Malaysia Electronic Industry

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THE STUDY OF STRUCTURAL EFFECT ON EXPORT COMPETITIVENESS

IN MALAYSIAN ELECTRICAL AND ELECTRONIC (E&E) SECTOR

UNIVERSITI PENYELIDIKAN, PEMBANGUNAN DAN PENGKOMERSILAN

UNIVERSITI TEKNOLOGI MARA

40450 SHAH ALAM, SELANGOR

MALAYSIA

DISEDIAKAN OLEH:

HASLINA BINTI CHE YAACOB

DR. NIK MAHERAN BINTI NIK MUHAMMAD

ZURINA BINTI ISMAIL

OKTOBER 2007


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Surat KamiTarikh

600-IRDC/SSP 5/3/137720 Disember 2004

UNiVERsrn TEKNOLOGI MARAInstitut Penyelidikan, Pembangunan danPengkomersilan (IRDC)

Institute of Research, Development andCommercialisation (IRDC)(Sebelum ini dikenali sebagm Biro Penyelidikan dan Perundingan)

40450 Shah Alam, MalaysiaWebsite : h ttp/ /: wwwruitm.edu.my/brc

Pengarah

UiTM Cawangan KelantanKampus MachangBukit llmu18500 MachangKelantan

Tuan/ Puan

PERLANTIKAN BAGI MENJALANKAN PENYELIDIKAN

Merujuk kepada perkara di atas, bersama-sama ini dimajukan salinan surat kelulusan

menjalankan penyelidikan serta ringkasan kos perbelanjaan bagi penyelidikan yangdijalankan oleh pensyarah dari UiTM Cawangan Kelantan ;

Tajuk Projek The Study of Structural on Export Competitiveness inMalaysian Electrical and Electronic (E&E) Sector.

Ketua Projek : Puan Haslina Yaacob

Kos Yang diluluskan : RM 19,880.41

Jenis Geran : Geran Dalaman

Sekian, terima kasih.

Yang benar f

KS-

PROF IUIADYA DR ROSMIMAH RUOHD ROSLIN

Ketua Penyelidikan (Sains Sosial dan Pengurusan)

s.k: 1. Prof Madya Napisah Hj SafiiKoordinator URDCUiTM Cawangan Kelantan

8. Puan Haslina YaacobKetua ProjekUiTM Cawangan Kelantan ,

3. Encik Mohd Halil Marsuki

Penolong AkauntanUnit Kewangan Zon 17(SHa haniarkan geran pcnye!h':!:an hix;i projek ini ke Kimpus Cawangzi)

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axb Canselor (Penyelidikan):hdtka n (Sains Sosial da n Pengurusan)

jlidiksji (Sains dan Teknologi)RSC

idingan (Kewangan)

03-55442094/5

03-55442097

03-55442091

03-55442760

03-55442090

Ketua PerundinganKerua PengkomersilanKetua Harta IntelekPenolong Pendaftar

Pegawai Sains

03-55442100

03-55442750

03-55442753

03-55447092

03-55442098

Pegawai Eksekutif

PejabatAm

FaxUnit Kewangan Zon 17Penolong Akauntan

03-55442057

03-55442093/2101

03-55442096

03-55443440

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OKAS


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Tarikh : 31 Oktober 2007

No. fail Projek : 600-IRDC/SSP 5/3/1377

Penolong Naib Canselor (Penyelidikan)

Institut Penyelidikan, Pembangunan dan Pengkomersilan

Universiti Teknologi MAPvA

40450 Shah Alam

Ybg. Prof,

LAPORAN AKHIR PENYELIDIKAN "THE STUDY OF STRUCTURAL

EFFECT ON EXPORT COMPETITIVENESS IN MALAYSIAN ELECTRICAL

AND ELECTRONIC (E&E) SECTOR"

Merujuk kepada perkara di atas, bersama-sama ini disertakan 4 (empat) naskah Laporan

Akhir Penyelidikan bertajuk "The Study Of Structural Effect On Export

Competitiveness In Malaysian Electrical And Electronic (E&E) Sector" oleh kumpulan

Penyelidik dari Fakulti Pengurusan Perniagaan untuk makluman pihak tuan.

Sekian, terima kasih.

