Mega-Project Mania: Malaysia – ASEAN’s Advanced Manufacturing Magnet

Government-linked zones and highly efficient ports power its investment attractiveness.

This article is part of a series exploring Southeast Asia’s industrial zone landscape. For a comprehensive overview, refer to our articles on Vietnam’s Mega-sites and Thailand’s Mega-sites.

Malaysia’s foreign direct investment environment continued to benefit from companies strategically de-risking their supply chains. During 2022, Malaysia attracted $35.9 billion in foreign direct investments (FDI). High-value investments have included an announcement of a $10 billion photovoltaic cell plant by China’s Risen Energy, Intel’s $7 billion investment for a chip-packaging and testing factory, and Austrian manufacturer AT&S’ $2.1 billion investment in a printed circuit board plant. These are just the tip of the iceberg of mega-projects that also include other renewable energy infrastructure, semiconductors, and electronics investments that Malaysia has received.

Multinationals identify the favorable climate that Malaysia provides for investment. The Milken Institute, a think tank that rates the investment climates across the ten member countries of the Association of Southeast Asian Nations (ASEAN) bloc, ranks Malaysia as the most attractive location among its ASEAN peers for foreign investment due to its macroeconomic outlook, access to financial services and the potential for future innovation and development.

Another driver of recent investments has been the strength of Malaysia’s ports and logistics infrastructure. The World Bank’s Logistic Performance Index (LPI) ranked Malaysia 26^th in its 2023 report, a significant climb of 15 spots from 2022. The Bank ranks Malaysia second highest among its ASEAN neighbors, following only Singapore, and a major reason for its position is the quality of its ports. Malaysia has four ports within the top 100 of the World Bank’s Container Port Performance Index, with Tanjung Pelapas Port ranked 6^th globally, surpassing all other ASEAN ports. In addition to Tanjung Pelapas, Malaysia also provides Port Klang in Selangor, that is ranked at 36^th of 348, as well as Johor in the Southern Region at 91^st and Penang in the Northern Region at 92^nd. No other country in ASEAN has as many ports within the top 100, demonstrating the connectivity that Malaysia provides across the major industrial regions of the country and ease of access to global supply chains.

Investors in mega projects will find strong connectivity to global trade through the main ports across the country, but they will also find limited availability of land in existing and well-established zones.

Malaysia’s Industrial Land Challenge: Meeting Rising Demand

Occupancy across Malaysia’s 247 active industrial zones is high and there is limited availability of large plots. The Malaysia Investment Development Authority (MIDA) lists 247 zones as being active across the country and 216 of these zones are located across Peninsular Malaysia, the center of manufacturing in the country. The remaining 31 zones are located in the Malaysian states of Sabah and Sarawak on the island of Borneo which, while providing more available land, but cannot compete with the infrastructure and labor markets available in peninsular Malaysia.

Many of the industrial zones are well-established across Peninsular Malaysia and have been in operation for decades. Occupancy rates in these zones can be as high as 90%. To address the growing demand, developers are planning to extend existing industrial zones, as well as establish new zones. The state of Perak is seeing the development of three major new zones that are scheduled to become operational in 2024. New zones are also being developed in the highly active states of Johor and Penang, which respectively received $2.9 billion and $2.2 billion in FDI commitments in 2022, the top two investment locations in the country.

Increased investment activity is putting a crunch on the existing supply, and investors are finding that there is limited land immediately available. According to CBRE, a property analyst and real estate firm, an additional 5.4 million square feet of industrial space is expected to be added to the industrial supply before the end of 2023. However, a significant portion of this incoming supply consists of built-to-suit warehouses, specifically designed and developed to meet the requirements of tenants in the logistics and light manufacturing industries and with limited stock of greenfield sites coming online.

