The Malaysian Logistics Landscape: The logistics industry is crucial for cost effective and efficient international trade

and is therefore, important for the competitive advantage of a country. Due to our strategic location in one of the largest industry regions, along one of the busiest shipping routes (the straits of Malacca); we have successfully developed our sea ports and become an important transhipment hub for Asia facilitated through Port Klang and the port of Tanjung Pelepas (PTP). The Kuala Lumpur International Airport (KLIA) and Senai Airport are key cargo airports, which are expected to be further built into regional air cargo hubs over the coming years; supported by further development of the five economic growth corridors Iskandar Malaysia in Southern Johor (IRDA), Northen Corridor Economic Region (NCER), East Coast Economic Region (ECER), Sabah Development Corridor (SDC) and Sarawak Corridor of Renewable Energy (SCORE). The Malaysian logistics industry is expected to grow10.3% in 2012 to reach RM129.93 billion, a marked increase from an estimated RM 117.8 billion last year supported by strong government backing for logistics-related development and growth fuelled by foreign investment. The introduction of initiatives such as the Government Transformation Programme (GTP) and the Economic Transformation Programme (ETP) created a more conducive business environment for the logistics market. Foreign Direct Investments (FDI) surged to RM 21.3 billion in the first half of 2011 compared with RM 12.1 billion in the previous corresponding period, reflecting growing external interest and confidence in the wake of government initiatives to stimulate economic growth. Gopal Ramasubramaniam, Frost & Sullivan vice president for transportation and logistics practice Asia Pacific and country head, said Malaysias advantage due to its strategic location and focus on improving supply-chain efficiency will also drive growth in the logistics industry. He also added that the logistics industry is poised to enjoy double-digit growth with a projected compounded annual growth rate of 11.6% to reach a staggering RM203.71 billion in 2016. The countrys external trade is expected to increase 5.9% year-on-year to RM 1.32 trillion this year, from RM 1.24 trillion last year. The growth of external trade would spur growth of the transportation and logistics industry, especially for import and export forwarding, air freight and ocean freight related businesses. Total trade for the

first 11 months in 2011 was valued at RM1.156 trillion, up 8.7% from the corresponding period in 2010. Exports rose by 9% to RM 633.81 billion while imports expanded by 8.4% to RM 521.81 billion resulting in a trade surplus of RM 112 billion during the same period. In terms of cargo volumes, total cargo volume is expected to increase 10.1% from 495.29 million tonnes in 2011 to 545.13 million tonnes in 2012. In 2011, sea freight was the most popular mode of transport of cargoes in Malaysia, handling more than 90% of total freight traffic. Port Klang and Port of Tanjung Pelepas contributed 39.2% and 22.7% of total sea throughput in 2011, respectively. This year, total cargo volume by sea is estimated to reach 538 million tonnes, up to 10.1% from last year. Cargo volume by rail in 2012 is expected to reach 6.2 million tonnes, compared to 5.9 million tonnes last year. Outlook for the rail logistics segment will improve over the next few years, especially with the completion of Keretapi Tanah Melayu Berhads double-tracking project that links Johor Bahru to Padang Besar. Meanwhile, cargo volume by air is projected to grow 925,000 tonnes in 2012, up to 3.9% from last year. Despite the general sentiment that the Malaysian logistics industry would enjoy satisfactory growth in 2012, some observers remain cautious in forecasting the industrys performance due to worsening Eurozone financial crisis and weak U.S. economy data that have not seen much improvement for some time. Although Malaysia is less affected by events in the west, as a trade-reliant country, the Eurozone crisis and the U.S. economic situation would to a certain degree affect trades and subsequently, the demand for related logistics services. However, local logistics players can benefit significantly if they are able to turn threats into opportunities by filing up service gaps created by the crisis and expanding their operations to the West in view of the strengthening Malaysian ringgit.

