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Malaysia’s Growing Digital Economy: Opportunities And Sectors To Watch

Last updated on August 6th, 2020 at 12:58 am

Malaysia’s digital economy, as defined by its government registered an average growth of 9% annually between 2010 and 2016 in value-added terms, exceeding Malaysia’s overall GDP growth rate during the period. In 2018, Malaysia’s digital economy grew 6.9% year-on-year to reach RM 267.7 billion, contributing 18.5% to the national economy (up from 18.3% in 2017) according to the Department of Statistics. Although the 2018 growth rate of 6.9% is lower than in 2017 when it grew 9.8%, it is still higher than the country’s overall GDP growth rate of 4.7% recorded for the year according to data from Bank Negara.

This growth momentum is likely to continue thanks to a combination of government support, a youthful, tech-savvy population, and increasing digitization of SMEs among other factors.

On the consumer front, Malaysia boasts favorable demographics to support its growing digital economy. Of Malaysia’s approximately 31 million population, about 42% are aged 24 years and below according to the CIA and the median age of the country’s population is 29.2. This compares with neighboring countries such as Thailand where the median age is 39, Singapore (35.6), and Vietnam (31.9). A relatively young population as well as high incomes have helped push Malaysia’s internet penetration rate to 85.7% as of 2018, which is higher than the approximately 60% penetration rate in the region.

On the enterprise front, large enterprises currently dominate Malaysia’s digital economy as they adopt digital technologies such as e-commerce at higher rates than SMEs, partly due to larger enterprises having greater access to funding and technical expertise. For instance less than 44% of Malaysian SMEs use e-commerce for their business according to data from a 2018 report by SME Corp.

Bar chart showing usage of ICT tools and systems among Malaysian SMEs. 86.5% of Malaysian SMEs used desktop / laptops, 90.1% used internet connections, 91.4% used smartphones, 43.8% used e-commerce, 70.5% used social media, 50.2% used Finance & Accounting systems, , 28.8% used HR systems, 18.8% used POS systems, 14.5% used inventory systems, 12.5% used Customer Relationship Management (CRM) systems, 12.3% used supply chain management systems, 11.5% used order fulfillment systems and 10.5% used Enterprise Resource Planning (ERP) systems.

However, government support (such as the government’s PeDAS program which is aimed at assisting rural SMEs reach a larger consumer base through e-commerce platforms) and a growing breadth of affordable digital enterprise solutions could spur Malaysian SMEs to shift towards digital applications in the future. With SMEs accounting for nearly 99% of Malaysia business establishments, their digital transformation could contribute significantly to the growth of Malaysia’s digital economy.

To add further impetus to Malaysia’s digital economy which is already riding high on strong fundamentals, the Malaysian government has put in place several incentives to encourage greater market expansion and is aiming for the digital economy to contribute 20% to the national economy by 2020, up from 17.8% in 2015.

Some of the incentives include:

  • A RM 210 million allocation under Budget 2020 for the purposes of accelerating the development of digital infrastructure such as industrial parks, and in public buildings such as schools.
  • RM 21.6 billion allocated under Budget 2020 for the five-year National Fiberization and Connectivity Plan (NFCP) which will ensure high-speed connectivity throughout the country along with an additional RM 250 million to increase broadband connectivity in rural and remote areas such as Sabah and Sarawak with technologies such as satellite technology.
  • Under the Malaysia National Industry 4.0 framework, the Industry4WRD Readiness Assessment Intervention Program or in short known as ‘Industry4WRD Intervention Fund’ was launched by the government in Budget 2019. It is a financial support facility for Malaysian SMEs in the manufacturing and related services sectors to adopt Industry 4.0 applications and technologies such as the Internet of Things (IoT), sensor technology, artificial intelligence, robotics, 3D printing and others.

With many tailwinds to support market expansion, the International Data Corporation (IDC) predicts that by 2022, 21% of Malaysia’s GDP will be digitized, up from about 18% currently.

Sectors and industries to watch within this burgeoning market include:

E-Commerce

E-commerce is one of the few verticals in Malaysia that is relatively ahead of the digitization race with the e-commerce sector alone contributing 8% to Malaysia’s GDP in 2018. Already one of the fastest growing e-commerce markets in Southeast Asia, there is still ample growth ahead with the sector expected to expand to nearly US$ 6 billion by 2024.

Column chart showing Malaysia’s e-commerce revenue, 2017-2024. Malaysia’s e-commerce revenue was 2,651 million in 2017, 3,030 million in 2018, 3,680 million in 2019, 4,337 million in 2020, 4,974 million in 2021 (estimated), 5,433 million in 2022 (estimated), 5,750 million in 2023 (estimated), and 5,995 million in 2024 (estimated.

