Has Penang Lost Its Pizzazz?

Ahmad Kefli figured his job was secure. For 18 years he worked at the Penang factory of Astec Advanced Power Systems, a San Diego-based maker of electrical generators used in the power industry. Then, in April, the ax fell. Astec announced it was moving its manufacturing operation to China. Suddenly, Kefli, 35, and his 950 fellow employees were out of work. Today, Kefli drives a taxi and knows prospects are slim that he'll find a job as good as the one he lost. "The situation in Penang is very bad," he says. "Many companies from the U.S. and Japan have started to move to China."

It's a sudden reversal of fortune for a place Malaysians proudly call Silicon Island. As recently as last fall, Penang's palm-fringed industrial parks were home to 220 companies, and the corporate banners and nameplates amounted to a global directory of the electronics industry. Until the slowdown hit earlier this year, business had been so good that multinationals slipped in tens of thousands of workers from around Southeast Asia to keep the factories humming three shifts a day, seven days a week. All of those workers were sent home shortly after being sacked.

The bad news just keeps coming. Since January, dozens of foreign companies have either shifted their operations outright from the Malaysian island to China or decided that any future expansion will happen in Shanghai, Shenzhen, or some other Chinese city. In that time, Penang has shed some 12,000 high-tech positions, or about 10% of its manufacturing workforce. Sunnyvale (Calif.)-based chipmaker Advanced Micro Devices (AMD ) is just the latest; the company announced on Sept. 26 that it was axing about half of its 2,500 workers. For its part, Zip drive maker Iomega Corp. (IOM ) has cut its 1,500-person workforce by 300, although it is still relocating engineering and design staff to Penang from the U.S. "Will we still be here in three years? I hope so," says Joe Adams, vice-president of Iomega's Malaysian operations. "But like everybody else, we are looking at our options. China is a very compelling place to be."

"WE HAVE TO MOVE." Penang has endured downturns before, but this time the jobs seem to be disappearing permanently. What's more, the exodus isn't limited to assembly jobs. Penang engineers are being laid off, too, because their counterparts in China demand less than half the pay. And the dozens of small and midsize companies that supply companies like Dell Computer Corp. (DELL ) and Motorola Inc. (MOT ) with everything from die molds to robotic equipment are following their clientele to China. "Our customers are there, so we have to move. We can't lose the business," says Ooi Ching Hock, managing director of Prodelcon, which makes equipment for Cisco Systems Inc.

Everyone agrees that if Penang is to remain an electronics hub it will have to refashion itself. "China is coming up the curve in technical strength," says Joe Tang, president of Solectron Southeast Asia, which cut its workforce in Penang from 9,000 to 8,000 this year. "Penang also has to move up the value ladder."

It's not for lack of trying. For years, the Penang Skills Development Center (PSDC), a government-corporate joint venture, has worked to improve job skills. Earlier this year, PSDC earmarked funds to help the unemployed upgrade their skills with a basic course in science and math. As of September, not a single student had enrolled. "People at the grass roots don't realize how big a threat China is to us," says PSDC Director Boonler Somchit. By the time they do, it may be too late.

By Frederik Balfour in Penang

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