Defence, aerospace and maritime to Malaysia
Trends and opportunities
Like many South-East Asian countries, Malaysia’s economy continues to grow, parallel to the expectations of its increasingly wealthy and well-educated population. These expectations probe an increase in national expenditure, both military and civilian, in the Malaysian defence, aerospace and maritime sector.
Malaysia's industrial base in the defence sector is still characterised by low technology capabilities (concentrated in areas such as repair and maintenance) and reliance on partnerships with international contractors. However, its defence industry has progressed from merely providing maintenance and logistics support for foreign-built equipment for commercial and military aircraft. Many local companies are now engaging in joint ventures with foreign companies for shipbuilding and the assembly of armoured and military vehicles.
Australia-Malaysia defence story
The Australian Defence Force's commitment to the security of Malaysia is longstanding. The defence relationship between Australia and Malaysia has continued to develop under the auspices of the Five Power Defence Arrangements and the Malaysia Australia Joint Defence Program. The program includes the training of Malaysian military personnel in Australia, the attachment of armed forces personnel from each country to the other, and annual combined field exercises. Australia is Malaysia's largest destination for external military training.
Key market drivers (2015-2025)
Australia exported A$366m worth of defence equipment to Malaysia in 2015 (Source: Trade Map 2016). Malaysia's overall budget allocation for the security sector is A$10.5 billion. For internal security and public safety, the Malaysian Ministry of Finance has allocated almost A$4.4 billion, including for the procurement of 500 patrol cars and 500 motorcycles (Source: Business Monitor International 2016).
Malaysia's defence sector has largely developed from the provision of maintenance and logistic support for foreign-built equipment for commercial and military aircrafts. Despite falling commodity prices and China's economic slowdown, fleet modernisation remains urgent in light of regional security concerns and the rapidly changing security landscape.
Infrastructure modernisation and optimisation due to ongoing territorial claims and conflicts with the Philippines, Indonesia and China, plus the protection of the Strait of Malacca, are pushing the government to invest in modernising current military infrastructure and naval bases, particularly in the Sabah region. Malaysia has several territorial disputes with Indonesia, mostly driven by oil resources; some of these territorial claims have been resolved in international courts. Ongoing insurgencies in Sabah and Sarawak provinces (Borneo) have pushed Malaysia to delocalise its military bases. These have also generated tension with the Philippines. Rising tensions across the region have led Malaysia to actively invest in new maritime capabilities to enhance its maritime security (in the Strait of Malacca).
The disappearance of Malaysia Airlines flight MH370 emphasised the country’s overreliance on its stretched fleets and aged capabilities, resulting in calls for an immediate action plan.
Malaysian defence is highly dependent on foreign suppliers. Although there are insufficient capabilities at the manufacturing level, the industry is actively building up its local know-how in the maritime and aerospace sectors. Key priorities in defence research and development are mainly in C4ISR, cybersecurity and autonomous systems. The competitive landscape in Malaysian defence is heavily dominated by European Original Equipment Manufacturers (OEMs) while current regulations strongly encourage 100 per cent native Malaysian-owned companies’ participation.
The market for defence, aerospace and maritime equipment and services in Malaysia are very competitive. Countries such as Russia, United Kingdom, France and Italy are actively operating in the market on a joint public-private sector basis. High-level officials, including cabinet ministers, from competing countries make regular representations on behalf of their firms. The purchase of major military equipment is politically influenced. Decision-making considerations are vast and complicated, and not limited to objective purchase factors such as ‘best product, best price’.
Defence Malaysia normally has direct procurement agreements with OEM’s. Aerospace maintenance companies usually buy equipment as and when needed, mainly through local agents. Equipment must strictly adhere to military standards for data security in order to be marketed as military equipment.
Doing business in Malaysia would often mean dealing with politically well-connected companies. Malaysian end-users are very loyal to existing suppliers so it is essential to get established on the ground floor of any new system or project. Historic buying patterns are also important and this has given some countries, particularly the United Kingdom, an advantageous position over the years.
