Move Over China, Malaysia Intends to Be the Next Semiconductor Powerhouse

Created: June 25, 2024
Updated: July 6, 2024
Move Over China, Malaysia Intends to Be the Next Semiconductor Powerhouse

While China combats other regions of the world with new import-export tariffs and uncertainty around its long-term distribution of electronics, there is potential for Malaysia to make headway in the industry. 

Watching things unfold we realize that, following great effort to improve the supply of components like semiconductors and other pieces of consumer electronics, there is potential for these gains to be reversed in the form of higher overall costs. 

While things shake up in the electronics sector, Malaysia is focused heavily on increasing its capacity for semiconductor manufacturing and recent funding and support from its government will, in Prime Minister Anwar Ibrahim’s eyes, see the country rise further up the totem pole. Malaysia has the potential to become a significant contributor to numerous industries, but whether it could take on China’s legacy position is down to each of the countries’ movements in the years to come. 

The Question

Could Malaysia overtake one of the largest countries in the world, which, in 2024, is expected to exceed US$198 billion in revenue from its semiconductor industry? Plans set out by the Malaysian government support exponential growth to bring in US$1 trillion worth of business to the southeast-asian country. 

Here, we’ll take a look at the performance and growth of the Chinese and Malaysian markets and highlight some of the key points when considering who might lead the way in chip manufacturing. 

Workers examining shipping crates
Malaysia's ambitious plan aims to attract US$1 trillion in business

Disruptions to China’s Supply Chain

While it’s common to talk about the global pandemic as it relates to the semiconductor industry, the event is still quite relevant today. The disruption to China’s manufacturing capacity remains problematic for the country as, at the time, buyers were also forced to diversify where possible. Moreover, in its effort to build self-sufficiency, these events also hindered the growth of its fab footprint, resulting 

Combine this with the trade war between China and the US and the country is seen to be in a decline compared to its previous standing in the electronics industry. Actions by the US in recent years have not only driven down trade in the country, but also overshadowed exports to other nations. 

China’s Current Position in the Electronics Industry

The country has long been in a positive position, and seen as the ‘powerhouse’ of global electronics production, but with time, technical evolution, and interest among other continents to localize their development, China’s weaknesses have come to light. 

Firstly, the strengths. Here is where China’s proficiency really shines through, particularly when it comes to rolling out new and emerging tech. 

A worker examining a chip
China, once a global electronics leader, reveals weaknesses amid evolving tech and localization trends

Strengths

Low-End Production

China has been known for low-end electronics, and remains the leader in this area so long as other countries are still developing their own infrastructure. Local companies Semiconductor Manufacturing International Corporation (SMIC) and Yangtze Memory Technologies Corp. (YMTC) boosted their production efforts thanks to the country’s “Big Fund”. 

However, much of its success relies on exports. China’s integrated circuit exports surged in early 2024, which shows promise based on ‘yesterday’s’ industry. With tariffs in place between the US and Europe, many believe that localisation could take effect if costs rise too high. China’s power position raises concerns among others as it has the potential (pre-tariffs) to flood markets with cheaper goods that are technologically sound. 

High-Performance Chips

Huawei within its borders provides China with a strong asset in the form of its chip design arm, HiSilicon. Local studies of industry suggest that, despite the US restrictions on Huawei developments, the company helps accelerate China’s development of and capacity for high-end, high-powered chips. 

Chip Testing and Packaging

To reach its current position, China became a hub for all chip-related procedures, including back-end manufacturing and testing—a critical step in preparation for product installations. Local companies are responsible for around 38% of global testing and packaging, contributing alongside Taiwan and Singapore. 

Weaknesses

Dependence Western Equipment

Its primary manufacturers SMIC and YMTC are heavily dependent on advanced machinery from Western companies—tools that are vital to its high-end semiconductor production. Relying on these imports puts Chinese industry in a vulnerable position and more susceptible to struggles amid geopolitical tensions and new trade restrictions. This is something we’re seen to witness as the US imposes high tariffs on high-tech machinery. 

High-Performance Manufacturing

Perhaps unsurprising based on the aforementioned equipment acquisitions, but Huawei has experienced great difficulty in manufacturing 5G smartphones through the 7nm-class process. This will impact China’s trajectory to independence, which is a win for competing nations.

Cue Malaysia: Investment in Semiconductor Fab

Considering the questions asked here—whether Malaysia could be the next fab powerhouse—the country owes much of its success to its Chinese relations. Currently, Malaysia accounts for around 13% of global semiconductor assembly, testing, and packaging.

Malaysia has been pivotal in supporting China’s assembly needs, and its government has also recognized the potential for growth in this sector, injecting significant funds into its manufacturing footprint with an expected increase to 15% of the global share by 2030 

The country’s Prime Minister Anwar Ibrahim is a major advocate of this as he believes the country can cement its position in the sector and become a leading international hub for chip manufacturing. The investment allocated to the semiconductor industry will play a major role in plans to increase the amount of talent in the industry.The country will invest in 60,000 workers, furnishing them with desirable skills and expertise in integrated circuit design, as well as component packaging and testing.

PCB boarding manufacturing
Major semiconductor investment to skill 60,000 workers in design, packaging, and testing

Strengths

Infrastructure and Skilled Labour

Malaysia has been establishing its manufacturing footprint for the past five decades, focusing on backend tasks, such as assembly, testing, and packaging. Within this the country has nurtured a specialist labor force, equipping its industry with knowledge, skills, and equipment to support the fast-growing industry.

Foreign and Government Investment

We’ve already noted the buy-in from China as a major customer, but Malaysia has also received investments from the likes of Intel, GlobalFoundries, and Infineon, bringing US and European supporters into the mix. This, alongside the support of its own government’s forward-thinking policies, put the country on a major growth trajectory with dedicated national services to help along the way. 

Geopolitical Position

Despite its ties to both the US and China, Malaysia is well-positioned to soak up opportunities from companies looking to diversify and decentralize their operations. 

Weaknesses

Talent Retention

The draw of higher paying jobs in neighboring countries is one of the key concerns for the country and, most likely, a reason for more investment from its authorities. Talent retention is a key concern for the region in general as more developed countries draw expertise from Southeast Asia. This is a major concern for the industry in its present state as significantly higher investment is required to keep talent in the area. 

Economic Vulnerability

As the semiconductor industry plays a huge role in Malaysia’s overall economic growth, the country anticipates the risk of over-reliance on chip manufacturing. This heightens the demand for technology transfer and innovation in order to ensure the nation can keep up with current trends. There is also competition from some neighboring countries, including India and Japan, which are also attracting major foreign investment to become semiconductor hubs. 

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