The Critical Role of Domestic Enterprises in Penang’s Industrialisation
By Lee Siu MingAugust 2022 FEATURE
This article is extracted from Founder's Grit, published by Penang Institute and Digital Penang.
PENANG BEGAN ITS industrial journey amid a challenging economic backdrop in the late 1960s; in 1967, the free port status of this trade-dependent entrepot was revoked, badly affecting the local economy and a small network of trading firms. Macroeconomic indicators showed that by the end of the 1960s, unemployment was above 9% (not including underemployment) and per capita income was 12% below the national average.
Under the leadership of Tun Dr Lim Chong Eu, Penang pioneered the establishment of a Free Trade Zone through the gazettement of the Free Trade Zone Act in 1971 by the federal government. Bayan Lepas FTZ opened in August 1972, and was the first FTZ to be established in Malaysia. It is located close to the Penang airport, allowing smooth logistics management for electronics shipment to key export destinations.
Many studies have documented the State’s success in attracting foreign direct investments (FDI) from eight pioneering companies into Bayan Lepas FTZ. These eight companies, known as the Eight Pioneers, are National Semiconductor, Advanced Micro Devices (AMD), Intel, ams OSRAM, Hewlett-Packard, Robert Bosch, Hitachi and Clarion. However, not many elaborate that these eight companies are still present in Penang today, in one form or another. This is a testament that many companies that invest in Penang have a long-term, sustainable relationship with the State, and continue to prosper here.
The second FTZ was established in Perai in 1980. This was mainly for heavy industries and was to serve seaborne industries with connections to the rail lines. Subsequently, the Bayan Lepas FTZ was extended in three further phases. With the Free Zone Act 1990, Malaysia’s FTZ evolved into a Free Industrial Zone (FIZ). For premises not located in the free zones specifically, manufacturing companies which export at least 80% of their production are qualified to apply for a licensed manufacturing warehouse (LMW) status, licensed under Section 65/65A of the Customs Act 1967, and are directly controlled by the Royal Malaysian Customs as a facility provided to export-oriented firms. Thus, new companies that have their premises outside of FTZs and FIZs now mostly apply for LMW status to enjoy most benefits applicable to the companies in those zones.
Growth of supporting companies
In the 1970s and 1980s, as Penang focused its industrialisation journey with the entrance of companies in the electrical and electronics (E&E) industry, many supporting companies emerged to meet the supply chain demands of the major firms. The textile and garments industry also flourished in Penang during this period. The industries in Penang during the early period of industrialisation were mainly labour-intensive and characterised as low-skilled. Industries began automating in the 1980s, and by the mid-1980s, Penang had become home to a network of MNCs and local supporting companies.
Stamped metal components, automation equipment, gigs and fixtures, machine tools and moulded rubber products (Athukorala, 2014; Rasiah, 2002) were among the supporting industries that spurred Penang. This period marked the major setting up and growth of SMEs in Penang’s industrialisation. While at the beginning many were foreign SMEs, domestic SMEs subsequently formed and took part in the MNC-SME partnerships. It should be noted that some of the foreign SMEs continue to develop in Penang and have also set the foundation for the entrance of subsequent MNCs from their home countries.
Notably, FDIs by MNCs catalysed the emergence of many successful local entrepreneurs and firms. Knowledge and technical skills transfer processes were crucial for such developments. Some of the local firms established by ex-employees of MNCs are LKT Engineering, Globetronics, Shinca, Shintel and Unico (by Intel ex-employees), and Loshita and BCM Electronics (by Motorola ex-employees). In most (if not all) cases, the former employers of the new entrepreneurs become the first customer of the new ventures. Unico Holdings, Eng Teknologi and Globetronics Technology are among the companies that exhibited such a relationship in the early formation years (United Nations Conference on Trade and Development (UNCTAD), 2011).
According to Rasiah (2002), the machine tool industry depended considerably on spillovers from purchasing firms, technology transfer from foreign firms and imports as well as domestically developed technologies, and experienced rapid growth from the early 1980s. MNCs became the output purchasers and technology suppliers to local firms.
The growth of local firms advanced with the strengthened relationship with other MNCs. As illustrated in the case of Globetronics, the company’s first customer was Intel, which outsourced a component of its manufacturing system to Globetronics. Globetronics scaled its capabilities and with proven records of success, it subsequently managed to secure deals from major MNCs such as AMD, Agilent, STM, CREE, Epson, Toshiba and Spansion (UNCTAD, 2011). As of 2019, Globetronics has formed at least 15 years of partnership with CREE.
