From the "Far Eastern Economic Review"


All Wired Up
State-of-the-art technology, skilled workers and a savvy government keep Penang humming

By Simon Elegant/PENANG
Issue cover-dated July 6, 2000

PENANG IS BOOMING, and it has got the Asian Crisis to thank for the good times. Enticed by Malaysia's cheap ringgit, many of the multinationals whose electronics factories form the backbone of the island state's economy are pouring money into upgrading their technology, a process that looks set to ensure the industry's continued vibrant good health for several years to come. The state government expects the electronics industry to grow 10.5% this year.

Penang has been the centre of Malaysia's electronics industry since a range of incentives to attract multinationals to the island was enacted in the 1970s. Currently 148 foreign companies have facilities there, producing everything from consumer electronics to computer disk drives to semiconductors. Electronics products comprise the bulk of the state's manufacturing output, which, in turn, contributes 43% of the state's GDP.

Chief Minister Koh Tsu Koon, a former academic, says Penang's current good fortune is a direct result of the Asian Crisis and Malaysia's decision to peg the ringgit at 3.80 to the U.S. dollar in September 1998. "The ringgit peg gave us a breathing space and we made use of that to upgrade technology and skills, so hopefully when we move to a different peg our competitive position will have improved," he says.

Indeed, several multinationals were considering leaving Penang for cheaper alternatives such as China before the recession hit, says Subramaniam Pillay, who teaches economics at Penang's Science University of Malaysia and has worked closely with local electronics makers. Instead they stayed, and in a big way. Commitments of foreign direct investment in Penang rose dramatically in 1999, jumping nearly 80% from a year earlier to 4.8 billion ringgit ($1.25 billion). The bulk of the money--all but 220 million ringgit--was reinvestment by existing companies, usually undertaking precisely the kind of technological upgrading that put the industry on its current roll.

Naturally, there's a flip side to this bright picture. Analysts say the lack of new companies setting up shop in Penang is a clear warning sign that the state government must redouble its efforts to help manufacturers--both foreign and local--move up the value chain by constantly upgrading their technology and workers' skills. "Why aren't new investors coming?" asks Subramaniam. "The ringgit is pegged artificially low, the workforce is just as competitive as ever and there's no pressure on wages, so why aren't they coming? In the longer term, that's worrying."

To say that Koh is keenly aware of the problem would be an understatement: Both friends and foes say he practically lives and breathes the electronics industry, meeting executives several times a week and aggressively lobbying the central government on their behalf. That approach certainly seems to be a hit with the multinationals. The Penang authorities "really understand what we need," says S.H. Wang, managing director of Intel's huge facility in the state.

What's that kind of understanding worth? In Intel's case $2.8 billion. That's how much the company has spent in the past two-and-a-half years upgrading its Penang facility, which employs 8,000 people and covers 75 hectares. Wang ticks off a laundry list of areas that have been improved: automation, motherboard design, test-tooling development, failure analysis. The facility's failure analysis is now so advanced that even some problems from the United States, Intel's home market, are sent to Penang for resolution. And even some nontechnology functions are being expanded: Marketing and distribution planning for new products in the Asia-Pacific region is now being undertaken in Penang, Wang says.

Intel is by no means alone. Over at lighting manufacturer Osram, the company's avuncular managing director, Yap Peng Hooi, is showing a visitor a piece of new technology that he says will be an earnings mainstay in coming years.

It doesn't look like much, a small black box with a three-inch screen reminiscent of the green headache-makers prevalent in the earliest days of computers. But the polymer technology underlying the flashing green screen is a leap forward that will significantly reduce the energy used by screens on mobile phones, says Yap. And that will allow a much longer battery life, a key selling point. Yap says that Osram, a subsidiary of German electronics giant Siemens, is currently tooling up a factory to produce the screens, which he expects will account for a quarter of Osram's earnings within three to four years, pulling in around $190 million annually.

Some companies do leave Penang, of course, but recent numbers have been low and the companies that have left have been largely from the lower-tech, labour-intensive end of the scale. The only major recent casualty has been Applied Magnetics, a U.S. maker of disk drives, which laid off 1,200 workers earlier this year. But not only have most of those workers found other jobs but also the closure of Applied Magnetics' factories was almost entirely because of a global oversupply of disk drives, says Subramaniam.


At almost the same time as Applied Magnetics was announcing its shutdown, Quantum Corp., another U.S. company, said it was moving its entire manufacturing line of digital linear tape, a computer memory device, to Penang. Announcing the move, a company official said the superior skills of Penang workers had been a key element in the decision, which is expected to generate some 5.4 billion ringgit in revenues over the next three years.

A similarly hopeful pointer to Penang's continued prosperity is the case of Komag, a U.S. company that makes thin-film disks, the part of a computer disk drive that actually stores digital information. Earlier this year, the company announced that in a move to cut costs, it was shifting its worldwide production to Penang.

While the emphasis for now is on production in Penang, Komag's director of Asia operations, Tan Thaim Seng, says the company is also hoping to develop its capacity to do fundamental research and development there. The biggest problem for the moment is that "there aren't a lot of people doing postgraduate research work in Penang. It's not something that's readily available. We hope to do something within three to five years with our own people. We need to build a base."

The need for a pool of highly skilled workers to help Penang make the next leap forward is one that is echoed by other executives. "Right now it's not a problem," says Intel's Wang. "But I think if we continue to grow at the current pace, getting engineers, software engineers, could be an issue down the road." Wang adds that Intel has advertised around the world for qualified Malaysians, especially those with postgraduate degrees in engineering. "We are trying to upgrade ourselves and go to the next level," he says. "We could do it with our current people but we're trying to skip a level."

Chief Minister Koh says that staying ahead of the competition is also the greatest challenge facing Penang. It will mean helping companies move into research and development, including software and the Internet. "The transition to software is happening and will continue to pick up its tempo," Koh says. "Eventually, my aim is for Penang to be the next MSC," or Multimedia Super Corridor, Prime Minister Mahathir Mohamad's ambitious attempt to clone Silicon Valley outside the capital, Kuala Lumpur. That won't happen for at least another five years, Koh says, adding that even then Penang will complement the MSC rather than compete with it for investors.