This article first appeared in The Edge Malaysia Weekly on June 2, 2025 - June 8, 2025

MALAYSIA’s neutral stance in the escalating US-China tech cold war is becoming increasingly difficult to maintain as geopolitical tensions mount and global semiconductor supply chains undergo a major realignment.

Since former US president Joe Biden signed the CHIPS and Science Act in August 2022, Washington has rolled out substantial incentives, including Advanced Manufacturing Investment Credit (Section 48D) and manufacturing grant incentives, aimed at reshoring chip production.

These moves have triggered a wave of semiconductor supply chain investments — with major players such as Intel Corp, Taiwan Semiconductor Manufacturing Co Ltd (TSMC), Micron Technology Inc and Amkor Technology Inc among those participating — contributing more than US$540 billion (RM2.29 trillion) to over 100 announced projects across 28 US states in the past three years.

According to the Semiconductor Industry Association (SIA) in the US, these projects are estimated to generate more than 500,000 American jobs, spanning chip fabrication, construction and support services. So far, the US Department of Commerce has approved US$32.54 billion in grants and up to US$5.85 billion in loans for 32 companies across 48 projects.

Among the biggest beneficiaries is Intel, which received up to US$3 billion last September in direct funding to “support the manufacturing of microelectronics” and “ensure access to a domestic supply chain of advanced semiconductors for national security”.

The result is a structural shift in the global chip industry — one that is slowly pulling supply chains out of Asia and back to the US. Caught in the middle of this transition is Malaysia, which for the past few decades has positioned itself as a neutral and reliable node in the semiconductor ecosystem.

Malaysia plays a vital role in the global chip supply chain. It is the world’s sixth-largest semiconductor exporter, contributing around 13% to global back-end services in chip packaging and testing. At least 6% to 7% of global semiconductor trade passes through the country. But the stakes are rising.

Even as Malaysia works to move up the value chain — including entering into a US$250 million licensing agreement with UK-based chip architect Arm Holdings plc to bolster local design capabilities — its position is under scrutiny amid the sharpening rivalry between Washington and Beijing.

Malaysia’s delicate balancing act took a tumble two weeks ago when Deputy Minister of Communications Teo Nie Ching remarked during a launch event that Huawei’s Ascend chips would “form the backbone” of Malaysia’s artificial intelligence (AI) development. The comment quickly circulated on X (formerly Twitter), shared by David Sacks — a close ally of US President Donald Trump known for his outspoken views on AI.

Complicating matters, the US Commerce Department had previously issued a warning against the use of Huawei’s Ascend chips, citing a potential violation of US export rules. The remark triggered enough concern that Malaysia’s Ministry of Investment, Trade and Industry had to clarify that the country had no official involvement in the Huawei-backed AI project and that it was not part of any national programme.

Meanwhile, neighbouring Singapore has been embroiled in its own controversy — a potential fraud case involving the alleged smuggling of Nvidia Corp’s advanced chips to China. Three individuals were charged with illegally routing restricted chips from Singapore, reportedly to China, including to the Chinese AI firm DeepSeek.

Certain quarters even linked the case to Penang-based electronics manufacturing services (EMS) provider NationGate Holdings Bhd (KL:NATGATE), the sole contract manufacturer for Nvidia in Southeast Asia — although the company has denied any involvement.

It is increasingly clear that the US is tightening its grip, not only on China directly, but also indirectly on third countries such as Malaysia.

In January, just days before Trump returned to the White House, the Biden administration implemented a rule under the “Export Control Framework for Artificial Intelligence Diffusion” that placed Malaysia in Tier 2 — limiting exports of high-end AI chips such as graphics processing units (GPUs) to 50,000 units over two years.

Although Trump later scrapped the rule in May, citing bureaucratic overreach, controls on chip flows to third countries are unlikely to go away.

Just last week, US lawmakers — Republican Senator Jim Banks and Democrat Senator Elizabeth Warren — raised concerns about Nvidia’s plan to open a research facility in Shanghai, citing national security risks. This signals that scrutiny over American chip firms and their overseas partners will only intensify.

As Washington doubles down on reshoring and Beijing races to catch up in chip self-sufficiency, Malaysia — a key assembly hub trying to climb the value chain — may soon find that neutrality is no longer a viable strategy.

The question now is whether Malaysia can remain a key player in the global chip ecosystem or whether it will be forced to choose between the US and China.

