This article first appeared in The Edge Malaysia Weekly on June 3, 2024 - June 9, 2024

THE global semiconductor landscape is shifting rapidly, with geopolitical tensions and technological advancements creating both challenges and unprecedented opportunities.

As such, the industry was delighted with the road map launched by Prime Minister Datuk Seri Anwar Ibrahim at Semicon Southeast Asia 2024.

But while they welcomed Malaysia’s National Semiconductor Strategy (NSS) — particularly the RM25 billion in fiscal support that will be poured into the sector — they remain concerned as to which segments the funds will be concentrated in and how quickly the tens of thousands of engineers needed can be trained, given the severe shortage of talent and current lack of interest in science, technology, engineering and mathematics (STEM) subjects.

Meaningful collaborations between companies in various sectors, academia and government will be needed to accelerate the push up the semiconductor value chain, industry players stress.

Amid the escalating US-China tech “Cold War” and surging chip demand driven by artificial intelligence (AI), Malaysia stands at a critical juncture as global chip firms diversify their supply chains to a “China Plus One” strategy, which also aims to avoid a repeat of the demand shock caused during the Covid-19 pandemic.

The unveiling of the NSS couldn’t have come at a better time as industry players and stakeholders from around the world, including the US, China, Europe, Japan, South Korea and Singapore, were gathered at the three-day conference in Kuala Lumpur.

They walked away with a better idea of what Malaysia has in store for the sector. The NSS — unofficially dubbed the Semiconductor Strategic Plan (SSP) previously — outlines five headline targets (see graphics), promising a comprehensive road map to enhance Malaysia’s position in the global electrical and electronics (E&E) value chain while building a “sticky ecosystem” in three phases.

In the first phase, according to the NSS, Malaysia needs to build on its foundations by continuing to develop the country’s strength in the E&E industry.

For instance, Malaysia should leverage its existing capacity and capabilities to support the modernisation of outsourced semiconductor assembly and test (Osat) services with moves towards advanced packaging.

In the second phase, Malaysia will be moving to the frontier by pursuing cutting-edge logic and memory chip design, fabrication and testing, while looking to integrate the purchasers of these chips.

By doing this, Malaysia could develop more home-grown users of power chips and build more local champions such as Inari Amertron Bhd (KL:INARI), ViTrox Corp Bhd (KL:VITROX), Pentamaster Corp Bhd (KL:PENTA), Oppstar Bhd (KL:OPPSTAR) and SkyeChip Sdn Bhd.

In the third phase, Malaysia needs to innovate at the frontier by supporting the development of local semiconductor design, advanced packaging and manufacturing equipment firms.

At the same time, the country should attract buyers of advanced chips such as Apple, Huawei and Lenovo to pursue advanced manufacturing here.

Over the past few decades, Malaysia’s E&E industry has been overly concentrated in the back-end process, namely the Osat part of the supply chain.

The NSS will now focus on integrated circuit (IC) design and advanced packaging, which are among the areas poised to drive innovation and industry growth amid the booming demand for chips and AI technologies.

The plan also emphasises fiscal support, with the government allocating RM25 billion for targeted incentives, signalling a robust commitment to fostering a conducive environment for both local and international semiconductor firms.

In return, the Ministry of Investment, Trade and Industry (Miti) will lead several agencies and other ministries in a quest to attract at least RM500 billion of investments in the first phase of the NSS.

The narrative of Malaysia benefiting from trade diversion and the nation’s ambition to move up the E&E value chain has been discussed for many years. With the unveiling of our own national semiconductor road map, how quickly and effectively can the blueprint be put into action?

Andrew Goh,corporate vice-president and general manager of Southeast Asia at Lam Research Corp, is of the view that the NSS announced by Anwar is a step in the right direction.

“As the government mentioned, the NSS is a living document, and we are certain that it will emerge as a very comprehensive plan soon. Lam Research is excited about the prospects of this new road map, and we are happy to work with the government to make this ambition a resounding success,” he tells The Edge.

Lam Research is a global supplier of wafer fabrication equipment and services to the semiconductor industry.

