Malaysia’s ambition to become a digital economy hub still at the halfway mark

Kuala Lumpur, Malaysia. Photo: Alex Block/Unsplash

Malaysia is not short of initiatives when it comes to the digital economy. But as the deadly coronavirus sweeps across the world, crushing the global economy and stranding people without access to online products and services, the Malaysian government is under pressure to rethink its strategies and to make its digital economy more inclusive.

This is particularly significant since it will help rake up investor interest in the country. In 2019, private equity, venture capital and corporate investors in Malaysia pumped in $232 million in startups in 2019, down 42 per cent from $398.2 million in the previous year, according to data compiled by DealStreetAsia. In comparison, funds raised by Singapore’s startups stood at $4.6 billion last year, while in Indonesia, risk capital investors invested $3.4 billion in companies in 2019.

In 1996, when Mahathir Mohamad was Malaysia’s prime minister, he launched the Multimedia Super Corridor (MSC) in Cyberjaya. The goal was to spur the development of the IT sector, replicating Silicon Valley in California, by becoming a home for many startups and global technology firms. However, two decades later, the project was seen as a failure, and the target considered to be too ambitious.

In 2017, the Malaysian government under ex-premier Najib Razak launched an ambitious plan of becoming a fulfillment hub for global brands to reach ASEAN buyers, by launching a Digital Free Trade Zone (DFTZ) with Alibaba Group Holding Ltd founder Jack Ma. While the initiative had a positive effect on exports from small and medium-sized enterprises, its real economic impact remains vague.

While growing the digital economy has always been a top agenda for the Malaysian government, a lack of consistency in policies has raised questions around the execution. The recent abrupt change in political leadership has yet again affected the country’s path to digitalization.

Malaysia is meetings its digital adoption targets 

In an earlier interview with DealStreetAsia, Malaysia Digital Economy Corporation (formerly known as MSC Malaysia), the lead agency in driving the digital economy, said Malaysia is on track to achieve its revised upwards target of 20 per cent contribution to the country’s gross domestic product (GDP) by the year-end. This was underpinned by government initiatives to boost digital adoption.

“This year, we are going to focus on digital adoption. We initially set a target for our digital economy to achieve 18.3 percent of GDP by the end of 2020, but at the end of 2018, we had already achieved 18.3 per cent. We are looking at potentially 20 per cent by the end of this year, which is higher than our initial target,” said its chief operating officer Ng Wan Peng.

Denying that DFTZ is a lost cause, Ng explained that the initiative has helped more than 13,000 SMEs to export their products overseas. “The platform has close to 60 partners, including marketplaces and logistics players such as Ebay, Shopee, Amazon, Lazada, DHL and Pos Malaysia. We are expanding our partnerships,” she added.

Ecommerce is a key driver for Malaysia’s digital economy as it contributed 8 per cent to the country’s GDP in 2018.

But digital adoption by SMEs is still sluggish

However, despite the government initiatives, the digital adoption rate of SMEs in Malaysia remains low and its e-commerce industry is still in its infancy.

Hobbled by its dependence on the agriculture sector, the GDP growth of the country’s SMEs moderated to 6.2 percent in 2018, from 7.1 percent in 2017. Accounting for a fifth of total exports, SMEs growth halved to 3.4 per cent in 2018 from 7.2 per cent in 2017.

According to Malaysia’s SME Association president Michael Kang, only 10 to 20 per cent of the association’s members have embarked on digitalization, and only about 7 per cent of them are involved in an online business. This has put Malaysian SMEs at a disadvantage, particularly during the  COVID-19 pandemic.

Kang’s statement was in line with a study done by the Malaysian government agency SMECorp last year that showed only about 32 per cent of Malaysian SMEs have adopted digitalization.

“From our experience operating in this market, it is evident that many entrepreneurs (in Malaysia) still lack access to the knowledge and skills to diversify their businesses online,” said one of the leading e-commerce platform players.

