The scope of Malaysia’s ICT ambitions is well captured by Cyberjaya, a technology centre launched by Prime Minister Mahathir Mohamad in 1996 as an answer to Silicon Valley. The idea behind this smart city was to move past reliance on the primary and heavy industrial sectors to a service-driven model, as in the West and the Asian tigers of Hong Kong and Singapore. Unfortunately, the political and economic ramifications of the Asian financial crisis would dim interest in the Malaysian tech centre for years to come.

PROGRESS REPORT: Now, 16 years later, Cyberjaya is home to more than 620 companies, including 35 multinationals and 315 firms with Multimedia Super Corridor (MSC) status. However, even with two universities and dozens of office buildings, the city’s population falls from 53,000 to 16,000 at night as workers commute back to residential areas in the Klang Valley. This is largely due to the fact that enterprise area of Cyberjaya was developed first. Today, there are more than 15,000 residential units in the pipeline, which should increase the night time population.

The tempered expectations for Cyberjaya’s future are in line with general sentiments about Malaysia’s progress in technology. A report by Boston Consulting Group puts Malaysia’s “e-intensity” – an indicator of actual internet usage that combines infrastructure and uptake – well above that of Indonesia and other ASEAN rivals but significantly lagging the developed West, Eastern Europe, and the “Asian tigers.” While connected Malaysians tend to be voracious consumers of technology, overall device and broadband penetration is low, and IT workers are in very short supply. The talent shortage and the small domestic market also limit growth for home-grown ICT firms.

For ICT to be a primary enabler of Malaysia’s transformation into a high-income country there must be improvements taking place across the board in education, training, infrastructure, funding, and entrepreneurial capacity. “Singapore and Vietnam will remain Malaysia’s most formidable competitors in ASEAN as more countries in the region begin vying for data storage contracts from multinationals,” Mohamed Nasir bin Abdul Majid, the managing director of Malaysian IT services company Teliti, told OBG.

CORRIDORS OF POWER: Cyberjaya is the nucleus of a top-level, multi-decade government initiative to promote the ICT industry in Malaysia. The MSC is both a concept and a location – a 750-sq-km area that stretches from the Petronas Towers in Kuala Lumpur (KL) city centre to Kuala Lumpur International Airport in southern Selangor, swallowing both Cyberjaya and the administrative capital of Putrajaya.

ICT companies based in this area can apply for MSC status from the Multimedia Development Corporation (MDeC), which is responsible for both the administration of MSC and for setting overall IT policy. MDeC is a sub-department of the Ministry of Science, Technology and Innovation, fulfilling for the IT sector the role of dual administrator and promoter that the Malaysia Communications and Multimedia Commission (MCMC) carries out for the telecoms sector.

MDeC is tasked with ensuring investors access incentives, including a “pioneer” designation that exempts companies from 100% of taxes for 10 years, eligibility for research and development grants, duty-free multimedia equipment imports and overseas market access facilitation. The number of active MSC-status companies grew by 216 in 2011 to reach 2247 in total, of which 75% were Malaysian-owned. There was also significant growth in ICT jobs in 2011-12, as employment in MSC-status firms grew by 7%, adding 7602 jobs to reach 119,138 jobs created through the programme since 1996. Sales by these companies increased 16% year-on-year to RM31bn ($10bn), which included 20% growth in local sales and an 8.5% bump for export sales.

GROWTH OF CYBERCITIES: Although the “central corridor” in the Klang Valley has received the most investment, due to the inevitable clustering of tech firms, it is just one of seven “cybercities” recognised under MSC.

The others include Penang Cyber-City 1, Melaka International Trade Centre, Menara MSC Cyberport in Johor, Meru Raya in Perak, Kulim Hi-Tech Park in Kedah, and Putra Square in Pahang. The development of cybercities tend to be public-private initiatives: state governments or property developers can apply for cybercity status for their projects if they meet criteria such as reliable high-speed broadband infrastructure and proximity to research institutes.

