Should Malaysia join the US chip alliance?

THE United States-led global semiconductor alliance is growing in size and Malaysia, as the world’s sixth-largest chip exporter, should consider lobbying to join.

It would be a timely move, aligning with Malaysia’s ambition to rise up the semiconductor value chain by manufacturing higher-value chips and expanding its footprint in chip design.

On Sept 9, India became the eighth member of the alliance initiated by Washington, months after the world’s most populous nation announced its intention to become one of the top five chip manufacturers by 2029.

For years, Indian engineers have worked on designing chips for global companies. In fact, Intel Corp’s second-largest chip design centre is located in India.

India now aims to become a giant in the semiconductor assembly, testing and packaging (ATP) segment, which for decades has been Malaysia’s strong play. Malaysia commands 13% of the global market for chip ATP services.

In addition to India, three Asean countries – Indonesia, Vietnam and the Philippines – are already part of the alliance. The remaining four members are Costa Rica, Kenya, Mexico and Panama.

The semiconductor alliance enables members to benefit from US knowledge transfer, explore new business opportunities and further integrate into the global supply chain.

It also allows members to benefit from the International Technology Security and Innovation (ITSI) Fund, established under the CHIPS and Science Act 2022.

The ITSI Fund provides US$500mil to the US State Department – US$100mil per year over five years starting in fiscal year 2023 – to support the development and adoption of secure and trustworthy telecommunications networks, and ensure semiconductor supply chain security and diversification.

For Vietnam, the ITSI Fund was launched earlier this week on Sept 11, partly to help train local workforce in the ATP landscape.

Malaysia’s semiconductor journey, which began in the 1970s when Tun Dr Lim Chong Eu brought in the “Eight Samurai” – the first batch of multinational corporations including Intel – is now at a critical point in advancing to the next level of growth.

As more countries focus on building their semiconductor expertise, especially in the ATP segment, Malaysia will surely face increased competition going forward.

To stay relevant in the global chip-making business, the government is already driving several initiatives including the establishment of a semiconductor integrated circuit design park in Selangor, which was launched in August.

However, more can be done, such as potentially joining the US-led global semiconductor alliance.

Malaysia needs the technical and technological expertise and support to pursue higher-value chip-making, which the alliance can provide. Membership in the alliance could also attract more American investments into the country.

However, there are concerns: Would Malaysia be seen as anti-China by joining the alliance? Would stronger ties with the US semiconductor industry derail Malaysia’s chip exports to China?

A membership in the Washington-led semiconductor alliance does not mean Malaysia is distancing itself from China, its largest trading partner.

Indonesia and Vietnam, which are part of the alliance, continue to have a cordial relationship with China. The communist state is a key investor in both nations.

One can equate Malaysia’s potential participation in the semiconductor alliance to its bid to join the BRICS bloc.

Does a BRICS membership mean Malaysia is moving away from the US-led Western camp in favour of closer ties with China and Russia? Certainly not.

In fact, Malaysia’s participation in the semiconductor alliance could present an opportunity for the country to reaffirm its neutral stance in global diplomacy, especially after the BRICS bid and the prime minister’s call for de-dollarisation.

The US State Department, on its website, says that the CHIPS Act 2022 enables strategic US investments in critical sectors in order to reduce risks and bolster global economic security.

“The ultimate goal is to bring new trusted information and communications technology vendors and semiconductor production capacity into the global market, in ways that will directly benefit the United States as well as our allies and partners.”

The intensifying global chip-making race has made it more pressing for Malaysian companies in the semiconductor space to bolster their research and development (R&D) efforts.

For years, a persistent issue in Malaysia has been local companies not investing enough in R&D. In 2020, the gross expenditure on R&D stood at a low 0.95% to the gross domestic product, highlighting the need for greater investment in this area.

It is also high time for Malaysian players to expand their operations internationally.

Having a physical presence in foreign markets, such as a building a factory in India or Vietnam, could allow the Malaysian semiconductor firms to ride on the respective governments’ incentives to boost the ATP segment.

At the same time, the companies’ existing operations in Malaysia could shift towards higher-value semiconductor ventures, positioning the country as a leader on the global platform.

The strategic realignment of the Malaysian semiconductor industry will require strong government support, including incentives.

Vietnam, for example, has provided substantial corporate income tax incentives for semiconductor R&D and production, including a four-year tax exemption, a 50% tax reduction for nine subsequent years, and a preferential tax rate of 10% for 15 years from the licensing date.

To remain competitive, Malaysia launched the National Semiconductor Strategy (NSS) in May this year, offering incentives to foreign investors and planning to train 60,000 Malaysian engineers to meet industry demand.

The success of the NSS will depend on an efficient rollout and the government’s flexible approach in responding to the needs of industry players.

Joining the US chip alliance will accelerate Malaysia’s plan to transform into a global powerhouse in the semiconductor industry over the next decade.