Doing Business in Malaysia: Moving Towards High Income Economy
I think Malaysia has a lot of advantages; in addition to the standard banking opportunities here, Malaysia is a center for Islamic banking, and has some of the world’s biggest Islamic banks centered here who are also lending and supported the economy in terms of SME financing, and corporate and investment banking initiatives.
Interview with Rakesh Aravind, Country General Manager of TRAVELEX – Malaysia
How sophisticated is the financial industry in Malaysia compared to other countries in the world? What makes Malaysia the financial hub of the region?
I think Malaysia has a lot of advantages; in addition to the standard banking opportunities here, Malaysia is a center for Islamic banking, and has some of the world’s biggest Islamic banks centered here who are also lending and supported the economy in terms of SME financing, and corporate and investment banking initiatives.
The other advantage that Malaysia has as a center, is that it has a lower cost base from some of its neighbors, like Singapore or Hong Kong, and the availability of skilled and unskilled labor here – whether local or imported. If you’re a manufacturer or consultancy business, you would get a range of professionals to service your customers in Malaysia.
The other advantages about Malaysia is that it is very accessible for Southeast Asia, so you can jump in a plane and be in Indonesia, Thailand, or Vietnam in two hours; India in four hours; and Japan in six hours, so you can service the South Asian region by being based in Malaysia.
At the same time, you can have access and support from the government for your infrastructure needs – you can have a business with lower operational expenses, like office rentals, hiring of staff, utilities – and use that infrastructure to service the region, where you may be able to achieve higher revenue.
For example, if you invoice in Singapore, Hong Kong, or Japan, then it will obviously be very different to invoicing in Malaysia, Vietnam, or Cambodia because of the economies of scale.
Malaysia was one of the tigers of the region, and went through a period of very high growth rate. Recently, the economy has stalled and is growing less than in the past. There is an impression that there are more challenges on the horizon. How do you see the future in Malaysia (continuous growth or serious challenges)?
If I could just take a step back, as I’ve been working in Malaysia for 20 years, and my initial entry to the market was when they were building the airport that you landed in. It was a multi-development, they built two runways, a terminal building, all of the facilities around it – and it was all done in 4-5 years.
Prior to that, they build the Petronas Twin Towers and you had development going under the stewardship of Mahathir Mohamad, there was a lot of focus on growth and development, which has been driving the economy.
Since then, instead of having one or two key projects in development, we’ve had a few. For instance, we have the Eastern Corridor, which is in the east of Malaysia, and the government has a big initiative to encourage SMEs to set up and grow their industries there. Recently, in the last couple of years, the Iskandar Development Region, in the south of Malaysia in Johor, where you’ve got four universities, hospitals, and condominiums to encourage Malaysians, Singaporeans, regional and global companies, and countries to buy and invest in manufacturing, education, hospitality, and various industries.
As a result of those advantages in Malaysia that I’ve mentioned, we’re able to cater for the service ability of countries like Singapore, where they may have higher rentals, wages, and unavailability of land, and across the bridge all of this is available for half the price. I think Malaysia will always have that option in the next 10-15 years, where we can neutralize our infrastructure to service the region around us, but at the same time, being accessible and cheaper space.
You mention some of the huge projects of the past. Do you think the government should spend more money on public sector projects or are doing the right thing for the economy?
I think the government has done the right thing for the economy. In the last 15-20 years, most of us have experienced that exponential growth, which has been good for us in terms of exposure, up-scaling, transfer of technology. When they come initially, they’re bringing international experts to design, build, and transfer technology to develop all of these developments.
There is a second layer with the locals, who have absolved all of this, and gone up the value stream and are able to do the same thing again (whether in-country or expertise is sought by other countries because we’ve done it here). I think going forward, we will have selected mega projects, like the Petronas Twin Towers and the airport projects, but they will need to be more specific to cater for what the local market and region needs.
When we speak about the context of the economy or business, what do you think are the three most important challenges for Malaysia in its future?
Personally, I think what is important will be the high-skilled labor market. We only have a population of 29 million, and as we have all of these projects, you will find that it can be a challenge to find good people or managers, some of them may be expatriates, which is obviously a different cost element there. If you’re looking for locals, I think that as we grow in the future, it will be a challenge to find and retain good people (because as Malaysian up-scale themselves, they get employed in other countries).
The second option is that we’ve spent a lot in the past 20 years, in terms of capital expenditures, to fund all of these projects and a lot of them have given us good returns, and some have not. Going forward, I think capital will be an issue because there are a lot of projects and we need to choose intelligently for what works and what benefits the people and country.
Lastly, I think the education system will play a strong role in Malaysia in bringing up the next level of professionals and skilled labor. That would need to be addressed properly, because in any country, if you have a good education system now, then it will leverage the country’s next generation to the next level.
You’re present in three different segments: managing, wholesale, and remittance. What is the industry outlook for these specific segments? Do you see more growth, conservation, or opportunities?
