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.
Is it Malaysian? Are we not merely contract manufacturing for the giants ? Without a knowledgeable work force - not bright
I always enjoy watching that channel. Plenty of useful insights. I can tell you he is on the money where Silterra is concerned. Political concerns trumped commonsense. With better leadership they could have done more. Same like Proton and all other top down initiatives, pride, politics and other nonsense things that should not be a basic consideration for running a business basically sabotaged a good idea. We should have imported the right leadership at these companies and let them be run without interference.
I haven't watched the video yet, so this is just my experience regarding semi-con industry in Malaysia.
There are two main parts in semi-con industry, the wafer fabrication (example at 4:22 mark) and chip packaging. The bottle neck is the wafer fabrication. It is highly specialized and very time consuming to make. Expect one tiny mistake will ruin the whole wafer.
The latter is every Tom, Dick and Harry can invest in and Malaysia already have few of those, including in Perak.
I have no idea which Malaysia have invested in, but if it is the latter then we're still playing safe in "low tech" part of semi-con and eventually competing with neighbouring countries if and when they too started investing in chip packaging.
Just my opinion, wafer fabrication is the gold mine, but to do that we need to reach ever higher in our tech and expertise.