FDI

The state of Penang, nestled along the northwest coast of Peninsular Malaysia, needs no introduction in the global electronics manufacturing sector. Despite its diminutive stature with just over 1,000 square kilometers of land area and a 1.8 million-strong population, Penang commanded an estimated 5% of global semiconductor exports in 2019, according to data compiled from the Department of Statistics Malaysia (DOSM) and UN Comtrade. The State’s transformation, from a traditional seaport economy into the Silicon Valley of the East, began in the 1970s, when the establishment of Malaysia’s first free trade zone in the State drew key investments from eight Multinational Corporations (MNCs). These pioneering investors – Intel Corporation, Hewlett Packard (now Keysight Technologies and Agilent Technologies), Robert Bosch, AMD, Litronix (now Osram Opto Semiconductors), Hitachi (now Renesas), Clarion and National Semiconductor[1] – sparked the development of a robust ecosystem of ancillary industries, which formed a foundation for the State’s rise as a prominent, offsite manufacturing hub. Today, Penang houses more than 350 MNCs that are supported by over 3,000 manufacturing-related SMEs. As Penang flourished as a vibrant, regional E E manufacturing hub, the local talent pool steadily accumulated a wealth of business intelligence and technical experience, enabling the robust supply chain to evolve in tandem with technology megatrends. This, in turn, enabled the State to focus on pursuing investments that have propelled the industry up the value chain, away from its beginnings as a low-cost manufacturing hub. Consequently, Penang has seen a proliferation of upstream technology-related investments in high value-added functions in recent years, ranging from research and development (R D), design and knowledge-based solutions, and downstream advanced manufacturing and testing to global business service (GBS) and Centre of Excellence (CoE) activities. Penang’s growing significance in the global E E value chain is demonstrated by its steady and resilient export performance in recent years. From 2014 to 2019, the State’s E E exports grew at a compounded annual rate (CAGR) of 12% to reach RM210 billion (US$51 billion). It has emerged as a hub for professional, scientific and controlling instruments (including medical technology), with exports of these products growing at a 5-year CAGR of 15% to reach RM23 billion (US$6 billion) in 2019. E E products, alongside professional, scientific and controlling instruments, collectively contributed between 77% and 82% of Penang’s total annual exports since 2014, and accounted for 50% of Malaysia’s exports in these two segments during the period. More impressively, despite the disruptions from the COVID-19 pandemic, Penang’s total exports continued to rise in 2020, growing 7% year-on-year to RM310 billion (US$75 billion), and a further 14% year-on-year in January and February 2021, driven by strong global demand for semiconductors. Shaping up as the destination of choice for advanced manufacturing investments As part of efforts to move Penang’s industry up the value chain, the State government has placed emphasis on attracting companies with strong commitments in implementing Industry 4.0 and sustainable investing. These efforts have yielded positive results, with the state having gained traction as a hub for advanced manufacturing investments. This is evidenced by the rising trend in investments per new job creation, which saw a six-fold jump from 2012 to 2020, as well as the number of global heavyweights announcing new investments as well as expansions of existing facilities in the State in 2019 and 2020. Penang attracted RM31 billion (US$7.5 billion) in approved direct manufacturing investment inflows in 2019 and 2020, 88% of which involved investments into the E E, equipment and medical technology industries. Prominent new investments included those from Lam Research, Bosch Group, Ultra Clean Holdings, Dexcom as well as Smith+Nephew. Together with planned expansions by a number of existing MNCs in Penang, these new investments, which are on track to commence operations between 2021 and 2023, are poised to bring Penang’s industry to greater heights and further integrate the State into the global value chain. Recent Notable Direct Manufacturing Investments in Penang Source: InvestPenang and respective companies Penang’s conducive business environment nurtures successful homegrown technology companies Penang’s conducive business environment has not only proven successful in attracting foreign direct investments (FDIs), but also successfully nurtured local E E success stories of locally employed engineers turned technopreneurs, who have founded and built companies that have successfully grown to become internationally renowned in their own right. These homegrown E E companies play crucial roles in the ecosystem, particularly in the areas of automated test equipment (ATE), automation, outsourced semiconductor assembly and testing (OSAT) services, electronics manufacturing services (EMS), precision engineering and tooling. The past five years have also seen the emergence of young, fast-growing Penang-based companies such as Experior, Oppstar Technology and Skyechip, which provide IC design and IC test design services to MNC clients globally. Public-private partnerships cultivate Penang’s talent development roadmap The state is cognisant that the development of a robust and skilled talent pool is imperative to support the growth of strategic industries in Penang. Strong public-private partnerships with concerted efforts in supporting talent development are key to Penang’s continued success. Toward this end, the