Malaysia’s Manufacturing Sector Falls Further Behind Neighbors

Manufacturing activity is springing back to life in Southeast Asia with one exception: Malaysia.

The Nikkei ASEAN Manufacturing Purchasing Managers’ Index, a monthly survey, rose to 51.5 in May, up from 51.0 in April, marking its highest level since July 2014. The figures in six of the seven countries surveyed were above the 50-point mark that separates expansion from contraction, indicating that business is improving, Nikkei reported.

By contrast, Malaysia’s manufacturing PMI slid to an 11-month low of 47.6 in May from 48.6 in April.

The diverging figures underscore high expectations for Prime Minister Mahathir Mohamad to improve the economy after last month’s historic election victory. Manufacturers “retained strong projections for output in the next 12 months, rooted in hopes that the new government will spur business activity in the year ahead,” said Aashna Dodhia, economist at IHS Markit, which compiles the survey.

Malaysia’s fourth consecutive month of contraction, due to both lackluster domestic demand and weaker exports, signals a headwind for Mahathir, who led the opposition Pakatan Harapan, or Alliance of Hope, coalition to a stunning victory against the ruling coalition under Najib Razak in the May 9 election.

The economy struggled to boost the manufacturing sector under Najib, who has been accused of poor governance and corruption.

 Awaiting New Policies

Robust economic growth has been overshadowed by rising inflation, partly due to a weak currency and higher gasoline prices as the government tried to reduce fuel subsidies.

Under his previous rule, Mahathir had an ambitious plan to boost Malaysia’s manufacturing sector—symbolized by national carmaker Proton, which was established in the 1980s. But the brand failed to take off, resulting in a 49.9% stake being sold to a Chinese company last year. Back in power, manufacturers await new policies from the 92-year-old leader.

In an interview with the Nikkei Asian Review on Monday, Mahathir said he is considering setting up a new national car company to raise the level of locally-produced vehicles and export them to international markets. “We are looking at a different company and we are also looking to Japan for some cooperation at the initial stage, (like with Malaysia’s) first national car,” said Mahathir.

All seven Southeast Asian countries surveyed in May also faced higher input prices. But for many, rising demand outstripped costs. Vietnam led the pack in May with “record expansion in new export business” according to the survey. The country has seen robust growth in the manufacturing sector, driven by foreign investment by South Korean companies like Samsung.

The Philippines came in second with client demand improving in the wake of tax reform measures that took effect in January, which cut personal income taxes. In Indonesia, strong domestic demand helped cushion a sharp increase in costs and softer export orders.