ACCCIM SURVEY REPORT ON ECONOMIC SITUATION OF MALAYSIA FOR THE 2 ND HALF OF 2012

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1 1. INTRODUCTION 1.1 THE PURPOSE OF THIS SURVEY In Malaysia, due to the wide participation of the Chinese businessmen in the economic activities throughout the country, Chinese's businessmen play an important role within the economy. A survey (part of an exercise carried out twice a year) has recently been carried out to gather feedback and opinions from Chinese businessmen. This survey can be viewed as a means to gauge the economic situation facing the Chinese business community in the 2 nd half of This survey covers four major areas in relation with the Chinese business community, namely: i. The Malaysian economic situation in the 2 nd half of 2012; ii. Major factors affecting business performance; iii. Malaysian economic outlook; and iv. Current issues facing the Chinese businessmen in relation to trade, investment and industrial development in Malaysia. 1.2 SIGNIFICANCE OF THE SURVEY Most of the data and statistics in relation to the economic situation available today are collected by the Government through Statistical Department of Bank Negara Malaysia and its agencies. The Malaysian Institute of Economic Research (MIER) has conducted surveys on the economic recovery in the past but has thus far, focused on the consumers and the manufacturing sector. Given that the Chinese business community plays an important role in the Malaysian economy, ACCCIM, as a national organisation representing the Chinese business community, take the task to assist the Government in gauging the economic situation facing the Chinese business community. It also attempts to collect feedback and opinion on various measures undertaken by the Government to enable them to evaluate the effectiveness of those measures. This would be helpful to the Government either in making adjustments to the existing policies or in the formulation of new policies. The results from the survey also provide a basis for ACCCIM to submit relevant memoranda to the Government and serve as a reference for the business community and foreign investors in formulating investment plan and strategy. 1

2 2. SURVEY METHODOLOGY The purpose of this survey was to collate information in relation to the economic situation facing the Chinese business community in the 2 nd half of The questionnaire was constructed based on the current economic issues faced by the country and the business community, and the various measures undertaken by the Government to address the issues concerned. ACCCIM represents around 30,000 Chinese businessmen and trade associations in Malaysia. As most of the prominent Chinese businessmen are the committee members of ACCCIM either at the national or state levels, these committee members could be taken to represent the Chinese business community. The total questionnaires sent out were 730. A total of 408 questionnaires was returned, making it a response rate of 55.9% of the total questionnaires sent. These 408 respondents made up the sample of this survey. The 55.9% response rate was reasonable, as other surveys conducted by other organisations have also experienced low response rates. The questionnaires were distributed to Chinese's businessmen across all sectors and industries. In terms of breakdown of distribution, the respondents were mainly from wholesale and retail (24.5%), manufacturing (22.1%), professional and business services (12.0%), construction (8.3%), real estate (6.4%), agriculture, forestry and fishery (5.9%), and telecommunication and information technology (5.1%) as well as others (15.7%). These sectors concerned are said to represent the major sectors of the economy. The breakdown of responses may be depicted as follows: Sector Percentage Wholesale & retail trade 24.5 Manufacturing 22.1 Professional & business services 12.0 Construction 8.3 Real estate 6.4 Agriculture, forestry & fishery 5.9 Telecommunication & information technology 5.1 Others (Sample Size) (408) 2

3 About 24% of the respondents were from Non-SMEs (according to annual turnover and full time employees) The National SME Development Council has provided a definition for small and medium enterprises with regard to manufacturing (including agro-based) & manufacturing related services, primary agriculture and service's sector (including information and communications technology, ICT), as described below. Primary Agriculture A small and medium enterprise in primary agriculture is an enterprise with fulltime employees not exceeding 50 or annual sales turnover not exceeding Ringgit Malaysia (RM) 5 million. The agriculture, forestry & fishery sectors have been classified in this category in this report. Manufacturing (including Agro-Based) and Manufacturing-Related Services (MRS) A small and medium enterprise in manufacturing (including agro-based) and MRS is an enterprise with full-time employees not exceeding 150 or with the annual sales turnover not exceeding RM 25 million. The manufacturing, mining and construction sectors have been classified in this category in this report. 3

4 Services Sector (including information and communications technology, ICT) A small and medium enterprise in services is an enterprise with full-time employees not exceeding 50 or annual sales turnover not exceeding RM 5 million. The real estate, transportation, forwarding and warehousing, telecommunications, information technology, wholesale and retail trade, international trade, tourism, hotels, restaurants, recreation and entertainment, finance and insurance, professional and business services have been classified under this category in this report. For the manufacturing based business, 50.0% of the respondents employed 5-50 employees, with another 28.3% employing employees, whereas 11.8% of the respondents claimed that they employed more than 150 employees. For the services based businesses, 32.4% of the respondents employed 5-19 employees and 25.8% employed less than 5 employees. On the other hand, less than 10.0% (9.8%) of the respondents claimed that they employed more than 50 employees. Full-Time Employees Manufacturing Services Number of employees Percentage Number of employees Percentage Less than Less than ~ ~ ~ ~ ~ ~ More than More than (Sample Size).0 (152) (Sample Size).0 (256) In the case of turnover achieved annually, for the manufacturing based businesses, nearly 30.0% of the respondents reported that their companies annual turnover exceeded RM10 million. About 12.0% of the companies surveyed reported having an annual turnover that exceeded RM25 million. 4