Yang benar

Ketua

Projek Penyelidikan.


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KUMPULAN PENYELIDIK

HASLINA BINTI CHE YAACOB

KETUA PENYELIDIK

DR. NIK MAHERAN BINTI NIK MUHAMMAD

Ahli Kumpulan

ZURINA BINTI ISMAIL

Ahli Kumpulan

^yi^^


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PENGHARGAAN

Setinggi-tinggi penghargaan dan terima kasih diucapkan kepada semua pihak yang terlibat

secara langsung dan tidak langsung bagi membolehkan penyelidikan ini disiapkan dengan

sempurna.

Di antaranya:

Dato' Professor Dr.Hussin @ Mohamed Ab. Rahman

(Pengarah Kampus UiTM Kelantan)

Prof. Madya Dr. Noormala Bt Amir Ishak

(Dekan Fakulti Pengurusan Perniagaan)

Nik Kamaruzaman bin Abdulatiff

(Koordinator Penyelidikan, Pembangunan dan Pengkomersilan UiTMKK)

Semua pensyarah yang telah memberikan kerjasama dan sokongan di dalam menjayakan

penyelidikan ini.

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TABLE OF CONTENTS

Letter of transmittal

Acknowledgement

Table of content

List of tablesList of figure

Abstract

Page

ii

iii

viiviii

ix

CHAPTER 1: INTRODUCTION

1.0 Introduction

1.1 Background of the Study

1.2 Term and definition.

1.3 Problem Statement

1.4 Objective of the Study

1.5 Research Questions

1.6 Significant of the Study

1

7

8

8

11

11

12

m


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CHAPTER 2 : LITERATURE REVIEW

2.0 Introduction 13

2.1 Economic Theory 13

2.1.1 International Trade Theory And Comparative Advantage 14

2.1.2 Evaluating Competitiveness And Comparative Advantage 15

2.2 Competitiveness 17

2.3 Export Competitiveness in Malaysia 19

2.4 Export Competitiveness in the World Market 21

2.5 Measuring Competitiveness 24

2.6 Constant Market Share Model (CMS) 25

2.7 Revealed Comparative Advantage Model (RCA) 28

2.8 Conclusion 30

CHAPTER 3 : RESEARCH METHODOLOGY

3.0 Introduction 31

3.1 Method 31

3.1.1 Constant Market Share (CMS) 31

3.1.2 Conceptual Framework 35

3.1.3 The CMS Formula 35

3.1.4 Sensitivity Analysis 37

3.1.5 The RCA Model 38

3.2 Data 40

3.3 Conclusion 41

IV


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CHAPTER 4 : FINDING AND ANALYSIS

4.0 Introduction 43

4.1 Constant Market Share (CMS) 43

4.1.1 Change in Export Value 45

4.1.2 Structural Effect 45

4.1.3 Competitive Residual 47

4.1.4 Second Order Effect 48

4.1.5 Summary 49

4.2 Revealed Comparative Advantage (RCA) 50

4.2.1 Export Performance Ratio of SITC 776 (Semiconductor) 50

4.2.2 Export Performance Ratio of SITC 772 (electrical machinery, 60Apparatus, parts and necessary).

4.2.3 Export Performance Ratio Of SITC 764

(Telecommunication equipment) 68

4.2.4 Export Performance Ratio of SITC 759(Printed circuit board) 81

4.2.5 Export Performance Ratio of SITC 752

(Disk drivers, printers and PCs) 90

4.3 Conclusion 101

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CHAPTER 5: DISCUSSIONS

5.0 Introduction 104

5.1 Recapitulation of Major 105

5.2 Discussion 109

5.2.1 Constant Market Share ( CMS ) 109

5.2.2 Revealed Comparative Advantage (RCA) 113

5.3 Limitation of the Study 115

5.4 Implication 116

5.5 Recommendation 116

5.6 Conclusion 166

BIBLIOGRAPHY

APPENDICES

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Table Description Page

Table 1 Competitiveness Ranking For 2002 2002-2003 7

Table 2 Gross Export of E & E manufacture in Malaysia 10

Table 2.1 Desirable Characteristics on Competitiveness Measures and 25Methods

Table 4.1 Result of Yearly Decomposition of Change in Malaysia Export 44Value of E & E products

