Malaysia's Surprising Stance in the Chip War?

Semiconductors are an essential component in a broad range of everyday electronic products and without these chips, modern electronics would not exist. This industry has experienced remarkable growth over the past two decades with sales skyrocketed more than 300 per cent from US$139 billion in 2001 to US$573.5 billion in 2022.

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Semiconductors, commonly known as chips, are crucial components in various electronic devices, including computers, smartphones, cars, and many other high-tech products. This upward trend is projected to continue, with an estimated 56 per cent increase by 2030. The demand for semiconductors in enterprise-driven sectors such as digital infrastructure, which requires greater computing power, will be the driving force behind this growth.

The importance of the semiconductor industry extends beyond its economic significance; it plays a crucial role in driving a country’s digital ambitions. Governments worldwide are increasingly recognising the need to minimise the impact of global supply fluctuations by bolstering their domestic chip manufacturing capabilities.

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The term "chip war" generally refers to the ongoing competition and geopolitical tensions surrounding the semiconductor industry.

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Some background that leads to the chip war:

·??Supply and Demand Imbalances: The chip war has been fueled by a significant demand-supply imbalance. The increasing reliance on advanced technologies, such as 5G, artificial intelligence, and Internet of Things (IoT), has led to a surge in demand for semiconductors. However, the supply chain has struggled to keep up with this demand due to various factors like the complexity of chip manufacturing, capacity constraints, and unexpected events like the COVID-19 pandemic.

·??Geopolitical Tensions: Geopolitical factors have also contributed to the chip war. The United States and China have been engaged in a trade and tech war, which has had significant implications for the semiconductor industry. The U.S. government-imposed restrictions on certain Chinese technology companies, including Huawei, citing national security concerns. This led to disruptions in the global semiconductor supply chain and prompted China to accelerate its efforts towards self-sufficiency in chip production.

·?Technological Advancements: The chip war is also driven by the race for technological advancements. Countries and companies are striving to develop and manufacture cutting-edge chips to gain a competitive edge in industries like telecommunications, automotive, and artificial intelligence. Key areas of focus include smaller manufacturing process nodes (such as 7nm, 5nm, and beyond), faster and more power-efficient chips, and specialization for specific applications like AI and autonomous vehicles.

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The chip war has evolved to a combination of factors. Here are some key events and developments that have contributed to its initiation:

·?Trade and Tech War Between the US and China: The trade tensions between the United States and China played a significant role in escalating the chip war. In 2018, the US government-imposed tariffs on a range of Chinese imports, including some technology products. This move was part of a broader trade dispute between the two countries, which led to retaliatory measures from China. As the tensions intensified, the US government targeted specific Chinese technology companies, including Huawei, citing national security concerns. These restrictions disrupted the global semiconductor supply chain and prompted China to accelerate its efforts towards self-sufficiency in chip production.

·?Rising Demand for Semiconductors: The increasing demand for semiconductors across various industries, such as consumer electronics, automotive, telecommunications, and data centers, has put pressure on the global supply chain. Emerging technologies like 5G, artificial intelligence, and the Internet of Things (IoT) fuelled the demand for high-performance chips. However, the supply side has struggled to keep up with this demand.

·?National Security Concerns: Semiconductors are vital components in defence systems, communication infrastructure, and critical infrastructure sectors. Governments around the world need to protect and safeguard national security interests. This has led to increased scrutiny and regulation of chip exports, investments in chip manufacturing capabilities, and efforts to reduce dependence on foreign semiconductor suppliers.

·?Technological Advancements and Innovation: The rapid advancement of semiconductor technology and the quest for innovation where companies are competing to develop and manufacture advanced chips with smaller process nodes, improved performance, energy efficiency, and specialized applications like artificial intelligence, autonomous vehicles, and quantum computing.

·?Supply Chain Vulnerabilities: The pandemic highlighted the risks of relying heavily on a few key regions for chip manufacturing and exposed the fragility of the supply chain. Disruptions in production and logistics, such as factory closures, shipping delays, and shortages of critical components, further exacerbated the supply-demand imbalance and prompted nations to reassess their dependence on foreign suppliers.

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While the United States has been a key player in shaping the dynamics of the chip war, it is important to note that the impact of the chip war extends beyond the United States and has significant implications for China as well.

·?Restrictions on Chinese Technology Companies: With the United States imposing restrictions on Chinese technology companies over national security, has forced China to accelerate its efforts towards achieving semiconductor self-sufficiency and reduce its dependence on foreign suppliers.

·?Drive for Semiconductor Self-Sufficiency: China aims to reduce its reliance on foreign technology and become self-sufficient in semiconductor design, manufacturing, and supply and have increased investments in research and development, established national semiconductor funds, and implemented policies to support the growth of the domestic semiconductor industry.

·?Development of National Champions: China has been actively supporting the growth of domestic semiconductor companies to compete globally, which involves providing financial support, preferential policies, and market opportunities. One such company, SMIC (Semiconductor Manufacturing International Corporation), China's largest foundry, have received significant government backing to expand their manufacturing capabilities and compete with established global players. China is also investing in strategic acquisitions and partnerships to enhance its semiconductor capabilities.

·?Implications for China's Technology Ambitions: China aims to become a global leader in advanced technologies, including semiconductors, artificial intelligence, 5G, and more. However, restrictions and challenges in the semiconductor industry pose a significant hurdle to its “Made in China” ambitions. The need for China to strengthen its domestic semiconductor capabilities to achieve its technology goals and reduce its dependence on foreign suppliers is now key.