Defence procurement in Malaysia is primarily done by the Malaysian Armed Forces, depending on the project size, and are based on the Malaysian Armed Forces’ Fourth Dimension Development Plan (4D MAF). Projects under RM2 million will be handled by the relevant armed service (Navy, Army or Airforce), whereas approval from the Ministry of Defence and the Prime Minister is necessary for any major purchases by the government.
Tenders are fully advertised in local and foreign media and posted on the Malaysian Government's central procurement website. Offset agreements remain an integral part of Malaysia’s international defence contracts, where a supplier is required to direct some benefits of the contract back into Malaysia as a condition of sale, including by way of co-production, knowledge transfer, training or investment. Malaysia’s offset objectives are twofold: to develop its high technology sectors and to strengthen its defence industrial base, in line with its Vision 2020 policy to redirect its economy to capital and knowledge-based industries. Exporters should review the government’s defence procurement guidelines around countertrade and offset requirements before bidding for contracts.
For several decades Malaysian armed forces have been operating their legacy fleets from different platforms (OEM) such as Boeing F/A18D platforms or Airbus A400M. Over the last five years plans to replace the platform fleets in stages have been discussed, but with minimal investments. Demand remains high to replace Malaysia’s aging platform fleets on a large scale.
Obsolescence issues within the Royal Malaysian Airforce (RMAF) unit will continue to hinder optimum operation of aircraft fleets in the coming years. Without alternative sources of maintenance support, logistics support will be a growing challenge due to RMAF’s dependency on OEMs for upkeep. (Source: Frost & Sullivan 2015).
Aviation | aerospace
Malaysia continues to act as a hub for visitors to the rest of South-East Asia. Its locally based airlines will provide growing opportunities for those in the aircraft-delivery supply chain, as well as aircraft maintenance and airport infrastructure. The Economic Transformation Programme (ETP) sets out the government’s policy priorities that aim to propel the country up the global value chain. Under this program Malaysia has targeted the aviation MRO (maintenance, repair and overhaul) space to contribute RM13.4 billion in Gross National Income and create 20,700 new jobs by 2020 (Source: Malaysian Government Performance Management and Economic Delivery Unit 2010).
Demand is high to replace Malaysia’s 30 to 40 year-old platform fleets, with a high focus on air platforms – highlighted by pending tender for new multi-role combat aircraft, plus a strong intent to further invest in unmanned systems, implying more investment in infrastructure and ground control stations (Source: BMI 2016). The Malaysian Industry-Government Group for High Technology (MIGHT), the body entrusted to chart the nation’s aerospace fortunes, and which promoted the concept of SIAP confirmed that it would also house some 30-odd local MRO companies, some of whom have formed strategic alliances with the likes of Lufthansa Technik. The Malaysian Government will examine ways to bring the likes of GE, Pratt & Whitney, Rolls Royce and Honeywell into SIAP.
Maritime | coastal surveillance | shipbuilding
Malaysia’s economic trade is powered by sea borne transportation. One aspect of services that could be provided to shipping companies in Malaysia is in the form of ship leasing. The concept of leasing vessels to clients, such as those in the oil and gas industry, is becoming increasingly attractive in the Malaysian Defence industry. Malaysian ports were managed and operated by the government. Increasingly, ports are being privatised and the commercial operations of these ports are undertaken wholly by private entities. Companies that produce port equipment may consider offering Malaysian ports advance equipment such as comprehensive ports and cargo management and monitoring system, vessel traffic management and dredging services.
Another key opportunity is in the area of ship leasing. The concept of leasing vessels to clients, such as those in the oil and gas industry, is becoming increasingly attractive in Malaysia. Continuous anti-piracy missions and patrols around the Straits of Malacca have allowed the Royal Malaysian Navy to develop a high proficiency in maritime roles. Maintaining the security of transmitted information is a priority for all naval and maritime enforcement agencies. Equipment upgrade programs have been undertaken frequently by naval forces, to cater for ageing vessels.
