Speech by Lim Guan Eng at the MCTIIC 2011 on "Powering Penang Growth by Adapting to China-AFTA" - A Key Gateway For China to ASEAN From A Cleaner, Greener & Safer Penangon on Saturday, 10^th September 2011 at 4 pm: 

Powering Penang growth by adapting to China-AFTA 

When the China-Asean Free Trade Area (CAFTA) came into effect on the 1st of January, 2010, it was already evident to many of us that this will be Asia's decade. Somewhere along this decade, China's economy, measured in Purchasing Price Parity (PPP) terms, will overtake the US economy to become the largest economy in the world. With worries of managing government debt continuing to plague the European Union as well as the United States, Asia will have to take the lead in driving economic growth for the rest of the world.

The China-AFTA pact (CAFTA) is the result of a visionary proposal by former Chinese Premier Zhu Rongji at the ASEAN-China Summit in November 2000. Even then, it was already clear to Premier Zhu and the leaders of the respective ASEAN countries that the rapidly expanding trade between China and ASEAN would grow by even greater leaps and bounds with the institutionalization of a Free Trade Area (FTA).

From 1991 to 2000, ASEAN-China trade grew at an average annual rate of 20.4%, much faster than either the growth in China's global trade (15%) or in ASEAN's global trade (11%). This rate accelerated to 30% in 2002, a clear sign of the dynamic economic activity that was taking place between China and ASEAN.

In 2001, the year which China joined the WTO, China-ASEAN trade (exclusive of HK) was US$41.6 billion.[1] This increased to US$223billion in 2008, an average annual increase of 30%.[2] As a result, China became ASEAN's third largest trading partner while ASEAN became China's fourth largest trading partner.

Malaysia's importance in the trading relationship with China within the ASEAN context is highlighted by the fact that we are the second largest trading partner, after Singapore, comprising approximately one fifth of the total China-ASEAN trade. As of 2010, China became Malaysia's largest trading partner, overtaking Singapore, Japan and the United States.

Penang sits at the hub of this trading relationship given that half of Malaysia's exports to and imports from China are in the electrical and electronics (E&E) sector of the economy. Intermediate as well as assembled E&E products from and to Penang from China form an important part of the global supply chain for major multinationals that operates in both places.

How then can Penang take full advantage of CAFTA in this new decade? We recognize that the nature and structure of CAFTA has opened up economic opportunities in four areas, namely: (i) opportunities to increase trade in physical goods (ii) opportunities to increase economic activity in the service sector (iii) opportunities to increase the two way flow of direct investment and (iv) opportunities for cooperation in other economic areas.

Currently, Malaysia benefits from a strong manufacturing export sector and within this sector, E&E products comprised 34% of total exports in the first half of 2011. But the current composition of E&E export products including consumer electronics, electronic components and electrical items, are mostly in stable or even sunset industries, therefore limiting their growth potential. In fact, the latest figures show that exports from this category of products decreased by 6.5% in the first half of 2011.

With the removal of import and non-tariff barriers for trade in goods and with the changing demands of the marketplace, there are many opportunities to Penang-China expand trade in growth industries such as medical devices to cater for the expanding health care industry and solar panels and light-emitting diodes (LEDs) to cater for the expanding renewable and sustainable energy industry.

Penang has successfully utilized its advantage as an E&E manufacturing hub to expand its share of exports in these growth industries. Many of the local and MNC manufacturing LEDs such as Philips Lumileds, SILQ and Osram have successfully moved up the value chain by producing better quality and more energy efficient products.

More recently, companies such as St. Jude Medical, B Braun, Accellent, Symmetry Medical and Ambu have expanded or started their operations manufacturing medical devices in Penang.

Last but not least, Bosch Solar Energy's RM2.2b investment in a crystalline photovoltaic (PV) manufacturing plant in Penang in June of this year (2011) heralds the potential for more solar energy related products and its components to be exported to and imported from China.