Logistics Sub Segments Road Freight Transport Sea Freight Transport Air Freight Transport Towing and Pushing Services (Sea Ports) Support Activities for Transportation Courier Services

No. of Business Establishments 1,898 306 8 37 41

Source: Department of Statistics Malaysia, Economic Planning Unit, Frost & Sullivan (2012)

The Logistics Performance Index: In the World Banks International Logistics Performance Index (LPI) 2012 ranking, Malaysia came in 29th with a score of 3.49 out of 5, lagging behind its neighbour Singapore, which ranked 1st with a score of 4.13 (comparison in table 1 and 2 below). The LPI is based on a worldwide survey of operators on the ground such as global freight forwarders and express carriers to measure the logistics friendliness of 155 countries. It helps countries identify the challenges and opportunities they face in their trade logistics performance and ways to improve current process. The index is the weighted average score of a countrys performance relative to other countries across six key dimensions efficiency of the clearance process (border control system), quality of trade and transport related infrastructure, ease of arranging competitively priced shipments, competence and quality of logistics services, ability to track and trace consignments and timeliness of shipments in reaching destination within the scheduled or expected delivery time.
country LPI rank LPI Score 4.13 3.49 Custom Infrastruc Internatio Logistic Tracking & Timeliness s ture nal s Tracing Shipment Complet s ence 4.10 4.15 4.0 4.07 4.39 3.99 7 3.2 3.43 3.4 3.54 3.86 8 3.40 5

Singapo re Malays ia

1 2 9

Table 1: LPI Scores Malaysia vs Singapore, 2012 (World Bank, 2012)

Malaysia Export Time and cost/Port or airport supply chain Distance (km) Lead time (days) Cost (USD) Export time and cost/Land supply chain Distance (km) Lead time (days) Cost (USD) Import time and cost/Port or airport supply chain Distance (km) Lead time (days) Cost (USD) Import time and cost/Land supply chain Distance (km) Lead time (days) Cost (USD) Shipments meeting quality criteria (%) Number of agencies exports Number of agencies imports Number of documents exports Number of documents - imports Clearance time without physical inspection (days) Clearance time with physical inspection (days) Physical inspection (%) Multiple inspections (%) 84 km 2 days 285 USD 105 km 2 days 298 USD 71.05% 2 3 2 2 1 day 1 day 6.19% 2.77% 73km 3 days 285 USD 172 km 2 days 298 USD

Singapore 130km 2 days 178 USD 25km 2 days 250 USD 130km 2 days 266 USD 25km 2 days 250 USD 95.48% 2 1 1 1 0 day 1 day 1% 1%

Table 2: LPI Details-Malaysia vs Singapore, 2012 (World Bank, 2012)

The quality and availability of trade-related infrastructure such as roads, railways and ports play important roles in a countrys logistics performance. Similarly, efficient border management and coordination of agencies involved in border clearance are critical. There are notable gaps between Malaysia and Singapore in terms of border clearance management, logistics infrastructure and timeliness of delivery. It is crucial to plan for a comprehensive reform of the border management system to include only relevant agencies and simplified processes to achieve optimum security and fiscal objectives. Custom officials are facing serious challenges with the ever increasing volume and complexity of international trade, coupled with the widening scope and spectrum of their functions, placing a strain on the governments resources. At the same time, both trade and industry sectors demand efficient customs clearance

