Title: Understanding The Malaysian Electronic Industry Document Type: FS

Issues

Document No. Revision Page of Date

IR-EE-0002 New 1 24 20-Nov-09

Summary Of Changes

Rev Detailed Description of Deletion or Changes (List Effective Revised

changes by relevant section numbers; for deletions, Date By
list superceded document)
New Initial Release 20-Nov-09 0134

Prepared By: Date:

_________________________________ __________________________
Anisah Seleman
Custodian

Approved By: Date:

_________________________________ __________________________
Major (R) Zailani Safari
Project Manager

NOTE: If the content of the procedure has changed completely, indicate a "complete
revision" rather than listing each section number change. Minimum
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 2 24 20-Nov-09

1. The Current E&E Industrial Profile

The E&E industry plays an important role in Malaysia‘s development.

E&E is the largest manufacturing sub-sector in terms of GDP contribution.

The sector employs some 462,000 people or 43% of total employment in the
manufacturing sector, and contributes 62% of total manufactured exports.
Semiconductor accounts for 90% of the total electronic component‘s exports
in 2007. According to UNCTAD Handbook of Statistics, 2006-2007 Malaysia
was among the five largest exporters of semiconductor devices in the
world.
Majority are foreign-owned companies.
Equity: 96.3% foreign, 3.7% domestic (2007)
Major sources: Japan, USA, Netherlands, Singapore, Germany
Have spinned-off a few local companies eg. Globetronics, Dominant
Semiconductor, Carsem, Unisem & AIC Semiconductor.
Wafer fabrication : 5 companies (Infineon, SCG Industries-ON
Semiconductor, Silterra, X-Fab and MIMOS)
Assembly and test : 28 companies
IC design house : 28 companies
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 3 24 20-Nov-09

‗Market Trend for the Semiconductor industry in Malaysia 2006-2011‘ (Gartner

Report, 12 March 2008) reports the following:

Q: Why is Malaysia’s semiconductor manufacturing output declining?

Main reason is the continuous shift of lower-end production out of the Malaysia
market.

This shift has driven Malaysia to move up the electronic value chain in recent
years, for example, in the higher value-added manufacturing and R&D space.

Implementation of initiatives, strategies and plans by Malaysia enables the country to

remain competitive.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 4 24 20-Nov-09

Malaysia continues its drive to move up the value chain into the higher value-added
manufacturing, as well as into R&D, to ensure its long term competitiveness in the
electronic and semiconductor industry.

Malaysia continues to engage in developing a highly educated workforce and rolling

out initiatives, strategies and plans to move up the value chain.

In Malaysia, the government has initiated its strategies by focusing on

semiconductor clusters, leveraging on information and communication
technology (ICT) and enhancing its R&D capabilities.

The (Malaysian) government's investment in human resources development and

creation of Centers of Excellence will help drive the implementation of these
strategies, sustain the country's growth and move the economy up the value chain.

Gartner (March 2008) found that ―the country‘s semiconductor revenue (is set) to
grow from $9.6 billion in 2006 to $11.9 billion in 2011, with a CAGR of 4.5%‖. The
sector employed some 462,000 people or 43% of total employment in the
manufacturing sector, and contributed 62% of total manufactured exports. According
to UNCTAD Handbook of Statistics, 2006-2007 Malaysia was among the five largest
exporters of semiconductor devices in the world.

In terms of innovation output, a large proportion of Malaysian filed patents in the US

are related to the field of semiconductor.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 5 24 20-Nov-09

Moving up the value chain is crucial to ensure long term competitiveness of Malaysia.
Gartner (March 2008) reports that:

―Both Singapore and Malaysia continue to develop a highly educated

workforce, equipped with strong knowledge, creativity and innovation and
are moving up the value chain into higher value added electronic
production. These key determinants are crucial for the two close neighbours
to ensure their long term competitiveness in the electronic industry‖.

