering growth aspirations. Ensuring an adequate pool of technical and skilled workers is key if the state is to make the transition into high-tech, advanced industrial segment without hiccups.
MAKING PLANS: SCORE, while a state-directed initiative, is also a shared one in that it constitutes one of the five economic corridors conceived at the federal level to balance development throughout the country. SCORE encompasses a vast landmass stretching some 70,000 sq km over the state’s resource-rich central region. Running alongside the SCORE initiative is the umbrella programme governing the industrial development direction of the entire state, referred to as the Strategic Industrial Development Plan (SIDP). The SIDP is similar to the SCORE plan and is premised on a cluster-based approach, which targets resource-based industries that can attract investment and result in high value addition and employment creation. Taking the example of the timber industry, the state has long been one of the world’s leading exporters of tropical hardwood timber. Under the SIDP, export restrictions on raw timber have been imposed to promote downstream processing and special industrial areas have been earmarked for integrated milling operations that will produce more finished products, such as pulp and paper.
Similarly, the palm oil industry, the state’s third-largest export earner ahead of timber and behind liquefied natural gas (LNG) and petroleum products, is being steered away from a dependence on the export of crude palm oil into the downstream manufacturing of refined foods and advanced bio-fuels. Resource-based clusters that the SIDP intends to establish are grouped into six primary categories: wood, agro-based and food processing, petrochemical and gas, palm oil-based, advanced ceramics and biotechnology. Additionally, there are two non-resource-based clusters also being promoted: shipbuilding and electrical and electronics.
INDUSTRIAL (E)STATE OF AFFAIRS: Industrial zones are not a novel concept for Sarawak and a number of estates have been under operation for some time, predating SCORE. The 813-ha Sama Jaya Free Industrial Zone, located 16 km from Kuching’s city centre, was established in 1991 with a focus on the high-tech sector, particularly electrical and electronic manufacturing. There are 16 investors with operations in the free zone, including multinationals, such as MEMC Kuching, Hitachi Global Storage Technologies Malaysia, Tiayo Yuden (Sarawak), X-FAB Sarawak, Toko Electronic (Sarawak), and OMG Electronic Chemicals. The zone has an especially strong presence of firms engaged in the manufacture of semi-conductor materials and components.
In recent years, the free zone’s momentum has been relatively flat as a result of a lack of new investments. For example, in October 2012, global electronics manufacturing services firm Sanmina SCI, a key tenant in the industrial area, had to lay off more than 800 workers as part of a restructuring programme. However, good news was received the year after when in April 2013 Comtec Solar Systems, a Chinese monocrystalline wafer manufacturer, announced plans for a new RM1.2bn ($365m) plant that was followed in July 2014 by an expression of interest to double the planned plant’s annual capacity from 300 MW to 600 MW.
In lieu of all the attention surrounding SCORE and the big-ticket, high-profile foreign investment deals being negotiated and secured, some industry representatives have expressed concern that the needs of established domestic manufacturers operating outside of SCORE nodes risk being neglected. The semi-conductor industry, for example, is also reliant on favourable electricity tariffs to remain competitive. In recent years, commercial electricity rates have increased in Kuching – which is where about 35% of the state’s industrial units are located, according a 2014 property bulletin from CH William Talhar Wong & Yeo (WTWY). Some argue that established industry is helping to subsidise new industry, feeling that the tariff raise was implemented to fund the capital expenditure needed to construct the hydro dams and power transmission infrastructure that will supply anchor SCORE investors with preferential power rates. “If preferential rates were not offered, the big investors would simply not come and this would be a huge loss to the state. It is basic economics and business logic for a utility to provide discounts to its bulk consumers. It is a practice that happens all over the world,” Abdul Karim told OBG.
