Malaysia's Place in the Race for Semiconductor Business

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Malaysia's success in attracting investment for the final stages of the semiconductor production process will likely continue in the coming years, but its push to move up the value chain will prove challenging amid labor shortages and rising U.S.-China tensions. In recent months, industry leaders from the United States such as Intel, NVIDIA, Texas Instruments, Applied Materials, Lam Research, Micron and Hewlett Packard have committed billions of dollars to establishing or expanding their presence in Malaysia, many of them with a focus on the chip industry. The phenomenon goes beyond U.S companies, as Infineon (Germany), Bosch (Germany), AT&S (Austria), Ericsson (Sweden) and Simmtech (South Korea) are likewise rushing to the country, with much of this activity taking place in the past 18 months. In 2023, Malaysia became the top exporter of semiconductors to the United States. Chinese companies — particularly those that make machinery for semiconductor manufacturing — are also making sizable investments.

Intel (over 10 years) and Infineon (over five years) are each planning $7 billion in investments in Malaysia. NVIDIA is planning $4.3 billion to construct an artificial intelligence data center, while Texas Instruments is planning $3.1 billion to construct two new Outsourced Semiconductor Assembly and Test (OSAT) facilities.
As of December 2023, Vietnam had received the second most investment in the semiconductor sector among Southeast Asian countries, totaling approximately $5 billion since 2022. This sum is dwarfed by the combined investment commitments listed above.
Intel's expansion plan includes establishing a cutting-edge 3D chip packaging facility, marking Intel's inaugural venture into overseas 3D chip packaging infrastructure.
The bulk of investments are in northern peninsular Malaysia, specifically in the states of Penang, Kedah and Perak. These areas saw the first Malaysian free trade zones in the 1970s, driving semiconductor operations there for 50 years, and their proximity to Singapore further renders them attractive destinations relative to the rest of the country.
The Malaysian state of Penang — once known as ''the Silicon Valley of the East'' before losing market share to South Korea and Taiwan in the 1990s — alone attracted $12.8 billion in foreign direct investment in 2023, which exceeds the total it received from 2013-2020.
Malaysia is the world's sixth largest semiconductor exporter, though exporting chips after OSAT does not accumulate the same value as chip fabrication. Malaysia exports a wide variety of semiconductors and related products, such as integrated circuits, transistors, diodes, optoelectronic components, power semiconductors and sensors.

The U.S.-China chip rivalry is driving interest in Malaysia, and its experienced workforce and neutral status provide advantages over the country's Southeast Asian competitors. In recent years, the United States has imposed export controls that seek to limit China's access to cutting-edge semiconductor technologies, as well as attendant technologies like electric vehicles and green energy products — a decision that has affected not only China but international chip producers the world over by fragmenting the global supply chain. Against this backdrop, alternative markets in Southeast Asia have become increasingly attractive investment destinations due to their proximity to China, relatively low labor costs, skilled workforces, and reduced risk of getting caught in the middle of U.S.-China trade tensions. Malaysia is at the front of the pack for several reasons. For one, the country has been a chipmaking hub since the early 1970s when the Malaysian government offered Intel a tax-free zone to establish a factory in the state of Penang. Over the decades, it has specialized in assembly, packaging and testing — granting it experience that is now paying dividends amid the global search for a reliable semiconductor manufacturing supply chain because Malaysia already has a seasoned workforce, along with chipmaking infrastructure that its peers like Vietnam need to build from the ground up. Malaysia's location also provides easy access to large markets like China and India, and has cheaper labor costs compared with other more developed Asian countries with strong semiconductor sectors, like South Korea and Taiwan (though they typically compete in different sections of the semiconductor supply chain). In addition, Malaysia's semiconductor sector receives generous government support in the forms of tax breaks, grants and subsidies. The country's status as a former British colony means the English proficiency of its inhabitants is on average higher than others in Southeast Asia as well, boosting its attractiveness among Western companies. But one of the most important drivers of Malaysia's attractiveness is its willingness to accommodate both Western and Chinese companies, providing a neutral ground that enables semiconductor suppliers to go to their customers who are leaving or diversifying out of China. Indeed, in recent years, Malaysia has also become a haven for a growing number of Chinese suppliers following their clients out of China.

Malaysia holds 13% of the world's semiconductor assembly, packaging and testing market.
The United States has garnered backing from its allies in Europe (such as the Netherlands) and Asia (such as Japan) in its efforts to restrict the sale of chipmaking equipment, as well as 14- and sub-14-nanometer semiconductor chips, to China
Before the United States began imposing tech restrictions on China, chipmakers around the world sourced parts from Chinese companies. This, in turn, is also driving Chinese companies — such as Fengshi, a semiconductor equipment manufacturing company — to expand to Malaysia. According to the Malaysian consultancy firm InvestPenang, there are currently 55 Chinese semiconductor companies operating in the northern state of Penang. This is compared with the 16 Chinese companies that were doing so before the United States instituted its Chips Act in 2022, which subsidizes U.S.-made semiconductor chips and boosts investments in cutting-edge science and technology initiatives to increase the United States' competitiveness against China.