5 For the services based businesses, about 40.0% of the respondents had an annual turnover of between RM1.0 million to RM5.0 million. Additionally, about 18.0% of the companies had an annual turnover of more than RM5 million. Annual Turnover Manufacturing Services in Ringgit Malaysia Percentage in Ringgit Malaysia Percentage Less than 250, Less than 200, ,000 ~ 999, ,000 ~ 999, ,000,000 ~ 4,999, ,000,000 ~ 2,499, ,000,000 ~ 9,999, ,500,000 ~ 5,000, ,000,000 25,000, More than 5 million 17.6 More than 25 million 11.8 (Sample Size).0 (152) (Sample Size).0 (245) About 82.0% of the respondents were domestic market oriented whereas the remaining 18% focused on both domestic and export markets (11.5%) or export markets (6.9%). Domestic market 81.6 Export market 6.9 Both domestic and export markets

6 3. SURVEY FINDINGS 3.1 THE MALAYSIAN ECONOMIC SITUATION IN THE 2 ND HALF OF Sales performance Sales Performance Sustained From the survey, about 85% of the respondents replied that their firms sales performances were either good or satisfactory. This represents an increase of 8% points compared with the period in 1 st half 2012, where only, 77% of respondents reported similar outcomes. In the case of future sales outlook, the majority of the respondents (79%) believe that the good and satisfactory sales levels experienced in the second half of 2012 would continue into the 6-months period of 1 st half of 2013, however, fell. Certainly, the survey results showed that businesses were slightly less optimistic going into 2013 as the % of respondents being pessimistic of the future sales of their businesses showed an increase of 6% points compared to the results in the last survey. The improvement in sales performance in 2H 2012 came mainly from the wholesale and retail sector, where 86% of the sector s respondents reported good or satisfactory sales performance as compared to 73% in the 1 st half of This represents an upswing of 13% points. In the case of the manufacturing sector, it showed a slight improvement with 85% of the respondents reporting good and satisfactory performance (1 st half 2012: 82%). In summary, the majority of businesses sales performance can be said to have experienced improvements for the period under survey. On the whole, the good and satisfactory sales performance experienced by the majority of businesses surveyed for the 2 nd half of 2012 is reflective of the sentiments in the markets that the Malaysian economy was resilient. The Malaysian economy is expected to report a growth of about 5% or thereabouts for Even MIER s survey showed that the Consumer Sentiments Index improved to points in 4 th quarter 2012 (2 nd quarter 2012: points). At the time of writing and, based on 3Q2012 results, growth in the Malaysian economy has been mainly driven by strong domestic demand, with growth mainly underpinning by private consumption, as well as 6

7 private and public investments. This is expected to have continued into 4Q2012. Sales Performance Sales Performance 1 st Half nd Half 2012 Mfg WRT Mfg WRT 1 st 12 2 nd 12 1 st 13 (Forecast) Good Satisfactory Poor (Sample Size) (71) (88) (88) (99) (355) (395) (388) 7

8 3.1.2 Production volumes Increase in Production Volumes In line with the improved sales performances, the supply side also saw similar improvement trend where fewer manufacturers and businesses having reported decrease in production volumes. During this period of the survey, it is noted that 12% (1 st half 2012: 8%) of respondents reported increased productions volumes while another 77% (1 st half 2012: 71%) saw no change in the production volumes of their businesses. In line with a drop in future sales performance, businesses are likely to adopt a wait and see approach, with 15% of respondents expecting production volumes to increase for the 1 st half of 2013 and 23% of respondents believing that their production volume would experience a reduction. Production volume Production volume 1 st Half nd Half 2012 Mfg Mfg 1 st 12 2 nd 12 1 st 13 (Forecast) Increased Remained unchanged Decreased (Sample Size) (56) (78) (138) (201) (192) 8

9 3.1.3 Stocks Inventory levels somewhat unchanged Some 88% of the respondents reported that their stock levels were largely in the increased and remained unchanged categories in 2 nd half 2012 (this is slightly better than the result as reported in 1 st half 2012: 83%). There were minor shifts in the breakdown of respondents in both the manufacturing and wholesale and retailers sectors. Once again, majority of the respondents in these two sectors reported unchanged inventory levels, with minor shifts in the other categories ( increased and decreased inventory levels). Perhaps, more interestingly is the fact that the % change in each category of responses did not see major upswing / downswing as compared to previous quarters. This may indicate that the inventory levels of businesses are somewhat more stable than in the past. Going forward for the next six months in 1 st half of 2013, 16% of respondents anticipate to hold lower level of inventories while another 16% of respondents expect to increase the level of inventories. Stocks Stocks 1 st Half nd Half 2012 Mfg WRT Mfg WRT 1 st 12 2 nd 12 1 st 13 (Forecast) Increased Remained unchanged Decreased (Sample Size) (59) (71) (78) (82) (222) (273) (269) 9