Table 4.2 Export Performance Ratio of 776 or Semiconductor (1990-2004) 50-57fable 4.3~~ Export Performance Ratio of SITC 772 60-66

fable 4.4 Export Performance Ratio of SITC 764 74-80

Table 4.5 Export Performance Ratio of SITC 759" 81-86

Table 4.6 Export Performance Ratio of SITC 752 90-96

fable 4.7 Market Position of E & E Product by Destination 102-103

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LIST OF FIGURES

Figure Description

Figure 1 E & E Products' Share of National Exports

Figure 3.1 Schematic Representation of the CMS model

Figure 3.2 The Framework of these Decomposition Item

Page

7

32

35

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Abstract

Malaysia is among the world's top 20 trading nations. This is due to the structural

change in the Malaysian economy that turned the country from an exporter of primarycommodities into an exporter of high value-added manufactured products. In

Malaysia, E&E forged a strong foundation over the 1 ast 3 decades, which provides

new opportunities for such investments. This study analyses the structural effect on

export competitiveness of Malaysian E&E products focusing on semiconductor (SITC

776), Telecommunication product (SITC 764), Electrical machinery, Apparatus, Part

and necessary (SITC 772), Printed Circuit Board (SITC 759) and Disk drives, printers

and PCs (SITC 752). Furthermore, the study uses the Constant market share (CMS)

and revealed comparative advantage (RCA) framework to analyze the extent of the

export competition between Malaysia and other competitor economies. Overall, CMS

result shows that in the first sub-period (1990-1994), Malaysia E&E export was

competitive in the four markets studied, namely USA, Singapore, Japan and Hong

Kong. However, in the second and third period, CMS result shows that Malaysia E&E

export increased but not due to market competitiveness but due to the structural effect

- that is due to an increased in the world import. In terms of export performance ratio,

RCA results show that, Malaysia E&E product only performed was highly in the US

market for almost all SITC. Indonesia has concurred the Singapore market and Hong

Kong was concurred by China. However, Malaysia E&E export to the world generally

has comparative advantage over other competitors namely Indonesia, Thailand and

China. The study also revealed that Malaysia has higher export capacity to other

countries besides USA, Singapore, Japan and Hong Kong. Therefore the argumentsaying that China will intensify the competitiveness of Malaysian E&E market is

questionable since the study cannot reveal the comparative advantage hold by China.

The study found that China only dominated the Hong Kong Market for almost all

SITC studied.

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CHAPTER 1

INTRODUCTION


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CHAPTER 1

INTRODUCTION

1.0 Introduction

The electrical and electronic (E&E) industry is the leading industry within the

manufacturing sector and is the largest contributor to output, export and employment

opportunities in Malaysia. In 2004, Malaysia's exports of E&E products worth was

RM241.48 billion (US$63.55 billion), which accounted for 50.2 per cent of total

Malaysia's exports or 64.1 per cent of Malaysia's total exports of manufactured

goods. Major export destinations were the US, Singapore, Hong Kong, Japan and

China. As one of the leading exporters of electronics products in the world, Malaysia

markets electronics components, consumer electronics and industrial electronics.

The biggest export item is semiconductor devices used in a diverse range of

industries, such as automotive and telecommunications. Malaysia's electrical

products c omprise of household appliances, wires and cables, electrical industrial

equipment, dry cells and batteries and other electrical apparatus and supplies

(Matrade, 2005).

1.0.1 Electrical Products

A sophisticated range of electrical appliances are manufactured in

Malaysia, including:

Refrigerators, washing machines, vacum cleaners, electric fans,

instant water heaters, rice cookers, blenders, microwave ovens and

room air-conditioners.

Wires and cables.

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Electrical industrial equipment such as switchgears.

Distribution transformers and electric motors.

Dry cells, automotive batteries, incandescent lamps and fluorescent

tubes.

Major brands include Panasonic, Sony, Philips and Samsung. Home

grown brands like T, 'Pensonic', 'Khind' and 'MEC have also made inroads

into the export markets.

1.0.2 Electronic Products

Made-in-Malaysia electronics products are diverse and fall into 3

categories - electronic components, consumer electronics and industrial

electronics. These goods are sold globally, with semiconductor devices

valued at RM89.30 billion (US$23.50 billion) accounting for more than 30 per

cent of total E&E exports for 2004.

