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Doing Business in Malaysia

by: Jaime Ong-Yeoh and Erika Visser, Associate partners of Hofstede Insights

Malaysia is ranked 12th out of 190 global economies for ease of doing business in the World Bank Doing Business 2020 Report [1] and is the second highest in Southeast Asia and 12th among 169 countries for trade connectivity according to the DHL Global Connectedness Index 2018 [2]. Malaysia is a trading nation that offers access to emerging markets in Southeast Asia, as well as has resilient domestic demand. It has a highly developed infrastructure and offers a favourable climate to do business.

 

The three most important things to remember when doing business in Malaysia

  • Malaysia is a very diverse country - you will experience differences between the corporate cultures of government, government-linked companies, and local conglomerates versus the private sector and global multinationals operating in Malaysia, as well as cultural differences among the various ethnicities that make up the majority of its population (Malays, Chinese, and Indians). To be successful, one must be able to pick up on these nuances and adapt to the situation.

  • Malaysia as a buyer is not lacking in awareness and exposure, having been courted for a long time by companies with products and technologies from all over the world. Unless you are absolutely confident that yours is a truly unique or exceptional offering, avoid positioning yourself as superior or assume that you will be able to command interest or a premium just because you are a European/Western company. It is prudent to approach potential customers/partners with humility and speak of how you compare with other global players in your industry or how you can be compatible with the existing ecosystem.

  • Relationships and trust are very important for a variety of reasons. Who you know can be more important than what you know. However, just because you manage to establish a relationship with the main buyer does not mean they will be willing to enter a relationship with you; they may value their relationship with an intermediary more and choose to work through this valued intermediary instead. It is worth putting in the effort to establish good relationships because once that is in place it will be for the long-term as trust, loyalty, and business continuity are highly valued.

 

Top challenges for doing business in Malaysia

  • The market tends to operate on a low value/low margin, high volume basis. This makes businesses highly cost and price sensitive, and they seek to minimise capital expenditure and cash flow utilisation.

    • For government-linked companies or private sector companies that compete for government contracts, the lowest cost supplier has an advantage as that provides more allowance for the margin to be distributed among intermediaries in the value chain. Note that a tender process is often required for corporate governance to be on record. 

    • For SMEs in the private sector, managing cash flow and credit risk is an ongoing challenge. The preference is to make a small margin on a small,  manageable transaction, then rollover the profits to fund the next transaction.

Therefore, it is advisable to focus on a pricing strategy that can help you to build long-term business relationships and achieve business continuity, rather than trying to maximise profits purely on a per deal or transactional basis. 

  • Despite ongoing reform efforts, significant amounts of administrative procedures still exist, e.g. licenses, permits, approvals, supporting documentation, etc. These are processed by various government agencies and may come with associated fees. Requirements and processes may be unclear, inconsistently applied, and subject to change at any time. Expect this to happen and plan for it both from a timeline and budgetary perspective.

  • Politics plays a big influence in shaping the business landscape for government-linked companies or private sector companies that compete for government contracts. The political situation has been extremely fluid in recent times; while this generally does not pose any threat to public order nor business operations, it does influence who is/is not in favour at the top of the food chain thus who may/may not benefit from business opportunities within the ecosystem.

 

What to look for in a reliable partner when working with the government sector /government-linked companies:

  • Understands the national and local political situation very well.

  • Is well connected but does not lean too far to either side and is on good terms with all parties as opportunities can change depending on who is in favour with the government of the day.

  • Has previous relevant experience and is able to advise on or facilitate administrative requirements, e.g. licenses, permits, approvals, etc.

 

What to look for in a reliable partner when working with the private sector:

  • Has a regional presence in Southeast Asia and/or is willing to explore new markets, and is already exposed to products and technologies from other countries.

  • Is familiar with or can provide the support to navigate local administrative requirements, e.g. licenses, permits, approvals, etc.

It is always a good idea to have an independent third party contact on the ground to perform due diligence by checking the reputation and credentials of potential partners. An initial background check can be done by going to the Companies Commission of Malaysia website [3].

 

Business Meetings and Introductions

Initial meetings are usually more formal and used for getting to know each other and building rapport. You can expect a fair amount of small talk at the beginning of the meeting, and eventually, the most senior person on the host side will initiate the business conversation.

Higher ranking people should be greeted first and introductions on your side should be the same. You may extend your hand and shake hands with both genders but a more conservative Muslim member of the opposite gender may not offer their hand in return. You can smile and nod your head slightly instead. A gesture that has been increasing in use recently is bringing one’s right hand up to one’s heart.

Titles can be important especially if they are honorary titles bestowed by the sultans or the king such as ‘Tun’, ‘Tan Sri’, ‘Puan Sri’, ‘Datuk/Dato’, and ‘Datin’, and not just salutations such as ‘Encik’ (Mr.), ‘Puan’ (Mrs.), or ‘Cik’ (Ms.).  If titles are used when someone is introduced to you, you should refer to the person in the same way.

  • For the government sector or government-linked companies, respect for and use of honorifics and titles are important and expected.

  • In the private sector, titles matter less but best to use them initially until lightheartedly dismissed by the person.