10 3.1.4 Collections Improved Collections from customers For the 2 nd half of 2012, there were fewer respondents that reported poor collection for payment of debt (19%) and this represents a decrease of 7% points from that reported in the previous period (1 st half 2012: 26%). In fact, a larger % of respondents replied that their businesses had experienced satisfactory collections, where 72% of respondents advised that their businesses experienced satisfactory collections (1 st half 2012: 66%). Overall, the majority of businesses continue to be satisfied with the collections efforts. The reduced poor collections was reflected in both the manufacturing (20%) and wholesale & retail trade (23%) sectors for the period under survey (representing improvement of results when compared to those as seen for 1 st half of 2012). Forecasting into the future, some 16% of respondents believed that their collections would be good, while 22% of respondents were concerned that their collections would be poor. Nonetheless, businesses are advisable to be cautious and to step up efforts to better control their collections so as not to run into cash flow problems in the future. Collection for Payment of Debt Collection for Payment of Debts 1 st Half nd Half 2012 Mfg WRT Mfg WRT 1 st 12 2 nd 12 1 st 13 (Forecast) Good Satisfactory Poor (Sample Size) (69) (83) (80) (95) (343) (370) (358) 10

11 3.1.5 New orders from overseas market Increase in New Orders from Overseas Markets There was a larger percentage of the respondents reported increased new orders from foreign markets, which was matched by a corresponding drop in the decreased new orders category. Overall, this represents a reversal of trends compared to the previous half yearly surveys that had shown continuous rise in the % of respondents reporting decreased new orders from foreign markets. This may be taken as a sign that businesses in Malaysia may now be seeing the beginnings of a new dawn, although this may still be early days. The overall change in response pattern was mainly mirrored by a changes in response pattern by businesses in the manufacturing sector. There was a significant drop in the % of respondents experiencing decrease in new orders from foreign markets a change of 10% points. On the other hand, there was a rise of 12% points in terms of % of respondents experiencing increased new orders. Unfortunately, no respondents in the wholesale and retail sector reported increased new orders with the majority of respondents reporting unchanged level of new orders from overseas market. Overall, majority of the respondents (71% of respondents) were still hopeful that for the next six-months ending June 2013, their businesses would experience increased and unchanged levels of orders from foreign markets. New Orders of Goods and Services from Foreign Markets New Orders 1 st Half nd Half 2012 Mfg WRT Mfg WRT 1 st 12 2 nd 12 1 st 13 (Forecast) Increased Remained unchanged Decreased (Sample Size) (45) (21) (62) (22) (153) (157) (157) 11

12 3.1.6 New orders from local market Sustained levels of New Local Orders 81% ( increased : 11%; and remained unchanged : 70%) of the businessmen responded that the local market showed a sustained performance in the 2 nd half of 2012 in respect of new local orders. This represents an improvement in overall results relative to that in 1 st half of 2012 ( increased : 11% and remained unchanged, 64%; giving an overall total of 75%) as more businesses reported unchanged position. There was a drop in respect of forecast of new local orders for the 6 months period ending June 2013, as 23% of respondents replied that their businesses would likely experience decrease in new local orders. This is a reversal of the result reported in the last survey as only 19% of respondents had advised as such. This is in tandem with businesses feeling less upbeat about their future sales and production. New Local Orders of Goods and Services from Local Market New Local Orders 1 st Half nd Half 2012 Mfg WRT Mfg WRT 1 st 12 2 nd 12 1 st 13 (Forecast) Increased Remained unchanged Decreased (Sample Size) (67) (79) (80) (94) (316) (375) (355) In the breakdown by sectors, the major change was seen in the wholesale and retail trade sector as more businesses in this sector concerned reported unchanged new local orders. Businesses in the manufacturing sector saw little change in the breakdown of responses. 12

13 3.1.7 Sales prices Local Sales Prices Relatively Unchanged Overall, businesses were able to sustain their local sales prices for the 2 nd half 2012 period. The pattern of results for the period under review represents an improvement relative to that reported for 1 st half There were fewer businesses that reported the need to reduce sales prices (a decrease of 9% points). Instead, more businesses were able to keep their selling prices unchanged. However, some 22% of businesses forecast that they would need to reduce selling prices in the next 6 months ending June 2013 and 13% of businesses were confident that they could increase their selling prices for the same forecast period. However, just as observed in new orders (foreign and local), a major change was mainly seen for businesses in the wholesale and retail sector, whereby the sales prices in unchanged category increased significantly. This may in turn signify that businesses in the retail and wholesale have attempted to maintain sales mainly through keeping their sales prices constant. The overall results reflect the continued significant challenges and opportunities that businesses face, with the majority of businesses having to keep their sales prices unchanged to sustain their sales performance. Local Sales Prices Goods and Services Local Sales Prices 1 st Half nd Half 2012 Mfg WRT Mfg WRT 1 st 12 2 nd 12 1 st 13 (Forecast) Increased Remained unchanged Decreased (Sample Size) (63) (80) (78) (88) (297) (350) (338) 13

