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November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

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From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

NOVEMBER 5, 1999 VOL. 25 NO. 44

Low-Cost Competitor
Manufacturers choose Malaysia's cheap ringgit

Low-cost, skilled workers have helped Penang become Malaysia's preferred high-tech manufacturing destination Munshi Ahmed for Asiaweek
Back when Malaysia announced that it was cementing its ringgit exchange rate at 3.80 to the U.S. dollar, it was widely seen as a move to put a floor under a deteriorating currency. But 14 months later, the floor has become a handy ceiling, and Malaysia is reaping the benefits of an increasingly cheap cost structure to entice foreign manufacturers.

Companies from next-door-neighbor Singapore have been especially keen to come calling. U.S.-based Seagate, once the city-state's largest private-sector employer, announced in late August it was cutting 1,600 jobs in Singapore. The company now sources more disk drives from Malaysia and China than from its headquarters city. Likewise, American disk-drive maker Western Digital three months ago laid off 2,500 in Singapore. It too is moving some production to Malaysia.

Partly to save $80 million in payroll and partly to be close to major customers like Seagate and Western Digital, Komag Inc., a U.S. manufacturer of key computer disk-drive components, is shutting down both of its plants in California and starting a new manufacturing center in Penang. Komag officials say the company will realize a 67% reduction in payroll because of the relocation. It is considering putting another plant in the Sarawak town of Kuching.

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Thanks to the critical mass created by these and similar moves, Malaysia is emerging as a dominant global center for manufacturing of disk drives and computer components. In the first eight months of the year, Malaysia's electronics exports were up 10% over last year. And over the same period, foreigners applied to invest nearly $3 billion in new manufacturing projects. Some of the leading computer sellers in the world are coming to take advantage of Malaysia's relatively low costs and skilled workforce. Already, giant Intel - its Pentium chips power 90% of the personal computers sold worldwide - makes 30% of its microprocessors in Penang.

Cost comparisons between Malaysia and Singapore tell an obvious story: Land in the high-tech hub of Penang, for example, is roughly one-third what it is in Singapore. And depending on the industry and precise location, labor costs are anywhere from 35% to 65% cheaper in Malaysia. Western Digital pays about $184 a month for a production worker in Malaysia versus more than $300 a month in Singapore. Malaysia has also gained ground on lower-cost competitors such as Thailand and the Philippines (see chart). Komag considered both places as potential production centers before settling on Malaysia, where they were encouraged by promises from government officials that the current ringgit peg would not change for at least another year or two.

Does any of this have Singapore worried? Well, yes it does. Singaporeans are not known for taking such competition casually. Deputy Prime Minister Lee Hsien Loong cautioned recently that his island-state needed to watch the situation warily. "Demand is up, so we are exporting more and our factories are producing more. But the pressure to cut prices and costs is more intense than ever before."

In Singapore, manufacturing and related services represent about 45% of the city-state's GDP; the electronics sector is half of all manufacturing. Finally, more than 40% of electronics manufacturing is disk drives. Don't bother to multiply it out: Disk-drive makers in Singapore represent almost one-tenth of the entire economy, and significant job losses in the sector should be taken seriously.

But not too seriously. Analyst David Leow, who follows the electronics industry for HSBC Securities in Singapore, thinks the recent movements represent nothing more than a natural and positive evolution of Singapore's economy. "True, some companies are relocating their low-end manufacturing to cheaper production bases, but that doesn't mean Singapore has nothing left. Manufacturing has been moving out of the U.S. for years, and there was a time when some said that all the jobs were going overseas. But the U.S. has moved on to higher-end services, and it has its lowest unemployment rate in decades." Leow says Singapore is attempting a similar transition: "The government is encouraging entrepreneurship and technopreneurs. That's the future. Malaysia, China and Indonesia are a few steps behind." Leow's point is that a decrease in resources - of materials, land and humans - devoted to low-end manufacturing frees up these inputs for higher value-added endeavors like research and services. Already, Singapore-based engineers of many different nationalities are designing some of the world's hottest new PCs and notebook computers. Seagate is doing the high-end design work in Singapore on a low-cost disk drive to be made in Malaysia.

It would also be a mistake to overestimate the change in Singapore. It is not as if electronics manufacturing is going away. Through August this year, the city-state's electronics output grew 22% - even though disk-drive production fell. Singapore manufacturers also churn out printers, CD-ROM drives, DVD drives and printed circuit boards. That's not to mention add-on products like sound and video cards. Seagate maintains substantial operations in Singapore.

For now, the bigger worry in Singapore may involve its hundreds of small electronic-component suppliers, who have less freedom to move production as a way to remain competitive. Yet, says J.R. Ong, whose family owns and runs Singapore's First Engineering, a component company, there is really no option. "We must move where our customers are. We already have plants in China and Malaysia, but it seems we might have to shift more production out of Singapore and closer to our multinational customers." Ong is clearly ready to roll with the punches. That's likely to be a useful attitude going forward, especially for a technology component manufacturer. The world is turning upside down. Yesterday's floor is tomorrow's ceiling.

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