Malaysia's semiconductor industry has seen impressive growth.
Following in the footsteps of its Asian neighbors,
the country successfully built itself up as an attractive location for foreign direct investment.
It leveraged that to make a place of its own in the semiconductor industry.
But that industry has found itself sort of caught in the middle. Unable to invest in the future,
the country’s small local cluster of semiconductor firms find themselves
stuck in a tenuous place low in the value chain. With seemingly few good prospects.
In this video, we are going to look at Malaysia's place in the global semiconductor industry.
Malaysia began its journey into electronics assembly in the 1970s
with the second Malaysia Plan of 1971-75.
The plan pushed for the creation of free trade zones to generate light export manufacturing jobs.
Western semiconductor companies chose Malaysia over cheaper alternatives
like Thailand and Indonesia for a few reasons.
First, they were attracted to certain aspects of the workforce. Malaysian laborers at the
time were considered to be more disciplined and English proficient than their neighbors.
And second, the government dangled heavy tax incentives (10 tax-free years!),
lucrative tariff exemptions, less bureaucratic red tape, and a lighter regulatory touch.
For example, in a prior video I talked about the National Economic Plan
("NEP") and its realignment of the Malaysian economy along
ethnic lines. Go watch the video to learn more about it and why it exists.
Anyway. Part of the NEP's tenets is the distribution of stock to native Malays,
the Bumiputera race. But to ease the concerns of
western industries and kickstart the desired export manufacturing sector,
the Malaysian government largely waived the NEP's ethnic employment and shareholding requirements.
The first major investments into Malaysia came from National Semiconductor and Intel.
In 1972, Intel opened its ever first offshore assembly plant in the small island state of
Penang in the north. Companies like AMD, Hewlett Packard, and Hitachi soon followed.
Penang today remains one of Malaysia's core semiconductor regions.
Those initial factories focused on assembly and testing. Assembly and Testing. What are those?
Let us pause for a bit and dive into what that is all about.
The semiconductor manufacturing processes - so not including R&D and design - can be
very broadly categorized into two general stages: The front-end and the back-end.
The first stage, the "front-end", involves the fabbing of the semiconductor wafer. You use
super sophisticated lasers and all to print designs onto a slice of silicon.
TSMC, SMIC, and Samsung Foundry with their big billion dollar fabs. What those fabs are
largely doing is front end wafer fabrication. They are making the wafers that would turn into chips.
But how do you get from a pizza-sized printed wafer to an actual chip that
you plug into your Asus motherboard? Someone has to cut the wafer into chips,
encase them within ceramic or plastic so to make it easier to handle,
and test them to ensure quality. These steps are called "assembly" (I have also
seen it referred to as “packaging”) and "test". Together make up what we call the "back end".
Workers have to handle special materials or operate a machine.
The work is mundane and repetitive but at the same time requires dexterity and
close attention. Furthermore, productivity is relatively low. According to McKinsey,
50-70% of the time the employee is waiting for another machine to finish what it is doing.
Thus historically, back-end processes were characterized as being relatively
low-value compared to the front end. (Side note. That’s no longer the case
today. There has been a lot of exciting things done in packaging in recent years.)
It is largely for those reasons that assembly and test processes were first outsourced and
off-shored with Malaysia the main beneficiary. Now I do want to note that OSAT is a big and
varied industry. Companies in Taiwan offer these services too with the largest being ASE Group.
TSMC can do it too but if I recall correctly, most of their customers
with the exception of Apple opt to go with someone else to handle that afterwards.
One can say that this first phase of semiconductor investment showed
mixed results. This will be a recurring theme in this video.
On one hand, jobs were created and exports soared. Semiconductors contributed most of
the 15% annual growth in Malaysia's electronics and electric industries.
The industry at one point represented 20% of the country's entire GDP.
Exports grew by nearly 70%. In 1978, Malaysia exported $658 million
of semiconductors to the United States. This massive number was
on par with Singapore and South Korea and three times larger than Taiwan.
Judged on terms of employment, also a green checkmark. Between 1973 and 1985, employment
grew by an average of 61% each year. Malaysian unemployment rates in the 1970s reached 8%
and poverty was widespread so this growth was welcomed. Unemployment would fall to 4% by 1980.
Good stuff. But there were items for concern. For one, the jobs were definitely not
easy. Working conditions in these test and assembly factories were - to say
the least - not great. Plant managers did not properly observe safety regulations. Workers,
mostly women, complained of failing eyesight and heavy, unfair discipline from their managers.
These jobs paid little, though much better than other factory and textile jobs available
at the time. The average hourly wage in 1973 was 13 Malaysian ringgit in Japan,
12 in the US, and just 1.43 in Malaysia.