Semiconductor devices produced include:

o linear and digital integrated circuits;

o memories and microprocessors;

o opto-electronics;

o discrete devices;

o hybrids;

o arrays; and

o high-reliability military products.

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Malaysia is among the world's top 20 trading nations. This is due to the

structural change in the Malaysian economy that turned the country from an exporter

of primary commodities into an exporter of high value-added manufactured products.

The most significant change came during the late 1980's when the share of the

manufacture exports doubled i n a s pan of five years (MITI: 2 002), particularly the

Electrical and electronic (E&E) industry.

Malaysia is now an export-oriented and it is a significant component of the

Malaysian Economy. Electrical and electronics products accounted for RM189.49

billion or 56.6 per cent of Malaysia's total exports and remained the largest

contributors in 2001 and in the year 2002, it saw an increase of 4.5%. The largest

export market for E&E products was the USA, valued at RM51 billion absorbing 26.9

per cent of the total electrical and electronic exports in 2001 and it increased to

RM55.66 (28.1 percent) in 2002. Other major export destinations were Singapore,

RM35.9 billion (19 per cent) in 2001 which increased to RM37.79 billion (19.1

percent) in 2002, Japan RM21.6 billion (11.4 per cent) in 2001 but decreased to RM

17.87 billion (9 percent) in 2002, Hong Kong, RM14.52 (7.3 percent) in 2002, the

Netherlands RM11.7 billion (6.2 per cent) in 2001 but decreased to RM8.75 billion

(4.4 percent) in 2002 and China RM8.62 billion (4.4%) in 2002. In 2003, export sector

in Malaysian E&E product made up to 52.9%.

E&E valued at RM 85.18 billion (US$22.42) billion accounting for more than

40% of total exports for 2003. In 2004, Malaysia's exports of E&E products was

worth RM241.48 billion (US$63.55 billion), which accounted for 50.2 per cent of total

Malaysia's exports or 64.1 per cent of Malaysia's total exports of manufactured goods

(Maltrade,2005)

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In Malaysia, E&E forged a strong foundation over the last 3 decades, which

provides new opportunities for such investments. Many companies found Malaysia a

competitive manufacturing, and export base nation, as they move up the

manufacturing value chain, and produce higher end and high value added products.

This is reflected in the continuing interest amongst investors, to establish new

manufacturing operations in the E&E sector, as well as to expand and diversify

existing operations in Malaysia

For the period of 2000 to August 2003, 313 E&E projects were approved by

the Malaysian government, encountered for RM 8.6986 billion total investment

(67.8% foreign sources, that is RM5.9 billion, and 32.2% domestic sources, that is

RM2.7968 billion).

Within the electronics sector a lone, out of the 863 projects approved, with

total capital investment of RM37.4 billion, between 1998 - August 2003, 426 projects

were for the manufacture of electronic components, with the investment of RM25.5

billion 251 projects were in the industrial electronics sector, with the investment of

RM8.7 billion; and 186 projects were to manufacture consumer electronics products,

with the investment of RM3.2 billion. Total employment provided by the 863 projects

was 172,000.

Malaysia markets electronics components, consumer electronics and

industrial electronics to the world and the biggest export item is semiconductor

devices used in a diverse range of industries, such as automotive and

telecommunications.

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In the consumer electronic sub-sector, it is seen that companies have shifted

from the production of traditional products, such as VCRs, color TV sets, to higher

added value products, such as digital audio-video equipment, multimedia speakers,

TFT/Plasma TV sets and home theatres.

In the area of E&E research and development (R&D), the Malaysian

government continues to proactiveiy encourage the relevant R&D activities, through

both fiscal and non-fiscal incentives. For example, under the Economic Stimulus

Package announced on 21st May 2003, further incentives for R&D are provided, to

enhance R&D activities in the country which include:

1. approved R&D expenditure incurred during the Pioneer Status period, will

be allowed to be accumulated, and brought forward, and be given another

deduction after the Pioneer Status period;

2. expenditure on R&D activities undertaken overseas, including the training

of Malaysian staff, will be considered for double deduction, on a case-by-

case basis;

3. R&D companies will be given either second round Pioneer Status for

another 5 years or Investment Tax allowance for a further of 10 years; and

4. all value-added activities, including R&D will be designated as "prescribed

activities" that can be undertaken in free industrial zones or licensed

manufacturing warehouse.