Pointing to Lam Research’s strong presence in Malaysia and Singapore, with a total of five facilities in both countries, he says, “In fact, our newest and largest manufacturing facility is located in Penang. We have just recently opened our most advanced warehouse to complement the co-located manufacturing operations.

“It extends Lam Manufacturing Malaysia’s functions into an efficient end-to-end operation, from managing an extensive inventory of parts used to produce highly complex wafer fab equipment to shipping them out to customers,” he says.

Goh reiterates that implementing the NSS is a positive step for the country in accelerating the development of the front-end semiconductor ecosystem in Malaysia. “As the country’s only top wafer fab equipment manufacturer, we’re looking forward to playing our role in growing the local ecosystem.”

Goh is of the view that the targeted incentives proposed in the NSS can be “an invaluable catalyst for industry players” that allows them to invest in research and development (R&D) and drive the semiconductor industry further. “This growth and advancement are good for Malaysia as a whole [as it] can lead to semiconductor industry expansion, overall economic growth, talent development and job creation.”

JF Technology Bhd (KL:JFTECH) chairman Datuk Phang Ah Tong is full of praise for the NSS. “My first impression on the NSS is that the road map is absolutely spot on and it is exactly what the industry needs; money, talents and government support,” he tells The Edge.

Among the five headline targets, the two that really caught his attention are the allocation of RM25 billion as fiscal support and the 60,000 engineers required to support and enhance the semiconductor industry.

“It is a massive package and the amount is just extraordinary for the semiconductor industry. To give you perspective, over the years, the government has on average provided fiscal support of about RM1 billion for the whole manufacturing sector.

“But this time, the RM25 billion allocation will span five years, which means RM5 billion a year for the semiconductor industry, alone. The Malaysian semiconductor industry has never seen anything like this before,” Phang remarks.

JF Tech is a one-stop test engineering and test interface solutions provider serving semiconductor assembly, turnkey packaging and test services, as well as IC test handler suppliers.

“We must compliment the government for coming up with such strong support for the industry. To me, this extremely positive initiative will not only benefit the semiconductor industry, but also the machinery and equipment industry like automated test equipment (ATE),” says Phang.

Nevertheless, it remains to be seen how much of this amount will be allocated to Miti, the Malaysian Investment Development Authority (Mida) or even the Ministry of Education (MoE) to nurture the 60,000 engineers needed.

“This will help enhance the semiconductor ecosystem which, in turn, will attract more FDI (foreign direct investment) into Malaysia, to then spawn more domestic investments along the supply chain.

“Malaysia should focus more on our strengths, especially in the Osat space related to advanced packaging, to create more world-class champions, while at the same time strengthening IC designs and R&D (research and development) activities at the front end of the semiconductor value chain,” he urges.

Overall, says Phang, the NSS has set a clear direction for the future of Malaysia’s semiconductor industry, and it will help attract more FDI and domestic direct investment (DDI) to the country.

Like many other countries, especially those attracting FDI, Malaysia faces a significant challenge — while it has now attracted an abundance of investments, it is severely short of talents.

In today’s technological development landscape, says Pentamaster co-founder and executive chairman Chuah Choon Bin, talent remains crucial.

“One of the primary goals in the NSS is to train 60,000 engineers. To achieve this, interest in STEM must be nurtured from the primary school level, creating a larger pool of future engineers.

“I propose that the MoE revise the primary school curriculum to allocate more time for subjects and activities that spark young students’ interest in STEM,” he tells The Edge.

Pentamaster offers ATE for the semiconductor industry and factory automation solutions tailored for the medical technology industry.

Chuah says it is encouraging that the government is taking steps to strengthen Malaysia’s position as a semiconductor hub, recognising its future potential.

Over the past 50 years, Malaysia has excelled in and expanded its semiconductor back-end assembly industry. Chuah agrees it is now time for Malaysia to advance up the technology value chain, transitioning from being merely an Osat provider to developing its own intellectual property (IP) and product designs.

