- 19 hours ago
Malaysia's headline inflation edged up to 2.0% in May, driven partly by higher electricity prices following a surcharge on generation costs. While the overall inflation rate remains moderate, businesses particularly SMEs continue to grapple with rising operating expenses, raising questions about productivity, competitiveness, financing and long-term sustainability. We discuss whether Malaysia is moving towards a high-value economy or facing the risk of becoming a high-cost one, and the structural reforms needed to keep businesses competitive.
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00:00Malaysia continues to record positive growth in manufacturing, exports and businesses financing.
00:05But behind these encouraging numbers, a bigger question is beginning to emerge.
00:10Are the costs of doing business now rising faster than productivity?
00:14While higher electricity tariffs may have only made a modest contribution to headline inflation for small and medium-sized businesses,
00:22every increase in operating costs has a direct impact on profit margins, future investment and long-term competitiveness.
00:30So what is really happening with the Malaysia's business ecosystem?
00:34And more importantly, how can the country avoid falling into the trap of becoming a high-cost economy?
00:40We discuss this with Dato' David Gurupatham, Industries Unit co-founder.
00:43Thank you very much, Dato' for joining us.
00:46Firstly, we can say that Malaysia is encouraging business to move up the value chain.
00:51But rising electricity, labour and compliance costs are also increasing.
00:56Dato, so at what point do this cost start making Malaysia less attractive as a place to invest and do
01:03business?
01:05Well, I think it depends on which industry you're in.
01:09I think this actually shows, I think what a lot of people don't realise is this shows that the government
01:14policy is shifting,
01:15which means a lot of the lower-end SMEs are going to suffer.
01:20And I think it's not balanced, in my view.
01:24The real issue is that costs are rising faster than productivity in many sectors.
01:30Electricity, wages, compliance, land, logistics, subsidy, rationalisation are all moving up.
01:36Now, if you look at this article, it shows that the electricity alone pushed headline inflation to 2.0.
01:44Although they claim that business credit is growing, it doesn't show the full picture.
01:49So, in my view, Malaysia is losing attractiveness for low margin, labour-intensive electric KV manufacturing.
01:57But it remains attractive for E&E, data centres, semiconductors, logistic, Islamic finance, regional HQs,
02:05high-value manufacturing and services.
02:07The danger here is, Nina, is the middle trap.
02:12We are no longer a dirt sheep.
02:14We are no longer dirt sheep, but we are not yet fully high productivity.
02:19In other words, we're not quite as expensive as, for example, Singapore and Taiwan,
02:25but we're not cheap as the others as well.
02:27So, it's called the middle trap.
02:30And it will affect investors.
02:32Although they will still come, but they will demand better infrastructure, policy certainty,
02:37like Singapore and Taiwan, skilled labour and reliable energy.
02:41Are we ready? I don't know.
02:43Bottom line is, Malaysia is not becoming uninvestable,
02:48but the old Malaysian pitch of cheap labour, cheap power, cheap land is weakening.
02:53The new pitch must be stable, skilled, connected, pro-business and strategically located.
02:59But are we ready?
03:00Now, that's a question for the government.
03:02That is the reality that every businesses, especially SMEs, are facing right now.
03:07And many SMEs are still dealing with high operating costs.
03:10Are businesses investing in productivity and innovation,
03:13or are they simply trying to survive from month to month?
03:17Well, Malaysia is becoming a high-cost economy,
03:20but it's not yet a high-cost economy like, for example, Singapore, Korea and Taiwan.
03:27The real issue is this.
03:29Costs are rising faster than productivity, right?
03:32And for many SMEs, for example,
03:37the conversation is no longer simply about productivity.
03:40It's about survival.
03:42Productivity is second.
03:44The challenges are that many SMEs are facing multiple cost pressures, right?
03:50I mean, we all know that.
03:51I hear this every day when I talk to them.
03:54One, high electricity tariffs.
03:56Two, rising wages and labour shortages.
03:59You know, that's to do with the bureaucracy.
04:03Higher rental and financing costs.
04:06Compliance costs and subsidy rationalizations, right?
04:10All of this has drastically affected them recently.
04:14Customers who remain price sensitive in this environment
04:19cannot always invest immediately in automation or digitalization
04:23because preserving cash flow becomes the priority.
04:26I mean, this is the real day-to-day issue for SMEs, you know?
04:33And so we can talk about digitalization and we can talk about automization,
04:37but, you know, they have to be ready.
