This article first appeared in Digital Edge, The Edge Malaysia Weekly on July 22, 2024 - July 28, 2024

At the recent Semicon Southeast Asia 2024 conference in Kuala Lumpur, while launching the National Semiconductor Strategy (NSS), Prime Minister Datuk Seri Anwar Ibrahim made an ambitious remark about wanting the country to attract RM500 billion worth of semiconductor investments.

The lofty plan could be made possible through the establishment of 10 local design and advanced chip manufacturing champions with annual revenues of between US$210 million (RM980 million) and US$1 billion, plus 100 semiconductor-related companies with revenue of up to US$210 million.

To illustrate the magnitude of the prime minister’s ambition, the approximately US$107 billion target is more than that announced by various governments across the world: the European Union’s €43 billion (RM218 billion), the US CHIPS Act’s US$52 billion, and the third phase of China’s RMB340 billion (RM218 billion) National Integrated Circuit Industry Investment Fund (commonly known as the “Big Fund”).

To support the agenda, the Malaysian government will offer RM25 billion worth of incentives to attract foreign investors and train up to 60,000 Malaysian engineers to help meet industry demand.

But let’s take a step back to assess the current circumstances and how these goals can possibly be achieved. First of all, the world is definitely not flat — contrary to the argument of The New York Times columnist Thomas Friedman, who observes that technological advancements have “flattened” the world we live in.

Amid geopolitical shifts that span from East to West, we are seeing an unprecedented shift in global supply chains as a seemingly invisible economic cold war takes place. This has been happening since 2017, when former US president Donald Trump pulled the plug on the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) while, at the same time, reigniting the North American Free Trade Agreement (Nafta).

This created a domino effect and spurred various levels of economic retaliation across the world. Such new-wave protectionism is sweeping the globe, threatening trade liberalisation, as predicted by scholars Sebastian Krapohl, Václav Ocelík and Dawid Walentek in 2021.

What could Malaysia, as one of the countries affected, do? What are our comparative advantages and economies of scale that would allow us to stand out in the international trade arena?

To begin with, Malaysia accounts for 13% of global semiconductor testing and packaging — playing a pivotal role in supporting the global supply chain of semiconductors. But as our neighbouring countries across Southeast Asia are also throwing their hats into the semiconductor ring, time is of the essence here for us to grow Malaysia’s market share in the space.

The global artificial intelligence (AI) industry has progressed and grown at staggering speed in the last 18 months, putting tremendous pressure on supply chains to meet the demand for chips production.

While the global semiconductor market grew about 3.3% in 2022, Malaysia’s semiconductor export value grew nearly a whopping 30%. Penang alone attracted RM60.1 billion in foreign direct investment in 2023, more than the total it received from 2013 to 2020 combined.

The vast share of the investments received are presumably in the core semiconductor components space.

From a portfolio perspective, this represents the equivalent of our fixed-income allocation and should be an area we double down on. Further investment into more frontier markets should be akin to the equity portion of how we would normally think of asset allocation, considering the flexibility of risk-adjusted returns across both asset classes and time.

The key point of strengthening our core is simple: We benefit as a country as we continue to focus on our comparative advantage of being the neutral trusted trading partner for economies along the global supply chain.

As long as we are doing everything in our ability to further facilitate this initiative, capital will continue to flow — hopefully in an accelerated manner — towards the path of least resistance.

But we need to really ask ourselves if the country is set up for success to facilitate these growing manufacturing needs? From a policy standpoint, as protectionism grinds international trade to a halt, are we greasing the wheels that allow slowing gears to follow?

Does our corporate and international legal framework provide the assurance for further trade flows to pass through our borders? Have sufficient tax elasticity curves been mapped out to maximise trade flows and thus trade income and surplus into the nation?

As bits continue to play catch-up with bytes, the global semiconductor market is devoting plenty of resources to ensuring that innovation and production of cutting-edge chips allow for the intellectual progress that follows. It should be no exception for Malaysia.

Malaysia’s robust back-end semiconductor ecosystem will make strong economic sense for it to continue to build its beachhead in the global supply chain. This is because costs are simply lower when the distance and logistics between different parts of the value chain are smaller in nature.