―As the Malaysian government continues to provide attractive incentives for

R&D operations, we expect that more foreign companies will be encouraged
to move into this market. We believe this expanding R&D activity will open
up new opportunities for companies to get more business in the near future‖.

―In Malaysia, the government has initiated its strategies by focusing on

semiconductor clusters, leveraging on information and communication
technology (ICT) and enhancing its R&D capabilities.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 6 24 20-Nov-09

The government's investment in human resources development and creation

of centers of excellence will help drive the implementation of these strategies,
sustain the country's growth and move the economy up the value chain‖

Singapore and Malaysia Share of Total Malaysia Semiconductor

Asia/Pacific Electronic Equipment Consumption, by
Production - 2006 Application - 2006

Figure 2. Market share of the Malaysian semiconductor and E&E sectors.

Malaysia also has a unique geographical advantage to capitalize on its position as

the central gateway to a thriving Asia/Pacific market.

―They (Malaysia & Singapore) have natural strategic advantages from their
locations as gateways to the growing Asia/Pacific markets — China and
Taiwan in the north east, India in South Asia and emerging countries like
Vietnam in Southeast Asia‖.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 7 24 20-Nov-09

In summary, Gartner (March 2008) recommended that:

 Semiconductor vendors should consider having their higher value-added
manufacturing (such as new process technology) and/or new product
development in the two markets.
 Electronic equipment and semiconductor vendors should consider Singapore and
Malaysia strategic locations as gateways to a thriving Asia/Pacific market and tap
into new business opportunities in the emerging South Asia and Southeast Asia
markets.
 Electronic equipment and semiconductor vendors should establish presences in
several different locations, such as in Malaysia and Singapore, to hedge the risks
of overreliance on one or two particular countries.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 8 24 20-Nov-09

Below is a list of the major players in the semiconductor and E&E sectors in
Malaysia.

Table 1. Major Electronic Equipment Manufacturers in Malaysia.

Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 9 24 20-Nov-09

Table 2. Semiconductor Packaging Assembly (SPA) Facilities in Malaysia

Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 10 24 20-Nov-09

Table 3. Semiconductor Wafer Fabrication Plants in Malaysia.

2. Findings from the MIGHT Innovation Audit 2008

(Semiconductor Design Industry)

In view of the recent critical global financial situation affecting many of our export
markets and consumer market in the US and Europe, slower global economic growth
outlook, the declining global share of Malaysia‘s semiconductor manufactured
exports, and because our electronics industry is a critical sector and major
contributor to the Malaysian economy in terms of exports, employment and size of
investment; MIGHT in collaboration with MIDA has conducted a 2008 MIGHT
Innovation Audit (semiconductor design industry) at the end of Sept-December 2008.

Below are the summary findings from MIGHT‘s Innovation Audit 2008.

Majority of the companies surveyed

are in the early part of the supply
chain. In particular IC design houses,
which constitute 31% of the
companies surveyed. There minimal
equipment manufacturers participated
in this survey. However, there were
several participants that are not part
the E&E supply chain, which are
venture capitalists and training
institutions.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 11 24 20-Nov-09

Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 12 24 20-Nov-09

Malaysia has built up niche capabilities and wants to become a global centre for
Analog IC Design.

Most of MNC IC Design houses (like Intel and Spansion) and local IC design houses
in Malaysia has focused and built capabilities in advanced Analog IC design and also
mixed signal IC design. The local wafer fabs in Malaysia such as Silterra and MIMOS
are also focused on advanced Analog as well as high voltage power management
ICs. MNC wafer fabs such as Infineon also focuses on analog.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 13 24 20-Nov-09

Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 14 24 20-Nov-09

What inhibits technology progress?

The top most issue inhibiting the technology progress of the company is the lack of
skilled human resources.

Almost equally as significant is the lack of funding to drive new product

development. Funding is a crucial issue for IC design companies because of the
cost of IP cells/block are too costly for the current Government grant scheme to
support. External sources of funds from VC and institutional investors are needed,
but are not forthcoming in view of the inherent risk involved and the currently
unfavourable credit environment.

