This is a best prospect industry sector for this country. Includes a market overview and trade data.
Last Published: 8/23/2019

Due to the significant government changes from the 14th General Election on May 9, 2018, the new government is evaluating the needs of the military and is assessing military personnel and previously tendered procurement and projects.   In previous years, several military equipment upgrades were identified to ensure that the efficiency and preparedness of the Armed Forces’ were maintained at the maximum level.  Malaysia is in need of modern and cutting-edge equipment, however, the new government seeks to rebalance the country’s financial situation.

There have been calls from the NGO Transparency International to review and overhaul some of the country’s internal processes and address the high level of opaqueness in defense procurement.

Overview
Malaysia’ defense 2019 budget was the lowest after 2017, with an allocation of of only US$3.87 billion, a reduction of 40 percent from its allocated budget in 2018.  Of this allocation, US$3 billion will be for Operation Expenditure while the rest will be for Development Expenditure.  The budget represents a series of military and other “non-essential” spending cuts in the country, as the government pursues a process of fiscal consolidation aimed at eliminating the country's budget deficit and reducing soverign debts.  The overall budget deficit for 2018 was 3.7 percent of GDP and the government aim to reduce this to 3.4 percent in 2019 and 3.0 percent by 2020.

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Source: Malaysian Annual Budget Plan
Source: Malaysian Annual Budget Plan

The government recognizes that there is a need to upgrade the nation’s military assets, however, it also  highlighted the need for prudent utlilization of public funds for best-value spending.  To do this, the ministry is preparing the country’s first Defense White Paper (DWP), scheduled to be tabled in Parliament in September  2019.  This document is Malaysia’s first formal document for the defense and security sector to take stock of all its military assets and to chart Malaysia’s defence policies in the next decade.   It attempts to be a focused, yet flexible blueprint based on the assessment of the nation’s defense and security scenarios and identify the specific roles and tasks of the armed forces in the perceived scenarios. Until the publication of this Defense White Paper, the government is not expected to procure any new assets.

What constitute the Defense White Paper (DWP)
At the most basic level, the DWP lays out a comprehensive long-term plan for the nation’s defense. It puts into the public sphere, the government’s commitment to the safety of the people and to the defense of the nation’s territory and interests.

At the deeper level, DWP outlines the nation’s defense strategy, capability plans and funding requirements. It sketches out elements of the government’s defense investment, including new weapons, platforms, systems, and the enabling equipment, facilities, workforce, information and communications technology, science and technology as well as plans for its defense industry.

In a nutshell then, it reflects the government’s commitment to a safe and secure nation.

(Source: New Straits Times, Karminder Singh Dhillion, April 7, 2019)

Leading Sub-Sectors
Malaysia’s defense exports were negligible during 2012-2017 due to the absence of an advanced and developed domestic defense industry. Malaysia’s goal is for the domestic market to gain capabilities through collaborations and technology transfers, thus reducing its reliance on defense imports. Malaysia has enforced a robust defense offset policy to enhance the participation of its local industries. The country seeks to develop capabilities to produce at least some critical defense equipment locally and has already entered into deals with Turkey for the supply of the Pars AV-8 armored vehicles.

Opportunities
Currently, the industry lacks critical mass to encourage diversification of markets and users to support the export initiatives of the defense industry. High capital investments both at the initial and continuing operational stages inhibits ease of entry into the sector.  The high risk of setting up a manufacturing or assembly facility without first securing the supply contract for parts or products to the main buyer i.e., the Government of Malaysia.  In order to grow this industry, the government initiated a vendor development program for selected companies with both financially and technological capabilities, either through acquisition or joint-venture, to manufacture either parts or components to offset these risks.

Military products and services of the Malaysian Armed Forces are numerous in types and of varied specifications. The quantity for each product and service do not justify the production capacity of profit margin for local companies.  As a result, Malaysia must import such products and services which contributes to the high import of defense products. Malaysia is looking at ways to reduce the balance of payment and to create production capabilities of major parts within the country. Specificially, Malaysia wants to develop its capacity to overhaul and maintain the military equipment procured.

The current military hardware and software are depended upon foreign Original Equipment Manufacturers (OEMs). For the long-term, Malaysia is looking to develop an efficient technology management program and to reduce the cost of developing the technological capability without compromising on technological superiority.

All branches of the Malaysian Armed Forces had requested additional funding under the 11th Malaysia Plan 2016-2020 for new procurement.  However, due to the above mentioned budget reassessment, many of these requests may be altered, due to budget constraints, and the focus will likely shift to service life extension and upgrade programs, rather than large-scale procurement of new assets. 

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