with minimum intervention to ensure seamless flows of goods. Under such circumstances, the customs department needs to leverage on technology and innovation to improve delivery system and remain relevant. The logistics industry in Peninsular Malaysia is relatively better than East Malaysia. In Sabah and Sarawak, citizens still lack proper roads, ports and extensive transport networks to reach rural areas. Good logistical support is crucial to ensure timely delivery to clients. On a separate agenda, one of the National Key Results Area (NKRA) of the GTP is to improve rural basic infrastructure. Under this NKRA, 1,900km out of 7,000km of planned roads will be built in Sabah and Sarawak, the remainder in Peninsular Malaysia. Upon completion, 91.4% of the peninsular population will be living within a five kilometre radius to paved road. Sarawak currently has road networks of about 29,000km and the Ministry of Infrastructure Development and Communication will continue to spearhead the development of physical infrastructure and communication facilities in the state. In 2011, the ministry received an allocation of RM 242 million to implement 44 road projects in Sarawak. To date, 26 have completed while others are under various stages of implementation. For 2012, the federal government has allocated RM166 million to 20 road projects (including 18 continuous projects). The above are some highlighted in the LPI that needed improvements. While we are streamlining and standardizing border management processes and establishing better logistical structures; we also need to look into ways to improve delivery time invest in technologies such as GPS and RFID to make tracking easier for customers, improve our range of logistics services and introduce new pricing strategies to stay competitive. Slow Down in Haulage Growth: The haulage sector is expected to record a lower growth than last year at 5% volume growth in 2012. This is mainly due to the ongoing Eurozone crisis and the slowdown of the U.S. economy. President of the Association of Malaysian Haulier (AMH), Datuk Che Ismail expressed that 2012 would be a challenging year as the situation in the west may show little improvement. However, he remains upbeat about prospects

in Asia and said that the countries like Malaysia and Singapore with good infrastructure are poised t take advantage of the situation. Prior to the liberalization of the container haulage industry, here were only five operators which resulted in insufficient capacity that caused port congestions and delays in delivery of containers to their destinations. This prompted the government to introduce policies to liberalize the haulage industry. By 2011, the number of operators soared to over 200. The resulting competition is expected to bring about service rationalization, reduction in delays and rate adjustments thereby benefiting container users as well as encouraging greater containerization in the future. On 1st January 2012, the Competition Act 2010 came into force to promote a competitive environment, prohibit anti-competitive agreements and stop the abuse of dominant position in the market. With that, members of the haulage sector can no longer fix or jointly collaborate to influence prices or tariffs among each other. However, AMH has applied to the Malaysia Competition Commission (MyCC) to be exempted from complying with the act. Other applicants include the Malaysia Shipowners Association, Shipping Association of Malaysia, Federation of Malaysian Port Operators Council, Life Insurance Association of Malaysia and Nestle Products Sdn Bhd. Under the act, the onus is on the applicants to prove that their current commercial agreements or arrangements qualify to be exempted. If granted, individual enterprises will have to pay an annual exemption fee. There are four criteria that must be met to earn an exemption: There are significant identifiable technological, efficiency or social benefits directly arising from the agreement; The benefits could not be reasonably have been provided by the parties to the agreement without the agreement having the effect of preventing, restricting or distorting competition; The detrimental effect of the agreement on competition is proportionate to the benefits provided; and

 The agreement does not allow the enterprise concerned to eliminate competition completely in respect of a substantial part of the goods or services. Haulage operators continue to face increasing costs due to shortage of drivers, increased wages, rising fuel prices, higher spare pars and servicing costs. The demand for logistics security by customers also incurred high investments in information technology and global positioning systems. Apart from that, customer expectations on reliability and punctuality are increasing. To keep customers satisfied and loyal, haulage operators must look at ways to further enhance the reliability and timeliness of their services. Unless exempted from compliance with the Competitive Act 2010, haulage operators have another challenge to keep prices competitive amidst rising costs as they can no longer collaborate to influence prices. Maritime Sector Updates: The maritime industry and supply chain is also affected by the Competition Act 2010. The act prohibits agreements between companies intended to or lead to significant prevention, restriction or distortion of competition in any market for goods or services. Examples of prohibited agreement are those that directly or indirectly fix prices or other trading conditions, share market or sources of supply, limit or control production, limit market access, limit technical or technological development or investment and perform an act of bid rigging. The act also prohibits abusing of power by dominant players such as to impose unfair prices or other unfair trading terms, control production, limit market access, limit technical and technological development or investment, refuse supply to a particular enterprise and practise price or treatment discrimination towards different parties. However, there are existing practices in the maritime industry which may contravene the Competition Act 2010 such as allowing rate fixing by associations, giving berthing preference to certain port users at the expense of other users and fixing cooperation terms (technical or operational arrangements, price and remuneration terms). The liner shipping segment is an example of business that requires alliances among service providers in order to provide customers with competitively priced services while ensuring profitability.