The WTWY bulletin reports that Kuching saw no new industrial projects completed for 2013, stating that “with SCORE getting under way in the Central region, more related industries are expected to be mooted in the medium and long term in Kuching”. Compared to the RM7.5bn ($2.3bn) worth of FDI that Sarawak attracted during the first five months of 2014 – which made it the top recipient of FDI out of all the states in Malaysia – domestic investment in the state’s manufacturing sector was a more modest RM315.8m ($96m), placing Sarawak seventh among the 13 states in this category.
PENINSULAR ADVANTAGE: An additional concern cited on occasion by some in local industry is that despite East Malaysia being the site for most of the country’s upstream gas extraction, most of the gas that is not liquefied for export is piped to Peninsular Malaysia, where it is then sold for industrial processes and as fuel to industry at cheaper rates. The population of Kuala Lumpur is roughly equal to that of Sarawak and many manufacturers catering to the domestic market, for ease of logistics, prefer to establish production facilities in the Klang Valley – an area comprising Kuala Lumpur and the adjoining cities and towns in the state of Selangor. While Sarawak’s geographical location is appealing – it shares terrestrial borders with the state of Sabah, Brunei Darussalam and the Indonesian province of East Kalimantan – its neighbours are not appealing target markets. Sabah and Brunei Darussalam have small populations and the Indonesian provinces are under-developed and sparsely populated.
For manufacturers in and around Kuching, transporting manufactured goods to Peninsular Malaysia usually entails using Kuching Port, which is considered congested. The state’s only all-weather deep-sea port is in Bintulu, which is situated 600 km away and takes over eight hours to reach by roads that are considered in poor condition.
“Due to the low draught at Kuching Port, some shipping vessels have to operate at half their total cargo capacity. So until we can dredge the river further to deepen the draught, most heavy cargo goes out of Bintulu or Miri,” Rosli Saup, the acting general manager at the Kuching Port Authority, told OBG. Malaysia enforces a cabotage policy that prevents foreign ships from serving domestic routes. There are only an estimated 13 shipping companies utilising the Kuching Port to Port Klang route.
INTEGRATING CARGO: Improving the ability to ship the state’s output to export markets is a key undertaking for many stakeholders in Sarawak.
“Most cargo leaving Sarawak goes either by air or by sea, and port capacity and the number of air cargo freighters available are insufficient at the moment,” Clifford Arkat Johan, the Kuching branch manager for global logistics provider Agility, told OBG. Mohd Nadzim Hashim, the airport manager at Kuching International Airport (KIA), said that the KIA’s cargo building was too small for its needs, as of early 2015. “As inbound and outbound cargo requirements increase, we expect to be expanding our cargo facilities accordingly,” he added.
PORT PROJECTS: Bintulu Port, the state’s primary export gateway for timber and palm oil-based products, has a total handling capacity of 650,000 twenty-foot equivalent units (TEUs). The port is viewed to be operating well in terms of throughput and wait times. However, as SCORE-driven industries sprout up throughout the hinterland, the corridor’s cargo composition is expected to include new materials such as aluminium products, pulp and paper, biodiesel, downstream timber products and agro-produce. In anticipation of the added volumes to come and the need in some instances for purpose-fit storage facilities, two new ports at the tips of the corridor’s two coasts are being constructed and expanded to serve SCORE-specific industrial developments.
Samalajau Port, being developed by Bintulu Port Holdings, forms part of the SIP that is located 95 km from the city of Bintulu. About 450 ha of land has been allocated for the port project and construction began in 2012. Phase one of the RM1.8bn ($547.6m) venture is slated for completion in early 2016. Some facilities became operational in the first quarter of 2014, with 1m tonnes of cargo expected to be handled that year and 3m tonnes in 2015.
The port’s terminals – which will eventually have a collective annual handling capacity of 42m tonnes of dry bulk, 16.5m tonnes of general cargo and 60m tonnes of liquid cargo – have been specifically designed to meet the requirements of the energy-intensive tenants with operations in SIP, which so far includes producers of aluminium, manganese and ferro-alloy. Naturally, existing and prospective tenants are eagerly monitoring the port’s operational status as their business cases are dependent on export commitments (see analysis).
