ISSUES AND CHALLENGES OF LOGISTICS IN MALAYSIA: A PERSPECTIVE

Mohd Hafizzuddin Md Damiri*

Abstract Malaysias progress on logistics has failed to keep pace with its growth in trade. Developing countries in this region are now catching up, so faster progress on logistics development will be crucial to sustaining Malaysias competitive advantages. High logistics costs in Malaysia derive from poor transport infrastructure, underdeveloped transport and logistics services and slow and costly bureaucratic procedures for dealing with both exported and imported goods. The balance among these three varies among countries in the region but in each country, a complementary approach to address all of them will be needed to produce a sustainable improvement in competitiveness. Keywords: logistics issues and challenges, Malaysian logistics, trade and transport, logistics competitiveness, transport infrastructure. Transport and Logistics Issues Why focus on logistics? The case is simple. Reducing the cost and improving the quality of logistics and transport systems improves international market access and leads directly to increased trade and through this, to higher incomes and the scope for significant reductions in poverty. And, despite two decades of improvement, Malaysia has significantly scope for further reducing its transport and logistics costs.

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*Department of East Asia Studies, Faculty of Arts and Social Sciences, University of Malaya and Public Service Department (PSD), Malaysia. Paper prepared for the United Nations Economic and Social Commission for Asia and Pacific (UNESCAP) Regional Expert Group Meeting on Trade and Transport Facilitation for Export Competitiveness, Yangzhou, China 25-26 September 2008 and the National Conference on the Direction of the Logistics Industry and Supply Chain in Malaysia: Issues and Challenges, Shah Alam, Selangor, Malaysia 4-5 August 2009.

Studies have indicated the importance of efficient ports (in terms of both operational efficiency and document facilitation) for trade competitiveness 1, but the arguments highlighted show that ports are only one aspect of the connection between logistics and trade growth. Looking at the total cost of getting products from producers to markets, land transportation to ports accounts for a higher proportion than processing within the port or the maritime voyage itself, and it is improvements in land access that offer the greatest scope for increasing trade competitiveness.

Under the Third Industrial Master Plan (IMP3), launched in 2006, Malaysias logistics development were charted carefully and diligently as to keep on pace with other countries in South East Asia. Unlike its neighbors Singapore, Thailand, Vietnam Malaysia still lags on the development and competitive edge for logistics, if not, total logistics solutions. Transportation means by air, sea and land, coupled with disparity on issues related to regulations, policies and operations, hinders further improvement in this sector.

Then there is the use of technology. Investments in this may cost millions, if not billions of dollars, including upgrades, maintenance and necessary tune-ups. Skepticism on technology further impede logistics-related improvements be made, for example, the National Single Window (NSW). This project has been going on for years, where Malaysia is championing it in the ASEAN arena, without a hint of progress or success in

Engel, Charles & Jian Wang, International Trade in Durable Goods: Understanding Volatility, Cyclicality and Elasticities, NBER Working Papers 13814, National Bureau of Economic Research Inc., 2008.

the near future. This brings us to the elaborate details for each logistics segment and its problems, which of course, need to be ironed out appropriately.

i.

Maritime Issues

Seventy percent of Malaysias trade in manufactured goods is carried by containers and the use of containerized shipping has increased tremendously. During the 1990s, total container movements increased at least nearly 10 percent a year, with the fastest growth occurring in the ports of Malaysia. The rapid growth in container usage represents both a revolution in maritime technology and a significant logistics challenge to economies in the region.

Though container ports in the region are becoming more efficient in handling containers, Malaysia cannot keep pace with the rapidly growing demand for berth and storage space. While the capacity of the container fleet on the South East Asia East Asia routes increased at more than 20 percent a year between 1980 and 2000 2, the capacity of container berths to handle those ships increased at less than 8 percent a year. Countries in the region, including Malaysia, responded to the shortage by adding new berths, converting general cargo berths to container handling and developing new ports. Expanded capacity requires greater land area for use in container storage and storage yards to handle the capacity still cannot cope with the decreasing amount of space

Feenstra, Robert C. & Kee, Hiau Looi, Export variety and country productivity: Estimating the monopolistic competition model with endogenous productivity , Journal of International Economics, Elsevier, Vol.74(2), 500-518, 2008.

available both at the ports and depots 3. Not to mention the means of transporting the containers across land.

