Malaysia is one of the countries forging ahead with Industry 4.0 (IR4.0). The objective is to modernise our industrial capability, and transform the economy from a low-cost manufacturing country into a high-value competing manufacturer.
Throughout the years, advanced economies have invested heavily in research and development.
According to the Global Innovation Index 2018 by the World Intellectual Property Organisation, all countries within the top 15 ranking were high-income advanced economies.
Germany’s “Industrie 4.0”, first mooted by the government in 2011 via the High-Tech Strategy 2020 Action Plan, focused on transforming its manufacturing sector into a leading advanced cyber physical system provider.
In 2012, the United States adopted the “Smart Manufacturing” strategy policy to utilise networked data and Information & Communication Technologies (ICT) for their manufacturing processes.
Three years later, China introduced its “Made in China 2025” policy to secure its position as a global powerhouse in high-tech industries such as robotics, aviation, and new energy vehicles such as electric and biogas.
Japan is now positioning itself to introduce the next phase of Smart Manufacturing to secure its future manufacturing capabilities and increase digitisation through “Industrial Value Chain Initiative”. According to the EU-Japan Centre, the Japanese Internet of Things (IoT) market is projected to grow to US$126bil by 2020; this is 2.2 times its size in 2015.
In simple terms, the next industrial revolution is taking shape around the globe. Major advanced economies around the world are expecting a significant boost to their manufacturing firms’ competitiveness via IR4.0 methodologies.
Dawn of IR4.0 in Malaysia
For the past 10 years, Malaysia’s manufacturing sector has contributed ~23% to the country’s GDP. To achieve its high income status by 2023, manufacturing remains a core sector of sustainable growth under the 11th Malaysia Plan.
At present, the quick pace of technology advancement is beginning to pave the way for an imminent disruptive wave of IR4.0 in Malaysia.
Many firms attempt to maximise productivity and profitability while being cost-effective by leveraging on disruptive technologies such as IoT, artificial intelligence, automation & robotics, biotechnology, and more.
Not surprisingly, Malaysia is already feeling the effects of disruptive technology, from e-hailing taxi apps such as Grab, to shopping within the comfort of our own home without needing to be physically present at the mall using online shopping apps such as Shopee and Lazada.
In 2016, Malaysian household spending on goods (food and non-alcoholic beverage, clothing and footwear, furnishing and household equipment) fell to 26% of total household spending when compared to 33% in 1994.
Meanwhile, spending on services (health, recreation and culture, education, restaurants and hotels) increased from 20% of household expenditure in 1994 to 22% in 2016. This is clear evidence of the shift in consumption preferences away from goods towards services.
Besides the shift in preference towards services, the proliferation of e-commerce has also altered consumer behaviour. Since e-commerce requires a manufacturing firm with flexible and agile production capacity, the traditional manufacturing model of mass production is slowly losing its significance.
To survive the age of disruption, manufacturers need to adopt a business strategy that can respond quickly to consumer needs and market changes in a cost-effective manner.
Unlike today’s economy that often focuses on generic behavioural competencies, IR4.0 will transform the labour market into a skill-centric type of market, with respect to Information Technology (IT), data analytics, process understanding, and the ability to work with modern interfaces.
Currently, certain jobs do not need these skills. This implies that the core qualifications and skills used in today’s job market are insufficient to revolutionise the manufacturing sector. In short, increased automation will put many low-skilled workers out of job.
In 2016, Foxconn reportedly replaced around 60,000 factory workers with robots, and assigned those workers to tackle higher value-added elements in the manufacturing process.
Lack of standards and technology is another issue that may delay the industrial revolution. According to the Networked Readiness Index by the World Economic Forum, Malaysia ranks 31st out of 139 countries in exploiting the opportunities offered by ICT.
One example is the banking & finance sector, which is in the midst of being transformed or disrupted by digital banks and FinTech companies. In the new era of IR4.0, one shouldn’t be surprised if fintech poses a threat to traditional banking.
In fact, digital transformation is the main reason just over half of the companies on the Fortune 500 have disappeared since 2000.
Nevertheless, the level of disruptions, and the risks and opportunities differ across sectors. Essentially, the substance of this revolution lies on the application of available new technologies.
Despite the rapid emergence of IR4.0, there are still many local firms who are unaware that it may transform or replace their existing production methods altogether. In time, technology will transform the overall market structure and revolutionize to more efficient production methods.
This brings us to the main question: is Malaysia fully prepared for IR4.0?
The most recent Malaysia’s National Policy in IR4.0, “Industry Forward” (Industry4WRD) launched on 31 October 2018 by Prime Minister Tun Dr Mahathir, aims to help transform Malaysia’s manufacturing sector to be stronger and smarter.
This policy is expected to position Malaysia as a strategic partner for smart manufacturing, a primary hub for high-tech industries, as well as total solutions provider for the manufacturing sector in Asia Pacific by 2025.
Industry4WRD is expected to increase the productivity in the manufacturing sector per person by 30% from US$24,486 to US$3,132. This would elevate the absolute contribution of the manufacturing sector to the economy by 54% from US$61bil to US$94bil.
In conjunction with that, there must be a clear overarching policy and coordination by the government to provide an enabling ecosystem for the manufacturing sector to thrive by adopting new technologies, while strengthening on-going structural reforms.
To do this, the government might want to consider providing further assistance to SMEs by measuring their gaps and readiness, and guiding them to adopt IR4.0 technologies.
Despite that, the Malaysian education system should also be imperatively realigned for global recognition and relevance. The formation of Centre of Excellence in polytechnics by Malaysia Technical University Network as an effort to cultivate and improve the quality and multidisciplinary of R&D pertinent to IR4.0 is highly appreciated.
It is also important for private firms to invest in re-skilling and up-skilling their employees, and new entrants into the labour workforce. This is to sharpen the skillset of the workers in tandem to the new operating landscape – consistent with the policy’s target to increase the number of high-skilled workers in the industry from 18% to 35%.
In a nutshell, Malaysia’s future productivity growth is highly dependent on the ability of enablers and adaptors to apply advanced knowledge and technologies associated with the revolution to ensure a sustainable economic growth.
Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd