Malaysia Economic Update Report

In Q1 2024, Malaysia’s exports increased by 2.2% YOY to RM362.41 billion, driven by higher exports of manufactured and mining goods. However, exports saw a slight decline of 1.1% compared to the previous quarter (Q4 2023). Notable increases were observed in exports of iron and steel products, machinery, equipment, and parts, manufactures of metal, crude petroleum, and liquefied natural gas (LNG). Market growth was supported by increased exports to ASEAN, the United States, and Japan.

Imports in Q1 2024 saw a significant year-on-year growth of 13.1% to RM328.19 billion, despite a slight 0.3% decline from the previous quarter, driven by strong imports of capital and intermediate goods. Its sizeable trade surplus as of Q1 will help the country sustain its current account surplus, thereby bolstering liquidity within the economy.

Malaysia experienced positive trade growth with Free Trade Agreement (FTA) partners in Q1 2024, rising by 4.4% to RM456.02 billion, which represents 65.3% of total trade. Exports to FTA partners edged up by 0.3% to RM248.17 billion, while imports increased by 9.6% to RM207.85 billion YOY.

About the detailed trade growth in the first quarter of 2024 with main trade partners of Malaysia:

• ASEAN: Trade with ASEAN increased by 5.4% YOY to RM185.67 billion. Exports to the region grew by 1.1% to RM106.92 billion, driven by solid exports of petroleum products, machinery, equipment, and parts. Imports from ASEAN rose by 11.8% to RM78.75 billion.
• China: Trade with China grew by 3.3% YOY to RM112.28 billion. Exports to China declined by 3.3% to RM44.5 billion, primarily due to lower exports of electrical and electronic (E&E) products. However, there were robust exports of paper and pulp products, manufactures of metal, and petroleum products. Imports from China increased by 8.2% to RM67.78 billion.
• United States: Trade with the US rose by 12.2% YOY to RM66.92 billion. Export growth of 8% to RM42.07 billion was driven by strong demand for semiconductor devices, integrated circuits (ICs), and parts and accessories for office machines. Also, there were increases in exports of machinery, equipment, and parts, and iron and steel products. Imports from the US expanded by 20.2% to RM24.85 billion.
• European Union: Trade with the EU grew by 0.5% YOY to RM52.32 billion. Exports decreased by 2.4% YOY to RM28.58 billion, due to reduced exports of petroleum products and manufactures of metal. Despite this decline, there were strong exports of E&E products, palm oil-based manufactured products, and processed foods. Imports from the EU rose by 4.2% to RM23.74 billion.
• Japan: Trade with Japan fell by 1.1% YOY to RM41.83 billion. Exports increased by 0.8% to RM23.85 billion, driven by higher exports of crude petroleum, processed food, and optical and scientific equipment. Imports from Japan decreased by 3.5% to RM17.99 billion.

In summary, Malaysia’s Q1 2024 trade performance was marked by record highs in trade, export, and import values, with significant contributions from major trade partners and a robust increase in both exports and imports.

Companies are increasingly relocating from China to Southeast Asia, with Malaysia reaping substantial benefits due to its strategic position and well-established infrastructure.

Malaysia’s semiconductor sector, particularly in assembly, testing, and packaging, has a rich history dating back 50 years when Intel established its first international manufacturing plant in Penang. This legacy has positioned Malaysia as the sixth-largest exporter of semiconductors globally. Intel continues to invest heavily, with a recent commitment of over $7 billion for a new chip packaging and testing factory in Penang, slated to begin production in 2024.

GlobalFoundries, another major U.S. chip manufacturer, opened a hub in Penang to support its global manufacturing operations. Similarly, Infineon, Germany’s top chipmaker, will build its third wafer fabrication module in Kulim, Kedah, and Neways, a supplier to Dutch chip equipment maker ASML, committed to building a new production facility in Klang.

Malaysia’s appeal lies in its skilled labor force, lower operating costs, and robust supply chain infrastructure. According to the Malaysian Investment Development Authority, Malaysia holds a 13% share of the global market for chip packaging, assembly, and testing services. Exports of semiconductor devices and integrated circuits slightly increased to RM387.45 billion ($81.4 billion) in 2023 despite global chip demand weaknesses.

However, Malaysia faces challenges as it aims to move up the value chain. The competition from neighboring countries like Indonesia and Vietnam is fierce, and merely offering tax incentives is insufficient. Additionally, constraints in local supply chains and a shortage of skilled labor are significant hurdles. Former Deputy Minister of International Trade and Industry Ong Kian Ming highlighted that many foreign companies struggle to integrate with local supply chains, limiting the benefits to Malaysian SMEs.

To address these challenges and attract further high-tech investments, Malaysian Prime Minister Anwar Ibrahim has actively courted foreign investors. During a keynote address at SME Future Day 2024 in Berlin, Anwar invited German and European firms to invest in Malaysia, emphasizing the country’s strategic importance for accessing the Chinese market.

The Malaysian government is also focusing on building a national semiconductor strategic task force to enhance the semiconductor ecosystem. Investment, Trade, and Industry Minister Tengku Zafrul Abdul Aziz announced plans to institutionalize local company participation and update laws and incentive packages to remain competitive.

This move has the potential to elevate Malaysia’s position in the global semiconductor supply chain, attracting significant foreign direct investment (FDI) from global tech giants seeking reliable and diverse manufacturing partners while fostering local innovation and research capabilities. These higher value-added processes promise higher profit margins and substantial economic contributions, enhancing the sector’s overall economic impact. Additionally, this move would necessitate the development of a highly skilled workforce, prompting advancements in education and training programs focused on cutting-edge semiconductor technologies.

Despite the opportunities, Malaysia faces a brain drain challenge as skilled workers migrate to other regions for better prospects. An official study revealed that three out of four Malaysian workers in Singapore are skilled or semi-skilled, underscoring the need for strategies to retain talent.

As Malaysia continues to attract semiconductor firms and navigate the complexities of global supply chain diversification, its role in the global tech ecosystem is set to grow. The country’s strategic initiatives and investments are crucial to sustaining this growth and ensuring that the benefits of foreign direct investments are fully realized locally.

This report was compiled with contributions from the team of business experts in our Malaysia office.

ARC Consulting, a division of ARC Group, is an advisory firm specialised in supporting western companies operating in Asia. Our mission is to bridge between the business ecosystems of Asia and those in Europe and the US. Our services cover market entry and expansion, production and sourcing, cross-border M&A as well as ESG and operational improvement and compliance.

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