Tech diplomacy: Forging the China-Malaysia semiconductor alliance

THE surge in global demand for semiconductors, due largely to developments in artificial intelligence (AI) and electric vehicles, has accelerated Malaysia’s cooperation with Chinese firms while luring a wide range of international investors to expand and upgrade its semiconductor ecosystem.

It is a delicate balancing act that provides economic opportunities while at the same time carrying certain geopolitical risks.

Central to Kuala Lumpur’s push in the industry is the National Semiconductor Strategy (NSS) launched in May last year to turn Malaysia into a higher value segment of semiconductor activities, such as integrated circuit fabrication and chip designs.

The NSS has thus far been promising, with RM120.5bil in manufacturing investments secured last year, of which RM 55.8bil was for the electrical and electronics sector, with the potential to generate 88,000 new high-skilled jobs.

These investments would ultimately move Malaysia up within the semiconductor value chain.

Malaysia’s industrial ecosystem is already shaping the semiconductor landscape. Penang, well-known for Malaysia’s electronics exports, has been credited with a significant 13% share of global assembly and testing and is identified as a key growth area for advanced and complex back-end processes.

In fact, local firms are already promoting Penang as the ideal location for upgrading towards high-tech packaging with higher technical expectations.

China plays a multifaceted role in Malaysia’s semiconductor transformation. Chinese companies and supply-chain firms are active investors and customers of Malaysian plants, providing the necessary capital and market access.

In addition, they are significant buyers shaping the output of Malaysian firms, especially in the areas of back-end testing and packaging.

This relationship has enabled Malaysian factories to increase factory utilisation, which is particularly important for new Malaysian facilities.

The economic gains are real and substantial, even if this means navigating the geopolitical complications arising from Washington’s scrutiny of technology flows to China.

With Chinese firms seeking to establish themselves across upstream and downstream supply chain segments, Malaysia stands to gain from this expansion.

As reported in the media, China’s President Xi Jinping has offered to provide technical assistance on rare-earth processing during a state visit to Kuala Lumpur in April this year.

Given that rare-earth processing is critical for producing components used in semiconductor supply chains, the assistance from China could significantly help Malaysia add value domestically, in addition to building Malaysia’s reputation in the semiconductor industry globally.

Malaysia is also actively seeking new and non-traditional markets to expand its semiconductor industry.

During a four-day working trip to China in early September, Prime Minister Datuk Seri Anwar Ibrahim expressed Malaysia’s eagerness to learn and explore potential collaborations with Chinese companies, citing China’s significant advancement in the field.

This move is not only strategic but also necessary. With China as a huge market with strong corporate players, it is a chance for Malaysia to cement its role as South-East Asia’s semiconductor hub.

Of course, partnerships alone are not enough; execution is key. Anwar’s emphasis on technical training signals that any technological advancement requires skilled talent to sustain growth and innovation for decades to come.

In this regard, leveraging China’s knowledge and skills in semiconductors and rare-earth processing while developing local expertise would move Malaysia up the value chain.

Of course, Malaysia’s ambition in the semiconductor space needs to address the elephant in the room, namely the mounting geopolitical pressures, specifically from the United States.

In July, US President Donald Trump's administration notified Malaysia of a 25% import tariff on Malaysian products (subsequently lowered to 19% the following month), a move that caused concern among Malaysian businesses.

Although semiconductor products flowing from Malaysia to the United States remain exempt from the tariff, an ongoing investigation by the US Department of Commerce at the time of this writing could mean potential imposition of tariffs.

Amid frequent fluctuations in US tariffs and increased scrutiny, Malaysian exporters are facing great uncertainties, including those in the semiconductor industry.

Compounding matters at the same time, Washington was also reportedly drafting stricter AI chip export controls.

These uncertainties create a delicate balancing act: Malaysia must maintain and improve its position as a trusted supplier and partner to China, while avoiding jeopardising relations with the United States.

The wider geopolitical context introduces another layer of strategic consideration. Malaysia joined the BRICS bloc (Brazil, Russia, India, China and South Africa) as a partner state in October last year, gaining access to new trade and political networks.

While partner state status may not carry the same entitlements as full membership, Malaysia’s move to join the BRICS signals its intention to move beyond traditional Western-dominated supply chains.

Ultimately, Malaysia’s vision for its semiconductor aspirations is inseparable from China’s collaboration.

Its status as a BRICS partner state further opens up potential avenues for strategic investments and multilateral economic cooperation, particularly China, with which Malaysia already has a long-standing relationship.

At a time when US tariffs and export controls pose uncertainties to the traditional markets of Malaysia, Beijing offers a clearer route forward in the form of capital, knowledge transfer and more crucially, access to one of the world’s largest semiconductor markets.

President Xi’s offer to support Malaysia’s rare-earth processing is more than symbolic, as it addresses the gap faced by Malaysia that could potentially unlock long-term competitiveness in the semiconductor supply chain.

With careful execution, Malaysia could leverage Chinese expertise while positioning itself as a trusted hub for both upstream and downstream semiconductor activities, potentially transforming the country into a regional semiconductor powerhouse.

Ong Fong Yew is an Assistant Professor at Heriot-Watt University Malaysia. The views expressed here are entirely the writer’s own.

The SEARCH Scholar Series is a social responsibility programme jointly organised by the South-East Asia Research Centre for Humanities (SEARCH) and Tunku Abdul Rahman University of Management and Technology (TAR UMT).