Something remarkable is happening in Malaysia. Technology giants are expanding their operations in the country even while new competitors arrive daily. Intel and Infineon are each investing $7 billion in Malaysia.
Meanwhile, Nvidia is set to build an AI data center worth $4.3 billion. And Texas Instruments has allocated $3.1 billion for two new semiconductor assembly facilities. But this is only the tip of the iceberg. The influx of foreign capital includes the likes of Germany's Bosch, Austria's AT&S, Sweden's Ericsson, South Korea's Simtek, and major state-backed Chinese manufacturers such as Fengshi Metal Technologynology. For Malaysia, business is booming and the government wants to use that momentum to move up in the global value chain.
It wants to become a high-tech economy like Japan, Taiwan or South Korea. But things are rarely ever that easy. Before Malaysia can call itself rich, it must navigate through a maze of complications. Some of these complications are by its own doing, but some are beyond its control.
Like its geographic position sitting smack in the middle of an American-Chinese trade war. For Malaysia, the pressure is on. The government needs at least $107 billion in investments to become the next global semiconductor hub. If it fails, it will become a hostage to regional and global rifts.
The only way to escape that fate is to gather enough economic clout at home. And so, Malaysia must go big or go under. Today's sponsor is Odoo. It's the ultimate all-in-one management software that lets the user spend less time on tedious administrative tasks and more time on what truly matters.
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Check out Odoo today by hitting the link in the description and supporting me by supporting Odoo. Renowned for its stunning landscape and lush biodiversity, Malaysia has long sought to shift from low-end manufacturing to high-value industries. Like South Korea, Malaysia had trouble growing its economy.
The two struggled in the 1960s and the decades after. They started with roughly the same GDP per capita, and while there was economic growth, wages rose too quickly, which then made the respective industries less competitive for cheap labor. This phenomenon, called the middle income trap, keeps nations in a position where they are neither truly wealthy nor entirely poor.
In 1985, South Korea finally broke through the middle income trap. Its investments in innovation and improved productivity paid off, and its GDP per capita swiftly climbed to a high income status. Malaysia however, faced a different path.
It was unable to develop innovative industries in time and remained trapped. Now, Malaysia is looking to make things right as Tensions simmer between Beijing and Washington tech giants are pursuing an offshoring insurance policy Known as China plus one in pursuit of greater prosperity Profit and security companies are hedging their bets by expanding into the surrounding economies. At the center of the storm is a race for dominance in artificial intelligence, advanced robotics and green technology development. A $617 billion global industry that is growing with each passing year. Malaysia is uniquely placed in this tech race, with its location, robust infrastructure, well-established semiconductor industry and educated English-speaking workforce, Kuala Lumpur has an edge over the regional competition to become the next global chip giant.
In addition, Malaysia already holds a 13% global market share in the low-end field of assembly, testing and packing of semiconductors, a factor that accounts for 25% of the country's GDP. To turn Malaysia into the next Taiwan, local firms such as Siltera and Opstar Technologynology are looking to leverage the influx of foreign talent to expand into high-end activities such as wafer fabrication and integrated circuit design. To this end, Kuala Lumpur has launched the New Industrial Master Plan 2030, an ambitious set of policies aiming to boost domestic production and settle itself as the next global hub for semiconductor manufacturing. There is seldom a reward without great risk. Malaysia needs to go big or go home.
Yet, large-scale plans have a mixed history of success in the country. Beginning in the 1970s, Kuala Lumpur embarked on a radical economic restructuring effort known as the New Economic Policy. the stated aim was to redistribute wealth within the country while transitioning away from the export of raw materials such as rubber and tin. Following decolonization, Kuala Lumpur emerged with a strong drive to reinvent itself.
However, ethnically defined equalities resulted in severe unrest in the decades prior resulting in the expulsion of ethnic Chinese from Singapore in 1964 which at the time was part of Malaysia. So for the new Malaysian state to survive, things had to change and fast. Local lawmakers stepped up and a decade later Malaysia succeeded in industrializing its landscape. A new homegrown semiconductor sector had developed and local industries had made a name for themselves. However, the country was still reliant on low-cost manufacturing.
