THE services sector in Penang may have taken over as the biggest contributor to the state economy, but investment promotion agency investPenang says manufacturing is still the state’s engine of growth.

Agency director Lee Kah Choon said manufacturing still played an important role in the development of the state and that a recent investPenang survey showed the sector to be “healthy and stable”,  with most companies recording double-digit revenue growth in the first quarter of this year compared with the same period of last year.

Penang, he said, also remained a major player in the global semiconductor market, which is forecast to grow 11% this year to US$41.1 billion (RM176.03 billion). 

The growth forecast by Semiconductor Equipment and Materials International, he said, would benefit Penang manufacturers who export a significant volume of their  semiconductor products.

“We hold 8% of Malaysia’s total 10% contribution to the world’s backend semiconductor output as the world’s leading location for microelectronics assembly, packaging and testing.

“Some 40% of the global shipments of microprocessor assemblers are from Penang,” he told The Malaysian Insight.

The World Semiconductor Trade Statistics (WSTS) forecast that the biggest growth is expected from sensors, analogue and memory products.

Malaysia’s export of electronic and electrical (E&E) goods rose 3.5% to RM287.72 billion last year, compared with 2015’s figures. In the first quarter of this year, E&E products took up the biggest chunk, or 35%, of all exports.

Falling numbers and investor exits

Penang’s manufacturing sector has been growing since the 1970s. By the late 20th century, it was the state’s main economic driver, earning Penang the monicker “Silicon Valley of the East”. 

Until 2008, it contributed to more than half of the state’s annual gross development product (GDP), hitting 56.3% in 2006.

But the sector’s GDP share fell to 48.7% in 2009, and from there decreased by the year, except in 2014 and 2015, when the percentage rose to 44.1% and 44.7%, respectively. The services sector also recorded higher contributions in 2014 and 2015  at 49.5% and 49.1%, respectively.

In recent years, foreign and domestic investments in Penang also dropped from RM8.16 billion in 2014 to RM6.72 billion in 2015; and further to RM4.29 billion last year. 

Several big names, like hard-disk makers Seagate and Western Digital, communications equipment producer Amphenol, and LED substrate maker Rubicon, have also left Penang in recent years.

But Penang Institute analyst Ong Wooi Leng pointed to the resilience of Penang’s manufacturing sector, citing how it contracted by 19.4% in 2009 due to the US financial crisis but swiftly recovered in the last five years.

“Penang has a strong manufacturing base with top multinational E&E firms since the 1970s, and has become a pull factor for workers looking for engineering jobs.

“By virtue of its above average hard and soft infrastructure, Penang’s free industrial zones have been able to maintain their competitive advantage and to drive business and growth.”

Ong said the multinationals’ departures were due to global market demand changes, company reorientations, and rising operating costs that caused some to reduce lower value-added manufacturing activities. 

“We see a surge instead in knowledge intensive activities like data analytics, design, research and development,” she said.

Still growing

Lee said Penang had 45 years of experience in manufacturing, and its consistency and sustainability showed that investors were confident about doing business in the state.

He said Penang recorded RM59 billion from 2008 to 2016 in manufacturing investments, 73% more than investments between 1999 to 2007; and 67% were foreign investments.

“We are not in the slow years, especially with a healthy GDP and positive economic indicators. 

“The most obvious indicator is the big names we have with us here like Intel, Bose, Agilent, Motorola, Altera, B.Braun and others,” Lee said, adding that there were some 300 multinationals operating in Penang. 

Penang also recently attracted new investments and reinvestments. Among them are analogue and digital semiconductor maker Broadcom’s Avago Technologies (RM1.07 billion), automated test equipment maker Aemulus Holdings (RM25 million), Taiwanese firm Hotayi Electronics (RM1 billion), Scandinavian Industrialised Building System (RM100 million), and IT and software development firm Luxoft (RM235 million).

Osram is expanding its Solid State Lighting headquarters and R&D centre. Intel also launched its Asia Pacific & Japan Online Sales Group earlier this year.

Local firms ViTrox Corporation, Pentamaster Technology and Walta Engineering are building the RM63 million one-stop supply chain hub for metal parts Penang Automation Cluster (PAC), while five jewellery makers are investing nearly RM50 million for the Penang Gold and Jewellery Industry Cluster, fortifying Penang’s position as Malaysia’s biggest gold and jewellery exporter.

Services sector benefits from manufacturing

The manufacturing sector also grows the services sector that has many businesses supporting manufacturers.

“A big chunk of global business services (GBS) are manufacturing-based, supporting multinationals like Intel and Jabil. 

“Some MNCs themselves have also diversified into GBS and shared services outsourcing (SSO),” Lee said, adding that backroom operations had grown tremendously.

The logistics business serving manufacturers, he said, was going to grow bigger due to the One Belt, One Road initiative that would make Malaysia a logistics hub for China and the Asia Pacific.

Even quality medical and healthcare services and private education grew in Penang partly due to the needs and demands of investors, said Lee.

Gearing up for the future

Ong said Penang and Malaysia needed to close the skills gap with relevant training programmes as the manufacturing sector moved into Industry 4.0, where Internet of Things (IoT), wearable devices, artificial intelligence and automation would be in high demand.

Lee said Penang would focus on R&D and high-income, knowledge-based and high-value business activities, which would have spillover effects on locals.

The state with its @CAT programme, he said, aims to grow creative and innovative technopreneurs and startups, and nurture new talents in cloud computing, Big Data Analytics and IoT.

“We will maintain Penang as an international city ideal for sustainable living, working, and playing,” he said. – August 7, 2017.