This article first appeared in Forum, The Edge Malaysia Weekly on July 1, 2024 - July 7, 2024
Asean countries have become very attractive locations for chip companies in the US, Europe and Japan. Indonesia, Malaysia and Vietnam generated 57% of the region’s total manufacturing gross domestic product, which amounted to US$767 billion. Each of them, including Singapore and Thailand, has ambitions to be a major tech or semiconductor centre.
With its large population of 280 million and ambitions to digitally transform the country to be a top 10 global economy by 2030, Indonesia has vital resources, such as silica, energy, water and critical minerals like nickel. There are currently 21 silica and processing companies operating in the country, with top silicon wafer producers like Shin-Etsu, Sumco (a subsidiary of Mitsubishi) and Gstar, investing there. Indonesia’s nickel reserves, which comprise 52% of the world’s supply, is a key attraction for the battery value chain in the electric vehicle industry. Global car makers like Toyota, Mitsubishi, Foxconn, Ford and Hyundai, as well as Chinese EV companies are investing more than US$15 billion (RM70 billion) in Indonesia.
Vietnam had an earlier history of making chip components for the Soviet Union, with a Z181 factory. The Vietnamese developed its own technical capabilities and semiconductor industrial base with two large domestic companies — FPT Semiconductor and VHT (Viettel). The market cap of FPT alone accounted for US$7.8 billion, which comprised 25% of the Asean semiconductor market, valued at US$31 billion. Vietnam’s chip design ecosystem has attracted more than 30 foreign companies like Marvell, Synopsys and Cadence to set up design and research centres. The country also has a strong engineering skills base and is rapidly upgrading its industrial infrastructure.
In 1972, the Bayan Lepas Industrial Zone in Penang had eight pioneer foreign assembly and test companies. Malaysia currently participates in the three main stages of the chip production process, but with a high concentration on outsourced semiconductor assembly and testing and automated test equipment (ATE) manufacturers. Today, the Penang cluster has 350 multinational corporations (MNCs) and 4,000 small and medium enterprises (SMEs) that are engaged in semiconductor equipment work. Across the complex network chain are four chip value-added segments: materials and tools; intellectual property (IP) and design; chip fabrication and assembly; testing and packaging.
The infographic shows the existing end-to-end technology value chain, spanning materials, IP and chip fabrication through to system operators and device manufacturers. In 2022, South Korean professors Jinhee Kim and Keun Lee wrote extensively comparing the Taipei, Shenzhen and Penang tech ecosystem models. Penang was much earlier in establishing semiconductor factories, using foreign companies for technology, IP rights, designs and management. Taiwan also relied on MNCs for technology inputs, but established the Taiwan Hsinchu Science Park in 1980 to foster home-grown tech companies such as Taiwan Semiconductor Manufacturing Company, which has become a world leader in cutting-edge semiconductor chips. Shenzhen’s own tech ambitions came later around 2000, with the goal of growing home champions.
Each tech cluster began by learning as original equipment manufacturers, which means they assembled products based on the designs and specifications provided by foreign companies. Taipei and Shenzhen then began to adopt and adapt foreign knowledge to fit the local context, which allowed local companies to create their own knowledge through research and development (R&D) and filing patents, with the support of the local government to enhance education and collaboration platforms. These domestic companies upgraded to become original design manufacturers (ODM) or own brand manufacturers, learning how to upgrade skills and efficiencies by drawing on foreign and local suppliers in a regional supply chain, tapping the most efficient and reliable suppliers to produce world-class competitive products.
The tech centres in mainland China such as Beijing, Shanghai and Shenzhen could not have succeeded without Taiwanese engineers and experience in producing for Apple and other global tech brands.
As Professors Kim and Lee surmised, “Taipei and Shenzhen are [in the] mode of eventually creating indigenous firms. By contrast, the Penang model continuously relies on MNCs. Although the former model may be more difficult to realise, it has led to a faster catching-up than the slow catching-up mode of Penang. In terms of eventually promoting locally owned firms, Taipei and Shenzhen have been more active or aggressive in terms of the degree of public intervention than Penang. While the two cities involved a direct intervention of public sectors in specific R&D projects to help indigenous firms, the public sector in Penang focused on human capital development for the workforce hired in MNCs.”
Based on the Center for Security and Emerging Technology chip segments value-added calculation, assembly, test and packaging operations added less than 15% of the total value to produce a single chip. Although Malaysia packages 23% of US chips, the skill intensity in the country has not significantly moved upward to high-intensity cutting-edge technology. In short, developing home-grown world-class technology is still a work in progress.
Clearly, different Asean countries will exploit their own comparative advantages to find their competitive niche in the global tech supply chain. Finding the right balance between supporting MNCs and promoting local start-ups and SMEs to upgrade their R&D and labour force skills will be key to each ecosystem’s success.
Malaysia has clearly established local ownership in chip design, fabrication and ATE that support big players as ODMs, but the number of local start-ups is not enough to create competition in the domestic market. Competition stimulates innovation which can lead to production scale and scope, providing cost advantage and ultimately enabling dominance in the low and medium segments of the tech supply chain. The key is to rapidly develop a National Innovation System that can evolve into a Regional Innovation System. Given the smaller scale of the Malaysian market, this has to be done with foreign partners. Creating that robust local innovation system, including training and reskilling the labour force in the tech area, will be a major challenge in the days ahead.
Next, we will write on the role of the capital market and the start-up funding issue to foster tech innovation.
Tan Sri Andrew Sheng writes on Asian global issues. Loh Peixin is a research associate at the George Town Institute of Open and Advanced Studies, Wawasan Open University. The authors are engaged in a major study of the tech industry in Penang.
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