14 3.1.8 Number of employees Improved Employment Market The employment market showed improvements with the decreased responses dropping by 7% points and a similar improvement in the increased number of employees category of responses. The change can also be seen in the sectors. In both the manufacturing and wholesale and retail trade sectors, the number of respondents claiming to have reduced their number of employees decreased, with a major change recorded in the manufacturing sector that saw a drop of 20% points for the category concerned. This is a reflection of the improvement in business activities as indicated under the different business indicators earlier. Nonetheless, the majority of businesses are expected to maintain their capacity level in terms of human resource for the next 6 months ending June Number of Employees Number of Employees 1 st Half nd Half 2012 Mfg WRT Mfg WRT 1 st 12 2 nd 12 1 st 13 (Forecast) Increased Remained unchanged Decreased (Sample Size) (68) (84) (86) (95) (339) (387) (372) 14

15 3.1.9 Wage cost per unit of output Wages Were Generally Stable Businesses advised that the wage cost per unit of output for the whole of 2H 2012 largely remained constant, indicating that businesses were successful in their efforts to keep wage costs constant. A total of 72% of responses indicated that their wage costs remained unchanged in 2 nd half of 2012 compared 73% recorded in 1H However, the wholesale and retail sector businesses saw more businesses decreasing or keeping their wage costs constant (combined total of 97% for 2 nd half 2012 as compared to 83% for 1 st half 2012). There were no significant change in results for businesses in the manufacturing sector during the period. Looking into six months ahead, only 61% of the respondents believed that wage costs would remain unchanged for the period 1 st half However, there were 18% of respondents who felt that wage costs would increase in the same period, in line with the minimum wage requirement that recently came into force effective 1 January In contrast, there were 21% of the respondents expect to reduce wage costs in 1H Overall, there are mixed signal over wage pressure. Wage Costs per Unit of Goods and Services Wage Costs per unit 1 st Half nd Half 2012 Mfg WRT Mfg WRT 1 st 12 2 nd 12 1 st 13 (Forecast) Increased Remained unchanged Decreased (Sample Size) (64) (79) (81) (89) (315) (361) (345) 15

16 Capacity utilisation Relatively unchanged Capacity Utilization Overall, 63% of respondents claimed that their businesses were operating at more than 60% capacity in 2 nd half of 2012 (relatively unchanged from last survey period of 1 st half 2012: 64%). The capacity utilisation rate, however, is still well below the desired level of more than 80%. As noted in the previous surveys, many businesses continued to operate at low capacity levels with 11% of respondents reporting that their businesses operated at less than 40% capacity (there was a slight decrease in terms of capacity utilization as the % of respondents in this category increased by 5% points). As a whole, this means that businesses were still faced with significant excess capacity. To reduce the excess capacity, efforts are likely to be continued channelling into areas such as marketing and promotional exercises, introduction of new products and more innovative business measures to increase sales. Capacity Utilisation Level Capacity Utilisation Level 1 st Half nd Half 2012 Mfg WRT Mfg WRT 1 st 12 2 nd ~ % ~ 80% ~ 60% ~ 40% (Sample Size) (64) (71) (90) () (291) (408) 16

17 Investment in new resources or plant Drop in Investment in New Resources or Plant Given higher level of unutilised capacities, most businesses decided to continue to adopt a wait and see approach in respect of their decision to invest in new resources / plants for 2 nd half Indeed, only 63% of the respondents indicated that they would either increase or keep resources / plant investment levels unchanged in 2H 2012, compared with 68% in 1H On the other hand, more businesses (37% in 2H 2012) indicated that they would reduce their investments, in particular businesses in the manufacturing sector (the number of decreased respondents rose from 26% to 37%). Moving forward, 13% of respondents advised that they planned to increase such investments during the period of 1 st half 2013 but some 37% stating that they are considering reducing their investment in new resources or plant for the period concerned. The latter could be due to the excess capacity and rising costs of doing business. Investment in New Resources or Plant Investment 1 st Half nd Half 2012 Mfg WRT Mfg WRT 1 st 12 2 nd 12 1 st 13 (Forecast) Increased Remained unchanged Decreased (Sample Size) (58) (61) (81) (76) (264) (319) (306) 17

18 Economic Situation in Malaysia The Malaysian economy was seen to have experienced little growth in the 2 nd half of 2012 At the macro level, the majority of respondents (56%) had the perception that the Malaysian economy remained relatively stable in the 2 nd half of The percentage of respondents under this category of response increased from 48% for the 1 st half of 2012 to 56% for this period of survey. The biggest change was in the deteriorated response category where there was a drop of 10% points for this category concerned. There was a slight increase in the % of respondents who believed that there was an improvement in the Malaysian economy, to 14% (1 st half 2012: 12%). The above results demonstrates that the Malaysian businesses still wish to see more robust economic growth, and fervently hope that such growth could filter down more significantly to their businesses. The Malaysia Economy in the 2nd Half in 2012 was Growing 14% Deteriorating 30% Remained unchanged 56% 18

