Securing Malaysia’s position in the global semiconductor supply chain
11 Sep 2024
Malaysia’s semiconductor industry, a crucial component of the global supply network, now stands at a pivotal moment with an opportunity to redefine its trajectory and strengthen its position in the supply chain.
The proliferation of generative artificial intelligence (AI), the surge in demand for the Internet of Things (IoT) and the growing prevalence of electric vehicles (EVs) are driving a sharp increase in the need for more advanced chips. With the country’s strong foothold in the semiconductor industry since the 1970s, industry players stress the urgency of taking action now to capture future market share.
The competitive landscape has evolved such that the semiconductor industry, traditionally dominated by corporate giants, has now ignited an intense race among the world’s economic superpowers. As Deputy Minister of Investment, Trade and Industry Liew Chin Tong stated in May, capitalising on this “once-in-a-generation” window of opportunity would determine the country’s new era of economic growth.
A significant portion of the anticipated demand comes from the AI chip market which is projected to grow by about 40% and reach annual revenues of US$1.11 trillion (RM4.79 trillion) by 2032. This surge in demand has revitalised the semiconductor market’s exponential growth following a challenging 2023, driven by the AI chip market’s contribution of nearly US$52 billion in revenue that year, accounting for about 10% of the global industry’s total revenue.
“The solid demand for AI chips is going to be a huge growth driver for the semiconductor market over the next decade and chip makers have not been able to keep up with the booming demand. The shortage has now hit equipment manufacturing, making it difficult for companies to obtain key manufacturing tools and hit production goals due to growing demand,” says the Ministry of Investment, Trade and Industry (Miti) in a statement to The Edge.
The electrical and electronics (E&E) sector accounted for some 5.8% of the country’s gross domestic product (GDP) last year. On the global stage, Malaysia is recognised as the sixth largest exporter of semiconductors, commanding 13% of the global market for semiconductor packaging, assembly and testing while driving 40% of the nation’s export output.
As competition intensifies, the demand for high-tech equipment is drawing more global players to Southeast Asia to establish operations. Neighbouring countries such as Singapore, Vietnam and Indonesia have been aggressively positioning themselves as new semiconductor hubs in the region by offering attractive incentives to investors.
The key question now is: how can Malaysia solidify its role in this evolving supply chain? Despite experiencing political changes with four prime ministers over the past five years, the country’s stable transition has had little to no impact on the semiconductor industry — a promising indicator of resilience and continuity.
While global semiconductor giants are still redesigning and securing their supply chains, Malaysia must exercise its “strategic semiconductor diplomacy” to seize this opportunity to further develop and expand its semiconductor industry, says Miti.
There are bright prospects for home-grown firms to move up the value chain. This will feed into the New Industrial Master Plan 2030 (NIMP 2030) mission for the country to reindustrialise successfully and increase the industrial sector’s contribution to GDP by 61% to RM588 billion by 2030.
“Many home-grown Malaysian companies are already in the global semiconductor ecosystem and well-placed to move up the global value chain, including Inari Amertron Bhd (KL:INARI), Vitrox Corp Bhd (KL:VITROX), Oppstar Bhd (KL:OPPSTAR), Skyechip and Pentamaster Corp Bhd (KL:PENTA),” says Miti.
The launch of the National Semiconductor Strategy (NSS) by Prime Minister Datuk Seri Anwar Ibrahim during the Semicon Southeast Asia 2024 conference has also been lauded as a move in the right direction by industry players. The three-phase plan, backed by US$5.3 billion (RM22.86 billion) in fiscal support and targeted incentives, is designed to transform the country into a global powerhouse in the semiconductor industry over the next decade.
“Malaysia has the key success factors — an end-to-end supply chain, a skilled multilingual workforce and world-class infrastructure, including robust industrial parks — and the political will to make the NSS work. Miti is determined to capitalise on this two- or three-year window of opportunity, so time is really of the essence,” says Miti.
“We must make bold moves for Malaysia to capture the higher end of the global semiconductor value chain. Our E&E and semiconductor sectors contributed 40% or RM575 billion to our exports in 2023 — and that’s just by having our companies ‘play in the shallow end’ of the global revenue pool.”
Another strength is Malaysia’s neutral and open economy policy, which is in favour of the “China Plus One” strategy. This strategy, also known as Plus One or C+1, is a supply chain strategy that encourages companies to minimise their supply chain dependency on China by diversifying the countries they source parts from.
“We have a business-friendly government, which makes investing here good. The government has also announced a neutral, non-aligned stance and this is something we need to live up to,” says industry veteran and Malaysia Semiconductor Industry Association (MSIA) president Datuk Seri Wong Siew Hai, who will be going into the nitty-gritty of the NSS at The Edge-HSBC New Era for the E&E Industry: Riding the Next Wave Forum 2024 that is happening at the Eastern & Oriental Hotel, Penang, on Sept 9.