Malaysia will continue to be well placed in the assembly, packaging and testing ecosystem, but the country will struggle to move up the value chain due to domestic workforce limitations and its reliance on foreign companies. Though assembly, packaging and testing are crucial steps in the chipmaking process, they do not involve either integrated circuit design or actual wafer fabrication, which are far more sophisticated tasks and require highly qualified engineers who are currently high in demand but low in supply, both in Malaysia and globally. The recent influx of foreign semiconductor firms speaks to Malaysia's ambition to evolve beyond the back-end stage to the forefront of chip design and fabrication. Indeed, Prime Minister Anwar Ibrahim named this a ''critical goal'' for the country, with the U.S.-China rivalry providing a convenient trigger to move up the value chain given the outsized demand for design and fabrication capabilities. However, Malaysia will face severe constraints in its effort to move up the value chain, with an acute shortage of qualified engineers being chief among those challenges. The government estimates that 50,000 engineers are needed to make the jump, but only 5,000 engineering students graduate each year. Not all students of engineering study semiconductor manufacturing, and many of those who do eventually emigrate to nearby Singapore, where pay is much higher. Malaysia also lacks a domestic semiconductor company with distinctive name recognition like Intel, the likes of which it has relied on to power the industry since the 1970s. Malaysian firms like Unisem, Carsem and Inari Amrtron have, in turn, struggled to attract talent, with the bulk of Malaysian engineers opting to work for foreign companies that look more impressive on their resumes. As a result, domestic semiconductor firms have only been able to garner a small global market presence. More broadly, Malaysia is not alone in its goal to develop a high-end chip industry, an ambition shared by most moderately developed economies. However, even much larger economies like China, which has invested hundreds of billions of dollars to develop a high-end chip industry since 2021, have struggled to make meaningful progress in this endeavor, which bodes ill for Malaysia. That said, advanced packaging techniques that are now being developed may enable Malaysia to move up the value chain regardless, but potentially not in integrated circuit design and wafer fabrication.

In September 2023, Malaysia unveiled its New Industrial Master Plan (NIMP) 2030, which calls for $19.8 billion in funding by the end of the decade to support the high-tech sector. The government aims for NIMP 2030 to stimulate increased participation in front-end activities, including semiconductor equipment manufacturing, wafer fabrication and integrated circuit design. The Malaysian government launched a semiconductor task force in February to complement the NIMP 2030 and facilitate moving it up the value chain, led by the minister for investment, trade and industry.
There are around 80 planned front-end fabrication plants for construction currently globally, though not one of them is set to be established in Malaysia.
Oppstar, a Malaysian startup specializing in integrated circuit design, listed on the Kuala Lumpur Stock Exchange last year. It is one of the few Malaysian companies with this specialization, but there will be more to come amid the country's push to move up the semiconductor supply chain.
In addition to its engineering shortfall, Malaysia has an estimated general labor shortage of 1.2 million workers spanning several sectors, including 600,000 in manufacturing, 550,000 in construction and 120,000 in palm oil, highlighting a shortage of both white-collar chip designers and blue-collar manufacturing workers needed to operate the facilities.
In September 2022, Malaysia unveiled a new visa program designed to attract highly skilled workers by streamlining the process, allowing digital nomads and prioritizing key sectors. However, this has largely failed to bring in the desired talent as competitors such as Australia, Singapore, Thailand and Taiwan implemented similar policies around the same time.

Malaysia also faces competition from its Southeast Asian neighbors for investment, and its neutrality may only offer temporary benefits if the United States expands trade restrictions on China. In addition to its domestic constraints, Malaysia faces challenges internationally in its effort to advance its semiconductor sector. For example, Malaysia must compete with its Southeast Asian peers in attracting the global semiconductor firms seeking to diversify their manufacturing and supply chains away from China. Malaysia is already behind neighboring Singapore in wafer fabrication (of which Singapore commands 5% of the global market). Indonesia, the Philippines, Thailand and Vietnam are also looking to draw in foreign semiconductor firms and will compete with Malaysia in the back-end assembly, packaging and testing stage. Meanwhile, Malaysia has been facing pressure from the United States to distance itself from China, threatening the country's attractiveness as a neutral country in Beijing and Washington's geopolitical rivalry. So far, the Malaysian government has pushed back against this U.S. pressure. Nonetheless, the United States could expand its restrictions to Malaysia. Washington could, for example, impose restrictions on products and machinery produced in Malaysia owing to the country's collaboration with China on higher-end production, given that some Chinese companies are working with Malaysian companies to assemble higher-end chips that fall under U.S. restrictions. Moreover, if former U.S. President Donald Trump is reelected in November, he could impose penalties on Malaysian products if the United States finds that such products are workarounds for Chinese goods. Given Trump's protectionist trade policy, such a scenario would also increase the likelihood of the United States imposing tariffs on Malaysian goods (given the trade imbalance between the two countries), particularly if Malaysia is deemed uncooperative in the administration's China policy. China, for its part, also has the means to economically and militarily pressure Malaysia against cooperating with the United States; Beijing could, for example, threaten to reduce trade or withdraw its investments in the country, and/or intensify its military posture around claimed Malaysian waters in the South China Sea.

On March 5, Anwar told a press conference at the ASEAN-Australia Special Summit that efforts to restrain China's ascent will only exacerbate tensions and foster discord across the region, saying ''While we remain an important friend to the United States, Europe and here in Australia, that should not preclude us from being friendly to one of our important neighbors, specifically China.'' In February, he accused the West of ''China-phobia'' in an interview with the Financial Times and has generally been sensitive to U.S. criticisms that he is ''tilting'' toward Beijing, an accusation made by Vice President Kamala Harris in September 2023.
In practice, Malaysia's neutrality in the context of great power rivalry means hedging against both China and the United States by applying a principle of equidistance to both. This balance is exemplified by the country's participation in both China's Belt and Road Initiative and the U.S.-led Indo-Pacific Economic Framework. Malaysia has also sought to maintain a low profile in South China Sea disputes compared with other claimants (namely, the Philippines and Vietnam), despite multiple standoffs with Chinese maritime forces since 2013.
China is Malaysia's top trade partner while the United States is the top contributor of foreign direct investment to Malaysia, meaning both have leverage in the relationship.