DIGITAL MALAYSIA: Technology policy has been both the victim and the beneficiary of decades of central government planning, often driven by the oversized visions of prime ministers. To advance the ICT sector, Mahathir favoured MSC, while his predecessor Abdullah Badawi preferred to include IT as a component of his economic corridors. Prime Minister Najib Razak, who has inherited both programmes, has folded them into the umbrella concept of Digital Malaysia, alongside initiatives like the Economic, Government, Rural, and Political Transformation Programmes (ETP, GTP, RTP and PTP). Announced in July 2012, Digital Malaysia incorporates the ICT-related projects stipulated in the above programmes, while including several original initiatives. According to the deputy minister of science, technology and innovation, Fadillah Yusof, the plan envisions three main shifts in the Malaysian ICT sector: moving from a supply to a demand focus; from a consumption-centric to a production-centric approach; and from low- to high-knowledge-added.

The initial launch comprises 16 “sub-projects” of preexisting ETP and GTP programmes, along with eight new initiatives. These include an Asian e-fulfilment centre for e-commerce; e-payment services for small and mid-size enterprises; and growth of the embedded systems industry in Malaysia, among others. MDeC has ambitious goals: boosting ICT’s contribution to GDP from 9.8% (in 2010) to 17% by 2020, and raising Malaysia from 36th place to the top 20 in the Economist Intelligence Unit’s Digital Economy Rankings. But the new Digital Malaysia projects will add relatively little value above what was already planned. MDeC calculates that of a projected RM294bn ($95bn) increase in gross national income by 2020, only RM75bn ($24bn) would come from new programmes, while RM126bn ($40bn) would stem from earlier initiatives in the GTP and ETP and RM93bn ($30bn) would come from current initiatives.

BY THE RANKINGS: Moreover, beyond the slick presentations and high-concept programmes, it is unclear how much top-down ICT promotion will contribute to the growth of the industry. Consider the World Economic Forum’s annual Networked Readiness Index, where Malaysia ranks 29th out of 142 countries according to dozens of ICT-relevant indicators. Malaysia ranks sixth worldwide in the “government usage” pillar, which measures e-government and promotional efforts, but it suffers thanks to low rankings in “infrastructure and digital content” (65th) and “individual usage” (47th), which reflect a low penetration of broadband and computing devices. While government certainly has a role to play in ameliorating this digital divide, especially through prudent regulation by a department such as MCMC, the growth of Malaysia’s middle class and the expansion of ICT services by private sector forces will arguably have a greater impact in the coming years.

CONNECTING THE COUNTRY: Indeed, private sector activity under the aegis of government regulation and support is responsible for one emerging trend – the rapid expansion of internet access. The broadband penetration rate climbed rapidly over the past half-decade, from 21% at the end of 2008 to 31% in 2009, 55% by 2010, and 62.9% by the first quarter of 2012. This growth was largely driven by rapid adoption of high-speed wireless broadband, from the four GSM operators Maxis, Celcom, DiGi and U Mobile, as well as from WiMAX providers like Packet One, YTL, and REDtone. Indeed, while fixed-line subscriptions rose from 1.1m to 2m from 2008 to 2012, wireless broadband users surged from just 386,000 at the end of 2008 to 3.4m in the first quarter of 2012. Although Malaysia’s broadband-user demographic is skewed towards the young and mobile, many have jumped to wireless in order to escape the poor speeds and intermittent connections of the default ADSL product, TM’s Streamyx. MCMC found in 2009 that as many as 40% of broadband subscribers were using their wireless broadband in the home, generally with a laptop. With most of the mobile sector’s major players set to launch 4G networks in 2013, meanwhile, the draw of wireless remains strong.

