malaysia's automation sector: pursuit of opportunities and shift of industrial investment

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MALAYSIA’SAutoMAtIon SectorPursuit of opportunities and shift of industrial investment

OCTOBER 2015Solidiance has produced this white paper for information purposes only. While every effort has been made to ensure the accuracy of the information and data contained herein, Solidiance bears no responsibility for any possible errors and omissions. All information, views, and advice are given in good faith but without any legal responsibility; the information contained should not be regarded as a substitute for legal and/or commercial advice. Copyright restrictions (including those of third parties) are to be observed.

solidiance

2 | www.solidiance.com

1

2 3

45

6

1 Slowing manufacturing growth in Increasing interest in

Oil & gas Palm oil Electronics Automotive

3

2

4

5

6

Expected trends :

Solidiance's survey with >190 automation vendors revealed :

Chemicals Petrochemicals

Surging investment in

Industry categorization per vendors' priority :Expectations VS

investment trends :

Petrochemicals Chemicals

Relevance of aftersales marketImpulses from IT industrySupport from ETP program

High expectation

Expected challenges :Availability of personnelCybersecurity risksSpare parts supplyMachine safety

Downstream processing

Falling investment in

Transportation Oil & gas

Food & beverages Chemicals

Stable opportunities

Building & infrastructure

Electronics

Building automationHave-been

StarsAutomotive

Palm oil

Pharmaceuticals

Oil & gas

Future industrial outlook :Investment in processing industries continues for 3-4 yearsUpstream recovery in oil & gas : in the next 2-3 years

Local transport : restructure is needed, if ever to recover

Electronics : stable due to innovation, growing market, continued investment

High expectation Increasing investment

Petroleum

Petrochemicals

Chemicals

+

High expectation Falling investment

Food processing

+

Moderate expectationStable investment

Electronics

+

Low expectationFalling investment

Oil & gas

Mining

Palm oil

+

Pursuit of opportunities and shift of industrial investmentMALAYSIA’S AUTOMATION SECTOR

Source: Solidiance

CONTENT

PAGE 3

PAGE 5

PAGE 17

PAGE 13

PAGE 4

PAGE 8

PAGE 16

INfOGRAPhIC

CONClusIONs ANd OuTlOOk

AuThORs

ECONOmIC ANd

INvEsTmENT TRENds

ABOuTus

AuTOmATION vENdOR suRvEy

ExECuTIvE summARy


1

2 3

45

6

1 Slowing manufacturing growth in Increasing interest in

Oil & gas Palm oil Electronics Automotive

3

2

4

5

6

Expected trends :

Solidiance's survey with >190 automation vendors revealed :

Chemicals Petrochemicals

Surging investment in

Industry categorization per vendors' priority :Expectations VS

investment trends :

Petrochemicals Chemicals

Relevance of aftersales marketImpulses from IT industrySupport from ETP program

High expectation

Expected challenges :Availability of personnelCybersecurity risksSpare parts supplyMachine safety

Downstream processing

Falling investment in

Transportation Oil & gas

Food & beverages Chemicals

Stable opportunities

Building & infrastructure

Electronics

Building automationHave-been

StarsAutomotive

Palm oil

Pharmaceuticals

Oil & gas

Future industrial outlook :Investment in processing industries continues for 3-4 yearsUpstream recovery in oil & gas : in the next 2-3 years

Local transport : restructure is needed, if ever to recover

Electronics : stable due to innovation, growing market, continued investment

High expectation Increasing investment

Petroleum

Petrochemicals

Chemicals

+

High expectation Falling investment

Food processing

+

Moderate expectationStable investment

Electronics

+

Low expectationFalling investment

Oil & gas

Mining

Palm oil

+

Pursuit of opportunities and shift of industrial investmentMALAYSIA’S AUTOMATION SECTOR

Source: Solidiance


ExECuTIvE summARy

The market for Malaysia’s industry suppliers has reached

a turning point. After years of stable growth, Malaysia’s

closely intertwined state and industry sectors seem to have

fallen into a state of idle uncertainty, forcing automation

vendors to re-orientate and adapt in the market. In this

paper, we examine a screening of 198 automation vendors

in the country, a subset of which was surveyed in-depth

on their views of their market and contrast these with the

latest industrial developments, namely the massive shift in

investment growth sectors.