19 3.2 MAJOR FACTORS ADVERSELY AFFECTING BUSINESS PERFORMANCE Factors Affecting Business Performance for 2nd Half of 2012 Government policies Manpower shortage Increase in operating cost and price of raw Domestic competition Lack of capital Domestic political situation Management style Drop in foreign and domestic demand Insufficient training Foreign competition Lack of confidence Insufficient infrastructure Technological disadvantage Excess capacity of the foreign and domestic International political situation Government policies For the period six months ended December 2012, the greatest concern among businesses was the need for friendly government policies that promoted businesses activities. Some 47% of the respondents cited Government policies as the most important factors affecting their business performance during this period of survey. As noted in the past, Malaysian businesses continue to look towards the Government to introduce and implement economic policies that are business friendly and reduce cost of doing business and undertake efficient public expenditure that can spur greater economic growth. This is even becoming more acute given weak external economic environment, uneven economic growth in advanced countries and concerns about the sustainability of the world economies in the near term. The business community sees the implementation of business friendly policies as imperative and necessary to boost private investment and spur the Malaysia economy. It should also be noted that despite efforts to transform the Malaysian economy, the effects and benefits appear not to have filtered down meaningfully and significantly to the SMEs. 19

20 Businesses are concerned about new rules that were recently implemented such as the minimum wage policy and the extension of retirement age, to cite a few. In particular, the minimum wage ruling implemented on foreign workers has caused a lot of objection from the SMIs. Manpower shortage Concern was expressed by the respondents in respect of this factor with close to 44% of respondents feeling this was the second most important factor during the 2 nd half of 2012 s survey. It should be noted that in the previous survey, some 34% cited this factor affecting their businesses. Hence, the 10% points increase in % of respondents choosing this factor, indicating that this issue has become more serious and there is a need for the government to look into it to enable businesses to continue operating. Businesses and employers in Malaysia have long complained of shortage of suitably qualified workers and problem of supply of foreign workers as well as lack of job-fit and job-readiness of Malaysians (in particular, job readiness and employable graduates) that are likely to have impacts on their businesses. Increase in operating cost and price of raw materials Increase in operating costs and price of raw materials continues to be a concern among businesses in Malaysia, although this factor dropped from being the most important factor in the last survey period to the third most important factor during the current survey period. The rising operating costs could be the main focus here given the 1% point increase in EPF contribution (for workers earned RM5,000 and below), the imposition of 1% feed in tariff, the implementation of the Competition Act 2010 the implementation of the minimum wage, adjustment to fuel subsidies and the increase in costs of utilities (which shall continue to rise in the future). Although there continues to exist fluctuations in prices of raw materials, which in turn have had some impact on businesses operating costs, it is not likely to be the main force currently. Further more, the low capacity utilisation might have contributed to higher costs per unit of output, for a given fixed operating costs. Domestic competition Similar to the last survey period s results, concern with regard to domestic competition, at 35%, was ranked the fourth most important factor affecting business performance, during the period 2 nd half Business challenges have steadily increased and have forced the SMEs to compete with each other more fiercely. Also, more businesses continue to be set up and this pressure has added to the adverse effects of the weak global economy. This may also explain why 20

21 respondents continue to perceive that the Malaysian did not experience robust growth in the period under review. Overall, government policies, manpower shortage, increase in operating cost and price of raw materials, and increase in domestic competition were the four (4) major factors that affected the business performances in the 2 nd half of

22 3.3 MALAYSIAN ECONOMIC OUTLOOK The Chinese business community is optimistic about the economic outlook for 2013, 2014 and In general, about 59% of the respondents expressed confidence about the performance of the Malaysian economy and businesses outlook for the year This is an improvement from the last survey, where then, some 46% of respondents expressed similar sentiments. The 13% points increase shows that more businesses were confident and optimistic of the future of the Malaysian economy this time around. This may be due to the improvements experienced by businesses in respect of factors discussed earlier (such as sales, production volumes and improved collections). On the local front, domestic demand has been expanding while public and private spendings have also been increasing. The businesses appear confident that the Malaysian economy is resilient enough to withstand any external shocks that might occur in the future. Going forward into 2014 and 2015, respondents continue to be positive in terms of outlook and sentiments with regards the Malaysian economy. Overall, the Chinese business community is optimistic about the economic outlook for Malaysia for 2013, 2014 and Malaysian Economic Outlook Pessimistic Somewhat pessimistic Somewhat optimistic Optimistic

