Losing its mojo: Penang’s fading fortunes

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FMT LETTER: From Calvin Sankaran, via  email

Over the last four decades Penang had transformed itself from a sleepy backwater to one of the world’s most important high-tech electronics manufacturing hubs. The state’s visionary Chief Ministers, by sheer force of determination and single-minded focus, had turned Penang a global industrial powerhouse.

To understand the importance of the manufacturing industry to Penang, consider these statistics for 2013 – it comprised 49% of the state’s GDP and provided employment to 30% of the total labour force. The role of Penang in the global supply chain is highly critical too, any interruption to Penang’s manufacturing output will have a catastrophic impact on the global high tech supply chain.

The first wave of Penang’s industrialisation involved mainly simple assembly operations. While the second wave saw the state graduate to higher-value added and more technologically sophisticated activities such as Research & Development (R&D) and design as well as cutting-edge industrial sub-sectors such as LED, biotech, etc.

When Penang rocketed to the No 1 position investment ranking among the Malaysian states in 2010 and 2011 for the first time, there was much elation and optimism. With the ushering in of the new administration under Chief Minister Lim Guan Eng in 2008, expectations were high that it would herald a new era of prosperity and development. Penangites were convinced the state would finally catch up with its more successful rivals Singapore and Hong Kong.

However what transpired was the exact opposite – the state’s fortunes taking a drastic plunge with its future looking increasingly bleak and uncertain. Penang’s investment ranking also has fallen off the cliff with the state desperately struggling to maintain its attractiveness and competitiveness even among its fellow Malaysian states.

While other states have grown by exponentially, Penang has bucked this trend and underperformed badly. Worryingly the state leadership looks unfocused, bereft of ideas or concrete plan to steer the state out of the choppy waters it found itself in.

2012 had been a truly annus horribilis for Penang as far as investment concerned. It saw a shocking and unprecedented 72% drop in investment amount received. The state also tumbled from No 1 to a lowly No 6 position in the ranking. Only domestic investment into the state’s over-inflated housing sector kept Penang from dropping to the very bottom of the ranking table.

As such Penangites were naturally hoping 2013 would see the state shaking off its poor performance and recovers its rightful place – at the top of the investment ranking. Unfortunately the state’s investment performance in 2013 neither shows signs of recovery nor inspires much confidence that it would be in the future. In fact the data seemed to indicate larger issues looming on the horizon and pointing to systemic and structural problems.

Despite the nation receiving the highest amount of investment ever in 2013, Penang’s performance was a huge disappointment. The state performed poorly and finished a distant No 4, barely edging out Sabah. It received RM3.9 billion in investment, a puny amount compared to Johor (RM14.4 billion), Selangor (RM9.8 billion) and Sarawak (RM8.3 billion).

While the investment amount received last year did show a slight improvement compared to the year before, it was hardly something to be proud off. This is because using 2012 data as a benchmark for comparison is rather inappropriate as that year (2012) was the nadir as far as investment is concerned. A better comparison would be the year 2010.

When we compare 2013 investment with 2010 data the result is shocking – a massive 69% drop. On the other hand, Sarawak’s and Johor’s investment performances improved by a whopping 140% and 86% respectively for the same period.

Analysing the investment data further unveils even more serious strategic and long term concerns. For example, most of the investment (64%) in 2013 consisted of re-investments by existing companies, especially one particular MNC. Needless to say such over-reliance on a single investor is both unwise and risky.

New investments made up a mere 36% which puts Penang at the position No 7 for new investment received. This statistics is highly significant as it is a far more accurate indicator on the attractiveness as an investment destination. In this ranking Penang lagged behind minnows such as Kedah, Negeri Sembilan and Sabah.

Apart from these hard statistics, anecdotal evidence, personal observations and feedback from the industry in Penang also support the fact the manufacturing industry is in a state of steep downward trajectory. This can be seen from a few key trends that had been shaping up in the state in the last few years.

First, there has been an increase in retrenchments, scaling down of operations and even plant closures. Despite CM’s statement about Penang having a shortage of workers, in reality these jobs are mostly low-paying and low-value added positions that no Malaysians would be interested in.

Secondly, Penang is no longer the magnet that attracts top tier high tech companies to invest in the state. The fact that the Top 5 investments in 2013 for Penang featured two juice and candies factories illustrates this point rather painfully.

Thirdly, high-paying technical and management jobs creation has completely dried up. This has led to many high-calibre senior professionals and fresh graduates moving to other destinations such as Kedah, KL, Johor or even Singapore. In fact ‘brain drain’ is one of the biggest dangers facing Penang today.