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  • ElectronicsManufacturingServicesMalaysias EMS Advantage

    Malaysian Industrial Development AuthorityBlock 4, Plaza Sentral, Jalan Stesen Sentral 5Kuala Lumpur Sentral50470 Kuala Lumpur, Malaysia. Website: http://www.mida.gov.my Tel: (603) 2267 3633 Fax: (603) 2274 8463 E-mail: pa_electronics@mida.gov.my

    Published by Electronics Industry Division, MIDAApril 2007

  • Electronics manufacturing services (EMS)providers are assuming an increasinglyimportant role and making a significant impacton manufacturing industries worldwide today.

    EMS companies function as strategic partnersto larger Original Equipment Manufacturers(OEMs) by providing them with a full range ofservices which include contract design,prototyping, final system assembly,configuration, order fulfillment, and repair andafter-market services. By using the services ofEMS providers, OEMs can concentrate on theircore competencies such as research andproduct development, brand building, salesand marketing.

    Outsourcing to EMS providers also enablesOEMs to gain access to the latest equipment,process knowledge and manufacturing know-how without having to make substantial capitalinvestments as capital risks are converted intovariable costs.

    The trend in manufacturing partnership hasbeen growing steadily as OEMs strive to cutcosts to maintain their competitive advantagein the face of rapidly changing marketconditions, technological advances and globalcompetition.

    The EMS industry first appeared some 30 yearsago and has flourished since. Consolidationwithin the industry has led to the emergence ofa few well-known multi-billion dollar tier onecompanies with worldwide operations such asSolectron, Flextronics, Celestica, Jabil, Plexusand Sanmina-SCI.

    According to San Jose-based market researchfirm Electronic Trend Publications, revenue forthe global EMS market totaled US$190 billionin 2005, a 14 per cent increase over 2004. TheEMS industry accounted for 23 per cent of thetotal worldwide electronics assembly valued atUS$810 billion. The EMS market will continueto grow in the coming years as outsourcing ofelectronic manufacturing continues. Therevenue for the global EMS market is estimatedto reach US$328 billion in 2010. The firm alsofound that in the EMS industry, Asia accountedfor 45 per cent of the industrys production in2005, while the computer and peripheralsmarket made up 39 per cent of the industrysrevenue.

    The single, compelling reason for OEMs tooutsource to EMS providers is to improve theiroverall supply chain and gain a competitiveadvantage. Contract manufacturing offersnumerous benefits to OEMs, such as improvedefficiency, cost reductions, enhanced quality,flexibility, advanced production technology,additional capacity, faster time to market andresponsiveness.

    Traditionally, computers, cell phones andtelecommunications hardware provided thegreatest demand for outsourcing to EMSproviders. There are further opportunities forEMS providers outside the computer andcommunications fields, namely those in thedefense, medical, industrial, automotive, andconsumer sectors. A consulting firm,Technology Forecasters, Inc. (TFI) estimatedthat EMS could capture as much as US$10billion in medical devices outsourcing businessin 2009.

    The positive trends of outsourcing in the EMSsector will be a major opportunity in the comingyears. The In-Stat market intelligence reportestimated the contract manufacturing output inAsia to reach US$155 billion in 2009 fromUS$70.2 billion in 2004, with a compoundannual growth rate of 17 per cent over the2004-2009 period. This strong growth isincreasingly driven by the availability of low-cost labor and an increasing pool of technicalexpertise in the region. With increasing globalcompetition, challenges on staying cost-effective, and requirements for top qualitywork, more international companies areexploring outsourcing options in Asia inparticular, Malaysia.

    ManufacturingSuccess

    Gearing for

    The Global Trend

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  • The development of the E&E industry hasencouraged the establishment of contractmanufacturing services companies inMalaysia. These companies provide vitalsupport to the semiconductor, consumerelectronics, computer and peripherals,communications and data storage industries.Leading EMS companies, many of whom rankamong the top 50 companies worldwide, haveestablished and expanded their operations inMalaysia. Among them include Flextronics,Solectron, Sanmina-SCI, Celestica, JabilCircuit, and Plexus. These companiesmanufacture products or parts for OEMs andOriginal Design Manufacturers (ODMs). Theyprovide total manufacturing solutions byundertaking product design, manufacturingand distribution services for customers.

    BCM is one of the home-grown companies thathave since established a niche position withinthe EMS industry. Other Malaysian companiessuch as Globetronics, Carsem, Unisem and AICspecialized in integrated circuit andsemiconductor packaging.