The logistics industry relies heavily on cooperation between players which necessitates some form of agreement. Complying with the act requires players to review all existing practices and scrutinize agreement terms to avoid violating the act. We should all work towards creating a healthy business environment where service providers can operate in fair competition and help Malaysia achieve its goal of attaining global competitiveness. The budget 2012 proposed for a reduction of income tax exemption for shipping companies from 100% to 70% of statutory income effective 2012. Under Section 4A of the Income Tax Act 1967, shipping companies are fully exempted from income tax. Since 2000, tonnage almost doubled from 6.4 million deadweight tonnes to 12.4 million deadweight tonnes in 2010. Despite the growth of shipping tonnage over the years, there is still a gap between the growing demand for shipping services and the ability of local shippers to meet those demands. To date, 75% to 80% of total trades are still carried by foreign shippers. Currently struggling with an oversupply of vessels that is depressing freight rates, some parties expressed their concern of whether the Malaysian shipping industry will be able to compete effectively against its neighbours when tax incentives are reduced. Being a highly promoted sector in most maritime nations, most shipping companies pay no tax or minimal tax. The proposal to tax 30% of shipping profits could significantly reduce operators ability to compete. At though times like this, more policies and incentives are needed to spur the sector to a higher level instead of scaling down incentives. Additional tax burden will cut into the already thin margins. Perhaps we should all take a step back and find ways to stabilize the shipping business environment and introduce tax on shipping income in phases. Freight Forwarding Updates: In November 2011, a group of freight forwarders associations had arrived at a collective decision to stop providing deposits on behalf of shipping lines for the handling of containers. According to a statement released by the Federation of Malaysian Freight Forwarders (FMFF), freight forwarders would stop providing container deposits or letter of indemnity effective 1st December 2011. Prior to that, container deposits have been advanced by freight forwarders in an effort to shorten the time of processing container movements.

The practise of deposit-taking for containers by shipping lines started back in 2009 and the announcement made by FMFF is seen as the culmination of its campaign to make the practise illegal for the past two years. Although the Port Klang Authority (PKA) attempted to resolve the issue through an alternate container security management scheme, it achieved little success with only five shipping lines agreeing to join the scheme. Failure on the part of PKA and Ministry of Transport to mediate on the matter led to the frustration of freight forwarders, which has resulted in their move to engage stakeholders and government authorities to find a fair and workable resolution to the issue. With importers and exporters now having to fork out their own funds for deposits, industry players expect trade movements to be grossly affected. Until acceptable results are obtained through various meetings with government agencies pertaining to this matter, FMFF will continue to engage with shipping lines, non-vessel operating common carrier, freight forwarders and trade associations in providing and searching for the best solution to the issue. Air Cargo Sector Updates: According to the Association of Asia Pacific Airlines (AAPA), cargo carried on international routes by its members fell 7.6% in April from previous year and was down 4.8% over the first four months of this year. Director General of AAPA, Andrew Herman, stated that international air freight markets remain depressed with weak demand exerting further downward pressure on rates despite reduction in freight capacity. Were still seeing welcome growth in passenger demand, but airline profit margins have suffered as a result of the weak cargo market, and the impact of stubbornly high oil prices. Although key Asian economies are still performing relatively well, the operating environment remains challenging, clouded by uncertainties over prospects for th global economy, he added. The nations troubled airline MASs cargo division MASkargo, has recently agreed to pay a penalty of AU$6 million and contribute AU$500,000 to the Australian Competition and Consumer Commissions legal costs in five instalments over 24 months to settle an alleged price fixing litigation. MAS has been struggling for some time, with net loss in 2011 at RM2.52 billion and RM171 million for the first quarter

