Thinking Strategically about Malaysia’s Semiconductor Industry

We are in a new era which will see semiconductors as both the new oil and the new source of global conflict.

Intel founder, the late Gordon Moore, predicted in 1965 that the number of components that could be fit on each chip would double every two years as engineers learn to fabricate ever smaller transistors. Known as “Moore’s Law”, semiconductors have witnessed exponential growth over the past half a century.

Today, everything that requires computing power would have chips fitted on it, be it a weapon or just a watch or a car. Even in internal combustion engine cars, the amount of chips being used now has doubled compared to a decade ago, not to mention the chips that are fitted into electric vehicles. And we have not really entered the artificial intelligence era yet, which will see even greater use of chips.

Amid all this, Malaysia is right in the middle of the global chip making supply chain.

The electrical and electronics (E&E) sector comprises about 7% of Malaysia’s gross domestic product (GDP), with semiconductor devices and electronic integrated circuits (ICs) alone making up a quarter of total exports and two-thirds of E&E exports out of Malaysia, totalling RM387 billion in export value in 2022.

As the world’s sixth largest semiconductor exporter, Malaysia holds 7% of global market share in the semiconductor industry and contributes to 23% of American semiconductor trade as of 2022, a fact that is not widely acknowledged in the US. That being said, when I visited Detroit in May 2023, I did hear it myself from US Secretary of Commerce Gina Raimando that when factories in Malaysia were shut down during the COVID-19 lockdowns, Detroit’s automotive industry had to cease operating too.  

My four observations on Malaysia’s semiconductor industry are as follows.

First, scaling higher and engaging in more complexity

Making a microchip is an extensive process with several stages along the whole value chain, starting from the front-end through to the back-end. The front-end process refers to the manufacturing of silicon discs known as wafers, while the back-end process consists of assembly, packaging and testing.

Completing the value chain are electronics manufacturing services (EMS). Ultimately, the aforementioned electronic components form the brain of consumer electronics and other products. EMS providers step in as contract manufacturers to assemble or manufacture electronic products, often on behalf of multinational companies as original equipment manufacturers.

Malaysia welcomes more investments into both the back-end and the front-end parts of the semiconductor value chain under its industrial planning. To begin with, the country has an established presence in chip assembly, packaging and testing as well as EMS, producing 13% of global back-end semiconductor output.

At the same time, the newly launched NIMP 2030 aspires to see more front-end activities, such as IC design, wafer fabrication, semiconductor machinery and equipment manufacturing. Recent announcements of investment by Intel (US$7 billion), Infineon (US$5.5 billion) and Texas Instruments (US$3.1 billion) show that Malaysia is well positioned to scale higher and engage in more complex activities, which is central to NIMP 2030.

The back-end manufacturing of semiconductors remains highly relevant as advanced packaging is increasingly a sophisticated trade, and the back-end manufacturing helps Malaysia occupy an indispensable part in the global supply chain. Local champions such as Inari, Globetronics and Carsem are notable in this area.

Some like to claim that when it comes to trade, it does not matter whether Malaysia sells potato chips or microchips, as long as its absolute GDP, inward FDI and export figures are strong. That is far from the truth. Microchips have the potential to generate far greater value addition, with a stronger multiplier effect through a boost in productivity and innovation, which is why semiconductors and the E&E sector are an important focus area in the government’s plans, such as the NIMP 2030 and the 12th Malaysia Plan.

Second, precision engineering industry is the unsung hero

The global semiconductor industry in Malaysia has also created a number of successful Malaysian companies specialising in automation, such as Greatech, Pentamaster and Walta, just to name a few. Often being large local companies (LLCs) with well-established links to multinational corporations (MNCs), these manufacturers tend to have a major stake in the precision engineering or precision tooling industry. However, because most of them produce under non-disclosure agreements (NDAs), not many people know their collective capabilities.

Unfortunately, many Malaysian companies, especially small and medium enterprises (SMEs), are still dependent on unskilled foreign labour to make things by hand, and are reluctant to automate, fearing that machines from Germany or Japan are too expensive. Many do not believe that Malaysia has the capability to produce automated machines or precision tools at the level of Germany or Japan.

In reality, Malaysia has manufacturers who can make sophisticated automation machines and, importantly, they form the critical and highly resilient Malaysian supply chain for the semiconductor industry. To give an example, the Penang Automation Cluster – a joint venture between ViTrox, Pentamaster and Walta – designs and manufactures computer numerical controls and other high-precision tools for E&E players.

The precision engineering industry deserves more attention than it currently receives.

Third, the semiconductor industry should lead in creating well-paying jobs for Malaysians

The extremely competitive semiconductor industry is conscious of costs from its very beginning, as Chris Miller explained in Chip War. And it was this consciousness of costs that brought the semiconductor industry first to Hong Kong in the early 1960s and subsequently to Singapore, Taiwan and Penang.

