12MP is just another "LowYat-2"-type Kerbau

Has govt abandoned 900,000 SMEs to fend for themselves?



From Murray Hunter

Malaysian Prime Minister Ismail Sabri Yaakob announced in Parliament, while launching the 12th Malaysia Plan (12MP), that measures will be put in place to restrict the sale of shares in Bumiputera companies to Bumiputeras.

This effectively reduces the ability of Bumiputera shareholders to make potential capital gains on the sales of shares in their companies, due to the inability to make equity sales to non-Bumiputeras and foreign entities.

Bumiputra companies will also be seriously hampered in raising capital through equity sales, due to the restricted market they can sell equity.

If implemented, Bumiputra entrepreneurs will also find it difficult to sell their businesses, due to the new equity restrictions.

According to former Pakatan Harapan health minister Dzuilefly Ahmad, who is the MP for Kuala Selangor, many Malay business people are angry over this measure, describing it as “suicidal”, which will kill off the Bumi economy.

This latest equity announcement potentially risks creating a two-tiered economy, where Bumiputera companies have draconian equity restrictions placed upon them by the government.

There is no other economy in the world that has such provisions in company law.

There was even more startling news the week before the launch of 12MP, where the finance ministry (MOF) announced local freight forwarding firms will be required to have 51% Bumiputera equity to renew their customs licences from the end of next year.

This would force many family-built freight forwarding companies to sell out control of their firms, or shut down, draining the international freight forwarding industry of experienced players.

This announcement has caused deep rumblings and protests within non-Bumiputera business communities. Those who can exit and relocate are considering pursuing business opportunities elsewhere.

Singapore and Jakarta, as well as foreign companies that are exempted will be the beneficiaries of these racially restrictive measures.

These disruptive government equity announcements come at a time when the economy is on the decline due to the Covid-19 pandemic and corresponding public health restrictions. There have been more than 10,000 bankruptcies to date, since the start of the pandemic. This is on the rise.

Both official and informal sector unemployment is increasing. Many SMEs are voluntarily closing, even though the government introduced a debt moratorium. According to World Bank Figures, GDP has declined 4.9% over the last 12 months.

Pain and suffering is evident across the community, with volunteer food kitchens feeding people without income, and many now relying on charity to survive.

Is the government trying to pick winners again?

There was some expectation the 12MP would address the plight of businesses due to the Covid-19 pandemic. In contrast, the document was full of Industry 4.0 rhetoric, digital solutions, picking industry winners, and expanding government influence over the business sector.

The policies espoused within the 12MP document are totally oblivious to the effect of the pandemic on business, only mentioning the devastation in passing. There is little acknowledgement of the desperation many firms face during this time. The plan provides no recovery strategies for the crippled ones.

Chapter Three of 12MP is dedicated to industry, micro, small and medium industries (MSMEs), and entrepreneurship. Once again, the government has selected specific industries it considers will be the growth drivers of the economy.

These are the electrical and electronics industry, global services, the aerospace industry, creative industries, tourism, the halal industry, smart farming and biomass products.

Historically, the government has been very poor at selecting industry winners. Malaysia’s biotechnology push during the Abdullah Ahmad Badawi administration only led to a number of government corporations that did nothing, except spending money with little value-added returns to the economy.

Looking at the latest list, the electrical and electronics industry is primarily made up of big corporations which make their location decisions based upon strategic issues like country cost base, employee pool and quality, supplier availability, and logistics issues. These are variables that take a long time to change.

The issues are similar with global services. Multinational corporations will domicile their research, logistics, production, and regional offices based upon similar factors.

Increasing the number of global services corporations in Malaysia by 10%, based on the statistical figures provided by 12MP, would only add RM2 billion in domestic business spending. It just too difficult to see a four-fold increase in domiciled multinationals over the next four years, as 12MP has forecast.

The aerospace industry is already facing tough times from the pandemic and has been in decline. Forecasts indicate that passenger traffic is not likely to go back to 2019 levels until 2024.

Air fleets have been mothballed in storage, and existing players in the industry have drastically cut down their costs to survive financially. It is difficult to see how the Malaysian industry can achieve a three-fold increase over the next five years.

Only the air-cargo sub-sector is growing, which was not even mentioned in 12MP. The cost, resources to be allocated, and effort needed to create an aerospace cluster, might best be focused upon another industry, until the aerospace industry shows signs of recovery.

The measures the 12MP outlines for the creative industry may be too little to assist the industry to grow, especially with the long-term effects of the pandemic still unknown. The creative industry, as defined in the 12MP, is very fragmented and different sub-segments will require specific measures, rather than the generic range of measures the report suggests.

The feature film market is completely depressed, due to restricted audiences in public venues, and the whole entertainment business model is currently undergoing flux and transformation into something no one is as yet too sure of.

The growing importance of platforms and distribution channels like Netflix and Peacock were not mentioned. Even if growth takes place, the multiplier effects will be limited as compared to the recovery of the SME sector.

