The Johor-Singapore Special Economic Zone brings to mind the unsuccessful Iskandar Economic Zone and Forest City. Still, Malaysia’s Minister of Economy Rafizi Ramli says things will be different this time
A year into Donald Trump’s first presidency in 2018, Aztech Global , the Singaporean manufacturing and engineering services company, started looking across the causeway into the state of Johor as a viable location for expansion.
Trade relations between the US and China had just imploded under Trump. The US placed 25% duties on around US$34 billion worth of imports from China, including cars, hard disks and aircraft parts.
China then retaliated by imposing a 25% tariff on goods originating from the US worth the equivalent of US$34 billion, including agricultural products, automobiles and aquatic products. This moment set off a trade war between the two most powerful economies in the world that has escalated to the present day.
Jeremy Mun, Aztech’s chief operating officer and executive director, says the company’s decision to move across the border was purely a geopolitical hedge. At that time, the firm manufactured 100% of its products in China and exported them to key customers in the US, who accounted for the bulk of its group revenue.
The tariffs meant that Aztech’s end-customers would have to bear the additional costs. To avoid this, Aztech would need to diversify its supplier base to de-risk its supply chain.
Mun and the group chose Malaysia over Indonesia and Vietnam for its expansion because of its proximity to Singapore, its relatively stable political system and well-established electronics manufacturing industry. “We saw an opportunity and moved relatively quickly to set up the operations there,” he says. The group had its first Johor manufacturing plant up and running in Gelang Patah in late 2020 but quickly ran out of space.
Jeremy Mun (left), says that the company's decision to move to Malaysia was purely a geopolitical hedge. Photo: Albert Chua/The Edge Singapore
See also: Special corporate tax rate of 5% and worker’s tax of 15% in Johor-Singapore Special Economic Zone
They moved to acquire a 300,000 sq ft facility in Pasir Gudang in late 2022 for about $20 million. Now, the plant is fully operational and accounts for 65% of its manufacturing for the group’s entire operations, a stark contrast to the 100% manufacturing capacity from China seven years ago.
Aztech’s story is a textbook example of small- to medium-sized enterprises (SMEs) caught in the crosshairs of the ongoing US-China trade war, trying to survive mounting trade tensions and increased protectionism. Over the years, Asean, in particular Vietnam, has boomed as a region for a successful de-risking strategy.
However, Vietnam’s growing trade deficit recently has made it increasingly vulnerable to becoming the next target of US tariffs.
Just days away from Donald Trump’s second inauguration on Jan 20, when it is almost certain that he will up the ante on tariffs, a new solution for de-risking has emerged on the border of Singapore and Johor.
Source: The Edge Malaysia
A new economic zone for de-risking
The Johor-Singapore Special Economic Zone (JS-SEZ), first mooted in October 2023, is now a binding agreement between Singapore and Malaysia. It was officially signed on Jan 6. The JS-SEZ combines the entirety of Singapore and Johor state into one and is split into nine flagship zones and 11 economic zones.
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Its initial goal was to merge the two areas into one to promote greater cross-border trade. It will also be a regional hub for global investors to hedge against geopolitical risk by tapping into Singapore’s “sophisticated” market and Johor’s resources.
Just last week, more clarity emerged around the JS-SEZ. The zone aims to create up to 20,000 jobs and bring in 50 projects in five years or 100 in 10 years.
To sweeten the deal, both countries will commit an undisclosed sum to the JS-SEZ. Singapore will design funding support to facilitate Singaporean companies expanding into the JS-SEZ and the potential twinning operations of multi-national companies already in the city-state and the JS-SEZ. Meanwhile, Malaysia will establish a fund to support infrastructure and set up a one-stop centre to facilitate investments.
From Jan 1, investors in the JS-SEZ will enjoy a special corporate tax rate of 5% for 15 years and a special worker’s tax rate of 15% for 10 years. Malaysia’s existing corporate tax rate is 24% for resident and non-resident companies.
“JS-SEZ is a model for the future,” says Malaysia’s Minister of Economy, Rafizi Ramli, in an interview with The Edge Singapore on Jan 6, the day of the JS-SEZ signing between the two nations who have had their fair share of squabbles over the years.
“While I don’t want to dwell too much about the past, or the often spoken [about] relationship between Singapore and Malaysia, the JS-SEZ marks the beginning where our [total] sum together is definitely a lot more than our individual sum,” says Rafizi.
“I’m sure the majority of the investors around the world can see the rational and commercial sense of [us] doing this, and if anything, it is a sign that Malaysia and Singapore want to get a lot more out of this historical intertwined relationship between our two countries,” he continues.
While the China +1 strategy — where companies diversify their supply chain lines outside of China — has seen Asean countries like Vietnam, Indonesia and others as key beneficiaries over the last few years, Malaysia has emerged as a top nation for global investors in 2023 and 2024.