Undeniably, the Penang state government and Penang Development Corporation (PDC) played a vital role in the development of the productive and absorptive capacity of local firms and also encouraged MNCs-SMEs linkages. This is especially seen in the initiatives taken to stimulate export-oriented processing, assembly and testing activities (Rasiah, 2002; Athukorala, 2014). Vendor development programmes and localisation promotion by the government and agencies such as PDC also helped to facilitate the growth of local firms. Companies such as Eng Teknologi, LKT Engineering (Lim 1991; Lai 1995; Athukorala 2011), Polytool, Rapid Synergy, Metfab, Prodelcon, Choon Engineering and Globetronics (UNCTAD, 2006) benefitted from vendor development programmes launched by Intel and other major MNCs.
Even today, state and federal agencies continue to work on technical collaboration programmes and MNC suppliers’ day programmes to get more domestic firms to be MNCs’ approved suppliers. Over the years, as local employees hold key positions in MNCs, procurement from local companies also increased. (The ability of local firms to meet necessary demands remains a necessary factor).
In the 1990s, Penang focused on capital, skill and technology, and intensified linkages between supporting SMEs and MNCs. Plastics and chemicals sectors joined the industrial strength in the early 1990s. In addition to supplying to MNC partners, some Penang firms became suppliers to other high-tech firms, operating both domestically and overseas. Linkages of MNCs with local ancillary factories strengthened over time with the deepening of technology, improved local firms’ quality and reliability, rising transportation costs and exchange rate volatility.
Another clear example of the dynamic relationship between the state government, industry members comprising the MNCs and domestic firms and academics is the setting up of Penang Skills Development Centre (PSDC). Formed in 1989, PSDC is the first tripartite, industry-led skills training and education centre in the country, providing a supply of skilled workforce to the industry. The three parties provided the essential aspects required for the setting up of PSDC: the State through PDC provided the infrastructure at a nominal rental rate, while expertise came from the industry and academia. Members of PSDC include MNCs and local firms (LLCs and SMEs), and over the years a huge pool of skilled talent in the industry has come from PSDC. Located in the middle of Bayan Lepas, PSDC is able to grasp the needs of the industry and at the same time contribute to bridging the gaps between skills demand and supply. Over the years, the federal government has also supported PSDC in many ways including through the contribution of machines, equipment, hardware and software to increase the relevancy of skills of knowledge in the fast-evolving industry. Opening the same access to training and skills development to employees regardless of MNCs or SMEs, big or small firms allow for a higher velocity of knowledge absorption among firms.
Strengthened ecosystem and industrial diversification
Today, over 300 MNCs and over 3,000 supporting SMEs have made Penang their investment and operations destination of choice. Penang has strengthened its position as a regional automated test equipment (ATE) and automation hub. In particular, domestic firms thrive in the manufacturing of E&E equipment for back-end processes, outsourced semiconductor assembly and test (OSAT) services and electronics manufacturing services (EMS). From the supply chain view, local companies are involved in emerging trends and technologies including in the supply chain of 5G, automotive electronics, renewable energy, power devices, front-end semiconductor equipment and medical. Key players include Inari Amertron, Vitrox, Globetronics, Pentamaster, Elsoft Research, Greatech, UWC, Mi Equipment, Nationgate, Qdos Flexcircuits, Walta Engineering, Aemulus and Foundpac Group.
Besides that, local design and design test firms formed a new wave of clusters of local firms gaining traction in the higher value segment of the E&E industry value chain. These firms include Experior, Oppstar Technology, Skyechip and Infinecs. Similar to what took place in the 1980s and 1990s, these companies were founded by former employees of major Penang MNCs who now mostly service their previous employers and other MNCs and LLCs in the industry.
The network cohesion between MNCs and local firms is fortified as the industries in Penang progress and move up the value chain. An example of the linkages between MNCs and local firms can be illustrated by Broadcom’s statement during the opening of their Global Distribution Warehouse in Penang in 2017. Some of Broadcom’s Penang partners include Inari Technology, Aemulus, Exis Tech and Experior Technology. These local companies also outsource and engage with other local partners such as Vitrox and Mi Technovation.
