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Introduction:
There has been a structural transformation of Malaysia’s economy over the last 40 years. The country has progressed from an economy dependent on agriculture and primary commodities to a manufacture-based, export-driven economy spurred by high technology and capital-intensive industries.
During the last decade Malaysia has experienced a rapid development that places the country on the world map within the high-tech sector, including segments such as Information and Communications Technology (ICT), hardware and software, and IT-services in general. Several programs and projects have been implemented to encourage a wider diffusion of ICT in the economy. The key initiative is the Multimedia Super Corridor (MSC), which is a hub designed to promote multimedia products and services, by bringing together a legislative framework and a next-generation telecommunications infrastructure.
The Malaysian government still promotes the country’s manufacturing based electronics industry, thus also providing excellent opportunities for Danish companies within this sector - especially in relation to sourcing, outsourcing and setting up local production facilities.
Market Size Indicators:
To create an overview of the Malaysian ICT and electronics industry and point out some possible market opportunities for Danish companies this section firstly provides a brief description of the Multimedia Super Corridor followed by a presentation of market size indicators of the electronics industry in Malaysia. The section is concluded by a more specific introduction to the electronics industry in the state of Penang.
The Multimedia Super Corridor
The MSC’s location is currently within a 15 km wide and 50 km long zone, starting from some of the tallest buildings in the world – the Petronas Twin Towers – down south to the Kuala Lumpur International Airport (KLIA). The main components of this corridor are Kuala Lumpur City Centre, KLIA, a technology park and the two newly established intelligent cities Cyberjaya and Putrajaya. These components are bound together by a 2.5-10 gigabit digital fibre-optic network, providing high-speed computer links.
The MSC aims to revolutionise how Malaysians and others in the region do business, especially in relation to companies developing or using leading multimedia technology. As the MSC grows it is expected to provide the catalyst for the IT development in Malaysia. Various incentives have been introduced to encourage foreign partners to conduct R&D locally and promote joint ventures to enhance local technological capabilities. These incentives, also known as ‘The Bill of Guarantees’, include the government’s commitment to providing world-class physical and information infrastructure, freedom of ownership (i.e. no requirement for Malaysian participation), unrestricted employment of foreign knowledge workers and freedom to source capital globally. Furthermore, it is possible for foreign companies to receive income tax exemption for up to 10 years and a 100 % investment tax allowance for five years.
The Three Phases of the MSC
The planned development of the MSC over the time span from 1996-2020 has been divided into three phases:
· Phase 1: 1996 – 2004
Successfully create the Multimedia Super Corridor south of Kuala Lumpur
· Phase 2: 2004 – 2010
Link the MSC to other cybercities in Malaysia & worldwide
· Phase 3: 2010 – 2020
Transform Malaysia into knowledge-society
The first phase of the MSC has been successfully concluded. Some of the world’s most prominent ICT companies have established operations within the MSC, including companies such as Ericsson, IBM, Nokia, Intel, Sun, Computer Associates, etc.
The MSC is now into the tail end of its second phase, where the overall goal is to set up Cyberjaya linked high-tech centres throughout Malaysia and thereby bring the high-tech ICT benefits to the rest of the country. One of the most interesting aspects in this is the expansion of the corridor to Penang, which is expected to deepen and further technological growth in this state. This will be described in more detail later in this section.
Flagship Projects/Focus areas
To get the development of the MSC started, seven focus areas for multimedia projects have been identified. The focus areas provide concrete project opportunities for ICT companies throughout the world to collaborate with the Malaysian government in creating and implementing innovative ICT solutions.
Cyberjaya
Cyberjaya is one of the two intelligent cities established within the corridor. The other intelligent city, Putrajaya, is set to function as the Government’s new headquarter. Cyberjaya is established to become the headquarter for private companies. The aim is to create a multimedia catalyst centre for global R&D and design with the capacity to be the operational headquarters for multinational firms wishing to direct their activities using multimedia technology.
Cyberjaya is one of the most interesting aspects of the MSC, due to its high concentration of companies focusing on technology. As of December 2008, Cyberjaya hosts 474 companies, encompassing 30 multinationals and 444 home-grown companies with MSC-status. This can provide several opportunities for Danish companies seeking to identify local partners or customers. The high concentration of companies also provides excellent networking possibilities. It is projected that the total number of MSC-status companies will reach 500 within the project timeframe.
Companies with MSC-Status
There are presently a total of 2,000 MSC-status companies operating within a number of different sectors, ranging from software development to wireless technologies. This number is projected to increase to 2,500 by 2010, generating 100,000 jobs nationwide.
The major focus of the companies operating within the corridor is still on software development. One of the strengths of locating software development activities in Malaysia and within the MSC is the large talent pool of skilled English speaking developers with many different nationalities, making multi-lingual development possible.
