Breathing life into Malaysia’s Digital Free Trade Zone (DFTZ)

The Digital Free Trade Zone (DFTZ) is an initiative by the Malaysian Government focused on developing an ecosystem and catalyst to the booming internet economy and e-commerce activities in Malaysia. Spearheaded by Malaysia Digital Economy Corporation (MDeC), the DFTZ has been reviewed and refocused to serve two overarching goals: 

1. Creation of an E-Fulfillment hub: Development of KLIA Aeropolis into a logistical hub with the goal of establishing Malaysia into a regional e-commerce fulfilment hub. 

1. Grow Malaysian SMEs: The DFTZ is seen as a mode to drive export of Malaysia SMEs via e-commerce 

The purpose of this blog post is three-fold. The first will be an update on the DFTZ since the change in Government in May 2018. The second will be an in-depth look at the Malaysian winners of the DFTZ (so far) and the last part will feature recommended actions that can be taken into consideration moving forward.  

Updates on the DFTZ

Back in May 2018, many believed that the second coming of Prime Minister Mahathir would breathe new life in helping Malaysia become a global hub of the digital economy.  After all, it was Mahathir who was credited as the brainchild of the Multimedia Super Corridor (MSC) back in 1996. The MSC was envisioned to be a special economic zone which would attract both domestic and international high-tech businesses though; today, the success of the MSC remains a point of discussion. 

Mahathir was also credited by Founder and Chairman of Alibaba Group, Jack Ma as a source of inspiration during the opening of Alibaba Group’s first country office in Malaysia in June 2018. This was seen as a significant and strategic stance to take Malaysia into the next level. It is also essential to note that prior to the launch of the office, Mr Ma and Prime Minister Mahathir spent over an hour sharing ideas on how to lift more Malaysians out of poverty and support more young people and small businesses. 

Weeks after this meeting, the Pakatan Harapan Government announced that they have reviewed the DFTZ initiative and decided that it will remain.  While little is known on the review undertaken, it was stated that the key objectives of the DFTZ are to drive export of local SMEs by leveraging on digital technology and opportunities in eCommerce; and to attract regional eCommerce transhipment investments into Malaysia.  

Since that announcement, very little updates have been made on the DFTZ. In November 2018, during the budget speech, the Finance Minister highlighted the government’s continuous efforts in improving Malaysia’s eCommerce industry through the allocation of RM83.5 million for the first phase of the Digital Free Trade Zone (DFTZ) at Kuala Lumpur International Airport (KLIA).   

Identifying Malaysian Winners of the DFTZ

While the DFTZ remains in the first phase, there have already been Malaysian winners to this initiative. Among them include: 

1. POS Malaysia– Malaysia’s national courier serves as the primary operator of the warehouse facility within KLIA Aeropolis.  Given the landscape of the courier industry in Malaysia, it is likely that POS Malaysia’s influence will continue to grow in the foreseeable future. 
2. Malaysia Airport Holding Berhad: tasked to oversee the setting up of a regional e-commerce logistics hub in KLIA in collaboration with Cainiao which will be operational in 2020.  
3. Domestic banks: Currently, Maybank and CIMB are working with Alipay to enable alternative cashless payment facilities among merchants in Malaysia. This will allow both banks to benefit from upcoming activity with China through both e-commerce and tourism.  

Moving forward

While the goal of the DFTZ is to grow and diversify locations of Malaysia SMEs, comparative advantage on the other hand states that the nation that has the lower cost of production will always win and the nation that is least competitive will lose market share. Moving forward, the Malaysian authorities must ensure that the DFTZ does not create an irreversible uneven playing field for local SMEs. Among things to consider: 

1. Diversify strategic partners: A tracking mechanism should be put in place to monitor the establishment of new strategic partners beyond Alibaba Group to ensure Malaysian SMEs remain competitive.  
2. Larger Inclusion of Malaysian Firms: Malaysia needs to be realistic and pragmatic when reviewing the capabilities of Malaysian SMEs particularly against the competitive capabilities of Chinese SMEs. With the number of products flowing in from China to Malaysia far greater coupled with low production cost in China by at least 20-30%, it suggests that Malaysian firms will not be the net beneficiaries of the DFTZ. Moving forward, Malaysia must be allowed the right policy space to ensure that Malaysian SMEs are not left behind.  
3. Streamline initiatives by the government: Although the DFTZ isn’t designed to come with special incentives, MDeC can play a leading role to streamline existing regulatory framework and incentives for Malaysian SMEs such as the MSC status and incentives offered by SME Corp and Ministry of International Trade and Industry, respectively. Providing a one stop center through MDeC can substantially reduce the red-tape paving the way for local SMEs to benefit.