The work hours were relentless. The Malaysian government amended
a previously existing labor law to allow 24 work hours a day,
done in three shifts. Paid holidays off, sick days, and maternity leave were at a minimum.
And high unemployment meant that the companies
could lay off bunches of workers at will and with little recourse.
Workers complained about being laid off with no warning. Physical stress was through the roof.
But worst of all was that the workers were not learning anything.
From a policy making perspective, a critical goal of attracting these multinational companies
to set up shop here was to "upgrade" the knowledge and know-how of the native Malays.
You want technology transfer from the multinationals to domestic firms.
But the way these companies set up their factories and stock ownership prevented
such transfers from happening. Workers did not see the whole process from beginning to end.
They were segmented and isolated to doing a single task with no visibility to anything else.
They were worked too hard to learn anyway.
The Malaysian government realized that the domestic semiconductor industry was not
upgrading itself and decided it needed to recalibrate its policies.
But before it could, the market performed a recalibration of its own.
The mid-1980s offered an opportunity amidst pain. A wave of overproduction
plunged the entire electronics and semiconductor industries
into a crisis. This happens from time to time in the industry.
The down cycle triggered a wave of layoffs and consolidation around the world. Semiconductor
employment in Penang went from 19,000 in 1983 to 18,226 in 1985, to 13,100 in 1986. Workers
came out in force to protest the retrenchments and the police had to be called to keep order.
But in the wake of this devastating forest fire, green shoots. The Malaysian semiconductor industry
survived, burned off its cruft, and got healthier. Underperforming companies were taken over.
Smarter companies used the crisis as an opportunity to upgrade their operations,
bringing in more automation and preparing for when the good times return.
Furthermore, the 1985 Plaza Accord forced the appreciation of the Japanese Yen, New Taiwan
Dollar, and Singaporean Dollar against the US Dollar. I mentioned some of the other consequences
of this historic event in my other video about the Bank of Japan's stock purchases.
This ate into the competitiveness of manufacturer exports in Taiwan,
Japan and Singapore. Exporters in those countries thus set out for cheaper grounds overseas.
Many of those companies would settle on Malaysia.
Focusing on the recession and seeking to take advantage of these secular trends,
the government sought to get people working again. They devalued the Malaysian Ringgit
and extended a series of investment tax credits.
Combined with the wave of foreign direct investment from Japan, Taiwan and Singapore,
these moves succeeded. Employment and exports rebounded.
But this recession prevented the Malaysian government from doing what it had wanted to do
and what Singapore and Taiwan were able to do: Upgrade their industry's place in the value chain.
For several years, the government instead focused on improving the wages and working
conditions of its semiconductor workers. Important but not the greater goal.
It was not until the 90s that they finally took major steps
towards technical upgrading with Silterra.
In 1985, Malaysia's First Industrial Master Plan, which spans the time from 1986 to 1995,
emphasized the upgrading of skills, technology transfer agreements between multinationals and
domestic firms, and the establishment of local suppliers. Lofty goals but the plan's
actual concrete thresholds remained relatively humble due in part to the ongoing recession.
That same year, the government established the Malaysian Institute of Microelectronics Systems
(or MIMOS) with the goal of developing an indigenous semiconductor industry.
Begun as a part of the Prime Minister's office and spun out into an independent organization in 1993,
it would be Malaysia's answer to Taiwan's ITRI.
In 1995 the institute came out with a plan of action: the Action Plan for Industrial Technology
Development (APITD). A pathway towards building semiconductor national champions
within the chip design and wafer fabrication sectors using the Taiwanese industrial model.
Malaysia decided that it needed a TSMC of its own to diversify away from back-end technologies.
Thus in 1995, MIMOS launched Wafer Technology
(Malaysia) Sendirian Berhad. The startup would be later renamed Silterra.
But as I said, things got off to a slow start. The idea to launch Silterra first emerged in 1995,
but the actual company did not launch until 2000 with the completion of its first fab
at the Kulim Hi-Tech Park. MIMOS had attempted to find a foreign technology partner for the launch,
but there were no takers. Thus, Silterra launched with only its own indigenous technologies,
far behind the cutting edge.
In contrast, Morris Chang came up with the idea for TSMC some time in the mid-1980s
and the company launched less than 3 years later in 1987 with a 3 micrometer process just one or
two generations behind the cutting edge. And as I noted in another video, the company launched
with full technology participation and patent protection from Dutch electronics giant Philips.
So like I said, Silterra started quite late and a little behind in the industry.
Which is not necessarily a dealbreaker. After all, SMIC launched at around the same time too.
SMIC was able to advance their leading edge node processes and "catch up" very quickly.
However, Silterra lacked many of the advantages that SMIC had at the time.
