Tech Floods Into MalaysiaSafe From Natural Disasters, Island of Penang Attracts ManufacturersBy JAMES HOOKWAYPENANG, Malaysia—At first glance, this lush island looks like any other Southeast Asianvacation spot. Visitors flying in catch sight of sandy atolls before skimming past palm-shadedbeaches and fishing boats bobbing in turquoise waters.Last years natural disasters in Japan and Thailand caused a global breakdown in the technologysupply chain. This has many companies looking elsewhere to manufacture everything from carparts to hard-disk drives. The WSJs Patrick Barta explains.Then Penangs true nature reveals itself. Hangar after hangar at the bustling airport is decked outin the liveries of shipping companies DHL International GmbH, United Parcel Service Inc. UPSand FedEx Corp., each dedicated to flying out boxes of LED displays, chip sets and othersophisticated electronics.Following last years earthquake in Japan and floods in Thailand, global manufacturers arelooking to Penang and elsewhere to broaden their supply chains for everything from car parts tosemiconductors to hard-disk drives.The expansion is creating a growth spurt in countries that already were seeing investment climbas Chinas labor market overheats, putting this tropical state and places like it on the globalinvestment map.Penangs leader, Chief Minister Lim Guan Eng, is banking on another bumper year forinvestment in 2012 after taking steps to eliminate red tape—for example, pushing theconstruction of new industrial parks to make it easier for companies to expand here."We had fallen off the radar screen, so we went back to the drawing board," says Mr. Lim. "Itjust takes a little time to shake off the rust."
James Hookway/The Wall Street JournalA street in Georgetown on Penang, which expects another big year.Last year was a watershed for companies operating global supply chains. At the height of thedisasters in Japan and Thailand, companies relying on the kind of just-in-time supply chainspioneered by Toyota Motor Cowere left scrambling for alternative suppliers. The hardwareindustry was hit especially hard by the months of flooding in Thailand, with disk-drive makerWestern Digital Inc. and electronics companies Sony Corp. and Toshiba Corp. among thoseforced to temporarily shut down plants there.At one point, global prices for disk drives doubled before Western Digital and othermanufacturers began boosting production in Malaysia in the immediate aftermath of the floods.Now the California company is expanding across Malaysia in a five-year, $1.2 billion effort towhittle down its dependence on Thailand. A new Malaysian plant is expected to open this year.Chip maker Intel Corp., audio company Bose Corp. and electronic-equipment makers NationalInstruments Corp. and Agilent Technologies Inc. are among those that have also begunexpanding operations here."Longer term, many multinational companies are preparing better for natural disasters andsupply-chain disruptions, and they now see Penang and Malaysia as an attractive location," saidHeng Huck Lee, managing director at local contract manufacturer Globetronics Technology Bhd.Investing here does carry some risk. Malaysia is entering a period of political turbulence inwhich the long-ruling National Front faces stiffer competition from an opposition alliance. Thatmeans state governments run by opposition paries, such as in Penang, could face policy conflictswith Kuala Lumpur.But those tensions are relatively minor compared with those of some of Malaysias neighbors.The country sits safely away from the so-called Pacific Ring of Fire, mostly unaffected by theearthquakes and volcanoes that can afflict countries such as Japan and Indonesia. Malaysia alsois less likely to fall victim to the kind of flooding that left Thailands economy flailing last year.
Also helping Penangs appeal are an international air hub and strong logistics infrastructure,including inexpensive and reliable supplies of electricity and pristine water.The move to spread risk isnt necessarily requiring more money given the speed at which wagesare rising in production hubs such as China and Thailand, where sharply higher minimum wageswere introduced in April. And expanding into countries with lower taxes and logistics costscould actually reduce a manufacturers spending, said Stan Aronow, a research director attechnology consulting firm Gartner group. The cost for the manufacturers customers: "Notmuch, if at all," he said.In Malaysia, foreign direct investment reached 7.5 billion ringgit ($2.37 billion) in the firstquarter, up 15% from a year earlier. Many of the inflows were generated by Penang, an old hauntfor pirates that has seen an investment boom in recent years.The states inflows hit a record 12.2 billion ringgit in 2010 after a prolonged slump and reached9.1 billion ringgit last year, even as Mr. Lin tried to contain the inward rush of money to preventthe economy from overheating.Investment and manufacturing are surging in the Philippines, too, as companies spread their risk.The economy there grew at a 6.4% annual rate in the first quarter—the fastest pace in years.Some companies have been operating in Penang for years. Intel co-founder Andy Grove came toPenang to build a factory in the 1970s and was followed by a host of Japanese and Westerninvestors. Penang later lost some of its swagger as global tech companies planted stakes in less-expensive China.But as wage inflation approaches 20% a year on Chinas industrial seaboard, Penangs old guardis ramping up production.For example, Intel of Santa Clara, Calif., is expanding operations by scaling up a large researchand development hub, which now employs more than 2,000 engineers, some of whom are thechildren of Intel employees hired in the 1970s and 80s. Thousands more are employed in Intelstest and assembly plants. The worlds biggest chip maker has invested more than $4 billion inMalaysia over the years."Weve always had a view on how to make sure we have diverse locations," says IntelsSoutheast Asia director, Uday Marty. This is partly to ensure that the chip makers plants areclose to customers and to let Intel tap engineering talent around the globe."You also want to safeguard against things such as natural disasters," Mr. Marty said.Write to James Hookway at email@example.comA version of this article appeared July 19, 2012, on page B4 in the U.S. edition of The WallStreet Journal, with the headline: Tech Floods Into Malaysia.