23 3.4 IMPLEMENTATION OF MINIMUM WAGES (I): Is this likely to have a negative impact on your business? The Minimum Wage Policy has been implemented effective 1 January The minimum wage that will have to be paid to workers in the private sector is set at: RM900 per month for employees in Peninsula Malaysia and RM800 for those in Sabah, Sarawak and the Federal Territory of Labuan It formed part of the national Transformation Policy under the New Economic Model that has been announced and implemented by the Malaysian government in 2010 that is meant to drive Malaysia towards becoming a high-income nation by The survey undertaken by the labour department showed that there was a significant portion of Malaysian workers whose low salaries kept their household income below the poverty line. The Ministry of Human Resources had stated that some 34% of Malaysian workers earned less than RM700 per month. This was echoed by the Malaysian Trades Union Congress that had stated that the average basic wages was RM per month for five manufacturing sub-sectors, being electric and electronics, furniture, plastics, gloves and textiles (before the implementation of minimum wages). Despite the arguments put forth above, previous surveys carried out with regards to the view of SMEs towards the introduction of such a policy has been that the policy would bring about negative effects to businesses. The view of the respondents have not changed even for this period of survey. For four (4) consecutive periods of survey starting from 2011 till 2H 2012, the majority of respondents have felt that the policy is likely to bring more harm than good to their businesses. It is noted that for the period under survey, 69.4% (up from 55.9% for the last survey) of the respondents believed that the setting of minimum wages would bring about negative effects on their businesses, as shown in the table below. This represents a jump of about 14% points. This is understandable as micro business establishments, which employ 5 or less workers and pay an average salary of only RM613 a month far lower than the minimum wage of RM , are likely to be badly affected. The table also shows the concern of respondents by sector. 23

24 The top five sectors that had expressed concern and had negative opinions on the introduction of the minimum wage bill this time round (half year ended 31 December 2012) were businesses that were involved in: Mining Manufacturing International Trade (Import and Export) Agriculture, forestry and fishery Tourism, shopping, hotels, restaurants, recreation and entertainment This differed with the list of top five sectors that had expressed concern for the period ended June 2012 then, being: Agriculture, forestry and fishery Manufacturing Finance and insurance Telecommunication and information technology Construction Certainly, the Government ought to be concerned as sectors such as manufacturing, import and export and tourism related industries contribute significantly to Malaysia s economic growth and GDP. (a) Minimum wage ruling has negative impact on businesses 2nd Half of Professional & business services 55.1 Finance & insurance 29.4 Tourism, shopping, hotels, restaurants, recreation & entertainment International trade(import & export) Wholesale & retail trade Telecommunication & information technology Transportation, forwarding & warehousing Real estate 50.0 Construction 67.6 Manufacturing 83.3 Mining.0 Agriculture, forestry & fishery

25 (II): Do you support the minimum wage ruling imposed in Malaysia? Arising from the view and belief that the imposition of minimum wages policy is not beneficial to businesses in Malaysia, many respondents did not support the minimum wage ruling concerned. The sectors from which least support is noted include (starting from the sector with the least support): Mining Tourism, shopping, hotels, restaurants, recreation and entertainment Construction Manufacturing Professional and business services It should be noted however that the sector from which businesses appear to show the greatest support is the finance and insurance businesses (52.9% approval). In the previous survey, respondents from the tourism related sector were the strongest supporters but they have now dropped to second least supportive of minimum wages during this period of survey. This showed a sharp change in opinions by businesses in this sector concerned. Variations in response rates for this survey versus that of the last survey were also noted for other sectors as well. (b) Low support for minimum wages policy 2nd Half of Professional & business services 28.6 Finance & insurance 52.9 Tourism, shopping, hotels, restaurants, recreation & entertainment 21.1 International trade(import & export) 46.2 Wholesale & retail trade 35.0 Telecommunication & information technology 42.9 Transportation, forwarding & warehousing 30.8 Real estate 50.0 Construction Manufacturing Mining 0.0 Agriculture, forestry & fishery

26 Concerns have risen after some businesses found out that the implementation of minimum wages also include foreign workers as well. Overall, the concerns expressed by businesses are that minimum wages are inflationary and foreign workers would repatriate more monies back to their home countries (thus, causing greater cash outflows from Malaysia). Businesses also feel that different minimum wages should be implemented for different parts of Malaysia to better reflect the different standards of living that currently exist in Malaysia. 26

27 3.5 EXTERNAL ECONOMIC SECTOR AND DOMESTIC DEMAND (a) External economic sector will remain weak in the near future (b) Business be expected to be negatively affected A majority (84.8%) of respondents were of the opinion that the world economic environment would continue to remain weak and challenging in the near future. This is despite the advanced economies showing some stability recently with the Eurozone debt crisis stabilizing, as recovery will likely be slow in developed countries and somewhat uneven in other economies. Certainly, businesses have expressed their concerns with regard to the above developments whereby some 77% of the respondents were of the opinion that their businesses would be negatively affected, owing to the uncertainties in the foreign countries economies. Top major industries that have expressed concern were the manufacturing, and wholesale & retail trade. Business be expected to be negatively affected External economic sector will remain weak 2nd Half of Wholesale & retail trade Manufacturing

28 (c) Budget 2013 may not be able to strengthen domestic demand and maintain economic stability Generally, to cushion the negative effects emanating from external factors and sources, a country would rely on domestic demand to generate economic activities. However, only some 35% of respondents believe that measures as proposed in the Budget 2013 would be sufficient to strengthen domestic demand and thus, able to help maintain the nations economic stability. 28

