By Oberon Theam
The escalating US-China tech rivalry has created a rare strategic opportunity for emerging Southeast Asian economies such as Malaysia to elevate their role in the global supply chain. As companies increasingly seek to diversify their operations away from China amid US-China geopolitical uncertainty under the China Plus One (China+1) strategy, Malaysia has positioned itself as a key destination for many industries but most notably, semiconductor investment, a crucial engine of the global economy. Despite the fact that Malaysia has long been an essential hub for semiconductor assembly, packaging, and testing, its dominance in lower-value segments leaves it vulnerable to shifting geopolitical currents. To future-proof its industry, Malaysia must transition from a low-cost manufacturing base to a high-value innovation hub, competing in advanced packaging, chip design, and R&D. Yet, this shift faces critical challenges, including a persistent talent drain, the need for deeper technological capabilities, and the risk of becoming overly dependent on foreign firms. Moreover, Malaysia must carefully navigate the delicate balance between the US and China, as semiconductor investments increasingly carry political, not just economic, considerations, with U.S. export controls restricting China’s access to advanced chip technology and Beijing ramping up domestic production to reduce reliance on foreign suppliers. At the same time, Malaysia risks being sidelined from U.S.-led “friend-shoring” initiatives while facing growing competition from regional players like Singapore and Vietnam. Ultimately, Malaysia’s ability to climb the global semiconductor value chain remains uncertain, but the need for strategic policy reforms, targeted talent development, and technological self-sufficiency are essential to shift from being a China alternative to becoming a semiconductor and economic powerhouse in its own right.
Recent History and Implications
Over the past decade, the semiconductor industry has become a focal point of the U.S.-China geopolitical rivalry due to its critical role in powering technologies from smartphones to artificial intelligence systems. For example, in October 2022, the U.S. Department of Commerce implemented stringent export controls, adding 24 types of semiconductor manufacturing equipment and 3 types of software tools to the Commerce Control List, aiming to curb China’s advancement in this sector. In response, China intensified efforts toward self-reliance in semiconductor production through pre-existing national initiatives such as “Made in China 2025” to achieve self-sufficiency across all facets of the semiconductor industry, reducing dependence on foreign technology. As a result, this has led to a fragmented global supply chain that has both opportunities and challenges for Malaysia. With geopolitics in disarray and uncertainty growing, accelerated plans to diversify operations beyond China into more stable markets have increasingly directed investment toward Malaysia, strengthening its role in the semiconductor sector and elevating its status as an emerging market in Southeast Asia. For example, in 2023, Malaysia produced approximately 35.23 billion semiconductors and attracted $69.5 billion in approved investments, with $39.7 billion in actual foreign investment. As a result, the country now ranks sixth globally in semiconductor exports and has demonstrated resilience in the sector despite a global downturn, with semiconductor device and integrated circuit exports reaching RM387.45 billion in 2023. These figures underscore Malaysia’s rising importance in the global semiconductor value chain and its growing economic influence in the region.
Malaysia’s Semiconductor Industry
Malaysia has built a strong semiconductor industry over the past five decades, specializing in the “back-end” of manufacturing—specifically in assembly, testing, and packaging. The country holds a significant 13% share of the global market for chip packaging, assembly, and testing services, solidifying its position as a key player in the global semiconductor supply chain. Malaysia has been pivotal in supporting China’s assembly needs as Chinese firms seek to diversify production amid U.S. export restrictions, leveraging Malaysia’s established semiconductor ecosystem, cost advantages, and geopolitical neutrality. Due to this, the Malaysian government has recognized the potential of this situation as a catalyst for further growth in the semiconductor sector by injecting significant funds into its manufacturing footprint with a targeted increase to 15% of the global share by 2030. To that end, this strategic vision is also bolstered by collaborative efforts, such as the first Asia-Pacific Semiconductor Summit and Expo organized by Malaysia and China, aimed at enhancing cooperation and advancing Malaysia’s chip industry. Additionally, Chinese semiconductor design companies are increasingly partnering with Malaysian firms for the assembly of high-end chips, including graphics processing units (GPUs), to mitigate risks associated with potential U.S. sanctions. In politics, Malaysian Prime Minister Anwar Ibrahim has been a strong advocate of this expansion, emphasizing Malaysia’s potential to cement its position as a leading international hub for chip manufacturing. To achieve this, the government has committed to investing in 60,000 workers, equipping them with specialized skills in integrated circuit design, component packaging, and testing to meet the growing demands of the semiconductor industry.
