In his Budget 2027 speech, Prime Minister Datuk Seri Anwar Ibrahim announced RM1.2 billion in investments by Khazanah Nasional and KWAP to help local semiconductor companies move into higher-value segments, including an investment fund involving Khazanah and the Selangor state government. Separately, Khazanah and InvestPenang will establish a RM100 million Strategic Investment Fund to support semiconductor and advanced manufacturing companies in their early stages of growth. These commitments signal support for domestic industrial upgrading. Yet the speech offers no explicit focus or dedicated measures for precision machining and outsourced semiconductor assembly and testing (OSAT) — two critical pillars of Malaysia’s semiconductor ecosystem that deserve greater attention in the country’s industrial strategy.
Malaysia is one of the world’s most important semiconductor hubs. Yet many outside the industry judge its success primarily by the number of multinational semiconductor companies establishing operations here. Attention then turns to homegrown champions in the mid-tier chip design segment, such as SkyeChip (KL:SKYECHIP) and Oppstar (KL:OPPSTAR). Both are certainly important showcases for Malaysia on the global stage. But if the strategic objectives are to move up the technology value chain, create more well-paid jobs and help domestic small and medium-sized enterprises transform within a relatively short period, these two segments should not be the sole focus.
The crucial drivers of transformation are the precision machining companies and outsourced semiconductor assembly and test providers, or OSAT companies, that underpin Malaysia’s semiconductor ecosystem and support substantial employment. These seemingly unassuming industries are essential to the wider semiconductor supply chain, including wafer fabrication equipment (WFE) manufacturers such as ASML.
Take precision machining as an example. Mechanical modules used in semiconductor equipment to hold wafers may require machining tolerances as tight as 0.02 millimetres. The components must then undergo a series of complex surface treatments, including anodising and electroplating. They are subsequently integrated with other components, such as cables, power distribution boxes and circuit boards, into complete assemblies, tested and delivered to multinational semiconductor equipment manufacturers.
Some may question whether precision machining, surface treatment, assembly and testing are sufficiently sophisticated to contribute meaningfully to industrial upgrading and Malaysia’s climb up the value chain. But this reflects an outsider’s misconception. These fields involve numerous high-value manufacturing processes that depend on years of accumulated technical expertise and practical know-how to produce components that meet the semiconductor industry’s exacting requirements.
Precision machining also encompasses specialised, high-value technologies such as metal brazing. This process joins metal components using a filler metal with a lower melting point than the base materials, allowing the components to be bonded without melting the base metals themselves and producing a highly even joining surface. Certain applications of such techniques remain beyond the capabilities of machining companies across Southeast Asia. These are advanced technological capabilities in every sense.
If Malaysian companies can enter and establish themselves in these high-value areas, they will build a stronger competitive moat for the country’s semiconductor industry, building a fence for the future semiconductor industries path-dependency on Malaysia.
The government should therefore provide greater support for these industries when shaping semiconductor policy. In Budget 2027, the Prime Minister allocated RM1.2 billion through Khazanah Nasional to support local semiconductor-related companies. Frankly, however, this amount is a drop in the ocean for precision machining and OSAT businesses facing substantial capital expenditure requirements.
Malaysia’s precision machining and OSAT industry currently faces three simultaneous pressures: high capital requirements, cyclical orders and intensifying competition. Companies must invest heavily in high-precision equipment, process development and technical talent. Yet semiconductor demand rises and falls like a sine wave. During an expansion, businesses must often increase capacity rapidly. During a downturn, they must continue bearing depreciation, financing costs and the expense of idle capacity, making investment returns highly uncertain.
Meanwhile, China companies establishing operations in Malaysia are competing with local businesses for orders, talent and supply chain resources. Domestic companies therefore face a dilemma: failing to invest in upgrading could undermine their competitiveness, while aggressive expansion could leave them under severe financial strain when the industry turns down.
This is precisely the strategic moment for the government to step in and share the risks through equity participation, capital injections or low-interest loans.
Through strategic equity stakes, matching investments or long-term, low-interest financing, the government can help companies with proven technical capabilities and growth potential acquire equipment, develop manufacturing processes and train talent. Such support would prevent temporary declines in orders from forcing businesses to abandon long-term investments.
Financing should reflect the semiconductor industry’s cycles, with appropriate loan tenures and repayment grace periods. Success should be measured by technological improvements, local supply chain development and the creation of highly skilled jobs. Funding must also come with clear performance requirements and exit mechanisms to ensure that public money supports business growth.
The government’s role is to give local companies the staying power to weather an industry downturn, so that they can secure higher-value orders when demand recovers.
If the government does not act proactively, foreign investors and state investment arms will fill this strategic gap. Over the past six months, industry professionals have frequently received approaches from foreign strategic investors, particularly those from Singapore, Japan and Indonesia.
These investors typically engage industry specialists through professional consulting firms to assess the underlying potential of precision machining and OSAT companies. They then move quickly to acquire stakes or inject capital through private funds or state investment arms, seeking substantial returns. At least one key regional player in this machining and OSAT arena, GVT, which is headquartered in Singapore and with key operations in Penang, Malaysia, has already been fully acquired by ASML’s machining Tier-1 supplier Aalberts NV, giving it more direct control over this strategically important part of the supply chain.
If the government continues to lag behind, Malaysia could keep attracting semiconductor investments while missing a critical opportunity to strengthen its domestic industrial capabilities.
Foreign investors are interested in more than factories and equipment. They also recognise the value of the process know-how, technical talent and customer networks that local companies have built over many years. As control over these core capabilities gradually changes hands, the room for local companies to pursue independent upgrading may also narrow.
The government must therefore translate its semiconductor strategy into concrete financing and industrial support measures without delay. It must help local companies overcome capital barriers, master high-value processes and strengthen their capacity to grow independently.
Malaysia’s ambition must extend beyond attracting more semiconductor factories. It must ensure that local companies own technology, create well-paid jobs and command greater bargaining power within global supply chains.
The AI-driven semiconductor boom is likely to continue, but the current capital expenditure cycle will not expand indefinitely. Investment is projected to peak around 2028, so the window for positioning Malaysian companies to capture this wave is already narrowing. Building technical capabilities, qualifying for customers and expanding production capacity all take time. The government must act now so that local companies are ready to secure higher-value orders while investment decisions are still being made. If Malaysia misses this round, it risks watching the semiconductor boom accelerate while its own companies are left behind at the station.
Ooi Tze Howe is a semiconductor professional and founder of HEYA Inc, a non-profit think tank that advocates for higher education reform and fiscal reform.