In addition to manufactured exports, there are also opportunities to increase Penang-China trade through the export of halal products to the sizeable Muslim minority population which can be found in large numbers in some of the provinces in China.

Estimates of the Muslim population in China range from a low of 20 million[3] to a high of more than 100 million.[4] The Muslim population in China are mostly concentrated in the Northwest Areas like Xinjiang, Gansu, Ningxia, Qinghai, Guizhou and Hebei as well as in the province of Yunnan in the Southwest and Henan in the Center. Even the low end of this estimation would provide a number of people almost equivalent to the population of Malaysia as a market for Malaysia's halal food.

Malaysia's Halal Certification standards are well known and reputable not just in the process of preparing the halal products but also throughout the supply chain in the entire production, packing and transportation process.

Penang is already a gateway to the halal market to countries in the Middle East and also has the physical infrastructure such as the International Halal Sea Port and Halal warehouses and cold chain facilities that are extremely important to the process of marketing and exporting these products overseas.

Penang is also establishing itself as a serious halal research hub with joint research coming from Malaysian public universities such as USM, UPM and IIUM as well as two universities from Southern Thailand, namely, Prince of Songkhla University and Chulalongkorn University.

This area of halal food exports was often highlighted by business delegations from Henan, Shandong and a few other areas in China with a significant % of Muslim residents.

Penang companies who are already exporting unique Penang halal products should make full use of CAFTA by seeking out these new markets for their products.

While trade in physical goods will likely make up the majority of Penang-China trade, the areas with the highest growth potential are likely to be in the service sector. I will highlight two specific areas in the service sector which are prime candidates for growth. The first is in the related area of business process outsourcing (BPO) and shared services outsourcing (SSO). The second is in the area of tourism.

Penang is an ideal hub for BPO (Business Process Outsourcing) and SSO (Shared Services Outsourcing) because of its strategic location in the heart of Asia Pacific region and time zone which means that companies in Penang are able to conduct business round the clock in Asia, Europe and Americas.

In addition, the linguistic ability possessed by Penang's multiracial and multilingual population means that it can serve numerous groups in Asia as well as the United States, United Kingdom and Australia.

As economic connections between Penang and China continue to grow, these transactions will have to be supported. Many MNCs which have operations in Penang have also set up BPO and SSO arms in order to support their customers in and outside Penang. International companies such as IBM (IT), Ideal Capital (BPO), MoBif (BPO), JABIL Shared Service Centre, Dell (BPO), Seagate (SSO), National Instruments (BPO) and PMC Sierra (BPO) are but a few examples of international companies which have BPO and SSO operations in Penang.

The volume of business originating from China has and will continue to grow significantly as their sales to and from China increase. It is in the interest of these companies to increase the scale of their BPO and SSO operations in Penang, especially in order to exploit growing economic relationships between Malaysia and China and also ASEAN and China.

The other area of the service sector which will benefit significantly from CAFTA is the tourism sector. Already, tourist arrivals from China to Malaysia in 2010 stood at more than 1.1 million and is growing at an annual rate of 10%. Penang, with its unique combination of history, architecture, natural beauty, food and culture, is a natural destination for Chinese tourists. This unique tourism experience, acknowledged by UNECSO in the form of a World Heritage Site (together with Melaka), can be enjoyed by more Chinese tourists with the help of strategic government and business partnerships and initiatives.

For example, more needs to be done to exploit the Penang-Xiamen sister city relationship, established since 1993. The historical connection between the Hokkien population in Penang and their relatives and ancestors in this part of Southern China needs to be better explored or highlighted. While the Penang state government has already taken many initiatives to strengthen Penang-Xiamen ties - for example, in the publication of the "Penang-Xiamen Premier Business Route magazine" and organizing for Penang businessmen, companies and business chambers to participate in the 15th China International Fair for Investment and Trade in Xiamen in September 2011, these strategic initiatives need to be broadened to include a larger number of actors, especially from the private sector.

Additional tourism offerings such as short and long term cruise holidays departing from Penang to nearby Langkawi, Thailand and Indonesia needs to be developed in order to present more options to attract Chinese tourists to visit Penang.