In order to enhance the local industry’s position within the technological value chain, he opines that funding should be directed towards R&D and fostering partnerships between the private sector, leading global semiconductor companies and research institutions.

“Malaysia’s emphasis on IC design and advanced packaging within its NSS is a strategic move to elevate its position in the E&E value chain, particularly given the rising global demand for chips and the increasing use of AI.

“However, the success of these initiatives hinges on the availability of talent and robust infrastructure. The RM25 billion allocation must be carefully detailed, with significant investment directed towards talent development, infrastructure, government incentives and support for locals to go for international partnerships,” he stresses.

QES Group Bhd (KL:QES) co-founder and president Chew Ne Weng says the NSS is welcomed by all parties within the semiconductor supply ecosystem, from IC design, wafer fabrication and test assembly, to equipment, material and services.

“The announcement of NSS to target RM500 billion FDI and DDI on the semiconductor segment will definitely spur growth for many within the ecosystem.

“The plan to train 60,000 engineers is unprecedented and I hope the NSS task force can put priority to this effort to make it happen quickly. The semiconductor industry and E&E ecosystem have been suffering from lack of skilled engineers for many years,” he tells The Edge.

QES is a manufacturer and distributor of ATE, including test, inspection and measuring equipment, for the semiconductor industry.

Masaru Tsuchiya, partner and leader in McKinsey & Co’s Semiconductor Practice Asia, points out that advanced packaging requires materials expertise, and design requires strong software expertise.

Japan, South Korea and the US are among the countries currently leading these areas due to the strong local industrial ecosystem and talent base.

“It is important to create a pipeline of semiconductor talents both through identifying and reskilling existing pools of talents, especially further up the pipeline to support the parts of the value chain that Malaysia aspires to excel in.

“To accelerate talent development, Malaysia could consider cultivating partnerships with organisations that are already driving the industry. This effort may require collaborations at all levels, from government, industry to academia,” he says.

A strategic approach is imperative to ensuring success, says Datuk Loo Lee Lian, CEO of InvestPenang.

“In the mapping of Asian countries’ strength across the semiconductor value chain, it is evident that Malaysia’s competitive advantages lie in IC design, advanced packaging and equipment manufacturing. We applaud the NSS for accurately identifying these as the strategic verticals for Malaysia to build on.

“We need to be strategic with the targeted RM500 billion FDI to ensure it includes opportunities for local participation in the supply chain, equity, technology and IP ownership, and that the RM25 billion allocation in fiscal support will be directly to spur local start-ups and entrepreneurship.

“The human resources vertical should be a holistic approach to address the current technical shortages as well as build a sustainable pipeline for STEM talents,” she adds.

Putrajaya ought to flesh out or provide more clarity to the incentives, says TA Securities tech analyst Tony Chan Mun Chun.

Malaysia needs to have more concrete measures to address various issues and challenges facing the semiconductor industry, he says. “The fiscal support of RM25 billion is amazing, but it would be better if the government could provide more exact details on what kind of incentives will be given to support the industry,” says Chan, who adds that overall, the grand plan is “quite realistic”.

But he points out that as the local players’ main expertise is in the areas of Osat and ATE, it does make sense for Phase 1 of NSS to focus on helping the local Osat players build up or upgrade their current skills, considering that advanced packaging will certainly be the next high-growth area.

“For the IC design, we don’t really have many local players, and therefore, this is an area where we need to have a lot of human capital and talent, instead of physical infrastructures. So, this could be a longer-term game where we need to come out with some incentives or attractive policies to attract talents,” he suggests.

At first glance, says Chan, the RM25 billion allocation “looks huge”. However, industry players are still waiting for further details on the form of incentives, as well as implementation timeline. “I think a direct subsidy or grant will be the best, as this will motivate the local semiconductor players to expedite upgrading and upskilling.”

Oppstar co-founder and joint-CEO Cheah Hun Wah says the NSS comes in handy as it serves as an accelerated path to further cultivate nations and tech companies towards advanced semiconductors.

“It helps promote the innovation element and foster the development of a wide range of tech industries beyond just IC and advanced packaging,” he says.

