HK Multinationals Unlikely to Switch to Penang

Posted on June 1, 1997 
Filed Under Julian, Nikkei Electronics Asia

By Julian Matthews

The July 1, 1997 deadline does not seem to have the business community in Malaysia rattled in any way. Manufacturers, government officials and industry analysts are of the consensus that it will still be “business as usual” in Hong Kong.

They say that Hong Kong’s role as a center for sales, marketing and distribution of electronic components and as a springboard into the burgeoning Chinese market will remain despite its return to China.

“We do not anticipate any lacking in ease of business. Hong Kong will maintain its role as an operational and service center, and may even expand this role over time,” said James Chuen, business development director for Solectron Technology Sdn Bhd.

Chuen said that Hong Kong is an important port for the movement of electronic products and any new steps to transfer its shipping traffic to ports in southern China was unlikely to happen in the near term.

“If anything, the handover will help spur China’s growth,” he said.

Penang’s China Links

In recent years, US and European electronics companies have utilized their Malaysian counterparts based in Penang to spearhead moves into China.

Solectron’s Penang operation, which has a dual role of manufacturing base and Asian regional training center, recently trained a pioneer batch of Chinese graduates to staff its new plant in Suzhou, China.

The newly established plant is a leased factory, and Solectron Corp is committed to building its own factory there to replicate the success of its Penang operations.

Penang, which is one of the largest producers of semiconductors and computer components in the world, has strong ties with China. Many of the island’s Chinese majority, who have long controlled the economic growth of Penang, still have family connections there.

Chip giant Intel Corp also relied on its Penang operations to pioneer its move into China as far back as 1993. The company opened the Intel Architecture Development Lab in Shanghai to assist local firms in the development of Chinese software applications on the Intel architecture.

Intel broke ground last November for an assembly and test flash memory chips plant scheduled to be completed in 1997 and expects to spend US$99 million over the next two years on the factory.

Intel, however, still maintains its regional headquarters in Hong Kong.

Intel Malaysia country manager Yohani Yusof says the company does not foresee the role of its Hong Kong operation changing after the 1997 handover.

Intel has a strong presence in Penang, but has no plans to shift its regional headquarters out of the territory, she said.

Phileo-Allied Securities Sdn Bhd analyst Matthew Geiger says that companies with regional headquarters may have already split up the duties of their Hong Kong offices with their counterparts in Malaysia and Singapore.

“The IT industry enjoys a great deal of presence in Singapore, and Malaysia is catching up fast. Companies may have already restructured or re-aligned their roles in these countries as a means of business prudence,” he said.

Geiger says some of the companies may have planned to do so all along to get closer to the Southeast Asia market, but the handover date “just brought forward the schedule”.

Growing Component Exports

Components exports to both Hong Kong and China are expected to enjoy steady growth despite the handover, said O K Lee, chairman of the northern branch of the Federation of Malaysian Manufacturers.

Lee said in terms of investment flows, Malaysia still has clear advantages over Hong Kong and Singapore, which both have high business maintenance, property and rental costs.

Recent investments by Dell Computer Corp and Packard Bell NEC Inc, both of the US, and upgrades to existing factories in Penang have shown that the Malaysian state is still a viable enclave for the manufacture and assembly of electronics and computer products, he said.

However, Lee agrees that Penang cannot compete with Singapore or Hong Kong as regional logistics and trading centers. Both ports receive a large portion of exports from Penang-based US and Japanese component manufacturers, and are likely to continue to do so in the near term, said Lee.

The most recent data from the Malaysian government’s Department of Statistics, places Hong Kong as one of the top five export countries for Malaysian manufactured electronic components (Table 1).

Hong Kong maintains a healthy annual average of between 6-7% share of total exports of electronic components, the bulk of which goes to the US, Singapore, Japan and the UK, in ascending order.

HK Investment Shrinking

Foreign investment from Hong Kong, however, has taken a tumble in the last three years.

According to the Malaysian Industrial Development Authority, the government’s investment agency, approved electrical and electronics projects involving Hong Kong investment dwindled drastically from the 1994 high of about US$275 million to US$1.8 million in 1995 and a mere US$200,000 in 1996 (Table 2).

Foreign investment continued to pour into Malaysia from countries like the US, Japan, Korea and Singapore in 1996, but Hong Kong and Taiwan, another traditionally strong investor, have moved investments elsewhere.

Indications are that Hong Kong and Taiwan investors may have re-directed their capital to China. Hong Kong and Taiwan manufacturers are known for their expertise in low cost, high volume assembly of consumer products and may have banked on establishing manufacturing bases in China to serve that growth market in recent years, says an analyst.

Another factor is the stance taken by the Malaysian government since the early 90s, to turn down proposed investment projects that are labor-intensive and do not involve the use of hi-tech manufacturing processes.

Published in Nikkei Electronics Asia, Jun 01, 1997

by Julian Matthews, Malaysian correspondent

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