It comes as little wonder that Malaysia’s capital city, Greater Kuala Lumpur, is globally recognised as an ideal nearshoring hub. It serves as a conduit for businesses to bring their operations closer to their partners and customers in Southeast Asia.

This is especially important in today’s global economic climate, where rising labor costs and inflation have pushed businesses to explore alternatives like nearshoring, or outsourcing business processes to a nearby country or location to trim their overheads.

Malaysia boleh: The Malaysian advantage

It is easy to see why Malaysia is a prime hub for nearshoring in Southeast Asia. Besides its favorable geographic location, Malaysia boasts abundant natural resources vital for producing advanced materials.

In its New Industrial Master Plan 2030, the Ministry of Investment, Trade and Industry identified graphene, nitinol, rare earth, and microcrystalline cellulose (MCC) polymers as Malaysia’s core advanced materials. These materials support the country’s electric vehicle (EV), aerospace, and healthcare industries.

Its culturally diverse population complements Malaysia’s geographical and natural resources. Predominantly comprising Malay, Chinese, and Indian ethnic groups, Malaysians are proficient in speaking at least two languages, with a high level of proficiency in English. Thus, its workforce is well-equipped to bridge language and cultural barriers, connecting Malaysian businesses to the rest of Southeast Asia.

To solidify this advantage, the Malaysian government has proactively developed technical education. In March 2024, the government expanded its Technical and Vocational Education and Training (TVET) program centers into teaching factories, providing students with direct access to real industry training and easing their integration into industrial environments.

As Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi shared, such industry engagement is important to keep the local curriculum up to date with the Industrial Revolution 4.0. This involves integrating emerging technologies like the Internet of Things (IoT), Artificial Intelligence (AI), big data, cybersecurity, and cloud computing.

By staying updated with prevailing global technology trends and integrating them into its workforce, Malaysia transitioned from a developing nation to an upper-middle-income economy with an estimated gross domestic product (GDP) of €265 billion in purchasing power parity terms in 2024. Driven by resilient consumer demand, Malaysia has also continued to record a robust GDP growth rate, which increased by 5.3 percent year-on-year in the July to September 2024 period.

According to the Malaysia Investment Development Authority, Malaysia’s foreign direct investments (FDI) reached RM 85.4 billion (€18.17 billion) in H1 2024, signaling a healthy and robust economy.

Several industries stand out among these FDIs for nearshoring their operations in Malaysia to reduce costs and improve efficiency.

Electronics & Electrical

Malaysia counts established players like Intel, Panasonic, and Bosch among its E&E ranks. The island state of Penang is Malaysia’s leading E&E hub, specializing in semiconductor manufacturing. This is why Bosch selected Penang to nearshore a test center for chips and sensors in 2023. Costing €65 million, this test center bridges Bosch and its partners in Southeast Asia and the wider Asian region. By nearshoring its semiconductor testing and quality assurance operations to Penang, Bosch enjoys shorter delivery times and routes, in turn strengthening its ability to serve its customers within Malaysia and the rest of Southeast Asia.

Aerospace

Aerospace is another major industry in Malaysia that follows the same nearshoring trajectory as E&E. As Southeast Asia’s second-largest aerospace hub, Malaysia has a highly developed aerospace industry that achieved over RM 15.3 billion (€3.09 billion) in revenue in 2022, having grown at a CAGR of 17.6 percent, or RM 1.4 billion (€286 million).

Maintenance, repair, and overhaul (MRO) and manufacturing are the core drivers of Malaysia’s aerospace industry, contributing 45 and 49 percent of total revenue respectively. Nearshoring is a common strategy deployed by aerospace firms for these two purposes, done to diversify supply chains and thus reduce delivery times.

One such firm is major U.S.-based aircraft manufacturer Boeing. Starting as an aircraft supplier for Malaysia Airlines in 1972, Boeing recently acquired its first wholly-owned manufacturing facility in 2023. Initially owned by Aerospace Composites Malaysia Sdn Bhd (ACM), the facility empowers Boeing with the capability to manufacture its aircraft composite products and sub-assemblies. In turn, Boeing can streamline its supply chain within Malaysia and the rest of Southeast Asia.

Medical technology

Aside from E&E and aerospace, the medical technology industry has also extensively deployed nearshoring in Malaysia. Asia’s burgeoning healthcare sector has prompted Malaysia to strategically position itself as one of the region’s leading offshoring hubs for medical devices.

Singapore and Japan are among the key export destinations for medical devices, accounting for RM4 billion (€800 million), or 12.8 percent of Malaysia’s total medical device exports in 2022.

Shoring up against potential supply chain challenges in Malaysia

While Malaysia has been an ideal nearshoring location for the Southeast Asia region, implementing a nearshoring strategy in Malaysia comes with specific challenges.

To begin, businesses must pay close attention to Malaysia’s regulatory and political environments. While the Malaysian government has meticulously built a stable business environment open to foreign investments, businesses must still do their due diligence in ensuring their operations comply with local regulations.

For instance, manufacturers must comply with the Customs (Prohibition of Exports) Order 2023 guidelines when exporting goods out of Malaysia. Under this Order, manufacturers must apply for export permits for items placed under Conditional Prohibition and declare them where necessary. Taxes may also be levied to facilitate domestic processing.

Malaysia also has protectionist policies to safeguard its domestic market and business sectors and maintain its cultural and religious norms.

And although English is the de facto language used in Malaysia’s business circles, it is still helpful for businesses to sharpen their proficiency in other languages like Malay and Chinese to improve communication and collaboration, which will ease relationship building with suppliers and workers, reducing the time needed to establish core processes and align expectations.

Despite these challenges businesses, Malaysia still stands strong as a nearshoring location due to its strategic geographical location, abundance of natural resources, and multilingual and skilled workforce. Accounting for existing challenges and focusing on future-oriented investments will go a long way in enabling businesses to effectively harness Malaysia’s nearshoring prowess to diversify their supply chains.