Textile Crisis in Malaysia

Textiles are a notoriously cyclical business at the best of times, but Malaysian companies today face a crisis which could cripple large sections of the industry and, at the same time, involve the Government in major policy decisions which could upset the country's economic development.

However, Malaysia's problems are not as simple as those affecting the rest of the Far East, America and Europe. The invasion of Japanese and Hong Kong textile manufacturers into Malaysia over the last couple of years has at least doubled the potential capacity of the industry.

The foreign-owned companies are bigger, better-equipped, and more competitive than the local industry. The fear is that they will capture the existing export market and undercut local firms on the domestic market. Malaysian firms will be forced out of business and, when the recession is over, only foreign-owned companies will be left to enjoy the profits.

The Government has tried to encourage these new firms to sell a percentage of their equity to Malaysians and to concentrate on exports rather than the local market. But there is little indication that it is aware of the problems it may have created through its very generous investment and incentive schemes and its policy of allowing overseas companies to repatriate virtually all their profits.

At the same time, the Textile Alliance from Hong Kong has set up a massive vertically-integrated operation in Penang with Toray.

The impact of these companies on the Malaysian economy is demonstrated by Govt. figures. In 1973 there were more textile companies set up in Malaysia than any other kind of business—and the vast bulk were foreign-owned.

Many of the big Japanese textile names are now well-established in Malaysia: Toray Industries, Unitika, Kanebo, Japan Exlan, T. Nishio and Toyobo.

The reasons for the influx of foreign money are not hard to find. The textile industry is famous for its low wages and cutthroat competition. Rising costs at home, particularly for land and labour, have forced Japanese and Hong Kong companies to expand overseas.

Japan's new relations with China politically mean that Taiwan and South Korea no longer have the same appeal for Japanese investors. Malaysia is an obvious alternative. Although wage rates are marginally higher than in Thailand or Indonesia, Malaysia enjoys one of the most stable political systems and economies in Southeast Asia. (It is illegal to strike in Malaysia.) At the same time, the Government is prepared to give new companies a tax-free holiday for up to eight years. It also guarantees new investment and allows companies to repatriate their profits.

Malaysian companies may be disturbed about export competition, but they are a great deal more worried about the future of the local market. Currently, Japanese and Hong Kong countries which grossly overbought during last year's boom, are alleged to be dumping large quantities of textiles on the Malaysian market.

The situation is now so bad that local manufacturers have managed to persuade the Malaysian Government to take action. It is likely that in the near future it will impose a total ban on imports of shirting fabric and substantially raise the tariffs on other items.

This dumping may be only a temporary phenomenon. In the long term, however, Malaysian firms are scared that the newly-established Japanese and Hong-Kong textile groups will start competing in the domestic market. One local manufacturer said: 'If the Japanese compete on the home market, our established mills will sink. These conglomerates can afford to sell at ridiculously low prices and, if necessary, take a loss. The indigenous Malaysian companies are much more vulnerable.'

The Government claims that it has anticipated the problem and carefully tried to prevent direct competition between the new foreign-owned companies and the local industry. The new companies are only allowed to sell in quantity on the local market if they are manufacturing fabric not already made in Malaysia, or where there is a shortage of locally-produced material.

Local manufacturers are certainly not very confident that the Government will protect them. They argue that the Government is trying to be all things to all men, and that although it can perhaps monitor the existing market it cannot anticipate the future.

Ironically, the strongest criticism of Government policy comes from an expatriate. Baiji Nath Birla, head of Indian Malaysian Textiles (49% controlled by the famous Birla family of India and 51% by Malaysian shareholders), simply said: 'Although I am a foreigner myself. I think the Malaysian Government is selling out the future of the local people to the Japanese.'