If I could break it down to the wholesale and the retail business, I think there is a lot of opportunity in Malaysia because of the outward and inward movement of passengers and people. Being the Southeast Asian hub, you get a lot of currency moving in and out, so there is a lot of opportunity to service those customers. There is also a big push by the Central Bank to eradicate the parallel market, so that leaves more opportunity to capture that market. In the long term, the opportunities are real and will translate to an increase in revenue.
So, for example, when you speak about money changers, you mention that because of Central Bank policies, the number declined significantly to 475, will this number go lower as the sector consolidates?
What the Central Bank’s intention is, is to ensure that they have enough licensed money changers to service the market and industry, ensure they perform and are complaint in anti-money laundering policies and global compliance standards, and declare funds that are bought and sold. It is a more regulated industry, by doing that, you also stop leakages and outflow of funds within a country, which is important for the sustainability of the economy.
Capital controls are already in place in Malaysia, you can only take ‘x amount’ of ringgits out of Malaysia; when I say outflow, it is the unregulated movement of funds through sources other than a bank or licensed entity. That has already been reduced substantially over the last couple of years, through the initiatives of the Central Bank and the finance ministry.
If you’re Malaysian, then you’re not allowed to move more than 10,000 ringgits of cash-in-hand when you leave Malaysia; but you’re allowed to move money via bank-to-bank for amounts higher than that. As long as you change your money in Malaysia, you’re allowed to move more than 10,000 ringgits.
As a multinational, our profits are easily moved anywhere in the world; we report them to the United Kingdom, so we don’t have any issues on control in terms of repatriation of revenue.
According to the Heritage Foundation, the economic freedom in Malaysia ranks much worse than what Singapore ranks. Why is there such a big difference between the two countries in economic freedom?
In my personal opinion, Singapore has the edge because it is a smaller country, easier to control, and is a net-trading nation with no foreign debts, compared to the likely challenges of disparities in education and income that the government of Malaysia needs to balance and give equal opportunities to everyone: the economy can grow, people can up-skill, and enhance their revenue stream.
The dynamics are very different for both countries, hence the different approaches. In the 1970s, we were very much alike, the currencies were 1:1, and, from the 1980s, they kept changing. I think this is a direct reflection of the economy in Singapore and how it has become better over the years: selected policies and Malaysia has tried to keep as a country with a lower cost base to attract FDIs and new investments.
It has improved in the last 5-10 years, some policy have been made; the challenge would be that they’re stuck between moving to the first-world style policies, but not leaving behind the poor, uneducated, and underprivileged who are still in the smaller towns of Malaysia. You’re trying to balance that disparity, while moving forward at a slower pace when compared to Singapore.
There has been a big change from 20-25 years ago and everybody has moved up, but now we’re trying to go to that next phase. We’re sort of in-between now, but we’re not as big as Thailand or Indonesia, so it will be easier and faster.
The government tried, but failed in some initiatives when it comes to IT, to attract the big multi-national companies.
The government managed to bring a few (DELL, HSBC, and BMW), for these companies they have a lot of options with Singapore, Thailand, Vietnam, and India. If you’re a company you will do your research and see what works best for you. As a company, you will also be looking at tax initiatives or advantages that a country would be willing to give you.
We haven’t managed to bring a whole bunch of people in, but we’ve brought some, so there is potential there. What was, but changed was the Multimedia Super Corridor, but subsequent to that, the government has allowed other locations to become multimedia locations in other parts of the country.
Do you see a lot of support from the government when it comes to SMEs or do they still prefer to encourage large companies? What has been done in regards to SMEs?
In terms of local SMEs, from an upstream point of view, the banks encourage it and the government has selected schemes where they give you grants if you fit within that sector. There are a lot of options for you to buy or rent facilities; at the end of the day, it’s a market ability of your product and the market is changing so fast.
The other challenge that we’ve had to focus or encourage SMEs is that we have to compete with our neighbors (like Vietnam and Thailand) for facilities and availability of labor. If you’re bringing in a car plant, and you need 40,000 workers, the car plant owner would think about Thailand, Malaysia, and Vietnam. We’ve also got a bonus point because of the China impact, the availability of power, land, and workers are there.
A good example is that Malaysia used to have Intel for 10-20 years, but gradually their new facilities have been relocated to China.
If you’re in an industry like Intel, obviously China has worked better than Malaysia has because of the availability of resources. I think we will attract SMEs into Malaysia, but SMEs that don’t require a lot of unskilled workers, but semi-skilled and skilled, and who want accessibility of being in Malaysia where you can service your customers in South Asia (ports, airports, and road transports).
What does Travelex have planned for the next 12 months?
For Travelex, Malaysia is our first country in Southeast Asia. What we’ve done in the last three years is set up a base; we’ve hired the right staff, made cash centers, wholesale centers, and retail outlets. We’ve taken the Travelex global model and localized it for the Malaysia market to service Malaysia: banks, people, and licensed money changers.
The plan for Travelex is to use Malaysia as a base to service countries like Indonesia, Thailand, and other Southeast and South Asian countries. We have the facilities, knowledge base, and know-how, so what is important is the strategic country entry model needs to be right – what works in Malaysia might not work in Thailand – so you have to find out what works and grow the business.