Malaysian Business, Feb 1, 2007
WILL the United States spiral downwards into a recession this year? This is the key question dividing economists in the United States and the world right now. An economic downturn or recession would certainly have an adverse effect on our economy, especially affecting local technology exports to the United States.
In November 2006, tech exports amounted to RM9.08 billion or 17.8% of Malaysia's total exports. After Asean, the United States is the second major export destination for Malaysian manufactured products, with an export value of RM100.91 billion from January to November 2006, according to statistics of the Malaysia External Trade Development Corporation (Matrade).
As such, the local information communications technology industry (ICT) and other technology-related players will have to keep a close eye on events in the US, given the uncertainty that exists. Opinions vary on whether a recession is on the cards and different indicators are leading think tanks to come up with various views. The widely cited housing and real estate indicators, as well as a concern about the US manufacturing sector have lead many to believe that a downturn, even recession, could hit the economy this year.
`The housing market, which has been driving the US economy's growth over the last few years, is undoubtedly going through a recession with falling sales and prices in 2006', says Farheen Pasha, team leader, ICT Practice, Economics Research and Analytics (ERA), Frost & Sullivan Asia Pacific, quoting figures from the National Association of Realtors of the United States.
She adds that while this is expected to continue through 2007, the impact of the housing recession on the US general economy, specifically on spending and consumption, is uncertain. `The close of 2006 saw widely divided opinions. However, the majority of prominent US economists are predicting a mere slowdown, as opposed to a full- blown recession. As opposed to the growth of 3.3% in 2006, cautious optimism permits us to expect the overall US economy to grow at a rate of between 2.3% and 2.5% in 2007,' says Pasha.
Analysts are reportedly revising forecasts due to a strong US trade balance, retail sales and job creation figures. But locally, the Malaysian Institute of Economic Research (MIER) is expecting the US economy to moderate in 2007, affecting Malaysia's exports overall. How will all this affect technology exporters here?
No effect
There seems to be reason to believe the ICT sector will be insulated to some extent. Lee Boon Kok, chairman of the Association of the Computer and Multimedia Industry of Malaysia (PIKOM) says that a slowdown does not seem imminent.
`Generally speaking, the slowdown in the US economy is geared towards the housing sector and we are still very bullish about the technology sector. We also believe that the market has been pulled up by growth in new areas, particularly the emerging outsourcing segment as well as export of software and services,' he says.
He points out that there is some forecast the new Apple iPhone will drive up the demand in the consumer electronics industry.
`The tech sector is generally going strong due to the demand for mobility and seamlessness driven by the entertainment, gaming and commercial industries,' he says.
Pasha, however, is not so optimistic. `The Malaysian ICT industry is very dependent on the US economy for both imports and exports. Imports from the United States dominate the Malaysian IT hardware and software segments and the industry also depends highly on the import of technologies. On the export front, the vulnerability of the Malaysian ICT industry on US demand is higher because the United States constitutes the largest export market for Malaysian ICT products,' she says.
Malaysian ICT exports to China, Thailand and India as a whole exceed exports to the United States. The analyst points out that China, Singapore, Vietnam, Myanmar, Thailand, Indonesia, Laos, Pakistan, Iran and Saudi Arabia are the other important export destinations for Malaysian IT services, particularly for shared services, creative multimedia content and applications, e- procurement and e-manufacturing applications, Voice over Internet Protocol (VoIP), and other Internet-based telecommunications solutions.
But taking the effect of the 2001 US economic slowdown and its subsequent effect on Malaysian ICT exports, caution ought to permeate the industry this year.
`Though it was expected that this diversification of Malaysian ICT exports across Asia and across products would provide a buffer against the weak US demand in 2001, it was unable to prevent the slowdown in Malaysia's ICT exports in the face of the slowdown in the US economy in 2001. If the US demand weakens in 2007, then this is expected to affect Malaysia's ICT exports,' says Pasha.
The exact nature and extent of effect depends on how the slowdown affects ICT demand in the United States, but there could be an interesting, positive effect for Malaysia's business process outsourcing (BPO) industry. `An IT budget squeeze for US corporations may lead to a further trend of BPO and outsourcing that Malaysia is vying to develop. However, the nature of impact is currently uncertain,' says Pasha.
