ISSUES AND CHALLENGES OF LOGISTICS IN MALAYSIA: A

PERSPECTIVE
Mohd Hafizzuddin Md Damiri*

Abstract
Malaysias progress on logistics has failed to keep pace with its growth in trade.
Developing countries in this region are now catching up, so faster progress on logistics
development will be crucial to sustaining Malaysias competitive advantages. High
logistics costs in Malaysia derive from poor transport infrastructure, underdeveloped
transport and logistics services and slow and costly bureaucratic procedures for dealing
with both exported and imported goods. The balance among these three varies among
countries in the region but in each country, a complementary approach to address all of
them will be needed to produce a sustainable improvement in competitiveness.
Keywords: logistics issues and challenges, Malaysian logistics, trade and transport,
logistics competitiveness, transport infrastructure.
Transport and Logistics Issues
Why focus on logistics? The case is simple. Reducing the cost and improving the quality
of logistics and transport systems improves international market access and leads
directly to increased trade and through this, to higher incomes and the scope for
significant reductions in poverty. And, despite two decades of improvement, Malaysia
has significantly scope for further reducing its transport and logistics costs.

____________________
*Department of East Asia Studies, Faculty of Arts and Social Sciences, University of Malaya and Public
Service Department (PSD), Malaysia. Paper prepared for the United Nations Economic and Social
Commission for Asia and Pacific (UNESCAP) Regional Expert Group Meeting on Trade and Transport
Facilitation for Export Competitiveness, Yangzhou, China 25-26 September 2008 and the National
Conference on the Direction of the Logistics Industry and Supply Chain in Malaysia: Issues and
Challenges, Shah Alam, Selangor, Malaysia 4-5 August 2009.

Studies have indicated the importance of efficient ports (in terms of both operational
efficiency and document facilitation) for trade competitiveness 1, but the arguments
highlighted show that ports are only one aspect of the connection between logistics and
trade growth. Looking at the total cost of getting products from producers to markets,
land transportation to ports accounts for a higher proportion than processing within the
port or the maritime voyage itself, and it is improvements in land access that offer the
greatest scope for increasing trade competitiveness.

Under the Third Industrial Master Plan (IMP3), launched in 2006, Malaysias logistics
development were charted carefully and diligently as to keep on pace with other
countries in South East Asia. Unlike its neighbors Singapore, Thailand, Vietnam
Malaysia still lags on the development and competitive edge for logistics, if not, total
logistics solutions. Transportation means by air, sea and land, coupled with disparity on
issues related to regulations, policies and operations, hinders further improvement in
this sector.

Then there is the use of technology. Investments in this may cost millions, if not billions
of dollars, including upgrades, maintenance and necessary tune-ups. Skepticism on
technology further impede logistics-related improvements be made, for example, the
National Single Window (NSW). This project has been going on for years, where
Malaysia is championing it in the ASEAN arena, without a hint of progress or success in

Engel, Charles & Jian Wang, International Trade in Durable Goods: Understanding Volatility, Cyclicality
and Elasticities, NBER Working Papers 13814, National Bureau of Economic Research Inc., 2008.

the near future. This brings us to the elaborate details for each logistics segment and its
problems, which of course, need to be ironed out appropriately.

i.

Maritime Issues

Seventy percent of Malaysias trade in manufactured goods is carried by containers and

the use of containerized shipping has increased tremendously. During the 1990s, total
container movements increased at least nearly 10 percent a year, with the fastest
growth occurring in the ports of Malaysia. The rapid growth in container usage
represents both a revolution in maritime technology and a significant logistics challenge
to economies in the region.

Though container ports in the region are becoming more efficient in handling containers,
Malaysia cannot keep pace with the rapidly growing demand for berth and storage
space. While the capacity of the container fleet on the South East Asia East Asia
routes increased at more than 20 percent a year between 1980 and 2000 2, the capacity
of container berths to handle those ships increased at less than 8 percent a year.
Countries in the region, including Malaysia, responded to the shortage by adding new
berths, converting general cargo berths to container handling and developing new ports.
Expanded capacity requires greater land area for use in container storage and storage
yards to handle the capacity still cannot cope with the decreasing amount of space

Feenstra, Robert C. & Kee, Hiau Looi, Export variety and country productivity: Estimating the
monopolistic competition model with endogenous productivity, Journal of International Economics,
Elsevier, Vol.74(2), 500-518, 2008.

available both at the ports and depots 3. Not to mention the means of transporting the
containers across land.

