understanding the malaysian electronic industry issues

Title: Understanding The Malaysian Electronic Industry

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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


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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


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‗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.


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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.


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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.


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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 Asia/Pacific Electronic Equipment

Production - 2006

Malaysia Semiconductor Consumption, by

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‖.


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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.


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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.


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


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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.


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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.


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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


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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.


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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.


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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.


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ASIC Solution

Providers

ASIC Solution

Distributors

ODM /OEM

End Products

Product Distributors

IC Fabrication

Houses

IC Packaging

Houses

IC Design Houses

Technology Providers

Market

Generic IC Providers

Direct Support to Key Customers e.g. Samsung

3rd tier or house brand of distributors

Design-in as referenced parts

E&E Product SectorSemiconductor Sector

Product (E&E/Software/ Mechanical) Design

Houses

Mechanical Prototyping & Tooling Houses

Key Decision Makers

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


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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


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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.


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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.


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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.


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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.


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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.

understanding the malaysian electronic industry issues

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