Malaysia’s Link with Electronics
The uproar over the dramatic decline in Malaysian FDI for 2009 over the last few days has prompted me to pen this article to explain a major reason behind the fall in our 2009 FDI, and what we can do to reposition ourselves for rapid recovery.
Our love affair with electronics began in the early 1970s when Craig Barrett of Intel, who was scouting for a suitable location for his factory outside of US, landed in Penang. Dr (Tun) Lim Chong Eu, then Chief Minister of Penang, heard that he was coming and gave immediate instructions that the roads from Georgetown to Bayan Lepas be tarred by the following day, ahead of Barrett’s site visit.
Sure enough, the very next day the roads were all ready, as workers toiled all night for the site inspection. So impressed was the CEO of Intel to the responsiveness of the government, that he agreed without hesitation that Penang would be his first factory outside of US.
The rest, as they say, is history.
Very quickly, American electronics companies like Texas Instruments, Motorola, Seagate, Western Digital followed suit. The Germans like Osram and Siemens joined the fray, followed later by other Japanese giants like Panasonic and Matsushita.
The presence of these MNCs boosted jobs in Penang as well as the rest of the country, which was having very high unemployment rates of about 30% at that time. Malaysia was just recovering from the racial riots 1969; thus job creation was the top priority.
Regionally, Asia was also poor and unstable.
Thailand was encountering military coups. China was still recovering from the abuses of the Cultural Revolution. Vietnam was at war. Burma, Laos, and Cambodia were all nations plagued with internal conflicts. Both Indonesia and Philippines were still under dictatorships. The region was in a delicate situation.
Intel Penang remained its sole factory outside of US for nearly 30 years until the emergence of China and Eastern Europe. Malaysian electronics companies, like Unisem, LKT and MPI, supporting the MNCs also flourished.
Hundreds of other SMEs supplying uniforms, catering, packaging, logistics, transport, as well as numerous other professional engineering, financial and computing services have also benefitted from the billions spent in the economy.
Very soon, Malaysia became the number one semiconductor outsourcing and manufacturing hub in the world.
So successful was Malaysia that even Singapore initially trailed the Penang model.
Being a foot-loose industry, the electronics sector could be built up anywhere in the world with the necessary infrastructure.
But Malaysia, beginning with its initial lucky start in 1972, continued to remain the first choice of the electronics players (until late 1990s), because we remained hungry, tuned in to the needs of the industry, adjusted to the changing electronics waves’ needs and provided the needed incentives to attract them.
As shown in Diagram 1, in the 1970s with the lucky break of Intel coming to Penang, we became known and soon became the ideal base for electronics labour-intensive assembly activities because of our then comparatively good infrastructure.
In the 1980s, we attracted the Japanese and Korean MNCs (Matsushita at one time had more than ten plants) in a big way, and Malaysia became the major exporter of E&E equipment (e.g. air-conditioners, fans, and TVs). This was achieved through our very successful export-orientation drive, under which we provided generous tax incentives to the FDIs (which were soon replicated by other nations).
The 1990s was a period of electronics boom. Personal Computers (PC) and first generation hand-phones became the fads, generating a huge demand for PC products such as disc drives, hard discs, computer ROMs and RAMs and hand-phone circuit boards.
Because we remained hungry and kept our ears to the ground we anticipated the beginning of this new wave. In 1988, (Tun) Dr Mahathir, then Prime Minister, announced the removal of all Bumiputera and local equity conditions for FDI coming in (for export operations) in New York. Companies such as Dell, Motorola, and the Taiwanese Acer invested in us in a big way, and soon we became a major exporter of PC components and Motorola hand-phones.
By 2000 as shown in Diagram 2, the country’s total export value expanded to RM337 billion with Electrical and Electronics (E&E) products contributing up to RM 230 billion, or 68.2% of total exports!
Missing the Electronics Linkage since 2000
In late 1990s, we anticipated and even prepared for the next new wave of boom through the creation of the Multi-Media Super Corridor (MSC) in 1996 and later Cyberjaya.
However the 1997 financial crisis required Malaysia to impose capital controls. This protected the survival of the existing electronics firms in the country through the fixed low exchange rate that kept our E&E products competitive, however this discouraged the inflow of FDIs in the new wave electronics activities.
Further the MSC also imposed many locational requirements on potential investors, which further hindered their coming in.
Inadvertently, we let success got into us, became overconfident, and did not follow up on the many suggestions and requests of the world’s electronics leaders such as Bill Gates and Stan Shih who attended our International Advisor’s Conferences at Cyberjaya hosted by the government.
In the meantime, countries such as China, Singapore, Taiwan and Korea (which recovered faster than Malaysia from the crisis) replicated our plans and became the main beneficiaries of the internet and smart-phone booms over the first decade of the new century.
As shown in Diagram 1, over the period 2000-2010, Malaysia was essentially de-linked from the new wave of electronics boom as the E&E companies in Malaysia did not established significant linkages to new technological products such as iPod, iPhone and Blackberry. By 2009, although the country’s total export increased to RM 553 billion, that of E&E products remained essentially stagnant at RM 246 billion, forming only 44.5% of total exports (see Diagram 2).
