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PP RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHPB
DE RUEHKL #0617/01 0951016
ZNR UUUUU ZZH
P 051016Z APR 06
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC PRIORITY 6336
INFO RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION

UNCLAS SECTION 01 OF 05 KUALA LUMPUR 000617 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR B. WEISEL AND J. JENSEN 
COMMERCE FOR JENNIFER BAKER 
 
E.O. 12958: N/A 
TAGS: ETRD MY
SUBJECT: MALAYSIA'S PROPOSED GUIDELINES ON FOREIGN 
INVESTMENT IN DISTRIBUTIVE TRADE SERVICES 
 
REF: KUALA LUMPUR 331 
 
Summary and Introduction 
------------------------- 
 
¶1.  (SBU) Summary:  The Ministry of Domestic Trade and 
Consumer Affairs (MDTCA) - the Malaysian ministry which 
regulates all distributive trade - recently proposed sweeping 
new regulations which would increase the cost of doing 
business in Malaysia for all firms in distributive trade. 
The new rules include increases in paid up capital, 
requirements to offer 30% equity to ethnic Malays, and, in 
some cases, creation of a separate marketing arm for foreign 
manufacturers operating in Malaysia.  The regulations were 
initially announced in December 2004 without any comment from 
affected industry or other Malaysian ministries.  Due to 
public outcry, MDTCA has since allowed for a comment period 
and says it will accept some changes.  MDTCA intends to 
submit the amended rules to the cabinet in April or May for 
implementation in mid-2006.  The AmCham has declared these 
new regulations to be a step back from recent trade 
liberalization policies championed by MITI and MIDA which 
will send the wrong signal to foreign investors.  The new 
rules are also likely to become an issue in the upcoming Free 
Trade Agreement negotiations.  We believe that there may 
still be an opportunity to influence GOM thinking, and post 
recommends that Deputy Secretary of Commerce Sampson address 
these issues with MDTCA during his visit in April.  End 
Summary. 
 
¶2.  (SBU) The Ministry of Domestic Trade and Consumer Affairs 
is finalizing the adoption of regulations to govern foreign 
participation in Malaysia's distributive trade services 
sector, which includes wholesale and retail operations.  The 
new guidelines would supersede a previous set of regulations 
that date to 1995.  The revised guidelines were first 
announced in December 2004, apparently without input from the 
foreign business community.  Since then foreign businesses 
have weighed in at various levels with the government, 
including the National Economic Action Council in the PM's 
office.  The MDTCA eventually acquiesced to hearing the views 
of the foreign business community as well, which have 
criticized the guidelines as being a step backward from 
Malaysia's efforts to attract more foreign investment.  The 
resulting amendments to the 2004 draft have alleviated some 
industry concerns, but the current draft retains provisions 
that could impact the ability and willingness of some foreign 
investors to do business in Malaysia. 
 
¶3. (U) At a Malaysian Trade Distribution Forum in January 
2006, Minister of Domestic Trade and Consumer Affairs Shafie 
Apdal emphasized the important role that the retail trade 
sector plays in developing Malaysia's economy and Malaysian 
entrepreneurship.  Shafie noted that in 2005 the distributive 
trade sector contributed about 12 percent to Malaysia's GDP, 
providing employment for some 1.2 million people.  He also 
noted that the sector is a key component of the government's 
efforts to increase Bumiputera (ethnic Malay) participation 
in the Malaysian economy.  Shafie explained that the proposed 
regulations are aimed in part at protecting the livelihoods 
of smaller traditional retail businesses and building up 
Malaysia's small and medium enterprises (SMEs), in part by 
restricting the activities of large retail operations, 
including foreign ones.  (Note:  Shafie's highlighting both 
the importance of the distributive trade sector and the small 
entrepreneur is completely in line with current Malaysian 
economic policy.  Over the past few years, the service sector 
has been the major engine for new economic growth and SMEs 
are seen as the drivers for that engine.  End note.) 
 
