Development through Offsets

Malaysia

Economic News

22 Jul 2010
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Last month, British firm Rolls Royce, a leading provider of power systems and services, announced a partnership with Metalysis Ltd to launch Malaysia's first tantalum processing and research and development (R&D) facility. The investment is part of the offset arrangement with the government for the procurement of Roll-Royce Trent 900 engines for Malaysia's fleet of six A380s.



The facility is expected to produce 100 tonnes of tantalum a year, worth about RM3bn ($848m). It will be located at Kulim Hi-Tech Park in Kedah, and should be operational by September 2007.



Tantalum, in powder form, is used for the production of electronic components. End-uses include mobile phones, personal computers and automotive electronics.



Targeting 10% of the world market, Metalysis Malaysia is to conduct R&D to scale up and increase production of super-grade tantalum powder.



Deputy Prime Minister Najib Razak said Rolls Royce, which is investing $5m in the facility, has provided Malaysia the entry point to the global advanced materials market.



"We are still quite a distance away from where we want to be in terms of progress and development in science and technology. But we have no doubt that we can achieve all that we have set out to do and will work tirelessly to achieve our objectives," he said at the launch of the facility.



Like many developing countries, Malaysia has relied heavily on imported technology in order to achieve rapid industrialisation both in the defence and civilian sectors. Malaysia's government understands that it can leverage on government procurement to accrue economic and industrial benefits for the country. Under these circumstances, in the early 1990s the government began to adopt offset requirements for major contracts.



In no realm is this practice more common than in the defence industry, where foreign investors looking to net government deals must provide substantial counter trades.



According to the ministry of defence, contracts for acquisition that amount to more than 10m euros will, as a general rule, attract counter trade or offset obligations for the seller. The offset arrangements must be completed during the time period of the contract in question.



Offsets activities in Malaysia take many forms. In the early stages of programme implementation, the preference was for direct offsets related to the item being procured, such as local manufacture of assemblies or parts. Now the government is also encouraging indirect offsets, such as investment in new high-value technologies such as the tantalum facility.



Olof Rapp, regional director of Rolls Royce in Malaysia, told OBG "the key is to provide offsets that are advanced technologically, and demonstrate how that technology can be transferred in practice." In the case of the Rolls Royce-Metalysis venture, all fifty employees of the facility will be Malaysian. Moreover, the technology introduced is new to Malaysia, and will provide linkages to other industries.



The country director of another European defence systems firm agreed, adding that there are certain areas, geographically and politically, that the government tends to favour in awarding contracts. "There is a tendency to favour offset proposals that focus on developing rural areas such as Sabah and Sarawak, and focusing on technology transfer, and not just creating jobs, is key," he told OBG.



He also added that the government likes to hedge its bets, seeking diverse sources of procurement. "If a company from one country nets a big contract then it is likely that the next one will be from somewhere else," he said.



The government is also keen to promote its designated growth areas under the Ninth Malaysia Plan. This year BAE Systems received a government procurement deal for two frigates for the Royal Malaysian Navy. According to reports the company is also exploring business ventures in Malaysia's biotechnology and agriculture industries, as these are industries that are targeted by the government for growth.



Eventual self-sufficiency in defence is also a priority, as a sophisticated defence industry is also part of Malaysia's vision of becoming a fully developed nation by 2020. In an interview earlier this year Najib, who also serves as defence minister, said that the implementation of the offset policy provided the impetus for local defence companies to acquire technology from abroad. As such "there has been a gradual development of the local defence industry."



"What we would like to see is for the local defence industry to contribute significantly towards flow of foreign direct investment, dual use technology as well as generate spin-offs to the other sectors of the economy."



In other recent aerospace industry news, helicopter manufacturer Eurocopter opened its regional maintenance centre in Malaysia, at Sultan Abdul Aziz Shah Airport near Kuala Lumpur.



Malaysia has also signed a deal worth RM417m ($114m) to acquire fighter trainers from Italy's Alenia Aermacchi. The Royal Malaysian Air Force will use the eight MB-339 jets to train its next generation of pilots to fly advanced aircraft, the defence ministry said in a statement.

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