VZCZCXRO3910
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1546/01 2920859
ZNR UUUUU ZZH
R 190859Z OCT 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 0127
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001546 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE PASS USTR - WEISEL AND BELL 
USDOC FOR 4430/MAC/EAP/J.BAKER 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD EAGR MY
SUBJECT: MALAYSIA'S NORTHERN CORRIDOR ECONOMIC PLAN -- LONG ON 
PROMISES, SHORT ON PRAGMATISM 
 
REF: KUALA LUMPUR 1005 
 
¶1. (U) Summary: Malaysia has launched another high-profile economic 
incentive program, the Northern Corridor Economic Region (NCER), as 
part of the government's efforts to enhance economic growth and 
development in outlying parts of Malaysia.  Prime Minister 
Abdullah's July launch of the NCER followed the 2006 advent of the 
Iskandar Development Region (IDR) in the southern state of Johor, 
directly north of Singapore (reftel).  NCER incorporates the three 
northwestern states of peninsular Malaysia - Perlis, Kedah, and 
Penang - along with the northern half of the state of Perak.  Unlike 
the IDR, the NCER lags behind the national average in development, 
with per capita income reaching just 76% of the national average. 
Those parts of the plan that are tied most closely to the economic 
hub of Penang have a certain inherent logic to them, but isolated 
development zones are more driven by political ends and are likely 
to be dependant on government support for some time to come. End 
summary. 
 
¶2. (U) The GOM awarded prominent government-linked company Sime 
Darby the task of devising a blueprint to kick-start the initiative. 
 The company will retain overall coordination of the project until 
the establishment of the Northern Corridor Implementation Agency 
(NCIA) in late 2007 or early 2008.  According to the blueprint, the 
GOM aims for some RM 177 billion (USD 50.5 billion) in investment on 
NCER-related projects through 2025, with around one-third being 
government-funded projects.  The blueprint specifically notes that 
the initiative's overall theme is "increasing value-added from 
existing industries," and is focused on "transforming" the 
agricultural, manufacturing, logistics, and tourism sectors in the 
region. 
 
¶3. (U) In a recent tour of a variety of sites in the state of Kedah, 
the heart of northwestern Malaysia, econoff observed an effort that 
is just barely getting started.  The Kuala Lumpur based Sime Darby 
reps that accompanied econoff were making their initial contacts 
with many of the same local entities, including the Kedah State 
Planning Unit, the Muda Agricultural Development Authority, the 
Kulim Hi Tech Park, and the Universiti Utara Malaysia. 
 
Kedah State Economic Planning Unit 
---------------------------------- 
 
¶4. (U) Dato' Haji Bashirudin bin Haji Abdul Jamil, Deputy Secretary 
for Development for Kedah, told econoff that the state has been 
somewhat successful in the last 15 years in expanding Kedah's 
economy away from its overwhelming reliance on agriculture. 
Although the state is determined to keep agriculture as a key 
element of the economy, it had also encouraged the development of 
four economic hubs.  These included the Kulim Hi Tech Park in 
southern Kedah (close to Penang), an auto manufacturing hub in the 
central area of Gurun, a manufacturing and logistics hub in Bukit 
Kayu Hitam on the Thai border, and an oil refinery in the coastal 
town of Gan.  Of these four centers, only the oil refinery in Gan 
has yet to be developed.  Bashirudin emphasized that all four 
centers purposely avoided encroachment on the state's rice paddy 
cultivation areas. 
 
¶5. (U) Bashiruddin and his colleagues told econoff they welcomed 
Sime Darby's expertise as the state seeks to further develop its 
four economic hubs, as well as the state capital of Alor Setar (the 
most populous single area of the state).  Noting that Kedah is a 
source for both goods and workers that eventually end up in Penang, 
they are seeking ways to leverage the state's proximity to Penang to 
improve Kedah's economy, in part to keep such workers in the state. 
 
 
A More Productive Agricultural Heartland 
---------------------------------------- 
 
¶6. (U) Though NCER emphasizes increased industrialization of much of 
northwestern Malaysia, preservation and development of the region's 
role as Malaysia's agricultural heartland is also a significant 
component of NCER.  The current blueprint actually calls for 
agriculture to comprise an increasing share of the region's GDP 
(from 12% now to 15% in 2012).  The plan calls for increased 
large-scale farming and productivity improvements, particularly for 
fresh and processed fruit and meat production, to encourage 
substantial increases in the region's agricultural exports.  The 
plan calls for Sime Darby to establish a seeds research and 
development center in Perlis state, which will focus in particular 
on using biotechnology to produce improved seed varieties. 
 
¶7. (U) Rice plays a particularly strong historic role in Kedah's 
agricultural sector. The Muda plains of central Kedah produce 38% of 
 
KUALA LUMP 00001546  002 OF 003 
 
 
Malaysia's rice, and the Muda Agricultural Development Authority 
(MADA) has since 1970 been seeking ways to improve production. 
Approximately 100,000 hectares of rice are under cultivation, and 
while MADA has been instrumental in increasing production in some 
cases to nearly eight tons per hectare (though the average yield is 
three to five tons per hectare), they are pushing for further yield 
improvement to nine or ten tons per hectare by 2020.  Despite 
improving production over the years, MADA officials told econoff 
that Muda rice farmers still need significant assistance, as their 
holdings are primarily small scale (just over 2 hectares per farmer) 
and their average age is 60 years.   Poor irrigation infrastructure 
is another impediment to increasing rice productivity.  In addition 
to encouraging infrastructure improvements, MADA is encouraging 
farmers to improve their yields by using better seeds.  MADA also 
promotes expanded markets for rice-based products, such as 
cosmetics, animal feed, and handicrafts). 
 
