Diverse offerings: By playing to the state’s competitive advantages in raw materials and human resources, local industries continue to grow and diversify

Sabah enjoyed the third-highest level of domestic investment in the manufacturing sector of any Malaysian state in 2013 and this carried over to the first few months of 2014. Foreign investment, however, has lagged somewhat, and remedying this shortfall is a priority for state and federal authorities.

A number of industrial parks and clusters are available, as the government tries to match manufacturing development with the raw materials that the state has to offer. Sabah provides an abundant supply of natural resources, with hydrocarbons and palm oil at the top of its list of locally sourced commodities.

Numbers & Strategies

According to the Malaysian Investment Development Authority, Sabah saw RM2.43bn ($758.4m) of domestic investment in its manufacturing sector in 2013, and RM1bn ($312.1m) between January and May 2014. This contrasted with foreign investment of RM1bn ($312.1m) and RM55.76m ($17.4m), respectively.

In 2012, Sabah was ranked third in the country in terms of overall manufacturing investments. The state’s own Department of Industrial Development and Research (DIDR) has figures showing 54 projects in manufacturing approved that year, worth RM5.83bn ($1.82bn), up from RM1.56bn ($486.9m) in 2011. Food manufacturing and biomass were the main targets for investment, showing the major standing of these sub-sectors within the state. Indeed, under the Sabah Development Corridor (SDC), the state’s major development plan, a number of projects putting agriculture and plantations together with manufacturing and industry have been initiated.

Current initiatives include the Sabah Agro-Industrial Precinct at Kimanis, which focuses on research and development as well as production, particularly at Halal Park. Natural and health food products, alongside advanced biotechnology projects, are combined to give Sabah’s food industries important extra value. Seafood processing is also being developed at the Marine Integrated Cluster in Darvel Bay, while palm oil industrial clusters at Sandakan and Lahad Datu will also explore the possibilities for using palm oil in oleochemicals, pharmaceuticals and in a wide range of food processing activities.

Moving Up The Value Chain

The state is aiming to push industrial producers up the value chain with tax incentives and by providing matching grants for investments in innovative processes. As Sabah has uncovered and developed more of its offshore hydrocarbon assets, there has also been growth in industries associated with oil and gas.

For example, the Sipitang Oil and Gas Industrial Park has recently seen a major investment in the form of Petronas Chemical’s $1.5bn Sabah Ammonia Urea Plant. This is slated to have a capacity of 1.23m tonnes per annum, with the completion date currently expected to be February 2016.

Recent times have also seen increased interest in a range of other manufacturing projects, including automotives. The Sapangar Bay Manufacturing and Logistics Cluster (SBMLC) is central in this regard, containing both the Kota Kinabalu Industrial Park (KKIP) and the Sapangar Bay Container Port. The KKIP has been crucial in supporting small and medium-sized enterprises (SMEs), offering competitive prices in prepared vacant lots and ready built factories.

Indeed, SMEs have long been the lifeblood of Sabahan industry. This is recognised through the DIDR’s One District, One Industry initiative. The programme is run in collaboration with SDC and government support and aims to enable districts to leverage their local competitive advantages to help develop a particular industry – for example, making furniture in a district with ample timber resources.

The programme also aims to assist the development of bumiputera (indigenous) entrepreneurs. Historically, much of the private sector in Sabah has been dominated by non-bumiputera groups, particularly ethnic Chinese, and so programmes such as these emphasise the creation of a more diverse balance.

Integrated Development

The establishment of a bumiputera business network is among the major aims of the Sabah Economic Development Corporation (SEDCO). SEDCO has invested in a number of manufacturing and industrial enterprises in the state, including firms producing paint, pipes and fittings, cement, and steel, amongst others.

With regards to the latter two investments, Cement Industries Sabah – in partnership with the Sabah Ports Authority and Tasek Cement – has the only cement-grinding plant in the state. Steel Industries Sabah, meanwhile, has a plant with an annual capacity of 180,000 tonnes of steel products.

The KKIP includes residential, commercial and industrial areas within its precincts, aimed at supporting integrated development. By the end of 2013, KKIP had around 219 firms operating within it, mostly resource-based industries, supplying the domestic market. Also coming to the KKIP soon will be a new motor assembly plant, according to press reports, being established by Tan Chong Motor Holdings. This will primarily assemble Japanese parts, thanks to a RM285m ($88.95m) investment. This development is also expected to give an impetus to trades associated with related materials such as rubber, plastics, paints and glass. The new plant will join SEDCO’s Kinabalu Motor Assembly, which is already involved in vehicle assembly in the state. Meanwhile, the SBMLC aims to develop the shipbuilding and repair industry. Malaysia as a whole hopes to capture more of this trade in the years to come, while Sabah’s offshore oil and gas industry has already provided potential customers in a variety of specialised maritime fields.

All of the existing SDC projects – which have also been integrated into the federal Economic Transformation Programme, the 10th Malaysia Plan and the forthcoming 11th Malaysia Plan – are entitled to tax and other investment incentives.

Nevertheless, industry in Sabah does operate with some added constraints. One of these is power, with a rise in electricity tariffs at the end of 2013, while there is a national objective to eventually remove all energy subsidies, affecting fuel costs. At the same time, many businesses in Sabah are concerned at the cabotage policy, which they say increases the cost of imported materials (see overview). Even so, despite these challenges, the state’s industries continue to expand, with the next stage likely to entail the development of a more export-oriented manufacturing around the industrial parks, which currently target the domestic market more than the international.

