Chipmakers looking for ‘China Plus 1’ find Malaysia
Construction cranes still surround the brand new factory at Kulim Industrial Park in Malaysia. But within that, legions of workers hired by Austrian tech giant AT&S are already gearing up to produce at full capacity by the end of the year.
Equipped with coveralls from head to toe, with oversized goggles and a hard hat, they are reminiscent of the worker bees in the movie ‘Minions’, but color coded by function: blue for maintenance. Green for sellers. Pink for janitors. White for operators.
AT&S is just one of many European and American companies that have recently decided to move to Malaysia or expand their operations. electrical and electronics production mecca.
The American chip giant Intel and the German company Infineon are each investing $7 billion. Nvidia, the world’s largest maker of chips that power artificial intelligence, is teaming up with the country’s utility conglomerate to develop a $4.3 billion artificial intelligence cloud and supercomputing center. Texas Instruments, Ericsson, Bosch and Lam Research are all expanding in Malaysia.
The boom is a testament to the extent to which geopolitical friction and competition are reshaping the world’s economic landscape and driving multibillion-dollar investment decisions. As the rivalry between the United States and China over high technology simmers and trade restrictions mount, companies – especially those in crucial sectors such as semiconductors and electric vehicles – are trying to strengthen their supply chains and manufacturing capabilities.
AT&S had production sites in Austria, India, South Korea and China – its largest factory – when it started looking for a new location.
“It was clear that after 20 years of investing in China, we needed to diversify our footprint,” said Andreas Gerstenmayer, CEO of AT&S. The company produces high-quality printed circuit boards and substrates, which serve as the basis for advanced electronic components that power artificial intelligence and supercomputers.
The search on the company’s site began in early 2020, just as warnings began to spread about a dangerous new coronavirus in China. AT&S scouted 30 different countries on three continents before settling on Malaysia.
Southeast Asia’s strategic position in the South China Sea and long-standing economic ties with China and the United States make the region an attractive place to settle. Nations like Thailand And VietnamAT&S’s second choice, are also aggressively trying to expand semiconductor businesses, offering tax breaks and other enticements.
But Malaysia has the advantage of a head start.
The country has been riding the technology wave since the 1970s, when it energetically courted some of the world’s electrical and electronic superstars, such as Intel and Litronix (now Osram, with headquarters in Austria and Germany). It created a free trade zone on Penang Island, offered tax exemptions and built industrial parks, warehouses and roads. Cheap labor was an added attraction, as was the large English-speaking population and stable government.
Malaysia’s history in semiconductor manufacturing was one of the main draws, Mr Gerstenmayer said.
“They are well aware of the needs of the semiconductor industry,” he said. “And they have a well-developed ecosystem in the universities, in education, the workforce, the supply chain” and more. Government support was another attraction, he said.
Tengku Zafrul Aziz, Malaysia’s Minister of Investment, Trade and Industry, said foreign investment started to pick up in 2019, driven by the increasing use of semiconductors in everything from cars to medical equipment. “There are 5,000 chips in one car,” he said.
After the Covid-19 pandemic exposed devastating weaknesses in global supply chains, interest in Malaysia as an additional source soared.
That trend accelerated as great power conflicts bubbled up.
Both China and the United States have moved to forge their own reliable semiconductor supply chains, in addition to supporting other crucial sectors such as renewable energy and electric vehicles.
“American and European companies and even Chinese companies wanted to diversify from China,” said Mr Zafrul Aziz. China is also establishing production facilities outside the mainland, partly, some say, to avoid U.S. sanctions. It is a ‘China plus one’ strategy.
Concerns about Taiwan, the world’s largest semiconductor producer, have further fueled investment in Malaysia, he said. The island is a source of increasing friction between China, which insists Taiwan is part of its territory, and the United States, which politically supports the country.
Malaysia is already the sixth largest exporter of semiconductors in the world and packs 23 percent of all US chips.
“It’s fantastic that a country of this size is having such a major impact on the global semiconductor market,” said David Lacey, director of advanced development and services at Osram, one of the world’s largest lighting companies.
Seated at a large conference table at the Sciences University of Malaysia in Penang, he quickly pointed to the technology in the room. “There’s a TV, there’s lights, there’s a projector, there’s phones,” he said. “You can be pretty sure there is a Malaysian component somewhere.”
The proximity of so many technology companies also exerts an attraction. Penang and Kulim, which are connected by two long, winding bridges, are home to more than 300 companies.
“Everything is here,” said Eric Chan, vice president and general manager at Intel in Malaysia. After half a century, that network and infrastructure cannot simply be duplicated.
Mr Chan also mentioned the government’s crucial cooperation during the pandemic in keeping factories open.
Foreign direct investments were almost $40 billion last year, more than double the total generated in 2019.
Mario Lorenz, managing director in Malaysia of German logistics company DHL Supply Chain, said: “Most of our major investments have taken place in the last two years.”
During that time, the semiconductor sector has emerged as a dominant force in the company’s operations in Malaysia. “We have followed the trend,” he says.
DHL Supply Chain’s newest global distribution center, Penang Logistics Hub No. 4, features custom orange and blue shelves specifically designed to accommodate the heavy, oversized crates used by a semiconductor company.
Four new supply chain facilities are in the works in Malaysia.
Malaysia’s track record lies primarily in the back end of the semiconductor supply chain – which also includes packaging, assembling and testing of components – activities traditionally considered less complex and of lower value.
But now the industry’s focus on packing smaller chips – chiplets – more closely together to increase computing power is increasing the value and technical complexity of these activities.
Intel is building its first overseas facility for advanced 3D chip packaging in Malaysia. When you bring in cutting-edge technology, there’s a “ripple effect,” says AK Chong, Intel’s vice president and general manager. in Malaysia. This development will attract dozens of new businesses and help improve the entire skillset of the workforce.
While such developments require a massive expansion of utilities such as green energy, sanitation, water and 5G digital infrastructure, several business leaders said they had confidence in the Malaysian government’s commitment.
“They have projects to provide green energy by building large solar farms,” said AT&S’s Mr. Gerstenmayer. “Malaysia is well on its way to becoming a global hotspot in the electronics industry.”