Kulim Hi Tech Park 
------------------ 
 
¶8. (U) Kedah officials point to the success of the Kulim Hi Tech 
Park (KHTP) near Penang as the type of development within Kedah that 
can leverage Penang's stellar economic reputation.  KHTP was 
Malaysia's first dedicated high technology industrial park, and 
since its dedication in 1996 has attracted over RM 20 billion (USD 
5.9 billion) in investment, mostly from overseas.  Most of that 
investment has been in technology manufacturing facilities that are 
integrated with the much larger electronics sector in Penang, just 
15 miles away. Intel has been a big presence at KHTP from the 
beginning and remains the largest single investor in the park, and 
has since been joined by some 20 other firms that now employ about 
15,000 workers.  Although close to the Penang metropolitan area, 
KHTP is being developed as a self-contained, mixed-use community 
which can house, feed, entertain, and educate its workforce and 
their families - it even generates its own electricity. 
 
¶9. (U) The NCER blueprint calls for the development of an 
electronics cluster stretching from Taiping in Perak to Gurun in 
Kedah, with Penang and KHTP at the sector's heart. KHTP officials 
noted to econoff that the development's success has led it to run 
out of space sooner than anticipated; the U.S.-German firm First 
Solar recently broke ground on a photovoltaic module plant (used for 
solar energy plants) that takes up much of KHTP's planned third 
development zone.  KHTP is considering potential future expansion 
into neighboring parcels, some of which are owned by Sime Darby. 
 
Bukit Kayu Hitam - Asian Composites Manufacturing 
--------------------------------------------- ---- 
 
¶10. (U) Although KHTP owes its location to its proximity to Penang, 
another manufacturing node, at Bukit Kayu Hitam (BKH) in northern 
Kedah, is less dependent for its success on its proximity to an 
existing economic success story.  However, its location at the 
northern end of Malaysia's North-South Expressway provides 
relatively easy access to ports, and its location on the Thai border 
has encouraged the government to promote it as a logistical hub as 
well.  BKH was developed with a significant influx of government 
support, including by former PM (and native son) Mahathir (who was 
also instrumental in promoting Langkawi, offshore Kedah, as a major 
tourist destination in southeast Asia). 
 
¶11. (U) Asian Composites Manufacturing (ACM) in BKH exemplifies the 
type of advanced technology manufacturing that the GOM seeks in 
Malaysia.  In this relatively remote corner of Malaysia, ACM 
fabricates cutting-edge aircraft components that make their way into 
every one of Boeing's commercial aircraft lines.  ACM is a joint 
venture among Boeing, Sime Darby, and the U.S. firm Hexcel, each of 
which owns one-third of the company.  Nearly RM 140 million (USD 41 
million) has been invested in the plant since its inception in 
¶2001. 
 
Universiti Utara Malaysia (UUM) 
------------------------------- 
 
¶12. (U) Just a few miles from BKH, but in an even more remote area 
along the Thai border, Universiti Utara Malaysia (University of 
Northern Malaysia) is well positioned to play a leading role as the 
NCER is developed and implemented.  UUM Vice Chancellor Tan Sri Dr. 
Nordin Kardi told econoff that the university, which was founded in 
1990 and now boasts some 25,000 students, aspires to be Malaysia's 
premier management school.  UUM hopes to participate in the drafting 
of impact studies for various NCER proposals, and also has proposed 
that the GOM allow the university to open an official NCER Research 
Center.  UUM is particularly interested in developing management 
techniques to foster NCER's agricultural development projects, 
 
KUALA LUMP 00001546  003 OF 003 
 
 
although the university has not previously been very active on 
agriculture issues. 
 
Comment 
------- 
 
¶13. (SBU) With the NCER the GOM is attempting in part to leverage 
Penang's prosperity to bolster the economy of the states which 
comprise its hinterlands, not unlike the government's efforts to use 
Singapore's prosperity to improve Johor's economy under the Iskandar 
Development Region.  One key difference is that Penang is in 
Malaysia, and thus is being touted by the government as an integral 
part of NCER.  Econoff's various interlocutors in Kedah admitted 
that proximity to Penang will continue to help development of 
sectors with existing ties to Penang, especially Kulim's Hi Tech 
Park, as well as BKH and Gurun (both of which are heavily dependent 
on access to Penang's port).  However, the initial plan indicates 
that a good percentage of the proposed NCER projects may have 
limited links to Penang. 
 
¶14. (SBU) Prime Minister Abdullah Badawi (who hails from Kedah) has 
long pushed a modernized agriculture sector as a pillar of 
Malaysia's future prosperity.  Thus the NCER's emphasis on 
maintaining and improving the area's reliance on agriculture is not 
surprising.  This emphasis reflects the political importance of the 
sector to ruling party UMNO; rice farmers in particular are 
overwhelmingly Malay and strong supporters of UMNO. They have also 
expressed occasional concerns (egged on by anti-FTA NGOs) that a 
U.S.-Malaysia FTA would bring a flood of cheap U.S. rice that would 
threaten their livelihoods. 
 
¶15. (SBU) Even more so than the IDR in Johor, the NCER does not 
initially appear to be much more than a public relations exercise. 
In the short term the government undoubtedly hopes the program will 
generate political support in advance of anticipated national 
elections.   NCER does not contain the types of investment 
incentives seen in IDR (which exempt certain investment from 
adherence to the government's bumiputera preference policy), which 
is not surprising given that NCER is not aimed primarily at 
attracting foreign investment.  In the medium-term the government is 
budgeting funds to support NCER infrastructure projects, and will 
likely remain the principle source of funding as the program moves 
forward. 
 
KEITH