The former core production sectors of Malaysia – Oil & Gas,

Palm Oil, Electronics and Automotive – are facing world

market plunge, rising cost and increased competition from

the neighboring markets, especially with the reduced trade

barriers of the ASEAN Economic Community (AEC) coming

into effect since 2015. Although investments were still up in

2014, they are massively changing their focus away from oil

& gas, automotive and other former key sectors, and towards,

for instance, chemicals and refinement of petroleum.

Industrial automation vendors question about where the

remaining opportunities are and which factors will affect a

move in the market. Our survey shows that firms radically turn

away from the once “land of milk and honey” in the oil & gas

as well as their “bread and butter” business in manufacturing

sectors, and instead see the future in processing industries

such as chemicals and food processing. Firms also see a

rising relevance of the aftersales business and believe that

positive impulses could also come from the IT industry.

Sector specific data partially confirms the future potential

seen by vendors in their newly preferred areas, yet also leave

a lot of questions open. At this point, it is hard to predict

how industrial investments and demands for automation

will turn out in 2015 and beyond. What is clear is that there

is not going to be a broad rebound of industrial growth

across sectors, but vendors must pro-actively seek for the

“pockets of opportunity” and prepare to offer their products

and services outside of their comfort zones.


malaysia’s manufacturing has slowed in value as former core sectors cool down; hence industrial suppliers need to look for new sources of growth

Manufacturing turnover in Malaysia

Malaysia’s economy

Effect of currency conversion:

CAGR in MYR for 2010-2012

~8% and 2012-2014 ~ 6%.

Hence slowdown in domestic

currency is much more

moderate.

ECONOmIC ANd INvEsTmENT TRENds

Malaysia is one of the most developed nations in ASEAN and has shown in the past a solid, industrial growth. It has developed essentially in four main industrial sectors:• Oil & gas – large reserve

fields, mostly raw exports • Palm oil – large

plantations, mostly raw exports

• Electronics – the biggest technically manufactured export

• Automotive – for the domestic market only

In recent years, the technical manufacturing, both in electronics and automotive, has slowed down. Producers and vendors of automation goods and services must ask themselves which sectors in Malaysia can open future opportunities and still hold potential for growth at this point.

There are some sectors which may hold this potential, especially one much discussed recently that is the chemicals and petrochemicals sector, which now overlaps with the petroleum / downstream industry.

Source: Malaysian Department of Statistics,

Economist Intelligent Unit (EIU), Solidiance

Analysis

59

69 73 75 75

-

10

20

30

40

50

60

70

80

90

100

2010 2011 2012 2013 2014

Bill

ion

USD

~11%

~2%

CAGR


Malaysia’s approved investments (billion USD) Malaysia’s investments by sector, 2014 (billion USD)

There is an evident shift in the Malaysian economy as downstream processing, petrochemicals, and chemicals, see an apparent surge in investments, while top sectors such as transport and oil & gas are falling in investments. The strong increase in downstream processing and petrochemicals are mainly due to super large projects such as the RAPID integrated refinery and petrochemicals project worth 16 billion USD (invested over several years). Electricals and Electronics appear stable while other sectors form a mixed picture. A strong increase is also in the production of basic metals, such as foundry projects. Buildings and construction could not be recognized here due to unrepeated reporting of investments. Other manufacturing sectors in total amount to roughly 4.3 billion USD worth of investments.

Approved investments were ~74 billion USD in 2014. The main driver remains to be the service sector with almost ~47 bn USD of investment. Notably, in 2014, the domestic investment had more impact to the economy, accounting for 72.6%, whilst the remaining 27.4% accounted for foreign investments. The investments recovered moderately fast after the economic crisis in 2008 and continued to increase over the last years.

