Malaysia aims for chip comeback as Intel, Infineon and more pile in

KULIM/PENANG, Malaysia — Ng Kok Tiong has been working in the semiconductor industry for 34 years and in all that time, the Kuala Lumpur native says, he has never seen the kind of activity in Malaysia that he is seeing now.

As evidence, Ng, a senior vice president at the top European chipmaker Infineon, pointed to a new phenomenon: daily traffic jams between Penang Island and Kulim, site of the country’s first-ever high-tech industrial park.

“Malaysia benefited quite a bit from this diversification of the supply chain,” said Ng, who is also the chairman of the Semiconductor Fabrication Association of Malaysia. “Traffic increased a lot because of so many factories coming. The government is now widening the road, and that will likely be complete by next year.”

Next to his office in Kulim, cranes and trucks are busy building a $7 billion facility that will eventually be Infineon’s — and the world’s — largest production site for silicon carbide chips, a type of power semiconductor used in electric cars, wind turbines and other heavy applications, as well as consumer electronics.

Malaysia has long been Infineon’s most important manufacturing hub in Asia, and the company now has more employees there than in its home base of Germany, according to Ng.

The country became an early leader in Asian chipmaking by attracting many foreign chipmakers back in the 1970s. It was even nicknamed “the Silicon Valley of the East,” but it lost ground to the likes of South Korea and Taiwan thanks to the rise of homegrown players Samsung Electronics and Taiwan Semiconductor Manufacturing Co. in the 1990s. Now Malaysia is hoping to make a comeback as the industry pushes to diversify production amid flaring U.S.-China tensions.

In addition to Infineon’s investment, Intel of the U.S. plans to pour $7 billion into Malaysia to turn the country into the company’s primary production base in Asia.

At the industrial park of Bayan Lepas in the southeast of Penang Island, about a 40-minute drive from Kulim, Intel is building its biggest site for advanced 3D chip packaging, an area emerging as the next battleground in the attempt to make ever-more-powerful chips.

“There is a saying that goes, ‘A rising tide lifts all boats,'” A.K. Chong, Intel’s vice president of manufacturing and supply chain, told Nikkei Asia. “When you have a new technology” introduced to a country, “you’re bringing in a lot of ecosystem suppliers. Like our advanced packaging — you need a new chemical solution and new equipment. So you expect a lot of these investments coming in. It’s like a chain effect.”

Inflows of foreign direct investment into Malaysia have reached record levels over the last few years, thanks in large part to global tech and chip companies. The country approved 71.4 billion ringgit ($15.25 billion) in FDI in the first quarter of 2023, already more than double the 32.4 billion ringgit recorded for all of 2019, before the unprecedented pandemic-driven chip crunch.

Malaysia is already a major hub for the final steps of the chipmaking process — it controls 13% of the global market for packaging, assembly and testing services — and is the sixth-biggest source of semiconductor exports, according to the government.

On the other hand, the country relies heavily on foreign chip players to sustain its industry. Intel, NXP, Infineon, Texas Instruments and Renesas have all had a presence in the country since the 1970s, while Malaysian chip packaging and testing service providers such as Inari Amertron, Unisem and Carsem play only a small part in the global market. The country has produced no major chip manufacturers like TSMC or Samsung, and it does not boast any top developers like Nvidia and Qualcomm.

And in 2020, chip suppliers in Malaysia suffered a monthslong lockdown due to COVID restrictions that created a bottleneck in the output of semiconductors.

But with the upheaval of the pandemic now in the past, Malaysia hopes foreign players will see its strengths — namely relatively stable geopolitics and little risk of earthquakes, typhoons or other natural disasters.

It seems many of them are. Jabil, Micron, Bosch, Western Digital and Lam Research are all expanding their manufacturing footprints in the area around Penang stretching from Kulim in the north to the Batu Wakan Industrial Park in the south. DHL Express is constructing several logistics centers in the area, after launching direct cargo flights five days a week between Penang and Hong Kong, a chip-trading hub close to mainland China, in mid-2021.

Timothy Archer, CEO of Lam, a leading U.S. chip equipment maker, told Nikkei Asia that Malaysia is one of “three major production hubs in Asia,” along with Taiwan and South Korea.

Intel’s Chong, who is also the company’s head for Malaysia, pointed to the country’s convenient location. “In terms of geography and logistics, we are at the center of Southeast Asia,” she said. “Also, our workers have good [English] language skills.”

Tien Wu, the CEO of ASE Tech Holding, the world’s largest provider of semiconductor packaging and testing services, said the company is expanding production in Malaysia to meet demand for diversified production bases. “Customers want us to have backup alternative sites for supply chain resilience purposes,” Wu said.

Scott Lin, president of Marketech International Corp., a leading chipmaking facility builder and equipment supplier to TSMC, ASML and Applied Materials, echoed that sentiment. “We are now finalizing a project to build new production sites soon in either Malaysia or Vietnam because of demands from clients,” Lin said. “No matter whether the cost is higher, that’s a trend we have to follow.”

Derek Taylor, head of strategic risk consulting on Asia at Marsh, a broker and risk adviser, told Nikkei Asia that Malaysia is keen to seize on the opportunity to expand its role in the electronics industry, though it will face competition to win investment.

“Malaysia is leveraging the track record of being a good place to do business, but it’s not alone,” Taylor said. “There’s competition [to attract investments] across Asia … like Thailand or India. It’s a very competitive space.

Given that the entire market is growing, he added, multiple countries could benefit from the broadening of “the geographic footprint of the semiconductor supply chain.”

But Malaysia specifically faces some challenges, Taylor added, pointing to a shortage of talent and limited access to renewable energy.

Infineon’s Ng said access to green energy is the top priority for chip suppliers considering new investments.

“The whole industry is talking to the government about increasing supplies of green energy. The government is fully aware,” he said. “If the government is not able to provide this, this might deter people from coming into Malaysia.”

Despite these local hurdles, however, Ng sees Malaysia and Southeast Asia as a whole playing a more prominent role in the semiconductor and electronics supply chain.

“Malaysia is already very big in chip packaging and testing, while Singapore has a huge ecosystem of front-end chip manufacturing. Combining, it’s a big hub,” said Ng, who also worked for many years in Singapore.

“I will say that ASEAN is a very attractive place for future growth for the semiconductors industry.”

Source: Nikkei Asia

Image: Freepik