Trends within the Malaysian electronics industry

The Malaysian electronics industry accounts for around 56.0 percent of the country’s manufacturing exports and is the leading industrial sector in terms of investment, industrial output and employment. Although dominated by the component and computer segments, the year 2005 witnessed the consumer electronics sector increase in importance and the country is now a key export orientated production base for consumer goods. Factors contributing to the industry’s growth included an increase in the usage of the Internet and demand for mobile and wireless devices.

Malaysian-American Electronics Industry (MAEI), whose members include Motorola, Dell and Intel and which accounts for nearly a third of Malaysia’s electronics exports trimmed their capital investment in Malaysia in 2005, though the spending on design and development increased by over 70.0 percent in 2005.

As one of the leading exporters of electronics in the world, Malaysia markets electronics components, consumer electronics and industrial electronics. The biggest export item is semiconductor devices used in a diverse range of industries, such as automotive and telecommunications. The semiconductor industry in Malaysia is now moving towards backward integration into silicon ingot growing, cutting and polishing of silicon wafers, chip design and wafer fabrication. Currently, three companies are producing silicon wafers, one of which also has the intention to manufacture silicon ingots.

Malaysia’s electrical products comprise of household appliances, wires and cables, electrical industrial equipment, dry cells and batteries and other electrical apparatus and supplies.


Regional comparison
The rapid growth of the electronics sector, boosted by the increasing percentage of electronic components in manufactured goods, has raised the profile of the industrial structures of many East Asian economies. The electronics sector accounts for
an increasing proportion of foreign direct manufacturing investment flows in East Asia, which provides low-cost production sites, adaptable workers and increasing technological proficiency.

The ratio of electronics exports to total exports in East Asia has been rising steadily over time which reflects the country’s extensive sourcing of components from regional economies and the trade-creating nature of electronics investment. In particular, electronics exports account for more than one-third of total exports for Singapore, Taiwan and Malaysia.

Southeast Asian countries including Indonesia and Malaysia have launched marketing campaigns designed to attract investors and electronics manufacturers. Both these countries are portraying themselves as low-cost, hassle-free alternatives to China. Greater respect for intellectual property, lower language barriers and labor costs are key selling points for Malaysia and Indonesia.

Much of Indonesia’s electronics manufacturing comes from companies based in Singapore seeking to avoid high labor and land costs in the city-state. Malaysia’s electronics push is spearheaded by its largest foundry, SilTerra Malaysia Sdn Bhd. The company is believed to have competitive pricing and quality that match or surpass what China’s foundries offer. It is expected that Vietnam will also emerge as a player in high-tech markets.

Malaysia’s engineering supporting industries, which include the mould and die industry, machining industry, metal stamping industry, casting industry, heat treatment industry and plating/surface treatment industry, have developed rapidly over the last three decades in tandem with the overall growth of the country’s manufacturing sector.

Significant developments have taken place in the manufacturing of parts for the electrical and electronics, automotive and construction sectors. Now, there is an increasing trend towards diversification into the manufacture of major components and finished equipment for both the domestic and export markets.


Looking ahead
The competitive advantage of Malaysian electronics industry has shifted from low-wage, labor intensive manufacturing activities organized by foreign based multinational companies to low-cost, rapid ramp-up, high-volume, increasing automated manufacturing activities with special capabilities in assembly, testing and packaging of semiconductors and hard-disk drives.

Malaysia also has a rapidly growing electronics manufacturing services (EMS) industry which is expected to boost the country’s electronics production further. The global EMS market in 2004 was about RM 342 billion ($91.69 billion) and is expected to increase to RM 547.2 billion ($146.7 billion) by 2007. The EMS industry in the Asia-Pacific region is forecast to grow at 20.0 percent per annum and the presence of many EMS companies in Malaysia will surely see the growth in the electronics industry in 2006 and 2007. This will in turn increase opportunities for the local supporting industries.

Consumer electronics is the “hottest” sub-sector in the Malaysian electronics industry. This sub-sector includes the manufacture of color TV sets, audio visual products, VCD players, DVD players, home theaters and video and digital cameras. It also provides opportunities for the local small and medium companies to become vendors in supplying parts, components and services to the MNCs. The capital investment in this subsector for the period 2000 till 2004amounted to RM 2.8 billion (US$0.75 billion). The rapid growth expected in the global consumer electronics market will result in the consumer electronics sub-sector remain the “hottest” one in the Malaysian manufacturing sector.


Conclusion
The manufacturing sector is expected to continue leading economic activity although expansion will be at a slower pace on weakening demand in the global semiconductor market. Malaysia’s budget proposals for 2006 contain incentives and funding that will encourage the growth of the high-tech sector and boost Malaysia’s appeal as an investment destination.

The budget for 2006 addressed key needs of the MNCs in the electronics industry which include Advanced Micro Devices, Dell, Intel and Motorola. The government has taken a large step forward in the betterment of the electronics industry by allocating about one-fifth of the budget, or RM 29 billion ($7.6 billion), to education and increasing funding for trade and technology institutes, noting many companies were currently forced to import many of their knowledge workers.

Malaysia needs to move up the value chain to design and development and this growth needs to be supported by government decisions. The country also needs to develop all the competencies needed to develop their own resources.

www.frost.com