With the realization of AFTA since January 2003, the ASEAN market should

provide new opportunities for companies operating in Malaysia. For widely traded

products, such as those in the E&E sector, this is supposed to be on-going efforts to

spur the growth of a pan-ASEAN market.

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At present, ASEAN has already completed the harmonization of standards

for 20 priority product groups, which are widely traded in ASEAN, and which conform

to 59 international standards of the ISO and the International Electro-technical

Commission or I EC. Out of the 20-product group, 18 are in the Electrical and

Electronic sector, ranging from refrigerators, air conditioners, television sets,

capacitors to cathode ray tubes and loudspeakers and parts. The harmonization of

these product standards, and the conformity to international standards, will facilitate

greater intra-ASEAN market access, as well as access into the global market.

However, China's robust economic growth and strong gravitational pull offoreign direct investments have been a serious threat to ASEAN countries,

particularly to those countries which are highly dependent on the E&E sector for their

export revenue (figure 2). However, although China's thriving semiconductor industry

has been fuelled by its costs competitiveness; most MNCs are not in a hurry to invest

in China. This is due to some distinct problems that have prevented them from

making a premature leap on the Chinese bandwagon. China has a lack of qualitative

factor such as conducive business environment, efficient infrastructure, and a sound-

banking sector.

China's burgeoning chip sector also appears to be a growing threat to

Malaysia. A study by the World Economic forum has indicated otherwise. The report

evaluates the economic competitiveness of a large sample of 102 countries in terms

of growth, business environment and technology. However, Malaysia's

competitiveness in 2002 and 2003 surpassed that of China and other ASEAN

countries (except Singapore). This is due to China's poorer ranking and perceived

deterioration related to its quality of public institutions, i.e. concerns about red tape,

corruption, judicial independent, trade barriers and banking system (Global

Competitiveness Report, World Economic Forum, 2003)

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Figure 1: E&E Products' Share Of National Exports

Malaysia - 53%

Singapore -6 4%

Sources: Asian Development Bank And Central Banks Of Various Countries

TABLE 1: COMPETITIVENESS RANKINGS FOR 2002 AND 2003

Gotiti^ v

MalaysiaThailandChinaPhilippinesIndonesia

200230373863

69

.. -

. . :

. . -.' :

2932446672

Busin^nv i rn r

2002

26

35386164

^ w ,

2631466560

..__ Technoloyy

'009

26416352

65

2039655678

Note: Higher Rankings (I.E Smaller Numbers) Imply Better Competitive Position

1.1 Background of the Study

This study analyses the structural effect on export competitiveness of

Malaysian E&E products focusing on semiconductor (SITC 776), Telecommunication

product (SITC 764), Electrical Machinery, apparatus, parts and necessary (SITC

772), Printed Circuit Board (SITC 759) and Disk drives, printers and PCs (SITC 752).

Furthermore, the study uses the Constant market share and revealed comparative

advantage framework to analyse the extent of the export competition between

Malaysia and other World economies. It was argued that the emergence of other low

cost producers such as China and ASEAN Free Trade Area (AFTA) will intensify the

competitiveness of Malaysian E&E market.

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Many studies have assessed the competitiveness of Malaysian commodity

exports, namely Palm Oil (Fatimah and Roslan, 1988, Mohamad, Fatimah, Abdul

Aziz, 1992), Cocoa and rubber (Md Nasir, Mohd Ghazali, Othman, 1993). Amir

(2000) on the other hand provides in-depth research on competitiveness of all

Malaysian manufacturing and factors that influence Malaysia's export

competitiveness.

Fatimah and Alias (1997) study on export performance of selected E&E

products, which is similar to this study. The present study however, extend the

research area by comparing the performance of Malaysia E&E market and their

competitiveness with three other countries namely Indonesia, Thailand and China

from the year 1990 to 2004. Even though a country's competitiveness is affected by

both price and non-price factors (e.g. product, quality, delivery service, business

environment and technology) this study has focused on identifying m easures and

determinants of Malaysian competitiveness in specific E &E s ector using Constant

Market Share (CMS) approach and Revealed Comparative Advantage (RCA)

approach. CMS decomposes of four components of actual growth of country's

exports: namely world trade, commodity composition, market distribution and

(residual) competitiveness. CMS identifies factors that contribute to the export gain

or loss in the world market - structural and competitiveness and the RCA analysis

provides a rough indicator of the strength of a product in terms of its comparative

advantage in the world export market relative to others (Fatimah and Alias, 1997).