Tariffs, regulations and customs
MAFTA gains for Australian exporters
While there are no specific tariff eliminations for the defence sector under the Malaysia-Australia Free Trade Agreement (MAFTA), iron and steel falling under chapter 72 will have tariff-free treatment from 2017. MAFTA gains in the services sector may also be relevant, particularly under the transport services subsector, with 51 per cent ownership being allowed for international maritime services and 100 per cent ownership for maritime agency services doing sales and marketing of maritime transport (under codes CPC7211,7212 and 7454). Improved access for skills training services, for advanced materials technology, avionics/aviation technology and electronics can be also accessed under code CPC 97090.
The export of goods and technologies designed for use by armed forces-defence related goods is subject to control under Customs Regulations and the Defence Export Control Office (DECO). Authorisation and permits to sell dual-use categories include electronics, computers, telecommunications and information security, sensors, lasers, navigation and avionics, marine and aerospace are subject to clearance by DECO.
Marketing your products and services
Australian companies are encouraged to develop partnerships with local defence companies as the routes to market solutions into the country effectively. Maritime civil engineering companies in Malaysia include Ranhill and Muhibbah Engineering. Companies can boost the effectiveness of its strategy, distribution networks and marketing by prioritising market segments and market dynamics, based on defence policy goals, budgets, procurement systems, local industry strength, competitors and supplier relationships. Affordability, availability of financing options, local partnerships and offset fulfilment are critical factors to win in Malaysia.
Within the aviation space, many Australian-related defence companies are currently active in the marketplace. Some of them have won long-term contracts for maintenance, repair and overhauls of aircraft fleets and accessories. It is also beneficial for Australian exporters to contact Team Defence Australia (TDA) at the Australian Department of Defence for opportunities to participate in defence trade shows in Malaysia. Austrade supports the department’s mission and objectives to promote Australian defence capabilities overseas.
Australian companies need to know how to respond to emerging trends and anticipate offset programs effectively for large tenders. Creating a local presence in Malaysia is advisable as the local presence allows the Australian suppliers to liaise directly with the Malaysian Government for tenders. It is important for Australian companies to distinguish their product or services from that of local and regional players in order to draw in potential Malaysian customers. As with all relationships, Australian companies are advised to establish and maintain good business relations with existing suppliers to ensure long-term business growth. Maritime civil engineering companies in Malaysia include Ranhill and Muhibbah Engineering.
There are five Malaysian companies that hold MRO (maintenance, repair and overhaul) concessions under the Ministry of Defence’s contractor program:
- Airod (air frames)
- SME Aviation (maintenance and repairs)
- Sapura Defense Sdn Bhd (simulators)
- Zetro Aerospace Corp Sdn Bhd (avionics)
- Satang Jaya (safety and survival equipment)
Within the aviation space, many Australian-related defence companies are currently active in the marketplace. Some of them have won long-term contracts for maintenance, repair and overhauls of aircraft fleets and accessories.
Key Agencies for Industry and Government
Australia Malaysia Business Council
Bursa Malaysia (Stock Exchange)
Central Bank of Malaysia (Bank Negara)
Defence and Security Technology Park
Defence Services Asia
Department of Statistics Malaysia
Economic Planning Unit (EPU)
Langkawi International Maritime and Aerospace
Malaysia Australia Business Council
Malaysia Australia Defence Alumni
Malaysian Defence Industry Council
Malaysian External Trade Development Corporation (MATRADE)
Malaysian Government Official Portal
Malaysian Industry-Government Group High Technology (MIGHT)
Malaysian Investment Development Authority (MIDA)
Malaysian Maritime and Enforcement Agency (MMEA)
Maritime Industry Institute
Ministry of Foreign Affairs
Ministry of Trade and Industry (MITI)
Royal Malaysian Customs Department
Royal Malaysian Navy (RMN)
Science Technology Research Institute Defence (STRIDE)
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