TM’s ongoing roll-out of fibre-to-the-home (FTTH) services under the high-speed broadband programme may slow or reverse this trend. The roll-out of infrastructure will be initially limited to 1.3m homes in the Klang Valley, where wireless coverage is already strong, so a general FTTH-driven expansion in broadband coverage is unlikely. Still, fast and reliable broadband access could help transform Malaysia’s creative content industry, according to Kenny Goh, the CEO of mobile communication provider MACROKIOSK. “The Malaysian IT sector has changed dramatically over the last 10 years, and government has played an important role in that. Investments like HSBB have opened up a whole range of new opportunities for web developers,” Goh told OBG.

CROSSING THE DIVIDE: Like most developing economies, Malaysia exhibits a pronounced digital divide, both in terms of access to and usage of ICT services. According to the MCMC, household broadband penetration hit 112 subscriptions per 100 households for KL in the first quarter of 2012, 83.4 in Penang and 75.5 in Selangor – three of the country’s most developed areas. At the other end of the spectrum, meanwhile, sat Pahang at 49.4 subscriptions per 100 households, Kelantan with 44.7, and the Borneo states of Sarawak and Sabah at 47.5 and 32.9, respectively. Within these states, moreover, the divide between urban and rural areas is starker still. Internet access is truly the final frontier – the household cell phone ownership rate is over 80% for all provinces, while television ownership uniformly exceeds 90% everywhere.

The MCMC’s Universal Service Provision (USP) programme is intended to bridge this gap, delivering network expansion, community broadband centres and affordable computers for rural communities. Funds for USP projects come from a 6% tax on telecoms operators, which are then contracted to deploy networking equipment at cost, although a recent rule change will allow operators to reduce their USP contributions by undertaking rural expansion on their own initiative. As of April 2012, the MCMC had completed 471 of 796 planned community broadband telecentres, 1938 of 3100 wireless villages, and installed 450 of 1000 cellular towers. The wireless villages will complement another key USP initiative: the 1Malaysia Netbook, an inexpensive laptop distributed to students in rural districts. MCMC handed out 540,000 of 1m units in 2010-11 and completed the job by November of 2012.

TECH SAVVY: Of course, the availability of internet services is useless without the devices necessary to access them. Here Malaysia ranks high relative to its neighbours, with the exception of Singapore: an October 2011 survey from Nielsen found that 77% of Malaysian “digital consumers” polled had computers in their home, 79% owned laptops, and 77% had internet-capable phones. Only 18% owned tablets, but 57% indicated an intent to purchase one in the next 12 months, the highest figure among ASEAN countries.

While these figures are likely a somewhat unrepresentative sample that skews toward the middle-class urbanite, they nonetheless demonstrate the relative dynamism of the Malaysia market. Moreover, 3.6% of total internet traffic in Malaysia comes from non-computer devices, according to a May 2011 report by Comscore, which ranks it fifth among 15 emerging and advanced economies surveyed, (ahead of Canada, Germany, and France). Comscore also reported that the most popular online activities for Malaysians include social networking, which accounts for one-third of online time, followed by entertainment portals, instant messages and e-mail.

GETTING CREATIVE: A strengthened ICT sector could have strong synergy with Malaysia’s nascent Creative multimedia industry. With the Asian media and entertainment market forecast to grow 6.5% annually, from $395bn in 2010 to $541 in 2013, there is a lot of market share to be won. Malaysia’s creative industry is small – grossing RM16.1bn ($5.2bn) in revenues in 2011, of which nearly RM5bn ($1.61bn) come from the 259 MSC-status companies that work in this field.

BOOSTING CONTENT: The government has made content a major focus, dedicating an entry point project to “creative content” within the Communications, Content, and Infrastructure (CCI) NKEA of the ETP. This has brought about a number of programmes from MDeC, such as the Integrated Content Development Programme (ICON2), which funds developers to create mobile applications for Apple and Android. As of May 2012, 69 apps had been introduced. ICON2 has been an uncertain proposition for investors, with over RM1.5m ($483,900) invested in training just 1115 Malaysians.