There is limited scope for further reducing costs by increasing vessel size and the next development is likely to be more direct services from what are now feeder ports. With higher volumes and more efficient smaller vessels, this could overcome the cost penalty of transfers in the hub ports 4. The start of this trend can already be seen in the slower growth rates of two regional megaports in this region: Port Klang and Port of Singapore.

ii.

Multimodal Transport

Malaysia uses containers for the maritime part of trips, loading and unloading them in the ports rather at the origin and destination of their cargo. This eliminates the main cost-saving advantages of container use. Countries that can best encourage door-todoor movement of containers using multimodal transport will be best equipped to compete and to bring trade benefits to their more remote areas 5, such as between West Malaysia and East Malaysia. To achieve this integration, Malaysia needs to:

Match inland with maritime infrastructure. An important reason that containers do not move inland from container ports is that road and rail

Venables, Anthony J., Evaluating Urban Transport Improvements: Cost Benefit Analysis in the Presence of Agglomeration and Income Taxation , CEP Discussion Paper, Center for Economic Performance, LSE, 2004.
4

Feenstra, Robert C., New Evidence on the Gains from Trade, Review of World Economics, Springer, Vol.142(4), 617-641, 2006.
5

Romer, Paul, New goods, old theory and the welfare costs of trade restrictions , Journal of Development Economics, Elsevier, Vol.43(1), 5-38, 1994.

infrastructure lack the right carrying capacity and vehicle dimensions for the transport of loaded containers. This scenario can be seen in East Malaysia.

Simplify trade documentation. Examples include the use of throughwaybills and single invoices for all modes. In customs clearance times, the economy of Malaysia is quite similar to those of other developing countries but if taken together, developing countries are significantly slower that developed countries. Another regulatory change to allow containers to be cleared for tariffs, customs, health and taxation charges at inland locations away from the ports would help reduce port congestion but could raise additional security concerns.

Develop an efficient freight forwarding industry. Third-party logistics or 3PL is not a well-advanced concept in Malaysia. In industrial countries, almost a third of logistics turnover is contracted to 3PL providers, but even in industrialized Malaysia, barely 10 percent of trade-related transport services are provided in this way. Progression to the earlier stage of second-party logistics or 2PL which companies unify their internal transport and warehousing functions and create their own internal logistics departments in Malaysia is still underway.

Develop effective communications systems, so that freight forwarders can take advantage of the shipping alternatives available and keep their clients aware of the status and location of their freight.

Even the least accessible countries in this region have improved the quality and scope of their information systems such as Thailand, Vietnam and Indonesia but few have been able to develop freight forwarding agencies that perform as well as those in the more accessible and trade-open countries, such as Singapore.

iii.

Ports and Land Access

The high costs of land access to ports, reinforced by the effects of production agglomeration, have caused an excessive concentration of export-related activities in port cities and essentially restricted the benefits of trade growth to the areas immediately surrounding ports.

If the benefits of trade are to be more widely distributed, the penalties of inaccessibility need to be addressed. Such action could not only stimulate trade-induced growth in currently inaccessible areas, but if successful, this could reduce and slow the growth of trade-induced urban congestion and pollution in port cities.

Reduction of port access costs depends on having adequate infrastructure, appropriate vehicles and logistics technology that allows these to be use efficiently 6. As container
6

Mangan, John, Chandra Lalwani & Fynes, Brian, Port-centric logistics, International Journal of Logistics Management, Vol.19(1), 29-41, 2008.

ports expand, we find it increasingly difficult to accommodate both the added space requirements and the road congestion that results from the high volumes of truck traffic servicing the ports. While the depth of the maritime access channel is not a constraint on growth, the urban congestion problems of port growth can often be solved by moving non-maritime port activities (mostly value-adding production and packaging services) inland7, closer to the industries that the port serves and to build rail links to avoid generating extra load traffic.

iv.

Air Freight

In Malaysia, air freight accounts 30 percent of Malaysias international trade by volume but more than 55 percent by value8. Air freight is important for Malaysia: first, because the distance from Malaysias major exports U.S. and Europe makes quick delivery of sea freight impossible; and second, because a high proportion of Malaysias manufactured exports require timely delivery. Another reason is because these manufacturers have high value to weight ratios, the ad valorem cost of their air transport is comparatively low.