 

Meetings should be scheduled in advance. Unless suggested by the host, you should avoid scheduling meetings during the following times:

  • 12 pm to 2 pm - as most Malaysians prefer to go out for lunch and socialise with colleagues (lunch break is 1 hour with the exact time being up to the organisation/individual).

  • 12 pm to 2:30 pm on Fridays - as Muslims (mainly men) go to the mosque to attend congregational prayer.

 

It is common for meetings to start late, but you do not want to be in a position where you are the cause of this so plan to arrive early or on time especially if there is a person of senior position involved.

If the meeting is organised by you, it is advisable to prepare and communicate an agenda in advance as attendees prefer not to be caught unawares and put in a difficult position or unable to answer questions. However, agendas and timings are not strictly followed and can easily deviate if there are other matters to be discussed. 

To an external foreign party, meetings can seem like asynchronous affairs - there will be a meeting for presenting one’s ideas/approach, perhaps several meetings in between for questions and clarification, and at a much later time another meeting for a decision to be communicated. In between, however, a lot of internal activity takes place such as gathering opinion, building consensus, and conferring with higher ups. This process can repeat multiple times until a decision is reached, and you may need to meet with many different parties on the same matter. Therefore, decision making generally does not take place during the original meeting but outside of it. It is ideal to have the presence of the key decision maker in meetings as this makes the process much faster, but this is not always possible especially if the matter is not considered ‘important enough’ to warrant their direct participation.

 

Business Cards

Business cards are usually exchanged during the initial introduction. There is no set etiquette, but the general practice is to present and receive it with both hands (adopted from the Japanese), examine it to show interest, and lay it down on the table in front of you. More recently, some people may use a mobile phone app to scan your business card and return it to you so as not to waste paper. If you know in advance you will be meeting with a Chinese business owner, it may be helpful to have your name also printed in Chinese characters although this is not necessary.

 

Dress Code

See ‘About Malaysia - Level 1’.

 

Business Entertainment / Meals 

Socialising is a very important part of establishing trust and long-lasting relationships.  Malaysians are very sociable and hospitable; you can expect to be taken out for meals either during or after working hours. 

Malaysians love food and it gives them great pride to introduce their local cuisine to foreigners, so be open. Be careful as the food can be spicy and you should let your host know if you do not enjoy spicy food. 

For Muslims:

  • Business entertainment should be at halal establishments only.

  • Do not eat pork and avoid drinking alcohol in their presence.

  • During the month of Ramadhan when Muslims fast from dawn till dusk, do not suggest any business entertainment/meals unless it is a breaking of fast meal.

For non-Muslims:

  • Business entertainment can be at non-halal establishments.

  • Consumption of alcohol in the evening and with dinner is acceptable and common (but not during lunch!).

 

Note that spouses are generally not invited unless explicitly mentioned, as the conversation can be both casual as well as business-related.

Food is commonly served in family-style sharing portions placed in the middle of the table that you dish to your own plate using a serving spoon. Unless it is clear that it is a single-serving dish meant for one person, expect food to be shared. Eating with hands or with cutlery are both common depending on the restaurant, the dish, and the occasion. When eating with hands, Muslims only use their right hand but this is not expected of non-Muslims or foreigners.

The party who extended the invitation normally pays the bill, but as a matter of politeness, all parties make an (small) attempt to pay. You must, of course, let your host ‘win’ and allow them to pay the bill; you should then reciprocate by paying the bill for the next meal. If there is a clear hierarchical difference, for example, a supervisor taking a junior employee out for an infrequent meal, the supervisor should pay. One only splits the bill once they are familiar with each other and eat together on a regular basis..

 

Gift Giving

For the government, government-linked sector and large companies, there is normally a corporate gift policy ranging from specified limits to no gifts at all. However, small gifts of nominal value such as corporate branded premium items or handicraft and food from your country are generally acceptable and welcomed.

 

For Muslims, avoid giving:

  • Alcohol and food containing alcohol (e.g, alcoholic chocolate)

  • Pork, pork products and pig products (e.g. pig leather, pig hair bristles)

  • Food that may contain animal products that are not halal (e.g. gelatin in confectionery)

  • Anything resembling the image of pigs or dogs

  • Anything with the image of sentient living beings (e.g. humans and human faces, animals) as this is considered idolatry. Geometric and abstract floral patterns are acceptable.

 

For non-Muslims, especially smaller privately owned companies, a gift of good quality alcohol will be appreciated once a close relationship has been formed.

 

If you are giving a high value gift, this is best done in private. High value gifts are not necessarily always construed as bribery - for example, while it would be inappropriate to give this at the start of a business relationship, it would be acceptable to commemorate a long relationship or a key milestone.

When receiving gifts, it is considered impolite to refuse. If you have concerns about receiving high value gifts, either accept the gift then declare it according to your corporate guidelines, or communicate a no-gift policy in advance of your visit.

 

Behaviour

Malaysia has a relationship-oriented rather than a task-oriented culture. Business is built upon trust and relationships rather than merely the exchange of goods and services at favourable terms and conditions. Building trust and relationships takes time, consistency, and patience. 