    Based on MIDAs records, there are more than1,695 E&E companies in operation in Malaysiawith investments of US$24.5 billion andemployment of more than 596,000 persons or37.8 per cent of total employment in themanufacturing sector. In 2006, exports ofelectronic products from Malaysia amountedto US$74.0 billion or 62.2 per cent of totalmanufacturing exports. There is thus goodpotential for the further development of theEMS industry in Malaysia.

    With an abundance of trained manpower, awell-developed infrastructure and an efficienttelecommunication system coupled with itscontinued commitment to research anddevelopment and infrastructure and human

    resource development, Malaysia is a viablelocation for the establishment of EMSoperations. The countrys sound informationtechnology infrastructure also allows EMScompanies to tap opportunities in virtualmanufacturing, a growing market trend arisingfrom the influence of the cyber world and itsborderless society.

    Malaysia also offers attractive tax incentives toencourage EMS companies to locate theiroperations in the country. These incentivesrange from Pioneer Status and Investment TaxAllowances to pre-packaged incentiveswhich incorporate a special package ofincentives to meet the specific needs ofindividual projects.

    The incentives are given based on certainpriorities such as the levels of value-added,technology used, industrial linkages, R & Dexpenditure, employment of scientific andtechnical staff, and capital investment incurred.Companies which qualify for these direct taxincentives are given partial or total relief fromthe payment of income tax for a specifiedperiod.

    Malaysia, strategically located in the vibrantgrowth region of Asia, is the ideal location forcompanies looking to establish EMS operationsor to source EMS solutions. Malaysia is also inan advantageous position to be the springboardfor EMS companies intending to penetrateother markets in the region. With the fullimplementation of the ASEAN Free Trade Area(AFTA) in 2003, EMS providers benefits from asingle market with a total population of morethan 500 million people and a combined GDPof around US$800 billion.

    Malaysias market-oriented economy andgovernment policies that maintain a businessenvironment with opportunities for growth andprofits have made the country a highlycompetitive manufacturing and export base.Investors are attracted by Malaysias: Political and economic stability Educated and productive multilingual

    work force Wide use of English, especially in business Liberal investment policies Attractive package of investment incentives Well-developed financial and banking sector Legal and accounting system based on

    international practice Well-developed infrastructure and

    telecommunications support Intellectual property protection

    Thus, multinational corporations from morethan 40 countries have invested in over 3000projects in Malaysia.

    The World Competitiveness Yearbook 2006,published by the Institute for ManagementDevelopment, ranked Malaysia as the 8th mostcompetitive country with population of morethan 20 million and the 8th most competitiveamong Asian countries ahead of India andThailand.

    According to the World Bank group, Malaysiaranked 21st out of 155 countries for ease ofdoing business.

    In the Deutsche Bank Research Report 2005,Malaysia was ranked among the top 5 growthcentres in the emerging markets which willpost the highest GDP growth rates from 2006to 2020. Malaysia was placed second, with aprojected GDP growth rate of 5.4 per cent perannum, surpassed only by India (5.5%).Malaysia was ranked ahead of China (5.2%),Thailand (4.5%) and Turkey (4.1%).

    US-based Employment Conditions Abroad(ECA) International Limited has also rankedMalaysia as among the five least expensivecountries in the world based on a price surveyon goods and services.

    Frost & Sullivan (F&S), a global growthconsulting company ranked Malaysia amongthe top five countries for energy, finance,logistics and global shared services andoutsourcing (SSO).

    The favorable ranking is a testimony to theattractiveness of Malaysia as an offshorelocation for EMS to conduct their businessactivities.

    The worlds major electronics companies withmanufacturing operations in Malaysia include:

    USA : Freescale Semiconductor, Intel,Texas Instruments, Dell, AMD,Agilent Technologies, LinearSemiconductor, Motorola,Seagate and Western Digital.

    Asia Pacific: Sony, NEC, Panasonic, Hitachi,Toshiba, Sanyo, Alps, Brother,Canon, JVC, Konica-Minolta,Rohm, Fujitsu, Samsung,Nichia, Funai, TDK, BenQ,Sharp, Mitsubishi, Fuji Electric.

    Europe : Alcatel, Philips,STMicroelectronics, Siemens,Marconi, Osram, Infineon.

    Its vibrant business environment and excellentquality of life have made Malaysia the choicelocation for offshore manufacturing operations.

    Malaysias EMS Industry MALAYSIA: An Attractive Investment Centre

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  • The corporate tax rate for both local and foreignowned companies in Malaysia has beenreduced to 27 per cent for the year ofassessment 2007 and will be further reducedto 26 per cent in the year of assessment 2008.With this reduction, the investment environmentin Malaysia is even more competitive. Malaysiascorporate tax rate is lower than many of thecountries in the region.