State government has backed Penang Skills Development Centre’s (PSDC) industry-led training and education efforts, which have helped train over 200,000 of workers to support the industry’s needs since 1989. The State has also coordinated collaboration for industries to provide input to local institutions of higher learning on the relevance of the institutions’ courses, and rallied the industry to support State-run scholarships (Penang Future Foundation) and STEM initiatives. Holistic initiatives to make Penang a world-class investment destination for global frontier companies The dynamics of the global value chain, especially for the technology sector, have evolved rapidly since 2018, particularly amid the complex confluence of trade protectionism, COVID-19 pandemic-driven issues and disruptive technologies. The State government believes that strong, geographically localised industry clusters could help companies mitigate the risks of supply chain disruptions, in addition to improving companies’ time-to-market at a lower cost. To further increase Penang’s attractiveness for high quality investments, the State is focusing on three key strategies: Extending its competitive edge in advanced manufacturing, further strengthening Penang’s industry clusters, which include expediting SMEs’ Industry 4.0 transformation journey, and nurturing more homegrown companies to penetrate the global supply chain Embarking on a continuous drive to develop and recruit talent to the State, as well as cultivate the younger generation’s interest in STEM Enhancing Penang’s liveability with a strong focus on making Penang a smart and green city The State government is committed to continue developing Penang in a holistic manner, with the aim of creating a vibrant business and investment destination with a robust and sustainable economy and high standard of living, creating a conducive environment to “work, live, learn, play and invest.” About InvestPenang InvestPenang is the Penang State Government’s principal agency for promotion of investment. Its objectives are to develop and sustain Penang’s economy by enhancing and continuously supporting business activities in the State through foreign and local investments, including spawning viable new growth centres. To realize its objectives, InvestPenang also runs initiatives like the SMART Penang Centre (providing assistance to SMEs), Penang CAT Centre (for talent attraction and retention) and i4.0 seed fund (a catalyst for the start-up ecosystem). For more information, contact [email protected]. InvestPenang also works closely with various industry associations, including SEMI, to promote Penang’s supply chain and E E ecosystem. InvestPenang is delighted to have collaborated with SEMI on numerous occasions since 2015 and endeavours to sustain the partnership in the years to come, including for the SEMICON SEA 2022 exposition to be held in Penang. [1] No longer present in Penang following a corporate M A exercise.

If you look at your clothes or shoes, there is a growing chance you will see the words Made in Vietnam printed on the tag. Since the United States lifted its trade embargo against Vietnam in 1994, the country has become the second largest exporter of apparel and shoes to the U.S. What may be less evident is the source of that new electronic gadget you received for Christmas, with its numerous parts, chips, and intricate supply chain. While light manufacturing has dominated Vietnam’s economic growth since the Đổi Mới economic reforms implemented in the 1980s, over the last decade the country has been repositioning itself to become a dominant player in the global microelectronics industry, a trend that has gained momentum in the wake of the U.S.-China trade war. In 2019, Vietnam ranked as the fourth largest exporter of electrical goods and components to the U.S. With exports doubling over the last four years and now exceeding $19 billion, surpassing Taiwan, Japan, and Korea (based on goods exported under chapter 85 of the Harmonized Tariff Schedule). Vietnam’s global electronics industry now accounts for about 40% of its exports, and the country seems to be just getting started. Early Entrants Though Vietnam owes its growing success in attracting foreign direct investment (FDI) in the semiconductor and microelectronics industries to the advent of China plus one – the business strategy to diversify business investments geographically – it was the few early entrants that gambled on this emerging market a decade ago that put Vietnam on the global stage. Of these early players, no other firm comes close to having the impact that Samsung has. It’s initial $670 million mobile phone manufacturing plant in the northern province of Bac Ninh in 2008 grew to a country-wide investment of $17.3 billion within a decade. Samsung is now Vietnam’s largest FDI contributor and accounts for more than 25 percent of its exports. Because of Samsung, Vietnam has become the second largest exporter of smartphones in the world. Around the same time, Intel opened its $1 billion semiconductor assembly and testing facility in Ho Chi Minh City, putting Vietnam firmly on the global technology map. More investors, like LG, Panasonic and Foxconn soon followed. Within a few years of these initial investments the industry was taking notice, illustrated by SEMI’s role in co-organizing the Vietnam Semiconductor Strategy Summits in 2013 and 2014. With SEMI SEA’s increased efforts to promote Vietnam as an important ecosystem in the electronics supply chain, more will be done to positively influence the growth and prosperity of its member companies in Vietnam. These early investors found Vietnam attractive for several reasons. Key among these are the country’s low wage rates combined with its favorable demographic structure – what the UN refers to as the golden population structure, which provides “Vietnam with a unique socio-economic development opportunity.” Companies are also attracted to the growing number of Free Trade Agreements (FTAs) that Vietnam belongs to, including the ASEAN Free Trade Area, CPTPP, the EU-Vietnam FTA, and, most recently, RCEP. Though the U.S. has yet to ink a trade agreement, the Singapore AmCham’s annual regional survey has consistently identified Vietnam as the most attractive country in ASEAN for a potential bilateral FTA partner with the U.S. Leveraging the Trade War If the plus one strategy was the catalyst that started this wave of electronics manufacturing in Vietnam, then the U.S.