Other issues are development tools (electronic design automation (EDA) tools) are
expensive to procure. However recently in June 2009, Malaysian Institute of
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 15 24 20-Nov-09

Microsystems (MIMs) in collaboration with Cadence (EDA Tool provider) has been
able to give 90% discount on EDA tools for SMEs.

Overall, the human resource

recruitment forecast over the next five
years is expected to increase.
However, year 2009 is expected to
experience a slight dip in recruitment,
partly due to the not so favourable
sales forecast due to the impending
financial crisis. The expected year-
on-year growth is about 6%.

The types of new recruits are centred

on IC design and application software
and hardware engineers. There is
also a strong emphasis on non-
technical related recruits as well.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 16 24 20-Nov-09

Innovation capability examines the

degree of innovation of a company,
based on the assessment approach
recommended by World Bank. The
audit outcome indicated that most
companies have limited external
linkages or collaborations with
external parties. However, most
companies scored very well in other
innovation stages such as awareness
and technology assessment.

Majority of the Fabless IC design

companies surveyed indicated that
they are using semiconductor
foundries are located overseas,
particularly Taiwan and China.
Among the local foundries, MIMOS
is the most popular followed by
Silterra. Only 23% of the companies
surveyed have in-house IC
fabrication facilities.

The main reason of fabless IC

houses for using local fabrication
facilities is the lack of support for the
required technology. Pricing on the
other hand does not seem to be a
critical issue.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 17 24 20-Nov-09

For fabless IC companies that

required technologies not support
locally, their technologies
requirement are centred on high
voltage CMOS, MEMS, high density
(sub 90nm), Si-GE, and non volatile
memories.

On questions related to Government

grants, only 8% of the companies
surveyed are currently receiving
Government grant support, while
50% of them do have the intention to
seek Government grant support in
the near future.

3. The Current Issues and Challenges

To address the wide range of issues faced by the electronics industry, we have
mapped out the supply chain of a typical supply chain model for consumer
electronics products. This model will serve as the basis to further understand the
linkages between the various players and the issues that they face.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 18 24 20-Nov-09

IC Design Direct Support to Key 3rd tier or house brand

Houses Customers e.g. Samsung of distributors

IC ASIC ASIC
Fabrication ODM End Product Market
Solution Solution
Houses /OEM Products Distributors
Providers Distributors

Design-in as
referenced parts Product (E&E/Software/
IC
Packaging Mechanical) Design
Houses Generic IC Houses
Providers

Mechanical Prototyping
& Tooling Houses
Key Decision Makers
Technology
Providers

Semiconductor Sector E&E Product Sector

Figure 3. Supply chain model for consumer electronics products

The segregation between the semiconductor and the E&E product sectors can be
clearly defined by examining the supply chain model shown above. Upstream
activities from the ODM/OEM position are considered part of the semiconductor
sector, while activities downstream of the ODM/OEM (inclusive) are considered part
of the E&E product sector.

In general the ASIC solution provide (or Fabless design house), for example
Pixelworks and Genesis for image processing, and the ODM/OEM/System
Integrators are the main consumers of products and services offered by upstream
companies.

The current issues presented in this paper are discussed as two separate sectors,
with their unique challenges faced by the industry.

1. Issues from the Semiconductor sector

Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 19 24 20-Nov-09

FSA‘s study1 on the challenges and opportunity of successful fabless companies

suggests 5 key challenges in the Global semiconductor industry.
1. Escalating Costs of Tapeout
 Third Party IP industry fragmented and small –and verification is
increasingly difficult and costly
 Escalating cost of design has caused a decline in expensive U.S. start-
ups.
2. Pricing Pressures--Volume increasing faster than revenue
3. Time to Market Pressures--Window of opportunity is sometimes shorter than
design cycle time
4. Pace of New Innovation Adoption Challenges Model--IDMs assert advantage
in DFM and DFT
5. Changing Landscape--Backend business model reinvents itself

―Technical problems keep getting harder, the cost of new designs keeps escalating,
and no end to these trends is in sight‖. The total IC development cost increases as
the technology progresses from .18um down to 45nm, where majority of the cost
contributor are Design/Verification/Layout, Software, and Test & Product
Engineering.