To fuel Malaysia’s burgeoning semiconductor industry, major industry leaders such as Intel, GlobalFoundries, and Infineon have also made substantial investments in Malaysia, drawn by its skilled workforce, well-developed infrastructure, and cost-competitive operating environment. Intel, for example, has committed over $7 billion to expand its advanced packaging and testing facility in Penang, marking its largest investment in Malaysia to date. Similarly, GlobalFoundries operates a 336,000-square-foot facility in Penang, serving as a strategic hub for its global semiconductor operations. Infineon, another major player, is investing €5 billion ($5.4 billion) to expand its wafer fabrication plant in Kulim, a move that will significantly enhance Malaysia’s capacity in power semiconductors, critical for electric vehicles (EVs) and renewable energy systems. Although these investments reinforce Malaysia’s role in the global semiconductor supply chain, they also highlight a critical challenge: the need to transition beyond low-value activities like assembly and testing into higher-value segments such as advanced packaging, chip design, and wafer fabrication. Without this shift, Malaysia risks remaining a secondary player in an industry increasingly shaped by geopolitical tensions, technological advancements, and supply chain realignments.
Moving Up the Value Chain
Ultimately, to remain competitive in the semiconductor industry, Malaysia must transition from traditional assembly and testing to advanced packaging and chip design, two high-value segments that are shaping the future of global chip manufacturing. Advanced packaging, which integrates multiple chips into a single package to enhance performance and efficiency, has become increasingly critical with the rise of AI, high-performance computing (HPC), and 5G technologies. Unlike conventional packaging, advanced packaging is capital- and R&D-intensive, requiring sophisticated infrastructure and expertise rather than low-cost labor and is estimated that the global advanced packaging market will reach $55 billion by 2028, growing at a compound annual growth rate (CAGR) of 8%, highlighting a lucrative opportunity for Malaysia.
To position itself as a leader in this field, Malaysia has earmarked RM22 billion ($5.3 billion) in semiconductor-related investments under the New Industrial Master Plan 2030 (NIMP 2030), focusing on shifting towards high-tech, high-value activities and manufacturing. In addition, the Malaysian Investment Development Authority (MIDA) has also introduced incentives, tax breaks, and grants to attract foreign firms to set up advanced packaging facilities in the country. In addition, Penang’s Batu Kawan Industrial Park has already seen increased investments from global firms, including Intel’s $7 billion investment in a cutting-edge chip packaging and testing facility. Locally, Singapore has also been making significant strides in advanced packaging, intensifying regional competition and requiring Malaysia to act swiftly to maintain its edge in the semiconductor industry. Recognizing this urgency, Dr. Ong Kian Ming, former deputy minister of International Trade and Industry (MITI), has stressed the importance of leveraging public-private partnerships to drive innovation. He argues that without stronger local R&D capabilities and collaboration between the government and industry players, Malaysia risks falling behind its regional competitors.Another avenue for Malaysia to move up the value chain is chip design, an industry that is becoming increasingly important due to the proliferation of semiconductors across various sectors. While competing with giants like Nvidia, AMD, or Qualcomm may be unrealistic, Malaysia has the potential to focus on specialized areas. One key growth sector is automotive semiconductors, as the industry shifts toward electric vehicles (EVs), advanced driver-assistance systems (ADAS), and autonomous driving. The demand for automotive chips is projected to grow to $116.6 billion in 2030, up from $38.7 billion in 2020, according to Gartner, creating a significant opportunity for Malaysia. The country has already attracted Infineon, which is investing €5 billion ($5.4 billion) in its Kulim plant to expand automotive chip production, signaling Malaysia’s potential to specialize in this niche. In addition, the Malaysia Semiconductor IC Design Park, located in Puchong near Kuala Lumpur, collaborates with key partners such as software maker Cadence Design Systems Inc. and chip company Arm Holdings Plc.