Proposed guidelines 
------------------- 
 
¶4.  (U) The guidelines proposed in December 2004 define 
distributive trade as "all linkage activities that channel 
goods and services down the supply chain to intermediaries 
for resale or to final buyers."  They would apply to any 
business containing 15 percent or more foreign interest. 
Such businesses would need to obtain the approval of the 
inter-ministerial Distributive Trade Committee (DTC), chaired 
by the MDTCA's Secretary General, in order to begin 
operations, or to open new branches of an existing 
establishment.  The guidelines are divided into the following 
categories:  hypermarkets, departmental stores, superstores, 
specialty store, various other smaller distribution formats, 
direct sellers, and franchisors/franchisees.  No foreign 
 
KUALA LUMP 00000617  002 OF 005 
 
 
involvement would be permitted in a variety of other 
distributive trade sub-sectors, including supermarkets, 
mini-markets, convenience stores, gas stations, newsagents, 
and medical halls.  Under the December 2004 proposal, foreign 
manufacturers, even those with existing facilities in 
Malaysia, and including those with up to 100 percent foreign 
equity, would be required to set up a separate business 
entity to engage in any defined distributive trade, and the 
new entity would need to adhere to the guidelines as 
applicable. 
 
¶5. (SBU) At all levels of distributive trade, the guidelines 
(as initially proposed) would require that all qualifying 
foreign direct investments (those exceeding the 15 percent 
threshold of total foreign equity) reserve at least 30 
percent of equity for Bumiputeras (ethnic Malays).  The 
guidelines also would impose minimum capital requirements 
ranging from RM 50 million (approximately USD 13.4 million) 
for hypermarkets down to RM one million (USD 269,000) for 
specialty stores and the various other smaller distribution 
formats in which foreign direct investment would be 
permitted.  A distributive trade company with paid up capital 
of RM 10 million and above would be automatically allowed 
three expatriate key post positions, while those with paid up 
capital between RM one and RM ten million would be allowed 
one automatic expatriate key post, though exceptions to these 
limits would be considered on a case-by-case basis. 
 
 ¶6. (SBU) In September 2005 and again in January 2006 the 
MDTCA issued CDT-approved amendments to the December 2004 
draft guidelines.  Among the changes were the implementation 
of a maximum three-year grace period for a defined foreign 
investment to meet the designated Bumiputera or local equity 
requirements; loosening the paid up capital requirement by 
applying it only to the headquarters of a new investment 
rather than to every new outlet deriving from the investment; 
and changing the 30 percent equity requirements for 
activities involving alcohol and non-halal food to apply to 
any local investor, not just Bumiputeras.  The committee also 
reportedly approved an amendment that would exempt existing 
manufacturing companies from the requirement to set up a 
separate marketing arm if they wished to engage in wholesale 
(but not retail) business. 
 
Embassy Discusses Concerns with MDTCA 
------------------------------------- 
 
¶7. (SBU) On February 17, econoffs and econ specialist met 
with Mohd Talak bin Abu Bakar and Mizool Amir bin Mat Drus, 
Assistant Directors in the MDTCA's Domestic Trade Division, 
to raise our concerns regarding the proposed guidelines. 
Talak has been the Ministry's principal interlocutor with 
industry as well.  Econoff observed that the government 
promulgated guidelines without the input (at least initially) 
of the foreign business community that would be so affected 
by them.  The draft guidelines, even with the recently 
reported amendments, still appeared to be potentially 
damaging to Malaysia's attractiveness for foreign investment. 
 Econoff added that U.S. industry had indicated particular 
concerns about the new minimum paid-up capital requirements, 
and about the requirements for manufacturers to set up 
separate entities to market their products in Malaysia. 
Industry is also concerned about the proposal to require 
hypermarkets to reserve 30 percent of shelf space, and 30 
percent of all products sold, for B 
umiputera products. 
 
¶8. (SBU) Talak admitted that the MDTCA had not been 
transparent when it first promulgated proposed revisions to 
the guidelines, and said the ministry now was keeping 
industry better informed and involved in the process, 
pointing to the amendments that have been made to the 
December 2004 draft as proof.  He said the government decided 
to issue a new set of guidelines in 2004 primarily to clean 
up the much amended 1995 guidelines, not because it saw a 
need for a new approach to foreign investment in the sector. 
Nevertheless, Talak pointed out that the new guidelines 
actually open up much foreign investment possibilities, as 
the earlier rules only allowed a maximum of 30 percent 
foreign investment in the retail sector, compared to 70 
percent in the new guidelines.  (Comment:  Although the 
maximum possible equity may have been increased by 40% in 
some subsectors, it is difficult to see where such 
possibilities lie since much of the distributive trade sector 
is closed to foreign participation.  In any case, the new 
regulations are not very accommodating to foreign direct 
 
KUALA LUMP 00000617  003 OF 005 
 
 
investment, as they add both cost and complexity to doing 
business in Malaysia.  End Comment.)  He added that in the 
last year the MDTCA also has been working more closely with 
the Ministry of International Trade and Industry (MITI) to 
ensure that the regulations would not impose a significant 
impediment to foreign investment. 
 
