By Karl Crnkovich
While on the airplane ride during my last trip to Penang (which is a short, 1- hour flight from Singapore), it was a typical cloudy, tropical day in May that promised afternoon thunderstorms. As we descended from the sky, I couldn’t help but to look out of the airplane window as an island about 1/3 the size of Oahu, Hawaii came into view with two causeways that connect the island with the mainland. As we broke out of the clouds, an emerald green mountain appeared in the distance with a summit obscured by silky white cloud cover – like a gorilla in the mist. The area around the airport is covered with hundreds of warehouses and industrial buildings that extend into endlessness. This is Penang – also known as “Silicon Valley of Asia”
For decades, China was viewed as the primary location for American and other Western entrepreneurs and business owners to develop their business opportunities, but like all developing countries that offer opportunity, China has risks. Communication difficulties, spotty supplier responsiveness, shaky intellectual property protections (or even respect for property overall) were just some of the risks Western companies were willing to accept due to China’s labor cost advantage. Larger Western firms also viewed China as an attractive market for its massive population and could not resist the prospects of access to 2 billion people. However, times have changed and as a result, the market is shifting. Due to international and domestic economic and political forces, yearly average manufacturing wages in China have increased by 80 percent since 2010. (IDC Worldwide Robotics, 2017) As result, China’s labor costs are only 4% cheaper than those in the U.S. when productivity is factored in, according to Oxford Economics. At the same time, Association of Southeast Asian Nations (ASEAN) member states have steadily developed infrastructure and capacity for labor intensive commodity type products like consumer electronics, apparel, footwear and textiles.
Among the ASEAN nations, Malaysia is standing out as worthy competition to China’s dominating presence. For those unfamiliar with the area and market, it may come as a surprise that the country has relatively good infrastructure, well developed ports and rail, and sizeable investments in hi-tech capabilities. As a result, Malaysia (and Penang) is positioning itself to become the next choice location for large volumes of foreign investment in manufacturing and the next hub of electrics manufacturing in Asia – the Silicon Valley of Asia.
Due to a convergence of economic and political factors, Chinese labor costs have steadily risen over the past decades. By official government policy, Chinese society is rapidly becoming urbanized. Furthermore, China’s population continues to grow by 16 million each year and they are well on the way to exceed 1.4 billion people mark in our lifetime. (Statista, 2016)
In an effort to provide its people with access to basic services, China is enacting various social welfare programs, which has forced the government to raise revenue through taxes and fees. This in turn has contributed to an increase in labor costs in China. At the same time, experience in manufacturing has brought Chinese companies remarkable success. In search for better margins and longer term value, China is rapidly moving from low–cost production into medium to high-tech manufacturing and as a result, its labor costs have risen further.
According to Trading Economics, China’s overall minim wage at the end of 2016 stood at $338 per month while the same source of data shows Malaysia at $240 per month. (Note: Statistics for China are notoriously difficult to collect as China’s government controls virtually all data.)
In any case, by many accounts, Malaysia’s labor costs are equal to or lower to China’s costs (after adjustments for cost of social welfare, taxes and productivity). Figure 1 below shows Average Annual Income comparison between China and several other Asian countries.
Through my frequent visits to Malaysia, over the past decade, many of Malaysian manufacturers voice similarity in an hourly labor wage between Malaysia and China. Malaysia was able to close this labor cost gap through lower taxes, well developed guest worker program where labor is imported from locations such as Indonesia, Nepal and Sri Lanka and overall lower social welfare cost. In figures, China’s cost of social welfare accounts for 30-50% of salary. By comparison, in Malaysia this cost is approximately 12%. See figure 2 for Cost of social welfare comparison.
Communication Barriers in China
By surveying U.S. based companies which operated in China or have Chinese suppliers, difficulty in communicating with Chinese counterparts is often a number one complaint. In China, younger (urbanized) generations are learning English in schools, however, older and more experienced manufacturing managers, engineers and technicians (all key people to talk to for a successful supplier relationship) tend not to speak English or other languages. See my earlier article about The Key to Successful Supplier Relationship to see why it’s important to get to know your suppliers. This in turn can create miscommunication during the early stages of manufacturing (DFM/DFA, Prototyping etc.) which could have very costly and at times fatal consequences for U.S. based start-ups. Tools such as Google Translate, made this issue even more acute as U.S. companies would often receive a false sense of security after receiving emails from Chinese companies, seemingly written in decent (not perfect) English but only to find out that the emails were translated by a machine. For this reason, I advocate that my clients get to know their suppliers on a personal level and whenever possible, make an effort to travel and meet them before investing their limited resources in a supplier they have never met. (Again, refer to my earlier article about the Key to Successful Supplier Relationships to learn more.) By contrast, Penang and Malaysia (a former British Colony) utilizes the Latin alphabet and generations have learned English from early childhood. Penang, as a former East India Company trading post and colonial center, has a history of multiculturalism, which includes regular use of English language. In my experience, established Malaysian companies (especially in Penang) are very responsive and often reply to e-mails as opposed to my experiences with China companies where I commonly experience delays in responses or miscommunication, due to limited or no English proficiency.