Softening the blow
Downturn or not, the industry association believes technology manufacturing players should be proactive to adopt best practices and streamline business processes to achieve the best productivity possible. It shouldn't take a downturn to force players to recognise the value in such improvements and will stand them in good stead to move up the global value chain.
`I think we have to really plan wisely: we have to identify a few focus areas. Study the existing strengths of our ICT industry and leverage on those strengths. Rather than going after what we wish to do, we should focus on what we can do best with our existing capacity and strengths,' says Lee.
Malaysia is certainly a force to be reckoned with in shared services and outsourcing, (SSO) for example. `The industry has to look outwards for new markets. It is also advisable that these players work collectively and promote the country at a regional and global level. Malaysia must focus on our niche. For example, we can play the role of being the gateway to Asia,' he elaborates.
Although Malaysia does not have a sizeable market, its infrastructure is relatively well developed. Attracting the right talent and focusing on priority areas will probably keep the industry in a healthy state despite external economic factors. Pikom sees the Middle East and China as two markets that are showing promise.
Pasha concurs.'Trade relations with neighbouring Asian countries such as China and India offer greater potential for Malaysian exporters. Generally, the ICT industry is booming in most of the emerging markets, including Russia, China and Poland. Exporters can also target these emerging countries as a long-term diversification strategy,' she says.
E&E boom
The electrical and electronics (E&E) sector made up 47.8% of total exports from January to November 2006, to a total of RM256 billion, a 6.7% increase from the same period last year. Despite uncertainty surrounding the US economy, demand for semiconductors is estimated to remain positive.
`It is hard to predict if the US economy will slow down this year, and it is the same for the oil price. It was predicted to go up and it came down recently to below US$60. Although there are signs that the housing sector in the United States is seeing a slowdown, consumer spending was not affected. With the oil price coming down and stabilising, consumer confidence will probably not be affected,' says Datuk Wong Siew Hai, chairman of the Malaysian American Electronics Industry (MAEI). MAEI is an electronics industry committee within the American Malaysian Chamber of Commerce (AMCHAM Malaysia). It represents US electronics companies here, and its 17 member companies accounted for a quarter of Malaysia's total E&E output in 2005.
Wong cites projections of the Semiconductor Industry Association (SIA) for the industry's growth as well as analysts' projections to support the optimism felt in the sector despite talk of a recession.
The SIA has projected world semiconductor growth at 10% this year, driven by mobile phones particularly 3G, digital cameras, MP3 players, personal digital assistants (PDAs) and digital TV which are all showing double-digit growth, Wong points out.
`I expect the E&E industry in Malaysia to continue to grow in 2007, especially if SIA's forecast comes true, barring any unforeseen circumstances that might affect the US and world economy. Under the Third Industrial Master Plan (IMP3), it has been projected that the E&E industry will experience a compounded average growth of 9.2% during the 2006-2010 period,' he says.
He adds that the economic report released in October 2006 had projected Malaysia's Gross Domestic Product to grow by 6% in 2007. `However, various financial analyst and research houses have forecast a lower growth rate, of about 5%, as they expect the US economy to slow down somewhat and this in turn may impact global demand,' says Wong.
Up the value chain
The E&E companies in Malaysia have continued to expand and go up the value chain, but Wong believes that to increase in importance, companies need to ensure that the quality of talent also increases.
`Many of these companies have gone into design and development, technical support, customer support and shared services. These expansions have resulted in the need for more knowledge-based human resources. It is thus important for Malaysia to develop as many qualified technical and professional human resources that can support industry expansion in these areas,' he says.
He adds that more of such people need to be encouraged to continue their education to take up postgraduate studies. `Meanwhile, any shortage of such talent will need to be filled by foreign knowledge- based workers until the development of our human resources is increased and improved. I expect to see the shared services industry continuing to grow as Malaysia is ranked highly for providing such services,' says Wong.
Becoming global competitors means companies will need to address cost competitiveness, and strive to go up the value chain. This also applies to the ICT sector, which can implement cost-control measures to improve margins.
`They need to be more innovative by providing more value and better customer service and developing competitive products. Spending more time and resources in innovation and development will be key to winning businesses and staying ahead of competition,' he adds.
To Wong, these companies also need to increase their usage of ICT technologies as e-business has become an important global business trend with global companies. `We need the government to help put in infrastructure to support broadband in the country so that the Internet penetration rate can be increased. Improving the government delivery system will also help the companies to move faster and be more agile in response to competition,' he says.
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