The semiconductor space has spawned several “unicorns” in the past, such as Inari Amertron Bhd (KL:INARI) (RM14 billion market capitalisation), Pentamaster Corp Bhd (KL:PENTA) (RM3.6 billion market cap) and Vitrox Corp Bhd (KL:VITROX) (RM8.7 billion market cap). These are cases in point of significant economic value organically generated by virtue of having semiconductor “clusters” emerge in the northern region of Malaysia — largely catalysed by the early days of Intel in Penang.

But it has been over five decades since that catalyst. For now, how do we reverse-engineer and accelerate a similar outcome of another 10 Intels that would generate much more returns for the economy?

By clearing the path for such transitions to take place.

Just as one would have a certain set of criteria in picking a new home, businesses would do the same. We could start with a basic 5P framework: place, price, promotion, product and people.

Place: Alongside our existing clusters of industrial parks, tenants first and foremost wish to ensure that they are in a stable neighbourhood that has all the available amenities and infrastructure. Proximity to their suppliers and customers, cheaply available utilities such as water and electricity, and sufficient facilities for their teams. Being based in the same area also offers access to competitors for knowledge exchange, intelligence gathering and talent acquisition.

Price: From the perspective of economic policies and reforms, Malaysia stands out as a particularly cost-effective business centre. But perhaps we can do more. With a public and private capital base at the national level that rivals that of other countries, we need to ensure an adequate capital allocation that will be put to good use. This is because the returns from such strategic investments could have a multiplier effect on a direct and indirect monetary level. Malaysia should be top of mind when it comes to decisions on shifting the global supply chain.

Promotion: We herald the motherland as the Silicon Valley of the East — and arguably the numbers say so. Does the world think so, though? In today’s world of lightning-paced information and availability of insights, have we done enough to be top of mind of the very top companies we so wish to vie for? Have we made a dedicated concerted effort to do so, not just on a national but also global scale?

Product: It has now become a mainstream approach to product development, but Apple most famously preached user-centric product development and has gone on to dominate global markets. This focus on user experience drives the development of intuitive interfaces and seamless interactions — but could this be translated from the design of a smartphone (which is also part of the semiconductor value chain) into an offering of a country?

How do we take such learnings and incorporate them at a national scale? Fundamentally, from a basic-needs perspective, we probably already fit the vast majority of requirements. Thinking that way, however, would be akin to the likes of Nokia and Blackberry debating a young upstart like Apple back in the early 21st century — something corporations nowadays strive not to take for granted.

People: We have heard it all before — talent deficit, brain drain, imprecise skill sets. Yet, Malaysia remains a global talent hub for the most competitive markets in the world such as Singapore, Hong Kong, Taiwan and the UK. So, there is no doubt that talents exist in the country. Schools and syllabuses set a core foundation, but take years if not decades to materialise. Training does help, but it is also a function of pedigree and quality. Could we arrange the variables against time, cost and opportunity and optimise for solutions that work for both today and tomorrow?

Malaysia and its people continue to make great strides in this market. In a global paradigm where powerhouses across the world spark a tit-for-tat strategy to shore up resources and defences, outcomes will depend on the different parties and how they interact with one another. In such a once-in-a-lifetime opportunity, we should really swing for the fences.

We recommend, first, focusing on increasing Malaysia’s competency over the last few decades as a key facilitator in the global supply chain. The country needs to continue to beef up this muscle as we already have a core base there. This is mainly because, as supply chains constrict, international companies will be incentivised to be closer to their core partners and suppliers — to enable these movements of goods, services and talents by utilising Malaysia as a platform for global trade.

As the centre of gravity of innovation increasingly shifts onshore, just like the early days of Intel setting up shop in Penang, there will be massive spillover effects, enabling the acceleration of Malaysia towards that global arena.

But again, time is of the essence here. Ambitious? Perhaps. Possible? Definitely.

Raja Hamzah is a director of TalentCorp, and an avid investor and adviser in the technology space. Y C Ng has been a venture capital/private equity investor and operator in Europe and Southeast Asia for over a decade and was previously an early pioneer of Sequoia’s early-stage Surge programme.

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