This article first appeared in Forum, The Edge Malaysia Weekly on July 28, 2025 - August 3, 2025

Malaysia has long been regarded as a global player in the semiconductor back-end — a legacy born in the 1970s and 1980s, when multinationals such as Intel, AMD and Hitachi established assembly and test operations in Penang and other industrial zones. This early start positioned Malaysia as a critical node in the global electronics supply chain, with back-end activities accounting for a significant share of national exports and employment.

Yet, more than 50 years later, Malaysia has not meaningfully advanced into higher-value segments of the semiconductor industry front-end, such as proprietary chip and systems design, integrated circuit fabrication, development of electronic design automation (EDA) tools and other high-value activities that enable the industry ecosystem.

This stagnation persists despite repeated political ambitions to “move up the value chain” and “develop a high-tech economy” — words that are almost standard fare for many government publications (see graphic).

Why has Malaysia remained stuck in the back-end, and why has its ambitions to climb higher in the value chain faltered?

The answer most likely lies in a complex interplay of factors — all pointing to systemic weaknesses in collective leadership, strategy, capital formation and perhaps even national psychology.

One of the most critical gaps has been the absence of clear, consistent and technically competent leadership at the national level. Unlike Taiwan (with its Industrial Technology Research Institute) or Singapore (with its Economic Development Board), Malaysia lacks a strong central institution with the authority, expertise and long-term vision to direct industrial development, especially in a highly complex and capital-intensive sector like semiconductor.

Leadership in Malaysia’s technology space has often been fragmented across ministries, agencies and states, resulting in overlapping mandates, underfunded programmes and inconsistent policy follow-through.

On top of this, political transitions have repeatedly reset or even led to the abandonment of previously agreed priorities, and technocrats capable of steering high-stakes semiconductor strategies are few and often marginalised.

Semiconductor front-end activities are expensive, high-risk ventures that require deep pools of patient capital. Doing engineering and manufacturing at the atomic and molecular level is not trivial. Returns may not come within the usual time frames familiar to the usual investment managers. This has inevitably led to fear and the constant desire to retreat to familiar investment playgrounds.

Malaysia has historically lacked both the domestic venture capital depth and the political courage to syndicate public-private investment at scale. While Taiwan coordinated funding between the government, banking sector and private entities to establish companies such as United Microelectronics Corp and Taiwan Semiconductor Manufacturing Co Ltd, Malaysia’s initiatives — when they exist — are typically fragmented, undercapitalised or, in the case of our foray into the semiconductor integrated circuit fabrication business, short term.

There is no national semiconductor fund of significant scale. Existing government funding mechanisms (such as Malaysian Investment Development Authority grants or Cradle programmes) are often geared towards small and medium enterprises (SMEs), not towards the billion-dollar capital calls required for fabrication plants or proprietary-chip design firms.

Exacerbating the capital shortfall is Malaysia’s long-standing, insatiable appetite for property development. For decades, land and real estate have been perceived as the safest and most lucrative investments — drawing in not only private wealth but also institutional funds, pension money, government-linked companies (GLCs) and politically connected capital.

This has created a systemic bias in capital allocation: Instead of channelling funds towards risky but high-potential technology ventures, capital is disproportionately deployed into malls, condominiums, gated communities and speculative land bank. Banks, developers and even state economic development agencies have often favoured quick-turnaround real estate projects over long-gestation tech ventures.

The result is a persistent crowding out of industrial policy goals. When capital chases short-term returns in concrete rather than long-term gains in silicon, the country inevitably sacrifices the opportunity to build foundational capabilities in the knowledge economy.

Another key weakness is the absence of a coherent, indigenous innovation strategy. Malaysia has not yet developed a comprehensive national policy that ties talent development, research and development (R&D), intellectual property (IP) creation, design capabilities and export incentives into a singular national agenda for semiconductor leadership. Continuous meaningful wealth-creating initiatives between academia and the industry is virtually non-existent.

