“Closure of Disk Drive Firms could Bode Ill for Malaysia”, a Commentary by Francis E. Hutchinson

Commentary 2016/42, 10 August 2016

Last month Western Digital and Seagate, two leading American disk drive manufacturers, stated that they were closing their facilities in Penang and relocating some production aspects to Thailand. All up, this could result in the loss of more than 4,000 formal sector jobs in the northern Malaysian state. These are not closures of footloose concerns, but rather firms that have relationships with Malaysia that span decades. And, far from labour-intensive operations, they include Seagate’s technology centre for slider manufacturing and Western Digital’s R&D centre. Facilities like these have been touted as indicators of Malaysia’s ability to take on more than simple assembly-line operations.

Beyond the direct and indirect economic and social cost of these closures, these business decisions are indications of two worrying trends in Malaysia.

First, these job losses are the result of structural issues such as a shortage of skilled workers and low levels of productivity. Thus, while the country scores well for its ease of doing business and the quality of its infrastructure, it struggles at providing an enabling environment for more sophisticated operations. Seagate’s decision to close its more complex facility in Penang whilst retaining its assembly operations in Johor could indicate that Malaysia is more competitive in less skill- and technology-intensive tasks.

Second, these closures could be part of a broader shift in Malaysia’s economy away from manufacturing towards services. While some academics and policy-makers are promoting services as a new driver of growth for emerging market economies, this needs to be treated with caution. Many service sector jobs are low-skilled and those in high value-added niches tend to generate relatively few jobs. In addition, few service sectors can generate the demand for supporting industries in technologically-demanding sectors in the manner that electronics and autos do. Indeed, there are other academics that state that Malaysia is de-industrializing prematurely – earlier and at a lower per capita level of income than other countries that have made the transition from manufacturing to services.

Beyond these worrying trends, these firm closures re-state the value of looking at fundamentals. Despite Malaysia being a signatory to the TPP and potentially able to benefit from cumulative rules of origin that would bind it to American and Japanese regional production networks, it has lost out to Thailand – a non-signatory of the pact. If anything, this trend illustrates the importance of taking care of fundamentals, as opposed to potential benefits accruing from free trade agreements.

Francis E. Hutchinson is Senior Fellow and Coordinator of the Regional Economic and Malaysia Studies Programmes at ISEAS – Yusof Ishak Institute.

The facts and views expressed are solely that of the author/authors and do not necessarily reflect that of ISEAS – Yusof Ishak Institute.  No part of this publication may be reproduced in any form without permission.