Good air freight facilities are important in attracting fast growing, high value-added industries. Hence, competition between airports in South East Asia to act as a hub for major logistics companies is growing tremendously, providing services equally or better than the other. The smaller and newer airports that can offer better services are also
7

Meixell, Mary J. & Norbis, Mario, A review of the transportation mode choice and carrier selection literature, International Journal of Logistics Management, Vol.19(2), 183-211, 2008.
8

Ministry of International Trade and Industry (MITI), Malaysia, Malaysia International Trade and Industry Report 2008, Percetakan Nasional Malaysia Berhad, Kuala Lumpur, 2009.

growing faster than the larger ones; this happens in support of low-cost carriers, by giving an alternative to air travel besides major airlines servicing the various South East Asia air sectors.

Airlines and traditional freight forwarders both compete and cooperate with each other to provide air transport-based freight services. The progress of air freight forwarding and air freight logistics in Malaysia and its neighbors could be compared in favor with that in the U.S. and Europe, while at the same time depending on multinational air carriers for efficient air freight logistics.

Policy Recommendations To again highlight the importance of logistics, it is best, against this background, for the need of the Government of Malaysia to take actions to improve trade-related logistics on several fronts, if Malaysia were to increase its trade competitiveness, apart from being burdened with logistical nightmares.

i.

Domestic Integration

For the less open and accessible areas in Malaysia, especially in East Malaysia, the development of more tightly integrated domestic markets and logistics systems is a high priority. Besides promoting an appropriate mix of modes roads, waterways and rails complementary institutional actions must be taken to extend better transport services to remote areas and to establish better conditions for market development, for example through postharvest services, cargo consolidation through farmer or business

associations, information on prices and market demand, access to credits and human skills.

ii.

Private Sector Collaboration

The transport of the outputs of very simple extractive industries may not require advanced logistics abilities, but high-value products call for services such as freight forwarding, 3PL, warehousing, storage, packaging, e-business use and tracking.

Logistics needs of this kind tend to better served by the private rather than the public sector. In Malaysia, the Government may be well advised to withdraw from direct provision of logistics services while creating the right enabling environment for competition and private investment. This may entail legalizing and deregulating freight forwarders and allowing new entrants, including the international companies that can be a major source of capital, technology and new management practices needed to develop sophisticated services. Even areas such as port management and operations that are traditionally managed by the Government may benefit from private service provision.

Given the fixed costs of entry, private operators are reluctant to provide services where trade volumes are low. The initial public investment in facilities such as inland container terminals in potentially high-growth areas in Malaysia, which are distant than ports, can be recovered through later concession revenues or outright sales.

To encourage private sector collaboration, the Government has established the Malaysia Logistics Council (MLC) in January 2007, to (i) provide leadership and serve as a focal point to address all issues relating to the development of the industry, (ii) monitor and coordinate implementation of programs and activities of the respective Agencies/Authorities at both Federal and State levels involved in the development of the industry, (iii) steer research and training activities of the Center of Excellence for Logistics and Supply Chain and (iv) streamline strategies and policies governing the logistics industry which cuts across several implementing authorities 9.

iii.

Regulatory Environment for Transport

Lack of regulatory coordination across transport modes is a common problem in Malaysia, if not, the South East Asian region. One regulatory agency monitors ports, another on road licensing, third on freight forwarding and each may have different plans, standards and reporting requirements. This presents problems for firms that seek seamless freight movement across modes. A transparent and uniform regulatory and legal regime for private sector participation, safety, environment, traffic rules, vehicle weight and dimension is a prerequisite for an effective transport agency. An obvious solution is regulatory consolidation so that businesses face consistent rules. Improved transport infrastructure in trade corridors is an important strategy that will facilitate the attraction of foreign direct investment and trade-based growth away from port cities. While infrastructure development in competing modes can stimulate intermodal competition, it can be costly in the early stages of trade corridor expansion:

Malaysia Logistics Council, Terms of Reference for the Malaysia Logistics Council, January 2007.

for Malaysia, it has five economic corridors, focusing on different primary activities, apart from logistics.

Future Directions for Logistics in Malaysia In terms of competitiveness and efficiency in Southeast Asia, Malaysia should look towards emerging economies and development of their logistics arrangements, ports and infrastructure, freight management, connectivity and usage of technology. These countries are rapidly moving and taking measures such as separating regulator and operator functions, corporatization, investment and cooperation, mergers and acquisitions, branding and marketing, development and so forth, to become a brand known within the region.

By having adequate hard and soft infrastructures, Malaysia will be able to increase the level of competition from its neighbors and grow influence to foreign logistics service providers to establish their regional offices. However sweet it may sound, the logistics scenario in Malaysia will still face numerous other challenges with its neighbors in the region, in this increasingly competitive and liberalized environment.

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