of 2012. For May 2013, MASs passenger traffic recorded a decline of 7.2% while cargo traffic was down 8.1% On a brighter note, MASkargo has commenced its twice-weekly freight service to Ho Chi Minh Citys Tan Son Nhat International Airport. The decision to expand operatons to Ho Chi Minh City is due to the citys connectivity to multiple destinations and Vietnams recent cargo growth. MASkargo hopes to seek commercial partners to help provide an extensive network and service coverage required. The tough situation has also affected budget airline pioneer AirAsia, albeil to a lesser degree compared to MAS. AirAsias net profit in 2011 was halved to RM564.1 million from RM1.06 billion in the previous year. AirAsia was recently named the winner of the Air Cargo Industry Customer Care Award 2012 in Shanghai, making it victorious in the category of two consecutive years. During the acceptance of the award, Sathis Manoharen, AirAsia and AirAsia Xs regional head of cargo pointed out that AirAsia is currently above industry average in terms of cargo delivery efficiency at 92% for 2011 and 94% for the first quarter of 2012. AirAsias cargo services spans across the whole ASEAN region and extends to East Asia, South Asia, Oceania and Europe. Its most popular cargo commodities are peishables, machinery parts, electronics and apparels. The airline has been optimizing the capacity of its aircraft belly space to generate revenue by offering cargo services at rates lower than its competitors. AirAsian X cargo operations registered a healthy growth of 31.6% from the previous year to reach 35,016 tonnes in 2011. However, cargo performance for the first 3 months of 2012 was affected by the discontinued India routes where it suffered an 11% decrease in volume from a year ago. Due to strong improvement in yields, cargo revenue increased by a double-digit growth in the first quarter of 202 compared to previous corresponding period despite registering lower volume. AirAsia, AirAsia X and MAS have concluded a Supplemental Collaboration Agreement (SA) to work on areas such as procurement, aircraft component repairs, training, technical and operational efficiency and to champion common industrial issues. The collaboration also serves as a measure for the national carriers to prepare for the ASEAN open sky policy in 2015. The open sky policy will see all regional

restrictions on airlines being lifted and regional carriers can make unlimited flight to the 10 ASEAN countries. The freight outlook remains challenging in 2012 with more pain expected for air cargo operators. Work demand, over capacity, dwindling economic and business confidence will put downward pressure on cargo rates, yields and revenues. At the same time, declining sea freight rates and increased preference for cheaper and slower transportation options will further lower air cargo operators profitability and in worse case, threaten their presence. Future Direction: Under the Association of Southeast Asian Nations (ASEAN), a liberalization program of the logistics service sector has been agreed among member countries. This program aims to create an ASEAN single market by 2015; strengthening ASEAN economic integration through liberalization and facilitation measures in the area of logistics services and supporting the establishment and enhancing the competitiveness of an ASEAN production base through the creation of an integrated ASEAN logistics environment. The liberalization of the Malaysian logistics industry is expected to complete by 2013. Opening up the industry requires Malaysia to strengthen its logistics industry, improve capabilities of local logistics players and enhance the multimodal transport infrastructure in order to attract FDI and trade in the future. Towards becoming an Asia Regional Distribution Center Due to our strategic location, transportation infrastructure and availability of land, we can make Malaysia the preferred location for an Asia Regional Distribution Centre, allowing for value added logistics (VAL) activities. VAL is currently regarded as import export and not recognized by customs in the free zone. Val services such as repacking, customizing, labelling, testing, kitting and final assembly enable companies to lower inventory footprints of finished goods and concentrate on meeting customer demands for high quality specialized products. The custom is viewed as a regulatory body with a function in revenue collection rather than playing a trade facilitation role. Over the past years, there has been a reduction in VAL due to our conventional taking on customs role. Come 2013, the liberalization of the logistics sector will bring the Asia Regional Distribution Centers

