Alive but not well: The state of Penang’s SMEs

Penang is caught in a new industrial climate that requires that it draws on its impressive past to meet global challenges. There is no reason why our SMEs cannot keep up with the innovations that MNCs are making, if governments and other actors stay focused.

By Yoon Chon Leong

Plenty has been written about Malaysia being locked inside the so called middle income trap. The view is that the country is too expensive to effectively compete with low cost countries and lacks sufficient technological sophistication to beat competitors from more developed economies. The often prescribed answer is for Malaysia to innovate itself out of this situation. The problem with such high level advice – although absolutely correct – means little to the people who have to do the actual innovating.

High technology came to Penang over 40 years ago and over time, Penang’s business culture has gradually transformed itself from doing trading to one that is heavily influenced by technology and science. The popular perception is that while Penang has significantly benefited from technology- intensive foreign domestic investments (FDIs), not enough spirit of innovation came with it. While Penang continues to manufacture high technology products, the creativity and skills necessary to develop these products further remained elusively off shore.

Is this perception true or is it just that – a perception? While such analysis can never be fully conclusive, it is well worth the time to put what we know about the industry and the culture into sharper perspective, and hopefully provide some insights on what needs to be done to improve our chances of really innovating ourselves out of this trap.

Defining innovation
According to Albert Einstein, an innovator is a person who can effectively conduct “combinatorial play”. What this means is that such a person is capable of juggling many pieces of knowledge and technologies and combining them in ways that will effectively solve a problem. This is an interesting definition that holds a significance for how we design learning systems for the future.

The ability to innovate should not be construed to apply only to research and development (R&D) and hence technical excellence. Innovation can occur in many settings, from all aspects of work and life. For example, the ability for an industrialist to collaborate with a vendor to supply a bundled solution should be considered an effective innovation as it strives to improve the value of the bundled product beyond the sum of both products individually.

A brief history of innovation
1970—1980
This was a time when industry was driven by direct availability of trainable manual labour. The semiconductor industry at this time was still in its infancy. As a result of the high labour input in the manufacturing processes, the quality of the products was marginal at best. Process engineers were challenged to figure out ways to take the errors out of the production processes in an environment where workers were the ones responsible for most of these mistakes. Fortunately at that time, there was a working level supplier base of machine shops (sometimes backyard ones) that together with process engineers were able find solutions to these problems (i.e. developing jigs and fixtures to remove operator-dependent errors from various processes). Innovation flourished as a result of this win-win relationship between local small and medium enterprises (SMEs) and the multinational corporations (MNCs).

1980—2000
During this period, a new set of ideas about good manufacturing was injected into industry as a result of the quality revolution started by Dr Deming and adopted first in Japan. Industry in Penang embraced these new ideas and started incorporating them in its manufacturing processes. This was a time when there was a unique opportunity to differentiate Penang’s value from those of more developed countries through quality.

Jigs and fixtures started morphing into automation. This meant that there was a need to integrate mechanisms and electronics to simple tooling. The field of electro-mechanics became the rage. Many professionals from MNCs started to leave their jobs to start up or participate in companies delivering this value. To the MNCs, automation was, and still is the solution to a very wide variety of quality problems associated with the manufacturing process. Hence this development was strongly supported via orders and innovative funding.

The combination of the opportunity to excel, a ready market and a cluster of complementary competencies provided the platform needed for further innovations to happen.

Process automation provided the opportunities to learn, adapt and install world class quality systems into production processes and help put Penang’s manufacturing prowess on the world map. Normally, when people go for training, what they take home is seldom put into practice. It takes more time, effort and sequential innovation to turn theory into practice than people think. However, this time around, the situation was unique. Almost everything learned – statistical quality control (SQC), quality control circle (QCC) and total productive maintenance (TPM) – were worked on and adapted to the local environment.

The growing recognition of Penang as place where quality was embraced played a big factor in helping to further the spirit of innovation. This was a time when industrial innovation was at its peak in Penang.

2000—2010
This decade demonstrated two major trends. One was the shift of the MNCs to a more global manufacturing outsourcing model. These companies started to worry about overdependence on single source models and began to develop multi-partner arrangements located at different regions of the world. The rapid adoption of global information technology (IT) systems made it much easier to operate such operational models. In addition, sourcing started to take on a more globalised nature. Economy of scale and virtual organisations became the new buzz words. This in turn created great growth opportunities especially for local automation companies as they became the suppliers of choice for expansion into the various countries.

This in turn created new challenges for the companies that now had to seek new ways to extend their reach both in marketing and in providing excellent after-sales service. The industry now had to work on creating a compelling brand for their products as their new customers were no longer located in close proximity to them.

Some companies succeeded in securing customer loyalty, but many failed and lost orders to foreign competitors. The industry was faced for the first time with an innovation challenge that was no longer based on technical excellence alone, but also, on the innovation of a profitable global value chain. Industry, with the exception of a few organisations, failed to innovate itself out of these challenges. However, the real impact of this was not fully felt until the 2000s, due to the lack of viable competitors at the initial stages.

By 2005, foreign competitors in the automation industry had become very significant. These had developed sufficient capabilities to duplicate Malaysian machines, and in some cases come up with better versions at lower prices. Listing the large local companies operating in the Penang area would show that the majority of them had been in existence for some time and very few new electronics automation equipment companies were established in the last 10 years.

This flat-lining of new company formations indicated a serious problem for industry, considering that Malaysia was once among the top countries in the world which developed and manufactured these products.