Cover Story: Reviewing Iskandar Malaysia (The Edge Malaysia, Sept 12, 2019)

AT Senai International Airport in Johor Baru, one will surely see passengers from China, South Korea and Japan making their way through the customs and immigration. This is not surprising considering that the regional airport with a capacity to handle four million passengers annually is directly connected to major cities such as Bangkok, Jakarta, Seoul and Guangzhou, on top of Kuala Lumpur, Penang and Kota Kinabalu.

A direct service to Shanghai is also in the pipeline, which will make Senai the third airport in Malaysia to have a direct link with China’s financial hub. In anticipation of this, Senai Airport Terminal Services Sdn Bhd (SATS) is expanding the airport’s waiting area to improve passenger comfort.

Senai International Airport has been a major beneficiary of the development of Iskandar Malaysia since the latter’s establishment 13 years ago. Over the last 10 years, the airport has seen an average annual passenger throughput growth of 16.8%, from 1.32 million passengers in 2009.

However, the special economic corridor is currently at a crossroads.

It has been well documented that the region is at risk of turning into a ghost town as huge property developments have not attracted the commensurate level of economic activities.

To put it bluntly, the income growth of the local population does not seem to have caught up with the impressive physical developments in the region. Many commercial and residential properties are deserted during weekdays, a sign that economic activity is less than robust.

With only about six years to go before Iskandar Malaysia is deemed to have reached maturity, what needs to be done to ensure a more equitable growth so that it can become a metropolis of global standing?

Iskandar Regional Development Authority (IRDA) CEO Datuk Ismail Ibrahim says the agency is working together with all stakeholders to continue to create more opportunities for the local population to participate in so that they can share in the prosperity created in the region.

“In order for the locals to have good jobs with high salaries, they must be involved in jobs that commensurate with their talents, with their level of education and whatnot. We are doing that, together with other agencies.

“These are by way of creating opportunities for people to enter education establishments, to upskill themselves, so that they will be able to reenter the job market,” says Ismail.

The fact that Johor has the largest property overhang in the country — RM14.4 billion worth of unsold properties — shows that the income level of the local population does not match the price level of the properties being offered.

Based on the projected population of three million by 2025 and a family size of 4.1, Iskandar Malaysia will need 1.2 million residential properties, says Ismail. Presently, the housing stock in Iskandar Malaysia hovers around 700,000.

“But at the same time, we are faced with this situation of surplus. So if you try to match this figure, in other words, the supply of houses that is in the market now does not meet the demand that is growing. So, this is the issue that we must tackle,” Ismail says.

While the property overhang is also prevalent throughout the country, the situation in Johor, especially within Iskandar Malaysia, is the worst, based on the number of unsold units and their total value.

Indeed, the economic corridor has been receiving huge amounts of investments in the promoted sectors of manufacturing, logistics, healthcare, financial and business services, tourism and creative industries but these are dwarfed by investments in the property development sector.

According to IRDA’s statistics, investments in the property development sector made up almost half of the RM302 billion worth of investments that have been committed so far. The sum is much higher than investments committed to manufacturing (23.8%), logistics (2.8%), tourism (2.6%), healthcare (1.5%), education (1.1%), financial and business services (0.7%) and creative industries (0.5%).

Ismail has repeatedly said that property development is not a promoted sector within Iskandar Malaysia. However, the situation is so prevalent that he cannot ignore the potential impact it might have on the overall health of the region’s economy.

He says IRDA is working with the Johor government and developers to understand the real issue — the mismatch between supply and demand in terms of pricing and products — plaguing the property sector in the state.

“So if developers are genuine, in terms of the development of residential units, they must be able to understand the level of purchase. So, unless and until we address this issue, you will have a surplus of housing stock, especially the higher-end products,” he says.

The issue of brain drain has also thrown a spanner in the works as top talent move to the Klang Valley or to more developed countries such as Singapore and Australia in search of better opportunities.

How can Iskandar Malaysia pull itself out of this quagmire? Ismail says the region’s growth and development, or its key success factor, is not dependent on one single item or component. Therefore, tackling the issue of how to attract quality investments, which create high-paying jobs that could keep local talent in the country and the economy thriving must be approached in a holistic manner, he adds.

