The free trade zone will surely bring opportunities, but SMEs will also need to be ready for 2019, as increased opportunities often come with increased competition

This article was originally published on ecommerceIQ as part of eIQ insights.

A bit about Malaysia

Malaysia is one of Southeast Asia’s smallest nations, but that hasn’t affected its digital ambitions. In 2015, Malaysia’s ecommerce market was estimated at US$1 billion and is on equal footing with Singapore in terms of market size and developed infrastructure, which may explain why the nation’s ecommerce industry is expected to increase by 8X to US$8 billion within the next ten years.

It is no surprise then, that Alibaba recently announced the construction of a regional distribution hub (e-hub) that will act as a centralized customs clearance, warehousing and fulfillment facility for Malaysia and the Southeast Asian region in order to speed up clearance for imports and exports. The hub is set for a launch in 2019.

Out of the e-hub was born the Digital Free Trade Zone (DFTZ) – a joint initiative by Prime Minister Najib Razak and Alibaba Group to accelerate Malaysia’s digital roadmap that aims to double ecommerce growth from 10.8% to 20.8% by 2020.

What is the free trade zone?

In March 2017, Malaysia formally launched the Digital Free Trade Zone initiative at the Global Transformation Forum. This is the first digital global trade platform beyond China, and the Malaysian government believes that a collaboration with Jack Ma will increase SMEs’ contribution to the nation’s GDP, which currently stands at 37 per cent, despite 97 per cent of businesses in Malaysia currently being micro or SMEs.

The free trade zone is composed of three zones:

The satellite services will facilitate end-to-end support and knowledge sharing for companies targeting the Southeast Asian market.
The eFulfillment Hub will be connected to Hangzhou’s Cross-Border ecommerce pilot zone – Alibaba’s HQ – via Alibaba’s OneTouch platform. According to VulcanPost, it will digitise many of the trading operations like customs clearance, foreign exchange services, financing services and logistics solutions which will ease bilateral trade.
The eServices platform is virtual and will complement the satellite services and Ma’s e-hub by digitally connecting users with government and business services.

Through DFTZ, the purchase of goods via the Internet worth US$276 and below will be exempted from paying tax. Currently, goods worth US$115 and below purchased online were not subjected to tax.

But what does the free trade zone really mean?

The partnership between Jack Ma and the Malaysian government was born from Ma’s concept of providing SMEs the infrastructure and overcome difficulties involved in conducting global trade – namely clearance and inspections.

If successful, DFTZ has the potential to double the growth rate of Malaysian SMEs’ goods export and create 60,000 direct/indirect jobs by 2025.

It is also estimated to support US$65 billion worth of goods moving through DFTZ.

“The establishment of DFZ would stimulate the economy as it gives room for online traders to compete in a healthy environment. Locations of the businesses will no longer be a hindrance to traders. For instance, a trader in Kota Belud would have an equal opportunity to market or sell his items, as a trader from the Klang Valley,” said Abdul Rahman, Head of Economic Planning Unit.

Although it is currently too early to quantify the benefits of the digital free trade zone, analysts have predicted that its launch will be good for the logistics sector. More specifically, for Malaysia Airport Holdings (MAHB) and postal company Pos Malaysia’s subsidiary, KL Airport Services.

The heightened connectivity should propel the growth and development of ecommerce in the region, lower trade barriers and benefit local players due to increased opportunities.

However, it isn’t simple infrastructure that Malaysia is building.

In order to create a functional logistics ecosystem that can improve regional level trade, it requires collaboration from various parties, companies and more. The success of the digital free trade zone also depends on the rate of retail growth – both offline and online in Malaysia and the region because it will need to grow in tandem with the scale of the free trade zone itself.

To leverage from the initiative, smaller players and SMEs need to scale their businesses to ensure that they are ready to utilize the ecosystem.

As this is the first time the free trade zone has ventured out of China, it simply cannot be a copy and paste of what has worked in the past with Chinese SMEs. Smaller Southeast Asian companies currently need help in shaping their businesses, along with help in lowering trade barriers.

Although the free trade zone will surely bring opportunities, SMEs will also need to be ready for 2019, as increased opportunities often come with increased competition.

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