Kulim, Malaysia – When tech giant AT&, S made the decision to increase production a few years ago to keep up with the growth of artificial intelligence (AI)), it did not look to China for its largest manufacturing facilities.
The Austrian firm’s plants in Chongqing and Shanghai – opened in 2022 and 2016, respectively – employ some 9, 000 workers between them, churning out high-end components used in everything from consumer electronics to cars.
However, AT&S was also learning about the potential benefits of concentrating production in one nation.
Like many tech firms grappling with the disruption of the COVID-19 pandemic and the trade war salvoes between the United States and China, AT&, S decided it needed to diversify its supply chains.
Malaysia quickly risen to the top of the list of potential locations for the business’s newest plant.
A little more than two years after breaking ground, AT&, S opened its newest production facility in Kulim, in Malaysia’s Kedah state, in January 2024.
The plant, AT&, S’s first in Southeast Asia, produces substrates – critical components that act as an intermediary layer between the chips and circuit boards used in AI systems and other advanced electronics.
The 1,7 billion euro ($1,8 billion) facility, AT&’s largest investment ever, will have about 6, 000 workers working there when it will be operational when it is at its peak.
“It’s part of the China Plus One strategy”, Suan See Yap, AT&, S senior vice president and managing director, told Al Jazeera, referring to the efforts of many companies to diversify production outside China.
According to Yap, “the need for more capacity and also having a footprint outside China drives the choice.”
AT&, S’s Malaysian facility is located at Kulim Hi-Tech Park, an industrial park which is a stone’s throw away from the neighbouring state of Penang, home to a free-trade zone that earned the moniker “Silicon Valley of the East” after emerging as a semiconductor hub during the 1970s.
The US company AMD, one of the main buyers of AT&, S’s substrates, is one of the chip manufacturers with a manufacturing base in Penang.
“Our customers are located here, so it’s a very strategic location, and there are 4, 000 SMEs around this area as well”, Yap said, referring to small and medium enterprises.
The supply chain is thus very well supported.
Malaysia’s geopolitical position also factored into the company’s thinking.
Our government tries to be impartial, and Yap remarked, “We want to be friends with all the nations.”
“This is a personal view, but I think we want to become the United Nations of semiconductors. We want to operate in a world where politics and, you know, geopolitical influences are exempt.
Numerous tech companies are betting on Malaysia, drawn from a variety of factors, including the country’s strategic location, established chip industry, well-developed infrastructure, and neutral stance in the Washington-Beijing conflict.
After grappling with political instability and corruption scandals in recent years, Malaysia hopes that positioning itself as a leading AI hub will transform its economy, cementing its rise from middle-income to developed status.
Anwar Ibrahim, the Malaysian prime minister, has emphasized the need to embrace every aspect of the AI economy, starting with the manufacturing of chips and setting up the data centers for training and operating models like ChatGPT.
Anwar, 77, has placed particular emphasis on the potential of AI to raise labour productivity and wages for workers, nearly one-third of whom earn less than 2, 000 ringgit ($450) a month.
Among other initiatives, the veteran opposition figure-turned-leader has overseen the launch of an ambitious national semiconductor strategy and a dedicated AI office.
Additionally, he has made investment from abroad a top priority.
Since taking office as the head of a multi-party unity government in 2022, Anwar has visited more than 30 countries to court investors and promote the country.
He has repeatedly stated at home and abroad that Malaysia intends to remain “fervently neutral” and does not want to take sides in the US-China conflict.
Last year, Malaysia approved $38.5bn in foreign investment, a 15 percent rise from the previous year’s amount and the biggest haul on record.
The wider economy, which has grown steadily since the COVID-19 pandemic ended, appears to be already seeing the benefits of the influx.
Gross domestic product (GDP) expanded by 5.1 percent in 2024, outpacing regional peers such as Thailand and Indonesia.
The World Bank projects that Malaysia could surpass its 2030 goal by achieving its goal of becoming a high-income nation by 2030. Malaysia’s GNI per capita stood at $11, 710 in 2023, the most recent year for which data is available, putting it roughly on par with Turkiye and Mexico.
Plans by Amazon, Google, ByteDance, and Microsoft to set up a number of new data centers in the nation have contributed a significant portion of the foreign investment windfall.
Once finished, the facilities are expected to support AI and cloud services used for everything from medical services to ride-hailing to online banking, as well as complying with local laws requiring the storage of sensitive data held by government agencies within the nation.
Microsoft, which plans to launch three data centres in greater Kuala Lumpur this year, has estimated that its facilities alone will generate some $10.9bn in new revenues and more than 37, 500 jobs over the next four years.
At the Microsoft office in Kuala Lumpur, Andrew Lau, director of strategic programs for Microsoft in Malaysia, stated to Al Jazeera that “part of our mission is to ensure we increase the adoption of AI as quickly as possible through Microsoft Cloud.”