Malaysia’s manufacturing investments were up 38% in 2014, but with a big shift in the invested industries

There is evidently constant rise of investments, but mostly in the services sector

Malaysia’s former “stars” are declining in investment, while other sectors seem to see a surge

34.8 46.5

42.8 32.8 33.0

48.3 52.4

68.6 73.7

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2006 2007 2008 2009 2010 2011 2012 2013 2014

46.7

22.5

4.5

Services Manufacturing Primary


Value of registered investment projects in Malaysia for selected industries

Source: Malaysian Investment Development Authority, Solidiance Analysis

Note: *In the data we acquire, Petrochemicals are included along with Petroleum category, whilst in our survey, Petrochemicals are included in Chemicals category

**Oil & gas are not recorded under manufacturing investments

2014 2013

(App

rove

d In

vest

men

ts in

USD

Bill

ion)

1.9

3.1

1.8 2.1 1.7 1.4

5.9 5.0

3.5 3.4

1.8

3.1

0.9

4.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Petroleum and Petrochemicals*

Electrical & Electronics

Chemicals Transport and Automotive

Basic Metals Food Processing Oil & Gas Mining and Palm Oil**

AverAge stAges of investMents registered in 2014

- In production, as of 2015: 74.3% - Under Implementation: 8.2% - Planning Stage: 17.5%


The activities of automaton firms have been focused so far on some of the technical industrial sectors such as electronics and automotive, plus key processing industries. About 80% of Malaysian automation firms build

The divide between firms giving a positive and negative outlook sentiment reflects the change of the automation landscape. Firms are either clearly positive - as they are betting on the right sectors - or negative as their industry focus cannot capture the current opportunities.

AuTOmATION vENdOR suRvEyOver than 190 automation vendors were screened and surveyed on their business location, expected trends and outlook

their headquarters in Kuala Lumpur and Selangor region. Automation firms in non-central regions tend to be focused heavily on technical know-how and products suited for the local industries, e.g. electronics in the north region.

Malaysian Automation vendors’ presence

Malaysian Automation vendors’ presence

Malaysia’s automation vendor landscape

North 52

Central 192

South 36

South East

9

North East

3

0

1

2

3

4

5

6

Negative Slightly Negative

Slightly Positive Positive

Current Business situation

Business Outlook


0 1 2 3 4 5 6

Support from the ETP program

Impulses from the IT industry

Relevance of aftersales market

0 1 2 3 4 5 6

Availabilty of personnel

Cybersecurity risks

Spare parts supply

Machine safety

Expected trends*

Expected challenges*

*Trends Index based on weighted average

of interviewees’ answers. “Completely

Irrelevant” (0), “Less relevant” (1), “More

relevant” (2), “Completely relevant” (3) to

the question: “What are the most relevant

business trends in automation?”

*Challenges Index based on weighted

average of interviewees’ answers.

“Completely Irrelevant” (-1), “Less relevant”

(-0,5), “More relevant” (1), “Completely

relevant” (3) to the question: “What are the

most relevant challenges in Malaysia’s

automation sector?”

Solidiance Automation Vendor Screening

2015 : an analysis based on published

office presence of 198 listed automation

distribution firms in Malaysia and

represents an estimated 90% market share.

The aftersales market is becoming more significant to the vendors. Especially in partially decreasing markets, maintenance and service are important business areas. The availability of (local) engineering experts will be one of the main issues of the automation industry while cyber security and the access to spare parts may be an upcoming challenge as well.

