The rise of protectionism

WHILE protectionism by governments has been a recurring theme throughout history, it is making a big comeback now, driven by Trumponomics 2.0.

President-elect Donald Trump, through increased tariffs, intends for the United States to reduce reliance on foreign goods by encouraging companies to relocate production back to the country, thereby creating jobs.

While the actual economic effect of that is debatable, it does make sense for countries to rethink or strengthen their policies towards concepts such as local content requirements (LCRs).

While LCRs have run counter to free trade obligations – these things are constantly negotiated between countries and bodies like the World Trade Organisation – LCRs do play a pivotal role in protecting and boosting local industry.

Like many countries, Malaysia has its fair share of protectionist policies in place. The financial sector is an obvious example. LCRs also exist in the oil and gas, construction and automotive sectors, to name a few.

But in Malaysia’s race to attract foreign direct investments (FDIs), is there a risk that some sectors are going to be dominated by foreign players?

Some local industry players are concerned.

This was raised at a panel discussion on the outlook for Malaysia’s semiconductor and electronics manufacturing services (EMS) industries at the CGS International Corporate Day event in Kuala Lumpur this week.

“With the influx of companies from China into Malaysia, is there a risk to Malaysian companies? The China companies could be more technologically advanced and have cheaper costs of production. If so, why are we then opening our doors to them?” posed the moderator of the session Peter Lim Tze Cheng of Trident Analytics Sdn Bhd.

In response, a representative of the Malaysian Investment Development Authority (Mida) noted that this is a concern raised by a number of Malaysian companies. His hope was for programmes such as the National Semiconductor Strategy to help strengthen local companies so that they will be able to withstand the competition. He did add that Mida and the government is in discussion to enhance the country’s LCR policies in these sectors.

It is hoped that the LCR policies come in sooner than later.

EMS companies involved in the automotive sector are already feeling the heat.

One business owner notes that it is very difficult for a local company to penetrate the China companies which have begun assembling cars in Malaysia. His claim is that even though the local part vendor could have a competitive pitch, the companies would still prefer to use vendors from China.

The concern also is that the planned Automotive High Technology Valley project in Tanjong Malim will also be dominated by companies from China, edging out local players from the sector.

Chin Fung Wei, the chief financial officer of Oppstar Bhd (the only integrated circuit or IC design house listed on Bursa Malaysia), noted that the semiconductor sector is highly protected in many parts of the world.

Chin, one of the panelists at the CGS event, noted that the top countries in the semiconductor space such as the United States, Taiwan, China, Japan and South Korea, have governments which strongly support their local companies.

He says that in contrast, Malaysia is known for opening its doors to foreign companies to set up shop and garnering FDIs as a result.

These foreign companies are also incentivised to do so.

“But going forward, if you want your own home-grown semiconductor companies to thrive, there needs to be a change in mindset.

“Look at the way the Taiwan government supports TSMC and how South Korea supports Samsung,” he quips.

However, in the past, the Malaysian government had spent billions of ringgit trying to bolster the country’s semiconductor industry by creating two wafer fabs.

But the experiment failed drastically.

Hence if there were to be any government funding for local companies, there has to be an assurance that it is done with the best governance structures in place. Malaysia does not have a good track record with such investments.

Meanwhile, there is one less exciting but crucial sector which has been decimated due to the lack of protection.

This is in the last mile of parcel delivery, where foreign companies were allowed without any restriction.

This has led to the closure of many local players and they are struggling to stay afloat following severe price-cutting by the foreign players.

Other countries tend to protect their last mile delivery sectors, knowing that it is a crucial segment of business. Hopefully, Malaysia will step up its LCR rules and enforce them to prevent more local companies from falling aside in our rush to attract more FDIs.