Along the Belt and Road

Alibaba's 'Digital Free Trade Zone' has some worried about China links to Malaysia

Key Points
  • A "Digital Free Trade Zone" between China and Malaysia, an official Belt and Road project, has many worried about the impact on local firms.
  • A core element of the scheme is an electronic platform which is designed to ease trade between Malaysian and Chinese firms.
  • The platform is a win for Alibaba, which hopes to eat rival Amazon's lunch in Southeast Asia, home to a booming e-commerce market.

Anxiety around China's globe-spanning Belt and Road initiative is seeping into the digital economy of at least one country.

Malaysia's Prime Minister Najib Razak and Alibaba Group founder and executive chairman Jack Ma after the launching of the country's Digital-Free Trade Zone in Kuala Lumpur on March 22, 2017

An Alibaba-led digital trade zone in Malaysia, which is part of Beijing's ambitious infrastructure project, is expected to boost trade between Southeast Asia and China, but some fear it could hurt Malaysian firms.

The "Digital Free Trade Zone," or DFTZ, is designed to make cross-region shipments more affordable for Malaysian small and medium-sized companies — the majority of businesses in the country.

A core element of the scheme is an electronic world trade platform (eWTP) which is designed to ease trade between Malaysian and Chinese firms. The virtual platform, due to take effect in 2019, will connect businesses, manage cargo authorizations and assist on customs. A brick-and-mortar facility in the Malaysian capital will also help with logistics.

An Alibaba monopoly?

The eWTP is a win for Alibaba, which hopes to eat rival Amazon's lunch in Southeast Asia, home to a booming e-commerce market. But critics say the Chinese tech giant holds too much control over the process.

"The initiative is led by Alibaba, which effectively makes it a monopoly as of now," said Abhineet Kaul, a director at Frost & Sullivan's Asia Pacific public sector and government practice. "More private players need to be encouraged to provide similar services to ensure that there is sufficient competition in the market."

That concern mirrors international worries around the Belt and Road initiative, which is widely seen as an attempt by China to construct a massive, multi-national zone of economic and political influence that has Beijing at its center. Last month, Chinese media reported that Beijing intends to arbitrate trade disputes with other countries through a set of new courts that are subservient to its ruling Chinese Communist Party.

Belt and Road not economically viable: analyst
Belt and Road not economically viable: analyst

When it comes to the digital push in Malaysia, Alibaba denies excessive control over the program.

A spokesperson told CNBC that no company is blocked from participating in the eWTP: "This platform is open to any company willing to similarly make their own investment of money and resources to develop the necessary infrastructure, and embrace a public-private partnership model to foster more cross-border trade in Malaysia and elsewhere."

Malaysia's minister of Communications and Multimedia, Datuk Seri Salleh Said Keruak, said he hopes other e-commerce interests will eventually participate.

"Alibaba was the natural private-sector partner to establish and kick-start this project, but we are engaged in discussions with several other ecosystem players as well and — in due course — our vision is to see more eCommerce players coming on board as partners to make the most of the DFTZ," he said.

Tough competition, digital differences

Another concern is that Malaysian firms may find themselves facing stiff competition from Chinese firms — many of which are supported by the government in Beijing.

"The e-service platform is open to more Chinese (small and medium-sized firms) from China," which means Malaysian vendors will face tougher competition, noted Chan Xin Ying, a Malaysia research analyst at Singapore's Nanyang Technological University.

Satish Raguchandran, founder of Russell Taylors, a firm that imports and re-brands kitchen appliances from China, for sale in Malaysia, expressed similar fears.

What is Alibaba?
What is Alibaba?

Companies that compete mostly on price will certainly be hit, said Kaul. But he said that any subsequent reduction in revenue or jobs would be compensated by greater business opportunities for the more efficient companies.

In response, Alibaba said the eWTP remains "open, transparent and inclusive," adding that the program "is not favorable to small businesses of one country over another."

Malaysia's government also listed several local companies that have seen revenue increase since the DFTZ went live in November.

Another potential area of difficulty for Malaysian entrepreneurs could be their country's relatively nascent digital development.

Kuala Lumpur is behind Beijing in terms of high-skilled labor and innovative practices, Chan noted. "In order to close the gap between Beijing's technology, it will cost a lot in terms of both finance and time."

But Alibaba argued that companies in Malaysia have other, built-in advantages, and the company wants to help them boost exports.

"Malaysian firms have many natural advantages including language and education to enable them be highly competitive globally," according to an Alibaba spokesperson. "Our role is to provide tools and training to help more Malaysian (small and medium-sized companies) get online and access global export markets."

Concern over Chinese investment

The DFTZ is just one example of Malaysia's participation in Belt and Road. Prime Minister Najib Razak has agreed to several rail projects and a deep-sea port that could see his country rival Singapore as a transshipment hub.

The Muslim-majority nation was the fourth most attractive destination for Chinese overseas direct investment in 2017, according to the Economist Intelligence Unit. Najib, whose international image has been tainted by investigations into an alleged multi-billion dollar corruption scandal, has warmed up to Xi's government in recent years.

Analysts agree that it's important for Najib to boost the economy ahead of general elections this year, but they warned of consequences that accompany closer Chinese ties.

"There are anecdotal complaints from Malaysian (companies) that (Chinese) companies procure almost everything from China, sidelining local firms," Wan Saiful Wan Jan, visiting senior fellow at Singaporean think tank ISEAS-Yusof Ishak Institute, said in a 2017 report.

He drew parallels to Zambia, Ghana and Nigeria, where Chinese state-owned companies rely on Chinese manpower and materials, shutting out locals from jobs. "Are there sufficient steps to ensure that not all funds flow out from Malaysia to (Beijing), bypassing local players?"

The issue is particularly sensitive given the long history of tensions between ethnic Chinese and Malay populations within Malaysia. Minister Salleh Said Keruak told CNBC that anti-China sentiment "has become a hallmark of the opposition's latest political smears against the government."

Malaysia is due to hold a general election before August, and tensions are fraught between the incumbent Najib and former prime minister Mahathir bin Mohamad, the opposing candidate.