The winning formula: Why investors choose Penang

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The impressive flow of foreign investments into Penang in recent times tells us undeniably that the state has things going for it. Most notably, it seems able to compete well for investments that do not feel comfortable being in China. Multinational corporations (MNCs) today are known to implement a “China + One” strategy, putting money into a secondary site to offset the disadvantages China suffers from. Penang benefits from this. But not all is going well. Among Malaysia’s major weaknesses is the lack of soft skills, and the culprit is more often than not, identified as the education system.

TO A FIRST-TIME VISITOR Penang can feel like it’s stuck in a time warp, caught between its colonial trading past and electronic manufacturing heydays; sandwiched between upper-tier cosmopolitan cities like Singapore and Shanghai and aspiring wannabes such as Phnom Penh and Ho Chi Minh City. According to the experts, the middle ground is a bad place to be – middleincome, middle-of-the-road, midlife crisis… The middle is not a destination but a pit-stop on the way to a high-income society, to moving up the value-chain and other aspirations. Or it can be the turning point for the journey downwards.

Penang may have established one of Asia’s first Free Trade Zones (FTZs) but now it has noisy neighbours muscling in, offering more manufacturing bang for less bucks. When it comes to brain power, Penang doesn’t even have the juice to meet the juggernauts of Singapore, China and India head on. Is it game over for the little island that could?

According to figures released by the Malaysian International Development Agency (Mida), Penang attracted the highest amount of investments in Malaysia in 2010. For the very first time, Penang led the pack, accounting for RM12bil or 26% of the total investment in Malaysia. While the numbers alone certainly stand out, these should not be taken in isolation (see article on p16).

To understand how Penang has consistently attracted substantial investment for four decades, PEM chats with industry figures to see what attracted them to Penang in the first place, why they’ve continued to reinvest and if Penang’s island mentality is its biggest asset or its greatest encumbrance.

Perhaps, the middle isn’t necessarily a bad place to be.

The FASTRON Group is an “old-timer” in Penang, setting down roots in the ftz in 1976 when it was still swampland. From Penang, FASTRON expanded across Asia and the EU and currently manufactures inductors for the lighting, automotive lighting and medical devices industries.

Getting started in Penang

FASTRON’s founder and group president Datuk Gabor Faskerty first heard about Penang in the late 1960s and flew to Asia on a fact-finding tour that included South Korea, Singapore, Hong Kong and Taiwan. “At that time Singapore wasn’t interested in consumer electronic manufacturing, they were already thinking about hightechnology products. I was told to forget about investing in Malaysia because the country was at least 10 years behind.”

Undeterred, Faskerty set up Nordemende operations in Penang – assembling TVs and radios – in 1974, encouraged by the large pool of local labour; four years later he formed FASTRON which supplied inductors for consumer electronics. “In the early days, the Penang Development Corporation (PDC) was always there to help us problem-solve, Tun Dr Lim Chong Eu and Datuk Seri Chet Singh’s office doors were always open for us.

“In those days even making a phone call to Europe meant a visit to the telecoms office in George Town (at least a 45-minute drive from Bayan Lepas) because we couldn’t call direct from the factory. The time difference posed a real problem as Germany was six hours behind. If we made a call and the person wasn’t in, we’d have to go back later and try again. It could take days just to get hold of someone!

“ The challenge is to continue Penang’s momentum and not to live on past successes now that all the old fellows of my generation have left the PDC.”

“It was a different life then; even flights to Europe usually involved two transits. I think the biggest miracle in Malaysia was to build Penang’s FTZ with very few professionals. Even today the ratio of engineers to population in Malaysia is very low compared to developed nations.” (According to figures taken from Penang Economic Outlook 2011, the ratio of engineers to population in Malaysia is 1:312; this contrasts sharply with 1:45 and 1:82 for Japan and Germany respectively.)

Penang’s advantages

Times have definitely changed since the pioneering 1970s and gone are the days when Penang’s growth was largely driven by unskilled labour-intensive manufacturing.

