(Yicai) June 29 -- After years of serving Chinese companies in Penang, partners Ang Siak Keng and Ng Ai Li of Zaid Ibrahim & Co have reached a clear conclusion: the most common mistake Chinese companies make in Malaysia is not underestimating costs, but misjudging the local working environment and working culture.

Many Chinese firms initially assume Malaysia is very similar to China in administrative efficiency, industrial support, and talent supply, among other aspects, Ang Siak Keng, partner at Zaid Ibrahim, the country's largest law firm, told Yicai.

China was Malaysia's second-largest source of foreign investment last year, with RM58 billion (USD14 billion), right after Singapore, with RM58.3 billion, according to data from the Malaysian Investment Development Authority.

For over a decade, Ang has watched wave after wave of Chinese companies arrive in Malaysia with capital, equipment, and manufacturing expertise, only for some to stumble in the least expected places. His advice is to have a long-term investment plan, set realistic expectations, and take the time to prepare in advance.

For example, Chinese firms are often unprepared for the fact that Malaysia is a federal state where state governments run certain  approval processes, Ang said. "Project timelines are less straightforward and require more time for coordination, communication, and sign-off."

The Malaysian legal system is also different, as it follows the English common law, Ang noted. In fact, in addition to enacted legislations, court precedents also carry legal weight. This is an aspect that first-time investors frequently overlook, he added.

There is a considerable difference between first-time investors and firms with established international experience, Ang explained. The former will generally go through a longer adaptation process, learning the local regulatory system, legal framework, and business culture, while the latter are more familiar with cross-border procedures and compliance requirements, so they can move faster.

Another common mistake is misjudging costs. Malaysia's minimum wage has reached RM1,700 (USD410) per month and may keep rising. But what attracts foreign investment today "is not cheap costs, but a stable legal system, political environment, international business environment, multilingual talent, and strategic access to the Association of Southeast Asian Nations market," Ang said.

Malaysia's Bumiputera Equity Requirement policy mandates that indigenous Malay and native individuals or agencies should own a specific share of a company's or project's equity. However, it does not apply as broadly as foreign investors often fear, Ng Ai Li, another partner at Zaid Ibrahim, told Yicai.

In fact, most sectors, including export-oriented manufacturing, carry no mandatory Bumiputera shareholding requirement. Restrictions apply only in distribution, logistics, government procurement, and concession licenses. "Everyone thinks that it will be an obstacle at first, but it really isn't," Ng noted. "It can be done without breaking any rules."

She gave as an example the case of a Chinese logistics company that negotiated about establishing a joint venture for a long time and ultimately structured the arrangement through a shareholders' agreement that preserved the investor's day-to-day operational control within a compliant framework.

Land ownership is similarly misread. Malaysia generally permits foreign investors to hold industrial land directly, but the real challenge is the varying pace of state government approvals and the risk of mid-process policy changes.

In one land purchase deal in Kedah, a policy change after signing of a sale and purchase agreement required the title to be converted from freehold to leasehold. The Chinese client accepted it, partly because industrial land tenure in China is also time-limited. Its approach was to include conditions-precedent clauses, provide realistic approval buffers, and add extension and termination rights built into the contract.

About tax incentives, many Chinese companies see securing the Pioneer Status as the last step. The PS is a highly sought-after tax rebate that grants companies engaged in selected industries, such as manufacturing, a partial or full exemption from corporate income tax for five years.

However, the real challenge begins after approval, Ng said. Schemes such as the PS typically require a minimum percentage of local employees and technology-transfer milestones within set time frames. These are conditions hard to meet in the short term by new Chinese investors in Malaysia, as they almost always rely on staff brought from China, she explained.

Her advice is to communicate early and apply for extensions proactively, rather than waiting for enforcement authorities to show up for surprise inspections.

Over the past decade, there have been clear, phased changes in how Chinese companies invest in Malaysia, Ang said. Until the early days of the Belt and Road Initiative, the main Chinese investors in Malaysia were large state-owned enterprises focused on infrastructure and energy projects. Later on, private electronics and industrial manufacturers also joined. But in recent years, the trend shifted again, with manufacturers in the new energy vehicle, semiconductor, electronic component, and battery industries taking center stage.

"There is a genuine gap between how these companies perceive Malaysia and what they actually find on the ground, especially for those going abroad for the first time," Ang pointed out.

Unlike Western, Japanese, and other foreign investors that typically make independent decisions, Chinese firms move in clusters, as upstream and downstream suppliers relocate to where key customers are, forming industrial ecosystems at the destination. The concentration of Chinese semiconductor companies in Penang and lithium battery manufacturers in Kedah is proof of it.

Chinese companies that successfully operate in Malaysia all have a few things in common, according to Ng. They integrate into the local production ecosystem quickly, build local teams early, and avoid over-reliance on any single partner. Those who fail are almost always the ones trying to run Malaysian operations like Chinese operations.

People, Not Permits, Create Friction

Malaysia’s multilingual, multireligious workplace culture do not always match with Chinese management assumptions. And while some executives assume they can export Chinese practices, Ng said that this is not how things work in Malaysia. In her experience, what ultimately puts companies in difficulty is almost always people, rather than legal formalities.

"You cannot look at this place through the China lens," Ng noted. "That mindset creates people problems first. And people problems hit the business directly."

She has seen companies arrive with meticulously prepared investment plans of millions of US dollars, only to spend years in internal friction because they could not manage local teams or bridge cultural differences.

Malaysian labor law protects employees far more robustly than most Chinese managers expect. Companies cannot dismiss staff at will, as they must issue written warnings, give employees a documented opportunity to improve first, and follow the statutory process or face compensation liability.

Cultural difference adds another layer. Malaysia is a multiethnic, multireligious society with numerous public holidays, Ng pointed out. Different communities observe their own religious customs, creating scheduling and management logic that differs considerably from China's.

Both Ang and Ng believe Chinese companies have become highly efficient at replicating factories -- shipping equipment, transferring supply chains, and quick production start. What cannot travel with the machinery are the wholesale organization, management systems, corporate culture, and the capacity for cross-cultural communication.

Firms that integrate into the local production system quickly and build local teams early tend to operate more smoothly, Ng said.

Editor: Futura Costaglione