PAPER 1 : MANUFACTURING SECTOR IN THE MALAYSIAN ECONOMY-

AFTA AND ITS IMPLICATIONS ON MANUFACTURING SECTOR’S

EMPLOYMENT

Date : 19 September 2005

Time : 9.00 am
Place : Equatorial Hotel, Bangi

Moderator : Puan Hajjah Normah bt. Mohd Aris

Presenter : Mr. Davies Danavaindran
Rapporteur : En. Abang Saifulhadi bin Abang Ibrahim
Cik Prema Letha Nair
En. Abd Jalil bin Awang

1. OPENING REMARKS FROM MODERATOR

1.1 The moderator invited the presenter, Mr. Davies Danavaindran,

FMM Council Member and Chairman of FMM Human Resource
Management Committee to deliver his presentation.

2. PRESENTATION

2.1 The main purpose of this paper is to provide an overview of the

manufacturing sector in the Malaysian economy. This paper
presents an analysis on the profile of manufacturing sector,
AFTA and its implications on manufacturing and employment
trends.

2.2 The manufacturing sector contributed 31.6% of Malaysia’s GDP

in 2004 (30.8% in 2003). It is the fastest growing sector with
value added expanded at 9.8% in 2004 (8.3% in 2003).

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 Manufacturing exports which accounted for 78.4% of total
exports, increased by 19.2% to RM376.8 billion in 2004. The top
export earner, Electrical and Electronic (E&E) products
contributed 50.2% or RM241.5 billion of total export revenue.

2.3 Other products with more than RM10 billion export value include:
chemicals & chemical products; machinery; appliances & parts;
wood products; optical disc & scientific equipment.

2.4 In 2004, Manufacturing Sales expanded by 19.7% to RM408

billion while employment in this sector increased by 3.1% to 2.92
million persons.

2.5 In 2005, Malaysia continues to show positive growth in the

manufacturing sector, where the value added expanded by 3.2%
in 2Q2005 (1Q2005: 5.7%) with support from output growth of
4.1% in export-oriented industries in 2Q2005 (1Q2005:5.4%).
Resource-based industries sustained double digit growth.
Output of chemical products and off-estate processing industries
(palm oil and rubber products) grew at 10.6% and 18.9%
respectively in 2Q of 2005.

2.6 Improved growth in the E&E products industry from -1.2% in the
first quarter of 2005 to 1.1% in the second quarter of 2005 is an
important factor contributing to the sustained growth in the
manufacturing sector. The transport equipment industry
remained robust at 9.7% in 2Q2005 (1Q2005: 13.5%).

2.7 It is noteworthy that the small and medium Industries (SMI’s)

constituted 90% of the manufacturing sector and there were
18,271 SMI companies in operation.

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2.8 It was noted that the crucial need of the establishment of ASEAN
Free Trade Area (AFTA) with the signing of the ASEAN
Framework Agreement on Enhancing Economic Cooperation in
Singapore, January 1992 by ASEAN Heads of Government. The
main objectives are to create an integrated domestic ASEAN
market of 515 million people and to offer an efficient &
competitive base for foreign direct investment (FDI) in ASEAN
countries.

2.9 The AFTA commitments are to gradually reduce tariffs from 1993
over the next ten years to 0-5% and eventually to eliminate all
import duties by 2010. It is targeted that all Quantitative
Restrictions and other Non-Trade Barriers be removed. As at
December 2004 the ASEAN-6 had 98.9% of products in the
Inclusion List, 99.6% at duties of 0-5%. As for new members:
Cambodia, Laos, Myanmar and Viet Nam (CLMV), 72.2%
products are included in the Common Effective Preferential Tariff
(CEPT) and 55.7% was at duties at 0 -5%.

2.10 As for Malaysia’s progress in AFTA, 97.31% products had been

included in the Inclusion List and 99.26% was at duty rates of
0-5% while 60.3% of products with nil duties, although 2.68%
products are still outside CEPT. From 1 January 2004,
automotive (cars, MPV and motorcycles) products, were
included in the CEPT, while the remaining products such as bus
and commercial vehicles will be included in 2005. All tariffs will
be reduced to 20% in 2005.

2.11 In 2005, Rice in the Highly Sensitive List (HSL) will be included
in 2005. Tariff in 2010 would be kept at 20%. Alcoholic

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 beverages, arms and weapons in the General Exception List
(GEL), are excluded permanently for safety, security, health and
moral reasons.

2.12 AFTA can create a massive integrated regional market with 515
million population and a combined GDP of US$700 billion. The
reduction of tariff to 0-5% will enhances import and export
activities among ASEAN members. Trade with ASEAN
expanded by RM41.4 billion to RM216.4 billion in 2004. Exports
surged by 22.2% to RM120.6 billion while imports grew by 25.5%
to RM95.8 billion. Businesses in ASEAN now have access to a
wider market with little or no tariff resulting in an increase in
economies of scale.

