This article first appeared in The Edge Malaysia Weekly on June 1, 2026 - June 7, 2026

FOR years, outsourced semiconductor assembly and test (OSAT) providers were viewed as the lower-margin, labour-intensive end of the semiconductor value chain — far removed from the prestige of chip design and wafer fabrication.

That perception is rapidly changing.

As artificial intelligence (AI), electric vehicles, data centres and high-performance computing drive demand for increasingly powerful chips, advanced packaging has become a critical bottleneck in semiconductor manufacturing. What was once considered a commoditised back-end process is now emerging as a strategic layer of the industry.

According to Malaysian Pacific Industries Bhd (KL:MPI) managing director Manuel Zarauza Brandulas, OSAT companies remain indispensable because semiconductor firms can no longer economically justify handling every stage of production internally.

While semiconductor companies have long outsourced non-core assembly and testing work to OSAT players, the increasing complexity of advanced packaging is reshaping the relationship between chipmakers and back-end specialists.

Although leading foundries and integrated device manufacturers continue retaining certain strategic packaging capabilities in-house, many still rely heavily on OSAT firms for scaleability, cost efficiency and specialised packaging expertise.

“They invest a lot in front end and research and development. Do you really need to invest in the back end when it is not strategic?” Zarauza asks rhetorically.

The economics are straightforward.

Unlike captive in-house facilities tied to a single product pipeline, OSAT players can aggregate demand from multiple customers, allowing them to achieve far higher equipment utilisation rates.

“If you only have one customer using 20% of the capacity, what do you do with the remaining 80%?” Zarauza muses. “An OSAT player can serve many customers and improve utilisation.”

That advantage becomes even more pronounced as semiconductor packages grow increasingly sophisticated.

Advanced packaging today is no longer merely about enclosing chips for protection. It plays a central role in thermal management, miniaturisation, power efficiency and overall performance optimisation — particularly in AI servers, automotive electronics and high-performance computing systems.

“The packages are getting very, very complicated and so are materials,” he admits. “Miniaturisation is difficult because of heat.”

As processing power rises, heat dissipation has become one of the biggest engineering challenges for the semiconductor industry. This is especially critical in AI servers and automotive applications, where chips must withstand high temperatures while maintaining long-term reliability.

“Very small is difficult, but very big is more difficult,” says Zarauza. “Where does the heat go out? How does it cool? Honestly, it’s very difficult.”

The growing technical complexity is also raising barriers to entry for newcomers hoping to build advanced OSAT capabilities.

While governments globally are pouring billions into semiconductor ambitions, Zarauza argues that advanced packaging ecosystems cannot simply be replicated through funding alone.

“You need the whole infrastructure and logistics,” he explains. “It’s very difficult to enter only because of money. There are years spent working with customers’ design teams to develop products.”

He points to India’s semiconductor push as an example, noting that advanced OSAT capabilities require long development cycles, deep engineering collaboration and years of customer qualification before meaningful returns can materialise.

At the same time, geopolitics is reshaping global semiconductor supply chains.

As tensions between the US and China intensify, multinational semiconductor companies are increasingly seeking manufacturing partners in politically neutral jurisdictions.

Malaysia is emerging as one of the beneficiaries of this realignment.

“Malaysia boleh,” Zarauza remarks, adding that customers are becoming more cautious about placing sensitive products within China amid rising trade war concerns.

For MPI, that has translated into a strategic pivot towards automotive and advanced packaging solutions, where margins are structurally higher and customer relationships are typically longer term.

“When you are involved in frontier products, margins are better,” he says. “We started investing in advanced packages only because these are getting more efficient and complicated.”

The result is an OSAT industry that is no longer merely a commoditised support function, but an increasingly strategic enabler of next-generation semiconductor technologies.

Read also:
MPI bets on next semiconductor wave as AI reshapes industry
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