This article first appeared in Forum, The Edge Malaysia Weekly on October 21, 2024 - October 27, 2024
Global fabless semiconductor companies and foundries rely on their production and assembly facilities in East Asia and Southeast Asia to manufacture 73% of their chips and semiconductor equipment. East Asian countries such as Japan, South Korea, China and Taiwan have developed a mature chip ecosystem with world class facilities, skilled engineers and well-established supply chains. In contrast, lower labour and operational costs in Southeast Asia make it a cost-effective option for outsourcing production when manufacturing does not require cutting edge technology.
Within Southeast Asia, Malaysia has long played a role as a third-party packaging and testing service provider. Building on this strong foundation, P Y Lai, founder of BlueChip venture capital fund and managing director of Intel Penang in the 1990s, strongly suggests that Malaysia capitalise on the opportunities in the chip packaging segment.
What is chip packaging? As chips become smaller, more transistors are packed on a silicon wafer, but the more the computational power, the higher the risk of heat generation and degradation in performance. Hence, chipmakers today focus on packing and stacking multiple chips, either similar or varied, into a single unit to enable superior performance in energy usage, lower heat production and advanced functionalities in modern electronics. This requires good packaging design and excellent production capacity.
Such advanced packaging helps meet the demand for semiconductors that run emerging applications now going mainstream — for example, 5G, autonomous vehicles and other Internet of Things (IoT) technologies, plus virtual and augmented reality. In short, the more advanced the chip or circuit, becoming a computer system on a chip (SoC), the more advanced the packaging. Since 2000, three major advanced packaging techniques have become commercially available and offer promising solutions for higher-performing chips. McKinsey estimates that advanced packaging sales will reach US$8.7 billion in 2026, driven by fan-out and 2.5D/3D packaging for artificial intelligence (AI) processors. Fan-out packaging is a wafer-level packaging technology where the package has connections fanned out of the chip surface, enabling more external input/output connections. 2.5D/3D packaging are methodologies that enable multiple integrated circuits (ICs) to be inside the same package. In 2.5D structure, two or more active semiconductor chips are placed side by side to achieve extremely high interconnect density. 3D structure, meanwhile, packs the active chips together by die stacking them for the shortest interconnect and smallest package footprint.
In short, advanced packaging enables smaller, faster and more powerful chips to be packaged together for better performance and at lower costs. This being a specialised business, it is small wonder that most foundries subcontract such packaging to really skilled contractors. Manufacturers for advanced packages include foundries such as Taiwan Semiconductor Manufacturing Co or TSMC, Intel and Samsung, as well as outsourced semiconductor assembly and test (OSAT) firms such as South Korea’s Amkor Technology, Taiwan’s Advanced Semiconductor Engineering (ASE) and China’s Jiangsu Changjiang Electronics Technology (JCET).
Mature and older-technology package manufacturing largely remains in Southeast Asia and Malaysia packages an estimated 26% of US chips. In 2023, the combined value added of the top five local OSAT companies (Inari Amertron [KL:INARI], Malaysian Pacific Industries [KL:MPI], Unisem [KL:UNISEM], Globetronics Technology [KL:GTRONIC] and KESM Industries [KL:KESM]) contributed almost 2% to Penang’s gross domestic product of US$25 billion, with these companies also creating 2% of the state’s jobs in the previous year.
How large is the chip packaging market? The latest performance chip market for 5G, AI, IoT, high-performance computing and automotive usage amounts to billions of dollars.
Take AI. (1) Nvidia achieved record revenue with its chips designed for training and inference of data centres. (2) The data centre AI chip market will reachUS$51 billion in 2028 at a compound annual growth rate of 35%. (3) AI PCs will represent 95% of the total PC market by 2029. (4) Generative AI is expected to provide new revenue streams for the telecommunications industry. Other revenue areas include AI-enhanced multilingual customer service, internal task automation and revenue-generating AI-enabled applications for service businesses.
The trend towards more advanced chip packaging that enables higher performance, and lower cost and power consumption, means that 2.5D/3D packaging, already used in high-bandwidth memory manufactured by leading companies such as SK Hynix, Micron Technology and Samsung, will see market growth. In addition, data centre processors by major cloud players such as Amazon’s Graviton, Google’s Axion and Microsoft’s Azure Maia also demand such advanced packaging technology. These cloud service providers recently agreed to develop data centres in Malaysia.
The world’s leading chipmakers have been making substantial financial commitments to advanced chip packaging techniques. Intel’s packaging facility investment in New Mexico and Penang is reported to be about US$10 billion (RM42.9 billion), while TSMC has invested US$2.9 billion in an advanced packaging facility in Taiwan. Although chip packaging facility costs are lower than building an integrated fab, OSAT companies are finding that moving up the quality and performance curve requires increasingly higher investments in research and development, equipment facility and tools. Yole Group estimated that globally, OSAT companies spent around US$14.5 billion on packaging facilities and tools.
Moreover, specialist material used in packaging adds another cost layer for OSATs. Interposers are the intermediate layer between chips that are built on a common substrate (the material on which the semiconductor is embedded) for AI chip packaging, which enables faster data transfer between components. Such specialist interposer costs can exceed US$100 per unit when connecting multiple substrates to support larger chips. Higher performance packaging requires extensive steps, which means more labour and equipment will be needed. ASE, the world’s leading OSAT, had packaging capital expenditure of US$1.8 billion in 2023, compared with TSMC’s US$3 billion. It has two factory projects in Malaysia. Malaysia-listed Globetronics just announced a nearly US$28 million investment to enter the same space, though its expenditure is significantly smaller than its competitors’.
If Malaysian OSATs want to play a greater role in upgrading from low- and mid-level packaging, it will mean huge investments in plants, tools and talent, given the scale and higher demands of the AI chip packaging industry. Malaysian chip start-ups could also play an important role in complementary packaging segments, helping to reduce overall chip expenses for high-end packagers. For instance, glass substrate is less costly than other substrate types, with Japan being the leading supplier. Working with foreign material suppliers, chip packagers and local champions would deepen the local supply chain, generating ecosystem benefits to make high-end packaging more cost effective.
What this brief survey of different parts of the semiconductor industry shows is that even though there is considerable potential for developing the industry in Malaysia, picking the right sector and market niche requires much greater expertise, technology and networking, as well as the right policy support. In the end, semiconductor chip competition is about ecosystem competition — which regional cluster will be a more technologically advanced, trustworthy and profitable partner in the global semiconductor supply chain.
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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