So To speed up the transition to a high-income economy, the government poured massive sums of money to accelerate the development of high-tech industries. Unfortunately, a crucial component was left out. Research and development was completely neglected in the process.
This mistake sealed Malaysia's fate. In addition, the government's wealth redistribution policy inadvertently led to a brain drain. Thousands of non-ethnic Malays moved abroad, never to set foot in Malaysia again. By the 1980s, economic growth slowed considerably and, with the Asian financial crisis of 1997, Malaysia entrenched itself even deeper in the middle income trap.
Yet Kuala Lumpur had an ace up its sleeve. As part of its post-colonial overhaul, Malaysia had also embarked on a 50-year-long endeavour to transform its coastal state of Penang into the Silicon Valley of the East. Beginning its existence as a small fishing village, Penang served as one of British Malaya's primary naval bases throughout the 19th century. Upon independence, its strategic location took on a more geoeconomic nature, with the Bayan La Pass Free Industrial Zone welcoming conglomerates such as Bosch, Motorola, Dell, Intel and Hewlett-Packard to assist in its transformation. By the 1990s, the results were clear.
Penang had reinvented itself from a post-colonial backwater to one of Malaysia's biggest success stories. Today, the region is home to over 350 multinational corporations, amounting to an estimated 5% of global semiconductor exports. As such, despite its small size, Penang punches well above its weight, accounting for almost 8% of Malaysia's economic output while measuring just over 1,000 square kilometers. Eventually, however, However, Penang's success became its downfall.
Malaysian lawmakers in the capital felt predisposed and left behind, so they spent the last two decades reinvigorating Kuala Lumpur. Resources, talent and wealth were actively diverted from the provinces into the capital. It needn't have been this way, but Malaysia scored one of the biggest own goals in history.
Not surprisingly, Penang declined in importance, and Korea's Samsung and Taiwan's TSMC relegated Malaysia's homegrown manufacturing to the sidelines by the turn of the millennium. Now, as of 2024, Malaysia is getting a second chance at prosperity. This time, the government wants to get it right, so it is committing significant resources to bolster its industrial sector. Reviving Penang plays a big role in that plan.
The construction of a 1 million square foot industrial park in Penang has already drawn interest from new names such as Jabil, Western Digital and LAM Research. Further inland in the Kulim district, Germany's Infineon plans to invest $5.4 billion to construct the world's largest production site for silicon carbide chips. which is a vital component in the manufacturing of electric vehicles. They are joined by over 50 Chinese conglomerates that are moving south in an attempt to loop around Washington's sanctions on Chinese manufacturing.
Regardless of state allegiances, private logistics giants such as DHL Express are lining up to form the necessary supply chains between the industrial manufacturing zones of southern China and Malaysia's Penang. Further south are the port cities of Klang and Tanjung Pelepas. By capacity, these sites already number among the 15 largest global ports, and the government has a special purpose for them. The plan is to transform the cities into industrial hubs where incoming chips can be built, tested, and shipped to consumers across the globe.
Still nearby in Seremban and Malacca, The government looks to develop industrial hubs where semiconductor giants such as Nexperia and Infineon can settle down. Likewise, across the sea in Borneo's Kuching city, Japanese firms such as Tayo Yuden are expanding their operations. A hive of high-tech activity is spreading across the country.
For Malaysia, the best is yet to come. Southeast Asia is in an economic boom. Technology giants that are looking to offshore their operations away from China have plenty of room to settle elsewhere.
The ASEAN market in particular is well suited for high-tech industries, with Singapore, Thailand and Vietnam posing the greatest competition to Malaysia's semiconductor hub ambitions. However, even within Malaysia itself, things are not what they seem. There are sincere shortcomings that prevent some companies from setting up camp. For one, Malaysia is seeing high levels of emigration.
People are moving out and looking for better employment opportunities abroad. The result is a nationwide brain drain. Malaysia now has an estimated labour shortage of 1.2 million workers, of which half are from engineering and manufacturing. In a country that produces only 5,000 engineering graduates per year, such numbers don't bode well. The government has a plan to train an additional 60,000 high-skilled local semiconductor engineers, but it won't work if Malaysian engineers earn just 90% of the median national wage.
