BY DATUK STEWART LABROOY
Mittelstand companies are incredibly focused and almost always family-run. The young men and women go through the apprenticeship system and learn that the goal is excellence.
– Tom Peters
A production facility at the Mittelstand.
IT'S time for the 2016 Budget to be rolled out and all the noise in the market is that the 2016 Budget will be a very conservative one with little in the way of goodies or incentives for companies or the man in the street. It appears that we just can’t afford to have a generous Budget and try to balance the books at the same time.
I am not an economist so I am not attempting to write a thesis on what ails the country and giving advice on what the Government should be doing in the way of crafting the 2016 Budget. What I would like to put forward is a proposal on what we need to do in building a better future for all of us and I pray that we are sufficiently enlightened to address it on Oct 23.
I am taking a narrow focus in this article by discussing the impact the Budget could have on the industrial sector. I am not expecting any response to what I will be discussing in this article except that, perhaps, it could be considered as a strategy for the future.
Over the last three years, I have travelled fairly extensively in Germany looking at industrial assets and visiting German companies. Germany's economy is the strongest in the world. Its trade balance – the value of its exports over its imports – is second only to China's, which is all the more remarkable since Germany is home to just 82 million people. Its unemployment is lower than at any time since right after reunification. Growth is robust, and real wages are rising.
One key to Germany's miracle is the Mittelstand, as the family-owned small and mid-size manufacturing firms that dominate the economy are known. The German Ministry of Economic Affairs defines the Mittelstand as firms with up to 500 employees and between €1mil (RM6.3mil) and €50mil (RM318mil) in annual sales. This cohort of businesses, which are often family-owned, makes up more than half of Germany’s economic output.
In Germany, the Mittelstand is viewed as a single unit, across the country:
- It contributes about 70% of the employment in Germany
- Provides skills and technical development
- Engine of growth for economy
- Focus of export-led strength
I believe that industrial platform in Malaysia should be modelled on the German “Mittelstand” that is focused primarily on SME development. In Malaysia, our definition of SME is similar, albeit turnover is smaller where the definition of an SME is a company having a sales turnover not exceeding RM50mil or full time employees not exceeding 200 workers.
Adopting the Mittelstand model of industrial development as a single platform is both value accretive, and nation building.
The success of Malaysia’s SMEs has been very uneven. The ones that lag are normally located in poorly presented old industrial estates and are fairly underinvested in the latest technology or management processes. They very rarely command a leading position for their products globally. The Government has always recognised the importance of SME as a major cog in our economic machine and have been very supportive in terms of incentives.
An aerial view of a Mittelstand.
The Government has recently announced measures to further boost the economy and the SME sector was singled out for attention. They include a RM2bil Working Capital Guarantee for SMEs affected by the depreciating ringgit, exemption on 90 tariff lines in the manufacturing sector and a further RM1bil for the Domestic Investment Strategic Fund.
However, we need to set our house in order before we start pumping money to stimulate growth.
What needs to be done?
1. A centralised approval and management process:
We need to streamline the agencies that deal with potential investors or at least the way they work together. We see there is a lot of duplicity in agencies at federal and state levels, sometimes working at cross purposes. The solution is to have one central agency like Thailand where the Board of Investment manages a large number of industrial estates with infrastructure and can direct FDIs to a variety of industrial estates. In Singapore and Vietnam, estates are also regulated and managed by a central authority.
2. Improve infrastructure:
Manufacturing and logistics will lead the new momentum of FDIs and local SME investments as Malaysia rightly capitalises on the huge investment it has made over the years in infrastructure.
We need to plan for a second port the size and quality of PTP in the north to cater for future industrial developments to capitalise on the movement of exports from southern Thailand. Such infrastructure investments are deemed necessary to bring growth to the Northern Corridor.
We need to plan for where the next wave of industrial locations should be based on our demographic profile and build the transport networks around it. Excellent infrastructure, services and access to a population base is needed to support these industrial cities.
3. New modern industrial estates need to be developed:
Sadly there are very few well established industrial estates that are gated and guarded, professionally managed or well- priced. Developers are keen to just sell raw land for maximum profit without any incentive to make the industrial spaces work.
Industrial land has been subject to speculation and prices have escalated to a point where it has become uneconomical to promote industries in these locations. Foreign companies have many choices and cost of land is a key consideration.
To keep land cost down, conversion charges and stamp duties should be waived. State governments should start to behave like their counterparts in Europe who give incentives to new industries to their municipalities.
Land costs have to be capped to around RM25 to RM40 per sq ft delivered with infrastructure. Federal and state governments have to invest in bringing infrastructure to these sites so costs can be mitigated. Penang has set an excellent example over the years on how a state development corporation manages its industrial development activities.
Federal and state governments should team up with industrial development specialists to create and manage these parks to international standards.
There has to be a fast track approval system in place for these estates and their buildings. Building standards must be grade A, green and in line with local and international best practices.
4. Creating the management and workforce of tomorrow:
Human capital is a key part of the Mittelstand strategy. The aim would be to set up colleges near the main industrial hubs so students can undertake industrial training at the factories in the estate as they progress through school. The industries should be consulted as to the skills sets they are required to have upon graduation and the foundation courses they feel are necessary.
Invite technical schools and colleges to set up in Malaysia and provide tax incentives in training local students and establishing skills mentoring programmes. The top management should be incentivised to undertake MBA programmes so they may learn to adopt the best management practices, governance and technology in order to compete globally.
To summarise, I believe that if these issues are dealt with urgently we will reap the key benefits of such an undertaking by:
• Attracting MNCs to Malaysia and energising our own SMEs, which will add to the technical skills of our workforce and technology transfer;
• Creating new and dynamic training and educational platforms to drive industry and reducing underemployment among our youth;
• Creating new investable grade A industrial properties;
• Delivering improvements in skills means productivity increases, quality of products and services and higher wages;
• Enabling higher wages and employment will create a huge driver for the growth in real estate from housing, commercial. retail to industrial,
• Taking advantage of Malaysia’s amazing infrastructure and location at the centre of Asean;
• Acting as the industrial and logistics hub for South-East Asia, India and East Asia;
• Developing long-term infrastructure projects that contribute to GDP, FDI and are export focus.