SOURCE LOCALLY: Still, with mobile devices front and centre in Malaysia’s internet evolution, increasing the share of local content is seen as a major priority. Moreover, the rise of always-connected, GPS-enabled “superphones” running the iOS or Android platforms could give rise to new market strategies for developers or telecoms. Maxis has taken the lead in the mobile app field and has launched 20 exclusive apps for its customers that include portals for entertainment, sports and news, as well as free or paid apps from local developers.

Other areas where MDeC is working to promote Malaysia’s competitive advantage include the animation industry – both for film and videogames. MDeC’s Malaysia Animation and Creative Content Centre (MAC3) is the hub, and is offering a Cloud Rendering Farm driven by Intel that lets local animation studios produce with lower costs. It has also spearheaded the MAC3 Co-Production Fund, which encourages foreign content producers to “outsource” animation work to Malaysian studios. In October of 2011 $70m in co-production deals were announced at an animation conference.

IN THE CLOUDS: Two maturing technologies – cloud computing and e-commerce – are the focus of MDeC initiatives to boost ICT adoption by small and medium-sized enterprises (SMEs), which lags in comparison to more developed countries. According to statistics from the Digital Malaysia plan, just 20% of SMEs utilise ICT tools, and they contribute just 32% to GDP as opposed to more than 55% in Japan and China. Digital Malaysia aims to help raise this to 41% by 2020, in part through encouraging businesses to adopt e-payment and cloud solutions. Through virtualisation, and paying for only the computing power they use, small businesses can save thousands in redundant IT equipment.

Outsourcing their technology needs would also limit their exposure to Malaysia’s talent shortage. To promote this strategy, MDeC has teamed with local provider Exabytes to offer a SaaS (Software as a Service) Acceleration Programme, which offers RM3000 ($967.8) in cloud hosting credit to all companies with MSC status.

MDeC’s target was for MSC-status companies to capture 1% of the global cloud computing market by 2012. That will require increased uptake of cloud services, as well as investment in data centres that will provide the necessary storage space and computing power. Indeed, EPP3 in the CCI NKEA focuses on turning Malaysia into a competitive location for data centres. Malaysia offers several advantages, such as a relatively stable political and regulatory climate, although a shortage of talented personnel, high international bandwidth costs, and steep energy prices might hinder the project. The first of several mega-data-centre projects was opened in February 2012 by the CSF Group, which also has ambitions of regional expansion in China, Singapore and Vietnam. Other centres are in the works for Teliti and My Telehaus operators. In March 2012 the NTT Communications Corporation of Japan invested RM250m ($80.65m) in the Cyberjaya3 Data Centre, which will connect to high-speed networks in Japan via an upcoming undersea cable.

SMEs that fear being left behind in an increasingly cashless economy could also benefit from electronic payment systems. The E-payment programme included as one of Digital Malaysia’s pioneer initiatives will subsidise the distribution of Point-of–Sale (POS) terminals to smaller retailers. SMEC orp, which is implementing the project, is targeting 25,000 POS terminals by 2012 and 1.125m by 2020.

OUTLOOK: Malaysia’s ICT sector is somewhat bifurcated between inward- and outward-looking service providers. The former is dominated by telecoms and associated service providers, which are addressing customers’ ever-increasing demands for the latest smartphones and tablets, and the fastest broadband speeds. But the market is limited by Malaysia’s small population, and indeed venture capital providers often assess funding applications based on a company’s potential to export its product to larger markets. This explains MDeC’s focus on overseas business.

The impact of Malaysia’s much discussed “middle-income” trap is also relevant: it caps the growth potential of expensive devices and broadband connections and limits the talent available for high-level innovation. At the same time, the stickiness of Malaysian wages makes it a consistent value proposition for outsourcing. Malaysia will need to upgrade its training and digital education programmes to truly compete with Asian tigers or the advanced Western economies, but there is nonetheless room for growth in the meantime.