This article first appeared in digitaledge Weekly, on September 14 - 20, 2015.
STAMFORD Raffles, the founder of Singapore, was probably right when he said the island was more valuable than a continent. Since its establishment, the city state has attracted merchants of all kinds from far and wide, making it the logistics hub of Southeast Asia.
However, lack of space is proving to be a major problem for expansion. Although the shores of the 718.3 sq km island have been reclaimed to cater for a growing population and industrial needs, there is a limit to it.
Across the Causeway, Malaysia has all the right ingredients of becoming a logistics hub for the region, too. It is located between two of the most important shipping routes in Asia — the Straits of Malacca and the South China Sea.
This strategic location, ample land and good infrastructure are among the strengths that Malaysia could tap to convince multinational corporations to set up their regional logistics centres here.
“A lot of people who wanted to set up distribution centres used to do it in Singapore. However, we are seeing more people come to Malaysia’s ports because Singapore is running out of land,” Westports Holdings Bhd CEO Ruben Emir Gnanalingam tells digitaledge Weekly.
In fact, the World Bank’s Logistics Performance Index 2014 ranked Malaysia second in Southeast Asia in terms of logistics connectivity, after Singapore, and 25th globally out of 160 countries. Singapore was in 5th place, followed by Thailand in 35th, Vietnam in 48th and Indonesia in 53rd.
Logistics is a key enabler of Malaysia’s trade-dependent and export-oriented economy, says Datuk Khasbullah Kadir, the chief operating officer of Kuantan Port Consortium Sdn Bhd (KPC), which is the operator of Kuantan Port.
Malaysia’s Third Industrial Master Plan (2006-2020) has projected a threefold increase in total marine cargo handled by the country’s ports, from 252.6 million tonnes in 2005 to 751 million tonnes in 2020.
Indeed, a vibrant logistics industry is vital for a developing country that depends on international trade as the backbone of its economic growth, says Freight Management Holdings Bhd managing director Chew Chong Keat. “Logistics make up about 10% of a nation’s gross domestic product. It is a fundamental part of a growing nation, so you really have to factor in close to 10% of GDP for logistics activity. Frost & Sullivan predicted a compound annual growth of about 10% up to 2017 for the industry.”
In his foreword to the Logistics and Trade Facilitation Masterplan (2015-2020), Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar also notes the importance of the logistics sector to the economy, “… it supports all sectors of the economy, facilitates trade, reduces cost of doing business and contributes to enhancing productivity and efficiency of the economy.”
The executive summary of the master plan points out that among the strengths that favour the country as a key logistics link to Asia is its status as a regional office and manufacturing base for MNCs such as Western Digital, Dell, Schlumberger, Seagate, Microsoft, IBM, Siemens, Toyota, BMW, Samsung, Keppel Corp and Temasek Holdings.
Deutsche Post DHL, BMW AG, Japan’s NYK and Singapore Post (SingPost) have also been investing in Malaysia’s logistics industry either through a physical presence in the form of warehouses and regional distribution centres or equity stakes in local logistics companies.
Just last week, BMW Group held the groundbreaking for its regional parts distribution centre in Senai Airport Free Trade Zone. The 761,000 sq ft facility will store and distribute BMW automotive parts to 22 countries in Asia-Pacific.
Last year, DHL Express, which is a part of Deutsche Post DHL Group, spent RM10 million on expanding its international express gateway facility in Penang to 4,000 sq m. The facility, which has become DHL Express’ largest in Malaysia, has a sorting capacity of 4,800 pieces per hour.
When announcing the launch of the facility, DHL Express Asia-Pacific CEO Jerry Hsu said the expansion was a natural progression towards enhancing the company’s services to its customers in the region, given Penang’s central location.
The China factor
While lack of space constrains Singapore’s growth as Asean’s logistics hub, China’s One Belt, One Road (OBOR) blueprint, which seeks to increase economic connectivity and cooperation between countries in Eurasia, will influence the development of logistics in this region.
OBOR comprises the land-based Silk Road Economic Belt (SREB) and the oceangoing 21st Century Maritime Silk Road (MSR). Both were unveiled by Chinese President Xi Jinping in 2013.
SREB refers to the belt of countries along the ancient Silk Road through Central Asia, West Asia, the Middle East and Europe. This initiative aims to integrate the region into a cohesive economic area by investing in infrastructure, increasing cultural exchanges and broadening trade.
MSR complements SREB and is focused on investing in and fostering collaboration in Southeast Asia, Oceania and North Africa through several contiguous bodies of water — the South China Sea, the South Pacific Ocean and the wider Indian Ocean.
