Rise of Malaysia’s middle class presents opportunities at our doorstep

This story was originally published on Lianhe Zaobao on 17 November 2019.

Mainland peninsula Malaysia lies just across the Straits of Johor. In the past, when local companies wanted to venture abroad, their first choice was to venture into Malaysia. However, is the Malaysian market still as attractive today? With the rise of the middle class, what kind of business opportunities does the consumer industry present to Singapore companies? In this issue of “Businesses in ASEAN”, we zoom in on Malaysia to focus on the latest trends and developments in this market.


ASEAN Malaysia
With a population of 32.6 million, Malaysia’s middle class is expanding rapidly, and there is considerable demand in retail, food and beverage, health care, education and e-commerce. (Photo: Lianhe Zaobao)

 

Malaysia is a close neighbour of Singapore and has traditionally been the preferred location for local companies, especially manufacturing ones, to go global.

However, in recent years, the economies of Indonesia and Vietnam have grown rapidly and attracted many companies. In contrast, the pace of Malaysia’s economic growth has slackened due to the oil crisis a few years ago.

On closer inspection, Malaysia’s economy is achieving a healthy improvement. According to data released by the Malaysian government for its 2020 Budget, the economy was expected to grow by 4.7% in 2019 and 4.8% in 2020.

Apart from the manufacturing industry, Malaysia’s consumer industry and digital economy offer potential business opportunities too.

ASEAN Malaysia Map

 

Proximity offers greater ease in management

For Singapore companies, what is most attractive about Malaysia is undoubtedly its geographical proximity and the affinity in language and culture.

"Malaysia’s proximity and cultural similarities to Singapore have made it a natural first stop of investment and expansion for many Singapore companies, especially the SMEs. It has been among Singapore’s top three trade partners for many years,” Mr Neoh Yi Liang, Enterprise Singapore’s Regional Director (Kuala Lumpur) said in an interview with Lianhe Zaobao.

He added that Malaysia’s consumer industry has become a sector with huge potential in recent years. With a population of 32.6 million, the country’s middle class is expanding rapidly, and there is considerable demand in retail, food and beverage, health care, education and e-commerce.

According to CEIC data, in March 2019, Malaysia’s private consumption achieved nearly 60% share of the country’ economy, which is the highest level ever. Private consumption is expected to be the main driving force for economic development, and the consumer industry presents huge business opportunities.

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Chan Weiwen of Singapore company Chan Yew Leathers guides a worker in its workshop. (Photo: Lianhe Zaobao)

 

In September 2019, Singapore company Chan Yew Leathers opened a store and workshop in Kuala Lumpur. The company focuses mainly on bag repair, restoration and tailor-making of leather goods such as watch straps and belts.

Mr Chan Weiwen, who is the third-generation at the helm of the company, told Lianhe Zaobao that as the income of Malaysians is on the rise, the demand for leather goods such as designer bags has also grown. This has augmented the demand for repair services.

In Singapore, the company has established partnerships with many internationally renowned brands. They leveraged on this to drive their expansion in the Malaysia market.

The 2,000 square feet store cum workshop at Sunway Velocity Mall currently employs a manager, an administrative executive and three artisans. Mr Chan shared that the workshop can accommodate up to 10 artisans, and the company intends to acquire more manpower as the business and customer base grow.

As for the reason for selecting Malaysia as their first choice for overseas expansion, Mr Chan explained, "Similarities in culture and language between the two countries and geographical proximity make it convenient for us to provide weekly training for our employees here." Currently, Mr Chan and his father Mr Chan Siew Wen take turns to travel to Kuala Lumpur every week to manage the local business. In addition, Singapore companies can set up wholly-owned subsidiaries in Malaysia and have full management control, whereas in Indonesia and Thailand, they will need to find local partners.

Mr Chan plans to open more stores in a year or two, and the workshop in Kuala Lumpur will focus on meeting and processing orders.

Increasing willingness from the middle class to spend on F&B

The rapid development of the middle class has also created opportunities for restaurant operators.

Four years ago, Creative Eateries brought its Japanese barbecue brand Rocku to Kuala Lumpur through franchise. In September 2019, it opened its third outlet at Sunway Pyramid Shopping Mall, which occupies an area of ​​4,000 square feet. A fourth branch is expected to open in 2020.

"Malaysians are very willing to spend on F&B, and business during weekends is also brisk," Mr Anthony Wong, CEO of Creative Eateries said.

He disclosed that the first store had achieved positive results in its first month of operation. 

Rapid development in e-commerce

Rental in Malaysia’s shopping malls is also reasonably priced and labour costs are relatively lower. Compared to operating in Singapore, restaurants in Malaysia can reap higher profit margins.

The group's Japanese hotpot brand Suki-Ya entered the Malaysian market through a joint venture.
Similarly to Singapore, Malaysia’s e-commerce has also achieved rapid development.

According to Mr Sam Cheong, Head of Group FDI Advisory and Network Partnerships, Group International Management, United Overseas Bank (UOB), 36% of Malaysia’s population is young and this drives the development of e-commerce, leading to a double-digit growth in the logistics sector.