04:40But right now, because of the cost pressures, you know,
04:43they're concerned about their daily cash flow, right?
04:46But there is a critical distinction.
04:48Survival mode focuses on preserving cash, reducing unnecessary expenses,
04:55renegotiating supplier contracts, improving their inventory.
04:58Now, what happens is this then works all the way down the supply chain, right?
05:02And so productivity mode focuses on generating more output, etc., etc.
05:08But they're not ready yet, you know?
05:10I mean, we just had the diesel, the subsidy rationalization and all that,
05:16and we're still coming out of that, still trying to sort of, you know, stabilize from that.
05:23So the risk is trying in survival mode for too long.
05:27Businesses that only cut costs often become very, sorry, less competitive over time.
05:32So conversely, investing aggressively in productivity without sufficient cash reserves
05:38can also threaten survival.
05:40So they're in a cash-20, damp-if-I-do, damp-if-I-don't situation.
05:44Over the next 12 to 24 months, SME should try to prioritize cash flow, right?
05:50Because that's the biggest challenge at the moment, right?
05:55So it's almost impossible for small and medium businesses at the moment, yeah?
06:02This is where the ripple effect happens.
06:04And yet, if you look at the data, official data right now, Dato,
06:08inflation is only at 2%, which appears manageable on paper.
06:11But are SMEs experiencing a much bigger squeeze on profit margins
06:15than the headline inflation figures suggest?
06:19Certainly, I don't, you know, I think this is one of the most misunderstood parts, right?
06:26People think, oh, it's just a 2% headline inflation.
06:30But it doesn't mean that SME costs have only increased by 2%.
06:34Headline inflation is an average across the entire economy.
06:38An individual SME's cost structure can rise much faster, okay?
06:42So, for example, for many SMEs, the cost increases.
06:46And in reality, Nina, in reality, it looks like this, right?
06:51So electricity potentially up by double digits for affected users,
06:55up by double digits, you know, effective pricing, right?
06:58Wages rising because labour shortages and minimum wage adjustments.
07:03Now, the government just threw minimum wage requirements recently.
07:06And SMEs are still adjusting to that.
07:09Now, employer contributions and compliance costs are increasing.
07:12This was also another measure by the government recently.
07:15Then rentals and insurance generally, they usually tend to go upwards.
07:20There's hardly a situation where rentals actually go down.
07:23And then you look at financing costs.
07:25They were higher than a few years ago.
07:28So you can't just take a 2% baseline rate and say, look, it's only 2%.
07:34It's not.
07:34So then you look at other things that SMEs have to deal with, right?
07:38Imported raw materials and exchange rates, right?
07:42For example, a restaurant, factory, or logistic company may therefore experience a 5% to 15%
07:48increase in operating costs, even though the national inflation is only 2%.
07:53So the real issue is the margin compression, right?
07:57Consider an SME with 10% profit margin.
07:59If it's cost rise by just a few percentage points and it cannot fully pass on, right?
08:05It's not a pass-through.
08:06Those increases to the customers because demand is weak or competition increases.
08:10That 10% margin could quickly shrink to 6% or 4% or even disappear.
08:15And this is going to cause some of these SMEs to quit the Malay phrase gulung tika because
08:21that margin just cannot work when actual cost is 5% to 15%, right?
08:28So on the street, Nina, when you talk to them, business owners, they tell me only one thing.
08:37Dato, I'm working harder, but I'm earning less.
08:40I'm working harder, but I'm earning less.
08:42And this is the reality of the situation for SMEs on the ground, Nina.
08:46And at the same time also, Dato, Malaysia is encouraging businesses to become more digital
08:50and AI-driven.
08:52Businesses are being encouraged to adopt AI and digital technologies, yet many are now
08:56paying more for utilities, like you've mentioned just now, that many of businesses are working
09:01harder, but earning less.
09:03So if cash is limited, are SMEs delaying digital transformation just to cover high operating expenses?
09:10Well, you know, Nina, I think the government has to be reasonable, right?
09:16In a sense that, you see, for SMEs, they can only deal with the issues that they are facing
09:22now, which is the priority.
09:24So for an SME, which do you prioritize?
09:27Do you prioritize your business stability, your cash flow in challenging times, or do you
09:34invest heavily now in AI?
09:37Now, that's the question that SMEs are facing, right?
09:40Do they, damned if they do, damned if they don't, right?
09:43If they invest, then what happens?
09:44So electricity, to be honest with you, Nina, is not the immediate, sorry, it's not an immediate
09:51competitiveness issue.