There are currently more than 75,000 IT and engineering graduates working in Malaysia. In particular the many Chinese natives among these have created the opportunity for companies to develop software for the Chinese market, while still reaping the benefits of being located in Malaysia
The education level in Malaysia is high compared to other countries in South-East Asia. The country is more culturally oriented towards the West, eroding cultural or language barriers amongst employees in business organisations. Malaysia’s long exposure to Western business culture has attracted various American and European multinational companies, enabling them to establish large development departments in the country. Malaysia has considerable experience within the software development industry, with broad competences in .Net, Java, J2EE, C++, PHP, embedded software, Multimedia and databases such as MySQL, Orcle, SQL Server, Sybase, etc.
Malaysia has a mature IT development industry comprising IT professionals with more than 20 years experience. Their educational backgrounds vary from a national degree to education from the US, England or Australia combined with an extended international work experience.
Malaysia offers one the lowest salary inflations in the world by less than 5 % and the price of hiring local developers is under 1/3 of the cost of hiring the equivalent number of Western developers. Moreover, Malaysia supplies productive and job loyal employees.
Knowing the importance of having a qualified human capital has led to the establishment of MSC Malaysia’s Knowledge Workers’ Development Institute (KDi) in 2005 to carry out various training programmes as stop-gap measures in order to provide established and start-up ICT companies with knowledgeable workers.
In 2007, there were over 1900 firms operating with MSC-status in Malaysia, local companies made up about 1400 of these companies, followed by more than 400 foreign-owned companies.
Furthermore, almost 50 companies of the 1900 companies with MSC-status were companies in 50/50 ownership. The fact that the majority of the joint ventures established are between local and foreign companies, even though 100% foreign ownership is not prohibited, clearly shows that there are several opportunities to be explored for foreign companies in Malaysia.
The Electronics Industry in Malaysia
Malaysia’s IT industry is a growth sector, mirroring the rapid expansion of e-commerce worldwide and the demand for the related hardware appliances, software and Internet related products and services. As one of the leading producers and exporters of semiconductors and integrated circuits in the world, Malaysia has developed a strong manufacturing base for high-end consumer electronic goods, such as various ICT products and computers and parts. Malaysia is particularly known for its production and semiconductor devices, memory chips, computer monitors and disk drives.
Made-in-Malaysia electronics products are diverse and fall into three categories: electronic components, consumer electronics and industrial electronics. These goods are sold globally, with exports of semiconductor devices valued at US$ 31.13 bn., accounting for 40% of total electronics exports in 2007. The export-oriented electronics industry now has more than 900 companies in production, where international players like Intel and Motorola attest to the quality and competitiveness of Malaysia as a production country.
In 2007, gross output of the industry totalled US$ 61.6 bn., while the industry’s exports amounted to US$ 83.2 bn. This makes up 58.9 % of Malaysia’s manufactured exports and 44 % of the country’s total export. Greater outsourcing activities and software development has helped to enhance the sector’s growth. The output of semiconductors increased by 3.6 % in 2006 and by a further 4.6 % in 2007, however, the semiconductor output is forecast to increase by 2.3 % in 2008, the lowest growth rate due to the weaker global market.
The Electronics Industry in Penang
The northern Malaysian state of Penang is one of the most interesting areas in Malaysia for companies within the ICT and electronics industry. The state, which now populates some 1.5 mio people, has undergone an intensive and impressive process of industrial and technological transformation in the past 30 years. It has moved from being labour intensive with low technical processes into more technology-, skill- and capital-intensive production processes. Today Penang is also known as the ‘Silicon Island of the East’.
Penang pioneered Malaysia’s first Free Industrial Zone (FIZ) to initiate and facilitate the development of export-oriented manufacturing. There are now two FIZs and five industrial parks in Penang. Favourable incentives for the investors, the strategic geographical position of Penang, a stable government, well-developed and modern infrastructure facilities combined with a well educated workforce are all key factors why Penang has long been and will continue to be a major attraction for investors and foreign companies seeking Malaysian partners.
Companies in Penang
In 2005 (latest up-date available) there were already more than 700 companies operating in the industrial parks in Penang. Of these, 162 are involved in the electrical and electronics sector (E&E). This sector serves as Penang’s high-tech industry hub, hiring a total of 97,343 workers or 58.5% of the state’s total workforce (2005 estimates). It also hired the largest number of engineers, numbering 6,911 of the total 8,766 engineers in Penang’s technology parks (2005 estimate).
The most dominant areas within the E&E sector are semiconductors and wireless telecommunications, while supporting automation products is an area of increasing importance. In the field of semiconductors, world leaders such as Intel, AMD and Fairchild have been in Penang for more than 30 years. Motorola and Agilent are very big players in the area of wireless communications. Although these companies are some of the most prominent players within their fields, many smaller and local companies within the E&E sector are situated in Penang. Opportunities for Danish companies may therefore both be found as a supplier to one of the larger multinational companies and in relation to sourcing or outsourcing to the smaller companies.