Source : FSA, 2006

Figure 4. Escalating IC development cost as the technology increases

1
―Challenges and Opportunities Around the Globe - Criteria of Successful Fabless Companies‖, Jodi Shelton,
Executive Director, FSA. November 2006
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 20 24 20-Nov-09

Price has been consistently falling over the years, with a recognisable downward
trend as the volume increases.

Source : FSA, 2006

Figure 5. Price reduces as volume increases.

One of the key attribute of successful fables companies is ―Effective Clustering‖,

among ―Fabless to partner and partner to partner collaboration‖. There is a need to
build effective clustering of all players in the semiconductor supply chain to foster
synergies and spur innovation.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 21 24 20-Nov-09

Source : FSA, 2006

Figure 6. Collaborative Clustering Model.

MIGHT, in October 2008 has conducted an Innovation Audit on the semiconductor

and electronics industry to identify the current issues faced by local and MNC
companies in the sector. Through this audit, MIGHT has garnered in-sights into
teething issues faced by the semiconductor industry, especially IC design houses.

Below is the list of issues identified in the audit.

Issue 1. IC design eco-system is not complete or mature.
There are 2 main sub-issues pertaining the eco-system.
(a) There is limited synergy among the IC design, fabrication, packaging, and
E&E industries locally. The key stumbling block is the reluctance of MNCs
(like Intel and Spension) to outsource their IC design activities to external
(local) design house, in view of the reluctant to reveal their IP or technologies
to external parties. As such, local IC design houses are not able to capitalize
on the investment that the Government has put in place to build up the
presence of MNCs locally.
(b) IC design houses in particular are greatly affected by the lack of ASIC/IC
solution providers locally that develops the complete (low-cost electronics)
solutions for the end product developers. Without a strong base of ASIC
solution providers, the services offered by local IC design houses are not
highly utilized. As such, the growth potential of local IC design houses is
limited at best.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 22 24 20-Nov-09

Issue 2. EDA tool is too expensive, and forms a great barrier of entry for local IC
design house to conduct its business cost effectively.
IC design EDA tools are very expensive, and a single industrial license will cost in the
millions of USD. Local IC design houses are finding the EDA investment tools to be
financially too forbidding. Especially when potential customers are lacking locally,
and the subsequent upgrade costs involved to sustain the usefulness of the license.

Issue 3. Human resource competencies are lacking locally.

The lack of human resource competencies is the most commonly highlighted issue in
the IC design and manufacturing industry. Below is a list sub-issues related to
human resources;
(a) As part of the Government‘s initiatives, Analog, RF and mix signal IC design
technologies are encouraged. However, Analog IC design knowhow is not
easily trainable, nor attainable. Typically, Analog IC designers require 5 to 10
years of experience in order to be proficient enough to design
commercializable Analog ICs. Malaysia lacks talented Analog IC engineers to
engage in Analog IC design.
(b) Local University graduates do not possess sufficient skills to support the IC
design and manufacturing industry. University graduates‘ understanding of
the subject is too academic, and lacks the industrial focused required by the
industry.
(c) There is a lack of expertise in foundry process development. This area of
competency is crucial to ensure that our IC foundries are cost-effective and
technologically advance enough to compete against competitions from China
and India.

Issue 4. Local IC Fabrication cost is too high compared to China

Fabrication services offered by local IC foundries are too expensive when compared
to foundries in other countries like China. For local IC fab-less design houses to
utilize local foundry facilities, they must design-in the local foundry‘s process
technologies into their IC design. However, if the local foundry is not cost effective
enough, the final product to be produced locally will not be cost competitive. As
such, this lack of cost competitiveness will jeopardised the cluster synergy that the
Government is trying to foster.

