Posted at 11:58 p.m. PDT Monday, June 25, 2001

Silicon Valley cutbacks are felt in Malaysia

BY SARAH LUBMAN

Mercury News

A year ago, Malaysia opened a trade office in San Jose, hoping to lure more high-tech companies to its rapidly developing shores.

These days, inquiries are down, and Yew-Fook Phang, the director of the Malaysian Industrial Development Office, has altered his pitch to fit the sluggish economy.

``We have to tell companies about the lower cost of doing business there,'' Phang said. ``Before, we tried to promote Malaysia as the dynamic, growing Asia Pacific area. But this downturn is global in nature.''

U.S. tech companies still see Malaysia as an attractive, low-cost production site. But as orders and sales have fallen, the results are trickling overseas in the form of layoffs and manufacturing lulls.

The latest job cuts were announced last week by Solectron, which cut its worldwide workforce by an additional 16 percent, bringing the total number of layoffs this year to 20,700 workers. Before the latest round of layoffs, Solectron, the world's largest contract manufacturer of electronics, employed 9,000 people at its three circuit board and systems assembly sites in Penang and Johor.

Malaysia ``is participating in the slowdown just like everyone else,'' said Bill Callahan, a spokesman for National Semiconductor. The Santa Clara firm had cut its staff 10 percent worldwide by the end of May, including in Malaysia, where it previously employed 2,500 people at its chip assembly and testing operation in Melaka.

In March, Seagate Technology closed a disk-drive assembly site in Malaysia, laying off 4,000 workers. A spokesman said that while the slowing economy wasn't the cause, it did speed up Seagate's plans to consolidate its Malaysia operations.

In 1999, Malaysia was the eighth largest high-tech export market for the United States, and its sixth largest high-tech import market, according to the most recent statistics from the American Electronics Association.

The roster of Silicon Valley companies with significant Malaysia operations includes Intel, Agilent and newcomers such as Gibraltar Semiconductor of San Jose, one of the few companies expanding there.

Gibraltar, a subsidiary of New York-based Mini-Circuits Laboratory, moved just this month into its first building on a 10-acre site in Penang and began hiring Malaysian engineers and designers to work on its radio frequency microwave components. Kelvin Kiew, Gibraltar's president, said they chose Penang because it had the engineering talent the company needs, in addition to being close to two big customers, Motorola and Agilent.

``The uncertainty there makes people apply for jobs,'' Kiew said. ``We get a lot of good candidates.''

Regarding Malaysia's much-hyped Multimedia Super Corridor, Kiew said, ``I actually don't know where it is physically located.''

He added that the MSC -- which is just south of the capital, Kuala Lumpur -- is geared toward Internet and computer companies, not the wireless industry.

Kiew, like many U.S. executives, sees Malaysia as a good long-term bet, citing its relative political stability and its infrastructure, which compares well with competitors like China.

In the interim, though, companies must navigate the tricky territory of slowing down without undermining their ability to respond once the economy recovers.

``Managers who run Malaysia operations are desperately trying to find out what's happening in the tech sector here,'' said Ernie Bower, president of the Washington-based U.S.-ASEAN Business Council. ``They're trying to walk a tightrope: you have to cut back output right now, but you don't want to lose your investment plan or your good people.''

If the tech slump continues beyond the first quarter of 2002, Bower added, some tech companies might pull out of Malaysia, which would force it to start courting other industries.

Malaysia is already trying to diversify its high-tech dependence by venturing into the space industry, doing light aircraft assembly and composite parts manufacturing.

For now, Malaysia's office in San Jose is also setting its tech sights lower. Since many big software companies such as Siebel Systems and Oracle already have operations in Malaysia, Phang is concentrating on smaller firms with about 20 to 30 software engineers.

``We don't want to depend on the semiconductor industry because it's very cyclical,'' Phang said. ``Once there's a downturn, firms have to lay off thousands and thousands of people, and it gets very political.''