¶9. (SBU) Talak noted that Minister Shafie Apdal had 
personally proposed several provisions in the draft 
guidelines, including the minimum paid up capital figure of 
RM one million.  Talak explained that the capital 
requirements (which for a similar local business with less 
than 15 percent foreign equity are only RM 350,000) are 
designed to ensure genuine, high-quality foreign investment 
that would inhibit unscrupulous investors from making a quick 
buck in Malaysia's retail sector.  Talak added that Shafie 
had decided to exclude restaurants from the guidelines, 
though it is unclear whether this exemption will be enshrined 
in the final regulations.  Talak further pointed out that the 
15 percent foreign equity threshold essentially exempted a 
significant chunk of foreign investment from the new 
guidelines. 
 
¶10. (SBU) Talak also noted that MITI has proposed to MDTCA 
that foreign manufacturers licensed by MITI or the Malaysian 
Industrial Development Agency (MIDA) under the Industrial 
Coordination Act of 1975 should also be exempt from the 
proposed requirement to set up a separate marketing entity to 
sell their products in Malaysia. Talak told us Minister 
Shafie Apdal has not yet made a decision on MITI's proposal. 
We understand another proposal would exempt manufacturers 
from this provision if they distribute their products through 
local distribution channels rather than through direct 
marketing of their products.  Talak also told econoffs that 
Shafie has already lifted the January 2004 moratorium on 
hypermarket construction, anticipating that the new 
guidelines would alleviate the concerns of local retailers 
that had led to the moratorium in the first place.  Another 
revision eliminates the proposed requirement that 
hypermarkets seek application for new branches at least two 
years in advance. 
 
¶11. (SBU) The MDTCA is in the process of reviewing comments 
it has received from industry on the proposed guidelines and 
hopes to finish a final draft soon, according to Talak.  The 
ministry currently plans to submit the guidelines for cabinet 
approval in April or May for implementation by mid-2006. 
 
Embassy Actions and Proposal for Commerce 
----------------------------------------- 
 
¶12. (SBU) The Ambassador also weighed in with MDTCA in a 
February 24 meeting with Minister Shafie Apdal, emphasizing 
that many of the measures that reportedly would be covered 
under MDTCA's new distributive trade regulations would run 
counter to what the U.S. would like to see in an FTA.  The 
Ambassador suggested that MDTCA defer implementation of the 
new regulations pending a decision on the FTA negotiations. 
Shafie said he realized that the distributive trade 
regulations caused issues for some parties, but stressed that 
he is under considerable political pressure, including from 
other Cabinet members, to release them soon (see reftel for 
further detail on their meeting).  As the guidelines have yet 
to be released, post recommends that Deputy Secretary of 
Commerce Sampson address these issues with MDTCA during his 
visit to Malaysia in late April.  The Commercial Service has 
agreed to this suggestion and is waiting for confirmation of 
a meeting with Shafie Apdal. 
 
AmCham's Position 
------------------- 
 
¶13.  (SBU) In a memo to the National Economic Action 
Committee at the end of October 2005, the AmCham stated their 
concerns with the proposed distributive trade rules, 
specifically:  the requirement for manufacturing companies to 
establish a separate marketing arm with 30 percent bumiputera 
equity; the requirements on hypermarkets mandating that 30 
percent of the products on the shelves must be bumiputera 
products and that 30 percent of total sales must be from 
bumiputera products; the lack of coordination between 
government ministries such as MITI and MDTCA that might 
produce overlapping and conflicting regulations; the lack of 
transparency in the process; and the lack of public comment 
prior to the unveiling of the new guidelines.  AmCham was 
unequivocal in its declaration that the proposed guidelines 
 
KUALA LUMP 00000617  004 OF 005 
 
 
would have a negative impact on the foreign direct investment 
in Malaysia.  AmCham was particularly alarmed by the 
retrospective rules which they believe would send unfavorable 
signals to the international investment community and call 
the credibility of Malaysia's policies into question. 
 