The Tanjung Manis Integrated Port is a wholly owned subsidiary of the Sarawak Timber Industry Development Corporation (STIDC). The relatively isolated township of Tanjung Manis, located 466 km by road from Kuching, is being developed into a halal, palm oil and timber-processing cluster, and is earmarked to replace Sibu as the state’s centre for shipbuilding (see analysis). With a draught of 11 metres, the deep-water river port handled 93,000 TEUs in 2013 and once expansion plans are completed in 2018, is expected to handle 220,000 TEUs per year.
Although the new port capacity being brought on-line across the state is designed to serve imports and exports arriving into and departing from the adjacent industrial areas, cargo will invariably need to travel overland between them. Accordingly, the highly anticipated and much delayed construction of the pan-Borneo highway and improvements to local air freight facilities are essential to ensuring that Sarawak has an efficient and seamless multi-modal logistics network (see Transport chapter).
REGIONAL CONNECTIVITY: As the federal government in Kuala Lumpur grapples with preparations for the ASEAN Economic Community (AEC), which is set to launch at the end of 2015, and also tries to mitigate the threats and maximise the opportunities presented by the liberalised movement of goods and people across the member countries, Sarawak is concerning itself with a less formalised sub-regional cooperation initiative, the East ASEAN Growth Area. Occupying 1.6m sq km of resource rich land and with a combined population of 57.5m, the sub-regional alliance comprises Brunei, five eastern provinces of Indonesia (Kalimantan, Sulawesi, Maluku, West Papua and Papua), two provinces of the Philippines (Mindanao and Palawan) and East Malaysia (which includes the states of Sabah and Sarawak and the federal territory of Labuan). Along with Brunei Darussalam, Sabah and Sarawak are among the most economically advanced of the bloc’s members and, in turn, stand to gain in terms of market access and raw materials, should regional trade increase. The two states also occupy a strategic geographic position, separated from North Asia by the South China Sea, and possess some of the most developed transportation infrastructure within the sub-region, positioning them to become trans-shipment and aviation hubs for traffic entering and leaving the bloc.
LABOUR SHORTAGE: For industrial investors into Sarawak, more pressing perhaps than transportation infrastructure concerns, which should be surmounted over time, are concerns about potential labour shortages. The state’s primary sectors, especially palm and timber, are reliant on a largely expatriate workforce. Many are migrant labourers from Indonesia that are returning home due to newfound employment opportunities in their country of origin. Sarawak’s secondary sectors, meanwhile, face a shortage of locally trained skilled workers that is set to increase further as SCORE transforms the state’s industrial base and expands value-added activities.
At an October 2014 signing ceremony for the relaunch of the Centre of Technical Excellence (CTE), former chief minister, Abdul Taib Mahmud, said that private firms in the state are faced with a dilemma when it comes to training and up-skilling existing employees, as there is a strong tendency for technically proficient employees to get poached by companies in Peninsular Malaysia or overseas that can offer higher salaries. It is estimated that 6205 new skilled workers will be needed by 2020 and that SCORE alone will create 300,000 new jobs by 2030.
According to the Sarawak State Secretary, Mohamad Morshidi bin Abdul Ghani, between 2016 and 2020 Sarawak could face a shortage of 27,600 mechanical engineers. State authorities are aware of the mismatch between the current labour pool and industry requirements, and via the CTE and other educational initiatives are looking to bridge the gap quantitatively and qualitatively. However, it is very much a race against the clock. In both Bintulu and Samalajau, where the early stage SCORE investments have been concentrated, a major labour squeeze is being experienced that is leading to calls by some for the state to relax restrictions on foreign work permits in the interim, given the circumstances.