The 12MP prescription for the tourism industry, in almost total collapse with the pandemic restrictions, needs much more than a generic revitalisation of branding. There is no mention about assisting SMEs that are totally dependent on tourism to survive, and those made unemployed.

More than 120 hotels have shut their doors permanently due to the pandemic. There is no assistance offered to these businesses in dire straits from the pandemic, and finding alternative means of income for those directly affected by the drastic decline in tourism.

This omission in the 12MP will place a major additional burden on the nation’s economic recovery.

The halal industry is rapidly growing internationally and Malaysia isn’t getting a big enough share of this growth. The growth of the halal industry in Malaysia will be directly related to market development, which has been ignored by 12MP.

Smart farming and biomass industries are very specialised and those companies that are already involved or are likely to enter, are technology-based and highly capitalised companies that don’t need government assistance.

The effort could be put into existing farmers who urgently need assistance to survive. They need assistance in production and market development, where more extension is needed and the role of Fama expanded.

Little to assist ailing small business

The 12MP has little to assist the hundred of thousands of existing SMEs, financially stressed from the pandemic. Most of what 12MP lays out for the sector has already been done over a number of years, by multiple agencies.

There are numerous mentions of the triple helix, collaboration between institutions of higher education, government and business, without explaining how this concept will be used to assist existing and new businesses.

Incubator programmes already exist around the country at universities, technical colleges, ministries, and other government agencies. Expanding them will require not just the physical infrastructure, more building, but experienced entrepreneurship teachers and mentors, who are already in drastic short supply. Nothing has been mentioned about how the trainers can be trained.

The 12MP calls for encouraging SMEs to adopt innovation. However, it doesn’t explain how. The recommendation that more entrepreneurs should take up research from public universities and research institutes opens up a Pandora’s box of issues that aren’t easy to resolve.

For example, university and research institute intellectual property (IP) policies are restrictive and bureaucracy currently not SME friendly.

Secondly, the actual researchers are usually full-time lecturers who have little time to assist SMEs take any piece of research from the R&D stage to the prototype and commercialisation stage.

In addition, getting funding to do this type of scaling up is extremely limited through agencies like the Malaysian Technology and Development Corporation (MTDC), which is already working at capacity.

Finally, although most universities now have an extensive range of registered patents with the Malaysian Intellectual Property Organization (Mipo), not many patents solve real commercial problems.

The 12MP talks about widening market access for entrepreneurs, but is silent on how this is to be undertaken. These are the important issues for SMEs that have not been addressed in any detail. The same thing has been said in previous Malaysian Plans, only to be resaid in the next plan.

One has to wonder how much artificial intelligence (AI) and Industry 4.0 are really going to assist under-capitalised SMEs, which can’t make ends meet financially.

The majority of Malaysia’s 900,000 SMEs are finding it difficult to pay salaries, let alone invest in the future. Perhaps more short-term initiatives like salary assistance to keep people employed would spur more immediate economic activity at present.

Most business activities that Malaysia’s set of SMEs undertake at present are not suitable for such concepts as AI and Industry 4.0. The majority of Malaysian SMEs are focused on service, small manufacturing, repair and maintenance, and the food and beverage industries.

Using local materials is a great ideal set out by the 12MP. Most SMEs already buy local if the material quality is suitable, the price is competitive and there is a stable supply. To buy raw materials locally, the industries that create them must be set up locally first. This should be market-driven rather than government-driven.

The 12MP within the industry section talks about negotiating to reduce barriers for cross-border trade. This is confusing, as 12MP states in the introduction that the Asean Economic Community (AEC) environment is already operating and a series of new free trade agreements (FTA) have already been negotiated.

Here, it appears the authors of the chapter on industry haven’t read the introduction to the report, making the whole document disjointed.

The 12MP is extremely disappointing for SMEs. Not only have restrictive new equity laws been introduced, but 12MP is advocating a massive increase of government influence through increased bureaucracy in the economy.

This is likely to lead to higher costs of doing business. This will further hinder a market-friendly environment that business needs to operate within. Many sunrise industries like smart farming and downstream biomass product production just don’t need government assistance.

The wisdom of setting up an aerospace cluster runs the risk of having the same fate as Malaysia’s steel, automotive, and biotechnology clusters. Billions spent and nothing to show.

The 12MP is not rakyat or people centric; it is bureaucratic-centric, bringing more government interference into the business-environment.

Bumiputera businesses are now seriously hampered in their ability to raise capital through equity sales. This will weaken them and put them at a disadvantage to SMEs in other Asean countries.

Non-Malays now have a disincentive to build companies that they will be forced to sell off at some future date, with retrospective regulation threatening ownership and control.

This could potentially cause another bout of brain drain and capital flight. Finally, the government has abandoned Malaysia’s 900,000 SMEs to fend for themselves in an economic crisis much worse than the Asian Financial crisis back in 1997.