Turning Point for the Electrical and Electronics (E&E) Industry in Malaysia? Part 1

Media Statement by Dr. Ong Kian Ming, Deputy Minister of International Trade and Industry (MITI) on the 30th of July, 2019

The report in June 2019 that Apple was mulling a 15-30% supply chain shift out of China and that Southeast Asia was a potential relocation destination created a lot of media interest in Malaysia.[1] What could the Malaysian government do in order to pull some of these investments onto our shores? How ready is our local E&E industry to capture part of Apple’s value chain? Which companies could be potential beneficiaries? These questions are part and parcel of a larger debate regarding the E&E sector in Malaysia. The industry is facing a turning point in its development, and the US-China trade war has created a unique window of opportunity which can catalyse the development of the entire industry in Malaysia for decades to come.

Contribution to the Economy

Before we delve into the future prospects of the E&E industry, it is important to contextualise the current role which this sector plays in the Malaysian economy. The E&E sector’s contribution to the overall health of the country’s economy goes far beyond its 5.4% share of GDP in 2018 (RM78b out of a RM1.4 trillion economy). It is BY FAR, the largest driver of exports in Malaysia. 38.1% of the almost RM1 trillion in exports in 2018 came from the E&E sector. Manufactured petroleum products comes in at a distant 2nd with 7.7% of total exports in 2018.

It is also a DISPROPORTIONATE contributor to the nation’s trade surplus. Out of the RM120.5b trade surplus enjoyed by Malaysia in 2018, 99% or RM119.2b was generated by the E&E sector. Without the contribution of the E&E sector, Malaysia would have experienced the ‘twin deficit’ phenomenon – a budget as well as a trade deficit and this would likely have had an effect on foreign investor confidence. Many would be surprised to learn that Malaysia’s largest export to China is not palm oil or agriculture or petroleum products but products from the E&E sector. This is also one of the few sectors where Malaysia enjoys with trade surplus vis-à-vis China.

Table 1: Snapshot of the E&E sector in Malaysia in 2018

Driver of productivity and wage growth

The E&E sector is also a leader in terms of productivity gains. From Table 2, the E&E sector has been leading the way among the manufacturing subsectors in terms of productivity growth. The average annual growth rate of 10.4% from 2011 to 2018 surpasses the productivity growth rate of the petroleum, chemicals and plastics sub-sector as well as the transport equipment subsector (See Table 2 below).

Table 2: Productivity gains (measured by sales / employee) of selected manufacturing sectors (2011 to 2018)

The E&E and optical subsector is also the largest employer in the manufacturing sector, hiring approximately 562,000 workers of the 2.5 million manufacturing workforce in 2018. The average wages paid out to the E&E sector is one of the highest among the manufacturing sub sectors and significantly higher than the average wages paid out in the service sector. According to Table 3, the average wages paid out per employee in the E&E subsector is RM46,451 in 2018 which places it second after the Petroleum, Chemicals and Plastics subsector with average wages paid out at RM52,248.

Table 3: Average wages paid out per employee in selected manufacturing and services sectors (2018)

One of the main reasons driving productivity and wage growth in the E&E sector is investments in technology and equipment. This sector, more than any other sector in the country, is at the forefront of Industry 4.0 adoption including big data analytics, internet of things (IoT) and systems integration. Most, if not all, of the companies in this sector, be it multinational companies (MNCs) or local large companies (LLCs), are exposed to the global supply chain, and thus have no choice but to innovate and invest in order to remain competitive.

Beyond the numbers…

Beyond the figures and statistics displayed above, the development of the E&E sector is at a leading edge of an increasingly complex and sophisticated Malaysian economy. What used to be a sector dominated by MNCs has shifted to one where LLCs and SMEs play an increasingly important role. Some of the local SMEs which started off being suppliers to the MNCs in Penang have grown into large listed entities which are able to do their own R&D and venture into new markets abroad. Some of the more well-known names include Vitrox, Inari Amerton, Pentamaster and the recently listed Greatech and TT Vision.

Some of the electronic manufacturing services (EMS) companies in Johor have also grown to be regional players as a result of their business with big MNCs such as Dyson. VS Industry, ATA, SKP Resources and Denko have grown and will continue to grow as part of this supply chain as companies such as Dyson diversifies into other products such as its electric car project which will be based in Singapore but which will source for components from around the region including from Johor-based EMS companies.

As these MNCs have expanded their E&E operations in Malaysia, they have also diversified into services related activities such as regional / global procurement, human resource and accounting administration and IT services for their global operations. This has led to a steady increase in the number of principal hub operations in the manufacturing services sector for these E&E companies. Examples include Smart Modular, Sharp Corporation, Osram, Broadcom (Avago Technologies), and Integrated Device Technology Sdn Bhd.

There is also a small but growing home grown sector in the higher value added segments of the E&E sector including R&D activities such as Integrated Circuit (IC) design. Companies such as Infinecs, Experior and Oppstar Technology, which were started by Malaysians who were formerly working for MNCs, are now at a turning point in terms of taking the next leap in their scope and scale of R&D activities.

Datuk Seri Wong Siew Hai, chairman of the E&E Productivity Nexus is absolutely correct in pointing out, in a recent article, that the E&E sector in Malaysia is at a crossroads.[2] Domestically, with the change in government in Malaysia in 2018, and externally, with global uncertainties as a result of the US-China frictions, there are many challenges and perhaps MORE opportunities for the E&E sector in Malaysia.

However, this requires the government together with the industry partners to work together in order to capture these opportunities. This will be the subject of the next article.


[1] https://asia.nikkei.com/Economy/Trade-war/Apple-weighs-15-30-capacity-shift-out-of-China-amid-trade-war

[2] https://www.thestar.com.my/business/business-news/2019/07/27/rejuvenating-the-ee-industry/

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