Facing Challenges and Risks
While Malaysia has established itself as a key player in semiconductor assembly and testing, its long-term success depends on moving up the value chain into high-value activities such as advanced packaging and chip design, segments that rely more on technological expertise than labor costs. If Malaysia effectively capitalizes on these opportunities, it could solidify its role as a regional semiconductor hub, attract more foreign direct investment (FDI), and secure a larger share of the global semiconductor value chain. However, achieving this will require strong policy execution, higher investment in research and development (R&D), and closer collaboration between industry and academia.
Despite these opportunities, Malaysia faces structural challenges that threaten its competitiveness. One of the most pressing concerns is brain drain, where skilled workers leave for better job opportunities abroad. According to TalentCorp CEO Thomas Mathew, around 1.86 million Malaysians—equivalent to 5.6% of the population, well above the global average of 3.6%—have emigrated over the past five decades, with a 2023 Department of Statistics Malaysia (DOSM) study revealing that 39% of Malaysians working in Singapore are skilled workers and 35% are semi-skilled. This is particularly concerning for the semiconductor industry, which relies on highly specialized engineers and researchers to drive innovation. To counter this, the Malaysian government has implemented several initiatives to retain and attract local talent such as The Returning Expert Programme (REP), spearheaded by TalentCorp, offers tax incentives and other benefits to skilled Malaysians returning home. However, retaining these skilled workers will depend on improving salaries, career progression opportunities, and local R&D capabilities.
Most importantly, Malaysia’s semiconductor industry is also caught in the intensifying geopolitical rivalry between the United States and China, making it increasingly difficult to maintain a neutral position. The US has imposed export controls on advanced chipmaking tools, such as extreme ultraviolet (EUV) lithography equipment from ASML, preventing China from acquiring cutting-edge semiconductor technology. On the other hand, China has repeatedly doubled down on accelerating its self-sufficiency efforts, investing billions under its Semiconductor Development Fund to reduce reliance on Western chipmakers. These tensions have direct implications for Malaysia as American firms like Intel, Texas Instruments, and Micron are expanding their presence in Malaysia, reinforcing the country’s role in the US-led semiconductor supply chain. At the same time, Malaysia remains one of China’s largest semiconductor trading partners, with bilateral trade in electronic components reaching $80 billion in 2022, according to Malaysia’s Ministry of International Trade and Industry (MITI).
As both superpowers seek to reshape the global semiconductor landscape, Malaysia must carefully navigate restrictions, investment incentives, and geopolitical pressures. Balancing economic interests with strategic neutrality will be essential to ensuring its long-term competitiveness and resilience in an industry that is increasingly shaped by politics as much as by technology.
Conclusion
The escalating US-China tech rivalry has reshaped the global semiconductor landscape, creating a pivotal opportunity for Malaysia to solidify its role as a key player in the industry. With major economies diversifying their supply chains away from China, Malaysia has the chance to move beyond its traditional strengths in assembly, testing, and packaging to establish itself in higher-value segments such as advanced packaging and chip design. This transition is essential for Malaysia to remain competitive and secure a larger share of the global semiconductor market, which is projected to reach $1 trillion by 2030. However, for Malaysia to fully capitalize on this opportunity, it must address several critical challenges, including a severe brain drain, alongside insufficient R&D investment, limited high-tech infrastructure, and growing geopolitical pressures from the US-China tech war. The intensifying geopolitical tensions between Washington and Beijing threaten to complicate Malaysia’s neutral stance, as both superpowers seek to influence the semiconductor supply chain through export controls, investment restrictions, and technology bans. To successfully ascend the global semiconductor value chain, Malaysia must implement targeted policy reforms, invest heavily in research and development, and strengthen collaboration between government, academia, and industry leaders. Ultimately, Malaysia’s future in the semiconductor industry hinges on its ability to navigate these complexities, determining whether it rises as a global powerhouse or loses its competitive edge to regional rivals like Vietnam and Singapore, who are rapidly advancing in semiconductor manufacturing and high-tech innovation. Without strategic reforms and investment, Malaysia risks stagnating in the lower tiers of the value chain while other nations capture the industry’s next wave of growth.
Photo from Blackridge Research Website
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.