THE call for SMEs to adopt Industry 4.0 technologies is growing louder. With technology rapidly evolving and converging, there is a stronger urgency for SMEs to leverage new developments to enhance efficiency and increase productivity to better compete and grow moving forward.
The tabling of Budget 2019 as well as the launch of the National Policy on Industry 4.0 (Industry4WRD) last week show the government’s commitment in assisting small businesses toward this end.
Under the Budget, the government has set aside over RM5bil to help businesses embrace the Industry 4.0 age.
Among the measures include an allocation of RM2bil under the Business Loan Guarantee Scheme (SJPP) to incentivise SMEs to invest in automation and modernisation and a RM3bil Industry Digitalisation Transformation Fund with a subsidised interest rate of 2% under Bank Pembangunan Malaysia Berhad to accelerate the adoption of smart technology such as automation, robotics and artificial intelligence.
Finance Minister Lim Guan Eng also announced assistance for the first 500 SMEs to carry out the Readiness Assessment to migrate to Industry 4.0 platforms via Malaysia Productivity Corporation.
The Federation of Malaysian Manufacturers (FMM) notes that sufficient grants and incentives have been provided for the adoption of new technologies, human capital development, promotion of entrepreneurship, innovation and R&D, all of which are essential to achieving Malaysia’s ambition of a high income country.
“FMM thanks the government for supporting the industry’s transition into Industry 4.0, especially with a special allocation for small and medium industries. The Budget incentives, which includes the creation of a RM3bil Industry Digitalisation Transformation Fund, would help to create a comprehensive ecosystem covering human capital development and technology adoption to facilitate implementation of the National Policy on Industry 4.0,” says FMM president Datuk Soh Thian Lai.
The manufacturing sector contributes about 22% to the country’s gross domestic product (GDP) and SMEs make up about 97% of the sector.
In the Industry4WRD report, it is noted that among the challenges faced by SMEs in embracing Industry 4.0 include their lower levels of collaboration with research, reduced access to high performing graduates, and less revenue to invest resources in strategic planning.
However, the agility and specialisation of SMEs will be critical in achieving the 10-year vision to make Malaysia an innovation hub. The report notes that it is important to ensure solutions to SMEs are valuable and accessible, and that the research community and larger businesses are greater incentivised to collaborate with SMEs.
Meanwhile, SME Association of Malaysia president Datuk Michael Kang points out that most of the announcements and incentives for SMEs remained the same as previous years.
A total of RM17.94bil has been earmarked for SME development in 2019 under the Third Focus: To Foster an Entrepreneurial Economy.
What is sorely lacking, though, is an emphasis on exports, he adds.
“They are all there. The loans, the guarantee scheme, halal development, and even the reduction in corporate income tax rate from 18% to 17% for taxable income of up to RM500,000 for SMEs with less than RM2.5mil in paid up capital.
“But what’s missing this year is the Market Development Grant (MDG),” he says.
According to Kang, the MDG has been useful and effective in encouraging SMEs to participate in trade fairs and missions for export. In previous years, the grants were well taken up.
He cautions that there is not enough focus on export under the new Budget and this could impede the country’s goal to boost SMEs’ contribution to export.
In 2017, SME export was at 17.3%. Increasing this to 23% by 2020 will not be an easy task, says Kang.
Kang hopes that plans for Industry 4.0 will be executed smoothly and promptly.
“Every year, the Budget is read around October or November, and approved in December. But by the time the plans and policies are implemented, it is already July. So half the year is gone. This makes it hard to assess the impact of the policy for the year. For example, the automation grant in the previous Budget, even Mida didn’t know the guidelines for the implementation of the grant.
“So we hope this government will be ready to roll this out starting January. We hope they’ll have the guidelines, funds and mechanism ready by early next year,” says Kang.
He lauds the government’s attention to building the infrastructure needed to connect SMEs to the digital economy.
“There are a lot of related technologies like artificial intelligence and Internet of Things that SMEs need to adopt before they can be a smart manufacturing company. They have to start with digitisation. So it’s good that the government is looking at fibre optic. Infrastructure is important. Otherwise, the rural businesses can’t even be connected.
“But there is a lot to do before we can get SMEs to fully embrace smart systems. This is not something a one-year Budget can do. Adoption will take five to 10 years. We will need consistency in policy and budget to encourage mechanisation,” adds Kang.
To support the growth of the digital economy, the government will launch the National Fibre Connectivity Plan in 2019 with an allocation of RM1bil.
FMM’s Soh also applauds this move to ensure more affordable fixed broadband prices through a reduction by at least 25%.
“FMM hopes to receive confirmation that the price reduction is also applicable to businesses and should give priority towards better connectivity in industrial estates,” he says.
Soh is also pleased that the government has allocated funds to promote ‘Buy Made-in-Malaysia’ and hopes for strong enforcement of ‘Buy Made-in-Malaysia’ in government procurement to reinforce support and confidence in locally manufactured products which meet quality standards.
“(We are also happy with) the formation of a Task Force to drive regulatory reforms to ensure a more business friendly environment through improved business processes and tax administration, and that action is taken to evaluate and redefine the role of government in business to remove crowding out and allowing the private sector to lead and grow the economy,” he says.
