After a two-year hiatus, the Semicon Southeast Asia chip industry conference will be hosted in the Malaysian city of Penang this June.
Semicon says it will “commemorate Malaysia’s 50th Year of manufacturing excellence and celebrate Penang’s reputation as the Silicon Valley of the East, built on decades of manufacturing excellence and industrial experience”.
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Even if those 50 years hide a certain amount of to-ing and fro-ing among chip producers, there has been a considerable return of investors in 2021. Among others, US giant Intel announced in December it will invest $7bn into the city to build a new chip-packaging and testing factory, creating 9000 jobs.
The pandemic has intensified chip demand and cemented the industry as a key strategic sector for major economies worldwide. Western, Chinese and Japanese investors have all contributed to an influx of capital into the Malaysian chip sector, attracted to the country for its production expertise and geopolitical positioning.
fDi Markets, a greenfield project announcement tracker, recorded seven semiconductor projects in 2021, worth an estimated total of more than $10bn — a historic high representing some 40% of the total greenfield FDI tracked into Malaysia last year.
Breath of new optimism
Linda Tan, president of SEMI Southeast Asia, tells fDi that “it is not just the Intel project that has breathed new optimism into the electronics segment in Malaysia, but investments and projects from other key organisations such as TF-AMD, Lam Research, Micron and Nexperia that have also propelled the industry”.
When asked whether Malaysia can outshine its neighbours in chip production, Ms Tan says that every country in south-east Asia has its own strength and focus.
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“There is a strong focus in Taiwan on the advancement of technology and foundries (fabs), whereas Malaysia is establishing a strong footprint in IC [integrated circuit] design, engineering, packaging and testing services and solutions as well as electronic manufacturing services,” she explains.
Malaysian bank AmBank research has forecast that the country’s electronics exports will grow between 8–10% in 2022, driven by global semiconductor demand.
Existing ecosystem
Datuk Seri Wong Siew Hai, president of the Malaysia Semiconductor Industry Association (MSIA), says that two reasons why Malaysia has returned to the fore of late is the country’s experience and technical expertise.
The bottom line is that we’ve shown that we are able to be competitive through quality improvement and automation
“We have the ecosystem and services to support a factory; a stable government, compared to other countries; and English and Chinese language skills. But the bottom line is that we’ve shown that we are able to be competitive through quality improvement and automation,” Mr Wong explains, adding that the country is less exposed to natural disasters than Taiwan and Japan. Several fabs in these countries either closed or experienced shortages due to droughts last year.
Malaysia is no stranger to shortages or suspensions, however. During the supply chain crunch last year, caused by the Covid Delta outbreak across south-east Asia, supply shortages were exacerbated by severe lockdowns in Malaysia, triggering uncertainty among foreign investors. Geneva-based STMicroelectronics, which makes semiconductor products, suspended operations at its Johor plant last July.
But as the industry grows, there are more concerns over the need for workers. A survey by the MSIA last year found that the Malaysian semiconductor industry needed at least 16,000 new workers in the fourth quarter of 2021 and 23,000 new workers in 2022, ranging from engineers to technicians and operators.
China’s long shadow
Still, even with supply chain disruptions, Malaysia emerges as a secure investment destination amid ongoing US–China trade tensions.
Ton van den Bosch, partner and head of the Singapore office at Addleshaw Goddard, says that “Taiwan is a fine spot, but it’s a risky spot”.
“With not a particularly friendly government across the strait from Taiwan, a lot of chip companies are looking to diversify [away from Taiwan] and Malaysia is a good option,” he says.
Mr van den Bosch sees the move to Malaysia as part of the same trend in other manufacturing sectors, like garments or shoe manufacturing, but the semiconductor sector stands out due to its strategic value.
But he adds that as the semiconductor industry gets more nationalist, it remains unclear whether certain foreign investors, namely Chinese investors, will continue to be welcome.
Under the previous leadership of Najib Razak, inflows of Chinese capital were readily associated with large-scale infrastructure projects, such as the $20bn East Coast Rail Link project, which was declared to be linked to government corruption and to leave Malaysia heavily indebted to China. It was cancelled under the subsequent prime minister Mahathir Mohamad but has since resumed construction.
Kaho Yu, principal analyst at Verisk Maplecroft, says that concerns over Chinese investment are unlikely to have much of an effect on the chip sector.
“The fact that Malaysia is welcoming investment in strategic sectors, like semiconductors, does not pose the same threat as investment into infrastructure, which will recall problems with Chinese investors of the last few years, nor as those going into critical assets,” he says.
More interesting, Mr Yu says, is that foreign businesses are coming to Malaysia as a result of geopolitical or logistical reasons, not on account of a growing domestic market.
“It begs the question why many investors left Malaysia in the first place,” he says, suggesting that neighbouring countries had built up better, fuller semiconductor industries. “They only go to Malaysia when they need to.”
Future fabs
Mr Wong remains hopeful that this new wave of investment could galvanise more development of the country’s value chain.
With a population of 32 million, Malaysia is an export-oriented market and has been unable to develop a semiconductor value chain in the way its neighbours have. “We would prefer to develop our own semiconductor industry, like Taiwan, South Korea or Japan, but we have struggled over the years,” he says.
Intel’s new project is not a fab, Mr Wong points out. “Malaysia has few fabs, and that’s an ecosystem that is really missing here and we need to strengthen,” he says.
Though the Malaysian government does not offer “fantastic incentives” to investors to build fabs, Mr Wong hopes that with the OECD’s proposed 15% minimum tax rate, Malaysia might not need to.
This article first appeared in the April/May 2022 print edition of fDi Intelligence.