An Electrifying Industry Outlook on E&E

The Malaysian-German Chamber of Commerce and Industry (MGCC) recently hosted an electrifying Industry Outlook event where Malaysia’s electrical and electronic (E&E) industry took centre stage.

A key driver of the Malaysian economy, the E&E sector accounts for nearly 7% of the country’s GDP and is a major contributor to the export industry and employment market. Last year, the industry created 600,000 jobs.

In 2022, Malaysia was the 9th largest exporter of E&E products and the 6th largest exporter of semiconductors.

With a history that spans five decades, Malaysia’s E&E journey began with only eight companies in the 1970s and today, the industry continues to expand amid global demand for consumer products and industrial electronics.

Although the industry is forecasted to undergo a downturn of 10.3% this year, it is poised to make a recovery with a projected growth of 11.8% in 2024.

“It is well noted that leading multinational corporations (MNCs), local small and medium enterprises (SMEs), mid-tier companies (MTCs) and local large corporations (LLCs), have successfully integrated, resulting in a robust and comprehensive ecosystem that make Malaysia a significant player within the E&E global value chain,” Matrade chief executive officer Sharimahton Mat Saleh said in her keynote address.

“Malaysia has developed its core competencies in the production of silicon wafers, semiconductor assembly, manufacturing and distribution solutions, engineering services for inspection, test, measurement, analytical, and automated handling equipment. Thirteen percent of the world's chip assembly, testing and packaging activities take place in Malaysia and 7% of the semiconductor trade passes through the country.”

How the NIMP will facilitate the heartbeat of the Malaysian economy

The E&E sector was identified as one of five sectors that can boost Malaysia’s future exports in the New Industrial Master Plan 2023 (NIMP 2023) which seeks to revitalise the manufacturing sector and advance Malaysia’s economic complexity to ensure the country remains resilient amid an increasingly competitive global trading landscape.

During a robust panel discussion, Noor Suziyanti Saad, Director of the E&E Division of the Malaysian Investment Development Authority (MIDA) explained that the NIMP 2023 focuses on two areas integrated circuit (IC) design and wafer fabrication.

Noor Suziyanti added that other areas in the semiconductor industry that will benefit from the NIMP are R&D design and advanced packaging which allows multiple devices to be merged and packaged as a single electronic device.

Last year, MIDA approved 29.3 billion but this year the investment agency is seeing promising prospects and is projected to double thanks to new investments.

However, as more investments flow in, some challenges require addressing such as talent crunch and a lack of infrastructure in new industrial areas to facilitate companies’ operations including the lack of water and electricity which can severely hinder factories from fulfilling their orders.

“This is the feedback from newcomers when they want to expand operations. The NIMP addresses these issues and how we can find a way to facilitate our investors,” Noor Suziyanti added.

Challenges E&E players face when implementing green technology

Reducing dependency on fossil fuel by transitioning to renewable energy is the route businesses are heading towards in the quest to become energy efficient and achieve carbon neutrality. The destination is clear but the journey comes with its fair share of challenges.

The good news is there is now an existing framework from the Malaysian government to steer the country to a high-value green economy which industry leaders say will remove some hurdles to this goal.

“(In the past), I would say there would be a lot of challenges but since the NETR was announced, we now have a framework from the government on how we will move towards net zero,” said Florian Herrmann, Vice President & Chief Financial Officer of Infineon Technologies (Malaysia) Sdn Bhd.

However, Herrmann pointed out one issue regarding the roadmap which is the timeline between respective industries and what the framework proposes does not align.

For example, Infineon aims to reduce its carbon emissions by 70% by 2025 but the NETR has set 2050 as a target for carbon neutrality which is 20 years later than industry players.

“Nevertheless, we are very happy because of the path Malaysia is going, we are satisfied there is a framework now but we need acceleration to meet our Infineon targets. Most industry players have set a timeline for neutrality between 2030 and 2040 and want to be carbon neutral much earlier than what the Malaysian government envisioned,” he added.

Addressing the talent crunch

Given the aspirations to further grow the industry to meet global demand, a significant talent boost is required to support this growth. According to reports by consulting firms, this shortage is expected to become a tech worker crisis by 2030 at a time when the industry will grow more than 80%.

For major players like Siemens in Malaysia, the strategy of the leading technology provider believes in collaborating with educational institutions as a means of upskilling and reskilling its workforce as well as formulating a company culture that fosters learning.

“A good place to start when it comes to upskilling and making sure you have the right skill set is starting with your own company,” said Tindaro Danze, president and CEO of Siemens Malaysia Sdn Bhd.

Danze said besides having programmes that encourage staff to go above and beyond their job description, leaders must embrace failure as a way of inspiring learning.

“The other thing is the experience in executing projects – we have been around the E&E market for decades and some things don’t work the way you expect them to but you are allowed to fail.”

The current focus is to upskill Siemens’ existing workforce and to enable this, the company has collaborations with the Selangor Development Centre. Upskilling the future workforce is just as crucial so having contact with several universities allows Siemens to have influence over the syllabus and run its professional programme. The other support which Siemens provides for the semiconductor ecosystem is the Digital Experience Centre that was launched in Penang to attract SMEs to utilise the sandbox-like centre to test out their manufacturing without losing big bucks.

How smaller companies are bouncing back from the effects of the MCO

After experiencing several movement control orders (MCO) during the Covid-19 outbreak that hampered operations, the E&E industry had to realign its business strategy.

The likes of TS Electrical Marketing Sdn Bhd whose business started with manufacturing switchboards found that their cash conversion cycle became longer when components were delayed due to the long lead times for digital power meters which led to margin losses.

“To cope with this, we tried to look into other strategies so we invested in a company to pick up some digital technology, all thanks to a grant from the Malaysian government – that’s how we tech up our company during this downtime,” Chiam shared.

Outlook of Malaysia’s semiconductor industry

Andrew Chan, Director of Malaysia Semiconductor Industry Association (MSIA) subscribes to the belief that Malaysia should take the opportunity to be more aggressive in order to increase its market share globally.

“In some ways, I feel the NIMP is not aggressive enough because if Malaysia were to keep its pace based on the RM593.52 billion of E&E exports in 2022, we are looking at 1.3 trillion of exports by 2030,” Chan said.

“Over the last seven years, E&E investments by MIDA came in at about RM248 billion, if we can replicate that we have a chance of doubling the figure.”

However, he said that Malaysia still needs a proper response to the various chips that several countries have enacted to boost semiconductor supplies.

“Even countries that are not in the semiconductor value chain like Brazil and India want to get in for national security so if you are one of the top five or 10 semiconductor players in the world, we need to be more aggressive,” Chan added.

During the discussion, Chan also unpacked reports by consulting firms that provided a breakdown of the profit pool in the industry.

“What (these reports indicate) is that the designers take about 45% of the profit pool, fabrication takes about 45% leaving only 10% for the assembly test which is where Malaysia is strong – that seems to say we are low value and low margin but that is only looking at the profit pool,” he said.

When it comes to profit margin, chip designers record around 80% to 100% of profit margin while fabrication is around 60% and in the assembly test sector, profit margins can range from 5% to 25%.

“So, I would say that the profit margin is good, 10% may look small but in terms of profit margin, it’s actually quite high,” Chan concluded.