09:53AI is a long-term productivity driver.
09:56Electricity is an immediate input cost.
09:58So for a manufacturing SME, restaurant, or whatever, if AI's rising electric costs are already eroding
10:08its margins, business under financial pressure are less likely to invest in digitalization
10:13or automation.
10:14So if these SMEs are already facing these challenges right now, where are they going to find the
10:20money to invest in AI and automation?
10:24Number two, AI adoption requires financially healthy business, right?
10:31If the government wants SMEs to embrace AI, but adoption requires cash flow, confidence,
10:37investment capacity, skilled employees, et cetera, because you'd also need the employees to be
10:42able to deploy this AI and things like that, right?
10:46So how are they going to do it if these SMEs are in survival mode?
10:49As I just said, you know, where margins are so low, they don't have the money.
10:53They've already been blasted by all these policies of, you know, I'm not saying subsidy
10:59rationalization is wrong, but they're just reeling from the impacts, right?
11:04So where are they going to get these skilled employees?
11:06Where are they going to pay for these skilled employees, et cetera?
11:09So if firms are in survival mode, AI becomes an aspiration for the future, but not an immediate
11:16concern, right?
11:17Number three, I believe that the policy is it's better to target and support some of these
11:24SMEs rather than doing it across the board and keeping electricity cheap for everyone.
11:31So maybe, you know, the pricing should also, I understand, you know, TNB is a private company,
11:38but there must be some subsidy, I think, for some of these SMEs if the government says,
11:43look, I want you to go into AI and automation and I want to, we want to go into a
11:48higher value
11:48economy, but you've got to do that in a way that supports these SMEs, right?
11:55Right?
11:55And a good way that AI builds tomorrow's productivity, you know, you must understand for them, AI builds
12:00tomorrow's productivity, not current productivity, right?
12:03All right.
12:04Datuk, finally, before we wrap up our conversation, if we can take a step back and focus on the
12:09bigger picture, and if you could recommend one structural reform, not financial assistance
12:14that would make Malaysian SMEs more competitive over the next decade, what would it be?
12:20I think that basically in terms of a financial reform, I think Malaysia, to be honest with
12:25you, you have to look back at all our policies, right?
12:29Because all our policies have been very, to a certain extent, disjointed.
12:34And what I mean by that is, yes, we have gone into some of these policies in a way that,
12:42you know, has not been coordinated, right?
12:48So we have to make Malaysia an SME productivity economy, not an SME subsidy economy.
12:55And the important structural reforms would be, one, cheaper, predictable industrial energy,
13:00not blanket subsidies, but long-term tariff certainty.
13:04SMEs must gain energy to green access, so rooftop solar reform.
13:10We have to reform the efficiency in financing.
13:13We need predictable input costs to price an investment.
13:17That's the number one, predictability, right?
13:20Number two is a rational SME productivity credit, not cash handouts.
13:25We need credit, tax credit, vouchers usable for automation, AI tools, accounting systems,
13:30and things like that, because we've realized that the subsidy mentality has to go,
13:36but a credit system might be better.
13:38Number three, faster payment loss.
13:40Many SMEs are tangled by late payment from large companies and government-like entities.
13:45Now, they are the biggest culprits, right?
13:47Trying to collect money from the government and government GLCs are really pushing SMEs to the brink.
13:53Now, Malaysia should impose statutory payment periods, automated interest on late payments,
13:58and public sector prompt payments.
14:00You know, the government should start paying people.
14:02I'm so sorry.
14:03I know this is going to hurt, but that's the reality of it, right?
14:06And then we have to test this and procurement reform.
14:10Government and GLC procurement should allocate more serious contracts to capable SMEs with transparent payment system and fewer middlemen.
14:18We have, I'm sorry to have this conversation, but we have so many middlemen that government should seriously look at
14:24it.
14:24If the government really wants to reform, then they have to have payment discipline, take out the middlemen.
14:33And essentially, Nina, I know people don't want to hear this, but, you know, corruption is still a very big
14:38issue.
14:39And this is some of the bureaucracy that we have to manage to address, especially for the future of SMEs.
14:45And while the Malaysian economy indicators remain encouraging,
14:48the real task is where the businesses can keep pace with rising costs through higher productivity,
14:53innovation, and competitiveness in a high-value economy.
14:57Dr. Naveed Gurupatham, thank you once again for joining us.
15:00We appreciate your time and perspective.
15:01Peace.
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