US-China trade war made Malaysia an ideal manufacturing location for both E&E and semiconductor sectors
by AZREEN HANI / pic by BLOOMBERG
MALAYSIA’S semiconductor sector, which experienced a downturn in 2016, is expected to make a steady comeback this year with the expansion of 5G technology.
The growth of the sector is also in tandem with the local electrical and electronics (E&E) and manufacturing sectors set to benefit from the US-China trade war that began in July 2018.
The trade war is a reversal of fortune for both the semiconductor and E&E industries that had made Malaysia an ideal location for manufacturing activities following moves by multinational firms, like Seagate Technology plc and Rubicon Technology Inc, to shut down their operations in Penang in 2017 and 2016 respectively.
According to ING Asia economist Prakash Sakpal, even if the US and China manage to strike a “Phase 1” deal soon, Malaysia’s semiconductor and E&E sectors would continue to benefit from realignment of supply chains.
“The supply chain relocation stemming from the trade war is positive for Malaysia, given its strategic trading location. If signed later this month, the preliminary trade deal between the two rivals should pave way for a broader deal later in the year, which in turn should be positive for the global demand, including that for the electronics products,” Prakash said in an email reply to The Malaysian Reserve (TMR).
Malaysian E&E and semiconductor sectors had outperformed in the global electronics downturn which started in 2018.
He sees room for this outperformance to sustain into 2020 as the sector should benefit from the imminent 5G launch and the offering of new smartphones and tablets compatible with this technology.
The escalation in the US-Iran tensions, however, could pose a risk to the automotive sector due to rising oil prices.
“A clear fallout of the US-Iran tensions is higher oil price inflation. And high oil price isn’t good especially for the automotive sector, which is also a key driver for semiconductor demand,” said Prakash.
The trade war has resulted in trade and investment diversions by American and Chinese companies looking to move some of their manufacturing capacities out of China, leaving countries like Vietnam and Malaysia to benefit from this supply chain reconfiguration.
An analyst told TMR that there are a myriad of reasons why American and Chinese manufacturers opt for Malaysia apart from being cost-effective.
“Skilled labour, strategic location and strong regulations for intellectual property made it an obvious choice for investors,” the analyst, who requested anonymity, said.
Last month, it was reported that for the nine-month period of 2019, Penang had recorded RM13.3 billion of total approved investments in the manufacturing sector, representing 23% of the country’s total manufacturing investments.
Chief Minister Chow Kon Yeow reportedly said two major subsectors with the most significant investments were E&E products and scientific and measuring equipment.
InvestPenang CEO Datuk Seri Lee Kah Choon told TMR that the state is doing “relatively well” in terms of investments amid growing interests from foreign investors.
“E&E, semiconductor — these industries are not new to us. We have a good supply chain, talents and support industry. On top of that, we have the existing infrastructure and legal frameworks, these are positive factors that attract investors here,” Lee said when contacted recently.
He added even when Seagate closed its operations in the state, the factory was immediately snapped up by Plexus Manufacturing Sdn Bhd which is now expanding its business there. Some of Seagate’s workers are with the company, Lee said.
Lee stressed that the government is also working towards attracting more domestic direct investments to complement the investment growth.
Asked whether 2020 will be the year of the comeback for the semiconductor and E&E industries, Lee said: “I will not say it is a comeback because our existing manufacturing sector has been growing steadily in the past few years.
“Generally, we are happy with these sectors. I think, in general, there is an encouraging momentum for further growth,” he added.