29 3.6 LIMITED LIABILITY PARTNERSHIP (LLP) (a) Some measure of familiarity with the workings of LLP (b) Majority of respondents not considering to convert their businesses from a company to LLP (c) Majority of respondents are not aware of the tax provisions surrounding LLP The Survey results show that some 42% of respondents were familiar with the Limited Liability Partnership (LLP) that came into effect in December 2012, and how it works. LLP represents an alternative business vehicle that is regulated under the Limited Liability Partnerships Act 2012 that combines the characteristics of a limited company and a conventional partnership. In the main, it represents a form of business vehicle that allows businesses to grow without having to worry too much about an individual s personal liabilities, personal assets and strict compliance requirements that are typically associated with limited companies. Its benefits include: a) Protection of limited liability of its partners in a manner similar to the limited liability enjoyed by shareholders of a limited company b) Flexibility of business operation through partnership arrangement that is similar to a conventional partnership c) Debts and obligations of the LLP will be borne by the assets of the LLP and not that of its partners. d) LLP has the legal status of a body corporate that is capable of suing and be sued in its own name; hold assets and undertake acts and activities in its name as a separate legal entity similar to that of a body corporate. Perhaps, owing to the lack of familiarity by some businesses, the majority (63.5%) of the respondents indicated that they would not consider converting from a partnership company to LLP status. There would also be other legal and operational issues that business would have to take into account before a decision could be made to convert from a partnership company to LLP. 29

30 The Budget 2013 provided incentives for setting up of the LLP. For example, companies converting to the LLP, are allowed to carry forward its unabsorbed business losses to be utilized against the future income of a LLP. Similar allowance is also made for unabsorbed capital allowances of company. In general, the tax rate on the chargeable income of a LLP is 25% except where the total capital contribution is not more than RM2.5 million and many more provisions. Some 45% of respondents indicated that they were aware of the tax provisions for the LLP. Familiar with the workings of LLP 41.9 Consider converting from a company to LLP 36.5 Aware of the tax conditions when convert from a company to LLP

31 3.7 PROPERTY SECTOR (a) Half of the respondents believe that the increase in tax rates for RPGT is a step in the right direction Malaysians have often complained about inflation and rising prices of properties in the country are indeed one of the often cited examples. As part of the government s efforts to curb property bubble from building up in Malaysia, several measures were introduced in the past, including: Increasing the tax rate from 5% to 10% for properties disposed of within two (2) years of purchase, under Real Property Gains Tax (RPGT) My First Home Scheme Tightening of rules on 3 rd house financing facility and the responsible lending guidelines 1Malaysia People s Housing Programme (PR1MA) Under the Budget 2013 announcements, further increase in tax rates under RPGT was noted, as the government continues to seek to curb speculative activities in the property market. The revised tax rates are summarized below: RPGT rates Disposal period Companies Individuals (citizens and permanent residents) Individuals (noncitizens) Within 2 years 15% 15% 15% In the 3rd to the 5th year 10% 10% 10% In the 6 th year onwards 0% 0% 0% 31

32 Based on survey undertaken, the results show that 48.3% of respondents were of the opinion that the increase in RPGT rates were likely to be able to curb speculative activities, whereas 39% of respondents opined that the change in tax rate would have no effect whatsoever. Despite the various measures (including those mentioned above), many respondents (72.5%) did not foresee that property prices would trend downwards in the near future, as noted in the graph below. Similar sentiments were noted in the last survey. In fact, developers are continuing to build and 2012 saw the most number of licences being issued to developers to sell and advertise. The government has in the past, also stated that property price increases of between 10-20% per annum is healthy and acceptable for the Malaysian economy. However, many critics have commented on what the price increases mean to the young generation (in particular, the extent of affordability of properties for the young generation) and the implication on their debt financing position. (b) Property prices to continue its upward trend 32

33 3.8 DO YOU FEEL THAT THE GOVERNMENT S EFFORTS TO-DATE TO MOVE THE MALAYSIAN POPULATION OUT OF THE MIDDLE INCOME TRAP HAS SHOWN POSITIVE RESULTS? The Malaysian Government has indeed recognized that the country has reached a critical stage of its developmental journey and that many of its past strategies and plans have required major rethink and overhaul. This recognition has also in part been driven by the changes that have taken place and continue to take place in the global competitive landscape. Furthermore, global economic outlook continues to remain uncertain, for instance the European Debt Crisis, high unemployment in many countries, commodity price volatilities, austerity drives by many governments in the Eurozone and economic slowdowns in emerging economies. These have all made global competition more intense, less trade and reduction in investments and FDIs in many countries. Investment flows generally aim for larger economies such as China, India and Indonesia, as these countries have the advantage of scale in terms of costs and size of domestic markets. Arising from the above developments, there was fear Malaysians are caught in the middle income trap, a case of being neither a low cost producer / imitator nor a high value add innovator / producer. In the past, Malaysia had concentrated on building up the country that previously relied on agriculture to one that was reliant on exports of manufactured products, particularly products in the electronics industry. Thus far, Malaysia has been successful in driving the economy to reach middle-income status. However, it is the next stage of the developmental journey that seems to be of concern as the country s momentum of growth had slowed. As a result, the government swung into action and implemented various strategies to propel Malaysia to become a high-income, knowledge intensive and innovation-led economy. Back in 2010, the government announced its efforts that included: a) New Economic Model b) Economic Transformation Programme The government has also launched various Strategic Reform Initiatives, and 51 broad and cross cutting policy measures. Six areas in which the government has attempted to make changes are: Competition, standards and liberalisation Improving public finance 33