Red Tape and IP Protection
While China often promotes itself as a modern economy where rule of law is applied evenly and fairly, many Western companies have long ago learned to tread carefully while operating in China. Intellectual-property rights are hard and costly to defend in China. The tangle of red tape involved in tax, compliance, customs clearance, business registration and so on can overwhelm small firms. (The Economist, 2014) By contrast, Malaysia has been streamlining its legal and regulatory structure in order to encourage foreign investment, especially in electronics manufacturing and technology sectors.
Penang: Turn Key Solutions for Electronics Manufacturing
Due to Malaysian government investment strategy and focus on development of key industries as well as Penang’s strategic location, Penang has positioned itself as a viable (but smaller) alternative to China when it comes to electronics manufacturing. Companies such as Western Digital, Dell, Netgear, Bosch and others have been doing business in Penang for years. More recently, the presence of Western companies in Penang has resulted in growth of raw materials suppliers, electronics designers and sub-contractors, and other specialized product and service providers who want to grow with their Western clients. Furthermore, Penang has the means to deliver products quickly and efficiently – the country features a container shipping port and a fully complement of “turn-key” logistics providers such as DHL, Federal Express and UPS.
Additionally, Malaysia can offer “full box build” of many electron products. This allows full product development in one location – manufacturers procure raw materials, manufacture the product and ship the finished product in market ready packaging directly to Western distributors. Some examples of “Full Box Build” that exist already in Malaysia are the high-end vacuum cleaner Dyson and the Keurig coffee machines.
As the electronics industry manufacturing trends shifted toward use of contract manufacturing as opposed to setting up company owned manufacturing plants via direct investment (FDI), Malaysian manufacturers in Penang and locations such as Johor Bahru quickly moved to provide such a service. Some of the manufactures later vertically integrated with their local suppliers and logistics companies to provide U.S. and Western companies with “turn key” manufacturing solution.
Electronics Manufacturing – A Constant State of Evolution
As is the case with China, manufactures in Penang are also moving up the value chain by focusing on higher end and higher value manufacturing backed by billions of dollars in investment from the Malaysian government. The Malaysian Government has made electronics manufacturing a primary focal point for development/growth in recent years which facilitated investment in not only actual manufacturing, but also development of sources of raw materials (plastics, chemical industry, packaging etc.) From 2011-2015 alone, in Penang, the electronics industry was the beneficiary of over 7 billion Malaysian Ringgit (approximately USD $ 1.6 billion) which accounted for the largest investment by sector in Penang. See Figure 3.
In an effort to control long terms costs, manufacturers in Penang are rapidly automating their production and are streamlining their supply chains thereby retaining not only cost competitiveness but also higher quality which makes them a very attractive place to manufacture products for not only large western electrics manufacturers but also start-ups which are extremely cost sensitive.
Your Company Has Options
Although China continues to dominate the manufacturing industry, it is important to know that other Asian markets are emerging as viable competition and should not be ignored. China’s rising labor costs, red tape and other issues is an opportunity for other Asian economies to emerge and fill the gap. Locations in Asia such as Penang-Malaysia, offer healthy and reliable competition by having good access to labor, a friendly regulatory environment, and “turn-key” manufacturing solutions. In addition to manufacturing, Penang offers access to world class electronics and plastics designers as well as direct access to raw materials. The industry trend of moving toward contract manufacturers and innovation has been alive and well in Penang for some time. This Silicon Valley of Asia is one to keep an eye on and consider for your companies needs.
To find out if Penang is a good choice for your business, contact us at:
Pinang or Penang, state (1991 pop. 1,065,075), approximately .400 sq mi (1,040 sq km), Malaysia, on the Strait of Malacca. It consists of Pulau Pinang (an island of 108 sq mi/280 sq km), formerly known as Georgetown; and Province Wellesley (292 sq mi/756 sq km), a strip of territory on the Malay Peninsula adjacent to Pulau Pinang. On the island is the capital, the city of Pinang, also known as George Town (1991 pop. 219,376); it is Malaysia’s second-busiest port. It was founded in 1786 by British merchants and was ruled by Great Britain until it became part of what is now Malaysia in 1957.
Penang is known for being the food capital of Malaysia with a huge number of street food or “hawker food” that emphasizes noodles, spices, and fresh seafood. Penang’s cuisine reflects the Chinese, Malay and Indian ethnic mix of Malaysia, as well as influences from Thailand and even Europe.
Fontana Global Associates