Business outlook of Automation vendors


* Index based on weighted average

of interviewees’ answers. “Completely

Irrelevant” (0), “Less relevant” (1), “More

relevant” (2), “Completely relevant” (3) to

the question: “What are the future growth

sectors for Automation in Malaysia?”Solidiance screened over than 190 automation vendors with 10 in-depth interviews on their business outlook and future industrial priorities. Based on the survey, the vendors had radically turned away from some of the previous high profile sectors and bet on previous side-lines of the business plus keep a few sectors in a middle-field of preference. The industries were grouped into three clusters :

1. “New hopes”, as these sectors appear to have suddenly high expectations in them

2. “Solid bets”, sectors that had performed well in the past and could be at least stable in coming years

3. “Fallen from grace”, large sectors, once hailed motors of growth, seem to have lost their importance here

While future investments are hard to predict in these sectors, recent investment records seem to confirm that the new focus is on chemicals, while the decline in coming investments, for instance, in oil & gas, is evident shown by the low oil price.

Ranked automation vendors’ priorities for relevant industry sectors

The surveyed vendors appear to re-orientate themselves towards new sectors, while still eyeing manufacturing classics

the new priorities for automation vendors – solidiance automation vendor survey 2015

“New hopes” “Solid bets” “Fallen from grace”

Food andBeverages

Buildings andInfrastructure

Buildingautomation

Palm Oil(processing)

Pharmaceuticalindustries

Oil & Gas industry

Automotive2

2.5

3

3.5

4

4.5

5

5.5

ElectronicChemicals

Aver

age

valu

e of

inde

xed

answ

ers

*

Solidiance Automation Vendor Screening 2015 : an analysis based on published office presence of 198

listed automation distribution firms in Malaysia and represents an estimated 90% market share.


The top fields* designated by surveyed vendors for Malaysia vary in product requirements, locality and complexityNote: *Highest ranking sectors by relevance index based on automation vendor survey, excluding infrastructure


industry food & Beverage (Petro) Chemicals electronics Buildings

Application FamilyProcess automationProduction automation

Process automation Production automationProcess automationSpecific systems

Key Applications

• Cleaning processes• Cooking processes• Fermentation processes• Unit labeling• Unit packaging• Product quality

• Cracking processes• Distilling processes• Reaction processes• Mixing and Blending• Product quality• Waste water

• Unit testing• Unit assembly• Unit stacking• Unit packaging• Product quality

• HVAC control• Air flow • Cooling / Heating• Energy management• Security

Key Products

• Process software• PLC, scada, HMI• Small drives• Sensors, relays

• Process software• Scada, HMI• Small drives• Large drives• Sensors, relays

• PLC, scada, HMI• Small drives• Sensors, relays

• Process software• Scada, HMI• Small drives• Sensors, relays

Key Regions• Central Malaysia• All other regions

• Central Malaysia• South Malaysia• East Malaysia

• Central Malaysia• North Malaysia

• Central Malaysia• All other regions

Product Complexity Low High High Medium

Risk Reduction High High Medium Medium

Savings Potential Low High High Medium

Process automation:

Refers to the automation of continuous “flowing” processes for fluids, gases as in chemical processes, fermentation of beverages or air cooling etc.

Production automation:

Refers to the automation of discrete “step wise” productions such as in loaves of bread baked, number of chips tested, bottles of beers filled etc.

Product complexity:

Refers to the variables that must be accounted for in the automation and hence increase the cost of automation.

risk reduction:

Refers to reduction of risk for human life and product liability, effectively reducing company risk and cost of capital.

savings potential:

Refers to lowered production cost i.e. by reducing downtimes and labor, allowing faster amortization of the investment.


CONClusIONs ANd OuTlOOk

Broadly, the vendors’ expectations are in line with the growth of investments, yet some sectors, such as f&B, are out of line


Automation vendor priorities vs. investment trends

In 2014, certain sector investments showed significant faster growth than others. This is, to a large degree, in line with the new priorities of the automation vendors - assuming that trends continue into 2015. This is at least likely for petroleum and petrochemicals due to the state driven “super” projects that will continue. Also, the chemical sector has had a significant increase. For food processing, however, the data seems to contradict as investments here are falling. This can be explained, for instance, by either very new trends coming up just in 2015 or perceptions unrelated to the investment trend. The neutral-to-positive stance of the vendors on electronics make sense in light of the data as well, as investment growth here is stable.