Issue 5. Limited support from local GLCs in procuring products designed locally
(vendor preference).
Local IC design companies are hampered by the lack of support from the
Government and GLCs in supporting the locally designed and developed products.
Research institutes of GLCs on the other hand, is hampered by Government policies
in channelling sufficient R&D proceeds for product testing and pre-commercialization.

Issue 6. Lack of access to the IC marketplace.

Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 23 24 20-Nov-09

Because of the lack of a matured eco system, local IC design and manufacturing
companies are required to seek overseas for businesses. However, there is a lack of
access to the global supply chain for semiconductors by local companies. As such,
the growth potential of local IC design companies is limited. Several companies are
now seeking alternate sources of revenue through by offering training and re-skilling
services to improve the current acute shortage of human resources in the
semiconductor industry.

Issue 7. Impact of the Global Financial crisis

The Global Financial crisis is beginning to have an impact on the E&E sector. The
massive layoff by Venture Electronics Services (M) Sdn. Bhd. is a clear sign of
distress in the E&E industry in Penang. However, the Global crisis has yet to impact
the semiconductor industry (as at the writing of this document) due to the long supply
chain of the industry. Nevertheless, semiconductor MNCs such as Freescale has
already begun precautionary measures like freezing of headcount and limiting
travelling. Local companies are beginning to face issues such as tight credit facilities
and fluctuating currency exchanges, which have significant impact on their
businesses moving forward.

2. Issues from the E&E product sector

In November 2007, a study was conducted by the Industry Research Task Force of
Penang (under PSDC) on the Technology Roadmap for the Electrical and Electronics
Industry of Penang. This study has revealed in-sights into the E&E technology
landscape, its issues, and recommendations to address the various challenges faced
by the industry. The followings are issues highlighted in the study by PSDC.

Issue 1. There is insufficient cluster synergy among the E&E clusters in Penang,
which encompasses companies across the entire supply chain from semiconductor
design and fabrication to the manufacturing of end products. There is an urgent
need to create a synergistic environment, where companies within the cluster can
interact, collaborate, and spur commercial and innovation activities within the cluster.

Issue 2. Gradual degradation of the quality and availability of excellent people is a

serious setback which, if not addressed quickly, will be the single most important
reason for Penang (and Malaysia) to lose its industrial competitiveness.

Issue 3. The escalating cost of people and infrastructure must be neutralized with
increasing productivity. Although increased efficiency may be able to compensate for
the higher cost of people and infrastructure, the continuously escalating cost of
production poses a significant challenge for local SMI and MNCs to manage.
Title: Understanding The Malaysian Electronic Industry Document Type: FS
Issues

Document No. Revision Page of Date

IR-EE-0002 New 24 24 20-Nov-09

Issue 4. For SMIs to engage in new product development, the need for R&D test
laboratories and Electronics Design Systems (EDS) tools are beyond SMIs to afford
individually. Contrary to E&E cluster of other countries (like Taiwan), ―Open Labs‖
facilities with resident experts are made available by the Government to assist SMIs
to develop their products. The lack of such facilities locally is preventing SMIs from
effectively developing its own products and be able to compete effectively against
foreign competitors.

Issue 5. With the current Government R&D grant scheme, the process of developing
new products or technology based on internal strengths are too risky a proposition for
SMI to pursue. SMIs are more inclined to collaborate and participate in MNCs‘s
product development process, where the risk lower, but the current Government
grant schemes do not support such collaboration.

Issue 6. The lack of market intelligence is a handicap to SMIs to enable them to set
their business strategies around key technology and consumer trends. Market
research and intelligence is crucial in making the right investment decision, but is
costly to attain. SMIs, with their limited market reach and financial resources, are
less able to take advantage of such information. SMIs‘ strategic decisions are
generally guided by their personal relationships with customers and suppliers.