Thursday 20 Jun 2024
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This article first appeared in The Edge Malaysia Weekly on April 24, 2023 - April 30, 2023

WITH rising concerns over the destabilisation of the Taiwan Strait as China repeatedly threatens to take the self-governing island by force, semiconductor companies on the island are experiencing increasing pressure from customers to diversify their operations outside of Taiwan where there are lower levels of geopolitical uncertainty.

Taiwan-based NAND storage solutions provider Phison Electronics Corp — two of whose five co-founders are from Malaysia — is one of these companies. It is considering the possibility of returning to the Southeast Asian nation that it had once invested in about a decade ago.

On the back of a rout in the global memory chip market, however, some are sceptical about Phison’s plan to return to Malaysia amid falling demand.

The company is already feeling the pinch from the downturn in the price of memory chips, with its net revenue for the first quarter of the year falling 41% year on year to NT$10.08 billion (RM1.46 billion), weighed down by customers’ conservative approach in the procurement process, according to Phison’s monthly disclosure.

According to co-founder and CEO Datuk Pua Khein-Seng, Phison’s renewed interest in Malaysia is not to mitigate the impact from the ongoing industry downturn but is driven mainly by customers’ requests to diversify its operations outside Taiwan to ensure a minimum supply disruption in the event of intensified geopolitical conflict in the Taiwan Strait — hence the term “Taiwan-plus-one”.

“We are not short of money, and we are not short of talent either. But because of Taiwan-plus-one, I prefer [diversifying to] Malaysia,” says Taiwan-based Pua, who was in Kuala Lumpur recently.

Phison’s memory chips are used in a wide range of electronic products, from removable pen drives and memory cards to solid-state drives in enterprise servers as well as the Mars rover in NASA’s Perseverance mission.

“Why now? Because my clients from the US have been urging us [to diversify elsewhere] since last October,” Pua tells The Edge in an interview.

“Phison has zero debt. We have no loans from the banks, and we are doing US$2 billion [RM8.9 billion] in business annually. We are a cash-generating business.

“While we intend to move certain portions of assembly to Thailand and South Korea, I never thought of moving our design base until [around] January and February, as we began to have some confidence in the current government. After Prime Minister Datuk Seri Anwar Ibrahim’s China trip, we thought maybe it is good timing now.”

In 2012, Phison made its first attempt to invest in Malaysia, but the operation did not last and the group completed the liquidation of Phisontech Electronics (Malaysia) Sdn Bhd in October 2020.

In the past, Pua had consistently listed work culture, market size and headhunting by Singapore tech companies as among the reasons for Phison’s failure in Malaysia.

But is the quality of the Malaysian labour force and are market conditions any different from what they were three years ago? Pua says the government can play a role to mend this situation.

Replicating Hefei’s success in Malaysia

Pua believes that, with the right public policy, the government could drive the growth of Malaysia’s integrated circuit (IC) design industry, the more lucrative part of the semiconductor supply chain, as opposed to labour- and capital-intensive assembly and testing processes that most local tech companies are involved in.

The 48-year-old entrepreneur — who gained fame for inventing the world’s first single-chip USB flash, or pen, drive about 20 years ago — expanded Phison’s operation to Hefei, China, in 2015, and intends to replicate the business model in Malaysia.

“The Hefei unit will have its IPO (initial public offering) by next year. We started Hefei in 2015 from nothing; we were there to source students and train them. Eighteen months later, Hefei started being involved in design works for Toshiba, Micron and Huawei.

“The students there benefited from training after graduating and became experts; the companies they worked for grew more profitable and are going to be listed. They will gain from [the companies’] share options, so they have a greater sense of belonging,” he says.

Therefore, Pua says, Phison’s investment in Malaysia, if it materialises, will have to be sustained by its own businesses and sales as well as be able to pay its staff generous bonuses, and potentially even offer them share options if the local unit is financially strong enough for an IPO.

“Aiming for an IPO is not for management to earn money; we want to use this to increase employees’ earnings so they will not think like a salaryman, because they own the company themselves. We can reward them with share options, and they are incentivised to stay and work harder,” he explains.

Pua hopes that with such a model, Phison will be able to retain its talent and prevent them from being drawn away by a stronger Singapore dollar or higher salary offers.

“After 2019, [the] world has been separated into two systems — one with China and another with the US. Thus, Taiwan has started to cut [away from Hefei]. We will remain as a shareholder [in Hefei as it] goes into the China business.

