PENANG, Malaysia (Reuters) - Only the paranoid will survive.
That's the advice Craig Barrett, chief executive of chip maker Intel Corp, gave Penang when he visited the Malaysian island living in fear that low-cost China is taking away its vital high-tech industry.
His message -- to be hyper-sensitive to the industry's needs or face losing jobs to other countries -- was painfully clear to officials and workers of Malaysia's technology manufacturing hub.
Penang has lost 30,000 jobs since 2000, one in six of a workforce now reduced to 150,000. Four-fifths of the jobs lost were in the high-tech sector.
Many of the positions appear to be going to China, where manufacturing workers earn just two-fifths of the wages paid to their Malaysian counterparts.
It is a troubling development for Malaysia because manufacturing of electronics and electrical goods accounts for about a fifth of gross domestic product and half of the country's exports.
But Penang state Chief Minister Koh Tsu Koon insists the worst is over and the island is rising to the challenge, moving up the value chain into research and development to compensate for the loss of jobs in manufacturing.
"There has been a tendency to overreact, to be overly pessimistic," Koh told Reuters last month in his office overlooking the Bayan Lepas industrial zone, home to some of the largest overseas plants of top electronics companies such as Intel, Hitachi Ltd and Advanced Micro Devices Inc.
Try telling that to employees of Agilent Technology Inc who lost their jobs four months ago, when the U.S. test equipment maker axed around 90 workers.
"This is the worst ever experienced by Penang," said a 45-year-old woman thrown out of work after 10 years with Agilent. "We have not been able to pull out of the slump and now companies are moving to China."
Contract electronics maker Solectron Corp said in May it was laying off 180 staff at its Penang unit, while Malaysian manufacturer Unico Holdings Bhd cut half of its 1,600 workforce after Intel, the world's largest computer processor maker, switched to China for cheaper computer motherboards.
Penang has wooed the electronics industry for four decades in a mightily successful drive to diversify a local economy founded on tourism and a duty-free port.
In 1972, Koh's predecessor, Lim Chong Eu, launched the Penang free trade zone, a designated industrial area which offered a host of fiscal incentives including tax and rent holidays to attract multinationals.
But the power of China, with its low costs and potentially vast internal market, is sucking away employers.
A human resources manager at a Japanese plant on Penang said manufacturing workers were paid an average $1.50 per hour. An employee doing a similar job in China earned about $0.60 per hour, while an American counterpart could get about $12.
China displaced the United States last year as the top destination for foreign direct investment and shows no sign of slowing. In the first half of 2003, it attracted $30.3 billion, while Malaysia got just $2.3 billion.
In July, the Malaysian American Electronics Industry sounded a warning that foreign capital investments from U.S. companies could drop to 1.5 billion ringgit ($395 million) this year, from 1.6 billion in 2002 and 2.3 billion in 2001.
Barrett said Malaysia had to educate and train its workforce better.
"Malaysia is making the migration from what I would have called an initially manufacturing site to more value-add, more innovation for R&D," he told Reuters last month.
Data from the World Bank showed Malaysia had 154 R&D engineers and scientists per million people, compared with China's 354 per million.
Barrett was in Penang to open a $40 million design center at the Intel plant, in a rare boost for the island. But tellingly, his next stop was China, where he unveiled plans to build a $375 million assembly and test plant in Chengdu.
Analysts said tax breaks and incentives aimed at getting companies in Penang to switch to higher-margin production may not work quickly enough to mitigate the loss of investments at the lower-end of the chain.
Nikolai Dobberstein, at consultants McKinsey & Co in Kuala Lumpur, said every country in the world was competing with money to lure foreign investment.
"It's a starting point but it's not enough. What one has to really think through is what is the value proposition for a company to have operations here," Dobberstein added.
Chief Minister Koh admitted he had been in despair.
"If you asked me last year, yes, that was the general mood. But this year, it's a different story," he said.
Koh said some of the big names in Penang were starting to think in terms of upgrading or expanding and, significantly, they wanted more space for R&D.
He pledged greater efforts to market Malaysia's advantages of political stability, advanced laws and an educated workforce.
"It is true we are not moving up the technology ladder fast enough, especially the local large- and medium-sized firms," Koh said. "But we have more than a good fighting chance if we continue to fight smart.
"There is no point engaging in a head-on collision course with China by pursuing price wars. Investors look at other considerations besides lower direct labor costs."