Singapore e-commerce and logistics companies that have entered the Malaysia market include Ninja Van, Shopback and Shopee.

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Ninja Van's delivery vans in Malaysia. (Photo: Lianhe Zaobao) 

 

Ninja Van first ventured beyond Singapore to Malaysia in 2015. Mr Lai Chang Wen, co-founder and CEO of the company, said that when the company started in 2014, e-commerce was already expanding rapidly. "There were many e-commerce companies, but reliable delivery services were few and far between."

After the company gained a foothold in Singapore and noticed that the region faced similar issues, it decided to expand into the Southeast Asian market.

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Ninja Van's warehouse in Malaysia. (Photo: Lianhe Zaobao)

 

In April 2019, Ninja Van launched Ninja Box at 95% of the light rail stations in Klang Valley, and became the largest parcel locker operator in Malaysia. The company also started to offer B2B services to equip corporate customers with first-mile/last-mile logistics solutions.

In terms of challenges faced, Mr Lai commented that due to Malaysia’s vast area, the company has more often than not encounter middle mile delivery issues. Sometimes, they would have to deliver to locations further than expected, or have trouble locating destinations via Google.

Each postal code in Malaysia covers wide grounds, and many addresses in different states look similar too. The company has hired locals to overcome this challenge.

ShopBack, a platform which provides users with cash rebates, also entered Malaysia in 2015. Chief Commercial Officer Ms Candice Ong told Lianhe Zaobao that their partnered businesses such as Zalora, Lazada, Expedia, Agoda and Foodpanda have operations in Malaysia, and local consumers are also familiar with online shopping.

Physical retail landscape remains active

The rise of e-commerce has not led to the downturn of physical retail stores. Many Singapore companies continue to invest in storefronts, offering experiential shopping experiences and unique creative products.

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A Nike store in Kuala Lumpur. (Photo: Lianhe Zaobao)

 

Singapore integrated enterprise SUTL Global acquired Malaysia's largest Nike-only store operator Sportsland in 2019, running eight Nike stores in Malaysia.

When interviewed, Mr Arthur Tay, SUTL Global Chairman and CEO said that the retail industry in Malaysia has grown steadily and physical retail is also flourishing. In the second quarter of 2019, the retail industry grew 4.5% year-on-year and is expected to grow by 4.4% for the entire year.

Mr Tay pointed out that Singapore and Malaysia share similarities in culture and lifestyle, consumers are keen to visit malls and they also enjoy experiential shopping.

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Naiise's branch in Kuala Lumpur which opened three years ago. (Photo: Lianhe Zaobao)

 

Naiise, a Singapore creative design store, opened a branch in Kuala Lumpur three years ago. Founder Mr Dennis Tay observed that as Malaysians become more affluent, consumers hope to buy more uniquely creative products and not mass market ones.

He indicated that the market demand is huge, and there are only one or two similar competitors, which means that there is a lot of room for their development.

In addition, as going green is more emphasised, Naiise is also looking to incorporate more environmentally friendly concepts into its products to cater to consumers' tastes.

Besides introducing the local market to products designed by Singaporean talents, Naiise also works with the local community to discover designers with potential.

Manufacturing industry still one of the most important facets of the economy

Mr Neoh pointed out that Johor, Penang and Selangor’s manufacturing industries have grown steadily while Kedah, Sembilan and Pahang are also ideal as bases for certain types of manufacturers. 

In 2012, Food Empire shifted its coffee production plant to Klang in Selangor to take advantage of the lower production costs there. They established a new factory which is better equipped in order to meet global demands. 

At the same time, the company decided to expand into food ingredients and snack production, so they set up a creamer and snack production plant in Iskandar’s industrial estate. 

As creamers are essential in 3-in-1 coffee mix, the addition of a creamer plant has helped the vertical integration of the business. Malaysia is a major exporter of palm oil, which is one of the main ingredients for producing creamers.

Businesses must adapt to lower bureaucratic efficiency 

General feedback from businesses on operating in Malaysia is that processing and approval of applications are relatively slower. Businesses have to adapt and adjust accordingly.

For example, it took an entire year before Chan Yew Leathers could officially launch in Kuala Lumpur. In the lead up to their launch, they had to apply for permits from various departments.

Mr Alvin Lee, Head of Group Wealth Management and Community Financial Services at Maybank Singapore told Lianhe Zaobao that meeting Malaysian regulatory requirements may subject merchants to additional legal costs, which is also time consuming.

He reminds companies to consider the impact of the minimum wage and possible  re-implementation of a goods and services tax (GST) on their business.

Malaysia removed the GST in 2018, but the media recently reported that the Malaysian Institute of Economic Research has called on the government to re-introduce the 3% GST because revenue from the sales and service tax is not sufficient to make up for the difference after the removal of GST.

In addition, Mr Lee suggests that companies developing their business in Malaysia can leverage on the free trade zone to obtain tax benefits, including tax breaks and flexible trade regulations. Companies in certain priority sectors are entitled to tax holidays, including reduced  import tariffs.

