KUALA LUMPUR: Recent datapoints suggest that Malaysia's electrical and electronics (E&E) export recovery is lagging behind its regional peers.

UOB Global Economics & Markets research said the lag could possibly be due to still-subdued demand from its top trading partners especially China; or the country's limited exposure to chips that drive Artificial Intelligence (AI), digitalisation and green economy trends.

It could also be due to intense competition from other countries in terms of pricing and production capacities.

The supply chain diversification into Malaysia concentrated mainly on cyclical products particularly E&E goods following the heightened US-China tech conflicts and accelerated adoption of automation and digitalisation brought about by the pandemic.

On a net basis, Malaysia's overseas shipments of  E&E products surged by 32.1 per cent between 2018 and 2023, marking the biggest gainer among export products.

Top E&E export markets for Malaysia in 2023 were Singapore (18.6 per cent share), US (16.3 per cent), China (15.2 per cent), Hong Kong (13.1 per cent), EU (8.5 per cent) and Taiwan (4.9 per cent).

Various industry surveys suggest that limited exposure to chips that drive AI, digitailsation and green economy is seen as a more probable reasn for the lag, whereby Malaysia's advantage and strength is in the lower value-add assembly and testing segment (which is estimated to contribute only ~10 per cent of profits in the semiconductor industry and 5 per cent-25 per cent of profit margin).

Malaysia has limited involvement in the higher-value add chip segments such as reserach and development (R&D) (which contributes ~45 per cent of the profit and 80 per cent-100 per cent of profit margin) and fabrication (~45 per cent of the profit pool and 60 per cent of profit margin).

The report said rising competition and policy risks have also led international companies to expand semiconductor supply chains in Mexico and Brazil to reduce its reliance on Asia.

Meanwhile, India is vying to be the world's top five  semiconductor producer in the next five years as it seeks to benefit from companies looking to reduce their reliance on China.

"On that note, the New Industrial Master Plan (NIMP) 2030 has set the right national strategic direction to transform Malaysia's E&E sector (one of the five priority sectors or 21+4 focus area), focusing on integrated circuit (IC) design, wafer fabrication, R&D design and advanced packaging," UOB research said.

Malaysia announced yesterday that it plans to build a large-scale IC design park in Puchong (Selangor), touted to be the largest in ASEAN to boost its role in the global chip supply chain.

UOB research said although the NIMP ) 2030 has set the right national strategic direction to transform the Malaysian economy and embrace a new global trade landscape, challenges remain high given that geoeconomic fragmentation and geopolitical tensions could intensify.

"Hence, appropriate industrial policies, a diplomatic balancing act and flexible usiness strategies  will be key elements in driving and sustaining Malaysia's trade prospects in the short and medium term." "Despite the challenges, we remain cautiously optimistic on Malaysia's trade outlook given robust investment approvals and rate of investment realisation. A stable and improved China economy and signing of more free trade agreements are catalysts to boost the trade outlook," UOB research said.

https://www.nst.com.my/business/economy/2024/04/1041644/uob-research-malaysias-ee-recovery-lagging-behind-regional-peers