-China trade war was the enzyme that supercharged it. A common quip in Southeast Asia is that the U.S.-China trade war is over and Vietnam is the winner, and this is apparent in both trade and investment trends. According to the Asia Development Bank (ADB), the riff between the U.S. and China has caused a redirection in trade, as U.S. imports from the PRC fell by 12% in the first six months of 2019 while U.S. imports from Vietnam increased by 33%, with electronics and machinery accounting for the bulk of this jump. The ADB further reported that in a prolonged and intensified trade conflict, the worse-case scenario would result in Vietnam, Malaysia, and Thailand being the biggest winners, “in that order.” On the investment side, a March 2020 Gartner, Inc. survey of global supply chain leaders revealed that 33% had “moved sourcing and manufacturing activities out of China or plan to do so in the next two to three years.” While this survey did not mention specific winners, the ADB reported that “newly registered FDI in Vietnam from the PRC and Hong Kong rose by 200% year on year in the first seven months of 2019,” indicating the move of Chinese suppliers to Vietnam. Additionally, a review of recent press reports indicate firms like Apple, Nintendo and Dell are encouraging suppliers to move parts of their supply chains to Vietnam. These suppliers are complying, with Compal Electronics, GoerTek, HZO, Inventec, Luxshare Precision Industry, Pegatron, USI and Wistron all reportedly announcing plans for new investments in Vietnam. Manufacturing Hubs Within Vietnam, microelectronic facilities have concentrated in a few geographic hubs. In the south, the Saigon High Tech Park in Ho Chi Minh City attracted early entrants Intel and Samsung, with firms like Nidec and Jabil soon following. The largest investment capital, however, developed in the northern provinces that ring Hanoi. Bắc Ninh, an hour’s drive from Hanoi, was the site of Samsung’s first investment and has since attracted Foxconn and Canon. More recently, firms have been drawn to the port city of Hải Phòng, the country’s third largest city, which is already home to Samsung and LG. The city’s close proximity to other manufacturing clusters, its new deep-water port, and its expressway that provides a 12-hour trucking route to China’s electronics epicenter in Shenzhen are helping make the city Vietnam’s new high-tech production center. In 2019, LG Electronics moved its entire smartphone production line from South Korea to Hải Phòng, and in 2020 Pegatron reportedly chose the city for its $1 billion investment plan. Local phone manufacturer VinSmart is also producing the country’s first 5G smartphones in Hải Phòng. In November, USI, a subsidiary of Taiwan-based ASE Holding, broke ground on its first production base in Southeast Asia, a $200 million phase-one investment in the production and assembly of chips for wearable electronic devices. USI’s investment, which is moving into the internationally managed DEEP C Industrial Zones in Hải Phòng, is “intended to move us closer to our overseas customers and accommodate their ever-increasing demand,” according to Mr. Kuei Chun Chi, the firm’s Manufacturing Service Director. “North Vietnam, with its strategic geographical position and an extended infrastructure in place, offers USI an optimal way to facilitate fast and flexible response to customers' orders.” Though the Covid-19 pandemic has dampened the pace of new investments in Vietnam’s microelectronics industry, it has also amplified the country’s attractiveness to investors. Vietnam was successful in containing the outbreak through aggressive quarantine and contact tracing measures, and as a result its economy has the brightest outlook in the region. The ADB forecasts the country will be one of the fastest-growing economies in SEA in 2021, with GDP estimated at 6.8%. The Ministry of Industry and Trade is also reporting that several of the world's largest technology corporations plan to shift their production chains to Vietnam post-Covid-19, an indication that technology firms will accelerate relocation plans in 2021. Vietnam’s successful response to the pandemic, combined with its strategic location, low wage rates and foreign trade agreements, will ensure that the region continues to benefit from the shift in supply chains in Asia, making it the new destination for electronics manufacturing. About the Author Stuart Schaag is Principal at E-Ward Trade Consulting LLC, which assists firms that are expanding their presence in the global marketplace by creating strategies combining market analysis, business development, commercial diplomacy, and relationship building. He previously spent 25 years in various domestic and overseas positions in the U.S. Department of Commerce’s International Trade Administration. Stuart served as the Commercial Counselor at the U.S. Embassy in Hanoi from 2014-2018 and resided in Vietnam until 2020.