Semiconductor chips – one of the key building blocks of phones, computers and even cars – have been a source of geopolitical tension between China and the US for almost 2 years. Firms looking for an alternative solution to buying chips produced in China have turned to Malaysia – and for good reason.
For over 50 years, Malaysia’s large supply chains have assembled semiconductor chips. With firms flocking away from China, Malaysia has recently become a safe second bet. This has been displayed by the $12.8bn of FDI received by Penang state in 2023 – more than the state received between 2013 and 2020.
As of February last year, the US imported 20% of its semiconductor chips from Malaysia – this is unsurprising considering the sheer number of semiconductor producers which have set up in Penang. Companies from China, Japan, Korea and more have set up there to maintain profitability.
Not only do semiconductor chips have multiple uses, but they are also becoming increasingly important. Technological advancements in AI are facilitated by semiconductor chips, so there is pressure on the demand side, increasing the profit motive for firms producing them. This makes the production in Malaysia even more attractive.
However, there are some limiting factors which could pose a threat to Malaysia’s growing dominance in this market. The first is a gap in skills in their economy – it is predicted that Malaysia needs 10x more graduates than it has currently to continue producing semiconductor chips at the rate they are being demanded. Whilst investment in education or training would be beneficial, this may only improve the situation in the long term. With competition from other developing economies like India, any investments in graduates may be too little, too late.
Malaysia also lacks a domestically produced household name in the semiconductor chip market, in comparison to other competitors such as South Korea (which has Samsung).
There is fear that the US could tighten restrictions further, extending them to include Chinese companies which are based in Malaysia. This may cause an outflow of capital from Malaysia, reducing the profitability of the market. Uncertainty caused by this would likely cause a negative multiplier effect as more and more firms leave Malaysia.
Malaysia’s accomplishments in this market have been impressive to watch, especially in such a short period of time. With that being said, much of the success of the Malaysian semiconductor chip market has been in reaction to current geopolitical conflicts – as the context of the global market changes, it will be interesting to see if Malaysia is able to keep up its advantage.