“I think both Singapore and Malaysia, especially Iskandar Malaysia, have come to terms on many things. From Singapore’s point of view, it cannot remain as it is now or be better unless it involves its neighbour, because it is dependent on Malaysia.

“We, at the same time, are looking at Singapore as a hub that is able to assist us in the growth that we want to see happen in Iskandar Malaysia. It is a combination of cooperation and competition — leveraging each other’s strengths,” says Ismail, adding that losing talent to Singapore, even as Malaysia strives to develop high-value industries, is a fact that the country has to accept in its development process.

What can and needs to be done is to keep attracting Singaporean companies or multinational companies operating in Singapore to Malaysia and, specifically, the Iskandar region, he says.

This is currently being done, with Singapore being the second largest source of investment in Iskandar Malaysia after China.

However, with the average income in Johor still lower than that in Kuala Lumpur and Selangor, the question is whether the jobs created in Iskandar Malaysia are well-paying ones.

Nevertheless, investors globally have noticed Iskandar Malaysia and, hopefully, they will bring with them high-paying jobs. For instance, Dyson Ltd has a research, design and development centre in Senai that employs 1,200 workers, of which 80% are Malaysians.

These local talent are mostly engineers who test Dyson’s home care and beauty appliances for durability. Partnering with local electronic manufacturing services companies, Dyson has been producing high-quality appliances in Johor since 2003.

Besides that, India’s largest pharmaceutical company, Biocon Ltd, has been operating in the Southern Industrial and Logistics Cluster (SiLC) in Iskandar Puteri since October 2010, producing insulin for international markets.

Iskandar Malaysia is also becoming the location of choice for global companies to set up their regional logistics hubs owing to the availability of land and relatively lower land costs, good infrastructure and strategic location in the middle of the East-West trade route.

In Senai International Airport’s free industrial zone, the BMW Group operates its 700,000 sq ft Asia Pacific Parts Distribution Centre, which supports over 20 countries in the region. DHL AG has a Global Centre of Excellence in Medini.

Having said that, a lot more needs to be done to attract quality investments to the region.

One of the areas that IRDA is keen to pursue is the development of the airport itself. Ismail believes that the airport has the potential to handle up to 17 million passengers per annum as well as develop its surrounding areas into a bustling industrial hub.

“We are of the view that Senai International Airport has huge potential, not only for passenger traffic but also for cargo, as well as maintenance, repair and overhaul. There are many MRO operators in Singapore and we can offer the space in Senai for them to expand and still be close to Singapore,” he says.

In 2018, Senai International Airport, which is owned and operated by SATS, a part of MMC Corp Bhd, saw 3.5 million passengers, a y-o-y growth of 13%. SATS is confident that the airport will reach its full capacity by the end of this year.

MMC Corp is developing an integrated industrial zone known as Senai Airport City (SAC) on 2,718 acres adjacent to the airport. According to MMC Corp’s website, SAC caters for MRO, general and high-tech manufacturing and logistics.

Changing priorities?

The Iskandar Malaysia initiative was spearheaded by Khazanah Nasional Bhd after the federal government asked the sovereign wealth fund to come up with a blueprint. Khazanah and its investee companies hold large tracts in Iskandar Malaysia.

Over the years, Khazanah, through its development arm Iskandar Investment Bhd (IIB), has made some catalytic investments in Iskandar Malaysia, including EduCity, Medini City, Legoland Malaysia Resort and Iskandar Malaysia Studios (IMS).

Sadly, some of these catalytic investments seem to be struggling or have failed outright. Earlier this year, Pinewood Studios decided to part ways with IMS while BioXcell, a biotechnology park developed by UEM Sunrise Bhd, has been put under receivership.

There is also talk that the sovereign wealth fund is looking at selling some of its tourism and hospitality assets in the region. Legoland Malaysia Resort, built at a cost of RM754 million, is said to be one such asset.

Ismail agrees that there could be a change of direction in Khazanah’s involvement in Iskandar Malaysia, in that the sovereign fund may have been asked by the new federal government to be more prudent.