Malaysia Semiconductor Industry Association (MSIA) president Datuk Seri Wong Siew Hai says Malaysia has to comply with both US requirements and China’s expectations.

“We have to try our best to deal with them. We cannot afford to get them upset. I hope we [don’t have to] pick sides, because both are very strong countries, both have good markets,” he tells The Edge over the phone.

“We do not want to lose one market versus the other one, because business goes up and down. That is why we always say we support both sides and then see what is the best thing we can do.”

Wong believes that besides complying with the requirements, Malaysia also has to find an alternative supplier.

“Let’s say, if we are not allowed to buy certain products from China, then we are going to find an alternative supplier. The local companies have to build up their capabilities in Malaysia and in the region,” he says.

“They have to adopt technology, work on improvement, innovation and develop products. They have to be cost-competitive, and they cannot be complacent. They have to keep up with the technology. If people are doing AI, they have to keep up with AI. If people are using more precise equipment, then they have to be more precise.”

Wong emphasises that engineering and innovation must be progressive, and that Malaysia must address its shortcomings to move forward.

“Now is the time to keep going and embrace future technologies, such as advanced packaging and AI. We have to figure out how to adopt all these in Malaysia and position ourselves properly,” he says.

Ajit Manocha, president and CEO of global industry association SEMI, points out: “We are living in a multipolar world, where power is not dominated by one single country, but distributed among multiple countries and multiple regions.” Therefore, there are many conflicting sovereign environments, complex tariffs, controls of regulations, fragmented global supply chain and talent shortages everywhere.

“The one word I’ve been using for the last couple of years is ‘unprecedented’ — unprecedented in many aspects: unprecedented number of opportunities, unprecedented number of challenges and unprecedented uncertainties. The geopolitical issues that we all are facing make our job more difficult, but the opportunities are still there. We must go after those opportunities and we must deal with those challenges,” he said in a speech at the Semicon Southeast Asia 2025 conference in Singapore last month.

Ajit acknowledges that talent shortage as well as energy and regulatory issues are the three most difficult to tackle.

“No single company, no single country, no single CEO can solve [these issues]. Being in the corporate world, I wanted to keep governments away. But now, I want the government to be part of us to address these three challenges,” he says.

Dr Jeremy Chang Chih-Cheng, research fellow and CEO at the Research Institute for Democracy, Society and Emerging Technology (DSET), tells The Edge in an interview in Taiwan that while working with China is an option, Malaysia must remain cautious.

“China’s long-term goal is self-reliance. They don’t really believe in relying on external partners. Their strategy is still very traditional — they want to dump excess capacity into neighbouring countries.

“So, yes, you should worry. You need investment to upgrade your industry, and you don’t have enough capital. Be very careful — ask whether China is bringing you opportunity and capital, or whether it’s just trying to control your industry and dump their overcapacity onto your market.”

He adds that the US economic system is based on capitalism, whereas China does not operate purely on economic logic.

“That’s why, despite all the problems with the US, Trump and isolationism, I still think the US is more reliable. To the Americans, the incentive remains: Who can make more money?”

Chang observes that Malaysia is rather strong in the back-end semiconductor packaging and testing, and has ambitions with AI centres.

“I’ve only visited Kuala Lumpur, not Penang, but I understand Penang is quite established in the OSAT (outsourced semiconductor assembly and test) segment. Honestly, I’m not really familiar with the development process of Malaysia’s electronics or semiconductor industry,” he says.

“But if I look historically — back in the 1970s — Malaysia and Taiwan were in a similar position. You had nothing. Whatever you had was about offering a cheaper ecosystem to receive orders from American clients and hoping to become a hub for contract manufacturing.”

In contrast, Taiwan seized the moment and played that game better than anyone, says Chang.

“There’s usually only one chance to go from the early stage of industrialisation to a more advanced one, and that depends on riding a major globalisation trend, where cost efficiency and technological development are both aligned. Taiwan performed better than South Korea, Japan, Singapore — no doubt.

“But today, the window to gain that ‘ticket’ to climb the value chain is getting smaller. The current situation is different. The world is becoming increasingly politicised.”

Nevertheless, he points out, when China became too costly and too risky — even Chinese companies began moving capacity out — Malaysia stood out as a safer, more stable destination for supplying both China and US markets.