34 Better public service delivery Defining and reducing the Government's role in business Human capital development Narrowing disparities At a macro level, statistics released in Malaysia appear to show that the government seems to be on the right track towards meeting its aims. This was indicated by a pick-up in private investment as a share of GDP to 15.4% estimated for 2012 from 12.5% in 2010 and a low of 8.2% in However, based on the survey results, many SMEs / SMIs appear not to have benefitted from the various government initiatives. This has led to many respondents not believing that Malaysia is on its way to being successful in respect of efforts to move the economy out of the middle income trap. The perception found in this survey is somewhat unchanged from the result that was noted in the last survey. This should be taken as a guide for the government to gauge to what extent the success of its existing initiatives and the need for it to intensify its efforts and look into further means to assist the SMEs / SMIs. Low success in efforts to move the economy out of middle income trap When respondents were analysed by sectors, the results were appalling, as evidenced by the graph above. Results were not encouraging across the board. Once again, the results appear somewhat similar to that for the last survey undertaken. 34

35 3.9 ARE YOU HAPPY WITH THE STATE OF THE MALAYSIAN ECONOMY TO-DATE, LEADING UP TO THE COMING 13 TH GENERAL ELECTIONS FOR MALAYSIA? Majority of respondents were not happy with the state of the Malaysian economy Yes 27% No 73% Consistent with the comments made in paragraph 3.5 above, it is noted that a majority (73%) of the respondents were not happy with the state of the Malaysian economy to-date, leading up to the coming 13 th General Elections for Malaysia. This result may be due in part to the fact that businesses are finding it increasingly difficult to operate and make ends meet. Business competition have become increasingly fierce, coupled with other issues such as manpower shortage and rising operating costs and price of raw materials. All of these have made it difficult for businesses to manage and some may find these issues a disincentive to continue their business. 35

36 3.10 BANKRUPTCY LAWS IN MALAYSIA Various parties have clamoured for review of the existing bankruptcy laws in Malaysia. This is because it is felt that Malaysia has one of the most stringent bankruptcy laws in the world. In Malaysia, the main causes of bankruptcy include: a) Car loans b) Personal loans c) Housing loans d) Business loans e) Corporate guarantors f) Guarantor g) Credit card debt h) Income tax debt When a person is declared a bankrupt, his/her existing bank accounts will be frozen. This means that he can not operate a banking account. Neither can the bankrupt open a new account nor use his/her existing account unless he/she gets permission from the Director-General of Insolvency (DGI). The assets owned will also be frozen and subsequently sold off to pay off the amounts due to the creditors. Other problems that the bankrupt is likely to encounter include being unable to obtain new loans and being unable to travel overseas. He/she is also likely to be ostracized by friends and members of the public. Given the difficulties that one is likely to encounter, especially in the case where one is not at fault (for instance, in the case of a guarantor being declared a bankrupt whilst the guilty party is the one who took out a loan and had refused to service the loan), many have sought for review of the existing bankruptcy laws. In line with the general sentiments, this survey notes that 74% of the respondents were in agreement with the need for such review to be carried out. 76.5% of the respondents also felt that the threshold that allowed financial institutions or creditors to institute bankruptcy proceedings ought to be raised. Currently, the threshold set is RM30,000, which may appear to be a paltry sum, considering the fact that loans that may be taken out tend to exceed this figure. Finally, 69.2% of respondents opined that the laws in Malaysia should be amended to make it easier for one to be discharged from bankruptcy. Currently, the laws do not permit an automatic discharge. Instead, a bankrupt can only be released of his/her bankruptcy status after applying to the court for the bankruptcy order to be annulled on grounds that the debt has been settled. Alternatively, he/she may apply 36

37 for a discharge which would be subject to stringent requirements, coupled with a favourable report from the Insolvency Department that emphasises the conduct and cooperation of the bankrupt with the department concerned. After a period of five years of bankruptcy, the person can also apply to the Director General of Insolvency (DGI) for a discharge under section 33A of the Bankruptcy Act This is subject to the DGI's discretion. In the main, an automatic discharge is sought by most parties. To make it easier for the bankrupts to be released from bankruptcy 69.2 To raise the monetary threshold for suing a person into bankruptcy 76.5 Reviews ought to be made with regards the current bankruptcy laws in Malaysia