Oppstar is but one of only a few Malaysian companies in the front end of the industry, offering a full spectrum of IC design services.

Cheah observes that the revolution of AI is something that everyone is excited about, but all the elements of the complete semiconductor that serves as a backbone are equally critical.

“We have witnessed the importance of semiconductors during the dot-com era, cloud computing, Internet of Things (IoT), fourth generation (4G) and fifth generation (5G). Therefore, targeted tax incentives are critical to strengthen our E&E industry,” he emphasises.

QES’ Chew says the RM25 billion being allocated for targeted incentives will be “very interesting” for all local companies within the semiconductor industry.

“We are certainly looking forward to finding out more about these incentives. We hope Mida would revive the matching R&D grants to equipment manufacturing companies involved in the semiconductor industry.

“We are also hoping that companies like ours can get some incentives in terms of rebates to hire more Malaysian engineers. Some of the incentives can also be in the form of assisting overseas export of Malaysian-developed technology to new markets such as India and Brazil,” he proposes.

Vidhya Ganesan, managing partner of McKinsey & Co’s Malaysia office, believes the phase one of NSS to build on Malaysia’s over five decades of Osat history aligns with the country’s growth ambitions.

The Osat’s global market size is estimated to grow by US$23 billion from 2024 to 2028 at a compound annual growth rate of 8%, with assembly having the largest market share.

Vidhya says the NSS aims to address headwinds such as rising labour costs and skill shortages, which are potential barriers for Malaysia to overcome and sustain its success in the semiconductor sector.

“The successful implementation of the three phases of the NSS will be beneficial to all stakeholders in the industry in the years ahead. Malaysia earmarked a sizable sum of RM25 billion (over US$5 billion) for design and advanced packaging. This investment is comparable to funding provided by leading nations in advanced packaging, such as the US and Japan,” she says.

In comparison, the US CHIPS Act had allocated US$3 billion into packaging development and manufacturing, while Japan approved US$3.9 billion in subsidies for chipmaker Rapidus Corp.

In his recent visit to Japan, Anwar emphasised Malaysia’s steadfast commitment to neutrality amid escalating tensions between the US and China, adamantly rejecting any involvement in a “Cold War” mindset.

Despite the absence of explicit strategies outlined in his speech on May 28 regarding Malaysia’s approach to navigating the trade war and evading entanglement in the crossfire, the majority of industry players express confidence and assurance in Malaysia’s determined stance.

Pentamaster’s Chuah says Anwar’s emphasis on Malaysia’s neutrality reflects the nation’s commitment to maintaining diplomatic independence and stability.

“It’s important that Malaysia’s NSS not only emphasises neutrality but also actively fosters an environment conducive to local innovation and competitiveness on the global stage, ensuring sustainable growth and resilience in the face of geopolitical uncertainties,” he says.

QES’ Chew adds, “We are a trading nation and, in my opinion, we should not get involved in the power play between these nations. The NSS will open up more FDI and DDI. In a way, we are already capitalising on the China Plus One strategy engaged by many multinational corporations. Malaysia, as well as the whole of Asean, will benefit from such a strategy.”

Lam Research’s Goh says the American equipment giant has a significant presence in Malaysia, including world-class manufacturing and deep engagement in the local ecosystem.

“Located in close proximity to customers and supply chain partners, it is one of our three manufacturing hubs in Asia, playing a vital role in providing innovation, advanced products and services for customers here to develop the next generation of memory and logic.

“This reflects our confidence in Malaysia. What we hope to achieve is to help Malaysia and Southeast Asia become a global hub for the semiconductor industry,” he elaborates.

Semiconductor chips, as their name suggests, conduct current but not entirely. Their conductivity lies between that of an insulator, which has almost no conductivity, and a conductor, which has almost full conductivity.

In the coming years, Malaysian semiconductor, E&E and technology firms will need to carefully re-strategise amid the intensified global chip war, central to the broader US-China trade conflict.

As Malaysia navigates this complex landscape, it will have to maintain a neutrality that is quite akin to how a semiconductor functions. 

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