High-Technology Outsourcing to SE Asia on Rise

Jakarta Globe, Soo Ai Peng & Khettiya Jittapong, May 20, 2010

Kuala Lumpur. Notion Vtec, a Malaysian maker of hard-disk drives and digital-camera parts, is busy ramping up production capacity these days.

Like its Southeast Asian peers, Notion’s orders have surged as clients in the United States, Japan and South Korea turn to contractors to source parts after they closed manufacturing facilities in the region during the global financial crisis.

The appreciation of the Japanese yen and the South Korean won has added incentive for companies in the two countries to outsource more jobs to local players such as Notion, which get paid in US dollars, to cut costs.

That has emboldened technology companies. Buoyed by strong quarterly earnings, they are setting aside more money for capital expenditure this year, as they expand factory floor space, add new assembly lines and hire more workers to tap growth. They expect the investments to translate into strong revenue and earnings growth for many quarters.

“If you look at the recession last year and the year before, it was very bleak then. None of us were optimistic about the future,” said Thoo Chow Fah, founder and chairman of Notion, which supplies parts to the likes of Western Digital, Nikon and Samsung, among others. “Now, there seems to be so much optimism.”

Companies such as Notion are the mainstay of exports in Asia’s third-most-trade-dependent country relative to the size of its economy.

Data released this month showed Malaysia’s exports rose 36.4 percent in March from a year ago and are almost back at pre-crisis levels.

Exports to Association of Southeast Asian Nations rose 45.3 percent and to China by 51.2 percent, showing a shift in demand from the United States and Europe to fast-growing Asia.

Electrical and electronics exports accounted for 37.5 percent of the 22.3 billion ringgit ($6.9 billion) monthly total.

Led by emerging Asia, global demand for consumer electronics has recovered strongly from the downturn.

Samsung Electronics, the world’s largest memory-chip maker, said it would invest a record $16 billion this year to boost output of chips and flat screens.

Southeast Asian technology shares rallied in 2009 and remain market outperformers so far this year. Bangkok-listed KCE, a maker of printed-circuit boards, rose sixfold in the past year. Hana Micro electronics, which makes touchpad and integrated circuits for use in smartphones, jumped 84 percent in the same period.

Malaysian chip maker Unisem and Singapore-listed Cheung Woh, a maker of hard-disk-drive components, saw their share prices treble in the past 12 months.

However, many fund managers underweight the sector, worried that export growth will be hit by Europe’s debt woes and still-weak US consumer confidence.

“We don’t invest much in the sector. We selectively invest in some stocks which have strong cash flow,” said Prapass Tonpibulsak, chief investment officer of Bangkok-based Ayudhya Fund Management, which has a small holding in Hana.

Analysis

Reuters