News Article

Malaysia’s ‘Silicon Valley’ surging thanks to trade war

Years after having resisted exerting pressure to move to China, Lee Hung Lung said his bet paid off. Sales at his Hotayi Electronic from Malaysia are on the rise, more staff are recruited, extended and ordered.

Lee is the founder and CEO of Hotayi, which produces and assembles circuit boards and other electronic products at two factories. The plants were situated on the coast of Penang, once known as the “Silicon Valley of the East” because of its 47-year-old industry in the energy and electronics business (E&E), before it lost its shine in China.

There came the trade war between the two biggest economies in the world, largely driving US businesses to seek factories outside China to avoid ransom tariffs and to contribute to a rebirth of Penang, adopting the expression “a decade of sleepiness” as defined by the fund manager.

Penang is only one of the countries in Asia vying for new locations and lower tariffs in supply chains.

Nevertheless, the two industrial areas have the value of a long-standing operator and consumer network in one location and cheaper labor than local rivals in Singapore. The two areas were linked to the Malacca Strait by a 24-km bridge.

The other reason for Penang is that many of Malaysia’s semiconductor and other electronic products do not face US tariffs, unlike China’s 25% limit.

In June Hotayi opened the second plant, five times the first at 350,000 sq ft. During a tour this month, staff checked devices for consumers such as Samsung, LG and Sharp.

“In 2007, I was under big pressure even from my leadership because China was cheaper than Malaysia-up to 30 per cent in labour costs,” said Lee, born in Taiwan, taking his striped white-fabric suit off as he sat on an interview in a conference room while smelling the paint.

“I then chose to go for more intelligent, which means more spending on IT, technology. Today Hotayi is becoming more, more and more high,” he said.

INTEL’S FIRST FOREIGN PLAN

Foreign direct investment into Penang soared 11 times to about $2 billion in the first half of this year-much more than it gained in any other full year.’ We have a trade war which is why consumers are moving their entire production lines back to China.’ The government expects that the second half is as solid, but it has declined to quantify the jobs created.

Malaysia said it would provide fiscal incentives in its next year’s federal budget, which was presented on Friday, to further promote high value-added business in its E&E industry.

The factories in Penang are developing US firms such as chip maker Micron Technology and iPhone distributor Jabil Inc. The state is desperately liberating more land to make room for new crops, including through reclamation, “said its highest elected official Chief Minister Chow Kon Yeow.

In 1972, when Intel established its first foreign manufacturing plant, Penang fired at the light of day. Many other major American companies such as Broadcom, Dell and Motorola preceded Intel.

Nonetheless, spending remained largely stagnant for over a decade at the beginning of 2005, government data indicate, as China tempted out businesses. Intel opened a plant at a Malaysian distributor in the Chinese city of Chengdu that same year.

“Penang became more of a sleepy town after that,” said Geoffrey Ng, head of strategic investments at Fortress Capital, a Malaysian asset management agency.

“It’s almost like a new revival for Penang. Penang is beginning to see a second wave of acquisitions after so many years of having lost its shine to China.” Micron has allocated RM1.5billion (USD358 million) to invest in Malaysia over the next five years this year. Hotayi, who has invested RM1 billion for its new plant, may invest another RM1 billion on increasing its capacity over the next year or two, said Goh Guek Eng, Managing Director.

Sales will increase to US$ 100 million this year by up to 40%, highest ever compared with a 20% average growth. Nonetheless, she added that a labor shortage that recently forced Hotayi to decline an order could hinder Malaysia’s growth in E&E.

QUICK TRANSFER

Qdos, which offers versatile printed circuits for companies such as Hotayi, among other companies in the Penang region, plans to benefit from the trade war only in the coming year, as consumers, who cut stock calls, place new orders.

Globetronics Technology, which left China in 2011, as the cost of production increased and concentrated on its decades-old Malaysian business, has announced this year that its sensor devices have earned more than 10% of their market share and are increasing production capacity.

Chief Executive Heng Huck Lee said several prospective customers of the group “mainly looking at a fast transition and start up by leasing ready facility and moving some of their current mature activities to Malaysia”

Pentamaster, a Malaysian producer of plant automation systems, said last year it finished its second Penang production facility and now expands its first plant floor space by another 10 to 15 million. He said he was looking to sell more to China because some businesses are not allowed to buy any high tech equipment from the US.

Malaysia’s E&E expenditures grew by 0.7% year-on-year to RM247.6 billion, while total exports dropped by 0.4% to RM650.8 billion. Over recent months, sales of computers from other countries such as South Korea and Singapore have collapsed.

“We feel Malaysia’s relative strength as a move up the electronics value chain,” said Prakash Sakpal, ING Asian economist. “And if so, the outperformance will persist even if recent momentum wears off in an ongoing global downturn.”

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