Chip Glut Batters Penang's Silicon Valley : Malaysia Hit by Hard Times 
International Herald Tribune
September 20, 1996
Michael Richardson  

A worldwide fall in demand for computer memory chips and other electronics, combined with a tight labor market, has cut a swathe through Malaysia's electronics industry as some plants close while others stop hiring and end overtime.

The global slowdown could push Malaysia's trade balance, which is edging into the black after years of chronic deficits, back into the red.

The country posted a trade surplus in May, the latest monthly statistic available, of just over 238 million ringgit ($95.3 million), compared with a trade deficit of 254 million ringgit in April.

Malaysia, a large exporter of semiconductors and other electronic components, sold almost 90 billion ringgit worth of electrical and electronics products in 1995, an increase of 30 percent over 1994.

The sector accounted for just over 52 percent of exports last year.

Many of the high-tech factories, 350 in all, are located on the island of Penang, Malaysia's so-called Silicon Valley where at least six foreign-owned companies so far this year have said they would close plants because of falling demand.

These include Grundig AG of Germany, which will shut a factory in Penang making audio systems unless a buyer is found by August 31. Hewlett-Packard Co. of the United States has also shut its computer disk drive operation in Penang to focus on making components.

Siemens Semiconductor Sdn , a unit of Germany's Siemens AG, is only hiring technical staff as it revamps its production, engineering and logistics systems at its Penang factory.

"Factories must consolidate and become more productive and competitive," said Yap Peng Hooi, managing director of Siemens Semiconductor.

While nearly 5,000 workers in Malaysia's electronics and electrical sector have lost their jobs in the first half of 1996, the government said this would help ease the country's acute labor shortage and hasten the restructuring of its industry.

"We don't mind the slump," said Mahathir Mohamad, the Malaysian prime minister. "If the workers are released from the electronics industry, they can switch to other jobs."

Rajeev Malik, an economist in the Singapore office of Jardine Fleming International Securities Ltd, said that many of Malaysia's exports in the electrical and electronic goods category are low-value-added.

"As the country loses its edge in these items, it will move towards higher-value-added electronics products," he said.

Malaysia has started to encourage labor-intensive industries to move to lower-cost countries — such as Indonesia, China, Vietnam and India — as it seeks to attract capital-intensive manufacturing, move up the technology ladder and reduce reliance on foreign labor.

"An essential component of the structural transformation of industry will be the shift into technology-intensive industrial activities," the government said in its Seventh Malaysia Plan, an outline of broad economic policies for the next five years.

The switch is vital if Malaysia, which has population of 20 million, is to ease its labor shortages. These drove wages up by 27 percent in the five years to 1994.

Unemployment was just 2.8 percent last year, well below the traditional 4 percent measure for full employment causing concern that that wage increases are outstripping productivity gains.

Copyright © 2006 The International Herald Tribune