First and foremost, SMIC was infused with amazing human capital.
It had TSMC DNA. Founder Richard Chang brought over with him a massive team to help him scale
his factories and bring them up to speed faster than any other startup foundry ever had before.
Human capital as it turns out would be Silterra's greatest weakness. TSMC had Morris Chang as its
CEO, an American with extensive experience in the industry. SMIC, as I already noted,
had Richard Chang (not related) a CEO already on his second foundry startup.
But Silterra, to be charitable, did not have that. The company's early top leadership lacked
tacit knowledge and experience with the front-end semiconductor industry.
Again, not an unusual situation. What you should do then is to bring in someone who has that
experience. Singapore's Chartered Semiconductor brought in expat talent from abroad too. There are
even several talented Malaysian semiconductor leaders like Loh Kin Wah, an ethnic Chinese.
But for whatever reason, political or otherwise, Silterra declined to bring in that foreign talent.
Weak linkages between the industry and the universities further stemmed a potential
pipeline of indigenous talent. As a result the company failed to make ground within
the ultra-competitive semiconductor industry. Today, it is the 16th largest pure play foundry.
As is so often is the case for lower-ranking foundries, Silterra mostly made losses year
after year. Annual losses got to as high as $100 million a year according to the Business Times.
From 2008 to 2017, the company's total losses were second only to Malaysian Airlines.
In 2019, the company's net profit margin declined by 40 percentage points and lost $41 million USD.
The losses forced the company to de-emphasize R&D and focus on getting profitable. Silterra
was owned by the country's sovereign wealth fund Khazanah Nasional, which has its own profit-making
priorities. Thus, the foundry has been the subject of sale rumors as early as 2011. Khazanah is not
super excited about bankrolling these losses even as everyone recognizes its strategic importance.
In 2021, Bloomberg reported that Khazanah finally sold a big stake in the firm to a
consortium of Malaysian and Chinese investors for $150 million. The investors have announced
a turnaround plan and another capital injection to make Silterra great again.
Okay so now the present day. First, the good. People still want Malaysia's electronic goods
and services. In 2019, the industry made up 34% of the country's total shipments abroad.
More than its petroleum and palm oil industries. And the growth trend is on the up and up with 2019
up from 2015. Penang is responsible for some 8% of global back-end semiconductor output.
There also exists a number of publicly listed Malaysian semiconductor companies.
Two are valued at over a billion US dollars:
Inari Amertron Berhad, Malaysia's largest listed tech company. It does OSAT for
radio and optoelectronics products in nine factories around Asia. Inari is the biggest
member of a Malaysian Big Four. MPI, Unisem, and Globetronics Technology are the other three.
And Vitrox, Malaysia's largest equipment maker and a provider of automated testing equipment
for the semiconductor packaging industry. Its cofounder and CEO Chu Jenn Wang
is one of Malaysia's richest men.
So all of that is the good. Now for the not so good. As you might have noticed from the list of
companies I just mentioned, the industry's strengths remains in assembly and testing,
the same as it has been since the start. Which means it holds low value in the value chain.
Furthermore, there are now challenges from both the high and low ends.
On the high end, you have companies like ASE Group pushing the envelope in chip packaging
and taking share at the high end. TSMC is also looking to offer advanced chip
packaging solutions too. On the low end, challengers from China,
Vietnam and the Philippines seek to take a chunk of that market for themselves.
An inability to spend on R&D research or find sufficient human capital remains a
prevailing challenge. Indigenous firms cannot afford to pay well. So talented
Malaysian scientists and technicians go to Australia, Singapore or the United States.
To stay competitive in the market, semiconductor firms import affordable, talented labor from
abroad, something that the government did not allow until relatively recently.
Today, Malaysia hosts the most foreign workers in Southeast Asia,
as many as 4 million according to 2013 estimates. Half of them are illegal.
Lastly, the industry is still dominated by foreign multinationals. Remember what
I said earlier on about the lack of technology transfer? That remains the case to this day.
Indigenous semiconductor OSAT firms like Inari are the exception, not the rule. The majority
of the industry remains foreign-owned, a situation that the government has not been able to dislodge.
Don't get me wrong. We should still admire and praise the country for having done this much.
For having created this industry from scratch.
There are many places who have failed to even get this far - like Hong Kong.
But we must also acknowledge that there is still a lot more ways to go in the journey ahead.
Malaysia's semiconductor story is an interesting study - a lesson in striking delicate balances.
You need to be able to bring in foreign talents to learn fast and gain experiences,
but in a healthy way that makes long term sense.
You cannot let the foreigners run the show. And you cannot let yourself get stuck.
You always be moving forward, because there is always someone else coming up from behind.