Melexis, a Belgium-based microelectronics solutions provider, recently announced the opening of its largest wafer testing plant in Kuching, Sarawak, East Malaysia.
The new facility, valued at EUR 70 million (US$76 million), marks a significant expansion into East Malaysia, where semiconductor assembly and testing (OSAT) facilities have been less concentrated compared to the more developed Penang in West Malaysia.
In 1969, Penang was designated a free trade zone, attracting major players like National Semiconductor, AMD, Intel, Bosch, and Hitachi. The establishment of the Penang Skills Development Centre in 1989 further solidified the region's foundation in semiconductor manufacturing.
Expanding chips eastbound
Yen Chou, an analyst and project manager at DIGITIMES Research, notes that Melexis's decision to set up in East Malaysia aligns with the Malaysian government's broader strategy to decentralize high-value-added industries. This initiative aims to promote investment in East Malaysia, leveraging its ample land and water resources.
Traditionally, states like Sabah and Sarawak have been predominantly agricultural, with lower wages and less stable employment compared to West Malaysia. The government's efforts to develop semiconductor clusters in these regions aim to create better job opportunities and prevent population migration to the West.
Kuching's Jaya Free Industrial Zone has attracted companies like Melexis and X-FAB Silicon Foundries, signaling a growing interest in expanding the semiconductor industry's presence in East Malaysia. The zone was first established in 1991 by the Ministry of Industrial Development Sarawak (MID). Japanese electronics manufacturer Toko Electronics was the first to establish a factory in this zone in 1995.
Companies within the zone are exempt from sales and services tax. Additionally, those granted pioneer status enjoy exemptions from import and export tariffs, a 35% corporate income tax, and a 5% development tax for five to ten years.
Once the income tax exemption period expires, companies can apply for an investment tax credit exemption for an additional five to ten years. The Sarawak state government also provides subsidies for water and electricity, along with other infrastructure support in the zone.
Source: DIGITIMES Research, July 2024
Malaysia's geopolitical advantage
Amid global trade tensions, particularly between China and the United States, Malaysia's neutral stance has made it a strategic location for manufacturing. Prime Minister Anwar Ibrahim has emphasized the country's neutrality, making it an attractive option for businesses looking to trade with China.
China-based TF Microelectronics and AMD have established joint ventures in Malaysia, while China's Tianshui Huatian acquired the Malaysian OSAT firm UNISEM. According to the Malaysian Investment Development Authority (MIDA), Malaysia held a 13% share in the global chip testing and packaging market in 2023.
Yen highlighted that Malaysia's open investment climate, regardless of capital origin, makes it an ideal destination for global semiconductor companies.
US President Joe Biden announced plans in May 2024 to increase tariffs on Chinese semiconductors, batteries, solar products, and other critical minerals, with semiconductor tariffs expected to rise from 25% to 50% starting in 2025.
Following that Chinese semiconductor and battery companies have reportedly requested that the Malaysian government lobby the US to exempt products manufactured in Malaysia from these tariffs.
However, Malaysia officials say they find it challenging and unlikely to offer guarantees to Chinese firms. The issue highlights Malaysia's continued struggle to remain neutral and non-aligned, having to boost Chinese companies' confidence while avoiding getting on the US's bad side.
Talent shortage
Despite having the highest proportion of STEM graduates in Southeast Asia, with 40% of university students pursuing STEM fields, Malaysia faces a significant talent shortage. The country's relatively small population and recent currency depreciation have exacerbated the issue, leading to a brain drain of high-level talent. In response, Malaysia introduced its National Semiconductor Strategy (NSS) to attract foreign investments and develop 60,000 high-end semiconductor professionals.
Malaysia collaborates with industries and universities to cultivate skilled workers and offers relaxed visa requirements for technical professionals, facilitating the entry of foreign experts. Yen noted that Malaysia's lower cost of living and prevalent Chinese-speaking communities make it an attractive destination for international professionals, including those relocating from Singapore.
About the analyst
Yen Chou received a master's degree from the Graduate Program for Political Economy at National Cheng Kung University. He worked as an assistant researcher at the Institute for Physical Planning and Information and as an analyst at DIGITIMES Research. His research focuses on Samsung's global investment and operation, the electronics industry in Vietnam, and the display industry in South Korea.
Credit: DIGITIMES Research