FASTRON’s managing director, Felix Faskerty observed, “It is so hard to recruit skilled and semi-skilled labour here now. I’m so surprised that there are still companies investing here because of the labour issue.”

However, Felix noted that the cost of doing business in Penang is still competitive given the slower rate of wage development. “We did a comparison of FASTRON worker salaries over a 30-year period, and found that on average salaries have increased ten times in Penang, compared to China where salaries have increased ten-fold in only five years. Having said that, China’s sudden increases may not be sustainable, unlike Penang’s experience.”

Faskerty emphasised, “The business environment in Penang is still very attractive when you consider that there is so much global volatility everywhere. We opened a factory in Shanghai in 2002 and four years later we decided to close the plant down after experiencing Chinese business conditions and the working environment. We discovered the hard way that it was better to close down the China plant and get our Chinese customers to buy our ‘Made in Penang’ products instead.

“Even transporting our machinery from Penang to China was so difficult and involved so much red tape. In the end we just shipped it all back, it was a very wise decision, we saved a lot of money.”

Challenges facing Penang

“The shortage of operators is especially worrying. I think if there were no foreign workers, the whole of the Bayan Lepas FTZ couldn’t function. I find that locals just aren’t interested in working in the factories anymore. Even at the higher end of the scale it is hard to recruit engineers, especially as we are the only inductor manufacturer in Penang. So often when we find staff we have to train them to bring them up to the level we need them at,” explained Felix.

Looking ahead, Felix expressed his concern at the current push to create a highincome society in Malaysia. “This can create all sorts of problems especially if there isn’t a corresponding increase in productivity. At the moment many people are simply comparing salaries globally but they are not looking at the actual costs of living. By developed world standards salaries in Penang may seem low, but the cost of living is also low and the quality of life reasonably high.

“It is still important to offer semi-skilled or unskilled work for people with no or low qualifications. An MNC might have a headcount of 5,000 employees, out of this perhaps only 10% are engineers. Automation can only do so much, real physical labour is still needed in manufacturing. This is life, even in high-income economies in Europe. It’s impossible to only have skilled labour in any nation. Does this mean that Penang gets stuck in low tech assembly? Of course not, manufacturing always becomes more technologically advanced, this evolution is an automatic process.”

Improving Penang

“It’s all about the litt le things. Take the example of the Penang International Airport,” said Felix, “did you know that one can only pay for a taxi in cash? Imagine how frustrating this is for international visitors who arrive late at night and can’t find the cash points. These little inconveniences make the difference between being a truly international city and aspiring to be one.”

Faskerty was more contemplative, “The challenge is to continue Penang’s momentum and not to live on past successes now that all the old fellows of my generation have left the PDC.”

Below: A production facility in the 1970s.

Datuk Faskerty with the late Tun Dr Lim Chong Eu.

Ledzworld Technology Sdn Bhd is a relative newcomer to Penang and was established at the end of 2008. Billed as the technology company behind the big brand led manufacturers, Ledzworld’s retrofit replacement lamps are used by professional users in a variety of applications — hotel and retail chains, office buildings, public buildings, airports and universities. Currently, all of Ledzworld’s R&D and manufacturing is done in Penang.

Moving to Penang

Unlike many companies that moved their manufacturing from Penang to China in search of cheaper labour costs, Ledzworld took the diametric route. Ledzworld’s chief marketing officer, Jan Kemeling explained, “There were three main issues we had with the Chinese way of doing business, the first is that they were always very cost-oriented and would always try to squeeze the last cent out of every product. With a new technology, or a non-mature technology when you don’t even know yet how you should make the best product, it is never wise to stinge on costs before having established quality levels. It’s all about the product’s quality and performance. The Chinese didn’t have the right mentality for the situation that we were in.”

Kemeling also cited China’s lack of Intellectual Property (IP) protection as a serious issue, especially as Ledzworld’s potential Chinese vendors “had no problem sharing our technology with other people or using it themselves in their own products. In the end, we would have become a training institute for Chinese lamp manufacturers!” The final straw was more critical and underlined how China’s reputation as a manufacturing hub has taken a serious dent. “At the point our customers started to have serious worries about quality issues related to China-made LEDs, we knew it would not be the right decision to start manufacturing in China. I wouldn’t say that we were in favour of relocating to Penang, but it became very apparent that we had to give up our idea of manufacturing in China if we wanted to be successful,” he stressed.

