Weakening Demand from US, Europe and Japan Likely to Be Offset By Demand From China and India

~ Taking a look back at the Malaysian Electronics Industry in 2008 and its market outlook for 2009 ~

SINGAPORE, Jan. 7 /PRNewswire/ -- The credit crisis and ongoing economic slowdown across major economies like US, Europe and Japan has impacted the semiconductor industry. There has been considerable slowdown in chip sales as more than half of revenue generated by chip sales is directly dependent on consumer spending. Beginning September 2008, companies have been witnessing reduction in orders, cancellation or slowdown in the active number of order renewals. This is primarily due to slowdown in consumer spending.

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According to Frost & Sullivan Asia Pacific Research Analyst of Semiconductors Practice Akkaraju Venkata Sridevi, consumers in US have been hit the worst due to the economic crisis. The third quarter performance of 2008 is the starting point of another downturn in the semiconductor industry after many years of successful growth. Industry participants across the supply chain have taken a cautious stand from the beginning of 2008 and have averted the possibility of inventory problems.

She added that the electronics industry is a major export earner for Malaysia. Electrical and Electronics (E&E) products, valued at RM198.1 billion, accounted for 38.7% of total exports during the period January - September 2008. Electronic integrated circuits (Semiconductors) accounted 26.5% of total exports of electrical & electronic products, but decreased by 7.4% to RM52.5 billion when compared to previous year.

"Malaysia is no exception; the global slowdown has affected the exports. Exports are set to shrink due to softening of demand from US, Europe and Japan. BRIC countries, other Asian economies and emerging markets such as Latin America and Middle East will prove to be an attractive destination for the end of 2008 and going into 2009. Despite the economic downturn, Malaysia still remains a profit center for many global manufacturers," says Sridevi.

She adds, "The financial crisis is set to hit chip sales. The overall semiconductor industry is inching towards a period of slow growth characterized by the effects of financial crisis and recession in US. As major manufacturing countries in Asia export their products to markets like US, Europe and Japan, it is feared that sales of personal computer, notebooks and cell phones will witness a considerable drop due to financial crunch."

"Thus," she continues, "Malaysian manufacturers exporting to US will witness low sales growth for the first time after 2001. This will lead to lesser demand ICs. Manufactures in Malaysia can profit by exporting to newer emerging economies where government spending is high to improve the quality of IT systems across various layers."

Falling commodity prices has affected the Malaysian economy in the past few months. The current financial turmoil has weakened its exports, but the government is currently implementing fiscal policies to stimulate domestic spending. The government cut interest rates for the first time since 2003. There are signs that few US based electronic firms might ramp down production and cut few jobs to stay afloat during the crisis. Recently, the government has also scaled down its growth target to 5.0 percent for 2008 and 3.5 percent for 2009.

"It is still uncertain as to what effects the current financial crisis will have in the next few quarters. Much depends on the reforms being implemented by the new President elect, of the Untied States of America," says Sridevi.

In terms of industry specifics, The Ministry of International Trade in its recent statements has identified the need for sufficient human capital as the electronics industry is the largest sub-sector within the manufacturing sector in Malaysia. The electronics industry has received second largest investment of RM 16.3 billion from last year until August 2008. The investment is mainly driven FDI projects.

"The government has been continuously engaged in improving the business environment allowing new investment in electronics industry and also encouraging the existing companies to boost their operations," Sridevi says, "The government has reduced corporate tax from 27 percent in 2007 to 26 percent in 2008 and it is expected to lower it to a further 25 percent in 2009."

The market for Malaysian electronics exports is likely to see a decline this year due to worldwide financial turmoil, the key sector for the economy. According to Sridevi, the US, a major export destination for Malaysian electronics, is likely to witness rapid decline in demand. "The uncertainty is very high and the many industry participants are taking a very conservative approach for the year 2009. The industry is expected to show signs of recovery by mid 2009 or later," she says.

The electrical and electronics industry is facing a cut back in orders, estimated to be at 25-35 percent. "The only silver lining is that the weakening demand from major economies like US, Europe and Japan is likely to be offset by demand from economies like China, India and to extent from countries from Latin America and Middle-East," she continues.

She adds, "The semiconductor industry will witness weak sales till the second quarter of 2009. Although emerging countries across the world will offset this weakening of demand from bigger economies to an extent, the semiconductor industry is not insulated from the adverse economic conditions and is expected to contract going into 2009."

One of the hot sub-sectors for 2009 to 2011 identified by Sridevi include emerging economies, which will continue to be a source of major revenue in 2009. "Many governments in Latin America and Middle-East are currently improving their IT systems, thus fueling the demand for PCs, and telecommunications systems," she said.

Cell phones, PCs and Mp3 players will also continue to be major sub-sectors for Malaysian companies.

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