The paycheck is just too little, hence the brain drain. Another domestic problem for Malaysia is housing. The influx of foreign companies into Penang, for instance, has driven up housing prices considerably. The local authorities have tightened rent controls, but it's only a temporary fix.
In Malaysia's federal system, regional dynamics often snowball into larger issues for the ruling coalition. Meanwhile, neighboring and English-speaking Singapore has welcomed $4 billion worth of investment from big names in the industry. such as Global Foundry SA and TSMC affiliate Vanguard International Semiconductor. They join Applied Materials, which is expanding its presence in the country through the construction of a $450 million factory in the city-state. With such investment, Singapore hopes to achieve a 50% growth in the manufacturing of advanced electronics, semiconductors, and robotics by 2030. Singapore's edge over Malaysia is its proximity and higher pay, which stands at $1,495 per month compared to just $469 per month in Malaysia.
That's a $1000 difference for the same labor. No wonder, in the first quarter of 2024, the number of Malaysians emigrating to Singapore jumped by 62% when compared to the previous year. Another advantage Singapore has is its consolidated system of governance.
In the last four years, Malaysia has seen four different prime ministers. Such rapid changes, often due to political scandals, severely undermine cohesive policymaking at the executive branch. Multi-billion dollar companies looking to do business prefer political stability above all else.
Malaysia offers too little of that. An example of this is the debate surrounding the introduction of a goods and services tax. In April 2015, Then, Prime Minister Najib Razak introduced the tax, only for it to be repealed in a dramatic reversal when Mahathir Mohamad came to power in May 2018. Since then, current Prime Minister Anwar Ibrahim has once again advocated introducing a goods and services tax on multiple occasions.
This back and forth legislative is not a landscape tech giants look to do business in. Singapore doesn't have such administrative instability. It's almost unheard of.
Singapore isn't the only competition though. Thailand, for instance, offers robust infrastructure, a skilled workforce, geopolitical neutrality, and generous tax privileges for investors. The perks have caught the interest of Sony Group, which has already invested almost $600 million in 17 projects across the country. Likewise, Vietnam has seen interest from major developers such as Samsung, who invested $3.3 billion in the country to bolster semiconductor production.
With proximity to China's southern industrial zone and a more stable political and demographic situation, Vietnam is shaping up to be yet another potential challenger in the race to become the next global chip giant. That being said. Malaysia still has cards up its sleeve. Its proximity to its competitors could play in its favor.
For instance, in the case of Singapore, Malaysia could negotiate for cooperation rather than competition. The two could act as extensions of one another. Malaysian-based firms could assemble, test, and package chips that are designed and manufactured in Singapore. Yet, this industrial symbiosis would require the Malaysian leadership to dial down its ambition to become the next global chip giant.
In practical terms, that would mean embattled Malaysian firms such as Unisem, Karsem and Inari Amartron would be left out in the cold. In exchange, however, Malaysia would retain its regional dominance. Even so, Malaysia would have to tread carefully at all times. While business follows profit, Geopolitics sets the rules. Washington has already voiced its disapproval of Prime Minister Anwar Ibrahim's cooperation with Chinese firms and there are fears that the sanctions regime may expand to include Malaysia.
For instance, Jetronix, a Malaysian firm, has already come under fire for allegedly supplying strategic electronic components to Russia in violation of the sanctions. Should Washington feel inclined they can end Malaysia's semiconductor boom with the stroke of a pen. So yeah, tread carefully.
China, likewise, accounts for $56.7 billion worth of Malaysia's imports and $103 billion worth of its exports. This trade includes the import of germanium and gallium, which are irreplaceable materials in the production of semiconductors. In addition, China has been Malaysia's largest trade partner for the past 15 years. A relationship only balanced by the United States as Malaysia's largest investment partner.
Sitting precariously in between two of the world's biggest economies, Malaysia must, therefore, dance between giants without stepping on any toes. I've been your host Shirvan from Caspian Report. Thank you for your time and sawal.