The growing attractiveness of Penang as a destination for medical tourism can also be taken advantage of by Chinese tourists especially as the demand for more sophisticated health care treatment grows along with growing Chinese incomes.

It is also hoped that the comprehensive collaborative framework established between MAS and Air Asia will see more direct flights to China from Penang in recognition of the growing economic linkages between the state and China.

Currently, FDI flows from China to ASEAN and to Malaysia are still relatively small.

An increasing number of Chinese companies are also realizing the potential payback from investing in Penang, evidenced by decision of four Chinese companies in four different sectors to set up operations in the state during the first fourth months of 2011.

Nissi High Tech Service is a power management company, Arvest Global is in the oil and gas industry, Shenzhen Alex Connector Co Ltd is a player in the E&E sector and Internatioal Marketing Organizing Service (IMOS) is involved in the service sector of the economy.

While Penang cannot compete with China on the basis of labor cost, where Penang has a comparative advantage is in the area of human capital, better physical infrastructure, the change in focus from manufacturing to research and design and a more conducive environment for the protection of intellectual property.

Chinese giants in the E&E sector including companies like Huawei, which already has a presence in Technology Park Malaysia (TPM) and MDec, should also seriously consider investing in R&D facilities in Penang to exploit the knowledge environment.

At the same time, an increasing number of Penang companies have also expanded their activities to China including AT Systematization Berhad (Suzhou, Industrial Automation Products), JEFI AquaTech Resources Sdn Bhd (Fujian, Frozen Shrimp/Food Processing) and Qdos Flexcircuit (Xiamen, manufacturer of Flexible Printed Circuits (FPC)).

In addition to private investment flows from Chinese companies in private opportunities, the Penang state government also welcomes the participation of Chinese companies and the Chinese government in important infrastructure projects in the state. The construction of Penang's Second Bridge, expected to be the longest in South-East Asia, is a joint venture between UEM Builders Bhd and China Harbor Engineering Co and is partially funded by a US$800 million loan by the Chinese government to the project.

The Butterworth-Penang Tunnel Project and other highway traffic elevation project which spans nearly 30km with a projected cost of RM 8 billion offers not only opportunities for Chinese investors but also a fiscal boost to pump-prime the economy should there be any global slowdown.

As of January 2010, CAFTA encompassed 1.9 billion people, had a combined GDP of US$6.6 trillion and total trade amounted to US$4.3 trillion. Under the CAFTA, more than 9,000 products imported from China to Malaysia are duty-free while China will reduce tariffs on more than 7,000 products from ASEAN. Besides manufactured goods, the agreement also covers services and investment. Hence, there are opportunities for many MNCs to increase local content of their products to be above 40% to take advantage of the ACFTA so that products can be shipped from Penang, Malaysia into China. We also hope that some of the US$10 billion Chinese-Asean Fund (CAF) can be invested in some of these projects in Penang and in the NCER.

Let everyone including MNCs and SMEs consider Penang as a reliable location that protects your investment and yet serve as a gateway to China through the CAFTA. In other words, we offer not just our natural competitive and comparative advantages in logistics,the high-tech, high-value and knowledge based industries but also in language. resort tourist destination and a cultural intermediary between East and West.

Penang can be the key gateway in Malaysia for China & ASEAN as Penang has several competitive advantages.

(a) Top in investments in Malaysia attracting 36% of Malaysia FDI despite having only 6% of Malaysia's population.

(b) The best financially-managed state in Malaysia according to Auditor-General's Report.

(c) The only government in Malaysia to be praised by Transparency International for having a clean government that fights corruption and practice open tender.

(d) Contributes 65% of Malaysia health tourism receipts.

(e) Pioneering green state with a ban on free distribution of plastic bags to hypermarkets.

(f) Safe city with the largest drop in crime index.

A cleaner, greener and safer Penang is the ideal gateway for China to ASEAN.

*Lim Guan Eng, Penang Chief Minister