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Malaysia Extends 100% Foreign Equity to 2004

Malaysia has extended a ruling that allows foreigners to have 100% equity in proposed manufacturing plants by another three years.

International Trade and Industry Minister Rafidah Aziz said the move was prompted by requests from investors. "This flexibility will help provide the impetus, and boost, for investors to continue to invest in the local manufacturing sector," she said in Kuala Lumpur recently.

The ruling was introduced in July 1998 to counter the then recession, and was expected to expire on 31 December, 2000. It covers all manufacturing activities, except in areas where local small- and medium-scale enterprises have the capabilities and expertise.

The extension indicates just how seriously the government is taking predictions of an impending global slowdown, which would be likely to harm electronics manufacturers in 2001. Malaysia's ability to attract new foreign direct investment in recent years has suffered from stiff competition from China, Vietnam and India, all of which are relatively cheaper, with abundant labor and huge potential markets. It has also lost out to some Southeast Asian neighbors because of a ringgit peg imposed at the height of the Asian currency crisis.

Malaysia has lowered projected economic growth for 2001, from 7% to 5.8%, and is bracing for worse to come yet. The country is among the largest producers of semiconductors and electronic components in the world, and is reliant on exporting such goods - particularly to the US, Japan, Taiwan, Singapore, Hong Kong and Europe - to keep its economy on an even keel. In 2000, about 60% of the total export revenue of M$369.5 billion (US$97.2 billion) came from exporting electronic and electrical products (see Table).

Rafidah said that the extended investment policy will also help with the expansion and diversification of existing plants. She urged local manufacturers be more productive and efficient in order to face growing competition from countries with lower production costs.

Commenting on the US economic slowdown, and the weakening demand for personal computers, Rafidah suggested that 2001 may see exports in the electronics sector dwindle by up to 10%.

Local manufacturers have already indicated their cautiousness about the first half of the year. As early as October last year, Unisem (M) Bhd, one of the largest local subcontract semiconductor manufacturers, suggested that the first half of 2001 "could be tough." A company official was cited as saying that there were mixed signals from different customers, some forecasting continued growth, and others forecasting a slowdown in their respective business segments; signals which point towards a wary market and unpredictable times.

Projections from market researcher Dataquest Inc support the contention that the boom times are over. The San Jose, California-based company's research indicates that there was a 31% rise in chip revenues, or up to US$222.1 billion, in 2000. Earlier projections suggest that the market will see a slower expansion of 21% in 2001 and 10% in 2002, turning to negative growth in 2003, largely due to manufacturing capacity expansions initiated during the boom years.

With the local economy inextricably linked to some of the largest American, Japanese and European semiconductor manufacturers in the world, and their long-established offshore assembly bases here, Malaysia can expect a hard landing in the coming years.

Malaysia can, however, expect to cushion the blow when the first two pioneer advanced wafer foundries in the country, Silterra (M) Sdn Bhd, and 1st Silicon (M) Sdn Bhd, come onstream this quarter, with their 0.25micron fab lines.

by Julian Matthews, Malaysia

(March 2001 Issue, Nikkei Electronics Asia)

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