This article first appeared in Forum, The Edge Malaysia Weekly on April 14, 2025 - April 20, 2025
Malaysia’s semiconductor industry is expected to reach US$18 billion (RM80 billion) in revenue by 2025. But the market is largely dominated by big foreign multinationals, with small- to medium-sized local companies supporting them in terms of components, materials and services as part of the semiconductor and electronic engineering supply chain. According to Penang government data, there are 350 multinationals (MNCs) operating in Penang, supported by over 6,000 small and medium enterprises (SMEs) operating in the Penang/Kulim electronics eco-system. SMEs are often too small to gain brand visibility and too limited in scale to generate large profits, causing them to lack the capital and capacity to undertake research and development (R&D) that would enable them to achieve global a reputation in advanced engineering solutions and production quality at scale.
On March 25, Greatech Malaysia announced the formation of a seven-member industrial alliance aimed at deepening local collaboration across various segments of the semiconductor supply chain. Deputy Minister of Investment, Trade and Industry Liew Chin Tong branded the union as “Team Malaysia”, which includes subsidiaries of several public-listed companies, including — Greatech Technology Bhd (KL:GREATEC), Aurelius Technologies Bhd (KL:ATECH), Coraza Integrated Technology Bhd (KL:CORAZA), L&P Global Bhd (KL:L&PBHD) — alongside several private companies (Swift Bridge Technologies Sdn Bhd, Eng Teknologi Sdn Bhd and Prodelcon Sdn Bhd). Together, these companies generated nearly US$400 million in revenue last year.
An innovation and engineering alliance is a powerful strategy for companies to maximise returns on their R&D investments, providing access to pooled complementary capabilities that enable them to combine talent, technologies, marketing and financial resources that would be difficult or costly to develop independently. Shared knowledge and resources not only enhance the ability to create more higher-quality products but also make the alliance a key driver of marketing, pooled services innovation and competitive advantage. For instance, Taiwan Semiconductor Manufacturing Company’s strategic alliance with global design tool vendors like Cadence Design Systems, Inc and Synopsys Inc helped to consolidate TSMC’s chip design capabilities while accelerating the technological advancement of its entire semiconductor production and packaging supply chain.
Malaysia is an established assembly, test and engineering cluster, with a well-developed ecosystem composed of local and foreign companies. But this ecosystem operates in a vertical setting, where local companies primarily supply goods to meet the immediate demand of foreign companies, relying on them for technology and intellectual property rights, without creating a knowledge exchange loop that drives innovation. In this set-up, local companies are more focused on perfecting their specific competencies within the semiconductor value chain, rather than pursuing cross-functional collaboration that elevates their technological capabilities.
The lack of integration reduces the ability of local companies to expand beyond their current roles and scale globally. Many of these smaller companies rely heavily on contract manufacturing through foreign-owned electronic manufacturing services providers such as Flex Ltd and Jabil, whose contracts are sourced from other MNCs that do not manufacture product components in-house. This subcontracting model locks these companies into a cycle of low- to medium-margin work that severely limits their ability to invest in R&D, scale and reputation, which is crucial for advancing local value added and achieving national competitiveness and brand reputation in the global market.
In the alliance, each member contributes a distinct set of capabilities to the semiconductor supply chain. While each company possesses a high level of technical capability, their individual capacities are significantly constrained by smaller scale in human, financial and brand social capital, preventing them from pursuing large and complex contracts. By pooling these capabilities together, the alliance creates a more integrated and robust service offering that is more attractive to major international customers. Such collaboration does not preclude the alliance members from competing with each other at the same time, while expanding their aggregate operational capacity and empowering them to negotiate from a position of greater collective strength.
Although Malaysia is not yet a leader in midstream semiconductor engineering technology, it occupies a critical middle ground that is strategically important to both the US and China. For example, Apple needs to shift some of its production to outside China, as US restrictions force the company to look at production in India, where Chinese companies have barriers to operate in due to the China-India border conflict. Apple CEO Tim Cook said in October 2023 that 95% of Apple products were manufactured and assembled in China, with plans to move nearly half of its business to India. In the interim, there may be opportunities for Malaysian companies where Team Malaysia could seek to fill in some of the production gaps.
Malaysia is already playing a role in supporting India’s semiconductor ecosystem, exporting US$726 million worth of semiconductor devices to the country in 2023. According to Custom Market Insights, the Indian semiconductor market is projected to reach US$100 billion by 2032, nearly double the forecast size of the entire Asean semiconductor market, which is expected to reach US$53 billion in the same period. At Semicon India 2024, Prime Minister Narendra Modi said India is set to play a major role in driving the global semiconductor industry. Despite India’s vigorous ambition, its semiconductor ecosystem lacks a robust and localised supply chain as well as specialised manufacturing talent. In contrast, Malaysia has a cultivated deep semiconductor ecosystem underpinned by over 50 years of industry experience.
Although Malaysia is the second largest semiconductor devices exporter in Southeast Asia after Vietnam, it continues to experience rising export volumes, driven by the increasing demand for specialised equipment and services that are required to assemble, test and package semiconductor devices, where Malaysia excels. Rather than directly competing with rising players, Malaysia should ride the growing demand from global semiconductor giants to create a domestic growth loop among the local companies. This does not mean that alliances are against the interests of the MNCs, since better quality services and products help reinforce the competitiveness of the MNCs also, thus consolidating the efficiency and resilience of the Penang/Kulim ecosystem.
The latest salvo of US tariff increases of 24% on Malaysian exports has exempted semiconductors. This is comparable to the rates imposed on Japan and South Korea (25% each), whereas tariff increases for other Asean members such as Vietnam (45%) and Thailand (36%) and Indonesia (32%) are higher. Singapore had the lowest tariff increases of 10%. (Editor’s note: On April 9, US President Donald Trump paused the higher reciprocal tariffs on most countries for 90 days, limiting it to 10%.)
There are thus opportunities to form not just local alliances, and also alliances within the Asean region to help each other become the next large player in the semiconductor industry.
What remains to be seen is whether the sudden tariff increases will send the global economy into shock and recession, which may also create a new cycle of risks for the semiconductor industry itself. In this era of every country for itself, self-help, self-strengthening and alliances are necessary for survival and greater resilience in a more competitive world.
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 writers are engaged in a major study of the tech industry in Penang.
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