That was the main reason that many Taiwanese firms — including Advanced Semiconductor Engineering Inc (ASE Inc), the world’s largest OSAT player — chose Malaysia for their comparatively low-end processing activities.

“But now, the US wants everyone to manufacture either in the US or Mexico. They’re pushing hard, and many stakeholders are no longer in a ‘wait and see’ mode. Companies aren’t waiting because they’re afraid of being targeted if Malaysia is perceived as playing too closely with China or helping China reroute its production,” says Chang.

For Malaysia, the only option might be to reach a clearer consensus or deal with the US, he adds.

Looking at the playbooks of Saudi Arabia, the UAE and Qatar, these Middle Eastern countries have successfully attracted US investment by aligning politically and putting capital on the table.

“Of course, Malaysia doesn’t have that kind of capital. But if you can persuade the US that you’re no longer playing the same role with China as before, and you’re a comparatively stable destination, then you still have a shot. You still have huge potential,” says Chang.

He adds that the costs are manageable for Malaysia.

“Compared with India, which is still not mature, Malaysia is still leading in the competition to attract businesses coming out of China. But I don’t think anyone should be satisfied with what you have now. In Taiwan, we’re never satisfied. You must keep running. If you don’t run faster, you become prey,” he says.

“The US wants to reshore, and there’s growing distrust of Asian countries. But compared to most regions, even other developing nations, you still have relatively better potential for private investment.”

However, Chang cautions that the current OSAT and packaging roles that Malaysia plays are still too labour-intensive.

“The semiconductor industry is becoming less labour-intensive and more capital-intensive. You need to ensure your industry can shift from labour-driven to capital-driven. If not, you risk being phased out quickly,” he says.

“Look at the Gulf countries again — they get it. They understand that manufacturing is now about technology and capital. So, they apply capital. That’s what Malaysia needs to think about too.”

Selangor Information Technology & Digital Economy Corporation (Sidec) CEO Yong Kai Ping says Malaysia is not at a forced inflection point yet, but the window for proactive strategy is narrowing.

“Malaysian semiconductor firms must double down on self-reliance, regional integration and global openness to navigate this era of tech decoupling — not by choosing sides, but by choosing excellence,” he tells The Edge when met at COMPUTEX 2025 in Taiwan.

Yong describes the global semiconductor landscape as rapidly bifurcating into two major blocs — “Blue Silicon” led by the US and “Red Silicon” led by China — driven by tariff policies and geopolitical tensions.

In this shifting landscape, Southeast Asia and the Middle East are emerging as promising demand centres, fuelled by young populations, accelerating digital adoption and unique market needs.

“For Malaysia, this is a pivotal moment to reposition itself, not as a follower, but as a regional pioneer in localised semiconductor innovation. To stay competitive, Malaysian players should target underserved markets by introducing policies such as a 30% local content requirement to stimulate internal demand,” he says.

Meanwhile, Malaysian companies should lead in AI-driven chip design for growth areas such as data centres, autonomous vehicles and drone inference systems. Local firms should also capitalise on Malaysia’s geopolitical neutrality to attract both Western and Eastern technology partnerships, while accelerating talent development and R&D through platforms such as Advance Semiconductor College of Malaysia (ASEM), fostering academic-industry collaboration.

“With the right strategies, Malaysia can become the semiconductor hub of the Global South. But only if we act with urgency and vision,” says Yong.

He admits that the geopolitical pressure on countries such as Malaysia is undeniably intensifying as the US-China tech rivalry deepens, particularly in the semiconductor and AI sectors.

“While recent incidents — including Malaysia’s placement under Tier 2 of the AI Diffusion Rule and unverified allegations of chip transits — have raised eyebrows, Malaysia still has the opportunity to maintain a strategic, pragmatic neutrality. To safeguard this position and navigate an increasingly polarised landscape, I believe Malaysia should focus on building internal resilience and strengthening regional partnerships,” he says.

Yong points out that like many of its neighbours, Malaysia has historically managed to entertain relationships with both superpowers — maintaining security ties with Washington while nurturing economic and educational linkages with Beijing. “This dual-track diplomacy remains both viable and necessary,” he stresses.

As the chip war between the US and China heats up, Malaysia’s neutral stance is getting more difficult to maintain. The country is under growing pressure to balance the demands of both sides, while trying to move up the semiconductor value chain.

Whether Malaysia can remain a key player in the global chip industry will depend on how well it can handle these political pressures without being forced to choose sides. 

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