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1.2 Terms And Definition

"Competitiveness" in this study was defined as any changes in the export

value measured by only microeconomic factor such as price factor (i.e cost of the

product).

"Specialization" was defined as producing a product which has a niche

market and high value added.

1.3 Problem Statement

The Malaysian economy has experienced a rapid economic growth during the

past three decades. The manufacturing sector has played a decisive role in

Malaysian economic success, contributing significantly to output, investment,

employment, and exports. Although the export sector particularly E&E has been at

the forefront in transforming the Malaysian economy, it has also made the country

highly dependent on the buoyancy of the external sector such as those mentioned

above.

The E&E sector as a major contributor to Malaysian export and accounting for

more than half of the country's export revenue has been sliding since the tech

meltdown in 2000. The past two decades or so have s een s ubstantial changing

patterns of export share and export merchandise in Malaysia. There is a very strong

belief that fast-growing China is overtaking the ASEAN-2 countries, in international

trade arena especially with the accession to the WTO of China. ASEAN particularly

Malaysia is facing the challenge of a rapidly industrializing China, not only China's

flooding its low-priced manufactured products, but competing indirectly in a third

country market, which is a more serious treat to ASEAN (Wong, 1984 in Wen, 2001).

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The local E&E industry has shown mixed performance across its various sub-

sector (table 1) while exports of lower-end product suffered declines. Even though

semiconductor sales had instead strengthened in 2003, amid the increasingly keen

competition and pressure to cut costs, Multinational Corporations (MNCs) are shifting

their manufacturing bases to lower-cost countries, mainly China. Declining exports

has also been more pronounced for labor-intensive and lower-value-added products

that is the most vulnerable to competition from China, such as television, air-

conditioners, electrical apparatus and refrigerators. The cost skilled labor in Malaysia

is estimated to be 2 times more expensive than in China (Ram 2003).

Table 2: Gross Exports 01Exports

Semiconductors

Electronic components andparts

Industrial equipment &machinery

Electrical appliances(consumer product)Total E&E exports

Share of total export (%)

E&E Manufacuturers In IV2000

(RM mil)

71,16995,662

36,182

26,463

229,476

62%

2001

(RM mil)

60,774

79,082

35,980

24,714

200,550

60%

alaysia.2002

(RM mil)

72,522

81,742

32,315

22,482

209,061

59%

2003

(RM mil)

77,985

69,196

33,465

21,810

202,456

53%

Increase

Decrease

Decrease

Decrease

Decrease

decrease

Sources: DOS

China's robust economic growth and strong gravitational pull of foreign direct

investments have been serious threats to ASEAN countries, particularly those which

are highly dependent on the E&E sector for their export revenue (figure 1). Does this

then imply doom and gloom for Malaysia?

Therefore, this study is interested to investigate the performance of Malaysian

E&E exports and their competitiveness as compared to other competitors.

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1.4 Objective Of The Study

The objective of the study is:

1. To analyze the market share of Malaysia E&E exports using constant

Market Share (CMS) approach in order to assess its competitiveness in

the world market.

2. To identify the Malaysian competitive position in E&E exports to the world

market from 1990-2004.

3. To examine whether the decline in Malaysia E&E export performance

over 1990 -2004 is associated with the decline in Malaysian

Competitiveness.

1.5 Research Questions

Based on the above problem statement and research objectives, the basic questions

that need to be addressed here are:

1. Does Malaysia E&E product have the comparative advantage in the world

market?

2. How competitive are these exports?

3. As compared to the selected countries, which competitive position

Malaysia is in E&E export, to the world market from 1990-2004?

4. Is the decline in Malaysia E&E export performance over 1990 -2004 is

associated with the decline in Malaysian Competitiveness?

5. Where are the potential markets for these products?

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Malaysia Electronic Industry

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