B2C e-commerce has garnered the most attention contributing to the top-lines of online retails such as Lazada (owned by Alibaba (NYSE:BABA)), Shopee (owned by SEA Group (NYSE: SE), and Zalora (owned by Global Fashion Group (ETR:GFG)).

However B2B e-commerce is poised to catch up as SMEs jump into the e-commerce bandwagon. Alibaba looks set to capitalize on this growth opportunity having emerged as one of the most aggressive players in encouraging and facilitating Malaysian SMEs to adopt e-commerce to reach a global customer base. Under its eWTP (e World Trade Platform), Alibaba collaborated with the Malaysian government to launch the world’s first Digital Free Trade Zone (DFTZ) at Kuala Lumpur International Airport (KLIA) Aeropolis in 2017 to assist local businesses sell their products in overseas markets through online e-commerce, and position Malaysia as a regional e-commerce hub. And in April this year, Alibaba’s logistics arm Cainiao Smart Logistics Network celebrated the inaugural flight of a new dedicated cargo route between Hangzhou and Kuala Lumpur.

Electrical and electronics

Malaysia is a global electrical & electronics (E&E) hub, with major players such as Intel, Hewlett Packard, Osram, Broadcom, Western Digital, and Samsung having manufacturing and distribution operations in the country notably Penang. Malaysia’s E&E industry (which can be categorized into 4 sub-sectors namely electronic components, consumer electronics, industrial electronics, and electrical products) is the biggest segment in the country’s manufacturing sector. Malaysia is the world’s 7th largest E&E exporter and the E&E sector accounts for 38% of Malaysia’s exports.

As Malaysia’s digital economy grows, spurring greater demand for mobile devices, semiconductors, storage devices, and other hardware, Malaysia strong E&E industry is well-placed to satisfy demand and profit. Only 62% of businesses in Malaysia are connected to the internet, 46% have fixed broadband, and about 28% have a web presence of some kind according to the World Bank. This is lower than the EU average where 96% businesses are connected to the internet, 95% have fixed broadband, and 75% have a website.

In an effort to incentivize Malaysian SMEs to adopt digitalisation measures for their business operations including electronic point of sale systems (e-POS), Enterprise Resource Planning (ERP), and electronic payroll systems, the Malaysian government will provide a 50% matching grant of up to RM 5000 per company for subscription to such digital services under Budget 2020. The government will also allocate RM 550 million to provide smart automation matching grants to 1,000 manufacturing and 1,000 services companies automate their business processes.

Furthermore, the imminent launch of 5G technology in the country (expected by the third quarter of 2020) should add a further boost to the E7E sector thanks to the offering of 5G-compatible smartphones, tablets and other devices. Satisfying this growing demand for electrical and electronic components suggests revenue growth opportunity for local E&E players such as Inari Amertron Bhd (KLSE:INARI).

Although the country’s E&E sector has been hit by production shocks as a result of Covid-19, these blips are likely to be temporary and should recover in the long term as market fundamentals remain supportive.

Cloud services    

IDC projects Malaysia’s overall IT spending to be approximately US$ 11 billion in 2020, with much of that shifting to managed and cloud services.

Research firm GlobalData foresees Malaysia’s digital spending to reach US$ 25.2 billion by 2023 from US$ 16.5 billion in 2018 (representing a CAGR of 8.9% during the period). Much of that spending will be on client computing and cloud solutions.

Bar chart showing Malaysia's ICT market growth rate (CAGR) a leading 5 IT solution areas, 2018 2023. Mobility is expected to grow at a CAGR of 20.9%, cloud computing 19.1%, data and analytics 17.6%, storage 14.3%, outsourcing 10.1% during the forecast period.

By vertical, the manufacturing sector is expected to account for the lion’s share of ICT spend in 2023.

By vertical, the manufacturing sector is expected to account for the lion’s share of ICT spend in 2023.

Cloud adoption is largely concentrated among Malaysia’s larger enterprises while adoption among SMEs, (which accounting for 98.5% of Malaysian business establishments make up the backbone of Malaysia’s economy) is relatively low. However this is poised to change with the Malaysian government encouraging SMEs to adopt digital technologies such as cloud computing, thanks to favorable provisions in Budget 2020.

Yet again, Alibaba has made its moves in Malaysia with its cloud computing arm Alibaba Cloud partnering with local domain registrar WebNIC to tap into this relatively underserved market.