Amidst the escalating US-China conflict and a series of harsh sanctions, Penang, Malaysia has unexpectedly become an investment destination for numerous semiconductor companies worldwide, seeking contingency plans to mitigate business risks from political disruptions. This strategy is also called the “China + 1” approach.
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Unexpectedly Becoming the Winner in the “Semiconductor Industry War”
The US increasingly tightens the restrictions on China, especially in the semiconductor sector, with support from European and Asian allies to impose limitations on the sale of advanced chips and chip-manufacturing equipment to China. This inevitably affects the business landscape of semiconductor companies collaborating with China, including those involved in supplying and importing components. This sets the foundation for the birth of the “China +1” strategy, as semiconductor enterprises seek new territories to ensure continuous trade with China.
Marcel Wismer, CEO of Kemikon shared “Western semiconductor equipment manufacturers cannot sell their advanced equipment to China when all of these manufacturers import components from Chinese companies, and they said to their Chinese suppliers that: ‘If you don’t leave [China], we have to find new suppliers.'” Consequently, Chinese companies are compelled to relocate or expand to Southeast Asia regions to avoid business disruptions. Penang, Malaysia is among the chosen destinations.
Foreign investment flows into Penang (Source: FT)
Thanks to the China+1 strategy, investment activities in Penang, Malaysia, are booming as the state attracted RM 60.1 billion (USD 12.8 billion) in FDI in 2023, surpassing the total investment received from 2013 to 2020 combined.
In this “race”, it’s not only Chinese companies seeking new havens but also Japanese, South Korean, and Western companies. Fengshi Metal Technology, a semiconductor equipment manufacturing company based in Shenzhen, China, shifted its investment focus to Malaysia, with personnel costs exceeding 30% compared to the market to recruit talent.
Fengshi is just among the many semiconductor players setting up or expanding their presence in Penang. Other semiconductor giants’ names include Micron and Intel from the US, AMS Osram and Infineon from Europe.
According to Invest Penang, a non-profit organization of the state government, there are currently 55 Chinese companies in Penang engaged mainly in semiconductor-related manufacturing. This number was only 16 before the US tightened its restriction policy.
Reasons for Malaysia to be the Chosen one
Theo bà Loo Lee Lian, giám đốc điều hành của Invest Penang, kể từ khi Mỹ bắt đầu áp đặt các chính sách hạn chế thương mại đối với Trung Quốc dưới thời chính quyền Donald Trump, và đặc biệt là kể từ khi các hạn chế được thắt chặt bởi Tổng thống Joe Biden, Penang bắt đầu nhận thấy làn sóng đầu tư từ các tập đoàn Trung Quốc đại lục giống Fengshi đổ bộ sang Penang rất nhiều.
According to Loo Lee Lian, CEO of Invest Penang, since the US began imposing trade restrictions on China under the Donald Trump administration, and particularly since the restrictions were tightened under President Joe Biden, Penang has seen a significant influx of investment from mainland Chinese corporations like Fengshi.
Malaysia has a 50-year history of handling the “back end” of the semiconductor supply chain, including packaging, assembly, and chip testing. Today, they continue to aspire to lead in the global “millions dollar” semiconductor industry, including higher-value activities like wafer fabrication and integrated circuit design.
Malaysian Prime Minister Anwar Ibrahim
Prime Minister Anwar Ibrahim of Malaysia once shared in an interview with the Financial Times that focusing on semiconductor development and investing in the workforce for this manufacturing industry is among the “key objectives” in Malaysia’s economic recovery strategy. Therefore, a series of policies to promote and attract FDI will undoubtedly be put forth by the Penang state government to attract semiconductor companies worldwide, creating a huge growth opportunity for Penang.
Hidden risks behind Malaysia’s “Victory”
According to Loo Lee Lian, the organization had to be “more selective” in choosing semiconductor firms to enter Malaysia due to the influx of investment bringing some hidden risks, including:
- Severe talent shortage and absence of a domestic semiconductor “champion” capable of attracting other partners. According to Zafrul, the Trade Minister of Malaysia, only 5,000 engineering graduates annually, and many of them move to Singapore for higher-paying occupations. Meanwhile, the semiconductor boom in Malaysia demands 50,000 high-quality personnel annually.
- Engineers’ salaries in Malaysia are lower compared to most other technology sectors, especially for fresh graduates with little experience. This is also why engineers in Malaysia tend to move elsewhere for work. Semiconductor industry experts also argue that Malaysia still lacks the necessary expertise to become a crucial part of the global supply chain.
The rapid increase in real estate prices in Penang, according to Knight Frank’s research
- Social imbalances: Local investment boom affects traffic and real estate situations. Industrial land prices have risen from around RM 50/m2 to RM 85/m2. Penang’s residential real estate price growth in the first half of 2023 ranked second only to the expensive city-state of Singapore. Additionally, traffic congestion occurs frequently due to sudden population density increases and the construction of factories and industries.
In addition to the mentioned emerging issues, industry leaders also express concerns about Malaysia’s situation. As the United States is Malaysia’s largest source of foreign direct investment and a significant actor in the US-China semiconductor conflict, the US may impose additional constrain policy on China at any time. This could result in restrictions on products and equipment manufactured in Malaysia from being exported to China amid the wave of new Chinese companies.
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