There is limited scope for further reducing costs by increasing vessel size and the next
development is likely to be more direct services from what are now feeder ports. With
higher volumes and more efficient smaller vessels, this could overcome the cost penalty
of transfers in the hub ports4. The start of this trend can already be seen in the slower
growth rates of two regional megaports in this region: Port Klang and Port of Singapore.

ii.

Multimodal Transport

Malaysia uses containers for the maritime part of trips, loading and unloading them in
the ports rather at the origin and destination of their cargo. This eliminates the main
cost-saving advantages of container use. Countries that can best encourage door-todoor movement of containers using multimodal transport will be best equipped to
compete and to bring trade benefits to their more remote areas 5, such as between West
Malaysia and East Malaysia. To achieve this integration, Malaysia needs to:

Match inland with maritime infrastructure. An important reason that

containers do not move inland from container ports is that road and rail

Venables, Anthony J., Evaluating Urban Transport Improvements: Cost Benefit Analysis in the Presence
of Agglomeration and Income Taxation, CEP Discussion Paper, Center for Economic Performance, LSE,
2004.
4

Feenstra, Robert C., New Evidence on the Gains from Trade, Review of World Economics, Springer,
Vol.142(4), 617-641, 2006.
5

Romer, Paul, New goods, old theory and the welfare costs of trade restrictions, Journal of Development
Economics, Elsevier, Vol.43(1), 5-38, 1994.

infrastructure lack the right carrying capacity and vehicle dimensions for the
transport of loaded containers. This scenario can be seen in East Malaysia.

Simplify trade documentation. Examples include the use of throughwaybills and single invoices for all modes. In customs clearance times, the
economy of Malaysia is quite similar to those of other developing countries
but if taken together, developing countries are significantly slower that
developed countries. Another regulatory change to allow containers to be
cleared for tariffs, customs, health and taxation charges at inland locations
away from the ports would help reduce port congestion but could raise
additional security concerns.

Develop an efficient freight forwarding industry. Third-party logistics or

3PL is not a well-advanced concept in Malaysia. In industrial countries, almost
a third of logistics turnover is contracted to 3PL providers, but even in
industrialized Malaysia, barely 10 percent of trade-related transport services
are provided in this way. Progression to the earlier stage of second-party
logistics or 2PL which companies unify their internal transport and
warehousing functions and create their own internal logistics departments in
Malaysia is still underway.

Develop effective communications systems, so that freight forwarders

can take advantage of the shipping alternatives available and keep their
clients aware of the status and location of their freight.

Even the least accessible countries in this region have improved the quality and scope
of their information systems such as Thailand, Vietnam and Indonesia but few have
been able to develop freight forwarding agencies that perform as well as those in the
more accessible and trade-open countries, such as Singapore.

iii.

Ports and Land Access

The high costs of land access to ports, reinforced by the effects of production
agglomeration, have caused an excessive concentration of export-related activities in
port cities and essentially restricted the benefits of trade growth to the areas
immediately surrounding ports.

If the benefits of trade are to be more widely distributed, the penalties of inaccessibility
need to be addressed. Such action could not only stimulate trade-induced growth in
currently inaccessible areas, but if successful, this could reduce and slow the growth
of trade-induced urban congestion and pollution in port cities.

Reduction of port access costs depends on having adequate infrastructure, appropriate

vehicles and logistics technology that allows these to be use efficiently 6. As container
6

Mangan, John, Chandra Lalwani & Fynes, Brian, Port-centric logistics, International Journal of Logistics
Management, Vol.19(1), 29-41, 2008.

ports expand, we find it increasingly difficult to accommodate both the added space
requirements and the road congestion that results from the high volumes of truck traffic
servicing the ports. While the depth of the maritime access channel is not a constraint
on growth, the urban congestion problems of port growth can often be solved by moving
non-maritime port activities (mostly value-adding production and packaging services)
inland7, closer to the industries that the port serves and to build rail links to avoid
generating extra load traffic.

iv.

Air Freight

In Malaysia, air freight accounts 30 percent of Malaysias international trade by volume

but more than 55 percent by value 8. Air freight is important for Malaysia: first, because
the distance from Malaysias major exports U.S. and Europe makes quick delivery of
sea freight impossible; and second, because a high proportion of Malaysias
manufactured exports require timely delivery. Another reason is because these
manufacturers have high value to weight ratios, the ad valorem cost of their air transport
is comparatively low.