Retail On The Rise

Meanwhile, the retail sector, including new malls largely in mixed-use projects, has expanded on the back of population and income growth, as well as homing in on visiting shoppers. While modern retailing is a relatively new development in Sabah, recent times have seen the state playing catch up. The next few years will also see a handful of new, higher-end retail developments, largely as part of mixed-use real estate complexes.

The focus for much of this activity is the KK area. The luxury Imago Mall is due to open its doors in the last quarter of 2014, forming part of the KK Times Square development. Imago Mall has set aside space for 300 retail outlets – with 65% of the mall’s net leasable area of some 800,000 sq feet already leased out by March 2014, according to mall management. Moreover, 2014 will see the completion of the Oceanus Waterfront Mall as part of the KK Waterfront development. This will add a three-storey, 200-unit shopping centre to a residential, commercial and hotel complex, which includes a 2-km seafront boardwalk.

Riverson Walk is also expected to come on-stream in 2014, with another three-storey retail mall. The following year, the Pacific Parade mall, also in a mixed-use complex, PacifCity, will open, in the expectation that the attached, 18-storey Pacific Heights luxury residential apartment complex will deliver a regular customer base. The C Park project is also adding a food avenue, a three-floor shopping complex and 48 designer four-storey shop lots to KK’s retail scene, as part of a mixed-use development.

New Interest

Along with the malls, new retailers are also entering Sabah. Bonia Group and MC at Box Office are entering the state for the first time in 2014 via Sembonia and MBO Cinemas, while DNP Clothing’s Miss Selfridges, Topshop and Dorothy Perkins are also making an entrance, as is Aeon Fantasy, amongst others. Imago Mall is also getting a third store from Parkson’s, Malaysia’s largest department store operator. In the ICT retail segment, Red One also announced plans to open six premium stores in Sabah during 2014, the first time the chain will be selling phones as well as other associated products in the state.

July 2014 saw the soft opening of the Menggatal Hypermarket, an outlet belonging to Chua Kah Seng (CKS). The complex, which spreads out over 100,000 sq ft, includes a supermarket across the ground floor, as well as two other floors, one which will include a department store and the other a wholesaler – with the latter two floors due to open later in the year. CKS is a company based in Sabah which owns a chain of supermarkets across the state.

All these new entrants will have to compete with some successful established players too, such as Karamunsing Shopping Centre, one of the state’s oldest malls; the One Borneo Hypermall, a destination retail experience east of the city centre; and Wisma Merdeka and Suria Sabah Shopping Mall, both in prime locations on the KK waterfront. Alongside these retailers, the mixed-use developments envisage tourists as a major element in their operational strategies – meaning that tragedies in 2014 concerning Malaysian Airlines flights and security issues in Eastern Sabah are expected to have a negative impact on the year ahead.

Attracting Brands

Many Sabah malls are trying to attract more prestigious international brands to their locations. Despite the progress that has been made, the current scarcity of such brands in the state means that they continue to receive significant interest when they do arrive. “There are still niche areas in retail that are undeveloped in Sabah,” Humphrey Tan Koon Yee, chairman and managing director of Makamewa, Suria Sabah’s holding company, told OBG. “Fashion, cosmetics and jewellery are all areas of huge growth, especially for tourist shoppers, and household goods are also in extremely high demand in KK.”

In the meantime, the spotlight is likely to fall increasingly on local and Western Malaysian shoppers, with the saturation of the KK market driving fierce competition ahead. Discount campaigns, loyalty schemes and promotions are thus likely to become a growing feature of the sector. Indeed, the creation of a distinguishing mall brand is vital. Suria Sabah is a good example of this, holding events such as a fashion month, including catwalk shows in the mall, both to boost the local fashion and ready-to-wear sector, while attracting local and international customers.

Key Challenges

One concern for businesses and consumers in the year ahead is the introduction of the new goods and services tax (GST). Due to begin on April 1, 2015, this will replace the old sales and services tax, and was set in the national 2014 budget at a rate of 6%. Essential food items will be exempt, along with transport and some financial and real estate related purchases. Whatever impact the GST might have in practice remains to be seen, with the effect so far being one of increasing caution among retailers in regard to immediate plans for expansion.

Another factor that has depressed the sector has been rising costs for utilities, particularly electricity. Tariffs rose 16.9% at the end of 2013, hitting consumers’ pockets, as well as raising costs for retailers. These hikes form part of national plans to remove subsidies, currently paid out on energy and basic food items, while also providing funding for the improvement of the local energy grid (see Energy chapter).

Malaysian Apparel

Outside KK, retail remains far less developed, indicating major room for expansion provided that incomes continue to rise and that some of the logistical issues to do with infrastructure are addressed by the state’s development plans. Product distribution can be an issue in a state where 60% of the terrain is hilly or mountainous, while only half the state roads are sealed and bridges generally have low loads. Existing plans to improve and upgrade the state’s transportation network are thus welcomed by the sector (see Transport chapter).

Sabah’s retailers are also increasingly looking to market the state as a destination where high-quality products can be bought at lower prices than in nearby rival centres. Mid-range apparel, handcrafts and decorative items in particular niches in which Sabah can excel in making the state a shopping destination for visitors from Vietnam, China, the Philippines and Indonesia – all markets with expanding middle classes that are now more mobile than ever.

These customers from overseas will now also be able to take advantage of the recent growth in direct air connections to the expanded Kota Kinabalu International Airport. The retail sector thus looks likely to continue to see substantive growth into the long term, both among local and international shoppers.

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The Report: Malaysia 2014

Sabah chapter from The Report: Malaysia 2014

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