Datuk Wong Siew Hai, the former vice-president of Intel’s technology manufacturing group suggests that Penang could build a niche in supporting automation products and in shared services. The industry could tap into the shared services and business process outsourcing market as many multinational companies in Penang are looking into automating and consolidating backroom operations.
Currently, Invest Penang (state government development authority) is actively promoting industries that are capital and skills intensive and high value added, such as advanced electronics; IT related products and services, advanced materials, high-tech and high value added components, etc.
Software Industry in Penang and the Expansion of the MSC
Software development is one of the areas, which fall under Invest Penang’s initiatives to promote higher value added activities in Penang. In this regard, the Penang state government has created the Software Consortium of Penang (SCoPe), which is set up to nurture and strengthen the development of the industry. As of May 1, 2007, the SCoPe had 46 affiliated member companies operating within the Penang software industry. However, the software industry in Penang is still relatively small compared to the massive concentration of such companies within the MSC south of Kuala Lumpur.
Penang is the first state in Malaysia to be awarded the MSC Malaysia Cybercity status. Officially known as the Penang Cybercity, phase 1 (PCC1), it provides a hi-tech growth platform for industries and businesses. This area is growing as the MSC, in line with the second phase of the MSC development, recently has been extended to include parts of Penang’s largest industrial park Bayan Lepas industrial park and its vicinity. The second and third MSC Malaysia zones in Penang will be launched on the mainland Penang in Bertam and Batu Kawan after 2008. This entails that companies in Penang will be able to benefit from the same incentives as the MSC-status companies located within the corridor, such as in the intelligent city of Cyberjaya or in a technology park.
Market Trends:
There has been a very positive development within the ICT and electronics industry in Malaysia the past couple of years. A recent forecast conducted by the International Data Corporation (IDC) expects this trend to continue. IT spending in Malaysia reached US$5,600 mio in 2008
Figure 2 - Malaysia’s IT Spending Forecast 2008-2012
(see pdf-file p. 9)
Source: IDC
As illustrated in Figure 2, the three segments services, software and hardware will all experience steady growth in the years to come. However, software is expected to enjoy the highest growth rate of about 25 %. The hardware market still represents the biggest IT spending share in Malaysia’s IT market, indicating that this sector will continue to be one of the driving forces in the Malaysian economy.
Shared Services and Outsourcing
The potential in shared services and outsourcing in Malaysia has increased dramatically amid the economic slowdown. According to Outsourcing Malaysia chairman David Wong, the industry has been growing at double the 15 % global growth currently and this growth is expected to continue.
Shared services and outsourcing activities has been one of focal areas of Multimedia Development Corporation (MDeC). Currently, the government estimates that the shared services and outsourcing industry in Malaysia will hit US$2 bn by 2012 if the double-digit growth persists.
In 2005 the MDC estimated that Malaysia will be able to generate as many as 100,000 jobs in this sector under the next Ninth Malaysia Plan (2006-2010). However this amount has increased due to the dramatic growth and the industry is now estimated to generate some 300,000 jobs by then with a target growth of 40-45 %.
Market Evaluation:
From being the world’s largest producer of rubber and tin, Malaysia is today one of the world’s leading exporters of semiconductor services, computer hard disk drives as well as audio and video products. This development creates business opportunities for Danish companies in Malaysia. These opportunities currently exist among others in relation to sourcing and outsourcing – primarily in Penang, but also in the area of software development and business process outsourcing – primarily within the Multimedia Super Corridor.
Evaluation of the Multimedia Super Corridor
The Government of Malaysia aims to attract leading companies of the world to locate their ICT industries in the country, undertake research, develop new products and technologies, and export from this base. Foreign companies are therefore most welcome in Malaysia and those who decide to join the Corridor enjoy several incentives and privileges.
The Danish embassy has spoken to foreign MSC status companies during the first phase of the Corridor. In general, all of them are rather satisfied with being a part of the MSC. They have all faced some difficulties at some point, but nothing of major importance. They all see the MSC as a good place to start if a company wishes to start-up their business somewhere in Asia, as the MSC offers very attractive benefits, especially when it comes to hiring foreigners, which all the companies have taken advantage of.
Another important aspect of being located within the corridor is having the opportunity to network with other MSC companies, which is one of the essential things for surviving within the Asian business culture.
Evaluation of the ICT and Electronics Industry
Malaysia, in general, has developed a strong and diversified manufacturing base within the ICT and electronics industry. The embassy finds that Penang, in particular, offers very interesting business opportunities due to the high concentration of companies within the industry combined with an attractive business environment.
In Penang, Danish companies of all sizes have the opportunity to find suitable local partners within a large number of sectors, as well as profiting from the incentive established to attract foreign investments. A Danish delegation to Penang in November 2004 reviled that the state offers great possibilities for locating the right business partner, as there are many SMEs with international experience operating there.
The expansion of the MSC to include parts of the Bayan Lepas industrial park in Penang will provide Danish companies with future opportunities – also within software.
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