  • Show respect for hierarchy and titles. It is important for some people and less important for others, so to be on the safe side use them until you are told by the person it is not necessary.

  • While travel may be a considerable cost to you, the personal interaction achieved during face-to-face meetings are important and expected (at least initially and for matters of importance).

  • Prioritise a long term, mutually beneficial relationship rather than seeking to merely derive maximum value on a transactional basis.

  • Be aware that business relationships may become social ones, the line is not distinctly drawn. You will likely be asked what you would normally deem as personal questions or get invited for social events outside of working hours.

  • Avoid outright disagreement on matters of importance; make difficult messages more palatable by using indirect communication.

  • Avoid open conflict and showing strong emotions, be diplomatic.

  • Show humility and respect. Appreciate the experience and wisdom of the local partner rather than coming in with a fixed mindset/approach or forcing your mindset/approach upon them.

  • Prioritise mutual benefit (win-win) over competition (win-lose). Pressure tactics are very unlikely to work with business partners.

 

 

Building Trust

 

The Malaysian business community is pragmatic and cautious, and tends to be risk-averse when it comes to any outlay of money. One’s word or handshake alone is not enough, they will be assured by some form of payment security especially for initial deals such as deposits, bank guarantees, performance bonds, etc. 

Be wary of people who trade only on legacy or ‘special’ relationships where having connections is the only thing on offer. If it sounds too good to be true it probably is, so agree on safeguards that both parties will perform.

 

Be Especially Careful with

 

Malaysia is ranked 51st out of 180 countries in Transparency International's annual Corruption Perception Index 2019, with a score of 53 (0 highly corrupt - 100 highly clean) [4] primarily due to concerns of large-scale corruption at the institutional level. The government of Malaysia has in recent times changed hands from a long standing government mired in alleged corruption scandals, to a government with a focus on leading reforms on anti-corruption, then back again to loyalists from the former government.

While the inflated price of goods and services caused by corruption impacts all its citizens, the average Malaysian does not experience too much first-hand corruption other than occasional ‘on-the-spot’ ‘fines’ or ‘fees’. According to a report by Transparency International [5], 23% of respondents in Malaysia experienced paying a bribe when accessing basic services compared to up to 65% in other countries in Southeast Asia (excluding Singapore).

Acts of corruption in business are generally a matter between local participants or when it involves mega-corporations. As a foreign SME, it is less likely that you will be a direct party to large scale corruption; set your own expectations and targets upfront and be happy with achieving your own price/margin expectations.

Note that the use of intermediaries is common practice in Malaysia and not in itself considered corruption. Any official service provided by an intermediary should be invoiced accordingly.

 

Short Case Study

 

A newly established fortified beverage company in Australia sought out a company in Malaysia to perform product development and contract manufacturing of its products. The Australian business owner claimed to have formerly held important positions in multinational beverage companies and hence had strong connections with importers, retailers and buyers; promising extremely attractive (but ultimately unsubstantiated) business projections.

The Malaysian manufacturer commenced product development efforts, purchasing specialty ingredients at their own cost to formulate samples. Despite initially agreeing on a fixed quantity of samples, the Australian customer turned out to be rather demanding and after multiple rounds of delivering and reworking samples (exceeding the limit agreed upon), the Malaysian manufacturer requested a nominal payment of AUD1,000 to offset the cost of producing additional samples.

The Australian business owner did not react positively, sending a barrage of strongly worded emails accusing the Malaysian manufacturer of “cheating” (despite them having fulfilled all initial conditions) and commenting “I know how you people operate”, all the while still demanding that more samples are produced free-of-charge. This aggressive behaviour was all the more shocking given that during early days the Australian business owner visited Malaysia with his family to meet the manufacturer and the mood then was friendly. Needless to say, the Malaysian manufacturer immediately declined to continue the relationship.

Takeaway: While titles and relationships are important in Malaysia, one should not try to position oneself as superior to others and only make superficial efforts at building relationships. Being aggressive and talking down to others in an effort to bully them into compliance is extremely counterproductive. Having humility and being respectful will take you much further. If you are unable to continue the business relationship for whatever reason, it is best to exit gracefully on good terms and keep the relationship intact for potential opportunities in the future.

 

References & Links

[1] The World Bank (2020.) Doing Business in Malaysia. Retrieved from https://www.doingbusiness.org/en/data/exploreeconomies/malaysia

[2] DHL Global Connectedness Index 2018. Retrieved from https://www.dhl.com/global-en/home/insights-and-innovation/thought-leadership/case-studies/global-connectedness-index.html

[3] Surunhanjaya Syarikat Malaysia (Companies Commission of Malaysia) https://www.ssm.com.my/Pages/Product/Company-Information.aspx

[4] Transparency International (2019). Corruptions Perception Index 2019. Retrieved from https://www.transparency.org/cpi2019

[5] Transparency International. (2019, November 2019.) People’s Experiences of Corruption: Implications for Business in South-East Asia. Retrieved from https://www.transparency.org/whatwedo/publication/peoples_experiences_corruption_implications_business_south_east_asia