“I guess for Khazanah and other agencies involved in Iskandar Malaysia, perhaps the directive or mandate given is to spend wisely, to make sure that every ringgit that you spend will benefit the country.

“There has to be very clear key performance indicators to indicate that there is a return on your investments. If this is not forthcoming, then you might as well cut your losses. I have full trust in agencies like Khazanah, that whatever decisions they make, it is for the benefit of the nation,” he says.

For example, the mutual separation between Pinewood Studios and IMS will bring benefit to the latter as it will have the freedom to market itself as a preferred film production base to moviemakers around the world, says Ismail.

Responding to The Edge’s questions regarding its investments in Iskandar Malaysia last Thursday, IIB says its main focus is to deliver sustainable returns to its shareholders and stakeholders as well as to develop the promoted sectors in Iskandar Malaysia.

“We are also actively promoting the digital transformation agenda in Iskandar Puteri through collaborative projects with international and reputable partners such as KT Corporation of South Korea for the Virtual Reality Centre of Excellence and DHL for the DHL-IIB Global Centre of Excellence.

“We hope that through these projects, we can move closer to realising our mission to position Iskandar Malaysia as a sustainable conurbation of international standing,” says IIB via email.

IIB will continue to invest in EduCity as part of efforts to enhance the latter as an educational destination. IIB is also supporting entrepreneurship and start-ups via IskandarSpace, a co-working and start-up community space in Medini.

Local companies growing together with Iskandar Malaysia

Although Iskandar Malaysia is still a long way from becoming a metropolis of global standing, it cannot be denied that the region’s development has helped grow the local economy and industries in Johor.

ATA IMS Bhd, an electronics manufacturing services company based in Johor Baru, is one such example. Founded by Datuk Seri James Foo, the company currently operates from several facilities — totalling more than one million sq ft of factory floor — in Johor Baru. According to Foo, ATA IMS is expanding into the internet of things and the smart home sector, producing radio frequency and Bluetooth-enabled parts.

At the moment, ATA IMS has the capacity to assemble more than 800,000 printed circuit boards a month and produces more than 200,000 battery packs. It is also able to produce 20 million plastic parts monthly.

“The development of Iskandar Malaysia has helped the growth of ATA IMS, as the development of Pasir Gudang Port and Port of Tanjung Pelepas allows imports of materials directly into Johor. We no longer have to rely on Singapore,” says Foo when met at ATA IMS’s headquarters in Johor Baru.

Between 2006 and 2018, ATA IMS (which was previously known as Denko Industrial Corp Bhd) saw revenue grow from RM116.9 million to RM2.91 billion. Its profit before tax also increased from RM1.62 million to RM152.5 million.

Note that in 2017, Denko bought Integrated Manufacturing Solutions Sdn Bhd from Foo and Datuk Fong Chiu Wan in a RM1.19 billion all-shares deal to create ATA IMS.

The growing demand for factories and warehouses has prompted the development of many industrial parks within Iskandar Malaysia. Among the companies that have benefited from the demand is AME Development Sdn Bhd.

Starting off as an industrial builder in 2011, AME ventured into the development of industrial parks by developing a small section called i-Park @ SiLC in SiLC. Eight years later, AME has developed three industrial parks in Iskandar Malaysia. The latest project is i-Park @ Senai Airport City. AME managing director Kelvin Lee Chai says 80% of Phase 1 of the park is occupied by investors while about 65% of Phase 2 is tenanted.

Companies at i-Park @ SAC make products such as contact lenses, biodegradable plastic resins, electrical and electronic goods as well as precision plastics. Out of the 189 acres earmarked for i-Park @ SAC, 112 acres have been developed, according to Lee.

While 13 years is a long time, it may be too short to turn a vast region of more than 2,000ha into a global metropolis. China, with its huge population and economic might, took 20 years to make Shenzhen, a fishing village, into an industrial hub before turning it into the global technology hub it is today.

But come 2025, will Iskandar Malaysia reach the same level of development as Singapore or even the Klang Valley?

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