AI demand lifts Malaysia’s chip sector, but not every player wins

Malaysia is benefiting from the global artificial intelligence infrastructure boom, according to HSBC Global Investment Research. The Southeast Asian nation is one of the primary regional beneficiaries alongside Singapore and Vietnam. This is evident in the country's rising chip exports and growing electronics trade flows with the United States, mainland China, Taiwan, and neighboring Singapore.

Malaysia's role as a critical point in the global chip supply chain, particularly in the assembly, testing, and packaging (ATP) stage, makes it indispensable to global semiconductor production. However, HSBC's report reveals that the benefits are not evenly distributed across Malaysia's semiconductor industry. Companies directly involved in AI-related demand, such as selected chipmakers, advanced packaging providers, and data centre operators, are experiencing stronger demand.

In contrast, those tied to traditional consumer electronics face challenges, as strong demand for memory chips can lead to higher input prices, squeezing manufacturers that rely on those components but do not directly benefit from AI-related orders. This concentration of rewards is important for Southeast Asia, where the electronics sector is often discussed as a broad beneficiary of supply-chain diversification and AI demand.

However, the exposure varies widely based on product, customer base, and position in the value chain. Despite the uneven rewards, the overall electronics sector in the region remains resilient, with the global electronics Purchasing Managers' Index and Asia electronics PMI remaining above the 50 mark that separates expansion from contraction.

However, HSBC highlights two concerns. First, supply risk, particularly around key inputs used in chipmaking. The Middle East conflict and its potential impact on critical materials such as helium pose uncertainties. While Malaysia is partly insulated from this risk due to its reliance on nitrogen for ATP processes and substantial domestic nitrogen production, its wafer fabs still rely on helium, making supply management crucial.

Second, Malaysia's ambition to move up the semiconductor value chain, from assembly to indigenous design, faces significant hurdles. The government's National Semiconductor Strategy, announced in 2024, commits US$6.12 billion and aims to train 60,000 highly skilled local semiconductor engineers by 2030. However, Malaysia's average engineering wages trail those in several Asian competitors, creating a risk of talent outflows.

Addressing this challenge through targeted grants, tax incentives, and other schemes will be essential for Malaysia to successfully transition to more advanced front-end manufacturing.