BlueChip VC Sdn Bhd co-founder Datuk Seri Lai Pin Yong concurs, saying that Malaysia is well positioned to take advantage of the opportunities presented under the current industry supply chain decoupling and there is an opportunity to invite the best semiconductor players to the country to make use of its neutral and open economy.
However, Lai — who will be speaking on Malaysia’s sweet spot in this current landscape at the forum — emphasised that the key is not to bring in start-ups or companies operating at the low levels but rather more mature investors with intellectual property (IP) and technology, specifically those who desire an additional base of operation.
“This presents an opportunity for foreign investors to partner with our leading local players. Our local players, including the government, need to have a paradigm shift in order to come up with a strategy to respond [to these opportunities],” he says.
There are still an array of challenges to navigate in both the long and short term. The industry is still vulnerable to supply chain disruptions caused by geopolitical tensions — particularly between major economies like the US and China — natural disasters and pandemics, making stable access to raw materials and components crucial.
The shortage of skilled workers in semiconductor manufacturing, design and engineering further exacerbates the problem, as global demand for talent outpaces supply, hindering production and innovation.
“Rising costs of raw materials, energy and logistics also pressure profit margins, requiring efficient management to sustain operations,” shares Jaffri Ibrahim, CEO of Collaborative Research in Engineering, Science and Technology (CREST), who will be participating in the panel in discussion on decoding the industry’s sustainability and talent conundrum.
“The industry must continually invest in research and development (R&D) to stay ahead of rapid technological advancements, which, though essential, is financially risky. Managing production levels and inventory amidst market volatility, especially in response to fluctuating demand from key industries like consumer electronics and automotive, also remains a challenge.”
In the long term, Jaffri believes that there are also growing pressures to adopt sustainable manufacturing practices, which must be balanced with cost efficiency and technological progress.
“Continuous innovation can lead to fatigue as the push for more efficient chips strains resources. Protecting IP becomes increasingly difficult in a globalised market, making strong IP protections vital for safeguarding innovations,” he says.
High-technology demand is driving growth
Globally, several key trends, notably the adoption of AI and machine learning, are shaping the industry’s demands and needs for more powerful and specialised semiconductors, says Jaffri. AI applications, from autonomous vehicles to data centres, require advanced chips that can process vast amounts of data at high speeds, leading to a surge in demand for graphic processing units, tensor processing units and other AI-specific processors.
The ongoing digital transformation across industries is also boosting demand for semiconductors. Jaffri says, as companies increasingly adopt cloud computing, IoT and 5G technology, there is a rising need for semiconductors that support these innovations. “The proliferation of connected devices and the growth of smart cities are further intensifying the demand for low-power, high-performance chips.”
Lastly, the global shift towards EVs and renewable energy is significantly impacting semiconductor demand. EVs require a range of semiconductors for battery management, power electronics and autonomous driving features, he says.
“The push for renewable energy solutions like solar and wind power is increasing the need for semiconductors that manage energy conversion and storage efficiently.”
Pushing boundaries
The influx of investments from behemoths such as Intel, Infineon and AT&S shows that Malaysia is ripe to receive investments. The local ecosystem, which has been 50 years in the making, has proven to support what these companies want to do. On top of that, the local talent has performed well and contributed to this global supply chain.
This is where the NSS comes in. In the first phase, the focus will be on domestic direct investment in integrated circuit (IC) design, advanced packaging and manufacturing equipment, while foreign direct investment (FDI) will be focused on wafer fabrication and manufacturing equipment.
At the launch of the NSS on May 28, Anwar said that in the first phase, the industry will leverage existing capacity and capabilities to support the modernisation of outsourced semiconductor assembly and test (OSAT) by moving towards advanced packaging, growing existing fabrications and pursuing FDI to expand capacity in trailing edge chips, particularly power chips, as well as developing local chip design champions.
The second phase will be to establish at least 10 Malaysian companies in design and advanced packaging with revenues of RM1 billion to RM4.7 billion (US$210 million and US$1 billion). There is also a hope to nurture at least 100 semiconductor-related companies with revenues close to RM1 billion, creating higher wages for local workers.
While the country has been doing well in the area of advanced equipment, automation and precision machinery, MSIA’s Wong says we have yet to be able to grow a global Malaysian champion. Although we do have some publicly listed companies in this industry with offices overseas, it is not big enough to compete with big corporations around the world.
“The government needs to [move Malaysian companies] up the value chain to make them have a global presence. When it comes to building up IC design and packaging companies, five out of 25 are local and the rest are foreign. Hopefully we can build more IC design companies.”