Penang’s advantages

Ledzworld looked around for opportunities in South-East Asia and eventually narrowed it down to Penang. “The existence of a mature semiconductor industry was a draw. My business partners and chief engineers came from OSRAM Opto, Philips Lumileds, Agilent, Sony, Motorola, HP, etc. so they had a good network in place, which meant that we could put together a team fairly quickly. In a sense we were lucky when we moved to Penang in 2008 during the economic downturn, as lots of very skilled engineers with years of experience were looking for jobs. Ledzworld was able to build a whole knowledge base, a whole skill base and supply chain from scratch in a short timeframe.”

Kemeling observed that the “island mentality” of his Penangite staff helped him to sleep easier at night. “Penangites who live and work here are very attached to their hometown, they’re happy with the way of life here and you can’t even get them to relocate to Kuala Lumpur. It’s like the Bridge doesn’t exist and they can’t leave the island! Compared to China, it’s easier to retain people here, which helps Ledzworld to achieve consistency and stability.

“In China when you employ an engineer you are 100% sure that in a year he won’t work for you any-more. In China every good, capable guy wants to start his own business and there are so many opportunities in China, there is such a shortage of skilled people so they tend to move all the time.”

Has Penang lived up to expectations?

Three years down the line and Kemeling feels reasonably satisfied with Ledzworld’s progress in Penang. “The Mida personnel we initially dealt with were a lot more professional than bureaucrats used to be when I lived here 20 years ago. They were also more know-ledgeable and helpful, so it was clear to us that these people really valued the arrival of a new technology business. Importantly, there are no other lamp makers in Penang or Malaysia making the type of lamps that we make.

Ledzworld’s CTA bulb, which won an award at the Lightfair International Innovation Awards in 2010.

“Penang is a very pleasant environment for expatriates, for their families, it’s an easy-going place. Ledzworld’s success depends on whether these people are going to be happy living here; other Asian cities by contrast are very hectic and expensive. But there have been several times in the past year where we’ve asked ourselves if we still want to be here.

“A major frustration is the lack of soft skills among our local engineers. If you have a top engineer from the US you can send him all over the world to make presentations, he can talk to anybody anywhere. Local engineers are not world-class engineers in that sense, we can’t send them out to the US to settle a design or manufacturing issue, it just won’t work. It’s got to a point where Ledzworld’s top management has to handle most of the communications with international tech companies. I don’t blame the staff , I blame the education system.”

A failure of Malaysian education and a need for a shift in mindsets

Kemeling was keen to elaborate, “The top management team continuously struggles with the education that people seem to receive here in Malaysia, it’s just not sufficient. There are definitely certain technical skills that are really good, but it is hard to find open, innovative minds; the initiative that you would expect from a guy with matching qualifications and work experience in the US is just not here. I’m not convinced that students learn how to debate or learn how to be creative at local universities. In particular, the level of English is extremely poor.”

The observation that the Malaysian education system has not succeeded in turning out industry-ready graduates is not a new one, and the lack of communications skills creates an obvious stumbling block. “Our business is a global business and just because we are based in Penang doesn’t mean we can get away with a Penang att itude. Our engineers need to talk to engineers in Japan, Silicon Valley and Europe to get something done together. If we really want to grow the technology industry in Penang the place needs to undergo a whole mindset change to internationalise. Technology isn’t local anymore, it’s global,” said Kemeling.

Sentinext Therapeutics Sdn Bhd is one of a handful of biotech companies based in Penang. The organisation is currently developing a vaccine against ev71 (enterovirus 71) which causes annual epidemics of Hand Foot and Mouth disease and neurological disease. Sentinext was founded by virologist Dr Mary Jane Cardosa who is at the forefront of research in Dengue Fever, Japanese encephalitis and ev71.

