Temporary entry ban on Indians may impact Malaysia's electronics industry

As COVID-19 cases soared in India and its neighbouring countries, Malaysia last Wednesday (May 5) announced a temporary entry ban on citizens of Sri Lanka, Bangladesh, Pakistan and Nepal. It had earlier on April 28 stopped flights to and from India in an attempt to prevent a new COVID-19 variant from entering the country.

The coastal state of Penang, which is the Electrical and Electronics (E & E) manufacturing hub of Malaysia, has expressed concerns that this will impact the state's manufacturers as it is dependent on skilled Indian software and information technology (IT) professionals.

Penang State Executive Councillor for International Trade, Domestic Trade, Consumer Affairs and Entrepreneur Development, Datuk Abdul Halim Hussain express concerns that the ban will impact the state's industrial sector. Datuk is a Malaysian title usually conferred by the King and Datuk Abdul holds the position equivalent to a state minister.

Penang state consists of Penang island which has a land area of 293 square kilometres and the city of Seberang Perai (751 square km) on the mainland of Peninsular Malaysia. The island is connected to the mainland by two road bridges.

Not too long ago, Penang was known to some as the "Silicon Valley of the East". It has a 48-year-old E & E industry and began attracting international manufacturers back in the 1970s with well-known US firms like Intel, Broadcom, Motorola and Dell setting up international manufacturing plants on the island. However, from around 2005, manufacturing companies gradually left its shores for China which offered plentiful skilled labour at lower cost.

Recent years saw the tide turning. Some manufacturers have returned to Malaysia because of rising costs in China as well as higher tariff - the consequence of the "trade war" started by the previous US administration. Interestingly, some Chinese companies who see setting up overseas plants as a way of getting around US tariffs, are doing so in Malaysia. In fact, Malaysia has specifically targeted Chinese manufacturers and has made it attractive for them to set-up factories in Malaysia by way of tax exemptions and investment tax allowances.

Penang to a certain degree competes with Singapore, which is 700 kilometres further south, for electronics manufacturing investments. Its largest advantage is that it has a significantly lower cost of labour when compared to the island nation.

At least 50 per cent of foreign direct investment (FDI) into Malaysia goes into the manufacturing sector making it the biggest magnet for FDI among various business sectors. At the moment, manufacturing companies from US and China are the two largest foreign investors in Malaysia.

Notable recent investors include US chipmaker Micron Technology, iPhone supplier Jabil Inc. Both have factories in Penang. Micron has pledged to invest USD 365 million in Malaysia over the next years. In the first half of 2019, foreign direct investments committed to Penang jumped 11 times to about USD 2 billion.

According to German market and consumer data company Statista, Malaysia attracted a total of MYR 21.79 billion (USD 5.3 billion) of foreign investments into the E & E industry between 2011 to 2019. Malaysia's share of the global backend semiconductor output is eight per cent and Penang contributes 80 per cent of this.

In 2018, the E & E sector produced USD 92.6 billion worth of exports for Malaysia. This was followed by another strong eight months between January to August of 2019 where E & E exports rose 0.7 per cent to USD60.2 billion. This is at a time where overall exports for all industries in Malaysia declined 0.4 per cent and electronics exports from other countries such as Singapore and South Korea fell.

Penang has established itself as a leading location in the world for microelectronics assembly, packaging and testing. It has a strong ecosystem supported by a network of over 3,000 well diversified and competent local suppliers. Some of the areas covered include automation, software development, plastics, packaging, electronics, precision engineering and metalwork.

Therefore, the ban on Indian professions entering the country, even though temporary will have some impact on productivity and manufacturing output. The travel restriction will affect all categories of travellers, including business people, and long and short-term social visit pass holders.

"There are about 3,000 professionals from India working in this state, mostly in software and IT," Datuk Abdul said during a press conference to announce a virtual business event.

He said some of these professionals are there on a contractual basis and these Indian professionals who specialised in software and IT were needed there to contribute to the electrical and electronic industry in order to meet increasing demands for electronic chips.

He added banning travellers from India, might hamper some professionals from India from coming here which could affect the E & E industries but admitted the impact was unavoidable. Datuk Abdul went on to emphasise that they will need to train local talent to reduce the reliance of imported talent to meet the state's industrial demands.