While e-commerce transactions in Malaysia tripled to exceed $3 billion (Gross Merchandise Value) in 2019 since 2015, according to the Google, Temasek, Bain & Company e-Conomy SEA 2019 Report, online retail accounted for only about 2 to 3 per cent of Malaysia’s total sales. The gap is huge when compared to e-commerce in economic powerhouses such as China (over 30 per cent), and United States, Japan and Korea (over 10 percent).

Indeed, although Malaysia’s internet penetration rate remained high in the region (81.2 per cent in 2018), the country’s current underdeveloped technology and limited bandwidth might have also discouraged users from leveraging online platforms.

“Facing downtime is disruptive for both retailers and buyers. Additionally, this creates a poor consumer experience which then hinders the adoption of e-commerce, especially for first-time online shoppers. And also for retailers as it distorts the supply-demand flow for online trade,” said a market player.

Maximizing the potential of the digital economy

To create an inclusive digital economy, the Malaysian government needs to tackle several issues, such as accelerating reforms in the telecom sector.

In an email response to DealStreetAsia, World Bank’s lead economist for Malaysia Richard Record highlighted one area of key focus for the new government: to get more people connected to broadband – no matter their location, rural or urban – and to bring more of the poor online.

“Ensuring that markets remain open and competitive, and that the public sector serves as an enabler of private initiative would be key elements in this effort,” he said.

While recognizing the Malaysian government’s recent economic stimulus package will help firms in the digital economy during COVID-19, he opined that measures are also needed to tackle other emerging risks. One of these risks is the international response to the pandemic which has caused countries to close their borders or try to recreate autarky, which could cause a shift in the patterns of trade.

The other challenge that might play out is one where rapid digitization of economic activities results in job losses or greater uncertainties when it comes to income for workers who lack digital skills or work in jobs with a limited ability to digitize.

“Like other countries in the region, Malaysia’s economy will be severely impacted by the COVID-19 pandemic. However, in many ways the higher levels of digital adoption in Malaysia mean that individuals, government and businesses are better able to cope with disruption,” said Record.

As for local players, accelerating digital inclusion during the pandemic is important, but recent political changes might introduce some uncertainties.

“The previous government (Pakatan Harapan) spent two years to understand us, and they invested a lot to promote the digital economy. But when leadership changes, certain direction and missions might change,” said online payment service provider iPay88 founder Chan Kok Leong. He added that the new government should leverage on the previous regime’s plans to boost the digital economy.

Initiatives surrounding the digital economy were at forefront of Malaysia’s budget for 2020 under the former Pakatan-Harapan led government. For instance, it allocated Rm550 million (nearly $126 million) in smart automation matching grants to 1,000 manufacturing and 1,000 services companies to automate their business processes. It also launched a Rm21.6 billion (approximately $4.9 billion) National Fiberization and Connectivity Plan for the next five years to improve the country’s connectivity.

“The government was on track (of becoming a regional digital hub) but with two changes of government, I believe that we have lost time and could be behind,” said Ganesh Kumar Bangah, founder and executive chairman at e-commerce solution provider Commerce Asia.

Amid the COVID-19 outbreak, the former National Tech Association of Malaysia (PIKOM) chairman opined that the new government should tackle the issues by focusing more on the economy and provide strategic investment to e-commerce industry success stories in Malaysia, to fund their expansion to other Southeast Asian countries.

As for regional players such as Shopee, its regional managing director Ian Ho also highlighted the need for concerted, centralized efforts from the government to work with e-commerce players on two main pillars. The first was driving adoption amongst businesses via grants or loans that e-commerce players can help support. The second: driving adoption amongst consumers. “With enough demand, businesses would naturally be encouraged to digitize and go online,” he said.

There is no doubt that Malaysia’s digitalization journey will accelerate as more people and businesses are expected to bolster their digital presence in post-pandemic world. But a greater potential can only be seen when Malaysian government is able to move from its various blueprints or visions to an effective and transparent execution.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.