Good air freight facilities are important in attracting fast growing, high value-added
industries. Hence, competition between airports in South East Asia to act as a hub for
major logistics companies is growing tremendously, providing services equally or better
than the other. The smaller and newer airports that can offer better services are also
7

Meixell, Mary J. & Norbis, Mario, A review of the transportation mode choice and carrier selection
literature, International Journal of Logistics Management, Vol.19(2), 183-211, 2008.
8

Ministry of International Trade and Industry (MITI), Malaysia, Malaysia International Trade and Industry
Report 2008, Percetakan Nasional Malaysia Berhad, Kuala Lumpur, 2009.

growing faster than the larger ones; this happens in support of low-cost carriers, by
giving an alternative to air travel besides major airlines servicing the various South East
Asia air sectors.

Airlines and traditional freight forwarders both compete and cooperate with each other
to provide air transport-based freight services. The progress of air freight forwarding and
air freight logistics in Malaysia and its neighbors could be compared in favor with that in
the U.S. and Europe, while at the same time depending on multinational air carriers for
efficient air freight logistics.

Policy Recommendations
To again highlight the importance of logistics, it is best, against this background, for the
need of the Government of Malaysia to take actions to improve trade-related logistics on
several fronts, if Malaysia were to increase its trade competitiveness, apart from being
burdened with logistical nightmares.

i.

Domestic Integration

For the less open and accessible areas in Malaysia, especially in East Malaysia, the
development of more tightly integrated domestic markets and logistics systems is a high
priority. Besides promoting an appropriate mix of modes roads, waterways and rails
complementary institutional actions must be taken to extend better transport services to
remote areas and to establish better conditions for market development, for example
through postharvest services, cargo consolidation through farmer or business

associations, information on prices and market demand, access to credits and human
skills.

ii.

Private Sector Collaboration

The transport of the outputs of very simple extractive industries may not require
advanced logistics abilities, but high-value products call for services such as freight
forwarding, 3PL, warehousing, storage, packaging, e-business use and tracking.

Logistics needs of this kind tend to better served by the private rather than the public
sector. In Malaysia, the Government may be well advised to withdraw from direct
provision of logistics services while creating the right enabling environment for
competition and private investment. This may entail legalizing and deregulating freight
forwarders and allowing new entrants, including the international companies that can be
a major source of capital, technology and new management practices needed to
develop sophisticated services. Even areas such as port management and operations
that are traditionally managed by the Government may benefit from private service
provision.

Given the fixed costs of entry, private operators are reluctant to provide services where
trade volumes are low. The initial public investment in facilities such as inland container
terminals in potentially high-growth areas in Malaysia, which are distant than ports, can
be recovered through later concession revenues or outright sales.

To encourage private sector collaboration, the Government has established the

Malaysia Logistics Council (MLC) in January 2007, to (i) provide leadership and serve
as a focal point to address all issues relating to the development of the industry, (ii)
monitor and coordinate implementation of programs and activities of the respective
Agencies/Authorities at both Federal and State levels involved in the development of the
industry, (iii) steer research and training activities of the Center of Excellence for
Logistics and Supply Chain and (iv) streamline strategies and policies governing the
logistics industry which cuts across several implementing authorities 9.

iii.

Regulatory Environment for Transport

Lack of regulatory coordination across transport modes is a common problem in

Malaysia, if not, the South East Asian region. One regulatory agency monitors ports,
another on road licensing, third on freight forwarding and each may have different plans,
standards and reporting requirements. This presents problems for firms that seek
seamless freight movement across modes. A transparent and uniform regulatory and
legal regime for private sector participation, safety, environment, traffic rules, vehicle
weight and dimension is a prerequisite for an effective transport agency. An obvious
solution is regulatory consolidation so that businesses face consistent rules.
Improved transport infrastructure in trade corridors is an important strategy that will
facilitate the attraction of foreign direct investment and trade-based growth away from
port cities. While infrastructure development in competing modes can stimulate
intermodal competition, it can be costly in the early stages of trade corridor expansion:

Malaysia Logistics Council, Terms of Reference for the Malaysia Logistics Council, January 2007.

for Malaysia, it has five economic corridors, focusing on different primary activities,
apart from logistics.

Future Directions for Logistics in Malaysia

In terms of competitiveness and efficiency in Southeast Asia, Malaysia should look
towards emerging economies and development of their logistics arrangements, ports
and infrastructure, freight management, connectivity and usage of technology. These
countries are rapidly moving and taking measures such as separating regulator and
operator functions, corporatization, investment and cooperation, mergers and
acquisitions, branding and marketing, development and so forth, to become a brand
known within the region.

By having adequate hard and soft infrastructures, Malaysia will be able to increase the
level of competition from its neighbors and grow influence to foreign logistics service
providers to establish their regional offices. However sweet it may sound, the logistics
scenario in Malaysia will still face numerous other challenges with its neighbors in the
region, in this increasingly competitive and liberalized environment.

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