This article first appeared in The Edge Malaysia Weekly on July 15, 2024 - July 21, 2024

PENANG has had a successful industrialisation journey over the past 50 years. During this time, its semiconductor and electrical and electronics (E&E) sectors have transformed from being labour-intensive and low-value-added industries into a powerhouse known as the Silicon Valley of the East.

Last year, the state contributed an impressive 32% share of the country’s exports, amounting to RM41.15 billion, and attracted RM71.9 billion in investments. Foreign direct investment (FDI) made up a significant portion of these, strengthening its position as an investment destination.

However, the influx of investments into the island state has posed challenges to its next phase of economic growth — land scarcity and talent shortage, among others.

“Penang’s greatest economic advantage is its people. It is the backbone of industrial and economic growth. At the same time, we believe Penang is now part of the growing nexus of the economic region vis-à-vis Kuala Lumpur, Johor, Singapore and Sarawak,” Affin Hwang Investment Bank Bhd CEO Nurjesmi Mohd Nashir said at the Penang Economic Forum 2024 organised by the investment bank and Penang Institute.

Several topics were discussed at the forum, including the state’s next growth prospects, its strategy to harness a competitive advantage and the collaboration between Penang, Johor and Sarawak as an economic corridor.

Speaking at the forum, the Yang di-Pertua Negeri of Penang Tun Ahmad Fuzi Abdul Razak acknowledged Sarawak’s wisdom in taking the initiative to drive economic growth, including the takeover of Bintulu Port, the launch of its own airline and the establishment of a sovereign wealth fund. Nevertheless, he added that it would not be practical for Penang to simply replicate these.

“I have long admired the Sarawak government’s proactive approach to driving economic growth through innovative ideas and initiatives. I believe that while it may not be practical or necessary for Penang to blindly follow similar initiatives, it may be useful for the state to be sufficiently inspired to develop its own niche and identity to protect its own long-term interests in the federation,” he said in his keynote speech.

Ahmad Fuzi pointed out that Penang had gone through a rapid industrialisation journey and developed numerous industrial zones, which have transformed the state into a semiconductor powerhouse. Thanks to its strong and vibrant E&E ecosystem, the state now accounts for more than 7% of the world’s semiconductor sales.

However, he highlighted, Penang lacks sufficient land to expand its economic base and develop even more industrial or economic zones, as well as to get into solar farming and large-scale plantations, among others. He also pointed out that the state does not have the financial resources to implement high impact socioeconomic projects and had become dependent on the federal government.

“We also face a lack of water resources, including insufficient raw water from Sungai Muda with the three major dams — Air Itam, Teluk Bahang and Mengkuang — unable to fully meet Penang’s increasing water requirements and need to purchase treated water from Perak and Kedah,” said Ahmad Fuzi.

Having said that, he hoped that the federal government’s agreement in principle to allocate RM4 billion to pipe raw water from Sungai Perak to the Bukit Merah Dam would help to increase the supply of treated water in Penang. “This means the challenges that Penang faces and what it can do are inextricably linked to the challenges faced by the country as a whole, as well as what are determined and implemented at the federal level.”

Recognising these challenges, the Penang government has taken a proactive approach to tackling such matters, including upgrading the infrastructure in the state, moving up the semiconductor value chain and being more selective in terms of FDI flows into the state.

Over the years, local semiconductor and semiconductor-related firms, especially public-listed ones, have been mostly involved in the mid to lower end of the value chain, serving foreign semiconductor manufacturers, brand owners, integrated circuit (IC) developers and fabricators.

InvestPenang CEO Datuk Loo Lee Lian emphasised the crucial role of resources like land, water and human capital. As such, the state has identified IC design, advanced packaging and equipment manufacturing as its key growth areas in line with the National Semiconductor Strategy.

“I think all of us know that we are in the midst of the geopolitical tensions, escalating the importance of semiconductors that has caused a shift in capital and investment to countries in Southeast Asia. Malaysia, especially Penang, has been a beneficiary or a high recipient of that FDI,” she said during the third panel discussion: The Penang Agenda — the State’s Prospects and Aspirations.