It registered a record US$74 billion in approved FDIs in 2023 — the highest in its history. Its economy grew by 5.3% in 3Q2024, headline and core inflation remained stable, while the ringgit regained its strength. In 2024, blockbuster investment announcements followed as Microsoft, Google and Oracle disclosed multiyear billion-ringgit investments into the country.
“Very rarely do you find two countries working as a team,” says Anwar at the 11th Malaysia Singapore Leaders’ Retreat held in Putra Jaya on Jan 7. Photo: Department of Information Malaysia
The JS-SEZ is undoubtedly part of Prime Minister Anwar Ibrahim’s efforts to restore Malaysia’s former glory. Since retaking office in 2022, he has gone on a charm offensive in implementing his Madani framework, which promotes good governance and investment, fosters innovation and enables domestic industries to expand globally.
In tangible terms, his goal is to attract FDI, push leading sectors in the country up the value chain and accelerate the growth rate by up to 6%. Rafizi, a close ally and once a professional accountant, is a key proponent of enabling this in Anwar’s political cabinet.
Their latest project is the JS-SEZ, which, if successful, should contribute RM117.1 billion ($35.6 billion) annually to Malaysia’s economy by 2030.
Rafizi’s pitch to investors is that “the timing is perfect”, given the synergies between Johor and Singapore. Global investors do not need to choose between the sophistication and complexity that Singapore can offer or Johor’s resource advantage, both of which have limitations.
“This is perhaps a good time to have a beachhead in Asean because its economy is expected to be third or fourth largest within the next 10 to 15 years. I would posit that in the same way global investors took positions on China 20 or 30 years back in anticipation of a strong consumer market; the sooner they come to this region, the better,” he says.
“Very rarely do you find two countries working as a team,” says Anwar at the 11th Malaysia-Singapore Leaders’ Retreat held in Putra Jaya on Jan 7. “You can’t see it in any part of the world where two countries decide to work together, promote both countries and attract investments.”
Johor’s past failures
Yet, sceptics of the JS-SEZ often point out that previous attempts at turning the Johor state into a booming economic zone have been unsuccessful. Some SMEs in Singapore have even called the agreement “deja vu”.
They refer to the Singapore-Johor-Riau (Sijori) growth triangle established in 1994 and the Iskandar Economic Zone established in the mid-2000s. The Malaysian government had set a target for Iskandar Malaysia to reach maturity by this year, with cumulative committed investments worth RM383 billion and a gross domestic product (GDP) per capita of US$31,100 for a population of around 3 million.
According to a UBS Malaysia Market Strategy note on Oct 3, 2024, by 2011, only 5% of total investment into Iskandar came from Singapore. Iskandar’s 2022 report card suggests a total investment of RM354.6 billion as of December 2021, with investments in mixed development and residential properties comprising 49%.
They note that Singapore accounted for RM140.7 million of total foreign investment or around 18%. UBS estimates that Iskandar’s GDP per capita stands at US$9,400, 22% lower than the national average as of 2023.
Photo: Khairani Afifi Noordin/The Edge Singapore
Perhaps more telling of Johor’s success or lack thereof is the US$100 billion Forest City real estate project, which sits uninhabited near the Causeway after its Chinese real estate developer Country Garden went bust. Other developments like Danga Bay and R&F Princess Cove remain “ghost towns”, indicating that there has been little success in making Johor great.
However, Rafizi says the JS-SEZ is different this time because it is an agreement between two countries with committed investments from both parties.
“We did cross the line and that monumental hurdle when both countries decided to sign an agreement and focus on the integration [of two countries] more than the dollars and cents of the physical investments,” says the minister.
He adds that the next step is to develop a blueprint for the region, which will clarify the situation for global investors and cluster the right industries in the ecosystem the two countries are building.
From there, Singapore and Malaysia will work towards realising the first 50 projects in the first five years. The minister explains that this milestone is crucial for the JS-SEZ’s success, as it demonstrates that the SEZ has reached a certain scale and critical mass.
In his view, once both nations can demonstrate that the JS-SEZ is gaining traction by fulfilling its immediate target of bringing in 50 projects, more people will abandon reservations and find a way to contribute.
“We all know that when you start a venture, it will not be easy. The efforts required will not be one-off. It needs continued nurturing and persistence. The same is true for the SEZ. Ultimately, both governments need to ensure a good bilateral relationship,” says Chee Hong Tat, Singapore’s transport and second minister for finance, at the UBS Asia Wealth Forum on Jan 14.
According to Rafizi, the JS-SEZ already has a headstart to success, with a cluster of good investments, infrastructure and facilities on the ground. For one, the Rapid Transit System (RTS), a shuttle link that will connect Singapore to Johor by train in 20 mins, is slated to be completed in 2026.
Photo: Bloomberg
With the RTS, Chee expects a reshuffling of resources and demand as people find it easier to move between Singapore and Johor. He notes that some retailers might be affected. While the government is looking at helping them transform, “we shouldn’t prevent market forces from working,” he says.
When questioned directly about past unsuccessful projects in Johor, Rafizi told The Edge Singapore authorities know the risk of overcommitting and overbuilding.