The country remains highly reliant on foreign direct investment (FDI), which, while successful in sustaining the back-end, has not translated into deep local capabilities or technology ownership. There is a stark difference between hosting a factory and owning the knowledge and IP embedded in the production process. Malaysia has failed to move from host to owner.

Until very recently, efforts to develop domestic design or fabless chip companies have been sporadic and under-supported. Without a deliberate ecosystem approach — from research labs and venture funding to access to EDA tools and go-to-market support — these efforts often stall after the initial seed stages.

The recently launched IC design initiatives in Penang, Sarawak and Selangor are good initiatives, and these need to be amply supported with capital, technology access and market opportunities. At the national level, the 10-year licensing deal with ARM Holdings has yet to show clarity and gain traction, and some are already beginning to feel that currently it is a bit of an over-reach for a nascent local design ecosystem.

Paradoxically, Malaysia’s success in the back-end may have become an obstacle in itself. The influx of multinational corporations to establish assembly, test and packaging operations — often with government incentives — created a sense of comfort and economic continuity. This has arguably bred complacency.

The back-end is essential, but it also operates on relatively thin margins and faces increasing competition from lower-cost nations. While countries like Vietnam, India and Mexico are rapidly absorbing similar back-end roles, Malaysia has yet to fully awaken to the strategic necessity of pushing through the upstream portions of the value chain.

The consequences of inaction are stark. Without a foothold in higher-value segments of the semiconductor chain, Malaysia risks being left behind in the continuous wave of global industrial evolution and transformation. Already, India and Vietnam have made bold strides towards making the semiconductor front-end their economic growth drivers.

Fact: We were once even ahead of China in the front-end semiconductor segment. We started IC fabrication in the late 1990s and early 2000s with a mix of several locally led investments (Silterra in Kulim; 1st Silicon, which is now X-Fab Sarawak; Mimos in Bukit Jalil) and FDIs (Motorola Semiconductor in Seremban, Fuji Electric in Kulim, Osram Optoelectronics in Penang, Infineon in Kulim), while China was still waking up to this activity.

Semiconductor Manufacturing International Corp in China was established only after we began shipping fabricated wafers to the global market. Yet, look at where we are now. While we have not added anything to the seven that we have, China has added nearly 50 front-end facilities to its industry base over the 25-year period.

By failing to invest in our own front-end capabilities, Malaysia may find itself permanently locked in low-margin segments — vulnerable to both automation and geopolitical shifts.

To move forward, Malaysia must:

● Establish a central “national semiconductor council” with clear authority, staffed by competent technocrats and backed by sustained non-partisan political will. At this juncture, it is worth noting that Malaysians are even running some of the renowned entities in the global semiconductor industry today.

● Create a sovereign semiconductor investment fund, pooling public, GLC and private capital to fund wafer fabs, EDA tool start-ups and advanced design firms.

● Address the capital distortion problem by instituting incentives or requirements that redirect portions of institutional and public funds towards high-tech industrial ventures.

● Invest in indigenous IP and design capabilities, including deep semiconductor programmes at local universities, targeting specific segments of the industry that Malaysia can still meaningfully establish and be competitive in.

● Benchmark aggressively against Taiwan, South Korea, Singapore and Israel that have leapfrogged through bold state-private coordination.

Malaysia’s potential in semiconductors is real. It has the talent base, industrial familiarity, connectedness and global credibility, and is nominally free of natural disasters. We are in the semiconductor industry “goldilocks zone”.

But potential alone does not move nations up the value chain. Strategic courage, capital depth and focused leadership do.

So long as the national imagination — and its capital — remains trapped in concrete rather than circuits, Malaysia risks remaining a competent follower in an industry that increasingly rewards those who dare to lead from the front.

Kamarulzaman Mohamed Zin is an advocate of the front-end semiconductor industry. He was previously with Khazanah Nasional Bhd and CEO of Silterra Malaysia.

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