As OBOR takes shape, observers point to the investment activities in key infrastructure projects undertaken by China’s state-owned enterprises and public companies in Southeast Asia, the Indian subcontinent and Africa as the precursor to the policy.
The SOEs, including China Ocean Shipping Company (COSCO) and China National Petroleum Corp (CNPC), have been investing in logistics and industrial infrastructure in Southeast Asia and beyond. In Malaysia, Guangxi Beibu Gulf International Port Group acquired a 40% stake in KPC in September 2013 and Guangxi Beibu, partnering IJM Corp Bhd, will invest
RM3 billion in developing a new deepwater terminal at Kuantan Port while Beijing Urban Construction Group Co Ltd is involved in the construction of an undersea tunnel linking Penang island to the mainland.
China has also promoted its technology and construction expertise for the Kuala Lumpur-Singapore high-speed rail project.
There is talk as well of GD Express Carrier Bhd (GDEX) benefiting from the booming e-commerce between Malaysia and China. This is because of GDEX’s relationship with SingPost, which counts China-based Alibaba Group Holding Ltd as a substantial shareholder. SingPost owns 24.2% of GDEX.
Hutchison Port Holdings Ltd (HPH), a port management company owned by Hong Kong billionaire Li Ka-shing’s CK Hutchison Holdings Ltd, is a substantial shareholder of Westports with a 23.5% stake as at June 3. HPH first acquired a 30% stake in Westports in 2000.
According to Ruben, HPH’s investment has enabled the Port Klang-based company to learn best practices and experimentation, and gain knowledge, data and technology from other ports within the Hong Kong group.
Challenges abound
Although Malaysia’s infrastructure is considered good — second only to Singapore in Southeast Asia — road congestion, especially in the last mile to Port Klang, is a nagging headache. This has been the case since 2006, laments Ruben. “One thing that I have been complaining over the last 10 years is the road. Although the government announced plans to enhance the last-mile connection in Port Klang, that is just a small part of the problem. It is a good start but a lot more needs to be done.”
In the Logistics and Trade Facilitation Masterplan, the Economic Planning Unit notes that the development of rail-based freight transport is curbed by limited accessibility and connectivity to the hinterland and poor integration with other transport modes.
Besides that, a lack of international air connectivity, especially direct flights to Europe from the Kuala Lumpur International Airport (KLIA), has resulted in the leakage of large volumes of air freight to the airports of neighbouring countries, especially the Singapore International Airport in Changi.
The master plan suggests improving the last-mile connectivity to Port Klang, addressing the bottleneck in the Padang Besar Terminal and developing freight hubs at strategic locations, as well as partnering the private sector on rail operations and infrastructure development.
In addition, the former low-cost carrier terminal at KLIA will be developed into an air cargo logistics hub. As at 2014, KLIA handled 753,899 tonnes of air freight, compared with Changi’s 1.88 million tonnes and the Bangkok Suvarnabhumi Airport’s 1.23 million tonnes.
In terms of governance in the development of the logistics industry, the master plan outlines a need to create a “champion” agency to improve coordination and collaboration among the stakeholders. The Transport Ministry will lead and drive the logistics sector through integrated planning and development and improve the coordination of government initiatives through inter-agency collaboration.
Externally, OBOR will benefit not only Malaysia but also many other countries within China’s sphere of influence. Beijing’s setting-up of the Asian Infrastructure Investment Bank will provide funding for many countries in the region to build their infrastructure.
China is also looking at possible alternatives to the Straits of Malacca because it is a choke point for China’s trade. At the moment, most of China’s crude oil imports from the Middle East and Africa have to go through either the Straits of Malacca or the Makassar Strait.
According to the Energy Information Administration of the US, as much as 15.3 million barrels of crude oil and liquefied natural gas were shipped through the Straits of Malacca last year. The bottleneck is a dilemma for China as it depends heavily on the strait for its energy needs.
China’s CNPC has invested US$2.5 billion in building pipelines connecting Kyaukpyu Port in Myanmar to Kunming, Yunnan province. These pipelines have the capacity to transport 12 million tonnes of crude oil and 12 billion cu m of natural gas a year.
There is also talk of the Kra Canal being built, connecting the Andaman Sea and the Gulf of Thailand, cutting out a distance of more than 1,000km. If the Kra Canal does get built, southern Thailand could become a logistics hub, competing with Malaysia’s ports and Singapore.
Despite all these challenges though, Malaysia’s position as the next logistics hub of Southeast Asia is within grasp, provided there is stability in its political system and few unexpected shocks to the economy.
