Malaysia’s faulty semiconductor industry calls for a repair

This column was first published on The Malaysianist, a weekly guide to understanding Malaysia’s current affairs that focuses on money and power. It was edited to reflect Tech in Asia’s editorial guidelines.

Malaysia’s most prized jewels have always included its semiconductor industry. This was the case even before foreign publications such as The Financial Times and The New York Times wrote about the country being a beneficiary of the protracted trade war between China and the US. 

Prime Minister Anwar Ibrahim’s government has also set up the National Semiconductor Strategic Task Force to help grow the island republic’s semiconductor ecosystem and draw in strategic investments. Tengku Zafrul Aziz, Malaysia’s minister of investment, trade, and industry, will chair the committee whose creation was driven by a focus on electrics and electronics, particularly electric vehicles. 

Photo credit: FOTOGRIN / Shutterstock

The semiconductor value chain is complex, but the industry is worth US$520 billion globally and powers everything from televisions to smartphones. As for Malaysia, the semiconductor sector contributes an estimated 25% of the country’s gross domestic product.

There are more than 200 companies, both local and foreign, across the country doing some kind of chip work. Malaysia even has a sole semiconductor firm in Kelantan by way of Japanese firm ROHM. Most companies, however, are based in Penang, particularly on the mainland. 

The country built its reputation on so-called back-end or lower-value jobs. Many of the companies in Malaysia make billions in revenue. But most of these players support larger foreign semiconductor firms.

See also: Malaysia gets in its own way on path to tech success

If Malaysia wants to truly focus on higher-value activities, the country has to consider a few things.

Starting line

If one’s start determines their end, then Malaysia’s beginnings may naturally cap how far the country advances along the value chain. 

Malaysia’s involvement in the sector stemmed from political and economic challenges. In the early 1970s, Penang faced rising unemployment after losing its free-port status. The local political party, Gerakan, which initially opposed the state government, later joined the national ruling coalition as part of an effort to build a broader political alliance following the country’s social unrest in 1969.

The year Gerakan switched political allegiances was the same year Penang’s semiconductor scene took off. Lim Chong Eu, who was Penang’s chief minister at the time, was able to push for the state’s free-trade zone status and go on a world tour with the backing of the federal government, seeking investors. 

Eight foreign companies including Intel, Robert Bosch, and Hitachi took up the call to set up operations in Penang.

The right foundation

Better policies

“Global competitiveness”