In particular, as shown in Diagram 3, the years 2008 and 2009 were actually the end of the last electronics cycle down-turn, with an over 30% reduction in the spending of all major semiconductor sub-sectors in 2008 and an over 40% decline in 2009.
This huge reductions in semiconductor spending over 2008-09 severely affected FDI inflow into Malaysia in 2009 (since our industrial base is still electronics-dominated), and is a major reason accounting for the low inflow of only US$ 1.381 billion in FDI into the country for the year.
China, in particular, since 2000 introduced new incentives in the form of grants and cheap land and quickly emerged as the base for the design and manufacture of the Apple iPods, iPhones, and now the iPads; and is also rapidly emerging as the major centre of photovoltaics manufacture. Taiwan, of course, became a major exporter of laptops and accessories, while Korea emerged to be the world’s top player in LCDs and flat-screen TVs. Singapore also participated actively in and benefitted from the new bio-medical technology wave with many new FDIs in the area of electronics bio-medical technology.
What can we do to Recover?
It has been widely forecasted (see Diagram 3) that 2010 will be the beginning of a new up-turn in the electronics cycle. Gartner Inc. of Stamford, Connecticut has estimated that spending in all the major semiconductor sub-sectors will increase by over 70% in 2010 alone! This uptrend will continue beyond 2012, with annual increases in spending of about 20%.
Interview with many of the electronics firms operating in Malaysia indicate that they are also experiencing significant improvements in theirs’ export orders for 2010.
Many of them are planning to open new operating lines, and are urgently seeking approvals from the relevant agencies to bring in thousands of required skilled workers and hundreds of skilled engineers. Their applications have so far been met with slow response from the immigration department.
The government should intervene urgently and allowed these firms to bring in the necessary workers (skilled and unskilled) for a limited time frame so that we can immediately ride on the new up-turn in the electronics cycle. This will help to improve our investment environment and generate new FDIs.
Besides capturing on the up-turn in the electronics cycle, we should also quickly steer our policies and incentives towards attracting more electronics investment in the new growth areas of solar energy, tablet computers, smart-phones, iPads, as well as solid state lighting (LEDs) and medical bio-technologies.
MIDA should engage the major players in this area (especially the Cupertino-based Apple) and convince them that what China can offer we can do better.
In a nutshell, we have to recapture the spirits of our pioneering hungry days of the early 1970s. We have to go the extra mile to offer investors terms better than our competitors so that they can set up bases here.
SunPower of San Jose is already building a US$ 700 million solar panel manufacturing plant in Malacca in my constituency of Alor Gajah, and B. Braun Melsungen from Germany is planning a US$ 600 million medical manufacturing plant in Penang.
But these are only small catches in the wide spectrum of new wave electronics investment.
As shown in Diagram 4, the iPhone global market will expand from 33.8 million units in 2010 to 80 million units by 2012, a more than two-fold increase over the next two years. Similarly the global tablet computer market will grow from 12.9 million units in 2010 to 50.4 million units by 2012, an almost four-fold increase over the next two years!
We have to offer incentives (in the form of grants and venture capital, as well as allowing the unlimited inflow of skilled workers, engineers, and scientists) so that we can integrate Malaysia into the supply-chain of Apple, Google, Microsoft, as well as the major solar energy (SunPower and Pasadena’s eSolar) and bio-technology (such as San Diego’s Scripps Research Institute and the Salk Institute) manufacturers; just like the days of the early 1990s when Motorola was world’s dominant hand-phone supplier and their phones were designed and manufactured in Malaysia.
Going forward, MIDA will have to remain alert; alert to the next waves of emerging industries in electronics, bio and nano-technology.
While we try to diversify away from electronics to other areas such as oil and gas, petro-chemicals and new materials, we must not forget that our industrial root is in electronics.
We have spent the last 40 years building up a large electronics base, with many local semiconductor manufacturers, as well as numerous SMEs which have achieved world recognition.
The sector has become our golden goose. The goose is now breathing slowing. We have to resuscitate it so that Malaysia can continue to progress rapidly.
We should send special teams of Malaysian scientists and engineers out to the South California Oakland-San Diego axis along Route 101, as well as to the Boston and Seattle areas to act as our early informants on the new emerging electronics trends. Nano, electronics, solar and bio-tech products that will come out in the market 3 years from now are already being tested and discussed in the R&D centers in these areas. By being familiar with them we can then design incentives to attract these relevant manufacturers to Malaysia.
By keeping our ears to the ground, by being open and liberal to the needs of the new-wave entrepreneurs, and by not forgetting our electronics roots (but instead foster and encourage the growth of these roots), we would be able to reconnect ourselves to the new trends in the electronics industry and ride the new up-turn of the coming wave.
Then we could see a new revival in our FDI figures, hopefully in the not too distant future.
//End.
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