Bowling along the pristine, straight, tree-lined avenues of Penang and admiring the classic British architecture of the large homes en route, the visitor readily senses a heady colonial atmosphere in the air. At the coast beaches of white sand stretch as far as the eye can see, gently reassuring the tourist that their natural beauty is here to stay.

In this typical tourist picture it is hard to connect Penang with the phrase "Malaysia's Silicon Valley."

"Once we're over Penang Bridge you'll see the answer," says Cheng Yuew Yee, a Penang resident who graduated from National Taiwan University and is now the Penang representative for Formosa Trading Services. He points out that Penang State includes Penang Island and Wellesly Province in the northwestern corner of the Malayan mainland. The two are linked by Penang Bridge, at 13.5 km. the longest in Southeast Asia. To protect Penang Island's tourism resources and avoid industrial pollution, the Malaysian government decided to restrict all industrial zones to the Wellesly side.

Wellesly's flourishing electronics industry is there for a reason. In 1786 the British East India Company saw the strategic importance of Penang's location at the northern entrance to the Strait of Malacca, and developed it as a trading port. Penang is still Malaysia's biggest trading port today.

With its pleasant climate, attractive surroundings, convenient harbour and international airport, plus deep-water wharves and cheap labor, Penang was chosen as a base 20 years ago by big American and Japanese electronics firms such as Motorola, Sony and Hitachi.

"Firstly the electronics industry is low on industrial pollution; secondly it's a labor-intensive industry that fully utilizes the abundant local labor market." Thus Chou Pang-ch'uan, investment director of the Malaysia Friendship and Trade Center, explains the warm welcome the industry gets from the Malaysian government.

The presence of large American and Japanese firms encouraged smaller businesses. "Industry attracts industry," notes Clarence Tou, general manager of Asia Resources Consultant Co., Ltd., who mainly handles investment in Malaysia. "With the big firms to fall back on, medium and small electronics firms from Taiwan need only act as satellite industries supplying them with parts, and they've got it made."

According to W. H. Chiu, managing director of Rectron's Malaysia plant, when the Penang Taiwanese Business Association was set up two years ago, over 70% of the 24 founding members were electronics producers making bridge diodes, capacitors and telephones. "Medium and small firms help the big firms with assembly and processing, and some big names use them as a production line."

"Initially Acer's Malaysian plant will concentrate on low-return, uncompetitive products which have been edged out of the Taiwan market, such as AT personal computers," explains Wang Tao-hsiung, of Acer Computer's general office. These products have no market in Taiwan, but they still have sales potential in the Middle East and Africa. "Such low-profit products can only be kept going by keeping costs to a minimum."

Malaysia has introduced nine-year state education, so the quality of the local workforce is generally good. "Quality is reliable, yet wages are only a quarter of Taiwan's, which really helps keep production costs down," says Peng Chun-p'ing, president of Action Industries.

"An even more important factor is that major American and Japanese electronics firms have been established here for years. Staff only need minimal training and they can quickly get started." Mr. Chiu points out that although local workers lack the skills found in Taiwan, with a month's training they can achieve 70% of a Taiwan worker's efficiency.

The anti-Chinese sentiment which makes Taiwanese businessmen so hesitant about Malaysia is little evident in Penang. "Penang has a 70% Chinese population," explains P'eng Chun-p'ing, and on the streets of Penang the Chinese conversation around you, the Chinese food and the shop signs all make you feel as much at home as in Taipei.

"Some 60 or 70 Taiwanese firms have now set up plants in Penang, and several more are applying to come," says Tou K'o-hsiao. But the rapidly mushrooming Taiwan firms are squeezing the local labor market.

Advantronics managing director Chen Chun-yin points out that judging by their current expansion rate, Taiwan firms will need about 30,000 workers by June 1990. But this summer there will be only 8,000 school leavers in Penang, of whom 20% will continue in further education, leaving a total of 6,000. "Starting this year the scramble for workers will heat up."

Quick-thinking P'eng Chun-p'ing has already decided to set up a management consultancy firm to assist Taiwan companies train skilled workers. "Taiwan firms are multiplying day by day, and the demand for middle management personnel cannot be met."

Beginning in April, Acer and TECO, both of whom are building plants in Penang's industrial zone, will be sending 20 or 30 locally recruited middle management personnel to Taiwan for short two-or three-month preparatory courses.

In addition to the labor shortage, spiralling land prices are another aftereffect of the rapid arrival of Taiwan firms. This is both a burden on Taiwan businessmen and a source of local resentment.

"When I was planning to set up a factory in Penang three years ago, there were coconut trees everywhere within a five kilometer radius of the site. Today locating a good site for a factory here is as hard as finding a good wife!" quips Action Industries managing director Peng Wen-chih.

Rectron, one of the old hands here, moved quickly last August to set up the Rectron Development Company and acquired a 25 acre site to build 24 300-ping factories. "All 12 units in the first phase were snapped up, and half the second phase units have been sold," W. H. Chiu says. Apart from cashing in on market demand, he hopes also to pass on his hard-won experience and assist Taiwanese midstream and downstream satellite firms in the electronics industry to invest here.

The Malaysian government is also concerned about the squeeze on Penang's labor market and land resources, and is adopting a more selective attitude towards applications from Taiwan firms. "Their aim is to encourage investment to spill over into other places," states Chou Pang- ch'uan.

"Malaysia's investment incentive scheme expires in 1990." Tou K'o-hsiao suggests: "Businessmen intending to invest should apply for a licence quickly in order to benefit from a five-year tax break."

Many Taiwanese worry about what might happen if ROC electronics firms find the incentives too great and scramble to invest in Penang.

"The survival of the fittest is a natural law which applies equally to industry, and any firm that cannot adapt should find another line of business," Wang Tao-hsiung calmly points out. Acer's approach has been to transfer labor-intensive parts of its production line to Penang, leaving the high-tech production intact in Taiwan. "International division of labor is the current trend. Investing abroad doesn't mean, reducing our in vestment and production in Taiwan, but rather upgrading our manpower utilization."

"Setting up factories abroad is aimed at expanding our firm's operational base," says P'eng Chun-ping. "Our real home is still in Taiwan."

[Picture Caption]

Many Taiwan firms mainly carry out assembly and processing work for large American and (Left) Penang is both a tourism center for Southeast Asia and the "Silic on Valley" of Malaysia.

(Left) Penang is both a tourism center for Southeast Asia and the "Silic on Valley" of Malaysia.

Penang's deepwater harbor with its high throughput volume and convenient transportation links is an attraction for foreign investors and manufacturers.

These roadsigns point towards Perai Industrial Zone, where many Taiwan firms are concentrated.

Taiwan businessmen generally give the Penang workforce high marks for personnel quality and ability to learn.

This Malay woman is inspecting bridge diodes.

A quiet beach gently beckons to tourists seeking leisurely relaxation.

Taiwan's Acer company is building a plant in Penang in preparation for starting production in the second half of 1990.

（Left） Penang is both a tourism center for Southeast Asia and the "Silic on Valley" of Malaysia.

These roadsigns point towards Perai Industrial Zone, where many Taiwan firms are concentrated.

Penang's deepwater harbor with its high throughput volume and convenient transportation links is an attraction for foreign investors and manufacturers.

Taiwan businessmen generally give the Penang workforce high marks for personnel quality and ability to learn.

This Malay woman is inspecting bridge diodes.

A quiet beach gently beckons to tourists seeking leisurely relaxation.

Taiwan's Acer company is building a plant in Penang in preparation for starting production in the second half of 1990.