to the most Favourable locations and we could lose out significantly if we continue to adopt such stand to VAL. We should start to recognize VAL regulations in the free zone, simplify current practices and increase logistic security measures. To position Malaysia as a strategic location for an Asia Regional Distribution Center, we can benchmark current practices with European Distribution Centers, standardize the process of classifications, upgrade clearance systems, strengthen warehouse security, employ wireless technology to monitor goods movement and deploy knowledgeable custom officers to be stationed on field. Green logistics leader Secondly, we can establish Malaysia as a leading green logistics country in ASEAN, as green logistics is an important strategy for creating sustainable supply chains and customer value. Green logistics look into ways to address environmental pollution, reduce carbon dioxide (CO2) emission, lower energy consumption and adoption of renewable energy sources throughout the whole logistics chain. Various companies overseas have started with initiatives such as better warehouse design, utilizing daylight through the warehouse roofing, wind turbines, energy saving lights, solar panels, collection of roof water and others to reduce energy consumption. Many countries in Europe have also incorporated green transport initiatives by purchasing environmental friendly vehicles, using cleaner fuels, planning logistics routes and introducing green city logistics scheme. In Malaysia, the awareness of green warehouse and transportation solutions is still limited. In some of our busiest cities such as Kuala Lumpur and Johor Bahru, there are no environmental friendly city logistics schemes. Upon liberalization, one of the criteria for FDI will be the existence of and support of green logistics. If these issues are not addressed, we would appear less attractive and receive a lower rating on sustainability and green supply chains, compared to neighbouring countries such as Singapore and Thailand that have made strong commitments to green logistics programs. We are approaching 2013 and this is our last chance to make up in effort what we have lost in time, to step up initiatives to introduce green logistics on a national scale. For a start, we could pilot a green city logistics initiative in Kuala Lumpur and

introduce subsidies for green warehouse buildings. The Ministry of Transport could also add to its agenda the need to increase awareness among local logistics players the importance of green logistics. Opportunities in healthcare logistics Another are to be given greater emphasis is the healthcare logistics sector as this sector will move towards commissioning more specialized logistics solutions. Medical logistics refers to the logistics of pharmaceuticals, medical supplies, medical devices, equipment and other products needed to support healthcare provisions. The sector will expand in line with governments plan to make Malaysia a hub for medical devices in the Asia-Pacific under the healthcare National Key Economic Area. In Malaysia, medical devices and supplies such as laboratory sterillizers, instruments, appliances, orthopaedic products, hearing aids and many others are imported from countries such as U.S., Japan and Germany. Imports of medical devices and supplies are estimated to grow at 9.5% annually to reach US$1.7 billion by 2015. As for pharmaceuticals, main exporters to Malaysia are Australia, Germany and France. The demand for medical services is increasing due to the population growth, rising standard of living, tougher life expectancy, growing affluence and increased consumer awareness. In terms of exports, value of exports for medical devices was at RM8 billion in 2008 and is expected to continue to grow at 8% over the next few years. Major exports include surgical glows, dental and ophthalmic instruments and appliances. For pharmaceutical exports, total exports were registered at RM567 million in 2008. According to Datamonitor, the pharmaceutical segments spending made up 53.5% of overall healthcare logistics spending in Malaysia in 2010. The healthcare industry demonstrated a general preference to outsource logistics functions rather than to manage them internally. The outsourced logistics spending in the healthcare industry accounted for almost 54% of the overall logistics spending in 2010. Specialized logistics solutions in the area of healthcare can be the next big market for local logistics players that are up for the challenge.

Going International Local players need to keep up with global development and provide comprehensive and integrated logistics services. It is ideal that local logistics companies and ports establish international links via merger and acquisitions, strategic partnerships and outward investments to ensure sustainability of operations and expand market share in international trade. With the on-going financial crisis in Europe leading to weaker euro, local logistics companies aspiring to enter Europe can take advantage of the current situation to establish a foothold in the market where demand for transport of goods is still considerably strong despite the economic turmoil. The weakening euro means tha it is now less expensive to expand into Europe and at the same time, local players can leverage on established network there. By setting up a base and partnering with companies there, Malaysia companies can offer a wider reach of locations and services to their clients.