“But the point to also note is that: Will this FDI come unlimited? Are we to enjoy this flow of FDIs forever?

“We have benefited from this inflow of capital based on our existing ecosystem that we have built over the last 50 years. The capacity, the human capability and human capacity, built over the past years. But challenges are emerging.”

Loo pointed out that Penang needs to be strategic in its FDI approach and consider its capacity, infrastructure, land, electricity and water needs, and human capital.

“In the past, we used to receive two or three investors on a weekly basis. But now, we receive three to five on a daily basis,” she said.

“But we are running out of capacity. So we learnt to be more clever and resourceful. We needed to be more strategic.

“Back in 2022, we mapped out the semiconductor supply chain to identify the opportunities against what we had. We concluded that we could not play in every field, but to have a strategy to choose what sectors we want to invest in — IC design, advanced packaging and equipment manufacturing — because these have the highest value and will give us a multiplied effect that will provide more opportunities for SMEs (small and medium enterprises). The allocation of resources, including land and utilities, will take into account the sector that we want to promote.”

Penang is in the midst of a massive reclamation project to develop a 930ha man-made island known as Silicon Island.

“It will be a smart, sustainable and green city of the future. It will also serve as the high technology and E&E hub,” said Silicon Island Development Sdn Bhd CEO Datuk Szeto Wai Loong.

“When we started to propose Silicon Island, we were advised that it had to be an economic catalyst for Penang. If not, as a lot of people would say, it would become another Forest City. As such, we have to add the industrial plan, and of course you cannot run away from the semiconductor sector.”

Penang state exco and chairman of the infrastructure, transport and digital committee Zairil Khir Johari said that apart from building new industrial parks, the state is working very hard to upgrade its infrastructure. “If we want to create and develop new industrial parks, we will need more power and water.”

In terms of water, Zairil said that while the state has been investing consistently over the last five years to ensure that it has enough water supply, it has faced an unexpected rise in water consumption.

“We are a bit water stressed at the moment due to an unexpected rise in water consumption and demand, since Covid actually, which was a bit unexpected and way over our projections. It usually takes us 10 years to increase water demand by 10%, but it increased 10% between 2019 and 2023. So sort of a 10-year demand surge in three years, which is causing some of our water stress problems,” he said.

Nevertheless, the state is working on upgrading its water infrastructure. But it will take at least one to two years to complete, he said.

Zairil also talked about some of the transport-related infrastructure projects in the state that would address the congestion on the island. He expects the Penang LRT project, which will run from Silicon Island to Penang city centre and towards Penang Sentral on the mainland, to start construction this year.

He also said the LRT will have its own connection bridge from the island to the Penang mainland.

“This will solve a lot of traffic problems that we face, bearing in mind that a lot of traffic comes from outside of Penang [island]. It will be a game-changing project,” he said.

“The other [form of] transport that we’re looking at is water taxis. Penang is an island, but we make very little use of our waterways in terms of transport.”

He also revealed that for the proposed water taxis, the state had called for tenders.

Bursa Malaysia chairman Tan Sri Abdul Wahid Omar said that although Penang is a semiconductor powerhouse, not many Penang-based companies opt to list on the local stock exchange. He pointed out that between 2020 and May 2024, only 17 companies from the state had an initial public offering (IPO) on the local bourse.

It should be noted that about 129 companies had their IPO on Bursa during that period.

“In terms of GDP (gross domestic product), Penang is the fifth-largest economy in Malaysia based on 2022 numbers. In terms of wealth, GDP per capita, Penang stood at number four in the country,” he said during the panel discussion.

“When it comes to representation on the stock exchange, Penang is underweighted. Although it contributed 7.4% to the country’s GDP, the total market capitalisation is RM71 billion out of more than RM2 trillion, which is below 4%. Potentially, we should see a doubling of Penang-based companies listed on Bursa Malaysia.

“Nonetheless, in recent times, we are seeing more Penang-based companies coming to the market. About 13% of new companies coming to the market are from Penang.”

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