    A wide range of tax incentives is also offered bythe government to encourage investment inmanufacturing activities. Companies which aregiven tax incentives qualify for partial or totalrelief from the payment of income tax for aspecified period of time. These incentives areconstantly reviewed to ensure that Malaysiamaintains its competitive edge to attractinvestments.

    1. Main Incentives for ManufacturingCompanies Pioneer Status: Income tax exemption

    of 70% or 100% on the statutory incomefor five years; or

    Investment Tax Allowance: Investmenttax allowance of 60% or 100% on thequalifying capital expenditure for fiveyears. The allowance can be utilised tooffset against 70% or 100% of thestatutory income.

    Reinvestment Allowance: Reinvestmentallowance of 60% for 15 years on thequalifying capital expenditure. Theallowance can be offset against 70% or100% of the statutory income.

    Accelerated Capital Allowance: Anaccelerated capital allowance consistingof 40% and an annual allowance of 20%is available for three years after thereinvestment allowance period.

    2. Incentives for High Technology Companies Pioneer Status: Income tax exemption

    of 100% on the statutory income for fiveyears; or

    Investment Tax Allowance: Investmenttax allowance of 60% on the qualifyingcapital expenditure for five years. Theallowance can be utilised to offsetagainst 100% of the statutory income.

    3. Incentives for Strategic Projects Pioneer Status: Income tax exemption

    of 100% on the statutory income for 10years; or

    Investment Tax Allowance: Investmenttax allowance of 100% on the qualifyingcapital expenditure for five years. Theallowance can be utilised to offsetagainst 100% of the statutory income.

    4. Pre-packaged Incentives Customised packages that cover tax and

    non-tax incentives.

    5. Incentives for R&D

    6. Incentives to Strengthen Industrial Linkages

    7. Other Incentives Industrial Building Allowance Infrastructure Allowance Import duty exemption for:

    - raw materials/components- equipment and machinery

    Flextronics has a very strong presence inMalaysia. Our confidence in Malaysia isgrowing stronger and is evidenced by ourexpansive investment in the Port of TanjungPelepas (PTP) Free Trade Zone in Johor.

    The Campus Concept facility in PTP is afully integrated manufacturing centre aimedto enhance our operational efficiency andcompetitiveness. It is a one-stop shopsolutions ranging from R&D, industrialization,mechanicals, PCBA, system integration,testing and logistics.

    Koh Yew WahGeneral ManagerFlextronics Technology (Malaysia) Sdn Bhd

    Malaysia is a growing and vibrant economywith a rich technology heritage. Solectronhas had a strong presence in Malaysia formore than 15 years because of the labortalent that enables Solectron to serve globalcustomers. Utilizing the Solectron ProductionSystem, our industry-leading combination ofLean and Six Sigma, we are helping customersto reduce costs, increase flexibility, minimizelead times, and improve quality to maximizecompetitive advantages. Malaysia is also hometo the Solectron Technical Center and FailureAnalysis Labs, which provide the regionalsites with support in the areas of Process andTest Development, R&D in the emerginginterconnect technologies such as liquidcrystal display assembly, High i/o Ball GridArraypackage assembly, lead free soldering,flip chip and direct chip attach processes.

    Joe Teng Heam HongSenior Vice PresidentSouth Asia Operations Solectron Corporation

    Incentives for Growth

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  • Malaysias advantage lies in the area to handlecomplex products with high flexibilityrequirements well. The technical competent ishigh and management and leadership

    capability in manufacturing is one of the best inthe world. Coupled with strong work ethics andbusiness-friendly and proactive governmentsupport, it is definitely one of the best, if not thebest, country for EMS industry.

    YJ Lim Managing DirectorPlexus Manufacturing Sdn. Bhd.

    MALAYSIA:Selected EMS, Sub-Contracting and Printed Circuit BoardAssembly Companies

    8

    As more OEMs from America and Europelook for ways to cut cost, there is going to becontinuous growth for the EMS industry inMalaysia. With the increase in designsolution providers, and inflow/ expansions ofOEM multinationals in the country, the EMSindustry in Malaysia is set for stronger growth.Areas of growth are likely to be focused oncommunication PCBAs, telecommunicationequipment, and integrated system solutions.Malaysia has demonstrated good experienceand track record as an electronicsmanufacturing destination, with the rightbusiness climate, political stability, electricaland electronics engineering capabilities,excellent infrastructure with a pool of skilledand multilingual workforce.

    CY LeeChief...

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