The export value to be reaped from going to the higher end of the value chain is significant. Miti says that even upping the game by 10% could add another RM58 billion to the country’s export revenue. One area of focus will be on enhancing Malaysia’s capabilities in IC design and embedded software, focusing on local companies that work on lower complexity designs.
“These represent the low-hanging fruit that we can reap based on our industry’s current strengths and foundation,” says Miti, adding that there is also a need to attract investments in mature node technology (greater than 28nm) to expand Malaysia’s fabrication capabilities.
Focusing on niche markets, such as testing equipment or precision machining for the OSAT industry, including development of specialised machinery and equipment, is essential for semiconductor manufacturing processes as well.
“To move to higher-end value chain opportunities, we must attract global semiconductor companies to set up fabrication facilities in Malaysia and encourage local companies to invest in and develop IC design capabilities. We need to also support the growth of semiconductor manufacturing equipment providers in niche markets,” says Miti.
Scaling a mountain of challenges
Wong notes that the government may lack sufficient funds to fully support the growth of a Malaysian company on the global stage, which is why government-linked investment companies (GLICs) are being called upon to assist in this mission. Recently, the government has also made efforts to engage directly with the semiconductor industry to better understand its challenges and pain points, as well as to explore how GLICs can provide support.
“To get companies into high-tech areas like IC design and advanced packaging, capital and technology are needed. There is a need to overcome tech acquisition to go up the value chain for IC design and funding is needed to lower the cost and risk of entry because the technology alone can rake up to hundreds of million ringgit,” says Wong.
Another aspect to consider is exploring new areas of investment. Wong suggests that, in the effort to develop a large local company into a Malaysian champion, local companies should also support it by choosing to buy locally. This support would not only help the local company gain visibility and credibility with global firms, but it would also make it easier for the company to market its equipment internationally.
“For example, if there is a global company here that has a presence in the Philippines and Vietnam, get them to use the same equipment in all these facilities. That is one way to expand our reach.”
Emerging semiconductor companies also face a range of challenges, including capital intensity, talent development and supply chain constraints. Karel Doshi, head of commercial banking at HSBC Malaysia, says building and upgrading manufacturing facilities requires substantial investment, leading companies to seek long-term loans or project financing.
“Financial aid typically sought by these companies includes working capital financing, R&D grants and equipment leasing finance to offset these challenges,” she says. Doshi will be delivering the closing remarks at the forum.
Collaborative efforts between the government and private sector are crucial to ensuring Malaysia maintains its edge in the global semiconductor race. With the right investments and strategic partnerships, the country can continue to be at the forefront of global semiconductor innovation, powering the AI revolution that will define the future.
“To support growth and to allow semiconductor companies in Malaysia to scale, they can access various types of financing, including equity, debt, government grants and initiatives. Venture capital firms and private equity funds are increasingly looking to invest in tech-forward industries like semiconductors. Start-ups and scale-ups can tap into these funds for growth capital,” she says.
Banks and financial institutions offer loans, lines of credit and other debt instruments tailored to the specific needs of capital-intensive industries like semiconductors. On top of that, with sustainability taking centre stage, green bonds and loans are becoming popular, allowing companies to fund eco-friendly initiatives within their supply chains.
“Companies are seeking financing to invest in cleaner production technologies, energy-efficient equipment, water efficiency solutions and renewable energy solutions to reduce their carbon footprint.
“In addition to green financing, HSBC offers end-to-end sustainability insights, guiding companies through carbon reduction strategies and supporting the development of circular supply chains within the industry,” says Doshi.
HSBC provides guidance for companies looking to transition to sustainable practices by offering insights on sustainability opportunities that may exist in the company’s business model, helping companies understand regulatory frameworks, develop sustainability strategies and identify suitable financing options, she adds.
“As companies look to upgrade their facilities, HSBC can provide tailored capital expenditure loans or project financing to ensure that companies have the resources to scale up efficiently.”
Building the future
Addressing the issue of talent, MSIA’s Wong notes that while the situation may not be critical at the moment, the industry is set to face a talent crunch in the coming years. Over the next seven years, the industry anticipates the emergence of new technologies and a push for higher productivity, which could help mitigate this impending shortage.
However, there is already a significant demand for engineers, and with declining enrolment in science, technology, engineering and mathematics (STEM) education in Malaysia, the availability of skilled talent may not meet future needs.
“The government, together with the industry, needs parents and children to venture into STEM education as there are a lot of career options on the horizon. We also need more STEM scholarships and science discovery centres to allow children to explore the world of science,” says Wong.
Miti concurs, adding that over the past several months, it has been working closely with the Ministry of Human Resources and the Ministry of Higher Education, and plans to engage with the Ministry of Education in the near future.
“To the parents out there, the message is simple: the prospects are bright for a secure, higher paying job in this industry for STEM or Technical and Vocational Education and Training (TVET) graduates,” says Miti.