All of Sentinext’s preclinical stage r&d is done in Penang.

Why Penang?

Developing a vaccine company based in Malaysia had been chief scientific officer Dr Mary Jane Cardosa’s long-time goal for practical and personal reasons.

“Establishing Sentinext and sustaining such an ambitious project will give credibility to the notion that Malaysians can address our own health problems and find our own solutions, rather than wait for somebody else to do it. Sentinext wants to fill a gap by providing solutions for diseases that US/EU organisations are not interested in, so it makes sense for all the research to be done locally right where the diseases are found. That’s where we assume that we will have local expertise and knowledge that we would not find elsewhere.”

Before settling in Penang, Cardosa and her team considered Kuala Lumpur, the Klang Valley and Sarawak. “There were several considerations that were important if we planned to be a big international company able to attract talent from anywhere in the world. We needed to have the company located in a cosmopolitan city that isn’t too big or too small; that has international schools, good amenities, good food - it’s true! A place where the quality of life is not impaired by traffic jams. Penang ticked all the boxes,” she said.

“Having access to Universiti Sains Malaysia (USM) was very important for Sentinext. USM is very industry-friendly and our labs are located within USM. This is a very big plus as we have access to the library, shared specialist services such as waste disposal, etc. From an operational point of view, it’s allowed us to get started almost immediately without having to deal with the nitty-gritty,” Cardosa elaborated.

Challenges

All of Sentinext’s preclinical stage research & development (R&D) is done in Penang and Cardosa admits that recruiting the right workforce was a challenge. “We believe that we need to build local capacity in R&D but there’s a big difference between the basic discovery or preclinical R&D and the development. When people say R&D they are very loose about it; there’s a big, big gap between the basic R and the D. We have realised that there is very little capacity for the D part of the work in the country and in the region for that matter.

“Finding the right ‘hands’ is a challenge, never mind finding ‘brains’! We have all these people seeking paper qualifications that have very little value in terms of real knowledge, experience and application. Our government’s policy in so-called human capital development, pushing people to more paper qualifications is rubbish. What we need now is good training for technicians and technologists.”

Cardosa is pragmatic though, “When you come first, you always have the problem of path-finding. We’re starting to look overseas for the additional skill sets that we need now, including experienced vaccinologists and clinical trialists. As I mentioned earlier, Penang’s a nice place to live and work for expatriates so this shouldn’t be an issue.”

Can Penang attract more biotech firms?

Dr Mary Jane Cardosa.

Although a specially designated 149.7ha Penang Science Park (formerly known as the Penang Biotech Park) was launched on the mainland in 2006 to attract new biotech investments to the state, Cardosa preferred the island’s charms. “I think Penang is still a good location as far as quality of life is concerned. If the government continues to support the few biotech firms that have invested here we will eventually develop a critical mass.”

She warned that establishing Penang as a biotech hub may require a completely different approach from the tried and tested formula used to attract the Electrical & Electronics (E&E) industry to the state in the 1970s. “The E&E industry in Penang started with manufacturing, but biotech is not like that at all”, she stressed.

“Federal and state governments try to use this approach by putting contract manufacturing organisations (CMOs) in place and hoping that they can build an entire supply chain around these. But there needs to be a product that comes out of it. Part of the problem with biotech in this country is that they haven’t understood that there is plenty of R&D that goes before manufacturing and related services. It’s not as simple as just setting up a manufacturing plant. What are we going to manufacture? It’s a chicken and egg situation, we have very little capability for integration and coordination in this country.”

Mini-Circuits is a global leader in wireless components used on land, air and in outer space, including WiMax, CATV, cellular wireless, RFID, medical equipment, test equipment, receivers, transmitters and satellite applications. Since the organisation began operations in Penang in 2000, it has invested over rm350mil in the state.

Why Penang?