MINIMUM WAGE: In July 2012 a new minimum wage policy for Malaysia was gazetted that took effect in January 2014. For Peninsular Malaysia, the minimum monthly salary for private sector workers is set at RM900 ($273.40), which translates into an hourly wage of RM4.3 ($1.30). While the minimum wage for workers in Sabah, Sarawak and Labuan, taking into account the lower cost of living, was set lower at RM800 ($243.40), which translates into an hourly wage of RM3.85 ($1.17). Local opponents of the minimum wage increase argue that the policy does not adequately factor in the marked differences in the level of mechanisation between the eastern and western parts of the country.
Sarawak’s timber and palm oil sectors are highly labour intensive, and due the state’s small population and insufficient local workforce, are largely reliant on migrant labour. Malaysian labour law stipulates that pay between foreign and domestic workers must be equitable, and some employers contend that absorbing extra salary will render some local industries non-competitive versus lower-cost labour destinations, such as China, Indonesia and Vietnam. “If we want to create a high income society, we need to pay our citizens higher salaries,” Abdul Karim told OBG. “However, rising wages must be matched by higher productivity, otherwise you end up with a non-competitive labour force and industries that are mobile will relocate,” he said.
RESIDUAL EFFECT: According to data from Alliance Bank, Sarawak has nearly 43,800 SMEs standing to benefit from the range of spill-over opportunities provided by SCORE. Over the course of 2013, investment into local SMEs surged to RM8.3bn ($2.5bn), a 75% rise on the RM4.7bn ($1.4bn) recorded the year before. By the end of 2014 investments into SMEs were anticipated by the bank to expand an additional 40%. Investment into SCORE rose to RM7bn ($2bn) over the first seven months of 2014, and the corridor’s cumulative investment to date stands at RM30.4bn ($9.2bn). Most of this has taken the form of big-ticket projects with significant downstream manufacturing spin-off potential, not to mention the requirement for support services in areas such as catering and logistics. Of the over 5000 ha SIP has been allocated, 481 ha will dedicated to SMEs, and the other industrial nodes within SCORE are expected to follow a similar blueprint.
Despite the positive outlook, SMEs in Malaysia face obstacles to growth, including sourcing credit, infrastructural issues and costs. The government, recognising the importance of a vibrant SME ecosystem as the backbone to a robust and sustainable economy, is ramping up the support being extended. The federal government had budgeted RM2m ($570m) in 2014 to enhance the competitiveness of locally owned SMEs in the manufacturing and services sectors, and is targeting an SME contribution of 42% to the national economy by 2020, up from 32% in 2012. To address challenges related to scale, mergers and acquisitions are being encouraged, and merged businesses are eligible for a flat rate of 20% on all taxable income for a period of five years. They will also be exempt from stamp duty on the merger document. Leading banks, meanwhile, recognise the growth potential of SMEs in Sarawak, and are increasing their lending exposure to the segment and utilising new risk assessment metrics and techniques to offer unsecured lending where feasible. Malaysia’s Credit Guarantee Corporation, for example, said it would provide RM70m ($21.3m) to Sarawak-based SMEs in 2015, while also holding entrepreneurship clinics throughout the state on a monthly basis.
OUTLOOK: With an abundant and cost-competitive energy mix, proximity to North Asian markets, and a proactive local government that offers attractive incentive packages to investors, Sarawak possesses the key ingredients to become a significant industrial player. Since SCORE was first conceived, the majority of the infrastructure focus has been on constructing dams and transmission lines that would ensure that the hydropower offtake deals negotiated by the corridor’s investors were delivered.
Recently, attention has shifted to fulfilling the logistics and human capital capacity required by the industrial zones, with the hope that momentum will spread beyond the big-ticket flagship investments and enable smaller-scale, downstream ventures to flourish. Indeed, while SCORE’s first five years have been met with early successes, there is a long way to go to achieving the vision of transforming the state from an extractive, resource-based economy into one driven by advanced, high-tech industries. While the concept and rationale behind SCORE and the industries being promoted appear solid, implementation and execution are critical in coming years.
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