¶14.  (SBU) AmCham later presented these comments to MDTCA in 
a February 2006 meeting with a number of other international 
chambers.  AmCham believes that this meeting was held so that 
MDTCA could say that it had coordinated with the 
international business community.  AmCham was not heartened 
by its inability to get a private meeting with MDTCA 
Secretary General Talaat; in the past 8 months, he has 
 
SIPDIS 
canceled 4 or 5 scheduled meetings with the AmCham and 
provided no explanation.  Still, some industry sources are 
reporting that MDTCA has accepted some of the private 
sector's recommendations.  For example, AmCham is cautiously 
optimistic that MDTCA will lift the proposed requirements for 
companies that entered under MITI or MIDA special incentives. 
 
Unanswered Questions 
-------------------- 
 
¶15. (SBU) The draft guidelines raise several key questions 
that MDTCA officials were unable to answer.  Talak did not 
express concern about whether the new guidelines might 
conflict with Malaysia's WTO TRIM obligations, noting that 
this was an issue for MITI to determine (inferring that MITI 
had not previously expressed any concerns in this regard). 
Some industry groups speculate that the government would have 
to impose identical guidelines on all Malaysian companies, 
not just those with 15 percent or greater foreign 
participation, in order to be WTO compliant.  Many of the 
provisions that previously referred to thresholds for 
"Bumiputera" investors now just refer to "local" investors, 
which may be an attempt to address TRIM concerns. 
 
¶16. (SBU) Another unanswered question is whether the 
guidelines would be enacted retroactively to cover existing 
foreign investments in the sector. MITI's proposal to exempt 
MITI- or MIDA-licensed companies apparently does not address 
whether new companies receiving such licenses from MITI or 
MIDA would also be exempt from the guidelines (should this 
proposal be approved by the MDTCA). 
 
Comment 
------- 
 
¶17. (SBU) Malaysia's efforts to implement guidelines on 
distributive trade exemplify the government's halting efforts 
to seek and utilize public input in implementing policy 
changes.  To a certain extent the MDTCA has responded 
favorably when industry has complained about the guidelines' 
potentially negative effects on foreign investment.  MDTCA 
also has been mindful of the prerogatives of other 
ministries, such as MITI's insistence that the new guidelines 
not inhibit those foreign investments that have been licensed 
by MITI or MIDA.  Although the Ministry would probably point 
to these actions as evidence of its transparency, these 
changes clearly were not made through a transparent process 
that allows for the regular, predictable input of interested 
parties, both in and, especially, out of the government. 
 
¶18. (SBU) MDTCA's proposed regulations likely would add to 
both the complexity and cost of doing business in Malaysia, 
for foreign and local companies alike.  It is a step back 
from MITI and MIDA's more relaxed posture of recent years. 
Some of its provisions appear to contradict the GOM's goal of 
attracting increased foreign direct investment to Malaysia. 
Certainly, the rather arbitrary increases in paid up capital 
for current and prospective business send the wrong signal to 
foreign investors.  While MITI may have convinced MDTCA to 
allow a grandfather clause for existing companies, new 
business ventures may still be obliged to operate under the 
new regulations and, therefore, would be required to apply to 
both the Foreign Investment Committee and the Distributive 
Trade Committee to obtain licenses and to offer 30% equity to 
ethnic Malays, with the resulting increase in overall 
business costs. 
 
¶19. (SBU) The new regulations could raise issues that would 
need to be addressed as we prepare to negotiate the 
U.S.-Malaysia Free Trade Agreement (FTA).  MDTCA has drawn a 
fairly firm line in the sand for allowable participation in a 
wide variety of distributive ventures.  Furthermore, the 
ministry appears unwilling or unable to delay final approval 
 
KUALA LUMP 00000617  005 OF 005 
 
 
of the guidelines while we negotiate an FTA.  Given the 
prevalence of socioeconomic preferences in this sector, such 
negotiations could prove especially challenging. 
LAFLEUR