Other items on FMM’s wishlist that were fulfilled include making available the resources and facilities of TVET training institutes, including offering courses run by the private sector and the extension of the Green Technology Financing Scheme for another five years through an allocation of RM2bil, which would encourage industries to step up investments in energy efficiency, renewable energy and waste minimisation initiatives contributing to a sustainable future for Malaysia.
Employees may be happy to hear that the minimum wage will be raised to RM1,100 from Jan 1. But employers, particularly small businesses, are not rejoicing.
Kang says it was unfair of the government to raise the minimum wage again barely two months of announcing a nationwide standardised minimum wage of RM1,050, which was to be implemented next year.
Prior to the initial revision of the minimum wages in September, the allocation for a minimum monthly salary for Peninsular Malaysia is RM1,000 and RM920 for Sabah and Sarawak.
“The RM1,050 rate hasn’t even been implemented and minimum wage is increased again. And the new rate will be implemented in two months’ time. This puts SMEs at a disadvantage,” says Kang.
As it is, Kang says some SMEs are already discussing the possibility of a salary cut with their workers – some as much as 20% – to tide over the current challenging period. The weaker economic growth, uncertainty in the global economy and cuts in development projects are taking a toll on their margins.
Additionally, it is getting harder for companies to secure foreign workers to help with their operations.
While Kang understands the government’s commitment to reduce the industry’s dependency on low-skilled foreign labour, he highlights that there is not enough experienced workers here.
“When the industry needs labour, we need to supply them with manpower. Otherwise, we will spoil their competitiveness,” he says.
Under Budget 2019, Lim announced the implementation of a new tiered levy system where the levies charged will be higher for employers with a higher percentage of foreign workers.
Lim also noted the shortage of workers in the agriculture and plantation industries, coupled with the decline in prices of agricultural commodities. As such, the government will assist these two sectors by reducing the extension levy for foreign workers who have served for 10 years or more, from RM10,000 to RM3,500 per worker per annum.
Kang counters that the tiered levy system should be applied differently for different industries as some sectors require more foreign labour than others.
“It’s not fair to force companies to cut down on foreign workers when those industries really need them. This will make their cost of doing business increase. Secondly, do we even have enough local manpower to help fill that gap?
“I hope the reduction in extension levy that is given to the plantation and agriculture industries can be expanded to other SMEs. They are in need of foreign labour, especially experienced foreign labour. Otherwise, it will be hard for them to grow,” he says.
Notably, Industry4WRD aims to make Malaysia the prime destination for high-tech industries. But with cost increasing beyond the sustainability of SMEs, Kang says the government needs to define the kind of local manufacturing outfits that can be nurtured here.
“Will we only have high-tech manufacturing or all kinds of manufacturing. If it’s only high-tech manufacturing, we hope the government can provide a budget to assist the others to move their manufacturing out to other countries that have a cheaper base. Some of them just cannot compete here,” he adds.
While the allocation for SMEs in 2019 is significant, YYC group tax executive director Zen Chow notes that there is not much tax incentives this round.
“SMEs like tax incentives because it has a direct impact on their cost of doing business. There are no new incentives this round but we are happy that the corporate tax was reduced. We thought that the government wanted to increase their revenue but they were still willing to give this incentive. So that’s good.
“It has been reduced gradually from 20% to 17% for 2019 onwards. Although it may not be a big impact, still, every 1% saved can be used for other cost. So that increases their competitiveness,” says Chow.
He is optimistic about the double deduction provided for companies to train their workforce.
“This is an initiative to make the implementation of Industry4WRD a success. Moving forward, high tech will be the focus. So this incentive can encourage SMEs to invest in human resource development.
“Whether or not this incentive will benefit SMEs depends on the vision of the SME. Some are still very conventional in their operations. But some want to move forward and expand. This can encourage the latter group of SMEs to expand and grow further,” he says.
YYC also urges tourism-related SMEs to take advantage of the RM500mil loan facility via SME Tourism Fund at 2% interest subsidy.
One thing on chow’s wishlist that did not make it to the Budget was tax incentives for companies that use digital technology to expand their businesses.
Instead, according to Budget 2019, all imported services – including online ones like software, music, videos and digital advertising – will be levied with a service tax starting Jan 1, 2020.
“We were hoping that e-commerce businesses can pay less taxes. But now, instead of reducing tax, the government is increasing tax for overseas businesses. This does not reduce cost but it can increase income.
“The government is using a different way to create a level playing field by introducing service tax for foreign providers. At the moment, the service tax is only for services by service providers in Malaysia. Services from overseas providers are not subjected to that tax. So, although there is no incentive for local providers, this move will bring up local competitiveness.
“From what we understand, this will be carried out in two phases. From 2019 onwards, businesses that use imported services have to self-declare and pay the taxes accordingly. For consumers, from 2020 onwards, they will have to pay for imported foreign services. In this case, foreign service providers have to register with the Royal Malaysian Customs and charge the tax,” explains Chow.
Another good news for SMEs is that they can look forward to their GST and income tax refund, which will be paid back by 2019.