Industrial Zone Locations

The supply crunch of industrial land was evident in a recent site-selection project that Tractus conducted for a fine chemical company. Chemical production is limited to a small number of zones, and of the 247 active zones in Malaysia, only 43 zones could accept an investment from a chemical processing company. The available land across these 43 zones was largely concentrated in Peninsular Malaysia, where 10 of the 12 zones that informed us, land was available were located. Sabah and Sarawak each provided one zone to consider for the investment; however, due to supply chain management obstacles, limited port infrastructure, labor market dynamics, and distance to clients, these zones were eliminated from further consideration. Satisfying these factors will be a common challenge facing companies considering Sabah and Sarawak, regardless of industry.

Evaluating the land conditions and legal status of a site early on through preliminary due diligence is critical to reducing risk and ensuring that the sites advanced have proper approvals, permits, and infrastructure to accommodate the investment. Tractus’ preliminary due diligence found that of the 10 zones in Peninsular Malaysia, only one held the necessary approvals, titles, and permits for 32 Ha of industrial land in a single plot. The remaining 11 zones faced challenges to providing land within the client’s investment window. This included sites where the developer had not acquired land from the state authority for industrial zoning, zones that had not integrated new land into their masterplans, and land that did not currently have utility infrastructure to support the investment.

Land Acquisition, Licensing & Approvals: Critical to Investment Schedule

Limitations on available land will often result in developers proposing plots for which they may not hold the proper titles and permits for an investment, and it is critical to understand those permits and verify that they have been acquired for the plot. The “Planning and Permission Approval,” known as the Kebenaran Merancang or KM, is granted by the State Land Administration Department (in Malay, Pejabat Tanah dan Galian (PTG)) to zone land for industrial use, as well as the zoning for different types of industries such as small, medium and heavy, and is the primary approval that required for an investment. Plots that hold the KM can be transferred to investors within 1 year, but plots without the KM will require upwards of 2 years to complete the approval process, posing a considerable risk to the investment schedule.

In addition, manufacturing investments also require several permits approved by regulatory agencies to commence construction, a process that can take about 1.5 years to complete. These include approval from the Department of Environment, a Manufacturing License from MIDA, and a building plan approval from the local authorities that involves coordination with 14 different government agencies and utility service providers. Depending on the industry and production volumes, manufacturing investors may also need to conduct an environmental impact assessment (EIA), which typically takes six to nine months, but the process can only be initiated after land ownership has been secured. While investors are prohibited from piling and construction prior to receiving these approvals, the industrial zone is able to undertake site preparation during the period to ensure land is ready for construction once the permits have been acquired.

Permitting Process Schedule

Government-Linked Industrial Zones: Strong Advocates for Streamlined Investments

Industrial zone developers can support investors during the permitting process and well managed developers will ensure that plots have all the relevant titles and warranties to accept the investment. The 247 industrial zones in Malaysia are developed by private companies and government entities such as the State Economic Development Corporations (SEDCs), Regional Development Agencies (RDAs), and Port Authorities and city governments. More than half of all zones are owned and developed by these government entities. Zones that are developed by the government entities are often better positioned to support complex investments from multinationals as they benefit from closer government relationships and potentially have stronger infrastructure and less risk of permitting issues and delays. While there may be an assumption that government linked zones are less proactive to support investment, the representatives from these government linked zones in Malaysia continue to demonstrate capabilities to support highly complex investment, within the investment schedule.

What We Can Do

Tractus has been assisting companies to make informed decisions about where to invest and how to expand their businesses in Asia and beyond for over 25 years. Our partners and senior management leverage their experience running successful manufacturing and service businesses, bringing this commercial perspective to our client work. We have proven experience advising companies on their location strategies, helping them optimize their real estate portfolios, and identifying the optimal sites to support their companies’ growth. We use a proven, integrated site selection, real estate and incentives negotiations methodology, comparing locations in a systematic and objective way that leads to a defensible result. Let us show you how we can support you to make your next assignment a success.

Authored by

James Meisenheimer is Senior Consultant Manager based in Thailand. Kay Khaing Htun is a consultant based in Myanmar.