Dow Jones Newswires -- December 10, 1997
Review/Malaysia: Penang State Keeps Its Edge, For Now
By Murray Hiebert
PENANG, Malaysia (AP-Dow Jones)--In late September, when most of Southeast Asia was being clobbered by financial turmoil, U.S. electronics giant Hewlett-Packard (HWP), or HP, trumpeted plans to invest an additional 1 billion ringgit in its operations in Penang state.
Had HP missed the news of the region's economic meltdown? Far from it. But what it saw in Penang, an island off Malaysia's northwest coast, it didn't see anywhere else: competitive costs, experienced workers, proximity to high-quality suppliers and widespread use of English, reports the latest edition of the Far Eastern Economic Review published Thursday.
Confident in that mix, HP decided to expand its facilities on the island to produce microwave modules, a key component in wireless telecommunications. 'We thought Penang gave us the best value,' says HP's Malaysia chief, Tan Bian Ee. 'It has a very pro-business environment.'
HP was among the first wave of hi-tech manufacturers to come to Penang in the early 1970s, attracted by its cheap labor and tax incentives for foreign investors. That winning formula has changed little since: The island's prosperity is still based on attracting leading multinationals to make telecoms and computer parts for export.
With the rest of the region braced for a hangover after a binge of unproductive investment, Penang now hopes its strengths will shine even more brightly, encouraging more multinationals to trigger a new cycle of growth.
Even Penang's problems, such as its labor shortage, are the problems of success. (Indeed, they seem oddly out of place in a country that has just announced harsh measures to deal with its financial woes). While companies elsewhere are contemplating lay-offs, Penang's hi-tech industrial estates are hungry for workers to meet the needs of its expanding electronics factories. And there's no sign yet that Penang risks losing its most prized investors to competing production sites such as China.
In recent months, Intel (INTC) and Motorola (MOT), both of which have had factories in Penang since the 1970s, have announced plans to establish regional distribution centers on the island. On top of that, Intel says it will spend another 1.4 billion ringgit next year to expand plants on Penang and in Kulim, an industrial park nearby on the Malaysian mainland.
Other companies have announced similar moves: Komag (KMAG), a U.S. producer of thin-film media used in computer disk drives, said in October it was adding research and development facilities to its Penang factory. Komag has invested more than 1.2 billion ringgit in its Penang and other Malaysian operations since 1993. When its current plans are completed, Malaysia will account for 75% of Komag's worldwide production.
And in April, Packard Bell-NEC opened its Asia-Pacific computer-assembly and distribution centre in Penang, which it chose over Singapore. Among the reasons for the decision, says Vice-President Lim Huat Seng, were that land costs 30 to 50 times more in neighboring Singapore, and that Malaysia has more suppliers of parts such as disk drives, keyboards and monitors.
While some measures of investment have slowed this year from the stellar pace of 1996, one category - additional investment by companies that already have plants in Penang - was sizzling even before the recent announcements. It reached 1.7 billion ringgit in the first half of the year.
The sharp devaluation of the ringgit makes Penang even more attractive for multinationals. The Malaysian currency has fallen more than 40% since July, pushing down the U.S.-dollar cost of salaries and locally produced parts. Multinationals say components make up about 85% of their costs, labor about 15%. Most of these companies receive dollars for their exports, and likewise pay dollars for their imports. Local inputs, though, are now about 40% cheaper.
'The depreciation makes us more competitive,' says Penang Chief Minister Koh Tsu Koon. 'If profit margins go up, it means companies will stay in Penang longer. By staying, they'll provide jobs, and provide subcontracts for components and more locally sourced inputs.'
Most managers in Penang expect the benefits of the ringgit's slide to be short term, however. 'I assume over time, maybe 12 to 16 months, things will equalize again,' says Lubbo Luken, managing director of Iomega, which opened a plant in Penang in July 1996 to produce large external drives for computers. Luken believes Malaysia's dependence on a broad range of imports will force employers eventually to raise wages to meet the rising cost of living.
Indeed, for companies exporting into the Asian market, the region's financial turmoil is a mixed blessing. 'If you have sales exposure in Asia, you could face an economic slowdown,' says an electronics analyst. 'You have to ask how resilient your product is.'
-(For the complete story, see this week's edition of the Far Eastern Economic Review.) |