2.13 The Challenges of AFTA are:

2.13.1 The competition from imported products strengthens

significantly, mainly from Thailand and Indonesia
particular in food, chemicals, rubber products and
fabricated metal industries.

2.13.2 The two options which can be adopted by the

business sector are either to compete with each other
or to follow the global trend of forming strategic
partnerships.

2.13.3 Therefore, there is a need to have strategic alliance

such as equity joint venture, marketing contracts and
sub-contracting with local and foreign MNEs for SMIs
to remain competitive in AFTA.

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2.14 The Strategies to strengthen AFTA and to promote its
effectiveness are:

2.14.1 Cross-borders mergers and forming of ASEAN

multinational enterprises (MNEs) would be beneficial.

2.14.2 ASEAN MNEs should exploit comparative

advantages whilst enhancing collaboration in
technology, human resource and management
expertise.

2.14.3 Innovations are very critical in order to create or re-

engineer products to meet new market demand and
to introduce new processes to improve productivity as
well as applying new marketing strategies to expand
sales opportunities.

2.14.4 Malaysian companies must be willing to invest in new

technologies and R&D to gain competitive edge from
their ASEAN competitors and maintain the existence
of Malaysian products in demand by ASEAN market.

2.15 Policy Measures on HRD across ASEAN

2.15.1 The paper has proposed some policy measures on

HRD such as promotion of outsourcing arrangement.
The ASEAN-6 should consider special incentives to
facilitate relocation of investment into CLMV
(Cambodia, Laos, Myanmar, Vietnam) especially for
labour intensive manufacturing activities.

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 2.15.2 Free movement of business persons through
implementation of ASEAN Travel Card should be
promoted to minimize red tape and delays on
documentation. Similarly free movement of skilled
labour and experts within ASEAN countries should be
encouraged taking into account member countries
domestic laws and regulations.

2.16 Facilitation of training within ASEAN especially for CLMV

countries should be enhanced.

2.16.1 The current Manufacturing Trend is geared towards

outsourcing where the economic benefits are proven.
The niche areas include transfer of in-house jobs to
outside firms, R&D, HR, accountancy, financial, IT
systems, warehousing, transport and maintenance.
These are aimed at reduction in cost, increase focus
on core competencies and tapping others expertise
for greater efficiency and productivity.

2.16.2 The introduction of new technologies and process

innovation will diminish total labour inputs, increase
effective vendor inventory management and
exploitation of global supply chain linkage. These will
increase human capital, reduce handling cost and
penetrate new markets.

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2.17 The paper highlighted the employment trends in manufacturing
sector.

2.17.1 A steady growth was recorded from 6.6% (2003) to

7.2% (2004) in employment in line with the overall
performance in this sector, 8.3% in 2003 and 10.5%
in 2005 which exceeded the target of 4.6% of the 8th
Malaysia Plan.

2.17.2 The other indicator is that the approved

manufacturing projects posted a steady rise in the
value of investment per worker, RM288.2 in 2001 to
RM377.0 in 2003. Furthermore, higher demand for
technical/skilled workers would continue to support
growth in the sector. Therefore, skilled workers are
crucial.

2.17.3 The paper noted that 44% of 77,182 workers required

in 2003 was for technical and skilled workers. High
demand of these workers are required in high value-
added manufacturing that involves design, innovate
and customisation according to customers’ needs and
not merely assembly.

2.17.4 The need to enhance the technology advancement

was highlighted where process technology utilises
mechanisation, automation and precision machinery.
Advancement in product technology should focus on
advanced materials and technology convergence.

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 2.17.5 In order to face the dynamic changes in the industry,
the way to overcome challenges is through
enhancement of productivity. It is essential to
integrate human and technical resources to enhance
productivity & job satisfaction. Strategic alliances to
supplement and complement own core activity should
also be strengthened. Productivity indicators should
be used in adopting world class best practices
benchmarks and embracing knowledge intensive
manufacturing activities.

2.17.6 In conclusion, it was stated that the FMM participates

in various productivity-related measurement activities
and plays the active role in various capacities such as
the Chairperson in National Productivity Center for
the Manufacturing Panel, Member of Productivity
Measurement Committee, Member of Quality
Management Award and Energy Management
Committee Sub-group helping Energy Centre identify
energy efficiency benchmark.

CONCLUDING REMARKS FROM THE MODERATOR

3.1 The moderator thanked the presenter for his in-depth analysis on the
topic of ‘Manufacturing Sector in The Malaysian Economy, AFTA and
Its Implications on Manufacturing Sector’s Employment.’