He notes that it is “unfortunate” that at the beginning of something like the JS-SEZ, there will be a lot of euphoria and some element of speculation. Therefore, it is important to implement the blueprint of the JS-SEZ phase by phase and focus on genuine and real value creation that is not speculative.
“We learn from our [past] experience,” he says. “You can spend billions of ringgit to put in all the infrastructure, and then it takes some time before the take-up rate happens.
“And that is why I keep mentioning reaching critical mass because I think once we reach that, the market will reflect, and demand and supply will follow suit. We are still on a learning curve, and it’s something that we will iterate together as we go along,” the minister adds.
Rafizi intends to be selective about projects and investments coming into the JS-SEZ and to work closely with “genuine” investors who see Malaysia, Singapore and Asean as a home for a long time.
Is it truly a win-win?
Analysts and observers alike have debated which country will benefit more from the JS-SEZ.
“We view the collaboration as a win-win for both Malaysia and Singapore, with each country leveraging its strengths. Malaysia offers cheaper real estate and labour for Singapore companies expanding into JS-SEZ. At the same time, Singapore can facilitate investments, driving job creation in the zone,” says Maybank analyst Wong Wei Sum in a Jan 7 note.
Yet CGS International Asean analysts said in their Nov 27, 2024 note that ground checks among their Malaysia and Singapore coverage universe indicate that Malaysia could benefit more in the near future from the JS-SEZ.
“Next to the Klang Valley, Johor is the largest contributor to the Malaysian economy among the 12 remaining states. Therefore, increased investment and employment created through greater connectivity with Singapore should provide further impetus to economic growth in Johor, which could, in turn, have a meaningful impact on the country’s overall GDP growth,” they note.
Unsurprisingly, Rafizi admits that the negotiation of the JS-SEZ was “complex” as it covered so many areas. “I feel that it was quite an achievement that we finally managed to sign it,” he says.
This time around, the minister says the underlying principle that was constant throughout discussions was that both parties felt the JS-SEZ was good for both Singapore and Malaysia.
He adds: “While we both have our concerns, the attitude was to agree on the common principles and then to move to the next layer of details. If there is anything that we can’t agree on, we should not stop negotiations just because of a few disagreements. We will revisit this and continue to work to refine our approach to find win-win solutions.”
Aztech Global’s Mun believes that if Malaysia can set up the infrastructure and place properly, the country will gain. But a strong neighbour would also benefit Singapore, he says.
Aztech Global's 300,000 sq ft manfuacturing plant in Johor now accounts for 65% of the company's manufacturing output, a stark contrast from 0% just seven years ago. Photo: Aztech Global
Aztech has already moved work carried out for customers affected by previous tariffs to Malaysia. With Trump’s second administration coming into play in just a matter of days, Mun says the company is receiving more inquiries into its Malaysia operations. Having yet to see the same magnitude of increase in manufacturers avoiding tariffs, Malaysia is seen as relatively “safe,” making customers feel “a bit more comfortable,” says Mun.
Other firms from Singapore are also preparing for the potential onslaught of tariffs. SP Manufacturing, an electronics manufacturing services business operating in the “mission critical” space, expanded into Senai, Johor, last October.
According to CEO Philip Ong, the idea to move was planted by their major shareholder, Novo Tellus, a private equity firm from Singapore that invests specifically in industrial and technology companies.
The 43,000 sq ft Johor plant, which costs up to eight figures, allows SP Manufacturing’s clients to avoid tariffs. As other precision engineering companies and firms in the same sector are also located there, Ong says it was “quite a natural way” to expand into Johor.
Meanwhile, other companies cite the growing cost of land and resources and market consolidation happening in Singapore as a pull factor into Johor.
RMS Marine & Offshore Service, a one-stop marine service provider for global shipping companies, says that Johor has space, manpower and currency arbitrage of at least one to three, which makes the JS-SEZ “very attractive”.
“Lower cost, labour and space are things we really need. We are at our limitations, and if we don’t expand abroad and if the Singapore government continues to tighten foreign labor through quotas, we lose competitiveness as a country,” says Seow Zhi Yuan, managing director at RMS Marine & Offshore Service.
He recalls some years back when the MNCs were happy with the productivity and cost balance of working in Singapore. Today, Seow notes, Singapore is deemed more costly than even the Scandinavian countries.
The company already has a facility in Johor, but its vessels and last-mile deliveries will be kept in Singapore. It is waiting for the next part of the JS-SEZ’s execution to determine whether it can expand further into Johor, including how easy it is to move goods and manpower.
“I think the ease of transportation becomes key. If I achieve financial savings, but the goods cannot get back to Singapore, everything will fall apart,” says Seow. “So it’s the ease of customs clearance, the green lanes that we are discussing that is key to the success of the arrangement.”
Likewise, Mun, who used to cross the Causeway daily at one point, hopes there will be a special pass for investors with businesses in both countries, like himself. “Our passport is not that big, and the stamp in Malaysia is pretty large, so just two trips will take up one page,” he says.