Scoot currently flies to 7 locations in Malaysia, including Kuala Lumpur, Ipoh and Penang. There are a total of 22 direct flights each week between Singapore and Kuala Lumpur. 

SMEs in urgent need for financing

In recent years, more Singapore tech start-ups are exploring business opportunities in Malaysia. The local SME sector is large and the demand for financing is strong, but traditional financial services cannot satisfy this demand.

Mr Neoh said that because smartphones and digital applications are used more commonly, Singapore tech companies and start-ups have ventured to Malaysia to explore business opportunities, test their solutions or provide services in areas such as electronic payments, B2C urban commuting, and B2B financial technology.

Finaxar, a financial technology company that funds SMEs, entered the Malaysia market in 2018. “We do know the challenges of SMEs in Singapore are echoed by SMEs in Malaysia, and may be to a greater extent than in Singapore,” said Mr Vihang Patel, co-founder and CEO of Finaxar. 

SMEs account for as much as 98.5% in Malaysia, and their contribution to the gross domestic product (GDP) is growing steadily. This figure is expected to increase from 33% in 2012 to 41% in 2020.

According to a 2016 report from Deloitte, banks can only meet the financing needs of about 50% of local SMEs. SME Corp, the central coordinating agency of Malaysia, estimated that the financing gap for SMEs is about RM80 billion (S$26.3 billion).

Mr Patel feels that the companies operating in Malaysia need to pay more attention to the impact from politics, currency and economic changes, and tailor a risk model from there.

Singapore securities crowdfunding platform Fundnel has doubled its trading volume in Malaysia in the past year. Fundnel’s co-founder and CFO Ms Sng Khai Lin said that since the launch of securities crowdfunding by the Malaysian Securities Commission in 2015, the sector has raised a total of RM67 million in funding, but it is only the tip of the iceberg compared to the funding gap faced by SMEs.

She noticed that Chinese investors generally hope to receive documents in Mandarin. "This, in particular, was a point we undermined because we presumed that our platform in English, as a universal language, would suffice."

There are different criterias in Singapore and Malaysia to become an Accredited Investor. To be an Accredited Investor in Singapore, the individual must have a net personal asset in value exceeding $2 million, or has an income of not less than $300,000 in the past 12 months. The requirements for being an Accredited Investor in Malaysia are more achievable, where an individual’s net personal asset in value is a minimum of RM3 million (S$1 million) or has an income of not less than RM300,000 (S$100,000) in the past 12 months. 

As income and affluence grow, the increasing demand for wealth management services had attracted startup Welnvest to seek out business opportunities in Malaysia. They are currently working with major banks on launching digital wealth management services.

Welnvest founder Mr Bhaskar Prabhakara shared that, in contrast with other countries, some of the local major banks’ spending on digital wealth management are relatively low. As Malaysia prepares to issue digital bank licenses in 2020, technology companies such as Grab, Touch ‘N Go and Boost are likely to apply. This will spur reforms in the banking industry, quickening the pace for digital services. 

Mr Cheong from UOB said that as the digital economy continues to develop in Malaysia, it will create more opportunities for B2B players to provide more services for the local government and companies.

Take for instance Singapore company Aptiv8 IT, which is now assisting a Malaysian public agency to digitise approval procedures. Mr Sam Tay, CEO of Aptiv8 IT expressed that local real estate development, infrastructure, resources and energy construction are flourishing, and these industries need to improve productivity with the use of technology. As such, the company decided to expand into Malaysia after a feasibility study.

Survivor’s guide for business owners in Malaysia

① Learn more about market and business practices, including regulations, consumer preferences, human resources etc. For instance, some companies pay salaries on a weekly basis.

② When communicating with government agencies or business partners, do not assume that email is the only communication channel. After sending an email, follow up with a call or text. People are more inclined to reply with WhatsApp. Understanding official procedures and applications will often make face-to-face meetings more effective.

③ Different states have different business practices and consumer behaviours, hence flexibility in management is essential. For instance, Johor, Kedah, Kelantan and Terengganu have adopted a workweek from Sunday to Thursday, while the working days in other states are from Monday to Friday.

④ Pay attention to opportunities beyond Johor and Kuala Lumpur, such as Kedah, Pahang, Sabah and Sarawak, where potential exists in industries such as agrifood and tourism.

——Mr Neoh Yi Liang, Regional Director (based in Kuala Lumpur), Enterprise Singapore 

 

Reporters share their observations in Indonesia, Vietnam and Malaysia

 “Businesses in ASEAN” is a series of reports launched by Lianhe Zaobao, bringing up to date regional market information to Singapore companies. This bi-weekly report focuses on key growth areas and business must-knows in different markets.

Next up, three journalists behind the previous stories on Indonesia, Vietnam and Malaysia will share their untold experiences behind the scenes. Readers can find out more on the charm and challenges of these three markets from their perspectives.

Other stories in the series:

  1. Explore business opportunities in ASEAN
  2. Indonesia: A market where obstacles and opportunities co-exist
  3. Opportunities arise in Vietnam due to US-China trade war