As Miller pointed out:

“[Hong Kong]’s 25-cent hourly wages were only a tenth of American wages but were among the highest in Asia. In the mid-1960s, Taiwanese workers made 19 cents an hour, Malaysians 15 cents, Singaporeans 11 cents, and South Koreans only a dime.”

This paragraph shows that once upon a time, wages in Malaysia were higher than in Singapore.

The semiconductor industry often complains that there is not enough talent in Malaysia. But it is important to note that ultimately Malaysia has a pay problem. It is just that many of Malaysia’s skilled workers, such as engineers and technicians, have taken up better paying jobs in Singapore.

Low pay is a systemic issue that perpetuates a vicious cycle of inadequate skilled job creation, particularly in sectors concentrating on manufacturing. Indeed, Malaysia is a rare case in which manufacturing median wage (RM2,205) is lower than that of general median wage (RM2,424) as of 2022.

While there is inadequate nationwide data on median salaries in specific occupations, engineers are not immune from this problem. A 2022 report by the Board of Engineers Malaysia found that over a third of recent engineering graduates had a starting salary below RM2,000 a month as of 2021 while 90% of them earned less than RM3,000 per month. For a single household in Kuala Lumpur, this is scarcely enough to get by, as highlighted in a 2018 study by Bank Negara Malaysia on living wages.

An unintended consequence is that students are discouraged from taking up full-time education, and by extension employment, in the science, technology, engineering and mathematics (STEM) fields. Malaysia’s engineer-to-population ratio stands at 1:170 as of late-2022, below the aspirational target of 1:100. Those who decide to pursue STEM often end up taking up other forms of employment, such as gig work, or choose to work in Singapore, where they can expect to make around $$2,800-3,400 (about RM9,500-11,500) per month as an entry-level engineer.

Admittedly, this is a chicken-and-egg problem, and Malaysia needs to do more in STEM education (and technical and vocational training) and to prepare a more robust talent pipeline in schools and universities. Nevertheless, the most crucial mindset shift it needs now is to acknowledge that Malaysia needs to pay its skilled workers better to address long-standing issues ranging from brain drain to underemployment.

Based on interactions with my constituents in Iskandar Puteri and Perling in the southern state of Johor, many of whom have taken up jobs across the border in Singapore, a simple rule of thumb is that paying Malaysians up to two-thirds of Singapore wages would be sufficient to entice many to come back, especially those who have families in Malaysia.

The NIMP 2030 aspires to see the manufacturing median wage double from RM2,205 as of 2022, to RM4,510 by 2030. With the aforementioned efforts to move up the value chain in front-end and back-end semiconductor activities, we can be even more ambitious and aim for engineering wages in the E&E sector to rise to RM5,000-6,000 for fresh graduates in MNCs or LLCs. It is hoped that with a paradigm shift, the semiconductor industry will be able to take the lead in helping Malaysians get better jobs and better pay.

Fourth, “G to G” collaboration on semiconductors

Until a few years ago, most governments around the world saw the semiconductor industry first and foremost as a private venture by investors.

Within the Malaysian government’s structure, the semiconductor industry was under the de facto domain of the Malaysian Investment Development Authority (MIDA), a government agency responsible for investment promotion, without much policy guidance from its parent ministry, the Ministry of Investment, Trade and Industry (MITI).

In the last two years, as a result of requests from industries and due to the intense strategic competition over semiconductors and AI, many governments are belatedly building the policy infrastructure and capabilities to coordinate policies and shape outcomes. The CHIPS Act and bans on the export of advanced chips by the US are the most significant examples.

In 2022, Malaysia and the US signed a Memorandum of Cooperation on Semiconductor Supply Chain Resilience. A signal of the growing importance of bilateral semiconductor trade between Malaysia and the US, the memorandum provides “guiding principles” to strengthen collaboration, transparency and trust between the two governments.

Even more recently in November 2023, the Dutch Prime Minister Mark Rutte visited Malaysia and Vietnam with 25 businesses, almost all of which were from the semiconductor and tech sectors. In his bilateral meeting with Prime Minister Anwar, it was decided that a G-to-G dialogue on semiconductors would be set up between Malaysia and the Netherlands.

Beyond just treating the semiconductor industry as an investment, MITI and the government of Malaysia should gradually build up stronger policy leadership in this realm.

I hope that with stronger collaboration among key stakeholders, including industry players, the Malaysian Semiconductor Industry Association (MSIA), policy thinkers and the government, Malaysia will be able to think more strategically about the semiconductor industry, so that we can be at the forefront of the most intense, interesting and important industry of our time.

This article is adapted from my keynote speech delivered at the National E&E Forum 2023 organised by Malaysian Semiconductors Industry Association (MSIA) on 6 November 2023.

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