Global Slowdown Strikes Malaysian Electronic Factories

Posted on November 1, 1996 
Filed Under Julian, Nikkei Electronics Asia

By Julian Matthews

The global downturn in the electronics industry is beginning to be felt in Malaysia following the closure of factories and a slowdown in production of existing plants.

Many factories, mainly in Penang, have put a freeze on recruitment and are controlling overtime, reducing shifts and shutting down during weekends, claimed OK Lee, chairman of the northern branch of the Federation of Malaysian Manufacturers.

“Business will be slow for the next six months, possibly until early next year,” Lee said.

The Penang’s Bayan Lepas Free Industrial Zone a manufacturing hotbed for many major multinational electronics companies has witnessed three factories closures.

Hard disk drive makers Quantum Corp, Hewlett-Packard Corp and audio equipment manufacturer Grundig AG closed their Malaysian factories in June, July and August, respectively.

Quantum retrenched 1,360 staff at one of its two factories in Penang Quantum Storage (M) Sdn Bhd, after relinquishing its HDD manufacturing to its Japanese strategic partner Matsushita-Kotobuki Electronics Industries Ltd.

A spokesman said making the new generation of HDDs required a high level of factory automation that Matsushita-Kotobuki was better qualified to handle.

In July, Hewlett-Packard announced it was leaving the “unprofitable” HDD business, affecting 1,150 employees at its factory in Boise, Idaho, in the United States and another 530 in Penang.

HP attributed the decision to a slowdown in demand combined with intensifying price competition. The company also conceded that its share of the disk- drive market had been steadily declining.

High Costs Slows HDD Development

In the last two years, the disk drive business has been hammered by high development costs, short product life cycles and falling prices, forcing consolidation among its players.

In August, Grundig ceased operation after eight years citing poor demand in Europe and losses incurred by the Grundig group of companies worldwide.

About 700 staff were laid off as a result of the move. Plunging global chip prices and hot competition in home appliances are expected to take their toll on the performances of multinationals based in Malaysia, making 1996 a tough year.

A survey conducted by United States-based research organization International Data Group, found that despite an increase in unit shipments, worldwide revenues for semiconductor sales fell 27.9% in the second quarter of 1996.

The survey indicated that dramatic drops in pricing of DRAM, SRAM and Flash memory chips had pushed down revenues. The largest drop in revenues affected DRAM, falling 46.1% from the first quarter while SRAM dropped 28.5%.

Industry analysts attributed much of the drop to a glut in semiconductors earlier in the year when PC companies placed large orders expecting demand to remain strong. When the demand failed to materialize, computer-makers started to slash their requirements.

Sharp price declines for DRAM chips and a softening of end-equipment demand were also attributed to the downturn.

In company statements, three major chip manufacturers Motorola Inc, Texas Instruments Inc and Advanced Micro Devices Inc, all of which have factories in Malaysia, projected shortfalls in earnings for this year compared to last year’s bumper growth.

Japanese Exercise Caution

Japanese manufacturers NEC Corp, Hitachi Ltd and Fujitsu Ltd have also separately announced plans to either cut back or delay their chip investment programs in 1996, which is expected to affect their operations in Malaysia. The main reason cited was the sharp downturn in memory prices.

The Malaysian government’s shift in investment policy in the 90’s to encourage only capital-intensive and high technology enterprises rather than labor- intensive ones, has also placed pressure on the growth of the consumer electronics industry locally.

Japanese audio equipment maker Aiwa Co Ltd, for instance, expects imports of compact stereo systems from Malaysia to decline due to rising demand for more advanced systems.

In a statement, Aiwa said imports would account for a mere 30% of its Japanese domestic sales of compact stereo systems in the six months leading up to September.

This is in sharp contrast to the year leading up to March 1996 when about 90% of Aiwa’s sales of compact stereo systems were imported from Malaysia.

Aiwa said the expected fall in imports was due to rising sales of mini-disk players which are only made in Japan.

The Malaysian government’s insistence that multinational factories switch to less labor-intensive processes and increase automation has forced manufacturers to re-evaluate their product lines. Added to their woes is a tight labor market, increasing wages and rampant job-hopping within the industry.

A number of Taiwanese and Japanese manufacturers have chosen to shift production to cheaper labor markets such as China, Vietnam, Thailand and Indonesia.

In August, in a shocked revelation, public-listed Lion Land Berhad announced it was quitting the computer business and selling off its computer division, Likom Corp Sdn Bhd. The move is seen as a big blow to the fledgling homegrown electronics industry.

Despite signs to the contrary, both government and industry leaders have allayed fears that the slump would continue beyond 1996.

They describe the downturn as “temporary” and “cyclical”, and expect market demand to make a recovery by year’s end. International Trade and Industry Minister Rafidah Aziz said the industry was in a transitional stage and “merely adjusting to some changes being made to tailor for more higher value-added products, while slowly phasing out those which needed high labor requirements”.

Published in Nikkei Electronics Asia, Nov 01, 1996

by Julian Matthews, Malaysian correspondent

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