With its cumulative industrial experience, the state has also diversified into other promising sectors such as medical devices, LED, avionics, halal and food manufacturing. In the medical devices industry, Penang has built its niche in the sub-segments of orthopaedic and cardiovascular with the participation of key local firms such as Straits Orthopaedics, CCB Medical and Allen Healthcare Products.
In the LED segment, as of 2018, Malaysia is the second largest exporter of the product under Harmonised System (HS) 854140, achieving an export value of USD4.5bil, and with a significant contribution from companies in Penang. This is an excellent record, given that Malaysia was the 10th largest exporter of the product with a value of USD745mil in 2008 (Table 1). Another illustration of MNCs-SMEs collaboration in Penang is in Gallium Nitride on Gallium Nitride or GaN on GaN (GoG) LED technology transfer programme. OSRAM is the MNC in this project working with local firms – Penchem Technologies, Inari Amertron and ItraMAS – with Collaborative Research in Engineering, Science and Technology Centre (CREST) as the facilitator. Local universities were also involved in the knowledge transfer programme.
Many Penang companies have grown beyond just operating in Penang or Malaysia. Penang-headquartered companies have expanded into China, Taiwan, Korea and The Philippines. In an analysis of companies in Forbes Asia 200 Best Under A Billion companies in the period of 2011 to 2020, Penang-headquartered companies have consistently grabbed spots in the list since 2013. Eventually, most of these companies have "graduated" from the list as they have grown beyond the billion-dollar mark (Table 2).
Central to the investment, evolution of industries and growth of clusters and firms in Penang, job creation is paramount in the economic and social development of Penang. From over 9% unemployment in 1970, Penang’s unemployment has dropped to around 2% in 2020. As described earlier, jobs have transformed from labour-intensive to become more automated. More advanced skills are required with greater requirement for knowledge-based scientific and research workers. Figure 1 shows the upgrading that took place in Penang’s job creation and approved capital investment from 1980 to 2019. Approved investment per job created has increased to over RM892,000 in 2019 from RM31,756 in 1980, showing that more high-value industries investments (and re-investments) have progressed over the years in Penang. However, without more granular data, it is not possible to identify different uses of capital expenditure to assess further specifics of investments’ impact on job creation.
In the services sector of the economy, other than the traditionally entrenched strength in tourism, Penang has also displayed robustness as a regional hub of Global Business Services (GBS) where the State has attracted more than 60 companies. The emergence of Penang as a GBS hub is not by accident. It stems from Penang’s cumulative industrial experience and expansion of manufacturing firms’ branches to include back office activities. More than 12,000 jobs in the GBS industry have been created in Penang. Over the year, the GBS industry in the state has also moved up the value chain into the activities of analytics, consulting, design and engineering services.
Understanding that the State cannot rely on past laurels, the State continues to encourage local SME development via a three-pronged approach, namely through Small Medium Enterprise Advisory and Training Centre (SMART Centre), Penang SME Centre and SMI Villages. SMART Centre provides advisory and training services for the purpose of capacity building of local SMEs. The Penang SME Centre located strategically in the middle of Bayan Lepas Industrial Park provides subsidised rental for office and manufacturing space for budding local SMEs while SMI Village within industrial parks allows larger SMEs to be located adjacent to MNCs and LLCs for synergistic operations and manufacturing linkages.
In recent years, the state also promoted additional linkages via clustering of strategic industries. For example, the Penang Automation Cluster (PAC) was formed by three LLCs (Vitrox, Pentamaster and Walta Engineering) in 2017, acting as locomotive companies together with the support of the state government to enhance the capacity and capabilities of local SMEs. According to PAC, the project aims to build and manage the local supply chain ecosystem on advanced, innovative and cost-effective engineering of sheet metal fabrication, tooling, machining and metal finishing services, uplifting the local SME capabilities to world-class standard as well.
Penang’s success did not come by accident nor did the former free port sail through smoothly on its industrialisation journey. Local firms worked hard to meet international standards as suppliers for parts and components in the supply chain, and over the decades, many became industry leaders in respective segments, forming part of the global value chain.
Lee Siu Ming is Senior Analyst at Penang Institute. This chapter is extracted from his chapter in Founders’ Grit. Inspiring Life of Stories of Enginnering & Technology Entrepreneurs in Penang. (Edited by Tony Yeoh, written by Marcus Dip Silas. Penang Institute. 2021.)
Lee Siu Ming
is a senior analyst at Penang Institute, and believes in the Latin phrase Audi alteram partem, loosely translated as “Listen to the other side".