·?Global Supply Chain Impacts: Supply chain disruptions, such as shortages and increased costs, have affected Chinese electronics manufacturers and industries reliant on semiconductors. Therefore, China has begun to explore alternative strategies, such as diversifying its supply chain, developing closer relationships with other chip-producing countries, and enhancing its domestic manufacturing capabilities.

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However, migrating supply chains can be an intricate move. As semiconductor companies consider reshoring or friend-shoring strategies, South-east Asia emerges as an attractive region due to its cost-effectiveness and reduced strategic risks. Strengthening collaborations among suppliers, manufacturers and distributors will be pivotal for the long-term growth and success of the semiconductor industry.

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Malaysia celebrated the 50th anniversary of its electrical and electronics (E&E) industry last year, with E&E exports experiencing an impressive compound annual growth of 16 per cent over 50 years.? Recognising the significance of the industry, the Malaysian government has placed strategic focus on initiatives to help the country move up the semiconductor value chain from back-end assembly to front-end design.

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“In fact, the geopolitical situation helps to bring more investments into Malaysia and this has been evident over the last three years, and (Malaysia) will continue to see more investments in the electrical and electronic (E&E) sector,” said YB Liew Chin Tong, Deputy Minister of Ministry of Investment, Trade & Industry (MITI) in a recent interview the Edge CEO Morning Brief.

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Malaysia as a choice location for companies impacted by the chip war:

·?Semiconductor Manufacturing: Malaysia has established a strong semiconductor industry, with several multinational companies having manufacturing facilities in the country. Companies affected by the chip war can expand their operations in Malaysia to meet the growing demand or invest in upgrading their manufacturing capabilities.

·?Attracting Investment: The chip war has prompted companies to reassess their supply chains and seek alternative manufacturing locations to reduce dependence on a single region. Here Malaysia is an attractive investment destination for semiconductor companies looking to diversify their manufacturing base. With a strategic location, infrastructure, skilled workforce, and favourable investment policies, makes it an appealing choice for companies seeking a stable and competitive manufacturing environment.

·?Talent Development: Malaysia has always focused on developing a skilled workforce to support the semiconductor industry. We have invested in educational programs, vocational training, and research and development initiatives to nurture local talent, to enhance Malaysia's competitiveness and attract more investments.

·?Collaboration and Partnerships: Malaysia offers a supportive ecosystem, research and development incentives, and access to local markets to attract multinational corporations. Such partnerships can bring technology transfers, knowledge sharing, and innovation to Malaysia's semiconductor industry, boosting its capabilities and competitiveness.

· Supporting Supply Chain Resilience: Malaysia as a reliable partner in the semiconductor supply chain, has strengthening our capabilities in semiconductor packaging and testing, materials production, and equipment manufacturing.

What are some activities that foreign semiconductor companies can set up in Malaysia:

·?Manufacturing: Malaysia has a strong presence in semiconductor manufacturing, particularly in assembly, testing, and packaging (ATP).

·?Outsourced Semiconductor Assembly and Test (OSAT): Malaysia is a significant player in the OSAT sector that provide services such as chip assembly, testing, wafer bumping, and other packaging solutions.

·?Design and Development: Malaysia has a growing ecosystem of semiconductor design companies that focus on areas such as integrated circuit (IC) design, system-on-chip (SoC) design, and application-specific integrated circuit (ASIC) design.

·?Research and Development: The Government supports initiatives to enhance R&D capabilities in semiconductor technologies, including collaborations between industry, academia, and research institutions. These efforts aim to foster innovation, drive technological advancements, and support the growth of the semiconductor industry in Malaysia.

·?Materials and Equipment: Malaysia is home to companies that manufacture and supply materials such as silicon wafers, chemicals, gases, and other essential components for semiconductor fabrication. Additionally, Malaysia has capabilities in manufacturing semiconductor equipment, including tools for wafer processing, packaging, and testing.

Here are some foreign companies that Malaysia their choice locations:

·?Intel Corporation, Infineon Technologies AG, Texas Instruments Incorporated, Advanced Micro Devices (AMD), ON Semiconductor, NXP Semiconductors N.V., STMicroelectronics, Western Digital Corporation, Renesas Electronics Corporation, Cypress Semiconductor Corporation: These companies have made significant investments in Malaysia, leveraging the country's favourable business environment, skilled workforce, and infrastructure to establish their semiconductor manufacturing operations.

·?MediaTek, Realtek, Novatek, M31 Technology, Elan Microelectronics & FocalTech: Leading Taiwanese semiconductor companies, has collaborate with a Malaysian chip design firms to design, development innovative technologies and enable new product offerings to be manufacture in Malaysia.

·?GlobalWafers: Through its subsidiary, GlobalFoundries Semiconductor (Malaysia) Sdn. Bhd. Manufacturing wafer and well as engages in chip design activities at its Malaysian facility.

These are just a few examples of semiconductor companies that have chosen to establish operations in Malaysia. By leveraging Malaysia's favourable business environment, skilled workforce, and supportive ecosystem, these companies can enhance their chip design capabilities, expand their product portfolios, and tap into the growing semiconductor market.

We assure you that InvestKL remains committed to working hand in hand with investors to accelerate the transformation of Kuala Lumpur as an advanced city with inclusive growth and development.

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