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Manufacturing Sector Waiting For A Favourable Wind
Malaysia Perspective | 07 February 2011

By Yang Min Wan

With weak external demands and domestic demands easing from a peak, Malaysia’s manufacturing sector is showing signs it is running out of steam. Coincidentally, climate changes and the industrialised West loosening its money supply have breathed a breath of life into the commodities market, thereby propping the manufacturing sector up into a sideways growth pattern in the nick of time.

Even though the commodities market staged a very strong rally over Q4 last year, it was still not strong enough to lift the manufacturing sector significantly.

The lacklustre performance of manufacturing growth weighed down on the November industrial production figure, which registered a year-on-year growth of only 5.1% that is below the market forecast of 5.9%. If not for the buffer contributed by the commodities market, industrial production would fare even more disastrously.

Looking ahead, as external demands are still unstable, the government will push ahead with infrastructure developments that are part of the economic transformation package in the second half of this year. This would shape up to be the gust of propulsion that will bring manufacturing out of its doldrums.

Second Worst Performance Of The Year
The freshly released November manufacturing output figure showed a growth of 6.5%. Though better than the 4.7% in October, it is still the second lowest growth rate in the past 12 months. Apart from a stronger showing than in October, the figure in November was the worst among all the months in the past year.

As I pointed out in my analysis of November’s exports in this column last week, there are a range of unfavourable factors that will hold down the export demand-driven manufacturing sector: the halting US economic recovery, the desperate attempts by the financial and capital markets to dance in sync with the vagaries of the US financial data, Europe still being beset by sovereign debts and its economic recovery largely a work-in-progress, while big brother of Asia – China – is starting to apply brakes to cool down its red-hot economy.

The most vulnerable industry within the external demand-driven manufacturing sector is also Malaysia’s largest manufacturing industry — the electrical and electronic (E&E) industry. Its exports fell by 11.6% in November, dipping below the RM20 billion mark to hit RM19.2 billion. Electrical and electronics production withered from 2.7% in October to a mere 0.5%.

This means that on a year-to-year basis, E&E production growth is close to zero; on a monthly basis, November’s E&E production has plunged by as much as 8.2% as compared to October.

Even though October was the first month of the 4th quarter, E&E manufacturing growth was already stagnating. The result slip of the manufacturing sector for the last quarter of the year is thus almost certain to be dismal. Production in the E&E industry saw a sharp fall to 30% in Q2 last year, retreating further to nearly 10% in the third quarter. Following this trend, the last quarter will probably come in at below 5%.

Domestic Demands A Poor Rescue For Weak External Demands
The electrical and electronic manufacturing industry is the country’s engine head of all external demand-driven manufacturing industries. If it is suffering from a substantial slowdown, there is little that the other export-oriented manufacturing industries can do to save the situation. Even the domestic demand-driven manufacturing may not contribute much to turn the tide. This is a structural weakness of Malaysia’s manufacturing industry.

The textile, garments and shoes manufacturing industry was able to sustain a double-digit growth last November, especially the garment industry which picked up pace from 16.6% in October to chalk up an impressive 28.5% in November. However, the proportion of the clothing industry pales in comparison to the heavyweight E&E industry and could do little to counter-balance the inexorable slide of the latter.

The representative from the domestic demand front is none other than the automotive assembly industry. Although this industry maintained a double-digit growth rate, it has already started slowing slightly, retreating from nearly 23% in October to above 18% in November. This sector grew sharply in Q2 to nearly 32%, while Q3 also grew by more than 19%. Q4 is expected to maintain the level of Q3.

Nonetheless, as the automotive assembly industry make up only 3.5% of the manufacturing production index and its representation in the industrial production index is even smaller at 2.21%, its strong growth will have little impact on the manufacturing and industrial production indices.

Economic Transformation Brings Fresh Impetus In The Second Half
With the wind of inflation blowing through the commodities market, petroleum, chemicals, rubber and plastic industries that exploit raw materials have performed well in November by growing 9.5%, which is twice that of the 4.7% in October. This sector grew by 6.1% in Q2 but slowed in Q3 to 5.2%, with stronger growth in Q4 expected.

The petroleum, chemical, rubber and plastic industries together account for 36.2% of the manufacturing production index and 22.98% of the industrial production index, making them the sector with the heaviest weightage among the 7 component sectors of the manufacturing production index.

Electrical and electronic manufacturing industry may be the largest exporting industry, but it ranks No. 2 in its proportion within the manufacturing production index, accounting for 32.3%, while weighing in at 20.50% of the industrial production index.

Apart from the appreciating commodities market, which is beyond our control, the building-related non-metallic minerals, base metals and metal-based products sector performed very well, registering a sharp growth of 24.4% in November compared to over 15% in October. This sector grew in excess of 23% in Q2 but slowed to 9% in Q3. It is expected to fare even better in Q4.

From the October and November industrial production figures, Q4 of the last quarter was struggling to put up a brave front. Disadvantaged with a relatively higher basis of comparison, the first half of this year, I am afraid, may fare just as poorly. Eventually, we can only pin our hopes on the economic transformation-related mega projects that the Government will start in the second half of the year.

If these mega projects, worth tens of billions of ringgit, are planned properly and proceed smoothly, we can expect the ripple effect it creates to stimulate domestic demands, strengthen the manufacturing sector and favour economic growth.

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