On The Road with Riverwood: Southeast Asia Part 2
By Ron Keith, CEO, Riverwood Solutions - On tour in Asia
Aug 27, 2012
Today the Riverwood Solutions team is in Malaysia, the world's second largest Electronics Manufacturing Services cluster (2nd only to Shenzhen), visiting Penang which is undeniably its technology hub.
Most of the world's leading
EMS companies have substantial operations here. Plexus, Flextronics, Benchmark, Jabil, Celestica, Sanmina-SCI, Venture and other major EMS players all have very large operations in Penang as do dozens of smaller EMS providers. These companies have attracted and helped develop an incredibly robust local supply base of both component suppliers and services companies that provide support to a broad range of high tech manufacturers here. In many cases, the EMS operations in Malaysia are older, more mature, and predate many of the China operations of these same EMS providers. Yesterday we were fortunate enough to visit a couple of these factories and spend some quality time with both plant management and regional executives from the companies' headquarters.
The relative maturity of some of these Malaysian operations we visited was quite evident when judged by the two different EMS factories that we toured. Unlike the relatively simple electronic products that we saw being manufactured in Ho Chi Minh earlier in the week, the factories we visited in Penang were producing some of the most complex electronic products we have seen anywhere in the world. The shop floor controls, training, process disciplines, and quality & productivity metrics we saw were quite impressive, with one plant demonstrating a sub 30 DPMO on highly complex networking products. With very little exception (those exception generally being driven by tax minimization schemes) the products being produced in these Malaysian facilities were finished product that was being shipped directly to distribution facilities in the US, Western Europe and Japan, or in some cases being direct shipped to the OEM's end customers. Products being produced at the factories that we visited ranged in complexity from internet switches costing a few thousand dollars or less to highly complex semiconductor manufacturing equipment requiring hundreds of hours of assembly and costing upwards of $500,000 per unit.
Malaysia has long been a hub of EMS manufacturing and until just recently was considered by many EMS industry execs and their customers to be a higher cost, higher capability alternative to China. But over the last 5 to 7 years the manufacturing dynamics have changed considerably between the two countries. China's manufacturing capability, quality levels, and process technologies have increased tremendously since the mid-2000s, as have its costs, making at least some of its advances a "zero sum game" according to one EMS industry exec that we met with in Singapore. Since allowing its currency to float in a controlled manner beginning in the summer of 2005, China has seen its cost structure climb steadily higher in both US dollar and local currency terms. Today, Malaysia is approximately on par with China in terms of overall EMS manufacturing cost structure, although regional differences within each country can swing cost factors 7 to 8 percent either way on a given product.
Malaysia today has a population of 29.2M making it the 43rd most populous country in the world and the 30th largest economy. The majority of workers are employed in services industries (51%) followed closely by manufacturing (36%). With a relatively high degree of urbanization relative to its peers in Southeast Asia (72% of the people live in the cities vs. just 30% for Vietnam), Malaysia currently runs a very low unemployment rate with the official number reported at 3.2%. When asked about their ability to scale up DL staffing in a tight labor environment, we were surprised to hear that many EMS factories in Penang import a considerable number of temporary foreign workers from both Indonesia and Nepal. At times these temporary foreign workers can account for 20% or more of the direct labor staff in a given factory. These imported workers from lower wage rate countries do little to impact the overall manufacturing economics of the plant as their lower wages are approximately offset by higher employment costs such as housing subsides, meal allowances and sometimes transportation allowances. It was interesting to note that some combination of local law and generally institutionalized practices dissuades companies from importing DL workers from both India and China into Malaysia.
Both of the EMS factories we visited yesterday had been in operation since the mid 1990's and both were originally started as dedicated EMS facilities. This is in contrast to the majority of EMS factories today in low cost regions of Eastern and Central Europe which typically were originally built by OEMs as captive facilities and were subsequently divested to EMS providers. This "original EMS DNA" is always evident in the factories that we visit whether they are in Texas, Timisoara or Tunisia.
Tomorrow we are back to Singapore and then off to Indonesia to visit both Sanmina-SCI and Flextronics in Batam.
Contributed by Ron Keith, Riverwood Solutions