“Especially here in Malaysia, because the networking is very strong – in the sense that we have good cables, we have good 5G as well – the capability to deliver the computate power to the public and to every person is a lot faster”, Lau said.
Which means that there will be a rapid adoption of AI in Malaysia using the cloud, he added.
“In fact, we’re seeing that already… 84 percent of Malaysians are actually bringing AI to work already”.
Upscaling Malaysia’s long-established chip industry is a crucial component of its strategy to ride the AI boom.
While Malaysia already ranks as the world’s sixth-largest semiconductor exporter, playing host to major players such as Intel, Infineon, GlobalFoundries, the local industry has been largely focused on “backend” services, such as chip assembly, packaging and testing.
Taiwan, South Korea, and the US have dominated both high-end manufacturing and design, making it more difficult and lucrative.
Under the National Semiconductor Strategy unveiled last year, Anwar’s government has allocated more than 25 billion ringgit ($5.6bn) to invest in high-value-added front-end activities over the next decade.
From establishing at least 10 Malaysian firms with a focus on design and advanced packaging that generate revenues of 1 billion to 4 billion ringgit (roughly $225 million to $1 billion), to training 60, 000 highly skilled engineers, the blueprint includes a set of ambitious goals for moving up the value chain.
Officials earlier this month revealed a first-of-its-kind partnership with Arm, a United Kingdom-based chip maker owned by Japan’s SoftBank, in an announcement that the government has hailed as a crucial step toward Malaysia becoming a hub for advanced production.
Under the agreement, Malaysia will pay the firm $250m over a decade to share its semiconductor-related licences, technology and know-how.
“Through this comprehensive partnership with Arm, we have developed one of the most ambitious technological plans Malaysia has ever seen to pioneer “made by Malaysia’s AI chips,” Anwar said at the start of the partnership.
“These chips will be designed, manufactured, tested and assembled here, and sold to the rest of the world”.
Industry figures believe Malaysia has a lot of potential to expand on its traditional strengths, even though it ultimately wants to enter the world of high-end manufacturing.
Malaysia is particularly well positioned to take advantage of the growing importance of advanced packaging, which involves the integration of multiple chips into a single casing for greater performance and functionality, said David Lacey, the president of the Free Industrial Zone, Penang Companies ‘ Association.
Multiple chips being packaged together could potentially have a similar functionality, Lacey said, making them more readily available for consumption in products like electric cars and health watches.
“So, the value-add of the packaging, or the value-proportion of the packaging, is rising up. According to Lacey, who is currently Osram Opto Semiconductors’ director of research and innovation, “it’s going from 10% to 30% or 40% of the value-add.”
“The balance of power, the product definition, is moving towards a package”, Lacey said.
Malaysia is also well-positioned to take advantage of this, again. So, you’ve got 50 years of packaging experience. And as a result, the electronics supply chain becomes significantly more valuable.
Yet, government officials and industry figures are acutely aware of the dangers looming ahead.
While the US-China rivalry benefitted Malaysia by spurring firms to diversify their supply chains, protectionist winds are now casting uncertainty over its tech ambitions.
Following an earlier pledge to impose duties of “25 percent or higher” on the chips, US President Donald Trump announced last week that tariffs on semiconductors would be “down the road.”
Trump, who has made a flurry of back-and-forth announcements on tariffs since entering office in January, did not specify a timeframe for the measures or whether certain countries or sectors could be excluded.
Many businesses are in wait-and-see mode when making investment decisions in Malaysia, according to Loo Lee Lian, the chief executive officer of Invest Penang, a state-owned nonprofit for investment promotion, Loo Lee Lian, said.
“So everybody is… holding on tight. In the upcoming six months, a lot will happen, Loo predicted.
“Nobody is making any decisions”.
Industry figures also face challenges, not the least of which is the difficulty of finding talent.
In a 2022 survey conducted by the Malaysia Semiconductor Industry Association, 47 percent of businesses identified the availability of talent as a major constraint to their operations.
Making up the shortfall will take some time, despite the government’s plans to train tens of thousands of engineers over the coming years.
Malaysian Minister of Investment, Trade and Industry Tengku Zafrul Aziz has noted that although the local industry needs about 50, 000 skilled engineers, local universities are only producing about 5, 000 engineering graduates annually.
As a possible solution to the shortfall, Aziz’s ministry has suggested allowing foreign graduates from nearby universities to work for a short while in the neighborhood tech scene. The proposal has received opposition from unions and has not so far been implemented.
After seeing a decline in company revenues of 13% in 2023-24 as a result of an industry-wide decline in demand, AT&, S ‘Yap anticipates business to be “flattish” this year.
But looking further ahead, the Leoben-based company’s outlook is bullish.
In 2026-2027, revenue is expected to reach 2.1 to 2.4 billion euros ($2.3 billion-$2.6 billion), which is higher than the record-setting 1.8 billion euro ($2 billion) of 2022-2023.
“We are at where we want to be today”, Yap said.