Chairman and president of Mini-Circuits Technologies (Malaysia) Sdn Bhd, Datuk Seri Kelvin Kiew was brutally honest when he talked about Penang’s appeal as an investment destination. “From a business perspective whatever benefits I can find in Penang I can find elsewhere. It’s personal reasons that keep me here; I’m a Penang boy, I studied in Penang, I’ve benefited from Penang and I want to give something back to my hometown. Besides I made a promise to my mother when I left for the US that I would return to Penang.”

Kiew felt that the state and federal governments’ continuous courting of international investment didn’t bode well for future prospects. “There’s too little help for local SMEs and far too much emphasis on helping the MNCs. In this respect, I hate the fact that Penang is being used like a prostitute. If you look at indus-trialised Asian nations, you will see that they became successful because of local companies and not because of foreign investment. We should not be too dependent on foreign companies, one day they’ll eventually leave,” he added.

Education — the weakest link

Over the years Penang’s traditional labour intensive manufactu-ring has slowly given way to technologically intensive manufacturing, creating a new challenge for employers to find graduates who are job-ready. This phenomenon is not limited to Penang. The nationwide figure for unemployed graduates as of 2009 is estimated at just over 80,000.

Kiew observed that “Mini-Circuits’ US, China and EU graduates are very wellprepared for the real world, Malaysians are not. This is a failing of our education system that continuously lowers the bar so that everyone passes with distinction. It takes a smart local graduate at least a year to get up to speed with us, for an average graduate it can take between four and five years. That long!”

 

“ One of the products we’ve developed here in Penang that I’m most proud of is an amplifier which is used by major wireless communication companies and the New York subway to track its trains. The ‘YSF’ initials on the products are my mother’s initials.” — Datuk Seri Kelvin Kiew

Looking ahead

Despite the obvious frustrations, Kiew still believes that there are positives to draw on. “There is plenty of innovative spirit here, but the important thing is to integrate these ideas with good business sense. I play my part as a non-official advisor to local tech companies, I give each of them about 10 hours of my time every month and even conduct classes for their people. I want to do it because it’s my passion and also because I want Penang to do well.”

Although local graduates may not be as job-ready as their international counterparts it hasn’t stopped Mini-Circuits in Penang from registering nearly 50 patents over the last two years, something Kiew is particularly proud of. “It’s important to develop IP locally because it adds credence to Penang’s ability. There is a number of Penang-based SMEs that have good patents, great products that are recognised internationally. Yet it makes me sad that they are not recognised locally.”

He noted, “I’m happy to be involved in the upcoming SME Village initiative which is supported by the Penang state government. The Village will act as an incubator centre where tenants share services, it also makes it easier for potential investors to visit and recognise Penang’s capabilities. It’s long overdue. It is all about large local companies helping the small players. It’s my hope that SMEs in Penang will be more proactive in helping local SMEs.”

St Jude Medical arrived in Penang in 2009 with an initial investment of over US$50mil. This is expected to be ramped up to US$300mil over the next five years. Its 28,000 sq m facility began manufacturing pacemakers and leads in January 2011. The report card to date? “So far, so good.

Why Penang?

St Jude Medical.

At the time of the interview, the St Jude Medical building in Bayan Lepas was having its facade spruced up in preparation for the facility’s grand opening on March 8, 2011. Managing director Torbjorn Andersson and his team have had a busy past year getting the place up and running.

“There were multiple reasons for coming to Penang,” said Andersson, “The Asian market is growing quickly and we wanted to have a footprint somewhere in Asia. Penang and Malaysia are industry-friendly and very pro-business and we’ve had great support. At the end of the day, we looked very closely at competence and the calibre of the people, and when we compared Penang to other possible locations we believed that we could find good people here.”

The existence of Penang’s mature semiconductor industry was definitely a pull for St Jude. “There are some similarities and workers are familiar with clean room procedures. We are very pleased with the workers we have hired, so far around 150 people out of 20,000 applications. We’re not intending to bring in foreign semiskilled labour, we would like to be ‘local’ for as long as we possibly can. We put a lot of time and money into training people, so if foreign workers are here for only two years, it’s a waste. Our training period is reasonably long as well, it can take as long as two to three months before we even let the operators begin work on the floor.”



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