“TVET must also be destigmatised — it is equally important and NOT secondary to the academic track. Without this robust talent pipeline, our dream to take advantage of global semiconductor growth will remain a pipe dream.”
CREST’s Jaffri notes that the talent crunch is being addressed through initiatives like the Returning Expert Programme, which aims to incentivise Malaysians working abroad to return home. Additionally, Malaysia offers the Residence Pass-Talent to attract skilled foreign professionals to work in the country. “The NSS aims to leverage and enhance these programmes, making them even more appealing to highly skilled professionals in the semiconductor industry to work in Malaysia.”
HSBC’s Doshi says companies have also sought financing for talent acquisition, training and development programmes as the industry faces a shortage of skilled talent. “Talent development support can also be provided and HSBC can collaborate with industry players to offer Talent Development Funds or Training Grants, enabling the upskilling of workers in advanced semiconductor manufacturing.
“Through these different avenues, HSBC can be a key partner in solidifying Malaysia’s position as a global leader in the semiconductor industry, ensuring long-term competitiveness while meeting the growing demands of the digital and green economies.”
The Edge-HSBC New Era for E&E Industry Forum 2024 will convene experts from various sectors to discuss emerging trends in Malaysia’s semiconductor industry and explore how the country can leverage its current advantageous position.
Organised in collaboration with HSBC Bank Malaysia and supported by IJM Corp Bhd (KL:IJM), the forum will feature a keynote speech by the Minister of Investment, Trade and Industry Tengku Datuk Seri Zafrul Abdul Aziz. He is expected to provide insights on how Malaysian companies can navigate and capitalise on this growth, while also outlining the government’s role in advancing the semiconductor sector.
Also speaking at the forum are Penang state executive councillor and chairman of the infrastructure, transport and digital committee Zairil Khir Johari and HSBC Malaysia CEO Datuk Omar Siddiq.
The panel discussion on the industry’s sustainability and talent challenges will feature HSBC Asia-Pacific’s regional head of commercial banking sustainability Sunil Veetil; IJM group CEO and managing director Datuk Lee Chun Fai; InvestPenang CEO Datuk Loo Lee Lian; Malaysia Digital Economy Corporation vice-president of digital industry acceleration Wan Murdani Wan Mohamad; and CREST’s Jaffri.
A boon for the construction industry
The construction industry is expected to experience a steady rise in semiconductor facility contracts as Malaysia strengthens its position within the semiconductor supply chain. The “China Plus One” strategy, which encourages companies to diversify their manufacturing bases beyond China, has made Malaysia an attractive option due to its strategic location and established presence in semiconductor manufacturing.
Additionally, rapid advancements in artificial intelligence (AI), the Internet of Things, 5G and electric vehicles are further fuelling the demand for more sophisticated semiconductor manufacturing facilities.
Datuk Lee Chun Fai, group CEO and managing director of IJM Corp Bhd (KL:IJM), says companies like IJM, with their expertise in building advanced technology facilities and data centres, are well-positioned to meet this demand.
Moreover, the government’s focus on enhancing the electrical and electronics sector through initiatives like the National Semiconductor Strategy is expected to generate more opportunities in this sector.
“Our vertically integrated approach, from construction to material manufacturing, enables us to deliver high-quality facilities on accelerated timelines — an essential capability in an industry where speed and precision are critical,” he says.
Construction companies also play a role in ensuring that semiconductor facility infrastructure meets stringent sustainability standards. By adopting green building practices, such as energy-efficient designs, sustainable materials and advanced water management systems, these companies help reduce the environmental impact of their projects.
“Our efforts are closely aligned with the ambitions of our semiconductor clients, who are increasingly prioritising high ESG (environmental, social and governance) standards in building designs. For instance, our SMART IBS (Industrialised Building System) and spun piles have received green certifications, such as the SIRIM Eco Label and MyHIJAU, which not only demonstrate our commitment to sustainability but also support the joint agenda of advancing environment-friendly practices in the semiconductor industry,” says Lee.
Building semiconductor facilities presents several unique challenges due to the highly controlled environments required for chip manufacturing. These facilities must maintain ultra-clean conditions, necessitating sophisticated heating, ventilation and air conditioning systems, stringent contamination control and exacting standards for vibration management.
Lee adds that the rapid pace of technological evolution in the semiconductor ecosystem also means that facilities must be designed with future upgrades in mind.
“The need for highly specialised consultants, labour and materials further complicates the construction process, making project management and timely delivery critical.”
“The use of BIM (building information modelling) allows us to design with flexibility in mind, ensuring that the facilities we build today can accommodate the needs of tomorrow. This adaptability is essential in a sector where technology is constantly evolving.”
Source: The Edge Malaysia