“Because it is also challenging for our Taiwan unit to be involved too much in China, it will focus on the Western market. For Hefei, however, we will still own the majority of shares and continue to provide support in technical development,” he says.

Nonetheless, Pua acknowledges that Malaysia does not have the benefit of a bigger market size like China. As such, he proposes that the government implement a certain level of local content policy to encourage foreign tech companies to set up their operations here to train local talent.

‘Malaysia is neither here nor there’

For a start, Pua says, the government could impose local content policy in its procurement process, as the public sector itself is potentially the largest consumer of technological products ranging from PCs to enterprise servers in data centres.

He adds that, when Phison first invested in Malaysia, the local unit was a cost centre to the group, as it did not yield its own sales. In addition, employees were just muddling through workdays and hopped on to the next job when a better opportunity presented itself.

“I asked myself why engineers here had no confidence to stay in a company. It was because Malaysians ultimately have a ‘salaryman’ mindset. As long as there is a higher offer, they will leave; they are just selling their labour, not selling knowledge. But why aren’t they selling knowledge? Because nobody believes that selling knowledge will be profitable.

“Nobody believes that an engineer here can become a billionaire. They are just taking orders from the Taiwan HQ; so, the Malaysian branch became a cost centre. There is no business; Intel and other foreign MNCs (multinational corporations) came; they were all establishing cost centres, hiring salarymen,” he says.

Pua says, with the government sector as the anchor customer through implementing local content policy in its procurement process, tech companies such as Phison will be able to sustain themselves in Malaysia in the initial phase of their operation, before stabilising in two to three years and eventually competing globally.

“The money we earn here will not be repatriated away from the nation. It will be reinvested into R&D, with the hope that, maybe three years later, the business can be self-sustaining and capable of competing globally,” he says, arguing that the country should start focusing on original design manufacturing, building up its own technological know-how and offering higher-paying jobs.

“Phison is here not to earn money; we are here to build talent, comply with Taiwan-plus-one. Second, I think the biggest issue for Malaysia is that it is still focusing on OEM (original equipment manufacturing).

“That is why, there is a lot of FDI (foreign direct investment) inflow to Asean, but Malaysia’s share of it is declining. Why? Because Malaysia has no [advantage in] labour; wages are more expensive than in Thailand, Bangladesh, Vietnam and Indonesia. Malaysia is neither here nor there; this is the problem.”

Pua believes that if Phison could prove to be a successful business case in Malaysia, it would set a precedent and attract many other foreign tech companies to invest in the country.

“Similar to those science parks in Taiwan, it started with the government pleading with overseas Taiwanese entrepreneurs to return and invest. Five years later, these entrepreneurs [who returned] made big profits. The government no longer needed to make a similar appeal; overseas entrepreneurs were all attracted to return,” he explains.

In fact, Pua, says Phison may not see much increase in profitability if an investment in Malaysia materialises, as the government may have already consumed the company’s products indirectly.

“To be a profit centre, in the early stage, how do you create a product that will be capable of competing with Taiwan, China and the US? It is impossible. But I noticed that China, India, Brazil and even the US now have come up with a local content policy. Government usage must have a certain level of local content, but Malaysia has no such policy.

“We design storage, and the government uses big storage. But the big storage they consume does not involve any Malaysian business. The government will [need] to incur this expenditure anyway, so we can come in to transfer know-how to Malaysia for free and use our technical knowledge to train up local R&D, but the government needs to implement local content policy,” he reiterates.

Worst-case scenario

Pua made no attempt to hide his agenda during his recent trip in KL, which was to lobby for more supportive public policy and pave the way for Phison to reinvest in Malaysia.

Nonetheless, he does acknowledge that after frequent changes in government in the past few years, there is concern over policy continuity in Malaysia.

“I do [worry about political risk]. I am worried about the upcoming [six] state elections. If there is another change of government, we will have to see what the new policies and strategies are by then. If this happens, my back-up solution is for Taiwan to absorb engineers in Malaysia,” he says.

“It is not up to me; I have no choice. If I have already invested money, transferred knowledge and this investment does not work out, they can come to Taiwan. They will get a higher pay there.”

And if the Malaysian government is not convinced about implementing local content policy that is conducive for foreign tech firms to relocate, Pua says Phison would rather adopt a wait-and-see approach until the business environment improves.

“I can only wait and see, because [I believe] there will not be any war [in the Taiwan Strait] at least within the next five years. As long as those key factors [that I have proposed] do not materialise, I know all efforts will be wasted.” 

 

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