The automation vendor survey was not able to cover basic metals as a potential sector. While the super heavy processes of this industry only partially fall under classical manufacturing automation, this could indeed be an interesting field for future development.

Malaysian automation vendors’ industry ranking vs. investment growth

3

3.25

3.5

3.75

4

4.25

4.5

4.75

5

5.25

5.5

-75% -50% -25% 0% 25% 50% 75% 100% 125% 150% 175% 200%

Ran

kin

g b

y au

tom

atio

n v

end

ors

Investment growth in 2014

Vendors follow investm

ent trend

Chemicals Petroleum

and Petrochemical

Considered equivalent in rank

Food and Beverage Processing

Electronics

Transport

Oil& Gas, Mining

and Palm Oil

Two sectors are not covered :

- Buildings (insufficient investment data) - Basic Metals (insufficient survey data)

Source: World Bank, Industry Data, Solidiance Analysis

Note: Separated Investment Data on Buildings insufficient for analysis


A closer look at three key sectors of interest show future potential that may exist but should be given a differentiated view

sector opportunities

vendors’ priorities make sense on a broad level, but may need a reality check

While the new priorities of vendors on chemicals and petrochemicals against former top fields such as automotive and oil & gas make sense, their optimism needs to be validated. On food and beverage, the flaming political announcements are not backed by hard investment data and the fantastic investment surge in petroleum and petrochemicals is driven by a few large projects.

future industrial outlook

trends are likely to continue in key sectors

The government and joint-venture driven investments in processing industries are likely to continue at least for the next 3-4 years. In the classical sectors such as oil & gas, upstream recovery is likely due after 2-3 years when global economic conditions favor higher energy prices. The local transport industry will have to restructure if ever to recover. Export sectors such as electronics will likely be stable as innovation from regional headquarters plus growing global technology markets and stable domestic conditions will favor investments.

How to win in the market

the factual market access will count more than ever in the automation industry

The growth in chemicals as well as petroleum and petrochemicals are dominated by super projects. This means that few decision makers will steer massive project volumes. Some companies will emerge as winners while many others will miss out.

Similarly, in small and not (yet) growing sectors like F&B, the access and presence in the underdeveloped market will decide who wins when the sector takes off.


fabian teja Boegershausen Manager

Fabian is a Solidiance’s Manager responsible for their Malaysia operation, based in Kuala Lumpur, with over 8 years of experience in research and consulting. Fabian accumulated his experience by playing different roles across different organizations, serving clients such as Continental Automotive and Siemens Industrial. He earned his Master‘s Degree in Financial and Industrial Management from Karl Franzens-University in Graz, Austria.

frederik Junge Visiting Analyst

Frederik is a visiting analyst based in Solidiance’s Malaysia office, currently finishing his degree in Sociology Politics and Economics at Zeppelin University, Germany. He has lived in a number of Asian countries including Nepal and Malaysia. Prior to Solidiance he has worked in several German business consultancies where he obtained insights on the global expansion strategies of fortune 500 companies.

AuThORs


What we doSoldiance is a corporate strategy consulting firm with focus on Asia Pacific. We advise CEOs on make-or-break deals, define new business models and accelerate Asia growth. Through our 10 offices across Asia, we provide our clients with a better understanding of intrinsic regional issues. To learn more about how Solidiance has helped many Fortune 500 & Asian Conglomerates to succeed in Asia, please visit:

http://www.solidiance.com/clients.

What we are focusing onOur industry experience is centered on healthcare, industrial applications,

chemicals, downstream oil, lubricants and the automotive industry. Our Asian

market entry and growth strategy services provide the required insights and

the necessary roadmap to capture a profitable market share in the region.

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malaysia's automation sector: pursuit of opportunities and shift of industrial investment

Data & Analytics