An Exciting Age for Penang’s Manufacturing Sector

By Lee Kah Choon

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LAST YEAR, Penang celebrated its 50 years of manufacturing excellence, significantly in the Electronics & Electrical (E&E) sector. While there are many other industries Penang is known for, such as tin smelting, steel making, food production and medical devices, among others, it is the E&E industry that Penang is well known for, not only nationally but globally.

Today, about 38% of Malaysia’s total exports is made up of E&E products, of which about 60% is from Penang; 78% of Malaysia’s external trade surplus is contributed by E&E exports, 70% of which is contributed by Penang, in turn.

In 2021, 76% of Malaysia’s total Foreign Direct Investment (FDI) was in the E&E sector, with 49% of this investment landing in Penang.

Globally, Malaysia has a 13% market share in chip testing and packaging, most of these done in Penang.

While the above are impressive achievements for the second smallest state in Malaysia (in terms of land area) with a population of 1.8 million, those who participated in the 50th celebration of industrialisation in Penang are in agreement that a charted course is still needed for Penang to go beyond its current successes.

With the current global landscape, Penang is well positioned to contribute towards the exciting growth of the global E&E industry. The East versus West technological competition has provided Penang with a golden opportunity to be a neutral supply hub for both competitors.

The US and its allies have embargoed high-tech equipment and chips to the Chinese block. Consequently, there has been a massive relocation of western companies operating in China and Russia into US-friendly countries. This relocation process also includes companies within “possible conflict red zones”, such as Taiwan, Hong Kong, Korea and Japan.

And so, the “friend shoring” process begins.

Penang, being a friendly location and with its mature E&E ecosystem, has become a natural choice for companies looking for a new home.

The E&E Industry

Our manufacturing excellence is gravitated towards the back end of the E&E supply chain, mainly in assembly and testing. Penang’s future lies in expanding its established space towards the front end of the supply chain, mainly in the integrated circuit (IC) design segment, where it has the necessary talents.

Additionally, Penang has shown its capabilities in providing automation solutions to the manufacturing industry too.

The Medtech Industry

Asia, including India, has emerged as the fastest growing region for medtech, prompting Tier 1 players to establish manufacturing sites in the region. With a five-year CAGR of 6.8%, the Asian market is estimated to reach USD147bil by 2027.

In tandem with the global expansion, Penang’s exports in professional, scientific and controlling instruments and apparatus (including medical devices) are on an upward trend, contributing about 65% of Malaysia’s total from 2017 to 2021. Consequently, Penang has garnered RM7bil in approved manufacturing investments in scientific and measuring equipment (including medical devices) from 2017 to 2021, representing 70% of the country’s total.

Penang also has the highest concentration of medtech companies in Southeast Asia and is proud to be home to six of the global top 30 medical device companies by sales. Over the years, it has matured as a medical devices ecosystem, supported by established local companies.

Apart from the availability of the matured E&E supply chain as well as the technical know-how in E&E production, both of which the medtech industry can ride on, medtech here is expanding at a time traditional global medtech bases in Puerto Rico, Costa Rica and Ireland are faced with human resource and capacity challenges. Furthermore, the expanding middle class and the aging population in Asia which demand better health care are also opening up new markets in this part of the world.

The Global Business Solutions (GBS) Industry

As the business model of multinational companies changes towards consolidation of their backroom services, they find that the multicultural/multilingual human resources available in Penang is a boon for their global operations. Penang’s well-placed time zone to support global operations is a further advantage to these companies.

In line with the changing global business models, Penang has also witnessed a surge in research and development; design and development centres are being set up on its shores to leverage on local talents.

All said, this golden opportunity has a very tight window and presents Penang with challenges too. What it needs now are talents, talents and more talents. In order to sustain its economic and industrial growth, Penang needs at least 150,000 new talents in the next five years.

For this to happen, multi-pronged strategies, involving all stakeholders such as industrialists, educationists, institutes of higher learning and government agencies, need to be initiated urgently. A tech-driven educational system beginning from the primary level has to be implemented immediately.

Malaysia also needs to ride on the talents of others. A national comprehensive talent attraction programme, attracting international talent with certain skillsets (such as software engineering) as well as more prominent policies to retain engineering talents are also important to create a healthy and sustainable talent pipeline.

To attract more knowledge workers to the state, Penang has undertaken a few initiatives, such as internship programmes to entice knowledge workers from neighbouring states. In line with this, the state should consider allowing them access to the affordable housing scheme it has undertaken. In fact, most government incentives to attract investment have to be reviewed to accord with current needs.

Grants and tax exemptions should be given to industries to incentivise and nurture investments that produce tangible intellectual properties in contrast to capital investment-centric incentives that may be low in intellectual property generation.

Malaysia and Penang are ready for technological disruptions; with nearly 40% and 60%, respectively, of their total exports made up of E&E products, they are deeply enmeshed in the E&E industry. Overcoming present challenges to the sector in order to take advantage of present conditions is the wisest way for them to thrive.

Lee Kah Choon

is Special Investment Advisor to the Chief Minister of Penang and a Director of InvestPenang. He is also a Distinguished Adjunct Researcher at Penang Institute.